PMC Bank Update: Will Depositors’ Woes Worsen?
Inter-Creditor Agreements: Will Problems Worsen?
 
On 7th November 2019, the Business Standard reported that PMC Bank’s woes might worsen as urban co-operative banks have not been made part of inter-creditor agreements (ICA). This might lead to questions as to where PMC Bank stands in the pecking order for recovery of its dues from HDIL, worth Rs 6,500 crore, Housing Development Infrastructure (HDIL).
 
Under the Reserve Bank of India’s (RBI) June 7 guidelines on resolution of stressed assets, all bank groups except urban cooperative banks (UCBs) have to mandatorily sign the ICA. The signatories include scheduled commercial banks (not regional rural banks or RRBs),National Bank for Agriculture and Rural Development, National Housing Bank, Exim Bank, SIDBI, small finance banks, as well as systemically important deposit taking and non-deposit taking non-banking financial companies. 
 
Effectively PMC Bank is now sharing space with a select group comprising high-street mutual funds, private equity firms, alternate investments funds, and off-shore lenders that have no seat at the ICA table. 
 
ED: HDIL Diverted Rs160 crore of PMC Bank loans
 
On 6th November 2019, Firspost reported that the Enforcement Directorate's (ED) investigation found that the promoters of Housing Development Infrastructure (HDIL), Rakesh Wadhawan and Sarang Wadhawan, has allegedly diverted a Rs 160 crore, PMC Bank loan to three Delhi-based hotels (called Libra Hotels) in which Rakesh Kumar Wadhawan is a director and shareholder.
 
An ED official identified these as 3-star hotels named Hotel Conclave Executive, Hotel Conclave and Hotel Conclave Comfort. TheWadhawans are accused of having siphoned funds from PMC Bank using overdraft facilities “disguised” as loan accounts, in collusion with bank officials.
 
RBI Monitoring Situation
 
Governor Shaktikanta Das told the media that RBI is closely monitoring the situation at the scam-hit bank. He added that an appointed agency was assessing the market value of the bank's assets (which are spread over various parts of Maharashtra and other states) and they would also check if the assets were encumbered to any other entity. Based on that, the Reserve Bank will take further decisions with regard to PMC Bank.  
 
  • Like this story? Get our top stories by email.

    User

    Fintechs, Banks and the New Geo-Economics of Global Finance
    Colonisation of politics by economics has long been acknowledged since the time of Kautilya. As a corollary to this rule, geopolitics also changes with time, with geo-economics being the catalyst for change. Over the last 200 odd year economics has shaped geopolitics many times. At first came global dominance in trade in commodities such as cotton, tea, spices and coffee. With the rise of air warfare came oil, diminishing the relative importance of other commodities. After the end of the Cold War, banking led by financial capitalism has determined the course of geopolitics. And now with the rise of technology companies, cyber space is the sunrise sector. 
     
    A recent UNCTAD report on digital economy captures this geo-economic transformation quite comprehensively. The report notes: “[a] comparison of the composition, by sector, of the top 20 companies in the world by market capitalization shows a dramatic shift. In 2009, seven companies from the oil and gas and mining sectors were among the top 20, accounting for 35 per cent of the total, whereas there were only three companies from the technology and consumer services sectors, which include digital platforms. Another three were from the financial sector. By 2018, the picture had changed significantly: the number of technology and consumer services companies in the top 20 had surged to eight (40 per cent), and that of financial companies to seven. By contrast, only two companies in oil and gas and mining remained among the top 20.
     
    “The shift is even more remarkable when measured in terms of market capitalization. In 2009, companies in the oil and gas sector accounted for 36 per cent of the total market capitalization of the top 20, followed by financial services with a share of 18 per cent, while technology and consumer services represented 16 per cent. By 2018 the share of the latter had increased to 56 per cent and that of financial services had risen to 27 per cent. By contrast, the share of oil and gas companies in total market capitalization significantly declined to just 7 per cent over the same period.” 
     
    These extraordinary shifts in the intersectoral shares of various industries provide a glimpse into the why and how of many debates that confront us. From the point of view of banking and finance, even if its share has increased in terms of market capitalisation (thanks to low interest rates) and absolute numbers, the relative importance has declined. The decay has been gradual following the 2008 crisis. 
     
    From the point of view of interactions between technology companies and banking, the former has been instrumental in automating the banking process. Staring with telephones in 1920, to the adoption of punch cards in 1930-1950 and the use of third generation IT systems such as IBM360 in 1960s, the thrust to the use of technology in banking up till 1970s was to improve the performance of the back office. After 1970, technology adoption in banking moved to the front office with the deployment of ATMs, pass book printing machines, mobile banking etc.  
     
    However the same suppliers of technology today meticulously “unbundle” many of bread-and-butter banking services. Such “unbundling” of financial services is thus driving the fear that technology companies or ‘fintechs’ may overtake/acquire banks at some point in time. This has prompted aggressive acquisition of fintech by banks in the US and EU. By Dec 2018 ten  banks had acquired 13 fintechs. However, the potential for the opposite trend is also alive and kicking. An example exists in Germany; fintech Raisin (promoted by PayPal) acquired its long-time service bank, MHB Bank of Frankfurt. A similar idea got floated in India recently when a payment fintech proposed taking a stake in  midsize private sector banks.
     
    Thus, the Indian financial sector is not immune to these undercurrents despite the policy decision that gives primacy to banking system. Thus, a standalone technology or telecom company offering payment service is not a likelihood in India but only in association with a bank or an NBFC. Moreover, banks in India are not on an acquisition spree but are in a collaborative mode with fintechs. 
     
    Then there are strategic considerations which cannot be overlooked in the long run on three counts. One, due to lack of depth in the Indian origin venture capital (VC), most of the Indian fintechs are financed from foreign VCs (and are even incorporated abroad). As Kai Fu Lee notes in his book, the approach of the Chinese and the US companies in respect of export of cutting edge digital technology is different: while the US companies mostly prefer the foreign direct investment (FDI) route, the Chinese fintechs have adopted a strategy of funding local startups. 
     
    Second, the entire fundamental and applied research which has a bearing on fintech, is happening outside India. The UNCTAD report notes that the US and China account for 75 per cent of all patents related to blockchain technologies, 50 per cent of global spending on the internet of things (IoT), at least 75 per cent of the cloud computing market, and for 90 per cent of the market capitalization value of the world’s 70 largest digital platform companies. Thus, in the absence of a home-grown ecosystem, there is a danger of third party technology vendor lock-in.
     
    Third, the encroachment of the fintechs in the financial supply chain on the asset side alters the balance of power in broad money creation (or M3). In India, since most of the banking system is under the public sector, M3 is closely tied to sovereign goals. As fintechs increasingly undertake lending, the sovereignty over M3 is no longer assured. Those who propose complete privatisation of Indian banking have missed this strategic point altogether.
     
    In conclusion, there is a need to deeply look at how Industry 4.0 will impact the financial sector of India. With nearly all capabilities available domestically, the adoption of Industry 4.0 in the financial sector requires planning and steering at the highest level to address regulatory blind spots and minimise inter regulator tussles.
     
    The RBI move on regulatory sandbox is a good move but the same needs to be replicated across other financial regulators.  
  • Like this story? Get our top stories by email.

    User

    COMMENTS

    DeepakSB

    6 days ago

    https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10487

    RBI has officially given licence to co-operative banks to loot and cheat its account holders. As of Nov 2019-PMC Bank scam and other co-operative bank scams are daily reported in press and media. 👆👆👆(Pdf file in link above -terms and conditions of Long Term Depodits -LTD-by Saraswat Bank-with permission of RBI). 👆👆👆 Its surprising that these LTDs are NOT covered by Bank Deposits Insurance scheme (DICGC).No loan/Overdraft/Premature withdrawal available till 7 years. If CO-Operative bank closes down/liquidated during tenure of 7 years-depositer will LOOSE ALL AMOUNT. 🚒🚒 Can any Individual/Organisation/Consumer Forum study these and file PIL to stop further cheating by co-operative banks of its account holders? 🚒🚒

    Navodaya co-op bank ex-chairman Ashok Dhawad surrenders
    On 4th November 2019, former Congress MLA Ashok Dhawad, ex-chairman of the Navodaya Urban Co-operative Bank, surrendered before the special court of Maharashtra Protection of Interest of Depositors (MPID) Act in the alleged Rs 38.75 crore scam after his anticipatory bail plea was rejected by the supreme court. 
     
    He reportedly walked into the courtroom accompanied by his counsel Devendra Chauhan. This is yet another cooperative bank that went into liquidation on account of irregularities and its licence was cancelled by the Reserve Bank of India (RBI) in October 2018. 
     
    The Times of India (TOI) has reported that the cops from Economic Offence Wing (EOW) of the police will be seeking his remand from the court. Dhawad’s spouse Kiran, who was also a director, has been granted anticipatory bail by the Bombay High court. On 6th November 2019, the Maharashtra Protection of Interest of Depositors (MPID) Act court judge, Sunil Patil, remanded Dhawad to police custody for one week.
     
    Dhawad, who was the chairman of the bank between 2011 and 2015, has been named as one of the accused in the case after his involvement in sanctioning and disbursing fake loans, misappropriation of funds, issuing clearance certificates even to defaulters and many other blatant irregularities were thrown up during the audit by the state’s co-operative department.
     
    Following the audit reports, which also indicted the bank’s former chief executive officer (CEO),Samir Chatt, an offence was registered at Dhantoli police station. The EOW, which took over the probe, has so far arrested 13 persons (including Samir Chatt) while about 40 are yet to be nabbed. 
     
    Many prominent builders and construction groups, like Jhams, were among the beneficiaries. Mukesh Jham and his wife Mahima were arrested earlier this year for having siphoned off amounts taken as loan which they did not repay. 
     
    Former board of directors, office-bearers, and some borrowers of the bank were booked by Dhantoli Police in Nagpur in May this year under various sections of the Indian Penal Code (IPC) for cheating and criminal breach of trust besides under the MPID Act and Information Technology Act.
     
    They are accused of approving unsecured loans between 2010 and 2017. The accused had allegedly returned the original documents of the properties mortgaged with the bank as well as the No Objection Certificates (NOCs) to those who have failed to repay loan. The police have also listed preparing fake registration documents among other irregularities allegedly committed by the accused. Another EOW official said the earlier board of directors and some office-bearers allegedly tampered with the computer records to show that the loan was disbursed to genuine borrowers. 
     
  • Like this story? Get our top stories by email.

    User

    COMMENTS

    Mohamed Meghani

    2 weeks ago

    Co operative banks in India should be renamed Chor operative banks

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 3 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)
    FREE: Your Complete Family Record Book
    Keep all the Personal and Financial Details of You & Your Family. In One Place So That`s Its Easy for Anyone to Find Anytime
    We promise not to share your email id with anyone