PMC Bank: Red Flags of 2015 Forgotten over the Next 3 Years!
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.
 
 
 
 
 
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    COMMENTS

    sundararaman gopalakrishnan

    8 months ago

    Superb example of investigative journalism.So far i thought RBI is inefficient.Now it is confirmed.Also, one should not rule out corruption in RBI.So far RBI is having a holier than thou image..May be it is undeserved?

    B. Yerram Raju

    8 months ago

    A comprehensive analysis and rich compliments to the author. It is for the Government and RBI to take corrective and preventive actions.

    Camila withney

    8 months ago

    confront your cheating spouse with evidence,i was able to spy on my cheating wife phone without finding out.....it really helped me during my divorce ....you can contact '[email protected] c o m' call and text 617 402 2260 for spying and hacking social networks, school servers, icloud and much more,viber chats hack, Facebook messages and yahoo messenger,calls log and spy call recording, monitoring SMS text messages remotely,cell phone GPS location tracking, spy on Whats app Messages,also improve credit cards his services are cheap.. and please tell him i referred you to him he is a man with a heart of GOLD. 

    Suketu Shah

    8 months ago

    Speciality of Modi govt is pretending to be saint in the Himalayas to all frauds taking place in its regime.

    Sudhir Mankodi

    8 months ago

    In every bank, any deviation from the instructions/guidelines laid down by the bank has to be approved by the \"Appropriate Authority\" designated with the mandate of the board. whether maintaining accounts by HDIL with other banks was approved by such authority and if so what actions have been initiated by the bank? This particular breach led HDIL to divert and misuse the funds to the detriment of the bank and its depositors.

    Dharam Vir Narang

    8 months ago

    Present governor is looking into the matter and hopefully he has worked in this direction and forward the report to finance ministry for further action.

    Vivek Bhatia

    8 months ago

    RBI i spectors sre corrupt and becasuse of their ovelooking important matters of bank mostly co operative banks innocent depositors suffer Govt should hold RBI for this mess

    PRAKASH D N

    8 months ago

    It is a national shame that the RBI could not smell the rat. Any ordinary officer can see from the facts what is going wrong in PMC. Whether the inspectors done it deliberately or under influence of higher ups, need to be investigated. I am reminded of one incident happened bin a South based PSB. In 2011-12, the bank witnessed CVC enquiry against CMD. RBI sent a team of inspectors who went into the irregularities committed by CMD and submitted it's report. When the bank received copy of the report, nothing serious was there whereas the inspectors had collected all details. It was reported later that the report was watered down at the instance of top brass. Whether PMC is a repeat?
    It is an opportunity for RBI to relook into it's systems, plug loopholes and fix accountability at every level to bring back the faith in RBI as a strong Regulator.

    REPLY

    Sudhir Mankodi

    In Reply to PRAKASH D N 8 months ago

    it must be understood that RBI is a regulator and has only oversight supervision through various methods, annual financial inspection by RBI being one of them. Once the irregularities are pointed out, the onus is on the highest authority of the bank to ensure compliance. The Board of the bank should be squarely held accountable and the properties in the name of the individual directors and their family members be attached and sold & proceeds be distributed to the helpless depositors. Then only the justice will be seen to be done.

    Small Finance Bank Deposits Jump 130% in FY2019, But Cost Remains High: Report
    Small finance banks (SFBs) will continue to see increased traction in deposits on the back of higher interest rates (1%-2% higher than most banks), focussed marketing strategies, and maturing branches of a fast growing branch network at 40% growth in branches in FY2019, says India Ratings and Research (Ind-Ra) in a note. 
     
    According to the research report, during FY2019, total deposits in SFBs jumped 130% leading to an increase in the share of deposits to 59.6% of non-equity liabilities in FY2019 compared with 37.6% in FY2018. "SFBs incrementally mobilised deposits of Rs288.5 billion in FY2019. But SFBs would need to mobilise around Rs600 billion in deposits over FY2020-FY2021 to support an annual growth asset of 30% and to maintain borrowings at 25% of the liabilities," it added.
     
    The ratings agency from Fitch group opined that SFBs would need to ramp up deposits quickly to replace grandfathered loans and gradually build granular deposits. This scenario has been playing out since then, it says, adding, "The early depositors were credit societies, co-operative and grameen banks, non-banking finance companies (NBFCs) flush with equity, other small finance banks and mid-sized corporates. We expect the share of granular deposits (current and savings accounts deposits (CASA) and retail term deposits), which accounted for 48% of the total deposits in FY2019 as against 42.5% in FY2018 would continue to increase over the medium term, aided by an increase in branches and banking points to about 3,500 at end-FY2019 and increase in deposit rates."
     
    For small finance banks low cost CASA deposits continue to be a challenge, Ind-Ra says.  
     
    Although CASA (low-cost deposits) increased 76% to Rs97.6 billion in FY2019, the ratio has seen a decline to 19.2%, as traction in term deposits increased and savings deposits were converted to term deposits owing to the high rates offered by SFBs. 
     
    "The building of a CASA franchise depends on factors such as developing long-term customer relationships, ensuring ease of transactions, fostering trust in the brand, having a large branch network etc. Large commercial banks benefit from vintage, resulting in deposits from large corporates, government departments, including all state and local bodies, trusts schools and hospitals, businessmen and customers whose incomes have grown with the banks over many decades. As a result, gathering CASA, especially CA, is a challenge for SFBs," the ratings agency says.
     
    For small finance banks, there is limited support for borrowing from policy institutions, while raising money from capital markets post another set of challenges for SFBs.   
     
    Over the past two year, total borrowings of SFBs declined steadily to Rs315 billion in FY2019 from Rs340 billion in FY2018, with a substantial, albeit expected, decline in bank borrowings and debenture funding (grandfathered loans). 
     
    This decline, Ind-Ra says was accompanied by a rise in refinance by policy institutions. “The share of policy institutions increased to 43% in total borrowings in FY2019 from 15% in FY2017. However, capital market borrowings present a different picture. Given the overall liquidity stress in short-term capital markets, elevated risk perception and risk aversion, especially for credits rated in the 'A' category and below', SFBs might face challenges in tapping the capital markets. On a cumulative basis, SFBs raised about Rs19 billion of CDs from December 2018 to mid-November 2019, with a weighted average tenor of 37 days,” it added.
     
    Assets under management (AUM) of SFBs reached Rs700 billion in FY2019, reporting a growth rate of 48% and a compounded annual growth rate (CAGR) of 32% over FY17-FY19. 
     
    For SFBs with microfinance vintage (AUM of about Rs447 billion in FY2019), the micro finance loan book grew by 28%, while the non-microfinance book grew 75%. Consequently, the share of the non-microfinance book in the AUM increased to 29% in FY2019 as against 23% in FY2018. 
     
    However, Ind-Ra says, microfinance loans still account for a significant proportion of the consolidated loan book of SFBs, exposing them to socioeconomic and political risks, along with natural disaster-related risks on the asset side. It says, “Most SFBs have grown their secured loan portfolio substantially, which partially offsets the overall risk exposure through asset diversification, and therefore, they might suffer lower losses given default. We expect the share of the microfinance loan book to decline gradually in the near-to-medium term to about 60%, as SFBs with microfinance origin would maintain their focus on growing their non-MFI portfolio.”
     
    Given SFBs' ability to attract deposits (relative to their cumulative size) and their core competency of assessing the credit profiles of the 'underbanked', Ind-Ra says it believes the prevailing environment provides a significant opportunity to SFBs.  
     
    “Considering the general environment of risk aversion, many banks are hesitant to lend to the SMEs, while NBFCs have been facing funding challenges. With the right credit assessment and collection models, SFBs might be able to on-board good assets,” it added. 
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    COMMENTS

    Rajolu Ramam

    6 months ago

    In the budget, the insurance cover is increased to 5 lakhs from 1 lakh for the deposits in the banking sector provided the bank pay its premium to DICGC regularly. Now one can
    take a F D of 5 lakhs from these small finance banks.

    Ramesh Poapt

    8 months ago

    few babies will be male after few years, if one catches young ones..

    Rajolu Ramam

    8 months ago

    The deposits in small finance banks will increase still futlrther. Even the 2 or3% increase is attracting many people. The so called public sector banks offer interest is the lowest like 6 to 6.5 % in the history of the country. Even one small finance bank offers 7% on savings bank deposits! After the recent defaults by some NBFCs and PMC BANK etc. People are some what hesitant to invest in SFBs as they are afraid whether they get back their money. Once they are confident, no body will go to public sector banks.


    Why Is Macquarie Capital Even Suggesting Nationalisation of Yes Bank?
    Foreign equity analysts such as Macquarie Capital, who had got their call on Yes Bank spectacularly wrong earlier this year is now raising the possibility of a nationalisation of the bank. This controversial suggestion would mean that the ordinary Indian would not only pay for the massive recapitalisation of public sector banks, but also pay for the blunders of private promoters,  who were not properly selected or adequately supervised by the Reserve Bank of India (RBI).  
     
    Yes Bank’s struggles to raise funds have been making news over the past many weeks with the stock being roiled with every bit of news about possible investors who may help bail it out from the enormous mess left by its founder Rana Kapoor. 
     
    After the board meeting yesterday, when the Yes Bank deferred a decision on a controversial binding bid from the Canadian investor Erwin Singh Briach to the next board meeting. 
     
    Analysts expect more bad loans, higher haircuts due to slower resolutions and uncertainty around equity raising, given the sharp correction in stock price.
     
    However, all of sudden, Macquarie Capital Securities (India) Pvt Ltd has suggested nationalisation of Yes Bank citing 'grave danger the lender may pose to the financial system'.
     
    In a report, Suresh Ganapathy from Macquarie says, "If a collapse of non-banking finance companies (NBFCs) like IL&FS and DHFL could freeze up liquidity, a collapse of a bank could be a far more serious issue as banking is heavily based on trust and any freezing of the clearing system due to a collapse of a bank could choke the system and further jeopardize economic growth which is already in the doldrums."
     
    Moneylife’s popular columnist R Balakrishnan calls this as a scene created by the brokerage, may be to manipulate stock price of Yes Bank. In a tweet, he says, “Why nationalisation? Just let it sink. Will be a good wake up call for people. How long will RBI keep junk in the economy? Sad if it is merged. Yes, let someone buy it if brave enough.”
     
     
    Macquarie cited earlier cases of Global Trust Bank (GTB) and United Western Bank (UWB), which were taken over by Oriental Bank of Commerce (OBC) and IDBI, respectively. "In both cases, the banks were put under moratorium and the Reserve Bank of India (RBI) and the government came forward and did a forced merger," it added.
     
    Apart from the stress in Yes Bank's books, Macquarie also warns about possible run on the bank deposits. It says, "We have already seen the deposit base declining for the past couple of quarters. We are mindful that a former deputy governor of RBI is on the (Yes Bank) board and closely watching the developments and how the situation is playing out."
     
    Yes Bank has been struggling to raise money from markets and investors. Yes Bank’s recent board meeting was inconclusive as they still have not firmed up on who could be the potential investors. It has been close to nine months since the new chief executive (CEO) Ravneet Gill took over and they are yet to raise money. 
     
    "When we had done a roadshow in Hong Kong and Singapore in September this year, we had clearly said that none of the 40 investors whom we met wanted to give Yes Bank capital. The struggle to raise money from quality investors shows us that investor interest in the stock continues to be very low," Macquarie says. 
     
    Yes Bank's net worth is around Rs250 billion below investment grade book (rated BB and below) is around Rs300 billion. Even after factoring in operating profits for the next six quarters, Macquarie says total capital needed by Yes Bank would be at least about $2.5 billion to $3 billion over the next 12 to 18 months. 
    Chartered accountant Ajit Mehta, in a tweet, calls Yes Bank as a directionless lender without any promoter. 
     
     
    Earlier in August 2019, global ratings agency Moody’s Investors Service downgraded Yes Bank’s creditworthiness deeper into ‘junk’ status, citing concerns over lower-than-expected capital raising in recent times and the lender’s ability to raise more funds in the future. 
     
    Moody’s also said that given the ‘negative’ outlook, an upgrade is unlikely in the next 12-18 months. Moody’s had mentioned in its note “Although the bank’s funding and liquidity profile has remained broadly stable, it compares weakly to other rated private sector peers in India. The negative outlook primarily reflects the risk of further deterioration in the bank’s solvency, funding or liquidity, as the bank continues to work through the asset quality issues and rebuilds its loss-absorbing buffers.”
     
    At 12.46pm Wednesday, Yes Bank was trading 13.55% down at Rs43.70 on the BSE, while the 30-share Sensex was flat at 40,275.
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    COMMENTS

    Subramanian S

    8 months ago

    Good article

    m.prabhu.shankar

    8 months ago

    -:)))) Everyone is clear. Its middle class tax payers money that is easy to get. Now its for bailing out private banks. But for farmers a strict no no...--:::)))).

    Harish

    8 months ago

    Macquarie's Indian offices should be nationalised.

    Nishesh Jambudi

    8 months ago

    Can we buy if Yes bank goes below Rs 10 ?

    Ramesh Poapt

    8 months ago

    where is rana kapur, gogias by the way?!

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