Until recently, the RBI has never been such a stickler about rules and procedures either. Or else, bank after bank would not have collapsed under the burden of dubious lending practices. Moreover, the Securities and Exchange Board of India’s seemingly hard-hitting initial order on the Demat Scam has already been considerably diluted since then. The RBI’s initial reaction was to impose a paltry penalty that was not even a slap on the wrist. But although one is in favour of stringent monetary penalties that act as a real deterrent to indiscipline, the damage caused by a three-year ban on expansion, when the economy is growing at 8 per cent seems excessively crippling.

In fact, each of the banks that have been punished, would probably have willingly paid penalty running into crores of rupees rather than suffer the incalculable damage caused by halting growth through branch expansion. But unlike the storm of protest that is raised by every Sebi order, the banking sector does not even dare to voice a protest against RBI decisions. In contrast, Sebi has even faced the ignominy of being fined by the appellate tribunal. Clearly, the RBI needs to revisit some of its statutes to align them with the changing economic environment while giving it more flexibility in decision-making.

Coming back to the UWB issue, if one excludes the IPO-tainted banks, it leaves a few foreign banks and certain public sector banks in the running, plus, of course, the Maharashtra government-led revival plan.

The last mentioned ought to have the least consideration, despite HDFC’s presence to lend it credibility. Firstly, the grapevine says that political interference in lending decisions were responsible for the collapse of UWB’s finances. Giving the bank another chance at revival, after it has several rounds of public money without adequate transparency will be hugely controversial. As for HDFC’s contribution to the bid, it is not relevant since the mortgage financier already has a significant stake in HDFC Bank.

... contd.