How PMC Bank Duped Its Depositors: All You Need To Know
As more details of PMC Bank's troubles surface, its has opened a messy dynamic that consists of office-bearers, the government and RBI, troubled realtors and aggrieved customers.
Mumbai-based Punjab and Maharashtra Co-operative Bank (PMC Bank) is making new headlines every day, ever since the Reserve Bank of India put curbs on the bank to prevent large scale withdrawal of deposits. A five-page letter by the former Managing Director Joy Thomas to the RBI has also made its way to the media and social media, where he reveals how they systematically kept the central bank in the dark and gave large loans to a single real estate entity, by flouting all norms.
These developments have sparked panic among citizens, giving rise to a slew of misinformation. BOOM has covered them here and here.
The bank is now facing the heat from enraged customers and legal authorities.
BOOM tells you all you need to know about the revelations around the PMC Bank controversy.
Basics Of The Bank
PMC Bank started its operations in 1984, and is among the top 10 urban cooperative banks in India.
Its annual report for financial year 2019 has reported:
- Deposits worth almost ₹11,617 crores
- Advances worth ₹8,300 crores
- Operations across 137 branches
- Gross non-performing assets (NPA) of 3.76%
What Link Exists Between PMC Bank And HDIL?
According to the note released by Thomas, before the current troubles with PMC Bank, the bank faced financial troubles twice before. In both these cases the Wadhawan family of the HDIL group bailed them out and helped the bank to overcome its troubles.
The first round of troubles occurred in 1986, when the bank was facing the repercussions of some "unlawful activities by its borrowers/members". It was then that the bank came into business with the now deceased Rajesh Wadhwan (affliated to the Dewan family) and his brother Rakesh Wadhwan, present director of real-estate firm HDIL. Their deposits with the bank helped keep it afloat.
The second instance came in 2004 when there was a run on the bank due to a larger failure of three separate cooperative banks. Rajesh Wadhawan had helped the bank with a deposit of nearly ₹100 crores to mitigate the liquidity crunch.
A formal banking relationship has existed between HDIL and PMC Bank, with the group contributing a significant share of bank's income.
What Went Wrong?
Thomas' letter also says that PMC Bank under-reported its non-performing assets. The actual non-performing assets of the bank are much higher than what what was actually revealed to the RBI.
In order to avoid action from the Reserve Bank Of India's (RBI), and riding on HDIL's record of paying back its dues (even if delayed), the bank did not classify unpaid dues and stressed accounts as non-performing assets. The delays on HDIL's side started showing up after their business entered choppy waters in 2013.
Additionally, in 2017, when the RBI asked for increased scrutiny, stressed accounts of the group were replaced with dummy accounts on the bank's balance sheets. The RBI in-turn did not check accounts since they were classified as loans against deposits and were of lower denominations.
The stressed legacy accounts belonging to this group were replaced with dummy accounts to match the outstanding balances in the balance sheet. As the loans were mentioned as loans against deposits and were of lower amounts they were never checked by the RBI.
While not mentioned in the letter, Reuters has reported that the number of dummy accounts stands at 21,000.
Although not mentioned in Thomas' letter, news outlets have reported that out the bank's advances of almost ₹8,300 crores, HDIL's exposure amounts to over ₹6,500 crores. The company has troubles of its own, and is heading to the National Comapanies Law Tribunal (NCLT) to face bankruptcy proceedings.
Lapses were also shown by the statutory auditors of the bank, who checked only incremental advances by the bank, and not the entire operations in all accounts. The letter attributes these lapses to auditors' time constraints.
What Is The Role Of The RBI?
The lapses above have brought to debate around the failure of the system, in this case the RBI, on how they failed to spot irregularities of such magnitude where not just rules were flouted but the management took active steps that are now part of a criminal investigation.
While there is reportedly lesser sophistication within the RBI's cooperative bank supervisory team, the Mumbai Mirror reported that the RBI had also supposedly warned the government in 2017-2018 that PMC Bank's chairman Waryam Singh was unfit to lead the bank. This they claimed was due to his proximity to HDIL which resulted in rules being flouted.
The RBI on September 24 issued its first wave of banking restrictions on PMC Bank, which BOOM has covered in a fact file here. This comes after PMC Bank appraised the RBI of the account irregularities on September 18. These restrictions directly hit customers, imposing a withdrawal limit of only ₹1,000 on them for a period of six months.
However as protests grew from all quarters, two days later, the RBI stated that depositors could withdraw up to ₹10,000 from every account. These relaxations would ensure that 60% of depositors with PMC Bank would be able to withdraw all their deposits in its entirety.
The second RBI notification can be read here.
The bank had laid down a plan to recover its dues from HDIL.
This includes adjusting an existing fixed deposit against its loan account, a claim to the NCLT and a claim to collateral pledged with other banks.
Meanwhile, first-information reports (FIR) has been filed against Thomas, the bank's chairman and its office bearers and HDIL's Wadhawan family. A lookout notice has also been filed against Thomas.
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