In the era of liberalised financial markets in India, it appears that even before the dust settles on one financial crisis there is a new one in the making. The latest is the ongoing revelation that a number of cooperative banks and financial institutions like Provident Funds have “purchased” government securities (g-secs) through means that flouted RBI guidelines, only to discover that the instruments they paid for are not going to delivered by their brokers. The matter came to light when on April 19, a NABARD team scrutinising the accounts of the Nagpur District Central Cooperative Bank (NDCCB), reported to the RBI that while the bank had made huge investments in government securities, it was not in possession of the certificates for the same. The high profile internet-based brokerage Home Trade, it transpires, had obtained Rs. 124 crore from NDCCB for investment in government securities, but had not delivered the certificates. Caught out by the NABARD team, the Chairman of NDCCB, Sunil Kedar, was the first to file a complaint against Home Trade on grounds of cheating.
 
Since then it has been discovered that the disease was more widespread, involving an as yet unfathomed number of banks, financial institutions and brokerages. According to Yashwant Sinha’s statement, besides the NDCCB, purchases of g-secs without delivery, have been made by Wardha District Central Cooperative Bank (Rs. 25 crore), the Osmanabad District Central Cooperative Bank (Rs. 30 crore), the Sadaguru Jangli Maharaj Cooperative Bank (Rs. 40 crore), the Amravati Peoples Cooperative Bank (Rs. 9.5 crore), The Swarnayug Cooperative Bank (Rs. 58 crore) and the Raghuvanshi Cooperative Bank (Rs. 5.4 crore). According to the Finance Minister the brokers involved in the transactions that were not completed were, besides Home Trade, Indramani Merchants Ltd, Kolkata, Syndicate Management Services Ltd. Ahmedabad, Giltedge Management Services Ltd., Mumbai, and Century Dealers Pvt. Ltd., Mumbai. In his view the sums involved were close to Rs. 275 crore.
 
Sinha’s statement, of course referred only to the reports he has received from the RBI, which relates to the set of banks from Maharashtra. But meanwhile evidence has emerged that the spread of the crisis is far greater. Once the NDCCB complaint had been filed, the floodgates were opened. Besides the cooperative banks in Maharashtra, at least 4 banks from Gujarat (Surat Nagrik Co-operative Bank, Surat Mahila Co-operative Bank, Karamsad Urban Co-operative Bank and Navsari Urban Co-operative Bank) and, in an unusual turn, the Seamen’s Provident Fund, have reported having invested large sums in as yet undelivered government securities.
 
When assessing the current crisis we need to take note of the fact that this crisis comes in the wake of a series of financial disasters over the last decade or so. We need only recall the engineered boom in stock markets in the early 1990s which involved all major Indian and foreign banks and the “big bull” Harshad Mehta, the subsequent periodic instances of alleged insider trading and price rigging by corporations and broking firms, the near collapse of UTI, the evidence of fraudulaent lending practices by some of the apex financial institutions and, more recently, the infamous Ketan Parekh episode involving among others the Madhavpura Mercantile Cooperative Bank. In all cases, investigations have focused attention on the ease with which one or more high profile brokers or firms could access huge sums of money to play the market.
 
This time too the government and the principal regulatory agencies are seeking to dismiss the revelations as one more “scam”, involving rogue traders operating in collaboration with unregulated financial institutions that have access to public savings. The description of the episode as a scam is facilitated by the fact that, though the investments in government securities was legitimate, they were made in an unlawful manner. Thus, they were not made in dematerialised (demat) form through a subsidiary general ledger account  as required, but in physical mode. And some of the brokers, including Home Trade, had not been recognised fully as brokers for transactions involving such securities. But with the “physical mode” transactions not having led to delivery of securities the question as to where the money went remains. Not clear say the investigating agencies, but diversion to the stock market for speculative purposes is a “hot” suspicion. But there is nothing to fear says Sinha, since the event is unlikely to disturb the financial system and deposits up to Rs. 1 lakh are insured under the Depositors Credit Insurance Fund Scheme.
 
The emphasis on events such as these being a scam is not without motives. It helps detract attention from the fact that there are systemic faults in India’s increasingly liberalised financial system. Those fault lines allow agencies authorised to mobilise household savings to divert, in this case through unlawful transactions involving legitimate investments in government securities, to cross the walls which separated different areas of financial activity during the interventionist, pre-reform years.