Did the Punjab and Maharashtra Cooperative Bank (PMC Bank) audit show the first signs of fudging data to hide beneficiary accounts as far back as 2014-15? It certainly looks like it.
It is true that hindsight is always 20:20, but perusal of a five-year old inspection report of the Reserve Bank of India (RBI) suggests that the fraud was already well underway then. The RBI inspector had flagged all the key elements of the deception that allowed HDIL (Housing Development and Infrastructure Ltd) to help itself to the Bank’s money without being detected. However, the inspector failed to find out that the HDIL group accounted for over half of the Bank’s business making it a captive bank of the realty group.
Did RBI then fail to follow up on its own findings? Or did its inspectors turn a blind eye to what was going on? Unfortunately, we do not know, as yet. This is because RBI has only parted with the inspection report for one year, viz., 2014-15.
Activist Girish Mittal had filed a Right to Information (RTI) request asking for certified copies of inspection reports of PMC Bank and Maharashtra Cooperative Bank for 2014-15, 2015-16, 2016-17 and 2017-18. Since Mr Mittal has won a case in the Supreme Court forcing RBI to provide him with bank inspection reports, his applications seem to get a better response than those of an average person. But even here,
RBI resorted to its usual chicanery and sent him only one report of PMC Bank for 2014-15 (that too heavily redacted), but has sent all four reports for the other bank.
The activist has filed a first appeal asking for the other reports; but until RBI responds, the details in the 2014-15 report show that RBI had caught enough red flags to have imposed stringent checks on PMC Bank in subsequent years.
Here are some of the issues raised by this report that eventually formed the main components of the scam and ought to have merited a detailed follow-up in subsequent years.
1. The inspector says that the Bank’s credit policy was reviewed on 30 August 2014. “A serious flaw detected in the credit policy was the fact that the cash-credit limits were sanctioned for three years at a stretch and were not subject to an annual review as envisaged (in RBI’s master circular),” he notes.
Remember, theconfession letter of Joy Thomas, the Bank’s former managing director (MD), says that the Wadhawans of HDIL, used to ‘overdraw’ funds through current accounts of their companies and ‘regularise’ them subsequently? He justified this on the grounds that the Bank earned high interest on this amount.
So, it would seem that lax rules regarding cash-credit limits and the failure to review them for three years at a stretch could have been a deliberate ploy to allow HDIL group entities free use of Bank funds.
Mr Thomas’s confession also indicates that HDIL’s business problems escalated in 2013, after the Maharashtra government changed the policy on transfer of development rights (TDR) and its key airport project was cancelled. It led to a liquidity crunch at HDIL which began to use PMC Bank as its cash machine.
This particular RBI report is immediately after the Bank began its downward slide but kept it hidden. But that isn’t really material. Mr Thomas has confessed that, since 2011, over half the exposure of the Bank was to HDIL.
2. “Credit appraisal and post-disbursement supervision in the Bank needed improvement,” says the report. Further, the Bank did not obtain “statutory dues certificates from borrowers, certified by their auditors and commenting on the loan proposal before sanctioning cash-credit limits.” The report says, some loans turned bad within a year of sanction, but staff accountability was not examined, despite such quick mortality.
3. While PMC Bank “maintained a list of directors and their relatives on the Bank’s intranet website… it did not maintain the names of entities in which the directors were interested” in the system. And there was only one recorded loan to directors' relatives, that, too, a paltry Rs8.52 lakh.
We now know about how chairman Waryam Singh was a part of the promoter group of HDIL. Also, since the MD has confessed to 60% of the loans going to HDIL, clearly there was large-scale fudging of directors’ interest. Details will only be available in the forensic audit by Grant Thornton.
4. The Bank’s audit committee was not constituted as per RBI guidelines; its functioning was ‘not considered effective’ because it had not even bothered to review and close the pending audit observations, says RBI. In another section, titled ‘systems and controls’, it notes that the audit policy itself was ‘considered deficient’ since it did not even “envisage the monitoring of audit observations as well as age-wise outstanding observations of the audit report.”
Given how every corporate governance report places onerous responsibilities on members of the audit committees of the board, it would be interesting to know whether RBI followed up this observation and sought a change in composition of the audit committee to ensure compliance with its observations. That fact that PMC Bank’s operations were virtually halted just a few years later probably is an answer in itself.
5.The “Bank’s executive team needed to be more pro-active towards enduring adherence to Master Circulars and effective internal control through the audit machinery and the review processes of MIS,” says the report. Elsewhere, it notes that the scope and coverage of both the internal audit and statutory audit needed to be aligned to look into the ‘irregularities pointed out’ by RBI inspection reports and the statutory audit simply ‘needed improvement’. The report further records a ‘large-scale inter-group fund transfer’, having been done without confirming bonafide need. Temporary overdrafts, sanctioned as working capital loan accounts by branch managers, were not reported to the head office for information and ratification.
One wonders how this could happen when the Bank used a core banking solution. There is no news about the statutory auditor Lakdawala & Company being questioned to find out whether the firm had been given access to the observations of the inspection report.
6. The report noted deficiencies in the ‘KYC identification/documentation. Stunningly, it says,
“The Bank had not allotted unique customer identification code (UCIC) to all its customers. A massive 108,807 customers, accounting for 13.02% of the total customer base, were not allocated UCIC.
Clearly, this was the genesis of the scam. It would be interesting to know if these customers were entered into the core banking system at all. Remember, a complaint against the Bank says that 21,049 accounts were created as “mere entries in the advances master indent submitted to the RBI” during inspection and were not created in the core banking software at all.
Add to this, Mr Thomas’s confession where he said, "In the RBI inspection prior to 2015, officers use to check mostly top few borrower accounts reported by the Bank branch wise, therefore, these accounts did not come into the picture until around 2017 onwards, when the RBI started asking for indent for the advances master. The stressed legacy accounts belonging to this group (HDIL) were replaced with dummy accounts to match the outstanding balances in the balance sheet. As the loans were mentioned as loans against deposits and were of lower amounts, they were never checked by RBI."
Clearly, the 2014-15 report was already very close to finding out the truth; but RBI shockingly missed the fact that over half the Bank’s lending was to the HDIL group. This was never detected, even when a general manager from RBI’s urban banks department, LM Kamble, moved over as general manager of PMC Bank and remained among the top three officials of the Bank until last week.
7. RBI says that the Bank did not follow the policy of ‘having two independent valuations’ for property above Rs50 crore as required by RBI’s July 2014 circular.
The Bank has repeatedly claimed that it holds 2.5 times security for loans to HDIL group. The true value of these loans and the adequacy of security will be evident only when RBI attempts to sell assets.
Having documented the red flags raised by RBI, it is also important to note what it missed. While Mr Thomas has confessed that 60% of the Bank’s loan exposure was to HDIL, the inspection report says that “exposure to housing and commercial real estate was 6.86% of total assets.” This included home loans of up to Rs25 lakh, keeping the total exposure to the sector at under 15%, finds the inspector. How did this happen? Also, while it flagged major issues with unsecured advances and ad-hoc cash credit, the inspector was satisfied that these were within permissible limits.
RBI’s information officer has dedicated himself to painstakingly redact every single name from the report which would provide specific details of the beneficiaries of PMC Bank’s largesse; so it is unclear if any HDIL group companies were even flagged by him. If only RBI officials showed the same dedication in their inspections and supervision, a few lakh depositors’ lives would not have been shattered.
Here is the copy of RBI Inspection Report on PMC Bank as on 31 March 2015...
It is gratifying to learn that the Finance Minister Nirmala Sitharaman is going to extend helping hand of Rs.25K crore to rescue shattered housing projects numbering about 1600. If and when projects are completed it would bring immense relief to those who have invested in housing since long. If the Government extends Rs.6K crore to the HDIL / the PMC, it would go long way to help the beleaguered thousands of suffering depositors. In such emergencies, the arrows in the armour / quiver of RBI could and should be put to use. The requisite minimum amount from some reserves from the Central Bank may be utilised and restored in next couple of years.
This hindsight should lead to better foresight and quick solution to the imbroglio. We have a history of cases pending in courts for decades. Attachments before judgments - euphemism for action by the CBI/ACB/various tiers of Courts should also be legally resolved for quick realisation of the seized asset.
While responding to Depositors' claims, all senior citizen claims should be done expeditiously.
To settle the depositors faster, I suggest securitized asset sale ( all properties and assets seized in this matter may be bundled up in special lot to be handed over to willing takers in the private banks, PSBs like the UTI NPAs were transferred years ago.
Auction route may not yield good price and may take much longer than anticipated.
It appears that with the prior knowledge of the fraud now, we have the benefit of hindsight and relate these general observations to the gravity of issues involved. May be, the inspector never really tracked the specific instances of dummies pertaining to HDIL , which can be seen from his observation regarding percentage credit to real estate sector (noted to be under permissible limits).
I do not wish to exonerate anybody, but borrowers over drawing limits is a common phenomenon in Public Sector Banks, so inthe highly politicized and more incompetent co-operative environment?
More importantly, if you could find out the other banks that it has red flagged but yet to publicly fall, it would be great. We can proactively avoid them
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
It is gratifying to learn that the Finance Minister Nirmala Sitharaman is going to extend helping hand of Rs.25K crore to rescue shattered housing projects numbering about 1600. If and when projects are completed it would bring immense relief to those who have invested in housing since long. If the Government extends Rs.6K crore to the HDIL / the PMC, it would go long way to help the beleaguered thousands of suffering depositors. In such emergencies, the arrows in the armour / quiver of RBI could and should be put to use. The requisite minimum amount from some reserves from the Central Bank may be utilised and restored in next couple of years.
While responding to Depositors' claims, all senior citizen claims should be done expeditiously.
Auction route may not yield good price and may take much longer than anticipated.