PSBs shun gold trade with co-op banks

PSBs shun gold trade with co-op banks
REUTERS & EEB

AHMEDABAD/MUMBAI, April 3: Three leading state-run banks in Gujarat have stopped accepting cheques from the region’s cooperative banks and have cut down transactions with bullion dealer clients of those banks. The commercial banks are the SBI, Bank of India (BoI), Punjab National Bank and Standard Chartered Bank.

“We have stopped accepting pay-orders and cheques issued by cooperative banks (on behalf of bullion dealers) and I understand other state-run banks having bullion dealings have adopted the same stance,” a senior State Bank of India (SBI) official, who requested anonymity said.

Some cooperative banks in Gujarat have run into liquidity problems due to volatile capital markets. The 30-share BSE Index (Sensex) has lost nearly 16 per cent since the end of February. Madhavpura Mercantile Cooperative Bank faced a run on its deposits after panicky depositors began withdrawing money on news that it had lent heavily in capital markets and that these loans had turned sticky due to a steep fall in share prices over the past month.

Other cooperative banks which lent to Madhavpura ran into a liquidity problem as they have not been able to recover their loans. Madhavpura’s board has been suspended by the central bank and an administrator has been appointed.

The Reserve Bank of India (RBI) is investigating Ahmedabad-based Classic Cooperative Bank case after payment orders, or banker’s drafts, on behalf of bullion dealers to four commercial banks bounced. A report is expected later this week.

The RBI said the banks’ exposure totalled a combined Rs 69.6 crore. SBI, India’s largest commercial bank, said on Saturday it has been exposed to a potential loss of Rs 39.57 crore ($8.48 million) after it sold bullion to a gold trader whose cheques drawn on Classic Cooperative Bank bounced.

The SBI official said SBI has decided to reduce its exposure to the bullion market until the RBI report on Classic Cooperative Bank is released. SBI was the largest supplier of bullion in Ahmedabad and its decision with other state-run banks to lower exposure to gold has created a liquidity problem in the market, traders said.

A Bank of India official, who requested anonymity, said his bank has also stopped accepting banker’s drafts issued by cooperative banks on behalf of bullion dealers as a precautionary measure. “We have cut the exposure as efforts would be now to retrieve the money locked in the trade,” the BoI official said.

Bank of India said on Thursday it had suffered a potential loss of Rs 130 crore after cheques issued by Madhavpura Mercantile Bank on behalf of a stock broker bounced.

The RBI had asked all scheduled commercial banks to provide details of the losses they estimate from various transactions entered into with urban cooperative banks. The RBI letter, sent late last week, specifically points to the losses the banks estimate on account of pay-order transactions, their exposure in the call money market and also in bullion trading deals with the cooperative banks.

This move by RBI is the first major effort to try and quantify the losses staring the banking sector in the face, following the Madhavpura Bank scam in which stockbroker Ketan Parekh has also been arrested.