ANOTHER BANK BITES THE DUST
Another monstrous NPA, another tale of brazen misgovernance. Will depositors bear the brunt again?
The crisis at the Punjab & Maharashtra Cooperative bank (PMC bank) has jeopardised the savings of hundreds of thousands of depositors, and raised fresh concerns about corporate governance standards in Indian banks.
On September 23, at the close of business, PMC bank—with 135 branches spread over six states and hundreds of thousands of customers—was put under RBI restrictions under the Banking Regulation Act, 1949, with the central bank ruling that depositors will be allowed to withdraw only Rs 1,000 from their accounts over the next six months. The fallout was swift—the next day, crowds of angry depositors gathered at PMC Bank branch offices, demanding their money, or at least, assurance that their savings were safe. Although the RBI relaxed withdrawal limits to Rs 10,000 soon after—saying that this would allow 60 per cent of the bank’s depositors to withdraw all their money— the damage was done.
As details emerged, each was more shocking than the last. The RBI said that its intervention had been necessary because of ‘major financial irregularities [and] failure of internal control systems of the bank’. Over the following days, the bank’s suspended managing director, Joy Thomas, made a stunning admission—of the roughly Rs 8,800 crore worth of loans issued by PMC, over Rs 6,500 crore, or more than 70 per cent, had been issued to a single company, Housing Development and Infrastructure Limited (HDIL). This is way beyond the RBI’s mandated limit— banks are not permitted to loan more than 15 per cent of their total loan book to a single firm. The rule is designed to prevent a single non-performing asset (NPA) from bringing down an entire bank—exactly the current crisis. According to the bank’s annual report, as of March 31, 2019, it had deposits of Rs 11,617.3 crore, a capital adequacy ratio of over 12 per cent, and NPAs of 2.9 per cent. “On the face of it, the balance sheet looked in order,” says an analyst. But as the crisis developed, doubts were expressed about the veracity of some of the figures.
Worse was to be revealed. One especially egregious violation by PMC was that it gave HDIL a fresh loan of Rs 96.5 crore in August this year, even though HDIL, by this time, had already been taken to bankruptcy court by a consortium of other lenders, including Bank of India. This was perhaps a consequence of yet another breach of governance standards—the existence of a quasi revolving-door situation between the management of PMC and HDIL. PMC bank chairman Waryam Singh had been a board member at HDIL from 2005-2015, and till September 2017, held a 1.9 per cent stake in that firm.
Thomas also said that even though HDIL had been defaulting on repayments for the past six or seven years, the bank did not report the NPAs because it held securities worth twice the loan value, and because bank officials feared that a disclosure of HDIL’s defaults would lead to a run on the bank.
Even as the probe moves to examining Singh’s role in the fiasco, depositors need to be assured that their money is safe. “First it was the stateowned banks, then private banks, followed by NBFCs and now, cooperative banks— something is really amiss in our financial system,” says a Mumbai-based analyst. ■