PMC Bank scam raises serious questions on RBI’s efficiency as regulator; central bank should wake up from its slumber

By now, we know that the Reserve Bank of India (RBI) was sitting duck through the entire period when the Punjab and Maharashtra Co-operative (PMC) Bank fooled the regulator flashing fudged balance sheet figures. The regulator proved to be utterly inefficient in monitoring one of the largest lending institutions in the co-operative banking space. The PMC Bank fraud case gives aspiring crooks lessons on how to smartly fool the all-powerful RBI and commit major financial frauds. The affidavit filed before the Bombay High Court by the RBI is shocking, where the central bank admits that it was ‘cheated’ by the PMC Bank management for a considerably long period of time. The loan details of Housing Development Infrastructure Ltd (HDIL) were smartly hidden by the bank’s management whenever it gave samples and the RBI officials thought that all is well with the inter-state co-operative bank. According to the affidavit details, even within the PMC Bank, only about 25 bank officials had access to the HDIL account details through special access codes out of the total staff strength of 1,800. [caption id=“attachment_7404161” align=“alignleft” width=“380”] Representational image. PTI[/caption] Not just that, the former chairman of PMC Bank, S Waryam Singh, who was part of the credit committees that sanctioned loans to HDIL, was a director of the company that is a clear case of conflict of interest. The RBI clearly failed to notice these wrongdoings till the fraud progressed to the final stage. The whole thing went on until one PMC Bank official tipped off the central bank about the gross irregularities in the bank, opening nothing but a Pandora’s box. After the fraud surfaced, the RBI put withdrawal restrictions instantly . Among those customers who had parked majority savings in the bank, as many as eight lost their lives allegedly due to the stress linked to PMC Bank episode. The alleged mismanagement at the PMC Bank did not take place overnight. The RBI, which is the regulator of the entire banking system including cooperative banks, failed miserably to identify the violations of rules by PMC Bank that has 137 branches, Rs 11,600 crore deposits and operations across six states. Why did the RBI not identify the issue earlier and wait till the last minute to clamp down on the bank stopping short of cancelling its licence? The regulator should have acted earlier without triggering a crisis which has now led to panic among customers, some of whom have parked their life’s savings in the bank. But, the RBI didn’t look deep enough, despite having vast resources and power, and instead chose to be content with routine checks. The details available so far reveals that out of the PMC Bank’s loan book of around Rs 8,383 crore, as on 31 March 2019, about 70 percent of which was given to real estate firm HDIL. Problems arose when this account began to turn into non-performing assets (NPAs). According to investigators, the bank management hid this stress from the RBI scrutiny. According to the RBI regulations, no bank can lend beyond 15 percent of a bank’s capital base to a single company. This limit could be different for co-operative banks. But, there is no justification for lending 70 percent of the loans to a single company. By doing so, the bank put itself under a huge risk. Why did the promoters and the board do that? It is just not the PMC Bank. In the industry as a whole, frauds involving banks are significant in terms of the quantum of money involved. Government-owned banks reported frauds of over Rs 95,700 crore in the first six months of the current fiscal, the Parliament was informed on Tuesday. “According to the Reserve Bank of India, frauds as per year of reporting, as reported by Public Sector Banks (PSBs), during the period from 1 April, 2019 to 30 September, 2019 is 5,743 involving a total amount of Rs 95,760.49 crore,” Finance Minister Nirmala Sitharaman said in the Rajya Sabha. The PMC Bank case raises serious questions on the efficiency of the RBI as a regulator. It clearly shows the RBI’s tools to monitor fraud in financial institutions aren’t working well. Moreover, it points out to the serious gaps that exist in risk-management systems in the banking sector, especially in the lightly regulated cooperative banks. The PMC Bank episode is yet another jolt to the central bank to wake up from its deep slumber.