Punjab & Maharashtra Co-operative Bank is a multi-state scheduled co-operative bank. It was established on 13th February 1983. The bank has 137 branches across 7 states in India. Mumbai is the main center of operation with 81 branches alone in Mumbai. The bank operates in the states of Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhye Pradesh.
Punjab and Maharashtra Cooperative Bank (PMC Bank) faced regulatory strike for misrepresenting its loan account. PMC had catered a loan worth Rs. 6,500 crore i.e. 73% of the bank’s total advances to just one borrower group i.e. Housing Development and Infrastructure Limited (HDIL) who was facing bankruptcy proceedings.
Granting loan of this scale, PMC clearly didn’t follow the RBI’s guidelines of granting the loan amount to single borrower which was 25% for a group connected companies and 15% for individual companies.
Along with this, PMC created 21,049 fictitious accounts to misrepresent and to channel the loan amount to HDIL group entities. All these accounts were never disclosed to RBI. PMC advanced the loan amount i.e. 6,500 crore to 44 different HDIL group entities. This scam between PMC and HDIL has been existing since 2011 and on 24th September, 2019, this scam was revealed when RBI intervened and asked for clarifications. In the financial year 2018-2019, PMC stated its Gross Net Performing Asset (GNPA) to be 3.76% which was comparatively lower than other state owned banks. When RBI intervened and investigated, the percentage of GNPA raised from 3.76% to 77%. It was concluded that PMC had been false representing the bad loan figure in the financial statement and hiding the scandalous association with HDIL.
Some of the causes for PMC crisis
- Misappropriation of Funds:
Misappropriation of Funds suggest intentional illegal use of funds for any authorized or unauthorized use. PMC granted a loan to HDIL which was defaulting payment to its creditors and was under purview of bankruptcy. The Association of PMC and HDIL started in 2011 and was finally caught in 2019. PMC kept on granting and lending funds consistently and misrepresented the association in their statements and with regulatory bodies. This misappropriation includes Rs. 6,500 crore i.e. 73% of total advances.
- Failure of Internal Control and Management System:
Such scandals are impossible to enact without the help of management or top level authority. Misrepresenting such a huge fund through creation of dummy accounts need support from the respective chain of command. The PMC crisis is an evident example of a failed control system or corrupt management system. All the bodies and departments of PMC failed to take detective or preventive or corrective actions against such scam. It took 9 long years for this scam to come public and it shows a deep concern regarding the ethical standards of business operations.
- Misrepresentation of financial statements:
The association of PMC and HDIL started in the year 2011 and they have been defaulting the transaction since then. It is impossible to get such a transaction to cut loose in their financial statement. The profit figure and non-performing assets were behaving oddly along with the performance of the industry or category.
In 2019, PMC reported the NPA of 3.76% but when RBI investigated the NPA turned out to be 77%. Similarly, the Return on Asset (ROA) dropped from 0.89% to 0.75% within a year and there was no trial before it was detected.
Similarly, the loan portfolio changed drastically from 2015 to 2019 i.e. in 2015 the loan in the priority sector was more than 40% which dropped to 15.06% in 2019.
Legal Intervention in PMC Case
- After the assessment and complained registered by Reserve Bank of India on 30th September, 2019, Mumbai Police filed a case of forgery, cheating and criminal conspiracy against the former chairperson of PMC Bank Mr. Waryman Singh and Managing Director Joy Thomas and other senior officials of the bank and promoters of HDIL, Executive Chairman Mr. Rakesh Kumar Wadhawan and his son Mr. Sarang Wadhawan.
- The Enforcement Directorate filed a money laundering case in the PMC Bank scam.
- Reserve Bank of India ordered Urban Cooperative Banks not to expose more than 15% of its capital funds to individual investors.
- Reserve Bank of India to set up a new cyber-security framework to assess the variety and scale of digital product offerings of banks. This framework will include bank-specific domain, periodic security assessment, well-built cyber-security incident reporting mechanism, governance framework etc.
- Urban Cooperative Banks with their asset portfolio more than Rs. 500 crore need to report their business loan to RBI.
Urban Cooperative Banks are categorized into two Tier; Tier 1 and Tier 2. Tier 1 comprises 69% of the total number of UCBs in operations whereas Tier 2 is only 31 %. Despite their lower number, Tier 2 has 87% of total deposit, 88% of Total Advances and 86.9 % of total assets of total UCBs operation.
PMC has customers from all backgrounds; individuals, societies, and institutional. Also, many small cooperatives banks are the customers of PMC. Crisis situations not only affect the company and individual customers. Such crises affect all the cooperatives associated with PMC along with their customers. The downfall of the PMC will lead to the downfall of 130 smaller banks who are associated with the PMC. Such cascade of falling smaller banks and cooperative banks will eventually create a panic situation across Indian and Banking Institutions.