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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It had 130 branches in the rural and semi-urban areas of Western India.
On September 13, 2006, the RBI announced the merger of the Industrial Development Bank of India (IDBI) and UWBL. The merger came into effect from October 03, 2006. IDBI offered a price of Rs. 28 per share to UWBL's shareholders.⁶

IDBI benefited from UWBL's vast branch network as the merged entity had 425 branches as against 195 of IDBI alone. The asset base of IDBI increased by Rs. 71.6 billion⁷. Commenting on the merger, Kirit Somaiya (Somaiya), the President of Investors Grievances Forum⁸ said, "For the first time, the interests of both depositors and shareholders have been fully protected."⁹

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Background Note

UWBL was founded by Waman Ganesh Chirmule (Chirmule)¹⁰ in 1936. It started its operations on March 08, 1937 (Refer Exhibit I for the logo of UWBL). In the year 1951, UWBL was declared as a Scheduled Bank¹¹, under 'Other Indian Scheduled Commercial Banks (in the private sector)' group.

In 1956, the Union Bank of Kolhapur was merged with UWBL followed by the merger of Satara Swadeshi Commercial Bank Limited¹² too in 1961. In 1969, UWBL obtained the status of a 'B' class bank and was upgraded to 'A' class in 1974.¹³ 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 of corporate governance and guided by sound ethical values.'¹⁴ UWBL offered diversified products like automobile finance, housing finance, corporate finance, export finance, finance for education, finance to SMEs, etc...

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6] IDBI paid Rs. 28 per share, a 31% premium over UWBL's closing price of Rs. 21.45 on the Mumbai Stock Exchange on September 13, 2006. A total of Rs. 1.5 billion was given to the shareholders.

7] "IDBI Snaps up United Western," www.business-standard.com, September 13, 2006.

8] The Investors Grievances Forum is a non-government organisation registered with SEBI. It was set up in 1993 to protect the interests of small investors against capital market frauds.

9] "IDBI Bank Wins Race for Troubled UWB," www.indianexpress.com, September 13, 2006.

10] Chirmule, popularly known as 'Annasaheb' or the 'Vima Maharshi,' was one of the well-known industrialists in India. He pioneered the concept of insurance business in India by setting up Western India Life Insurance Company (WILIC) in 1913. Later, in 1955, following the nationalization of insurance business by the Government of India, WILIC was merged with Life Insurance Company (LIC) of India.

11] The Indian banking sector consists of RBI - the central bank, commercial banks and co-operative banks. Commercial banks are of two types - scheduled and non-scheduled. "Scheduled bank" means a bank included in the Second Schedule of the Reserve Bank of India Act, 1934. Scheduled banks are subjected to statutory requirements. Scheduled commercial banks are further categorized into five different groups (i) State Bank of India and its Associates, (ii) Nationalised Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector).

12] Satara Swadeshi Commercial Bank Limited was established by Chirmule in 1907 mainly to serve the needs of small farmers.

13] Indian commercial banks are rated into different categories according to the CAMELS ratings. CAMELS ratings measure the relative strength of a bank on the basis of its capital adequacy, asset quality, management, earning, liquidity, systems and control. The ratings are given on a 1-5 scale. 'A' class banks are placed at the top end of the rating scale that denotes strong performance of the bank.

14] "Letter of Offer for Equity Share Holders of the United Western Bank Limited," http://203.199.12.51/dp/unitedwestlof.pdf, January 23, 2006.