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PMC Bank Crisis: An In-depth Analysis of the Ongoing Crisis
By Srinidhi Ramesh
PMC Bank Crisis: PMC Bank is the largest urban cooperative bank to be placed under the RBI watch since the crisis of the Madhavpura Mercantile Co-operative Bank in 2001 linked to the stock market scam of Ketan Parekh. While Madhavpura had a large exposure to a single stockbroker, two-thirds of its loans had been given by PMC Bank to a single HDIL real estate developer whose creditworthiness was already under a cloud.
The emerging crisis at PMC Bank is the tip of the iceberg in India's banking sector with broader, unresolved issues. The origins of the banking sector crisis goes back to the unresolved issue of non-performing assets (NPAs), which in the case of cooperative banks are magnified due to lax governance and a dicey business model.
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.
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.
PMC Bank Crisis: Bank profile
Particulars Details as on 31st March 2018
Registered Office 240, Shankar Sadan, SION (E), Mumbai-400022
Number of Members 66045
Number of Branches 134 Branches
Paid up Share Capital Rs. 294.22 Crore
Total Reserves and Funds Rs. 814.80 Crore
Total Deposits Rs. 9938.85 Crore
Total Loans and Advances Rs. 7457.50 Crore
Total Overdues Rs. 199.60 Crore
Gross NPA's 1.99%
Net NPA's 1.05%
Net Profit Rs. 100.90 Crore
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.
Failures of urban cooperative banks occur alarmingly frequent. Their numbers, according to RBI statistics, dropped from 1,926 in 2004 to 1,551 in 2018. A small capital base is one of the reasons why cooperative banks fail so often. Cooperative bank regulation by RBI is not as stringent as that of commercial banks. RBI should have greater power over cooperative banks and empower RBI to implement resolution techniques such as winding-up and liquidating banks without involving other regulators under the laws of cooperative societies.
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Srinidhi Ramesh
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