Mar 22, 2013, 02.58 PM IST | Source: Moneycontrol.com

How RBI has damaged its credibility in Cobra's sting

It would be a complete travesty if the CobraPost sting on India’s three biggest private banks – HDFC Bank, Axis Bank and ICICI Bank – ends up stinging either the wrong people or some scapegoats.

R Jagannathan, Firstpost

It would  be a complete travesty if the CobraPost sting on India’s three biggest private banks HDFC Bank , Axis Bank and ICICI Bank ends up stinging either the wrong people or some scapegoats.

The signs are ominous. The Reserve Bank of India (RBI), whose job it is to police the banking system, has gone to the other extreme and pronounced the banks "not guilty" even before it gets to know the results of its own probe into the matter.

RBI Deputy Governor KC Chakrabarty, not known for verbal discretion at the best of times, said "there is no scam (that) has happened…as no transaction has taken place." The BusinessLine quotes him as going further and giving the entire system a clean chit: "Let us not unnecessarily downgrade ourself. Our system to prevent money laundering is perfect, absolutely nothing (wrong with it)."

It must be perfect, if a cobra's poison fails to damage its health.

Chakrabarty’s observations are dangerous for they assume that since that this was only a sting, and not a real effort to actually launder black money through banks and insurance companies, there is "absolutely nothing wrong".

The opposite is true.

If a few unknown people can, with the help of cold calls, manage to get middle to senior-level bank officials from three top-notch banks to bend over backwards to help them launder money, it tells you that the supervision system is kaput. There is no guarantee that if a real crook comes along with his ill-gotten wealth, the system will not do cartwheels.

Chakrabarty also added: "Allegations do not mean flouting norms. There is not a single transaction which has taken place. KYC (know your customer) violations will happen in any system. These are all transactional issues and have nothing to do with money laundering."

Wonderful defence. Are these just KYC violations? If banks were willing to help customers they didn’t know, is it not safe to assume that they would do ever more for customers they knew better? Even the HDFC, ICICI and Axis Bank managements could not have asked for a better defence.

If the banks themselves believed Chakrabarty's statements, one wonders why they ended up suspending so many of their own officials who got exposed by the sting.

Soon after CobraPost showed how many branch-level and circle-level officials in these three banks were not only willing to help all comers, but were even willing to lay out the red carpet for them ( read here ), the banks went into a holier-than-thou mode and suspended those directly caught on tape. They talked about their high corporate governance codes, ethics and "zero tolerance" for violations.

While HDFC Bank suspended 20 officials , ICICI Bank 18 and Axis 16 while they launched investigations, some bought even external hands to make it above board.

HDFC Bank "appointed accounting and audit firm Deloitte Touche Tohmatsu India to carry out an independent forensic inquiry into the allegations and reported statements, as made by CobraPost representatives, when secretly taping bank officials."

Today's Economic Times makes the three banks sound even holier on the issue. The newspaper says that the chief executives have offered immunity to staff who want to blow the whistle on unfair practices and violation of guidelines. It quotes an internal staff mail from ICICI Bank CEO Chanda Kochhar as emphasising that “the bank lays very strong emphasis on ethical behaviour and has (a) zero-tolerance policy with violation in this regard. Any breach in this regard will not be tolerated.”

The other banks did much the same thing. While Kochhar is right to send this note, the moot point is this: were officials getting the same message from top management earlier? Was the pressure to lower deposit costs and earn fees by cross-selling insurance products pushing them to do things they knew were illegal or unethical? This is not a question just for ICICI, but the other two as well.

The broader point is this: the CobraPost sting clearly implies that none of the bank officials caught on camera thought they were going to be penalised for their actions. This may come only after a detailed enquiry, but if any of them thought they were being wrongly propositioned by CobraPost’s representative posing as a politician’s sidekick, they could easily have threatened to phone the cops. Or at least check with their seniors.

Since they felt empowered to do what they promised to do, it is a scam any which way you look at it.

The banks’ top bosses will always have plausible deniability. But it is highly unlikely that the second tier of management did not know anything.

Chakrabarty has not only jumped the gun, but caused serious damage to the credibility of the RBI’s supervisory intent by his statements.

As things stand, we can already discern what will happen.

One, KYC norms will get tweaked again, and ordinary people will be made to run from pillar to post to even open simple bank accounts. For those with moolah, the norms never existed, and will continue to remain on paper.

Two, the people who will pay the price will be the lowest cogs in the wheel, who will lose jobs or get docked for their service to banks.

Three, the RBI will probably fine the banks for negligence, and recommend some changes in laws for better supervision.

Four, the big bosses of the banks will have gotten a scare, but they may not ultimately face any kind of rap directly for running a system where charlatans are served with aplomb, and the rest are sent on a hurdle race.

HDFC Bank stock price

On July 22, 2014, HDFC Bank closed at Rs 839.90, up Rs 11.85, or 1.43 percent. The 52-week high of the share was Rs 861.00 and the 52-week low was Rs 528.00.


The company's trailing 12-month (TTM) EPS was at Rs 36.81 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 22.82. The latest book value of the company is Rs 180.50 per share. At current value, the price-to-book value of the company is 4.65.

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