Is the Bank of Baroda under danger of losing its banking licence? An alarmist message is going viral on WhatsApp, urging readers to withdraw their money from the bank. The message also shares legal website LiveLaw's reporting on the case. However, this is not true, as the possibility of revoking the bank's licence was just one of the possible options that Calcutta High Court division bench listed out to the Reserve Bank of India (RBI). This is related to a cross objection filed by the Indian Oil Corporation against Bank of Baroda, following a dispute after the bank refused to clear the payment of a bank guarantee invoked by IOC.
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A bank guarantee is a bank's vetting of a business, where a bank stands as its guarantor. This is usually, but not always, done where a relatively smaller and lesser known party gets a bank guarantee while dealing with a much larger party, where the bank guarantees payment on behalf of the smaller party to the larger party; thus bolstering the former's creditworthiness. More can be read here.
The message has been received multiple times on BOOM's WhatsApp helpline (7700906111). The message citing a link from LiveLaw, states:
"!!!!HIGH ALERT!!!! -- Anyone having funds in Bank of Baroda, pls withdraw it immediately....Please see below"
BOOM also found another user on Twitter saying that he received this message on WhatsApp, stating it may be incorrect.
What does the judgement state?
The Calcutta HC division bench comprising of Justice Sanjib Bannerjee and Justice Kaushik Chanda has directed the RBI to consider taking appropriate steps against the Bank of Baroda for its unsystematic conduct while dealing with a bank guarantee issued by it.
The order states:
"Considering the conduct of the appellants, the Reserve Bank of India should consider what appropriate steps may be taken against the Bank of Baroda, including revoking its licence or the authority to carry on banking business, if necessary."
Further, the HC dismissed the Bank's appeal for default.
However, while the Calcutta HC did direct RBI to look at revocation of the licence as one of the steps, it is not a binding order on RBI to cancel the bank's licence.
BOOM contacted a spokesperson of the RBI for comments, who did not comment on the issue. BOOM also got in touch with a Bank of Baroda spokesperson for comments. The spokesperson declined to comment, but directed this reporter to Bank of Baroda's filings with Indian stock exchanges, dated February 17.
According to the filing, the bank has insisted that their decision to not release the payment, was as per the terms of the guarantee. The Bank also maintains that the guarantee was conditional, and that it did not release payment as its terms were not met. "The Bank will take appropriate steps as per the legal advice and comply with all the statutory and regulatory requirements," said the bank in their statement to the exchanges.
This filing can be read here.
Bank of Baroda and the story of a bank guarantee
IOC entered into an agreement with infrastructure company, Simplex Projects in 2017, where the latter was to undertake some work at IOC's Bongaigaon facility in Assam. IOC agreed to make a mobilisation advance (an advance given to start some work of a contract) against a bank guarantee, and another guarantee on account of a security deposit. According to the court proceedings documents of the Calcutta HC, Bank of Baroda furnished an unconditional bank guarantee worth ₹6.97 crores to IOC on behalf of Simplex.
However, IOC invoked the bank guarantee when it felt Simplex was not living up to its part of the agreement. The bank did not release payment under the terms of the guarantee on the grounds that "the money may not have been made available by Simplex to the bank." IOC approached Calcutta HC seeking their intervention to ask the RBI to look into the conduct of Bank of Baroda, since it had acted in a manner not quite like a bank should, especially a nationalised bank.
Fear mongering around banks - not a first
This is not the first time panic inducing social media messages around the financial health of banks, has hit the banking ecosystem. When RBI imposed restrictions on Punjab and Maharashtra Co-operative Bank (PMC Bank) in September 2019, social media went overboard with unverified information that led to further panic about the safety of deposits in banks.
From rumours around Yes Bank shutting down, to those of 9 nationalised banks shutting shop, BOOM encountered a lot of rumours around the monetary and financial system in late 2019.
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