A Mumbai Court on Sunday remanded to police custody till October 9 the former Chairman of the crisis-hit Punjab & Maharashtra Cooperative Bank Ltd., S. Waryam Singh, officials said.
Singh, who was nabbed by the Economic Offences Wing (EOW) of Mumbai Police from his hiding place in Mahim late on Saturday, was produced before a magistrate court on Sunday.
Police said that he will be interrogated for his prima facie involvement in the alleged Rs 4,335 crore fraud case concerning the Housing Development & Infrastructure Ltd. (HDIL).
The 68-year old Singh was missing since the irregularities in the PMC Bank tumbled out two weeks ago, and was traced to a location in Mahim where he was in hiding and picked up.
Hours before his arrest on Saturday, Singh created a flutter by sending a signed, type-written letter to the EOW DCP Parag Manere, stating that he planned to surrender before the EOW by evening and also willing to cooperate.
However, the police team, which was already on watch outside his Andheri residence, quickly got cracking to flush him out of his hiding place near Mahim Church and arrested him.
Singh is the third important arrest in the PMC Bank case after its missing Managing Director Joy Thomas was arrested on Friday in connection with the same case.
Earlier, on Thursday, the police nabbed the HDIL Chairman and Managing Director - Rakesh Kumar Wadhwan and Sarang Wadhwan, respectively, and their assets worth Rs 3,500 crore frozen.
These arrests followed the EOW registering a case last Monday against the PMC Bank and the HDIL for causing alleged losses worth Rs 4,335 crore to the bank between 2008 and 2019 in the Bhandup branch.
The Mumbai Police FIR has named Thomas, Singh, the Wadhwans and other officials, and a Special Investigation Team has been formed to probe the case.
On September 24, the RBI slapped six-month sanctions restraining the PMC Bank from carrying out a majority of its routine businesses, sparking huge panic among depositors and stunning the banking and corporate circles ahead of the festival season.
Simultaneously, last Friday, the Enforcement Directorate (ED) entered the picture by launching separate investigation for money-laundering and carried out raids in six locations in Mumbai, besides making seizures of various movable assets of the HDIL top brass.
ED sources said that an enforcement case investigation report, equivalent to a police FIR, was lodged following a complaint by PMC Bank's Manager (Recovery Dept.) claiming over 21,000 fictitious accounts were created to suppress the stressed loan accounts of the HDIL, flouting the Reserve Bank of India norms.
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The Economic Offences Wing (EOW) of Mumbai police on Friday arrested Joy Thomas, former managing director (MD) of Punjab and Maharashtra Cooperative (PMC) Bank. This is the third arrest in the Rs4355 crore PMC Bank scam.
On Thursday, the EOW had arrested Rakesh Kumar Wadhwan and his son Sarang, both promoters and directors Housing Development and Infrastructure Ltd (HDIL).
Earlier this week, the EOW has registered a first information report (FIR) against senior officials of HDIL and PMC Bank. This included, PMC Bank's now-suspended Managing Director Joy Thomas, Chairman Waryam Singh and other executives. It also mentioned involvement of Sarang Wadhawan, the vice chairman and managing director of HDIL.
The FIR has been filed under Sections 409 (criminal breach of trust by a public servant or banker), 420 (cheating), and 465, 466 and 471 (related to forgery) of the Indian Penal Code along with 120 (b) (criminal conspiracy).
As per the complaint, the bank officials, between 2008 and 2019, deliberately violated banking norms and showed false profits to mislead the authorities, although the bank was actually incurring losses.
It also said that the bank also veiled the group's large exposure and non-performing assets (NPAs) from the Reserve Bank of India (RBI) by creating dummy accounts.
Whenever there is a financial scandal, a number of foolish solutions emerge. They are often like Band-Aid for a festering wound. Ostensibly aimed at protecting us, these solutions can end up harming us even more. They can impose a crippling long-term cost on innocent depositors, while letting off policy-makers, regulators, auditors and rating agencies whose repeated failures have allowed innocent people to be defrauded.
The latest example is Punjab and Maharashtra Cooperative Bank (PMC Bank) which appears to have operated like a piggy bank for the highly controversial HDIL (Housing Development and Infrastructure Ltd). HDIL’s promoters, Rakesh and Sarang Wadhwan, were finally arrested on Thursday, under unrelenting public pressure. The fact that Maharashtra elections are less than two weeks away may have also helped.
The PMC managing director (MD), Joy Thomas, who has virtually confessed to a massive fraud going back a decade, is still at large. Is it because his letter exposes poor supervision, even when PMC Bank made little attempt to hide its relationship with the HDIL group? Or is it to hide the collusion?
The enormity of the PMC Bank fraud (where the Bank managed to show a healthy profit and dividend record right to the day its transactions were frozen) has triggered a rush to withdraw deposits from all cooperative banks and private banks, including profitable ones. This forced Reserve Bank of India (RBI) to take to social media to reassure people about the stability of the banking system.
Ironically, it is RBI and the finance minister (FM) who caused panic in the first place -- RBI, when it restricted withdrawals from PMC Bank to just Rs1,000 on 23rd September. Since then, it has been forced to enhance the limit to Rs10,000 and again to Rs25,000 (on 3rd October) without providing any details on the state of the Bank’s finances.
If PMC Bank has an exposure of Rs6,500 crore to HDIL and saw withdrawals of Rs3,363 crore in the three days before RBI’s clampdown, it would technically have only around Rs1,700 crore remaining, out of its deposits of Rs11,617 crore (March-end 2019 numbers). Is this enough to cover the withdrawal of Rs25,000 per depositor? Is anything recoverable from HDIL at all? Or is the Bank is getting a quiet bailout? We have no answers.
FM Nirmala Sitharman’s tweet on 30th September also triggered panic and outrage. Responding to an anguished investor, she appeared to shirk responsibility and claimed, “Multi-state cooperative institutions do not come under Ministry of Finance even if they are called banks.”
This strange little word play ended with her acceptance that RBI is the regulator and is taking action. She was also silent about dual regulation and political control of ‘cooperative institutions’ leading to repeated failures. The FM would have been more reassuring if she had pushed for a single regulators and better control over ‘cooperative institutions’.
After all, there are stringent rules in place for deposit-taking non-banking finance companies (NBFCs) precisely to safeguard depositors. Secondly, claims settled by the Deposit Insurance and Credit Guarantee Corporation (DICGC) reveal that almost all payments, over the years, are on account of politically manipulated cooperative banks. PMC Bank is, probably, among the first to be looted by a corporate group.
I appeal to you not to mention/speak/write of such extreme things. Multi state cooperative institutions do not come under Ministry of Finance, even if they are called banks. @RBI is their regulator and they are taking action.
Our bigger worry should be about knee-jerk regulations to resolve the problem. A bank union-leader-turned-depositor-activist claims that he will file a public interest litigation (PIL) to demand that 100% of bank deposits must be insured. On 2nd October, The Telegraph wrote that the contentious Financial Resolution and Deposit Insurance bill (FRDI Bill) is being ‘reframed’ and may be re-introduced.
Let’s examine both issues. The FRDI Bill was the result of an international commitment made without taking into account India’s banking structure, ownership and supervision. The Bill was withdrawn in August 2018, a year after it was introduced, because it sparked panic among bank depositors just ahead of the general elections. The National Democratic Alliance (NDA) also did not have the numbers in Rajya Sabha to push it through.
This time, things are different. The government has a better chance of pushing it through the Rajya Sabha. The government has also shrunk the number of public sector banks (PSBs) from 27 to a mere 12, in just five years. Once the new round of mergers is complete, the government could start pushing for privatisation of banks. This would eliminate its responsibility, as owners, to ‘bail out’ PSBs through frequent capital infusion, as was done by the United Progressive Alliance (UPA).
According to the news report, the reframed Bill may re-introduce the prickly ‘bail-in’ clause under another name. A ‘bail-in’ forces bank customers/depositors to bailout the bank by converting a part of their deposits into equity. If the bank turns around, they could potentially benefit from stock price appreciation.
The idea is that banks must be bailed out by their own depositors, instead of pushing the burden on the country at large, including the poorest people who don't even have access to banking facilities!
In India, the ‘moral hazard’ that economists want to avert, will actually be enhanced if corrupt bankers, greedy politicians and unaccountable regulators know that they will never be held responsible for bank failures. Recent financial scandals have shown how greed, corruption and collusion ensure that all checks & balances (credit rating, disclosures and statutory audits) have failed to work.
The government reportedly plans to make ‘bail-in’ more acceptable by raising deposit insurance from the present Rs 1 lakh to cover a larger chunk of deposits. This would protect a large swathe of depositors and reduce objections to bail-in, but is it fair?
Fix This Regulatory Flaw
A former central banker points out, “Globally, all deposit-taking institutions are regulated and supervised under a single regulatory framework and same standard of regulation.” In India, cooperative banks come under dual regulation of RBI and the Registrar of Cooperative Societies, a sleeping organisation, controlled by political appointees who do not even respond to court orders.
It is, indeed, true that the Modi-government, in filing charges against two powerful politicians in the Maharashtra State Cooperative Bank (MSCB), has shown a willingness to address this issue. It still needs to establish that the action in backed by solid evidence and not a political witchhunt.
Notice how the government, which prides itself on taking tough decisions without hesitation, makes no mention about fixing the pernicious problem of dual regulation and political control over cooperative institutions.
The previous version of the FRDI Bill had kept cooperative banks out of its purview. The size of the MSCB scam, and the easy loot of PMC Bank by a corporate entity, indicates that keeping out cooperative banks won’t fly this time, especially if deposit insurance is planned to be raised.
Insurance costs are low today, only because PSBs and other commercial banks contribute to premiums but have received no settlement in decades. Insurance premium will zoom upwards even if a single PSB or a large private bank needs to be bailed out. There is also no clarity about how the failure of payment banks, NBFCs and micro-finance institutions will be dealt with. The failure of a massive IL&FS (Infrastructure Leasing and Financial Services) caused a major systemic problem; Dewan Housing and Finance Ltd is teetering and there is a sense of unease about at least two big players in this space.
The government cannot push the burden of ‘bail-ins’ on to depositors without fixing regulatory arbitrage or making regulators and intermediaries strictly accountable. Also, if PSBs are subject to bail-ins without better accountability, there is bound to be a flight of deposits. All this will also increase the overall volatility in the banking system which had led to bank nationalisations in the first place.
Instead of causing panic through hasty action and poor implementation, the government would do well to put out a new regulatory framework and rollout plan that is well thought out and open to public discussion.
Watch this video: Why Say No to Cooperative Bank for Saving or Investing in FDs for 1-2% More Interest by Sucheta Dalal