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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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

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...

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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