Project on Financial crises of PMC bank

Shubham Giri (Leader) 19305B0048

Christopher Nadar 19305B0068
Navin Anumala 19305B0043
Viraj Chimbulkar 19305B0064
Yash Surve 19305B0066
Shrutik Guttula 19305B0041

Guided by
Sandeep Khandekar sir
 Abstract

The trust of depositors in the Indian banking system was shaken in September 2019 when
the five-page confession letter written by Joy K Thomas, Managing Director and Chief
Executive Officer of Punjab and Maharashtra Co-operative Bank (PMC Bank), one of the
ten largest co-operative banks in India revealed gross financial irregularities, collusion,
and fraud in banking operations of PMC Bank from 2008 onwards. The Reserve Bank of
India (RBI) came into swift action and placed curbs on routine banking activities and
restricted the withdrawal of money to a limited amount. Succumbing to the shock,
depositors protested at several places and even, eleven depositors lost their lives. With a
huge exposure of 73% of the overall loan portfolio to a single borrower, Housing and
Development Infrastructure Ltd (HDIL) & group companies, that too facing insolvency
proceedings, the recovery of full money was almost impossible. The malice at PMC Bank
is the classic case of crony capitalism, collusion and fraud, and failure of corporate
governance. The case draws important lessons for reforming co-operative banking sector
and strengthening banking supervision in the country.

Keywords 
Co-operative banks, India, Punjab and Maharashtra Co-operative Bank, corporate
governance, collusion and fraud, liquidity crisis
Introduction:
Punjab & Maharashtra Co-operative Bank Limited (PMC), is a multi-state co-
operative bank that began operations in 1983.It has 137 branches cover a dozen
states of Asian country and nearly one hundred branches square measure in
geographical area. It's regulated by the Federal Reserve Bank of
Asian country and registered below the Cooperative Societies Act. It
additionally has branches in Karnataka, Goa, Delhi, Madhya Pradesh, and
Gujarat. It's one among the profitable co-operative banks in Asian country and
had earned total revenue of ₹1,297 Cr (US$182 million) and profits of ₹99.69
Cr (US$14 million) in the
financial year 2019.
At the time of its institution PMC was a cooperative bank however in 2000 it
got the standing of Schedule banking company by the depository financial
institution of Asian country. PMC is that the youngest bank to attain the
‘Scheduled Bank’ standing. The Multi-State standing was bestowed on the
Bank by the Central Registrar within the year 2004. The Bank so entered into
the National platform the Bank was given the approved Dealer class I License
by the depository financial institution of Asian country for Forex business
within the year 2011.
What happened at PMC Bank?
On 23, Sept 2019, the obligatory operational restrictions on PMC Bank for 6
months. Thanks to this, the checking account holders aren't allowed to withdraw
over ₹1,000 from their accounts throughout this era of restrictions. On twenty
six Sept 2019, the restrictions are mitigated and a complete a complete,000 may
well be withdrawn by customers. Former geographical area and geographical
region Co-operative Bank (PMC) manager Joy Thomas has admitted to
hoodwinking the auditors, bank’s board and therefore the run for several years
by concealing the default loans to the tune of Rs. 6,500 metals taken by realty
firm development and Infrastructure Ltd (HDIL). The social control board has
filed a hiding case within the PMC Bank scam. Consistent with associate FIR
filed within the case, HDIL promoters allegedly colluded with the bank
management to draw loans from the bank's Bhandup branch. The bank officers
failed to classify these loans as non-performing advances, despite non-payment.
Reports estimate the bank’s overall exposure to the HDIL cluster at around Rs
6,500 crore, or over seventy-three per cent of all the bank’s advances - and
every one of this don't seem to be being maintained.
The bank additionally allegedly created fictitious accounts of firms that
borrowed tiny sums of cash and created pretend reports to cover from regulative
supervising. In 2018-19, the bank had reported a profit of Rs ninety-nine. 69
large integers in its annual report. The bank showed 3.76 per cent (or Rs 315
crore) of advances (Rs 8,383 crore) as gross non-performing assets (NPAs), that
was sensible performance as compared to public-sector banks. However, it's
currently clear that the bank given false monetary reports to cover the dangerous
loan mess and the alleged collusion with HDIL and different firms.

Objectives:

 To provide rural financing and micro-financing.

 To remove the dominance of money lenders and middleman.
 To provide credit services to agriculturalists and weaker sections of the
society at comparatively lower rates.
 To provide financial support and personal financial services to small
scale industries, housing financial assistance, etc.
 To provide basic banking services to its members.
 To promote the overall development of rural areas.
 Body line

PMC Bank Crisis: PMC and HDIL Connection

Punjab and Maharashtra Cooperative Bank (PMC Bank), which is now subject to regulatory
restrictions for under-reporting its bad loans, allegedly issued a personal loan of Rs. 96.5 to
the debt-laden real estate company Housing Development and Infrastructure (HDIL)
developer Sarang Wadhawan, whose company had already defaulted on a Rs. 2,500-crore
loan from the lender.

Throwing all the laws into the wind, in August, PMC Bank had approved the personal loan
and it was beyond the Rs 2,500-crore loan that HDIL had ceased to repay and that the
cooperative bank refused to recognize as bad loans. Alarmingly, even when it was facing
insolvency proceedings in the National Company Law Tribunal (NCLT), PMC Bank
continued to work with the beleaguered company.
Another measure of financial robustness is calculated by Central Bank using a rating system
which considers CRAR, net NPAs to total advances, ROAs, cost to income and liquid assets.
PMC Bank had an A rating, considered one among the best.

Non-Performing Assets are bad loans that banks may have to write-off and the Gross NPA
rose to a sudden 3.79 % for the bank, thus dropping its ROA in 2019.

The lending portfolio had majorly the priority sectors like agriculture, education, housing and
MSME, up to an extent of 40% till 2015. But later the scenario shifted from priority sector
lending which by 2019 was a mere 15%.
Breach of Trust- PMC Scam, out of the closet

• PMC Bank was a favourite for small savings and deposits, for its reputation specially in
Mumbai where it had the largest chain of branches. On 23rd September 2019, RBI, based on
whistle blower’s complaint, restricted the withdrawals of deposits when the regulator noticed
huge withdrawals during the week. The whistleblower’s complaint gave details of the
deliberate underreporting of bad loans by PMC bank, and its dealings with the dying HDIL
prompting RBI to appoint an administrator for the next six months. There was massive
withdrawal of funds which added to RBI’s suspicion as withdrawals were crossing the
prescribed threshold. RBI increased the withdrawal restriction to Rs.25000 from Rs 1000 and
announced that 70 % of the account holders would be able to withdraw all their money. It
was unfortunate that PMC Bank misused money of the depositors to fund the affluent
demands of HDIL’s promoters Rakesh and Sarang Wadhwan, the father-son-duo. What was
shocking was that the bank gave two thirds of its loan to HDIL whose creditworthiness was
already at stake.

• PMCB’s account holders assembled outside RBI office demanding assurance that their
deposits were safe. They also demanded the revival of the bank for safety of their deposits.
They created a five-member delegation of depositors to put before RBI Governor, their
grievances for redressal.

• There was a concern for some banks over the letters of credit issued by PMC Bank, which
they appealed to RBI for necessary action.

• About six senior officers of the bank, whopping 21,049 dummy accounts and a decade of
misreporting led to the huge swindling, largest scam in the history of cooperative banks.
PMC Bank’s Legacy: PMC Bank was considered a matured 36-year-old cooperative bank
regulated by RBI. The bank was registered under the Cooperative Societies Act. In the year
2000, though being the youngest bank, it was conferred with Scheduled Status by the Reserve
Bank of India. Further the Bank was conferred multi state status from 2004 by the Central
Registrar, thus paving way for it to enter the national platform. The bank boasted of 137
branches spread across seven states with about 100 of them in Maharashtra and the rest in
Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh, and Madhya Pradesh. The Bank stood
among top 10 co-operative banks of the country. The Bank was accoladed with several
laurels for work ethics, great service to depositors, for lowest dispute ratio and as the best
urban cooperative bank. The Bank took pride in employing 70 percent women employees and
for various incentives provided towards upliftment of women. The largest urban co-operative
bank came under RBI radar from 2001, ever since the Ketan Parekh’s stock market scam
linked to the Madhavpura Mercantile Co-operative Bank debacle came to light.

For about a year till the scam came out in the open in 2019, it was known that PMC bank was
focusing on converting its poor performing branches profitable. PMC Bank’s vital statistics
failed to highlight the gravity of the situation until RBI imposed restrictions. Sharp
observation of bad loans coupled with the shift from priority sector lending to a few
borrowers from non-priority could have been taken as signals before the doom. For any
organization the capital position is a base indicator of its financial health, the capital -to-risk
weighted asset ratio (CRAR) is a measure of the banks’ exposure to bad loans. Banks need to
maintain mandatory CRAR greater than 9%.

Profitability is measured based on Return on Assets i.e.: Net income by Total Assets. ROA of
greater or equal to 1% is considered acceptable. It was found that PMC Bank had a ROA of
0.89% as on 31st March 2018 which seemed adequate. By the subsequent year end of 2019, it
subsided to 0.75, a sharp fall but not an alarming one.
 Analysis

PMC Bank Crisis: Highlights

 In 2017, Punjab and Maharashtra Cooperative Bank Chairman S Waryam

Singh held a stake of 1.91% in HDIL.

 Despite its failure to repay duties, PMC bank continued to lend to HDIL.
The bank issued HDIL founder Sarang Wadhawan a personal loan of Rs
96.5 crore, whose company had already defaulted on Rs 2,500 crore
loans.

 The Punjab and Maharashtra Co-operative Bank used at least 21,049

dummy accounts to cover accumulated non-performing assets of Housing
Development and Infrastructure Limited (HDIL) real estate companies.

 In his confession letter to RBI, the PMC bank managing director also
disclosed that the bank’s exposure to bankrupt HDIL was pegged at Rs
6,500 crore, which represents 73% of the total assets of the bank.

 Because the outstanding loans were large and if they were listed as NPA,
the bank’s profitability would have been impacted and RBI’s regulatory
action would have faced the bank, the MD said.

 According to the regulation, banks have a single entity exposure limit of

15% of their capital account, while group companies have a limit of 20%.
In the case of HDIL, exposure was at 73 percent four times the usual level.

Why is PMC in News??

Few days ago, PMC account holders got a message on their phones that shocked
them. PMC Bank was directed by the RBI to let the account holders withdraw no
more than ₹1000 for the next six months; not extend or provide any new loans.
All of this, overnight. No intimation was given to the customers. The reason
behind this punitive action by the RBI was primarily the under-reporting of Non-
performing Assets (NPAs) and underestimation of a debt. PMC gave out a ₹2500
crore loan to HDIL and despite the HDIL defaulting on repayments, PMC Bank’s
auditors did not classify the loan to HDIL as an NPA, and the RBI finally put its
foot down and termed the loan as a “complete loss”.

Action against those involved in Fraud

In the case of financial irregularities, the Economic Offences Wing (EOW) of

Mumbai Police has filed a first information report (FIR). PMC Bank’s suspended
director Joy Thomas, chairman Waryam Singh; HDIL’s Rakesh Wadhwan and
Sarang Wadhwan; other HDIL-related entities; as well as PMC Bank promoters
and officer bearers were identified as accused in the FIR filed by the EOW.

The Enforcement Directorate (ED) raided six locations in Mumbai and

neighboring areas to gather evidence in a money laundering case involving the
Bank and Housing Development and Infrastructure Limited (HDIL) Punjab and
Maharashtra Co-operative (PMC).

Several other financial institutions pursuant to Section 7 of the Insolvency and

Bankruptcy Code (IBC) have loan defaults against HDIL in the NCLT’s Mumbai
Bench. These include the Bank of the Union, the Bank of Industry, Dena Bank,
the Bank of the Union, and the Bank of India. 

The move came after the Mumbai Police’s Economic Offence Wing (EOW)
arrested debt saddled HDIL bosses on charges of alleged involvement in fraud
at the PMC Bank. Also included in the EOW action were the listed builder’s
commercial and residential properties worth Rs 3,500 crore. The Enforcement
Directorate (ED) confiscated 12 high-end cars, Rakesh Wadhawan, Chairman of
Housing Development and Infrastructure Limited (HDIL), and his son Sarang
Wadhawan.

According to PMC bank’s annual report 2018-19, as on March 31, 2019, the
bank had total deposits of Rs 11,617.34 crore and advances of Rs 8,383.33
crore. In 2018-19, the cooperative bank posted a total revenue of Rs 1,297.98
crore. The revenue was recorded as Rs 1,170.49 crore in 2017-18.
CONCLUSION

PMC Bank followed the ranks of failed co-operative banks due to mis governance. One still
is left to wonder if that would be a lesson to change towards greater accountability. Dual
supervision and other statutory provisions were blamed for the lapse in appropriate checks
and balances. Waryam Singh was a board member of HDIL while serving his term as
Chairman with PMC Bank, a sheer misuse of corporate governance. The nexus of politicians,
property owners and bankers formed a conspiracy that paralyzed the cooperative bank. It was
unfortunate that 1.6 million depositors were left in the lurch. Will they get their hard-earned
money back, only time would tell? Some banks will take a hit due to the letters of credit
issued by PMCB. Whistle blowers were the saviors in revealing such scams, but ensuring
their protection was very important. Sad state of affairs was that the crisis showed how
watchdogs like bank auditors, the government and the RBI were not just napping but were
unconscious! Twenty -one thousand and twenty -nine dummy accounts to keep non-
performing assets hidden was no joke. It is sad to note that the Indian financial arena was
akin to scams wherein private banks, public sector banks and cooperative banks were caught
on the wrong foot. In comparison to year 2009, frauds detected increased about 45% by 2019.
The financial embezzlement accounted to INR 71500 crores spanning across 6800 cases of
fraud.[14]. The case leaves one with several questions like addressing depositors’ woes,
regulator’s role in keeping check to avoid scams, role of banks in safeguarding people’s
money and ethical business, vital to society. It is intriguing to know why institutions like
PMC were called banks but were left out of the regulations of mainstream banking.
References

https://taxguru.in/rbi/pmc-crisis-depth-analysis.html

https://www.careeranna.com/articles/pmc-bank-crisis/

https://www.pmcbank.com/documents/PMC-BANK%20AR-2019-website-inal-final.pdf/