The Mumbai police has finally registered a first information report (FIR) against The Hongkong and Shanghai Banking Corp Ltd (HSBC) India, its former chief executive officer (CEO) Stuart P Milne, Priya Paul, relationship manager and several top officials of the Bank and its subsidiary, Canara HSBC OBC Insurance Co, for defrauding a very senior citizen and his family. According to the FIR, one Priya Paul, who was relationship manager, sold 83-year Rusi Postwala and his family members several insurance policies by redeeming his investments in mutual funds, under the pretext of ensuring better return on investment. Mr Postwala, his wife Rusi and daughter Khushnuma Behram suffered a loss of Rs1.48 crore, as per the FIR.
The FIR, a copy of which has been seen by Moneylife, names Ms Paul, Ms Jhumar, head of premier banking at HSBC's main branch, Vaishali Chauhan, manager of the same branch, Chirag Jain, chief operating officer (COO) of HSBC main branch, Stuart P Milne (the then CEO) of HSBC India, Ramakrishna S, head for retail banking and wealth development at HSBC, Animesh Raizada, head for wealth management at HSBC and Mayur Patni, head for customer relations at the Bank.
Initially, the Mumbai Police closed the file stating that there was no need to investigate the matter since no offence was made out. It was only when Mr Postwala and Ms Behram approached the State Police Complaints Authority, which observed and remarked that cognizable offences are made out in this case, the FIR was registered, after a gap of two years.
Ms Behram, in her complaint says, "...the accused officials of HSBC Bank and Canara HSBC OBC Insurance Co, with an intention to obtain handsome commission had committed offences of forgery, fraud, cheating, criminal breach of trust by forging signature of my daughter in the proposal form and filing wrong information of myself and my father and misappropriation of funds of my father and myself to the tune of Rs1,47,57,837 crore..."
Ms Behram, who is the daughter of Mr Postwala, filed the complaint. Describing the allegedly fraudulent ways used by HSBC officials, she says, "Around July 2013, Priya Paul informed my father in my presence that he should have a well balanced portfolio and since he already had equities and mutual funds, it would be better for him to put Rs5 lakh into insurance. When she realised that we were reluctant, she purposely misinformed us that it would be one time investment and would earn returns of about 8%, a comparatively safer option to investments in mutual funds. Ms Paul had intentionally never informed him that the insurance policy she was selling him was a recurring nature of five continuous years and his money would be locked for 10 years from the date of first premium."
According to Ms Behram, the relationship manager from HSBC told the family that since Mr Postwala was 80 years old, he was not eligible for insurance and the additional side benefit would be given to them as life assured. Ms Paul then made Ms Behram and her two daughters to sign on two policies as life assured and made them to undergo medical tests for two policies.
Over the next year, Ms Paul continued to assure the family that she is handling the portfolio of Mr Postwala and they should not worry about it.
When in 2013-14, Mr Postwala needed some money for investing in a new shop and for construction work at his property in Alibaug, he and the family, including Ms Behram, requested Ms Paul to liquidate his mutual fund investments. However, Ms Paul repeatedly told them that since their mutual fund investments are giving good returns they should sell their investment in shares.
However, when the family found that no interest or dividends were being received by them, they called Ms Paul for a meeting. During the meeting, Ms Paul told them that she had redeemed nearly all mutual funds of Mr Postwala and put all the money in two insurance policies. "We were shocked to know that Ms Paul had redeemed all of my father's mutual funds and diverted the monies to insurance policies without our knowledge. Unknown to us, she had been redeeming almost all of my father's mutual funds and investing this in more and more insurance policies and in turn to meet the premium demands for the same, she kept on redeeming more and more of mutual fund units," Ms Behram says.
Then, on 20 March 2016, Mr Postwala and Ms Behram approached Ms Jhumar, head for premier banking at HSBC's Fort branch. During the meeting, Ms Paul admitted that she had invested in four policies and since she had redeemed all mutual fund investments, except one, of Mr Postwala, for paying premium of the policies, she liquidated mutual fund investment in one scheme of Ms Behram as well. Ms Jumar promised detailed enquiry in the matter, but nothing happened. In fact, Ms Behram says, "we called up Ms Jhumar many times as well as personally went to the bank a few times to meet her, but she refused to accept our calls or even meet us."
When the family escalated the issue to the branch manager Ms Chauhan, they were promised the same things that were promised by Ms Jhumar. But there was no progress.
Ms Behram then asked the Bank for all her bank statements as well as those of her father for the period from 2012 to 2016. "On perusal of my father's bank statements, annual dividend and mutual fund statements, I noticed that all his mutual funds, except one, had been liquidated and monies received in his savings account been immediately used to pay premiums for Canara HSBC Life Insurance policies," Ms Behram says in her complaint. "One of my mutual fund investment was also redeemed and the redeemed amount of Rs1.50 lakh was paid to the same insurance company as premium for a policy," she adds.
According to the complaint filed by Ms Behram, there were a lot of discrepancies and wrong information, including personal details, income and health that was filled in the insurance policy documents. Ms Behram also found one know-your-customer (KYC) form supposedly filled by her, when she was not even present in India.
In addition, the HSBC Bank official had also withdrawn a sum of Rs31.30 lakh from the public provident funds (PPF) account of Mr Postwala, his wife Dhun and daughter Ms Behram on 22 April 2013. Value of these PPF investments would have been Rs45.09 lakh as on 12 March 2018.
The family was also made to sell their shares worth Rs38.12 lakh, which would have been valued at Rs41.02 lakh as on date, including the dividends.
Ms Behram and her father tried to escalate this issue with senior officials of HSBC Bank and Canara HSBC OBC Insurance Co as well as Reserve Bank of India (RBI), the Banking Ombudsman, and Insurance Regulatory Development Authority of India (IRDA). But they did not receive any response.
They succeeded in having the FIR filed due to the help they received from former Mr Mahesh Athavale, a former police officer and lawyers, who had worked in the economic offences wing (EOW) of Mumbai police and investigated several financial crimes.
Few months ago, they approached Moneylife Foundation, where counsellors suggested that the best recourse for them was to file police complaint to get justice.
Responding to Moneylife's mail, an official from HSBC says, "We value our customers and take seriously all concerns and issues raised by them. We are aware of this matter and have provided full support previously to the multiple investigating authorities that were approached by the customer. We are ensuring full cooperation to the ongoing investigation and remain committed to resolving our customer complaints fairly."
This is not the first time that officials of HSBC Bank have cheated its own customers. In March 2014, under pressure from the regulators, HSBC had settled and closed its five-year-old dispute with singer-actress Suchitra Krishnamoorthy.
While the settlement did not permit her to reveal the amount, we learnt that this case of gross mis-selling and customer abuse was been amicably closed. Moneylife Foundation had relentlessly pursued this case for over two years. (Read: HSBC agrees to compensate Suchitra Krishnamoorthy)
Moneylife published an expose in April 2012 on how HSBC looted Ms Krishnamoorthy for over five years by promising an extravagant assured return of 24% from mutual funds as well as insurance.
In November 2013, market regulator SEBI sent a strongly-worded notice to HSBC asking the lender to explain why its acts in handling the portfolio of Ms Krishnamoorthy were not in violation of its regulations governing fraudulent and unfair trade practices and violation of the code of conduct governing mutual fund distributors.
On the very day that the Reserve Bank of India (RBI) has to file an affidavit in response to a notice by the Bombay High Court, the management of fraud-hit Punjab and Maharashtra Cooperative Bank (PMC Bank) has sent emails to staff depositors seeking a declaration that they will not withdraw their personal deposits with the bank for a period of three years, even if restrictions on withdrawal are lifted by the regulator.
The email sent from the Bank's head office says, "...I/We undertake not to withdraw and to keep deposits with PMC Bank for 3 years even after the restrictions on the Bank are removed by Reserve Bank of India (RBI)." (See the image below)
The PMC Bank has been put under restrictions by the RBI since September after an alleged Rs4,355 crore scam came to light, following which the deposit withdrawal was initially capped at Rs1,000, causing panic and distress among depositors. The withdrawal limit has been raised in a staggered manner to Rs50,000.
Founded in 1984 by S Gurcharan Singh Kochhar, in a small room in Mumbai, the bank had now grown to a network of 137 branches in six states and ranked among the top 10 cooperative banks in the country.
Last week, I wrote about how the Reserve Bank of India’s (RBI’s) inspection reports, procured by Girish Mittal under the Right to Information (RTI) Act, had all but identified the fraud that led to PMC Bank’s (Punjab and Maharashtra Cooperative Bank) eventual failure way back in 2014-15; but RBI failed to dig deep or follow it up. Three years later, RBI froze depositors’ funds and eight persons succumbed to the shock and stress of their hard-earned savings likely to go up in smoke.
The story repeats itself with City Cooperative Bank (CCB), which is much smaller, with only 10 branches and Rs440 crore of deposits. CCB has been placed under RBI directions since 17 April 2018 for six months. Depositors were allowed to withdraw only Rs1,000 of their hard-earned deposits. This was a tightening of RBI’s regulatory action which was already in place in 2015-16.
RBI has extended the restrictions three times, the latest on 17 October 2019. By then, PMC Bank had collapsed and, with CCB depositors also reviving their protests, RBI increased the amount they could withdraw from Rs1,000 to Rs5,000.
When RBI places a bank under directions, it suggests a possible revival. RBI’s statement accompanying the CCB action said, “The issue of directions should not per se be construed as cancellation of banking licence by the Reserve Bank of India. The bank will continue to undertake banking business with restrictions till its financial position improves.” The reality is diametrically different. In CCB’s case, RTI activist Girish Mittal’s application yielded inspection reports for three years: 2015-16, 2016-17 and 2017-18.
Even a cursory reading of the summary findings, as of 31 March 2016 (marked Secret), clearly show that the Bank “did not have adequate assets to meet its liabilities” and there were plenty of other irregularities as well.
RBI had also imposed a ‘Supervisory Action Framework’ (SAF) on 23 November 2016. But, instead of an improvement, things only deteriorated over the next three years. Interestingly, the number of depositors nearly halved, from over 96,000 to just over 50,000, indicating an exit of savvy persons.
What explains RBI’s failure to take steps to revive the Bank in 2016? Was it that this tiny bank was headed by Anandrao V Adsul, a four-time member of parliament (MP) from Amravati, representing the Shiv Sena which was part of the then ruling alliance in Maharashtra? Several members of the Adsul family were also a part of the board of directors.
Or, was it because RBI, completely blindsided by a much bigger scam at PMC Bank, actually believed that CCB would be taken over and no other action was required? When RBI put PMC Bank under strict restrictions, PMC Bank was in talks to acquire two loss-making banks in Goa --The Mapusa Urban Cooperative Bank and the Madgaum Urban Cooperative Bank. It had also submitted a proposal to RBI to acquire CCB.
This only establishes RBI’s poor supervision and inspection and complete lack of market intelligence. Let’s look at what the RBI inspection reports said.
Inspection Report 2015-16: The report says that CCB’s assets would not cover liabilities. Its capital to risk-weighted assets ratio (CRAR) was -5.2% against the minimum stipulated level of 9%. The Bank’s net-worth was fully eroded. The report says that the realisable value of assets after provisions and depreciation, at Rs522.89 crore, was less than outside liabilities assessed at Rs547.70 crore. The real value of paid-up capital and reserves (-Rs15 crore) was inadequate to meet liabilities.
There were instances of fraud that were “neither reported by the Bank nor adequate provisioning was made thereon,” it says. RBI asked for 100% provisioning of these loans which only increased losses. Its credit appraisal was ‘not satisfactory’ and was not based on the ‘genuine need of the borrower’. The post-disbursement supervision was also ‘not satisfactory’.
The Bank’s board was not bothered about addressing all the issues and non-compliances noted by RBI. As in PMC Bank’s case, the audit system was found deficient, wasn’t adhering to KYC (know your customer) policy and had not even allotted unique customer identification code (UCIC) to all customers.
The Bank’s reported gross NPAs (non-performing assets or bad loans) were 11.83% and net NPAs were 8.84%. As against this, the gross and net NPAs, as assessed by RBI, were massively higher at 46.24% and 44.50%, respectively.
Based on the financials, as assessed in the inspection report on 31 March 2015, RBI imposed SAF, which placed strict restrictions on the Bank’s operations, without any revival plan.
At this time, CCB had deposits of Rs534 crore, of which Rs409 crore were high-cost term deposits (over 76.7%), and only Rs124.45 crore were current and saving accounts (CASA). Bad loans jumped in 2015-16 from Rs42 crore to Rs167.65 crore (gross NPAs) and the Bank did not have adequate provision for loan losses.
Inspection Report 2016-17: The Bank continued to remain under SAF that year. Yet, it’s paid-up capital increased by Rs11 lakh to Rs10.62 crore due to ‘new members’. However, CRAR declined dramatically from -5.12% to -28.68% “mainly due to high level of divergence in the loan portfolio of the bank,” says the inspection report.
The realisable value of assets, at Rs531 crore, was less than its outside liabilities assessed at Rs600 crore. Real value of paid-up capital deteriorated further. The report says, value of deposits as well as capital and reserves were fully eroded to the extent of 11.89%.
In simple terms, this means that the Bank was already eating up customers’ deposits. And, yet, there was nothing from the RBI to warn ordinary persons who were depositing more money into the Bank.
The inspection report says that total deposits increased from Rs534 crore to Rs586 crore; of these, term deposits had increased from Rs409 crore to Rs433 crore. The biggest jump of 22% was in CASA accounts which rose from Rs124 crore to Rs152 crore.
With RBI restrictions in place, the Bank’s loans and advances declined from Rs362 crore to Rs343 crore. Although the Bank was under RBI’s close watch, the insipid inspection report has no significant violations to report, except weaknesses in certain processes and absence of a policy on identifying bad loans, followed by a routine narration of the management structure and operations. The only negative observation is that the functioning of the audit committee, the loan and scrutiny committee and recovery committee needed improvement. The CEO (chief executive officer) of the Bank had resigned in July 2017 on health grounds; but RBI has no comment on management continuity or efficiency.
Interestingly, CCB’s operating income jumped a massive 103% due to profit earned from trading in securities (trading profit alone was up 341%). This, along with lower operating expenses (staff, etc), still led to a declared a net loss of Rs20.03 crore. However, RBI assessed the net loss for 2016-17 at Rs94.82 crore.
The report makes it clear that RBI imposed restrictions and hobbled operations with absolutely no turnaround plan. Meanwhile, innocent depositors were clueless that the Bank was sliding dangerously.
Inspection Report 2017-18: As is obvious, CCB’s position had deteriorated further by 31 March 2018, even under the SAF. Accumulated losses led to a decline in capital and the assessed CRAR declined from -28.68% to -65.46% on 31 March 2018. The Bank’s own estimate was much lower.
Finally, on 17 April 2018, RBI tightened restrictions by imposing more stringent ‘all inclusive directions’ on the Bank. This only confiscated depositors’ money and prevented them from withdrawing more than Rs1,000 from their accounts, with no revival plan. The inspection report notes that CCB’s real net-worth declined to -Rs120.19 crore, while the assessed net-worth fell 72%, to Rs50.48 crore.
This report also indicates a big drop in bulk deposits and savings accounts. Deposits dropped a hefty 24.20% (see table). Although RBI had prohibited premature withdrawal of deposits, and CCB also did not accept fresh deposits, people were allowed to take away term deposits on maturity.
Since CCB was made to reduce interest to the level offered by State Bank of India (SBI), as part of RBI directions, this too could have led to the withdrawal by alert depositors. The rest of the inspection report is a wishy-washy narration of routine markers. What is clear is that CCB had been forced into a zombie state due to RBI’s directions; the Bank had no leeway to improve profitability.
None of the three reports has any comment on quality of management; nor do they indicate whether CCB’s downfall was due to political interference, behest lending or sheer incompetence. These insipid reports call into question the very purpose of RBI’s annual inspections, which seem to add no value, but, in fact, precipitate the downfall of the Bank once it goes into the red.
All this holds important lessons for PMC Bank, where RBI is promising a turnaround, based on the sale of collateral security offered by the HDIL (Housing Development and Infrastructure Ltd) group against the massive Rs6,500 crore of fraudulent borrowings. With no independent assessment of the security, or the claims of other banks and creditors, the PMC Bank will remain in a zombie state, swallowing up depositors’ money. It is already a zombie on a path of slow decay with a running cost of Rs1crore a day!
We clearly need a different way of dealing with loss-making cooperative banks that are eating away people’s savings.
Here is the copy of RBI Inspection Report on The City Cooperative Bank as on 31 March 2016...
Here is the copy of RBI Inspection Report on The city Cooperative Bank as on 31 March 2017...
Here is the copy of RBI Inspection Report on The city Cooperative Bank as on 31 March 2018...