Scams aren't new, but PMC Bank turned them into a business model while RBI slept through it all

The website of Punjab and Maharashtra Co-operative (PMC) Bank lists its vision as the following: “To emerge as a strong, vibrant, most preferred premier co-operative bank committed to excellence in serving the customers, and augmenting the stakeholders value through concern, care and competence”.

At the end of 35 years, the bank, which started in a small room at Sion in Mumbai on 13 February 1984 is everything but what its vision statement says it is.

In the last two days, three Mumbai-based depositors of PMC Bank have died; one committed suicide while the other two suffered heart attacks. All the three breathed their last seeing their hard-earned money locked up in their bank, with access denied to them. The co-operative bank almost worked as a piggy bank for HDIL. It, thereby, flouted all golden rules of banking by lending as much as 70 percent of its loans to the company and hiding the actual state of non-performing assets (NPAs) to the outside world.

Representational image. News18

What did PMC officials get in return? The details of kickbacks received in this corporate-bank unholy nexus are yet to come out. Investigations have revealed that the bank’s suspended managing director, Joy Thomas, gifted nine flats to his second wife in Pune, whom he married after converting to Islam in 2005. The three lives lost are the latest victims of India’s problematic co-operative banking system. The operations of PMC Bank, which is among the top cooperative banks in India, were a mystery even to the all-powerful regulator, Reserve Bank of India (RBI).

Nivedita Bijlani (39), who allegedly committed suicide on Monday evening by taking an overdose of sleeping pill, had over Rs 1 crore deposits with the PMC Bank. She lived in suburban Versova.

Another account holder of the bank Sanjay Gulati of Oshiwara, who had Rs 90 lakh deposits with PMC Bank, died on Monday (14 October) following a heart attack. Fattomal Punjabi, the third customer, who had an account with the Mulund branch of the bank, died on Tuesday afternoon. Whether these deaths are directly related to the distress caused by the PMC Bank-scam is a matter of investigation.

PMC Bank financials in Rs crore

Source: PMC Bank annual report

But, it is clear that these three individuals, like many other PMC Bank depositors, were facing tremendous mental stress on account of the uncertainty regarding their hard-earned money. So far, the RBI has permitted withdrawal of Rs 40,000 per account from PMC Bank. This amount is a pittance for someone who has deposits of a crore of rupees. If indeed, these deaths are caused due to the PMC Bank crisis, the bank’s management, board, auditors and the regulator will have a lot of explaining to do for failing in their duty.

Was PMC Bank set up for a scam?

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 NPAs. According to investigators, the bank management hid this stress from the Reserve Bank of India's (RBI) scrutiny.

According to the RBI regulations, no bank can lend beyond 15 percentage 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?

RBI failed, yet again

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, too failed miserably to identify the violations of rules by PMC Bank. The allegations against the PMC Bank, which has 137 branches, Rs 11,600 crore deposits and operations across six states, include financial irregularities and dubious exposure to certain large corporates.

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.

No safety nets

India does not have a safeguard for depositors of failing banks. The deposit insurance guarantee scheme was set up in 1961 to ensure that the depositors are guaranteed at least some amount in the event of a bank collapse. This amount was enhanced to Rs 1 lakh only in 1993 from Rs 30,000. As the PMC Bank episode has shown us, this amount is painfully inadequate to compensate for those depositors who have parked their life’s entire savings, for instance, retirement money, in one bank.

This is the lowest deposit cover among comparable countries. Isn’t it time to overhaul the deposit insurance mechanism? As explained earlier, even a cover of Rs 1 lakh is too small an amount. The PMC Bank crisis is a big lesson for those depositors too who, in the hope of higher returns, park substantial savings in lightly regulated co-operative banks. Ironically, in 1999, PMC Bank had received an award from the All India Bank Depositors’ Association in appreciation of “work ethics oriented to depositors’ service”.

The path ahead for PMC Bank depositors remains uncertain. The only hope is if the bank is merged with a strong commercial bank which can then ensure that the PMC Bank depositors can get their money back. Even then, who will compensate for the loss of lives?