PMC Bank: Depositors Pay for Poor Supervision, Dubious Management
On Tuesday morning (24th September), depositors of Punjab and Maharashtra Cooperative Bank (PMC Bank) woke up to news that they can withdraw only Rs1,000 from their accounts, for the next six months. The harshness of RBI’s (Reserve Bank of India’s) action on a profitable, dividend-paying bank raises an important question: What is the Bank, and the banking regulator, hiding? How bad is the situation, that it warrants such draconian action and punishes the innocent and ordinary depositors so harshly? 
 
Although PMC Bank is largely unknown outside Mumbai, it has a unique character and is very well known to senior central bankers. But more about that later. The Bank’s customers are mainly small and medium businesses that will be devastated by RBI’s seemingly thoughtless action at a time when almost every business is facing a liquidity squeeze and financial constraints. According to sources, one businessman who had just deposited Rs10 lakh to make payments to suppliers fainted on hearing that his money was frozen. 
 
When would such a draconian action be warranted that an administrator is appointed? Well, only if the accounts were totally fudged and its books cooked, like at Satyam Computers. 
 
The Bank’s financials for the year ended 31 March 2019, certified by the statutory auditor, Lakdawala & Co, are excellent. It earned a net profit after tax of Rs99.69 crore and declared a dividend of 11%. Its non-performing assets (NPAs) are only 2.19%, doubtful assets are Rs26 crore and its statutory auditor’s report is squeaky clean. (See below). Is the report pure fiction? What are the dangerous ‘irregularities’ that warrant such drastic action?
 
 
All that the depositors know has come as two messages from the Bank’s managing director (MD), Joy Thomas, informing them that the Bank had been put ‘under regulatory restriction’ for six months, promising that all effort would be made to rectify irregularities and remove restrictions in that time. Another message assured depositors that their money is safe. Later in the day, the MD claimed to Zee Business that there was an issue with the Bank’s advances and they hoped to realise their assets. 
 
How does this mild and benign statement warrant such harsh action that hurts customers and could even cause permanent damage to small businesses? Clearly, there is a lot more and the rumour mills on social media have been working overtime. 
 
A business channel has reported that PMC Bank may have exposure to a tottering non-banking finance company (NBFC). However, a twitter-thread dating back to November 2018, probably, provides a more plausible clue. 
 
It says that the notorious HDIL Ltd (Housing Development and Infrastructure Ltd), which has gone into liquidation, owns 1% of PMC Bank and that it has received loans on concessional terms from PMC Bank in the form of overdraft facilities (OD). 
 
It further says that Ravi Jyot, a financial subsidiary of HDIL, has raised money on similar lenient terms from PMC Bank. Since HDIL filed for insolvency in August 2019, these dangerous OD facilities will end up as unsecured lending and could vanish. There could be others.
 
This realty company, with a shady reputation, has been in deep trouble for a while. An Economic Times report says that it has previously settled bankruptcy actions by Jammu & Kashmir Bank and Andhra Bank. 
 
Can one realistically expect PMC Bank to be able to close out these irregular ODs and recover the money in six months? The RBI action indicates otherwise. With the HDIL before the NCLT (National Company Law Tribunal) and being run by a resolution professional, it is unlikely that the company will have any leeway to return PMC Bank’s money ahead of others. Given that the RBI has pressed the panic button and, literally, stopped all lending activity of the Bank, one can only assume the worst.
 
 
 
Assuming the HDIL connection is correct, until RBI or the Bank provide any clarity, we have no idea about the size of this exposure and whether it is large enough to wipe out the Bank. 
 
However, the next day, on 25th September, Mumbai Mirror reported that exposure to HDIL is a massive Rs2,500 crore, which would certainly take the bank down. There is no official confirmation on this. 
 
If true, this would make PMC Bank’s case similar to that of Madhavpura Mercantile Cooperative Bank, which was brought down by its dubious lending of over Rs800 crore to scamster Ketan Parekh in 2000-01. Despite all the efforts to save it, the Bank was finally liquidated and its licence cancelled in 2012. With elections around the corner, RBI had broken its own rules to release the Rs1 lakh per depositor that is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) even before the Bank was liquidated. 
 
One of RBI’s responsibilities is to ensure there is no run on the Bank through misinformation and worse. But the banking regulator is silent. Some senior journalists have been told that RBI alone is not responsible for the regulation of cooperative banks. They are under joint regulation of RBI and the registrar of cooperatives; neither bothers to do its job. 
 
And, yet, there is a nice revolving door that allows senior RBI officials in the urban banks department to accepting lucrative consulting assignments with the very same cooperative banks that they supervised (or failed to supervise) after retirement. 
 
These are accepted after a perfunctory two years and top central bankers turn a blind eye to it. Retired central bankers tell us that this is true of PMC Bank, too, and we know it is true of Bombay Mercantile Cooperative Bank.
 
The irony is that this Bank, under former chairman, the late Charanjit Singh Chadha, used to sponsor the MR Pai Foundation Awards, in the name of the crusader for bank depositors rights. The programmes have invariably had senior central bankers as chief guests as well as awardees. 
 
PMC Bank had a high reputation for customer service. It was open 360 days a year and had a sharp focus on computerisation and digitisation. Many cooperative housing societies had their corpus and accounts with the Bank. A look at the annual report would show that it is a Sikh community bank, which means that it had a large number of traders and businesses as customers. 
 
As trustees of Moneylife Foundation, a not-for-profit organisation engaged in spreading financial literacy, we have always emphasised that people should not keep their money with cooperative banks, except to the extent of Rs1 lakh which is covered by the DICGC.
 
 
The failure of one of the most reputed cooperative banks would only underline what we have been saying. Unfortunately, most depositors fail to understand the serious implications of poor regulatory accountability in India. 
 
With elections round the corner in Maharashtra, it will be interesting to see whether RBI is again prevailed upon to bypass rules and release insurance. Or will it find a way to force those who enjoyed the ‘irregular’ advances to return the money? 
 
The best way out will be to remove the incumbent management and find a quick buyer for the bank. Its size, past reputation of customer service and investment in technology will make it a good acquisition.
 
But it is important that RBI calms depositors and allows a quick deal, like it did with Global Trust Bank, which also collapsed in the Ketan Parekh scam. Once the bad loans are quantified, there should be a lot of interest in this Bank. It will ensure that no depositor or customer suffers a loss.
 
Restrictions imposed on PMC Bank
 
1. Withdrawals of only Rs1,000 per account, also account-holders who owe the Bank money will have it adjusted from their deposits. Term deposits can be rolled over on maturity in the same name.

2. PMC Bank cannot make any fresh loans, renew loans and advances or make any investment without prior RBI approval.

3. It cannot borrow funds, accept fresh deposits or disburse funds or incur any liabilities without RBI approval.

6. Regulatory restrictions will be in force for the next six months.

7. If account-holders have any liability towards the Bank, the amount in their Bank accounts will be first used to adjust the relevant borrowing account.

8. The Bank can make investments only in government-approved securities.

 

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Comments
Raza Haider
2 years ago
BOMBAY MERCANTILE COOPERATIVE BANK DEPOSITORS & SHAREHOLDERS ARE WORRIED DUE TO FAILURE AND BAD SUPERVISION OF RESERVE BANK OF INDIA & CENTRAL REGISTRAT COOPERATIVE....
Raza Haider
2 years ago
BOMBAY MERCANTILE COOPERATIVE BANK is on the verge of collapse due to forge bogus loan taken by its chairman Zeeshan Mehdi MD Shah Alam money laundring bogus expenses not making the payment of shares FDR,s to the party. Inspite of making COMPLAINTS to the R.B.I. &CENTRAL REGISTRAR COOPERATIVE NEW DELHI by the shareholders and depositers. NO ACTION is being taken by RBI and CRS..This is totally failure of supervision Observation of RBI and CRS. Because inspite of finding of fake bogus loan frauds money laundering irregularities made by Noard of directors even FIR Zhad already filed by the shareholders RBI even not responding Now the position BOMBAY MERCANTILECOOP BANK is as same as PMC. and they is not far.👇👇👇👇👇👇👇👇👇👇👇
Raza Haider
2 years ago
P M Ravindran
2 years ago
I am amoung those who believe that all regulators exist to cover up failures of the authorities. Be it the information commissioners or the apex court judges.

In may 2019 an apex court bench headed by Arun Mishra ordered demolition of 5 apartment complexes within one month. The original crime was these had been developed violating coastal zone regulations. The crime of the judges was that they had given the verdict without even hearing the affected owners, who should be considered victims of the developers and public authorities who had sanctioned the construction. Ultimately last week the bench ordered the Chief Secretary to the Govt of Kerala to personally appear and explain. The babus went on overdrive, cut off water and electricity to the 350 odd families and invited tenders for demolition. It is only now that the court had ordered the GoK to provided interim compensation of Rs 25 lakhs to each owner and recover it from the developers and public servants responsible. The court has also frozen the bank accounts of the developers now. No need to ask how effective it is expectd to be. But then justice had already been murdered when the verdict was issued without hearing the affected parties. The current actions can be likened to supplying oxygen to corpses.
Govinda Warrier
2 years ago
On September 25, 2019, I responded in the media about RBI action against PMC Bank. Moneylife and The Hindu Business Line published my response online.
Moneylife is doing an excellent job in spreading financial literacy. But, unless the print media cooperate, outreach remains limited.
Print edition of financial newspapers which received my response in letter format opted not to publish it (they normally publish most of my responses). Today, I have sent the following to them again:

Save Banking System

This time around, one is afraid, the inept (being an Ex-RBite, using a mild word) handling of PMC Bank mess may have an impact on the trust people have been having in the Indian Banking System since 1960’s. With the nationalization of major commercial banks (1969) and extension of coverage of the Banking Regulation Act to cooperatives (1966), common man believed that someone is in control of the banks in India and his savings deposited in banks were safe.

Obviously, the action initiated by RBI imposing restrictions in the functioning of the PMC Bank is with good intentions and aimed at protecting the interests of bank’s depositors. One objective of imposing a ceiling on withdrawal from deposit account with the bank is to guard against panic withdrawals which may cause a run on the bank. Fair enough.

The ceiling of Rs1000 for withdrawal (raised to ₹10,000/- on September 26) during the coming 6 months, possibly the result of a ‘cut and paste’ approach to drafting directions needs immediate review. More transparency in such measures is needed, as today, the public trust in the financial system is not very high. The inadvertent efforts to destabilize the institutional system including the limbs responsible for regulation and supervision have also contributed to the present unenviable situation. The laws applicable to primary (urban) cooperative banks with multi-state presence and large clientele need immediate overhaul. “Cooperatives” remaining a state subject should not come in the way of regulating cooperative banks under the provisions of B R Act.

A related issue is, for the savers, the statutory provisions stipulating capital and reserves requirements including maintenance of liquid assets and the existence of deposit insurance (with a ridiculously low limit of Rs one lakh per account, though) are not found helpful in such situations. In this context, just as RBI has got its Economic Capital Framework (ECF) studied by an expert group chaired by former RBI governor Dr Bimal Jalan, GOI and RBI may consider appointing a panel of experts to study the capital and reserves framework of all banks including cooperative banks. The expert panel may also make suggestions on maintaining a national deposits protection fund under the aegis of DICGC to provide immediate relief to depositors in situations like this. A wholesale review covering adequacy of capital, liquid assets and reserves and realignment of their components may prove beneficial to the economy, as the exercise may release liquidity into the market.

M G Warrier, Mumbai
Meenal Mamdani
2 years ago
I always thought that RBI was totally professional and worked according to rules.

Now it looks like it has been negligent at best, or deliberately allowing some banks to bend the rules because either they enjoyed favored status with RBI officials or because of political pressure.

All this rot did not happen in one year or even 10 years. All the previous chief Governors are culpable in this disaster; either they did not know or turned a blind eye to the rot in the system. But their job included keeping an eye on the inner workings of the RBI.

All the hallowed names, Urjit patel, Raghuram Rajan, D. Subbarao, Y. Venugopal Reddy have much to answer.

It is not enough to be personally incorruptible if at the same time one is an inept administrator which allows bad practices to eventually lead to havoc.

That is why people in India often said that they would rather have a corrupt but able politician cum administrator rather than a saintly and inept politician administrator.
Samir Kumar Das
2 years ago
RBI is a corrupt regulator. They audit the banks annually but do not punish the corrupt employees. They just fine a few banks. They don't act on whistleblower complaints. The RBI employees auditing the banks are either corrupt or grossly incompetent not to observe the gross violation of laws and statutory guidelines. The mess in Banking system is largely due to an inept regulator.

Nasir Ahmed Rayadurg
2 years ago
How deep is this rut and how many more Banks will bite the dust. It's all Karma coming back, the old adage is true, Bankers cannot be trusted with people's money. What will finally emerge after this whole NPA, Scams, corrupt saga runs thru the system and leaves out a very few institutions to meet the aspirations of 130 crore population aiming the 5 Trillion $ mark.
AAR
2 years ago
Total loans and advances is 11000 odd crores. MM reports 2500 crores lending to troubled HDIL. Can a Bank even lend 30% of total loans to one customer?
AAR
Replied to AAR comment 2 years ago
Correction: Total loans is 8000 odd crores.
Sagar Cheulkar
2 years ago
Ani should quickly react , before more rumours spread. After all common man money can't be played like this. Maharashtra finance minister must take close look at this
RAJENDRA MOHANLAL GANATRA
2 years ago
Shocking story of zero regulation and punishment being meted out to innocent depositors. To pass the buck of regulation to registrar of cooperative societies who knows nothing of banking is a cruel joke! The government must act on the suggestion in this article to remove the incumbent management and find a quick buyer for PMC since it is feasible, and save the depositors from any loss. Besides, the criminally profligate management which has splurged the money and caused extraordinary pains to the depositors must be immediately packed to jail.

Our banks have habit of failing and being bailed out with public money. Their failures are not due to systemic meltdown but systematic mismanagement without any head rolling. Let's not forget that today's economic slow-down is in no small measure due to the PSB mismanagement. For too long the government has allowed PSBs to deteriorate to the point of going bust and then bailed out with recapitalisation with taxpayers' money. Merger of the banks is good since it reduces the number of nibblers, but is grossly insufficient. The merged PSBs must be subjected to management and regulatory revamp. The banks dealing with colossal amounts of money cannot be subjected to employee moral hazard. The government must now act resolutely since the country cannot afford inaction anymore!
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