Pre-merger, Is SBI Heading Towards bankruptcy?

Customers of State Bank of India (SBI), especially in south India, are forced to ask whether SBI is headed for bankruptcy as they find 99% of the automatic teller machines (ATMs) shut down and all branches declining withdrawals from the depositors’ savings account beyond a limit. Bank branches are refusing to honour cheques drawn on them, either their own or on third party, in spite of sufficient balance in the account. To top it, the bank’s branches refuse to give written objection for returning the cheque across the counter.

In February, SBI, in a regulatory filing had stated, “…the entire undertaking of State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), State Bank of Patiala (SBP) and State Bank of Hyderabad (SBH) shall stand transferred to and vested in the State Bank of India from 1 April 2017.”

What does the rule-book say? Is it because of systemic failure or management failure? Does the blame rest with the SBI, or with the Reserve Bank of India (RBI) as well, as it has been a silent spectator for the last 15 days? Just last week, when Bandaru Dattatreya, the Union Minister for Labour, approached the RBI’s office at Hyderabad, the central bank said that it has pumped in Rs1,170 crore worth of currency into the system, with half of it in the ATMs of banks and the rest to the bank branches.

Section 5 (c) of the Banking Regulation Act, 1949 defines a banking company as any company that transacts ‘banking business’ in India.

The Act clarifies, in clause (b) of the same section, that the expression ‘banking’ found in the definition should mean accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheques, drafts, order or otherwise. To constitute the business of banking today, the banker must also undertake to pay cheques drawn upon himself (the banker) by his customers in favour of third parties up to the amount standing to their credit in their ‘current accounts’, and to collect cheques for his customers and credit the proceeds to their current accounts. Lending by itself does not constitute banking business, clarifies ML Tannan.

A recall to all this became necessary, for the banks, even of the ilk of the SBI, seem to have forgotten the basics of banking. Yesterday I paid a carpenter for the work done at my house, by way of a ‘bearer’ cheque drawn on my savings bank account, Rs13,750, which was presented at the counter. The official at the counter and the accountant refused to pay the amount, saying that they can pay cash only up to Rs5,000 as they do not have enough cash. This is not a solitary instance. During the last fortnight, many customers faced this situation. Many members of the Resident Welfare Association, Kalyanapuri, Hyderabad, brought up this issue and demanded its resolution.

The payee asked for a written objection, which the bank officials refused to provide. The cheque was otherwise in order in all respects – with proper date, proper signature and adequate balance in the account. The Negotiable Instrument Act requires that if a cheque or bill of exchange is returned, either on the counter or in clearing, an objection memo duly signed by the authorised official of the bank shall be provided with the relevant reason.

In case a bank branch declines to honour a cheque, in writing, for want of cash in its vaults, it would amount to the bank being bankrupt. In the case of SBI, it is also the agent of Reserve Bank and operates the currency chest at a number of branches. Whenever a bank branch falls short of cash, SBI is supposed to make arrangements for providing the required funds. The transaction between the branches on such count can form the internal cash management of the bank.

Contrary to this practice, if the bank chooses to tell its customers that since there are not enough deposits coming into its vault and it is therefore restricting payments to its customers, it amounts to sheer mismanagement.

Since SBI is shutting ATMs and refusing to pay cash, either in full or in part, customers seem to have stopped depositing cash into their accounts and prefer to keep cash with themselves for meeting their requirements. This is a classic vicious circle.

Whenever creditors’ demands are not met and assets do not support the liabilities of a bank, that bank is said to be on the verge of bankruptcy. But by statute, the SBI cannot go into liquidation at its will.

Customers are losing faith in the bank with which they have been transacting for decades. Bad banking and good economy can never co-exist. Let not SBI declare bankruptcy ahead of its merger.