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PMC Bank : Will Creditors get Back their Money?

PMC Bank Scam, News, Full Form & Collapse Reason

The Indian banking sector has been going through a tough time since the past five years. In the last 5 years, India has witnessed failures of some of the giants in the financial service sector, ranging from Punjab National Bank, Infrastructure Leasing and Financial Services, Dewan Housing Finance Corporation Limited to Yes Bank.

The outcome of the Global Financial Crisis, in the mid-2000s, caused the first wave of the Indian Banking crisis in the form of the Twin Balance Sheet crisis. The infrastructure projects began to go sour, affecting companies’ capacity to repay loans and thereby deteriorating the balance sheet of the banks. Nevertheless, the economy stabilized and somehow continued to grow but finally, it succumbed to the adverse demonetization policies, followed by the Non-Banking Finance Companies (NBFC) crisis and a collapse in the real estate sector. This resulted in a Four Balance Sheet crisis and depressing economic growth. PMC was another one such bank that scammed its depositors of their life savings.

About PMC Bank

Punjab & Maharashtra Co-operative Bank Limited, also known as the PMC bank, is a co-operative bank with its headquarters based in Mumbai. It began its operations in 1984 in Scion, Mumbai. The bank had come a long way from its small beginning, currently, it as has a widespread network of 137 branches across six states. It is one of the top ten Indian cooperative banks. At the time of its establishment, PMC was a cooperative bank but in 2000 it got the status of Schedule Commercial Bank by The Reserve Bank of India. It is the youngest bank to achieve the ‘Scheduled Bank’ status.

Details of the fraud

The Bank had been facing regulatory actions and investigation over suspected loopholes in certain loan accounts. Loans given to Housing Development & Infrastructure Limited. are at the centre of the investigation

The crisis at PMC Bank first came to light on September 24, 2019, the day the Reserve Bank of India placed curbs on the activities of the bank for six months. RBI also limited the amount a customer could withdraw from their account during the next six months — to Rs 1,000 at first, and then later on to Rs 25,000.

A money laundering case has been filed against the bank.

The bank granted a personal loan of Rs 96.5 crore to Housing Development and Infrastructure’s promoter Sarang Wadhawan. HDIL had already defaulted on a Rs 2,500-crore loan given by the by the bank before.

Breaking all rules, the Bank had sanctioned the personal loan in August last year and it was over and above the Rs 2,500-crore loan that HDIL had already defaulted paying, and which the bank failed to classify as bad loans. What was more alarming was that PMC Bank kept dealing with the already financially stressed company even when it was facing insolvency proceedings in the National Company Law Tribunal.

HDIL was the only reason for PMC Bank’s crisis. It took loans from the Bank to clear Bank of India's dues, which had already initiated bankruptcy proceedings against the company for apparently defaulting on loans of around Rs 520 crore.

Bank of India approached the National Company Law Tribunal against HDIL August last year but withdrew the pleas after it reached a settlement with the company to resolve the issue. The bank submitted a fresh petition against HDIL in the tribunal after the company couldn’t meet the August 2019 deadline to settle the account.

Bank of India had said that it was dropping the bankruptcy proceedings against HDIL for 14 days weeks after it got two pay orders worth Rs 96.5 crore from the company. The bank acknowledged receipt of two PMC Bank pay-orders totaling Rs 96.50 crore.

S Waryam Singh, chairman of PMC Bank, had a 1.91 percent stake in HDIL till September 2017. In 2005, he joined the HDIL board as a director. He resigned to re-join the bank as chairman in 2015. Furthermore, he was a non-executive director at HDIL, he was listed as one of the promoters of the company and had dealings with several other entities managed by the HDIL founders. He was a director on the bank during his stint at HDIL.

The bank’s auditor classified the loan to the troubled company as standard while the central bank had highlighted it as a stressed account, making it mandatory for the bank to treat it as a toxic loan. According to some reports, the estimate of the bank’s overall exposure to the HDIL group was around Rs 6,500 crore or over 73 percent of all of the bank’s total advances, and all of this had not been serviced, meaning they had not paid any interest to the bank on the loans.

The bank also allegedly created fictitious accounts of companies that borrowed small sums of money and created fake reports to hide from RBI. 

In the financial year 2019, the bank had reported a net profit of Rs 99.69 crore in its annual report. The bank also showed 3.76 percent of advances as gross non-performing assets which was a good performance as compared to public-sector banks.

The Reserve Bank of India clamped down on the bank as it found the bank had under-reported bad loans during its annual inspection. RBI suspected that the actual non-performing assets of the bank could be in high double-digits.

Will the depositors get their money back?

It has been one year since the scam was uncovered and for depositors of the Punjab and Maharashtra Cooperative Bank, the situation is not very different from what it was almost a year ago when the RBI placed withdrawal restrictions on the bank after the mega scam.

The depositors have spent the last year holding protests, meeting politicians, writing to various authorities to get their hard-earned money back. There are many senior citizen depositors whose life savings are stuck in the bank and many youngsters who were saving up for their businesses.

Since the last year, RBI has allowed the depositors to withdraw just a meagre one lakh which is close to nothing for some depositors who has their entire life savings parked in the bank.

The new administrator aims to revive the bank and save the interest of the depositors whose money is stuck up there. Even after a year, the depositors still have some hope of recovering their money.

While the administrator of PMC bank and the RBI have been exploring various options for resolution of the bank, several factors such as huge losses incurred by the bank resulting in its entire net worth getting wiped out, steep erosion in deposits, etc. continue to pose serious challenges in finding a workable plan for revival of the bank.

The bank has also been making efforts for recovery of NPAs although progress has been constrained because of the COVID-19 pandemic and legal complexities. Nevertheless, in the interest of depositors, the PMC Bank and the RBI are continuing to engage with stakeholders to explore the possibility of finding a viable and workable solution for the resolution of the bank.

If losing their life savings was not enough, the depositors of PMC bank are in for a double whammy. On the one hand, they are unsure if they would get back their money. On the other, the bank is deducting withholding tax or tax deducted at source at 10% on the interest these depositors would have earned if the bank were fully functioning. Banks need to deposit TDS with the tax department. Even though the depositors may not get back their money entirely, they will need to pay tax on the interest they would have earned on their deposits with PMC Bank.

Depositors of deposits up to Rs.1 Lakh are fully protected even in case of liquidation of PMC bank by RBI eventually.

If the RBI is satisfied with the progress that the bank can get back to shape in a short period, it will free the bank from its clutches. Normal operations will then start. If not, RBI has powers to extend the period. Some co-operative banks are under RBI's umbrella for more than 2-3 years. Maharashtra based R S Co-operative Bank is facing RBI restrictions since June 2015. Kapol Co-operative Bank faced RBI restrictions for a long time from March 2015. New Delhi-based Vaish Co-operative Commercial Bank also faced a long spell of RBI's direction since August 2015.

The bank can face a monetary penalty if there are any violations of its guidelines especially KYC or anti-money laundering etc. In the past, RBI imposed penalties in co-operative banks for violation of guidelines. RBI in the last few years is creating strong deterrent by imposing penalties on banks for violation of guidelines.

However, RBI has the right to recommend eventual liquidation of the cooperative bank if assets are not sufficient to meet liabilities or run normal operations of the bank.

This happens because of inadequate capital, no scope for revival. The RBI then requests the Registrar of Cooperative Societies for winding up the bank and appointing an official liquidator. On liquidation, every deposit is insured up to Rs 1 lakh from the Deposit Insurance & Credit Guarantee Corporation. Any liquidation in a bank is not good news for depositors who have more than Rs 1 lakh.

How can RBI prevent such scams in the future?

In June earlier this year, the government changed the laws governing cooperative banks through an ordinance which was a positive move towards reforming RBI’s oversight of banks and enabling resolution.

The ordinance does three things. First, it changes the way the RBI can intervene in failing banks to protect deposits. Second, it allows cooperative banks to raise capital through issuing securities. Third, and most importantly, it increases the power of the RBI over cooperative banks.

Currently, the RBI can intervene in failing banks only after placing them under a moratorium. During the moratorium, depositors cannot access their funds. Naturally, this distresses depositors who can’t access their own money. The requirement for a moratorium is why, in the Yes Bank resolution, depositors had limited access to their accounts.

The ordinance changes this. Now, the RBI can intervene in a failing commercial bank (usually by merging it with another bank) without placing the failing bank in a moratorium. Depositors’ money will not be stuck. One day, they will wake up and find that their bank has been taken over by another. However, the new bank will continue to operate their accounts seamlessly.

The ordinance changes this uneasy tension between state laws governing cooperative management and the RBI which regulates the banking functions.

From now on, the Banking Regulation Act will enjoy supremacy over cooperative banks. The power of RBI to remove management or draw up plans to merge/dissolve cooperative banks will override the power of the state registrar of cooperatives.

The change does not completely level the playing field between cooperative banks and commercial banks but reduces the anomalies substantially. With additional powers over the banks, the RBI may be in a better position to prevent a rerun of the PMC Bank scam.

Another set of provisions allows cooperative banks to issue shares, debentures and other securities. This will allow cooperative banks to access financial markets. The provision to allow cooperative banks to raise capital through securities is another step towards making them safer. Equity capital acts as a buffer to protect depositors from smaller losses of the bank. The share-holders absorb the first losses. Only if the losses are more than the equity capital do the depositors lose money. That is why laws require commercial banks to maintain equity capital equal to 9-12 per cent of their deposits.

Before this ordinance, cooperative banks were exempt from this requirement and usually had deficient equity capital. Now, the RBI can require such cooperative banks to raise capital as they grow.

The ordinance gives RBI more powers over cooperative banks. However, for them to be regulated and supervised better, the central bank needs to ramp up its supervisory capacity.

Its failures in detecting scams in Yes Bank and other Scheduled Commercial Banks, where it had the power to do so, show that there will still be many challenges.

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An award is something which is awarded based on Merit. Awards & Recognition are a must in Life as it provides the necessary vigour to keep progressing ahead in Life. Awards do not only acknowledge success; they recognise many other qualities: ability, struggle, effort and, above all, excellence. This is the reason that for past 22 Years we have been christined as Best Stock Market Tips Provider & we are at the 'Top' in this field. Check out our Awards by clicking on Image or Post Title Now!!

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