Why You Should Be Very Worried

The shadow banking crisis

- Rashmi Pratap

Sometime in 1996, a high-profile non-banking finance company, or NBFC, that had grown meteorically over the past few years started defaulting on payments to lenders. When the first few cheques bounced, thousands of depositors landed up at its branches to demand their money. But CRB Capital founder Chain Roop Bhansali had flown the coop. Various stakeholders lost an estimated 1,200 crore in the CRB scam.

Bhansali, from Rajasthan, belonged to a middleclass jute traders’ family and, as a chartered accountant, had a reputation for using innovative ways to move money around. In Mumbai, he had a successful run between 1992 and 1995 and set up a slew of companies, including an asset management company (mutual fund) and a merchant banking outfit to help companies tap stock markets. Just before the defaults started, he had even managed to get a banking licence from the Reserve Bank of India of RBI.

Initially, he did well, as bull market and easy liquidity and a penchant for making friends with businessmen with cash to invest helped him grow. As the slowdown hit in 1996, his investments took a beating. The South East Asian crisis, and the real estate slump that followed it, added to his problems. He hoped things would turn around and borrowed money to pay back old loans. Eventually, he could not borrow further. CRB collapsed. Bhansali was eventually found in Hong Kong and brought back to the country to face trial in 2013.

Though it was a high-profile NBFC scandal, and the amount of money involved was high for the time, it did not create much turmoil in the financial sector. It just showed up the lacunae in the regulatory system.