The PMC Bank Saga and the Small Investor

Customers who went to their PMC Bank branch were greeted by apologetic security guards as the banking staff played truant. One cannot blame them for all they received was a curt message on September 24 that it had been put under directions by the RBI for six months. It is anybody’s guess whether the staff knew the reasons for the central bank’s overnight decision.

What’s Behind the Ruckus?

Let us first understand what it means when RBI imposes “directions” on a bank. Putting a bank under directions essentially means taking over a bank’s operations. The bank’s management has been superseded and the board stands dissolved, meaning that the central bank is not happy with the manner in which the leadership conducted business.

Such a situation arises when the RBI is not satisfied with the bank’s functioning and takes the step to safeguard the interest of borrowers. As a result to this, customers can only withdraw up to Rs. 1,000 (now enhanced to Rs.10,000) from the bank, irrespective of the type, total balance or the number of accounts. Only in the case of an emergency like hospitalization may the RBI grant extra money, though even this figure is liable to be quite low.   

But the bigger question is what went wrong? In the case of PMC bank, RBI found irregularities in lending. A report published in Business Today

 says the RBI directions came after the inspections which showed that PMC offered a loan of Rs. 2,500 crore to now-bankrupt real estate firm Housing Development and Infrastructure Limited (HDIL). What made the situation graver is the fact that the bank approved the loan without reporting it as bad loans despite the developer’s financial stress.

How Did This Happen?

Quite obviously it is yet another case of collusion between the bank staff and an entrepreneur. There could no denying the fact that the bank authorities were aware of HDIL’s financial status when the loan was offered. This being the case, why did the bank offer to lend such a huge amount and what made them circumvent the processes that RBI has set for such loans?

Quite clearly all of this once again points to a crisis in leadership among the industry. The banking industry survives and thrives on the spread between deposits and loans, which means that there is a concerted effort to lend in order to make profits. However, while doing so, shouldn’t the bank keep an eye on the depositors, especially in the cooperative segment, given that these are likely to be people from low to middle income groups?

These are some questions which needs serious contemplation to understand what our leadership is up to. And the question will be relevant to multiple sectors and economies.

And while we are considering these questions, should we also not give some thought to how these frauds would play out on the business confidence? Especially since Prime Minister Narendra Modi has been busy wooing investors, promising them robust returns. Does India really have the capabilities of fraud detection and if so is the legal system strong enough to punish the guilty?

Because if there is even an iota of doubt about any of the above, the only ones to suffer would be the honest, tax paying citizen. And this where Modi and his team at the Finance Ministry should focus so that the banks do not repeatedly get their NPAs refinanced at our cost while perpetrators of banking frauds blatantly show us the middle finger.