PMC Bank: Ex-MD's Confession Exposes Terrible Inspection Standards of RBI
Moneylife Digital Team 01 October 2019
While lot have been said about the cosy relations shared by the Wadhwan family and Housing Development and Infrastructure Ltd (HDIL) with the Punjab and Maharashtra Cooperative (PMC) Bank, a confession letter by the bank's former managing director, exposes poor standards applied by the Reserve Bank of India (RBI) during bank inspections. 
In fact, the RBI officials who conducted inspection of PMC Bank prior to 2017, did not even bother to check details of stressed legacy account, reveals the confession from Joy Thomas, now-suspended managing director of PMC Bank.
In the confession dated 21 September 2019 and submitted to the chief general manager in the department of cooperative banks supervisions, Mr Thomas says, "In the RBI inspection prior to 2015, officers use to check mostly top few borrower accounts reported by the bank branch wise, therefore, these account did not come into picture and it was 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 he 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."
PMC Bank also failed to report since 2008 some of the large accounts to RBI due to fear of reputational risks, the former MD claimed. He says, "The size of the (PMC) bank in 2011 was around 57 branches with deposits of Rs2,824 crore and advances of Rs2,000 crore.
The exposure to HDIL group then was Rs1,026 crore. Further had we classified them as non-performing assets (NPAs), we would have to stop charting interest on these accounts and we could have made losses. The growth path of the bank would got hampered. The bank had created a name for itself in the market. The HDIL group always promised to clear the dues and also gave adequate security to back their loans."
Mr Thomas, in his confession also tried to alleviate the statutory auditors. He says, "Since the bank was growing, the statutory auditors, due to their time constraints, were checking only the incremental advances and not the entire operations in all the accounts. They validated the incremental loans and advances and scrutinised the accounts which were shown by us."
According to the ex-MD, the relations between PMC Bank and promoters of HDIL goes back to 1986, when the Rajesh Kumar Wadhwan, the then director of Land Development Corp and many other companies run by the Dewan family, along with his brother Rakesh Kumar Wadhwan, rescued the lender from becoming defunct. "This family infused capital, help the bank and also helped to bring the networth of the bank from negative to positive."
"In the year 1986-87, they further infused capital of Rs13 lakh and kept huge quantum of deposits to for revival of the bank. Since then the Dewan family started banking with the (PMC) bank as depositor. The loans and advances relation started in the late 1990s. These advances were mostly in the form of overdrawals in current accounts of various firms of the companies of the family due to cheque presented in clearing. These accounts were regularised on regular basis. The operations in these accounts were good and satisfactory."
In 2004, several cooperative banks like Maratha Mandir Co-op Bank, South Indian Co-op Bank and scheduled bank, Global Trust Bank, failed. Due to this, there was run on PMC Bank as well. "There were huge withdrawals of deposit of the bank from 13 August 2004.
The bank was honouring all the payments of deposits on 24x7 basis from 13th August till 17 August 2004. It was on 17 August 2004, when the confidence of the deposits started building up again. At the time of the run, many people helped the bank in gaining the position with the funds and stood behind the bank in support.
Mr Rajesh Kumar Wadhwan was one of the them and deposited more than Rs100 crore to tide over the liquidity crunch faced by the bank."
Since that time, PMC Bank became primary bank of the Wadhwans and HDIL. HDIL used to carry out all their transactions like purchase of lands and development in Vasai, Virar and Palghar area only with PMC Bank. "In connection with their business, their accounts used to get overdrawn and thereafter they used to get cleared also in due course of time.
In this process, our bank used to charge 18% to 24% interest from their accounts and earned very good profit. Thus, bank used to had a lot of income which helped in the growth of the bank."
During 2006-07, the Wadhwan group's total exposure in PMC Bank was about Rs500 crore. This was the time, when HDIL was listed on stock exchange. At that time, HDIL and the Wadhwan family become specialist in slum rehabilitation projects and were pioneers of the transferable development rights (TDR) in India, says Mr Thomas. 
TDR can be considered as an important raw material in the real estate industry as it allows the developer to build over and above the permissible floor space index (FSI) under the prevalent rules of the respective locations.
However, "Owing to our limitations of funding, they started banking with other banks to fulfil their growing funds requirement. Till 2008, the bank continued to earn high interest from the funding for the business of Wadhwan family." 
"In 2011-12, the government of Maharashtra came up with the major policy change regarding re-sale of TDR, which was the strong business for the HDIL group. And at the same time, the company's major project of slum rehabilitation in the area near Mumbai airport got cancelled due to the change in policy and subsequent changes in the government. In 2013, the project near the airport was terminated due to non-completion."
"This was the time, the (HDIL) group started facing liquidity crunch and they also started defaulting with all dues of all banks...Since they were in defaults, they could not raise fresh capital or loan and their project also got stalled. Slowly collections got reduced therefore some of the accounts become stagnant."
"As the loans outstanding were huge and if these were classified as NPAs, it would have affected the profitability of the bank and the bank would have faced regulatory action from RBI. Further this would have created reputation risk for the bank. As the HDIL group had a good record of clearing their dues with certain delays, we continued to report all the accounts as standard accounts."
"Though some of the accounts were not performing well, it was not brought to the notice of the board. The subsequent overdues of various loans were also not reported to the board. They were running many projects and were also in the business of taking over the companies many a time."
"The concealment of information from board, auditors and regulators was due to the fear of reputational loss. The volume of accounts were huge as the major business of the company were to acquire small pieces of lands from farmers and then develop the land and create infrastructure after receiving necessary approvals from the authorities. The concealment of the information was done from the board due to the fear of the reputation of the company as the cheques were of small amounts. Till 2019, some of the accounts were reported and shown but many legacy accounts were not reported to the board."
According to a complaint filed by PMC Bank to the economic offenses wing (EOW) of Mumbai police, the bank replaced 44 loan accounts, whose individual balance outstanding, including principal and interest, was significantly higher, with 21,049 accounts. 
Out of the 44 loan accounts, eight belong to the HDIL group of companies and one each of Rakesh Kumar Wadhwan and Sarang Wadhwan. As on 31 August 2019, Rakesh Kumar Wadhwan has an outstanding of Rs2,008.62 crore, while Sarang Wadhwan's outstanding was Rs137.16 crore. 
On the same date, HDIL had an outstanding of Rs1367.55 crore, Somerset Construction Pvt Ltd (Rs239.16 crore), Serveall Construction Pvt Ltd (Rs190.68 crore), Saphhire Land Development Pvt Ltd (Rs145.59 crore), Emerald Reltors Pvt Ltd (Rs145.10 crore), Awas Developers & Construction Pvt Ltd (Rs140.43 crore), Prithvi Realtors & Hotels Pvt Ltd (Rs131.96 crore) and Satyam Realtors Pvt Ltd at Rs129.46 crore. 
Total outstanding of the HDIL group and its promoters towards PMC Bank is Rs4635.62 crore as on August 2019, the complaint shows.  
"These 21,049 accounts were actually not created in the core banking solution (CBS) of the bank, instead (these) were mere entries in the advances master indent submitted to RBI for conducting their inspection for the year ended 31 March 2018," the complaint filed by Jasbir Singh Matta, manager for recovery in PMC Bank shows.
Here is the letter sent by Joy Thomas to RBI…
Nagaraju Bommanahalli
4 years ago
In India nobody knows how Indian companies are doing fraud from the beginning to last ,for example a big business men will start the company in India as below .His companies actual value is Rs2000crores but with the help of the auditors,Banks,and chartered accountants he made his company s values to RS 6000 crores by book adjustment with bribe and he call IPO that is in share market and collect Rs10000 crores in share market, first he pumped 60%of money to foreign country in the name of business and will deposit most of the money in his name next he will file bankruptcy due to losses and will write off all the loans this is the business doing in India ED is doing drama ICICI Bank chandakochar is well known to all she done huge fraud in ICICI Bank, this drama of enquire is doing from past one year, but still she is not arrested, reasons In this icici bank scam all SEBI auditors ED RBI central government rating agencies big leaders of all parties involved.central government making all efforts to avoid arrest these fellows,if arrested all all foreign country become knows most of the Indian companies running on bogus and take away all foreign investment,then India become bankruptcy.This is well known by central government hence avoiding all efforts to arrest directors of icici bank chandakochar DHFL jetairways Videocon kingfisher airline PNB bank head il@fs etc . wait in few months most of the common people investment in icici bank NBFC PSU banks equity NCD mutul funds become Zero
Suketu Shah
4 years ago
The problem is voters of India.We get the govt we vote for.The public is stupid.No one votes for NOTA and then complaints for 5 yrs and again votes for the same people and complains.The problem is from the very top.More scams coming up it seems-big ones.
Aditya G
4 years ago
Forget this. Talent is drying up. In the next 10-20 years, institutions like RBI and SEBI will be staffed with jokers. This is the real risk I'm seeing here. When you can't find talent, no matter how good a business is, it will not do well over the long run. That's precisely what's happening to these public institutions.
Replied to Aditya G comment 4 years ago
@Aditya. You mean these crooks were fools ? If anything ,they are too much "talented". May be you will say Mama-Bhanja ,Mallya are fools also !!! Wall Street etc are full of highly qualified financial experts. Then what happened in 2008 ? Why legendary institutions like Lehman Brothers get blown up ? Bob Woodward wrote a book called " Maestro" about Greenspan. Now this former Fed chairman (for twenty years) is widely regarded as one who contributed heavily to the culture of reckless speculation and subsequent market collapse in 2008. PMC -like cases are orchetrated by cunning psychopaths with zero integrity. Buffett talks of three qualities for business: integrity, intellignce and energy.
Govinda Warrier
Replied to Aditya G comment 4 years ago
Without questioning Aditya's wisdom or ability to predict what can happen after 10/20 years, let's discuss the immediate issues concerning savings, bank deposits and how best to save the institutional system in the financial sector from sinking. I'm not for ignoring the talent-deficit issue on which Aditya has thrown light. But TMC Bank episode is shockingly unique, as more and more revelations are telling us. This not something we should brush aside and forget as is being suggested. Please don't divert attention from the main issue by lamenting about talent.
Gopalakrishnan T V
4 years ago
Sorry state of affairs. How the Board was kept in dark and how the Directors of the Board did not bother to understand the realitities of the bank's functioning should have come to the notice of the regulators and Statutory auditors. The Board has miserably failed to study the balacesheets and profit and loss accounts of the bank for years is a mystery and how the regulators both The RBI and the Registrar of Cooperative Societies missed to identify the risks the bank had posed to the depositors and regulators themselves for their lapses needs an explanation . THE FACT OF THE MATTER IS THAT BOTH HDI L AND THE BANK HAD TAKEN ALL THE STAKEHOLDERS WHO INCLUDE THE ECONOMY , THE DEPOSITOS, THE SHAREHOLDERS AND THE AUTHORITIES FOR A RIDE AND WHO WILL ULTIMATELY BEAR THE BRUNT NEEDS TO BE SEEN.
Kochar Bipin
4 years ago
Every monsoon, many Mumbaikars die due to building collapses - yet lacs of Mumbaikars, who have made Mumbai the most prosperous city in the country with a budget higher than several states,
are forced to live in slums and decrepit unsafe housing as most of the SRA and other redevelopment projects have stalled due to huge cost escdlations due to delays in approvals and the greed of Municipal Corporation of Greater Mumbai, India's richest city with a budget higher than many states. The Government should immediately step in and ensure that the SRA projects are swiftly completed by extending home loans to the beneficiaries of SRA projects whose dispersal is based on the progress on the construction.
Govinda Warrier
4 years ago
Madam Sucheta Dalal
Many thanks for publishing this article. Yet to read the text of the letter published alongside. Will, during the day. Beyond concentrating on PMC or RBI, let's dig out the rut in the system for the benefit of future savers and investors by converting this into a case study
Hemlata Mohan
4 years ago
Such being the quality of RBI inspection, how are they in a position to qualify other CAs who conduct audits?
shadi katyal
4 years ago
We were assured that Chowkidar will nukat Corruption but we fisd tht nation has lost more money by such bank scams as compared to all those years of UPA, Can Modi or Finance Minister tell the nation that how one after another such scams are still going on..
Question is simple and that most of such scams are by members of BJP and maybe hey feel Mukat Bharat sounds better than Mukat Congress
RBI and Center should have some kind of insurance for the depositors like in USA one is protected upto $ 100,000.00 per account.
Modi can do favor to Ambani'Group by giving all insurance business to Reliancer as in the vase of
Replied to shadi katyal comment 4 years ago
Please read the article the Scam was during UPA era. S... has hit the fan with the immanent bankruptcy of HDIL.
Chetan Kadam
Replied to shadi katyal comment 4 years ago
So all these frauds happened after 2014 na???
suneel kumar gupta
4 years ago
Now people r at the mercy of govt. Frel very sorry of sr. Citizens and small businessmen
4 years ago
Most of the depositors who have lost money might not even comprehend the accounting shenanigans of all those MD, CEO, Inspectors etc and their modus operandi. All these " experts" at the helm of affairs knew the tricks of the game and misused their knowledge to the hilt; their suitcases full of poor depositors' money. Anyway fudging data to cheat is centuries old. One goes to doctor to get cured. But the doctor make the desease worse for money !! Of course , some cynics would say : the patient went to the wrong doctor !! Therefore it is his fault !!! And it gets repeated again again !!!
Govinda Warrier
Replied to SURAJIT SOM comment 4 years ago
Aptly worded, insightful, brief observation. Let's take the discussion forward without getting immediately diverted into UPA-NDA politics and fixing responsibilities (In the long term, all these are important and necessary). The doctor's example seems to be apt in this case. If I manipulate the diagnosis or tamper the diagnostic tools to hide my ailments, the specialist's treatment may go wrong in my case. True, the specialist should also be sure about the reliability of the pathological/radiologist expertise.
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