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From MMC To PMC

From MMC To PMC

The great Indian sale on Amazon might have done its bit in reviving the market sentiment but the fact still remains the same. There is fear everywhere. About reducing auto sales, corporate losses & bankruptcies, widening fiscal deficit, reducing GDP, rising bank NPAs, higher crude prices, global trade wars etc. The list goes on. As if all this was not enough, we now have the PMC (Punjab and Maharashtra Cooperative) bank crisis. Yet another bank has come in the red.

The news has hit the lives of many. Newspaper reports are rife with stories. An actress has to beg for as little as Rs 500 to Rs. 3000 from her colleague because she believed in what has been termed as “cashless economy”. She is forced to sell her jewellery as she can’t access her hard-earned money. She transferred all her deposits to the PMC bank as it was offering better interest rate. It seems she was hardly aware of the fact that the banks offer deposit insurance of up to a maximum of Rs. 1 Lakh irrespective of the amount deposited!

A Gurudwara chief is finding it difficult to run Langar sewa, provide books to the needy or conduct health clinics. The reason remains the same – PMC bank crisis. This is not the story of one Gurudwara but of many others. Thousands of people have been affected as they can’t withdraw money from the bank, considering the restrictions imposed by the RBI.

One of the top cooperative banks has become bankrupt overnight. It is shocking to say the least. Newspaper reports show the extent of manipulation the bank officials were doing. The question is – are the auditors not responsible? What is the accountability of the RBI? Why could it not detect this fraud earlier?  

It came into limelight only when the RBI stopped its operations and appointed an administrator for the next six months. The depositors were not allowed to withdraw money freely. What alerted the bank was sudden withdrawal of money in large quantities. Over a period of less than a week nearly 29 per cent of the deposits were encashed! This happened as some of the large investors reportedly got a hint of a complaint made by a whistleblower.

The complaint pointed at massive underreporting of bad loans by the bank and its exposure to the real-estate company Housing Development and Infrastructure Limited (HDIL) promoted by the infamous Wadhwan family.

Days after the clampdown, Joy Thomas, the bank’s suspended managing director came out with a confession. The real-estate company had an exposure of Rs. 6500 crore, a whopping 73 per cent of the total assets of the bank!

The relationship between the PMC bank and the businesses, promoted by the Wadhwan family, started way back in the mid-1980s. In his letter to the RBI, Joy Thomas wrote that the family helped the bank in 1986 when it was in a bad shape by infusing Rs. 13 crore as capital. The family also had a huge quantum of deposits. In 2004, it again came to its rescue when Rs.100 crore was deposited in the bank. However, the family had also started borrowing money during these years. At times, their accounts would be overdrawn. But soon they would be regularised. The bank in turn charged huge interest ranging from 18 to 24 per cent, which gave it a good profit.

However, the company started facing financial crunch in 2012-13 after one of its major projects was cancelled by the government. Fearing action from the RBI, the bank did not classify the accounts as NPA. So much so, even its board was not informed.

Such was the proximity between the bank officials and the Wadhwan family that over 21000 dummy accounts were opened to camouflage the 44 accounts held by HDIL. In fact a Business today report says that such dummy accounts were opened mostly in the name of dead people or those who had closed their accounts. It took only 45 days for the bank authorities to open such accounts, without following the standard operating procedure. These accounts were not opened in the core banking system (CBS)! They were mere entries in the advance master indent submitted to RBI in March 2018. All this to support an erring client at the cost of public money!

The former chairman of PMC Bank, Waryam Singh, was also their partner in the real estate company. They had also floated another organisation for breeding race horses. Incidentally, Waryam Singh was appointed as chairman on the Board of PMC bank in 2015 for a period of five years after he served HDIL on its board for around 10 years. The company is now facing bankruptcy proceedings at the national company law tribunal (NCLT).

The PMC crisis story should act as an eye opener to both the government and the RBI. The apex bank might have introduced strict monitoring and regulatory procedure. But both PNB and PMC cases have shown that they are inadequate to ensure full compliance. The former could open bank guarantees & issue letter of credit without following the due procedure and the latter easily manipulated the books for helping a client. This only shows the vulnerability of the entire system. And what did the RBI do?

A similar case came into limelight in 2001. We may all recall the case of Madhavpura Mercantile Cooperative (MMC) Bank which was linked to Ketan Parekh’s stock market scam. The Madhavpura Mercantile had a large exposure to a single stock broker and PMC bank gave two-third of its loan to a single real estate developer – whose credibility was already questionable. The government and the central registrar of cooperative societies decided to reconstruct the bank way back in 2001. The bank had an equally horrifying story as that of PMC bank. The entire capital, reserves and 91 per cent of the deposits were eroded by the time RBI came to know. Its NPA stood at 88.2 per cent of the gross advances.

The government’s decision to infuse capital could not do much. The scheme expired in August 2011. Eleven years after the Madhavpura fiasco, the RBI finally decided to cancel its license in June 2012. The depositor’s fight to get back their money continued. Towards the end, only those who held deposits less than Rs. 2 lakh could get their money back.

Just a few years before the failure of Madhavpura Mercantile, a committee headed by K Madhava Rao had raised concerns about the increasing number of urban cooperative banks and their dismal financial performance. The committee questioned the lack of professionalism and corporate governance in these banks. After Madhavpura, the RBI discontinued giving fresh licenses for cooperative banks. The number of such banks has reduced from 1872 in 2004-05 to 1551 in 2018-19. However, their assets have grown manifolds.

Several working group committees were formed since 2004-05 to improve the functioning of the urban cooperative banks. The recommendations ranged from increasing capital-base to improvising their functions with technology to establishing a different independent organization for their supervision and so on. Some of the working groups also recommended that the dual-control of state government and the RBI should be ended. The recommendation has been conveniently ignored both in urban cooperative banks and even public sector banks. Had those recommendations been implemented seriously, the current crisis would not have occurred.

The approach taken by the RBI in the PMC case is akin to locking the barn after the horse has escaped. It is a matter of serious concern that it could not identify gross manipulation when its team visited for regular inspections.

While people are having sleepless nights, the regulatory response so far has been symptomatic, showing little understanding of the underlying disease. What is required is complete overhauling of the entire banking system so that no one has the clout to flout the rules easily. One thing that must be learnt from both the cases is that compliance with legal provisions must be beyond political intervention or ownership. If we do not rectify this, we will be caught unawares every time a new crisis emerges.

People have been asking the prime minister to intervene. So far, the finance minister has only paid lip-service by promising to speak with the RBI for expediting withdrawals. What happens next is yet to be seen. We can only hope against hope that the government and the RBI shall take some strict action for changing the way the entire system operates.

As far as the general public is concerned, we should not keep a lot of money with one bank. A bank offers a deposit insurance of only Rs. 1 Lakh. A recent research conducted by the State Bank of India recommends the insurance amount to be increased substantially. Till the recommendation is accepted, we should minimize our risk either by spreading the deposit money to different banks or investing in other options! Unfortunately for an average middle class person, who does not understand stock market, bank deposits were the easiest and most convenient option. But then if your bank fails, you will end up getting only Rs. 1 lakh. That is how the Indian Banking system is – more favourable for the industrialists, who can get loans easily, than a common man!

(The writer, a company secretary, can be reached at jassi.rai@gmail.com.)

(Published on 14th October 2019, Volume XXXI, Issue 42)