The Fall of United Western Bank

GROUP—6
Kanchan Salve :KHR2010SMBA21P020
Namrata Pillay :KHR2009SMBA18P040
Mangesh :KHR2010SMBA21P029
Amit :KHR2010SMBA21P052
Radha krishna :KHR2010SMBA21P006
Kavita :KHR2010SMBA21P030
Reserve Bank of India-RBI
Established in 1935, RBI is the central bank that regulates
and supervises the financial system in India.

It is the banker to the Government and all scheduled

banks in the country.

It’s important functions are to prescribe broad parameters

of banking operations within which India’s banking and
financial system functions.
UWBL-Background
United Western Bank Ltd (UWBL) was founded by Waman Ganesh
Chirmule in 1936.

It started its operations on march 08, 1937.

In the year 1951, UWBL was declared as a Scheduled Bank. “Scheduled
bank” means a bank included in the Second Schedule of the Reserve
Bank of India Act, 1934.

In 1956, the Union Bank of Kolhapur was merged with UWBL followed
by merger of Satara Swadeshi Commercial Bank Limited too in 1961,
UWBL obtained the status of a “B” class bank and was upgraded to “A”
class (Based on CAMELS) in 1974.
CAMELS Rating
CAMELS ratings on scale of 1-5. A corresponding to 1
being the best rating.
C
C Capital Adequacy
●

A
A Asset Quality
●

M
M Management
●

E
E Earnings
●

L
L Liquidity
●

S
S Sensitivity to Market Risk
●
Contd…
Over the decades, UWBL became one of the most
preferred private sector commercial banks in western India.

It had a vision of being “A technology savvy, customer

centric progressive bank with a national presence, driven
by the highest standards corporate governance and guided
by sound ethical values.”

UVBL offered diversified products like automobiles

finance, housing finance, corporate finance, export finance,
finance for education, finance to SMEs, etc.
Contd…
In the financial year 1996, the net worth of UWBL
crossed the Rs.100crores.

In 1997 opened first ATM in Satara.

By 2006, the bank had 230 branches, 12 extension

counters and 75 ATMs spread over nine Indian states that
were controlled by five zonal offices at Mumbai, Pune,
Kolhapur, Jalgaon and Nagpur.
UWBL Organization Structure
3- Tier architecture
Head Office

Satara

Zonal Offices

Mum Kolha Jalgao Nagpu

Branches
Pune
bai pur n r
……….230 branches……..…
The Makharia Group
The Company under the aegis of Maliram Makharia
Group was incorporated in 1982 as Maliram Makharia
Textile Mills Pvt. Ltd.

 Subsequently, the name was changed to Emtex

Industries (India) Ltd. to reflect the related expansion
and diversification activities under one single corporate
roof.

Further info on www.emtexindia.in

Failure of UWBL
“In general, one can say it was inefficient management of
the bank. In the last two years, huge losses were made,
leading to erosion of the net worth and negative capital
adequacy ratio.”
-Anand Sinha,Executive Director, RBI.

“I don’t accept that the bank has failed. We have

consolidated….We did not have the capital but if we were
given more time we would have raised it.”
-Satish Marathe, CEO, United Western Bank.
The Problem
There were several problems that led to the fall of UWBL that
once had reached the A class bank category.

Irregular transactions with some of its major shareholders

specifically Makharia Group Companies (MGC)

Conflicts between its major shareholders regarding the

ownership of the bank , poor governance and inefficient
management of capital were the main reasons for its collapse.

Increase in Non Performing Assets(NPA) and fall in CAR.

Transactions with the Makharia group
The Makharia family owned Emtex Industries was given overdraft
facility of Rs. 68.8 million to subscribe to the 1995 rights issue of the
UWBL bank.

Also, a letter of credit(LC) was sanctioned to MGC by UWBL

RBI felt that the LC facility was provided with the intention of
preventing MGC’s loan account with UWBL from becoming non-
performing assets (NPAs)

On May 30, 1998, UWBL was penalized for Rs. 1 million by the RBI
for irregular transactions with the MGC.
Transactions with the Makharia group
contd…
In the year 2000, UWBL filed a petition in the Mumbai High
Court against Emtex for defaulting on loan repayment. As of
late 2006, Emtex owed Rs. 499.1 million to UWBL and this
was classified as “doubtful” assets by the bank.

In another transaction in the year 2003, UWBL entered into a

settlement with Maliram Makharia Stockbrokers Private
Limited (MMSPL), a brokerage house under MGC to pay
back Rs. 57.5 million, on account of a loan that was earlier
given to MMSPL. However, as of August 02, 2006, UWBL
had not received any loan installment from the firm.
Transactions with the Makharia group
UWBL
Shareholding of
Makharia RBI
increases

OD facility
+
LC

UWBL
Rights issue

MGC
Makharia’s Outstanding
The Ownership Issue
In Aug 2000, infighting broke out for a controlling stake in UWBL
between the bank’s main shareholders i.e State Industrial and
Investment Corporation of Maharashtra Limited (SICOM) and the
Makharia family.
SICOM & MGC they held a 24% equity stake in UWBL out of which
MGC held a 14.5%bstake.
Each of the shareholders wanted four representatives on UWBL’s board.
On the other hand, nine professional directors of the UWBL board
strongly opposed the idea.
The management board of UWBL sought RBI’s intervention to seize the
voting rights of the MGC as they did not have the regulators' approval
for holding a more than 5% equity stake in UWBL.
The Ownership Issue Contd…
In order to overcome the takeover threat from the Makharias, the management
board of UWBL granted about Rs. 200 million as an interest free loan to the
bank's employee equity trust to purchase around 24,32,000 shares (8.41 % of the
bank's capital), from the secondary market. However, when UWBL applied to
RBI for approval, RBI sanctioned only Rs 60 million for this purpose. But even
without the approval, UWBL‟s management went ahead and sanctioned Rs. 200
million. For this violation, RBI imposed a penalty of Rs. 5,00,000 on UWBL on
May 29, 2001. The central bank also ordered UWBL to recall the entire loan
amount granted to the employee equity trust by sale of shares. UWBL was asked
to make provision in its balance sheet against the expected loss for the loan
amount for financial year 2000-01, based on the market price of the shares.
Though the management board argued that the sanction of the loan was in
conformity with the provisions of Section 77 (2) (b) of the Companies Act, 1956,
RBI was not satisfied with the explanation.
The Other Problems
In the year 1999, Resolutions were passed to increase the
authorized capital of the bank from Rs. 500 million to Rs.
1 billion at the general meeting held on August 07, 2000.
The management board of UWBL proposed to issue 1:5
bonus and 1:2 rights shares
From June 2001 onwards, UWBL was placed under
monthly monitoring by the RBI due to its poor financials
and rising NPAs.
FY Loss NPA
2000-01 156.8 million 3 billion
2004-05 986.4 million 4.5 billion
Financials
UWBL-Asset-Liability Mismatch
Details(2005-06)
In the annual inspection report for the year 2005, RBI
noted deficiencies in the asset-liability management of
UWBL. By March 31, 2006, the maturing liabilities for
short term deposits (3-6 months) were more than assets by
Rs. 318.80 million whereas the same for the long-term
deposits (1-5 years) exceeded assets by Rs. 13.2595
billion. This huge asset-liability mismatch adversely
affected the liquidity position of the bank
UWBL-Asset-Liability Mismatch
Details(2005-06) Contd…
(Rs. in crore)
Steps Taken
About 17 commercial banks including ICICI Bank,
Canara Bank, Federal Bank, Andhra Bank, Standard
Chartered Bank, Allahabad Bank and others expressed
their interest in acquiring UWBL.
September 13, 2006, RBI announced that UWBL would
merge with IDBI. The amalgamation came into force on
October 3, 2006.
IDBI announced that the financial performance of UWBL
would be merged with the financial performance of IDBI
in the third quarter of the financial year 2006-07.
Steps Taken Contd…
RBI conducted an informal bidding process by stressing certain key
conditions. One of the conditions was protection of all depositors (i.e.
ensuring repayment of all deposits) without any help from the Deposit
Insurance and Credit Guarantee Corporation (DICGC). IDBI offered a
premium of over 31% on the market value of the UWBL shares. RBI
was also concerned about the future of 3,000 UWBL employees and
made sure that their jobs were secure. IDBI retained all the employees
with the existing compensation package and other benefits as offered by
UWBL.
The board of UWBL forwarded a restructuring plan in which investors
such as SICOM, HDFC and IDFC together offered to invest around Rs.
3.5 billion in the bank. However, RBI turned down the proposal as it felt
it was too late to consider such a proposal.
Impact of merger on IDBI Bank
Analysts felt amalgamation would support growth of
IDBI.
Merger expected to diversify IDBI’s credit portfolio.
Other advantage analysts felt that merger would
consolidate IDBI’s financial position.
Challenges regarding integration of technology and
people.
Thank You!!!