Why RBI has put restrictions on PMC bank, what happens now to the Small Investor

Panic-stricken customers rushed to bank’s branches across the state and were unable to withdraw more than Rs 1,000, then raised to Rs. 10,000/-. They had not been aware that the bank, which was under the supervisory glare of the RBI, was being milked by real estate players led by HDIL with the connivance of bank officials.

 Reserve Bank of India (RBI) slapped restrictions on Punjab and Maharashtra Cooperative Bank Ltd (PMC Bank), a leading cooperative bank headquartered in Mumbai, appointed an administrator and superseded its board of directors, sending shock waves among thousands of its depositors. Panic-stricken customers rushed to bank’s branches across the state and were unable to withdraw more than Rs 1,000, subsequently raised to Rs. 10,000/-.  They had not been aware that the bank, which was under the supervisory glare of the RBI, was being milked by real estate players led by HDIL with the connivance of bank officials.

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What is the reach of PMC Bank?

Founded in 1984, PMC Bank was the youngest bank to get the status of a scheduled bank in 2000 and a licence of authorised dealer category 1 in the year 2011 for forex business by the RBI. PMC Bank has 137 branches spread across seven states with 81 of these in Mumbai, Navi Mumbai, Thane and Palghar regions, 10 in Pune and 12 in the rest of Maharashtra. The bank has several small businesses, housing societies and institutions as its customers. It was popular in the Sikh community as some of the original promoters were from the community-based in Mumbai.

What went wrong?

Going by the Annual Report and Balance Sheet, everything appeared to be hunky-dory. The bank, which has a deposit base of just over Rs 11,000 crore, reported a net profit of Rs 99.69 crore in 2018-19 as against Rs 100.90 crore in 2017-18. The bank showed 3.76 per cent (or Rs 315 crore) of advances (Rs 8,383 crore) as gross nonperforming assets (NPAs) in March 2019, which was a good performance considering that public sector banks recorded over 10 per cent gross NPAs.

But it turned out that the bank had suppressed the sticky assets and under-reported them; the total bad loans could be between Rs 2,000-2,500 crore. There was no way the bank could have made provisions for such high levels of bad loans. Though the auditor of the bank did not flag the issue in the Annual Report of 2018-19, the RBI became tough in the wake of huge divergence in bad loan reporting.

The bank was funding a clutch of companies, mainly in the troubled real estate sector, led by Housing Development & Infrastructure Ltd (HDIL). Commercial banks have already declared HDIL a defaulter. Rakesh Kumar Wadhawan is the Chairman of HDIL and his son Sarang Wadhawan is the Vice Chairman and MD. PMC Bank’s Managing Director Joy Thomas on Wednesday went on record to say that the bank had given loan to Wadhawan even after the company (HDIL) defaulted on its loans to other banks and the firm was taken to National Company Law Tribunal (NCLT) for insolvency proceedings. However, Thomas claimed that the loan was much lower than Rs 2,500 crore quoted in the media.

On August 20, 2019, NCLT admitted an insolvency plea moved by the Bank of India against HDIL in connection with a Rs 522-crore loan default.

What is the Wadhawan connection?

The Wadhawans of HDIL group had close links with PMC Bank for a long time. PMC Bank’s chairman, Waryam Singh, was on the board of HDIL for nine years (2006-15) until he resigned as a director. Incidentally, Kapil Wadhawan, chairman and MD of Dewan Housing Finance Ltd (DHFL), which is also facing a liquidity crunch, is a cousin of Sarang Wadhawan. After the Wadhawan family divided the group business, real estate (HDIL) was managed by Rakesh Wadhawan while the mortgage business (DHFL) went to his brother, the late Rajesh Wadhawan, father of Kapil Wadhawan.

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What has surprised bankers is that HDIL, already a defaulter and taken to NCLT for insolvency, managed to get a pay order worth around Rs 96 crore from PMC Bank for a settlement at the Bank of India. However, Thomas of PMC Bank had claimed this was given with the backing of Wadhawan’s personal guarantee. “Loans given to HDIL and other entities were suppressed despite defaults. The RBI supervision was also lax. They should have flagged these issues long back. I don’t believe their auditors did not know about this,” said Vishwas Utagi, former general secretary of Maharashtra State Bank Employees Federation. Utagi said the RBI was forced to step in after the HDIL was taken to NCLT for insolvency proceedings and it was not in a position to repay the loans and the bank was unable to make provisions.

What’s the way forward?

The RBI has appointed J B Bhoria as administrator of PMC Bank; he is expected to take appropriate measures to bring the bank back on the rails. The 14-member board of the bank headed by Waryam Singh has been superseded.

Going by the RBI’s actions on the co-operative banking front, one option is for PMC Bank to be merged with another bank. Between 2004 and 2018, the RBI has merged 72 cooperative banks in Maharashtra alone. Across the country, the number of urban co-operative banks has fallen from 1,926 to 1,551 in the last 15 years.

If the bank is liquidated, which is less likely, depositors will get Rs 1 lakh irrespective of the amount they had deposited. Small depositors need not panic as the bank has Deposit Insurance and Credit Guarantee Corporation cover under which deposits up to Rs 1 lakh are covered. The bank has also claimed it has enough assets to cover the liabilities.