How PMC Bank Duped Its Depositors: All You Need To Know

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.

ByMohammed KudratiPublished on Oct 02 2019 5:47 pm, Last Updated: Oct 02 2019 5:48
pm
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COMMENT
A Branch of PMC Bank
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.

Mumbai Mirror
✔
@MumbaiMirror
#PMCBankCrisis: Account holders protest outside @RBI in BKC

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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.

What Next?
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.