On 4th November, I wrote
that the Reserve Bank of India’s (RBI’s) inspection of Punjab and Maharashtra Cooperative Bank (PMC Bank) in 2014-15 appeared to have caught the first signs of data fudging to hide beneficiary accounts. This was clear from the inspection report procured by Right to Information (RTI) activist Girish Mittal, who has fought a hard battle
to get access to them.
Mr Mittal had also asked for the reports of three subsequent years which were strangely omitted from the bunch and have been released to him only after he filed an appeal. We now have an answer to the question that we asked in November: Did RBI follow up on its findings of 2014-15?
The shocking, but unsurprising, answer is: No.
The heavily redacted inspection reports for the years ending 31 March 2016, 2017 and 2018 further expose the shoddy, superficial and check-box approach of RBI inspectors. Worse, the documents show how the PMC Bank chairman Waryam Singh openly flouted RBI rules on related-party transactions in dealing with the HDIL (Housing Development and Infrastructure Ltd) group, year after year, but attracted nothing more than an ‘observation’. RBI inspectors do not recommend deeper investigation or punitive action over the brazen conflict of interest which eventually brought the Bank down.
Consequently, an obvious scam of over Rs7,500 crore remained unreported due to RBI’s wilful blindness for several long years and thousands of investors are in danger of losing their hard-earned savings.
The RBI’s inspectors’ notes and divergences (in the reporting of bad loans or transgression of rules) are mostly trivial, inconsequential or just procedural lapses. And, yet, we know that in those same five years (2015-2018) PMC Bank operated as the exclusive piggy bank of the Wadhawans of HDIL funnelling hundreds of crores of rupees to them at their discretion.
Let’s look at inspections since 2014-15 to 2017-18.
1. Cash Credit Limits: The inspection report of 2014-15 notes as ‘a serious flaw’ the fact that “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).” While the inspection report called for a ‘stringent review’ to “ensure quality of operation of the borrower and safety of funds of the Bank,” this does not even find a mention in the two subsequent years. Then, the 2018 inspection comes back to it as a bland statement. This shows lackadaisical inspections with no follow-up.
This is pertinent because PMC Bank’s former managing director (MD) Joy Thomas had said, in his confession letter
that the Wadhawans used to ‘overdraw’ funds through current accounts of their companies and ‘regularise’ them subsequently.
One observation that appears in all four reports, in the exact same manner without correction or action by RBI, is about current accounts failing to mention a customer’s credit facilities with other banks. Is it a serious omission according to RBI? If yes, why has it remained uncorrected and is reported mechanically every year without attracting punitive action?
2. Conflicts and HDIL Links: In 2014-15 the inspection noted that 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. It recorded a solitary loan to a directors’ relatives, that, too, a paltry Rs8.52 lakh.
In 2015-16, the inspector notes a more direct connection. It says, “the Bank had purchased some premises over the years from XXX (blanked out by clearly HDIL group), a listed company, on the board of which the Bank’s present XXX (blanked, but clearly Waryam Singh) was a director up to March 23, 2015. It is pertinent to note that XXX (again clearly Waryam Singh) had been a director of the Bank since June 1999 while he was a director on the board of XXX (HDIL is the blank) from the period April 27, 2006 to March 23, 2105.
Remember, this is an RBI inspection report and all it does is to mildly note that director had not recused himself from the discussion as prescribed by RBI. It does not even bother to find out if the purchase of property, worth over Rs55.5 crore was in order. Is it any surprise then that PMC Bank had no fear of getting caught? Other than this one transaction and some inconsequential findings, RBI inspection report for 2015-16 makes PMC Bank appear squeaky clean.
Here is the list.
While the 2016-17 inspection report gave PMC Bank a clean chit, the next one has another finding on transactions between the chairman and his relatives with HDIL.
It notes that (heavily redacted) that an overdraft of Rs30 crore sanctioned in December 2010 to XXX
was enhanced to Rs40 crore. This clearly refers to HDIL, since it notes that the “present chairman was then a director and also a director of XXX
when the loan was sanctioned.” We know that only S Waryam Singh, now in jail, fits this description.
The next paragraph notes another such transgression by Waryam Singh, again for HDIL; but it is so badly redacted (see image below) that we can only note RBI’s plaintive whine about the lack of corporate governance, without prescribing any corrective or punitive action!
3. Unique Customer ID:
A ‘big’ finding in 2014-15 inspection was that 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.” This may have been the genesis of the scam that helped hide 21,049 accounts by creating “mere entries in the advances master indent submitted to the RBI” instead of being entered into the core banking software. The next year, RBI noted that UCIC had been allotted to customers. Then again, in 2017-18, it noted that UCIC may have been allotted but several customers were allotted multiple UCICs. How is this possible in core banking software? What was the action taken? Presumably nothing.
4. Ineffective Audit Committee:
In 2014-15, RBI found the audit committee ‘deficient’ and issued several strictures for failing to monitor observations in the audit report. The next two years give a clean chit to the Bank, but the 2017-18 report complains about ‘deficiencies’ in identification of non-performing assets (NPA) and tendency to delay or postpone identification of bad loans. Subsequent developments show that the inspector was actually clueless about how bad this situation was. The audit committee members and auditors are now under arrest.
5. Audit Quality:
The 2014-15 report wanted both internal and statutory audit to be tightened. That report pointed to ‘large-scale inter-group fund transfer’ having been done without confirming bonafide
need. So what happened? Strangely, inspections in the next three years found no issue with the audit quality. However, the 2017-18 report again makes a passing mention of PMC Bank’s failure to assess working capital requirements or monitor end-use of funds. If this exposes the pointlessness of RBI inspections, consider another finding.
RBI’s 2017-18 inspection declares that 484 loan accounts, accounting for 0.01% of the total, had an outstanding balance of Rs2,304 crore and formed 30.90% of advances. This exposed the Bank to ‘credit concentration risk’, it says. Reading this comment without knowing the enormity of subsequent developments would suggest great diligence on the part of the inspector. In reality, PMC Bank’s exposure to HDIL group alone was over Rs7,500 crore. It makes you wonder if RBI inspections are entirely pointless.
If the 2014-15 report appeared close to finding the truth, the next three inspections clearly had their eyes tightly shut. Each of them has given a clean chit to the Bank and filled up the report with trivial information, such as absence of ramps for the disabled, or the Bank using the abbreviated name “PMC Bank”.
It is breath-taking how the minds of RBI inspectors were occupied with such petty and utterly pointless observations, when an enormous fraud should have been staring in their faces and which brought the whole Bank down.
If the RBI inspectors made as much of an effort in doing their jobs as they did in redacting names from the inspection reports handed over to Girish Mittal, many depositors’ money would have been saved. Here is an example of RBI’s whitening effort!
Clearly, RBI’s inspection process needs a complete revamp with inspectors being made seriously accountable and responsible for acts of failure. Otherwise, we are destined to lurch from one crisis to another.
RBI governor Shaktikanta Das fortunately has a more open attitude to engagement and feedback from different stakeholders. Hopefully, he will do what his rock-star predecessors, with all their shiny academic degrees, refused to touch—a focus on strict supervision of Bank’s lending operations and accountability for RBI’s inspections.