The Fall of United Western Bank
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Case Details:
Case Code : FINC040
Case Length : 15 Pages
Period : 1996-2006
Organization : United Western Bank.
Pub Date : 2006
Teaching Note : Not Available
Countries : India
Industry : Banking
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Please note:
This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.
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Excerpts
The Problems
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, 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.
Transactions with the Makharia Group
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On May 30, 1998, UWBL was penalized for Rs. 1 million by the RBI for irregular
transactions with the Makharia Group of companies (MGC) . The Makharia family
was given loans for purchasing UWBL's shares (in its 1995 rights issue) through
its flagship company - Emtex Industries (India) Limited (Emtex) . UWBL provided
an overdraft facility of Rs 68.8 million to Emtex. Also, a letter of credit (LC)
was sanctioned to MGC. According to RBI, the credit facility was granted to
Emtex "for the sole purpose of enabling the Makharia group of companies to
subscribe to the rights issue of the bank." Besides this, 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) . UWBL paid the penalty on June
16, 1998...
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The Fall
Industry experts felt that a long battle over the ownership of the bank had
led to poor governance and control systems at UWBL. The exact shareholding
of Makharias in the bank was not clear. According to the Mumbai Stock
Exchange (MSE) records, the Makharias owned around 3% of the shares whereas
the actual figure was much higher...
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The 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. Finally, on September 13, 2006, RBI
announced that UWBL would merge with IDBI and issued a statement that "the
amalgamation will come into force on October 3, 2006. All the branches of
the United Western Bank will function as branches of Industrial Development
Bank of India Ltd with effect from this date".
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... |
The Road Ahead
Analysts felt that the amalgamation of UWBL with IDBI would support IDBI's
growth. IDBI wanted to expand its branch network. By acquiring UWBL, IDBI got
access to its 230 branches that covered all the commercially important places in
Maharashtra. With the RBI having restricted branch licenses in over-banked urban
centers, this access would help IDBI's expansion. Analysts opined that the
merger would sustain the momentum of IDBI's growth in terms of deposits by
widening its retail presence.
Exhibits
Exhibit I: UWBL Logo
Exhibit II: Financials of UWBL (FY 2001 - FY 2006)
Exhibit III: RBI Directives to UWBL (As on January 27, 2003)
Exhibit IV: Audited Financial Results for the Quarter and Year Ended March 31,
2006
Exhibit V: Recent Mergers and Acquisitions in the Indian Banking Sector
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