While the Reserve Bank of India (RBI) virtually admitted that it was 'cheated' by the management of the scam-hit Punjab & Maharashtra Cooperative (PMC) Bank, it is noteworthy that as early as in 2011, a whistleblower had raised the issue of fraudulent activities taking place in the Bank on which no action was taken. All that RBI did was to forward the whistle-blower's complaint to chief executive officer (CEO) of PMC Bank instead of initiating an investigation or taking action.
On 28 January 2011, the whistleblower sent a letter (seen by Moneylife) to A Udgata, chief general manager (CGM)-in-charge of the urban banks department at RBI. The whistleblower, an employee of PMC Bank, alleged that actual non-performing assets (NPAs) of the Bank stood at 9.12% and not 1% as shown by the lender.
"Many large borrowers are NPAs, but the bank issues fresh loan in the name of the relatives of the directors or partners of the borrower NPA company and the NPA loans are closed by diverting these fresh funds towards settlement of NPAs. Also, the bank advises them to create a fresh partnership or proprietary firm and gives fresh loan to these new companies and then routes these funds to close NPAs or large borrowers or close pals of the directors of the bank," the letter says.
The whistleblower had alleged that "large borrowers at PMC Bank's Sion and Andheri branches are close friends, family and associates of the directors of the bank, hence the staff at the credit department are asked to do reverse calculations to arrive at the financials for the loan sanction. Then these calculations are given to the borrowers and they finalise their accounts and get it audited based on our calculations for loan."
According to the whistleblower, Housing Development and Infrastructure Ltd (HDIL), Dewan Housing Finance Ltd (DHFL), Dheeraj Builders, Trapinex and their group companies manipulated the banking system to their advantage. The 2011 letter says, "The bank manipulates its net time and demand liabilities by asking these companies to deposit cheques on a Thursday. These cheques are intercompany cheques drawn on HDFC Bank or Jankalyan Bank. These cheques are physically returned on Saturday. However, debit for outward return for these cheques will be spread over three days so that it does not come under monitoring by RBI for higher return percentage of cheques.”
"Further, in return of the favour, all black money of HDIL and group companies which are received in cash and deposited in their account with PMC Bank and these cash deposits above the specified limit are not reported to RBI or sometimes window dressed so that RBI cannot make out the black money is being made white here," the whistleblower wrote in the letter.
Interestingly, the RBI itself admitted that it was supplied with fraudulently manipulated data by the PMC Bank. In an affidavit submitted before the Bombay High Court in November 2019, RBI says, "The disclosed HDIL related accounts were seen and majority of them were assessed as non-performing assets (NPAs). Further non-monitoring of end use of funds and conflict of interest of Waryam Singh as chairman of PMC Bank and as a former director of HDIL group was also commented upon in the report along with the attempt by the bank to show disclosed accounts of HDIL group as standard by sanction of new loans to close or regularise the old NPA accounts... Consequently, the assessed NPAs of the bank were significantly higher than the reported NPAs."
"The bank had also sanctioned mortgage overdraft limits to a wholly-owned subsidiary of the HDIL while the present (now arrested Waryam Singh) chairman of the PMC Bank, was also a director of the company -- a clear conflict of interests and violation of RBI's master circulars... Waryam Singh also chaired a PMC Bank board meeting to ratify the approval of mortgage overdraft in which he was directly interested, again contravening RBI norms."
"The inspection team had also established the relationship between the chairman of the Bank and HDIL promoters, which might have acted as the primary consideration for sanction of credit facilities and resulted in their utilisation to pay off one-time settlement dues with other landers," RBI says in the affidavit.
The RBI affidavit, filed in 2019, states that the scale of violation and the connected lending that was established, based on available records, was much lesser due to the 'camouflaging' resorted to by the PMC Bank, and hence what was noted was 'flagged', though it was not found to be significantly affecting the Bank's financial health.
The important question here is, when the whistleblower had brought forward all these issues in 2011 itself, what did RBI do for almost eight years before the Bank went bust? Why was no action taken on the whistleblower's letter by RBI?
The letter sent by the whistleblower in 2011 also mentions the fake deposits worth Rs250 crore, which were updated in the system to portray PMC Bank as a big bank and to receive awards.
The letter says, "Now in the Omni core banking, we do not have access to head office accounts, but in the TBA software, the same was booked as under 'state district cooperative banks deposit' code 'STDIS-FD'. These vouchers were only signed by the then manager in-charge, accounts department, Manjit Ishwar Singh, Geeta Singh and Amit Mondkar. Fixed deposit (FD) receipts like that of Maharashtra Industrial Development Corp (MIDC) was printed and kept in safe for producing during inspection."
"When asked for FD confirmation, they used to say, yet to be received from the bank and they produced receipts to genuine deposits like Maharashtra State Cooperative Bank (MSC), State Bank of India (SBI), State Bank of Hyderabad (SBH) so that the inspectors get entangled in it and they do not ask for this confirmation. Once the RBI official insisted on the confirmation, their one official brought blank continuous paper stationary from MIDC and printed the conformation including fake deposits in the MIDC format and showed it to the RBI officer," the whistleblower stated in the letter.
The whistleblower also mentions how a few employees in the PMC Bank, who were 'rewarded' for helping HDIL in its manipulation and fraudulent activities. This includes Geeta Singh and Manjit Ishwar Singh, who headed the accounts department at PMC Bank's Bhandup central office and clearing department at Fort, respectively.
"...they have been provided flats in the Dreams Dheeraj Cooperative Housing Society at Bhandup west (a project of HDIL) by HDIL group at rates much cheaper than the then prevailing rates. Geeta Singh was allotted flat no 2003 in Dheeraj Dreams II C at a purchase cost of Rs12 lakh as against the prevailing cost of Rs55 lakh. Manjit Ishwar Singh was allotted flat no 2005 in the same building at Rs5 lakh against Rs50 lakh, the then prevailing cost. Both had obtained staff loan from PMC Bank for buying these flats."
"Joy Thomas (who was managing director when arrested by the police in 2019) was given a plot in Pune at Rs50 lakh against the prevailing cost of Rs10 crore and the non-agriculture (NA) was arranged by HDIL," the whistleblower alleged in the letter.
According to the whistleblower, in 2005, branch manager of PMC Bank's Versova branch gave an overdraft limit of Rs5.65 crore to Mahendra Dhariwal, Sunita Dhariwal, Dhariwals Films P Ltd, and Evershine Films without obtaining any security.
"When these film makers were unable to pay their dues, it came to the notice of the central office. The MD asked officials from the central office to investigate. A detailed report was submitted to the MD describing modus operandi of the fraud. This fraud was never reported to the RBI nor to Indian Banks' Association," the letter alleges.
According to the whistleblower, these NPAs were never revealed as NPAs by PMC Bank as it would have increased their NPA percentage. "The bank is already running in to huge losses though they have not disclosed the same to RBI or the general public," the whistleblower says.
A few days before its restrictions, on 19 September 2019, RBI sent its team for annual inspection of PMC Bank and thorough scrutiny of HDIL accounts, especially the Bank's exposure to the group.
Detailing the "modus operandi of hiding the information related to HDIL exposure" employed by the PMC Bank, the RBI affidavit stated they (Bank executives) tampered with management information systems (MIS) and NPC identification process. In this, the bank had given special access codes on Finnacle, its core banking software (CBS) for HDIL accounts with restricted visibility to less than 25 out of PMC Bank's 1,800 staffers.
RBI says, "While running the script for system identification of the NPAs, it deliberately excluded the HDIL accounts which were thus omitted from the system generated reports of NPA accounts, and ditto with the overdrawn accounts list. The PMC Bank's own MIS software called 'Opine' had a script for generating lists of newly sanctioned or disbursed accounts, but the undisclosed loan accounts were excluded from this list."
"These irregularities were not highlighted by the PMC Bank's concurrent auditors at the Sion Branch, where all these undisclosed accounts were parked though concurrent audits were carried out every month," the affidavit had pointed out.
In addition, the undisclosed loan accounts to HDIL group, sanctioned and renewed with approval from K Joy Thomas, the then managing director (now behind bars) of the Bank. This sanction of loans was not recorded in the minutes of the loan committee, recovery committee, or the board of directors, though they constituted a vital source of information for inspection, RBI says.
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