The failure of Punjab and Maharashtra Cooperative Bank (PMC Bank)—a relatively small multi-state cooperative bank—is a test for the reformist Narendra Modi government. Remember, Modi sarkar has waged a war on cash and wants us to keep our money in banks. The public fell in line, because it had no choice. The government cannot, now, try to distance itself from direct responsibility for a bank failure, as the finance minister (FM) has tried to do.
The Reserve Bank of India (RBI) has appointed a retired chief general manager (CGM) as the administrator of PMC Bank and a team of faceless retired bankers to help him. It has also commissioned a forensic audit by Grant Thornton which will take anywhere between four to six weeks, at the earliest, to submit a report. This is too slow, given that the stress and anxiety has already led to several depositors losing their lives.
What PMC Bank needs is a Satyam-like quick resolution by a team that is savvy and fully empowered to ruthlessly push for a solution that is in the best interest of a majority of stakeholders. For this, speed is of the essence. RBI does not seem to understand that it does not have time on its hand and delays are going to worsen the situation.
Crisis resolution cannot be handled by a retired central banker; most of them operate out of an ivory tower, with very little understanding or empathy for issues faced by people—especially businesses and non-salaried professionals. I say this without any disrespect to specific individuals; but it needs to be stressed that it requires a different skill-set and higher level of influence.
Delay in resolving the crisis will erode depositors’ money as the Bank pays salaries to its employees at the 137 branches that continue to function. One also assumes that the fees paid to the administrators and forensic auditors will come out of deposits with the Bank.
Loans to the Wadhwan group of HDIL, which caused the collapse, are variously estimated at between Rs2,500 crore and Rs6,500 crore. What is the status of nearly Rs2,000 crore that the Bank has lent to others? Are these loans secured? Has PMC Bank issued letters of credit (LCs) or given guarantees? If so, are these being honoured?
Nearly a month after the crisis, there is no clarity on the financial status of the Bank, while depositors’ money gets depleted every day that it remains in suspended animation. A forced takeover of the Bank— as some people are demanding—will be nothing short of a scandal, especially when there are 1,500 cooperative banks out there, apart from some giant finance companies, that are tottering dangerously.
Fortunately, RBI governor Shaktikanta Das is a lot more open and receptive than his predecessors. On 15th October, on behalf of Moneylife Foundation, we highlighted some of these issues to governor Das. Many of them need to be addressed with the same speed that was shown in making changes during demonetisation. Here are five moves that RBI should make urgently.
1. Statutory Dues: PMC Bank has business accounts of tens of thousands of small businesses where it was their sole banker. Its failure has set off a chain of alarming issues in relation to payment of statutory dues. Remember, defaults—even if they are not the customers’ fault—have been criminalised by this government.
Payments by PMC Bank were abruptly stopped on 23rd September. This means businesses would have failed to make payments of advance tax, GST (goods and services tax) and tax deducted at source (TDS) that may have already been deducted from employees or creditors. There may be provident fund dues to be paid.
Failure to make these statutory payments is a jail-able offence. Under the new rules, this may affect the ability of unconnected businesses to get GST credit, if any supplier in the chain is a PMC Bank creditor and has failed to deposit GST. The finance ministry needs to step in and ring-fence PMC Bank victims from needless harassment and prosecution for being unable to make payments due to the Bank’s failure.
2. Individual Payments: What is the status of salaried employees or professionals who had standing instructions with the Bank for payment of credit card dues or EMIs (equated monthly instalments)?
In a week or two, depositors who are unable to make payments, despite having funds, will be marked defaulters for no fault of theirs. The system has no provision to provide any leeway for this.
RBI needs to ensure that innocent depositors are given time to get back on their feet and the Bank’s failure is not allowed to affect their credit scores until then. This requires a systemic solution that should apply in all such cases.
3. HDIL Dues: A press release by the Enforcement Directorate (ED) states that it has seized assets and properties valued at Rs3,830 crore and another 80 properties around Mumbai that have yet to be valued. This caused elation among depositors.
But it is unclear how many banks and lenders will stake a claim to these assets and whether the same asset has been pledged to multiple lenders. More importantly, ED’s seizures could land up in court under the PMLA (Prevention of Money Laundering Act), unless a different approach is adopted that allows for quick resolution and repayment to PMC Bank.
4. Finding a Buyer: When the PMC Bank debacle first erupted, its reputation as a well-run bank with 137 branches across states attracted attention. A large cooperative bank even toyed with the idea of making an acquisition offer, but got cold feet once it learnt of the enormity of the fraud.
Even today, PMC Bank would find buyers if there is a quick estimation of losses and amount recoverable. A leading banker, who prefers to remain unnamed, told me, “The key would be to find a potential buyer who would be considered ‘fit and proper’ by RBI to run a bank and has deep pockets to acquire one.”
Such a buyer may be willing to pay anywhere between Rs1,500 crore to break into the banking business with a network of 137 branches and trained staff on board. But if the losses are higher, there will be no takers.
A less attractive option would be to sell the branch network, maybe to banks looking to expand into key geographies where PMC Bank operates. Again, this needs quick action, smart decisions, well-structured bids and willingness of RBI to play ball.
5. Changing the Rules: Finally, one hopes that the PMC Bank debacle is a harsh lesson to the government and a realisation that the cooperative bank structure has long outlived its utility; most of them are badly exploited by politicians.
The government must use the crisis to convert these into scheduled commercial banks with stringent oversight and supervision by a single regulator. The structure of deposit insurance has to be reworked. Collection of insurance premium from all banks cannot work when the risks involved are vastly different. In the past 25 years, all payments/settlements by the Deposit Insurance and Credit Guarantee Corporation have been for failed cooperative banks. Isn’t it ironical that these banks attract depositors by offering higher interest on deposits?
Clearly, they need to pay a risk-based insurance, as recommended by the Jagdish Capoor committee (but ignored for decades), instead of being clubbed with nationalised banks and large private banks. The same is true for payment banks and small finance banks. Of course, this will not work when there is outright fraud, as in the case of PMC Bank.
So, a quick resolution template with appropriate empowerment of RBI is a necessity at a time when the government is moving towards more privatisation. Each of the above-mentioned moves requires speed; but this understanding seems to be missing, so far.
Mumbai based businessman Dr. Santosh Bagla has sent out a press release on how the Reserve Bank of India (RBI) has asked Kotak Mahindra Bank to examine and redress the grievance within a time-bound manner. Mr Bagla had earlier complained to the Prime Minister’s Office (PMO) about vindictive action by the bank which was passed on with routine instructions to examine the matter. An article in this regard had gone viral on social media. At that time Kotak Bank’s communication department had issued a statement about ‘certain persons’ having ‘distorted’ a simple communication and made ‘damaging statements’.
The case pertains a ten year old matter where the Bagla family which acted as guarantors to Cogent Ventures India Ltd. The bank claims that it started routine recovery proceedings. However, according to Dr Santosh Bagla, the process obviously went bad. Dr Santosh Bagla claims a a ‘criminal conspiracy’ to falsely impliate his son Bhupendra, leading to his arrest, even when he had secured anticipatory bail. Mr Bagla claims that a Rs 50 lakh loan to Cogent Ventures (India) Limited was an “unsecured loan” and this was “admitted and confirmed by the advocates of Kotak Mahindra”, which led to Buphendra Bagla securing bail.
The Bagla family has since been fighting for justice and has written to the President’s Office, and the Union Home Ministry demanding a CBI probe against the bank and its senior management as well as the police offiicals involved in the arrest. They have also filed a complaint against the six Delhi police officials for “malafide arrest”.
Mr Bhupendra Bagla says he suffered enormous social humiliation, huge business losses and even a breakdown of his marriage due to the actions unleashed by the bank. “It took my family eight long years to come out clean, but we lost prestige, business respectability and faced social humiliation, besides suffering huge monetary losses in fighting the case. I will now file a defamation suit against Kotak”.
Interestingly, Mr Rohit Rao, Chief Communication Officer of Kotak Bank claims that “the borrower entered into an out-of-court settlement and repaid the bank’s dues” and that the “bank always acts in accordance with the prevailing law and regulations. We shall be dealing with the matter appropriately".
It remains to be seen what the bank says in response to RBI and whether Mr Bagla goes ahead with the litigation he has threatened; it is also a fact that banks are often over zealous in the means that they adopt for recovery, especially when borrowers are not big businesses.
Responding to the plight of distressed customers of scam-hit Punjab & Maharashtra Co-operative (PMC) Bank, Moneylife Foundation has decided to help them in filing writ petition in the Bombay High Court.
This is a very limited window of opportunity. We need to verify all the details and file the petition within the next 72 hours. It is in your interest to participate in this legal action because sometimes court orders benefit only those who file the petition and not all those who are affected.
Steps to Join the Writ Petition
We are moving to the next step: actual legal action. Here is how a depositor and customer of PMC Bank can join the writ petition.
1. We need data to make the petition strong. For this share your basic information with us. If you have only a PMC Bank account please download the form from here. If you have an account in other banks as well please download the form from here.
2. Send the completed form to [email protected] with "Writ Petition in PMC Bank Matter" in the subject line.
3. For filing the writ, you would need to sign an affidavit and vakalatnama.
4. Visit Moneylife Foundation office at 304, 3rd Floor, Moneylife Foundation, Hind Services Premises Industries Limited, Near Chaityabhoomi, Opposite Hindu crematorium, Off Veer Savarkar Road, Shivaji Park, Dadar-28
5. Meet Aravind Natarajan, who is coordinator for this.
6. Contact on 022-49205000 / 7045156415 (WhatsApp for sending message only).
The reason we need detailed information about each case is because as part of the legal strategy, we wish to group the affected people under different heads. Also, you will be making affirmations in court, which has to be 100% accurate and we cannot have surprises later on and spoil our case. We will keep all information totally confidential and we will not share it with anyone else.
Moneylife Foundation was approached by several depositors of PMC Bank, highlighting not only their own woes but several systemic issues that are likely to destroy their financial credit and get them into serious legal difficulties, maybe even leading to imprisonment.
Moneylife Foundation also conducted a survey of PMC Bank depositors to collate specific details of hardship faced by them through an online survey tool. If you haven’t, fill up the Survey here https://www.surveymonkey.com/r/PMCBank