The sector of cooperative banks is again in the limelight for mismanagement after the collapse of PMC Bank. Therefore, this sector needs a quick regulatory fix. It’s the same old story of over-borrowing by the property developers and mismanagement by the senior management. The sector itself has fundamental structural weaknesses. This relates to the duality in supervision and other regulatory requirements.
PMC Bank is the largest urban cooperative bank to be put under RBI surveillance since the 2001 Madhavpura Mercantile Co-operative Bank crisis. PMC Banks is highly exposed to HDIL (2/3rd of its loans attribute to HDIL), whose creditworthiness is subject to questions.
On September 23rd, RBI restricted the withdrawal of money from customer accounts. Typically, such restrictions are put if RBI finds that the withdrawals have gone beyond the prescribed threshold in a given period of time.
Initially, no one realized that the crisis will be this big until Thomas, the MD confessed himself. In his letter, he wrote that owing to time constraints, the auditors only used to check incremental advances and only the transactions shown by them. Even RBI missed these stressed legacy accounts during inspections as they replaced them with dummy accounts in order to match the balance sheet.
In August 2018, PMC Bank has helped in preventing initiation of insolvency proceedings against HDIL by granting a loan of Rs. 96.5 crore. The alliance between PMC Bank and HDIL dates back to the mid-1980s. in 1986, just two years after PMC Bank began its operations, it was on the verge of financial collapse due to a reduction in its net worth.
Former Director of Land Development Corp., Late Rajesh Kumar Wadhawan and a variety of other companies run by the Dewan family (and subsequently the founder of HDIL), invested Rs.13 lakhs in PMC Bank in 1986-87. They even supported the bank during occasions of liquidity crunch. More than 60% of the bank’s transactions came from this group. the bank even made a good profit by charging 18%-24% as the interest rate on its accounts.
But soon the things changed after the group began to experience a liquidity crunch in 2012-2013. The party defaulted on all its loans after the cancelation of HDIL Slum Rehabilitation Project near the Mumbai Airport. This posed serious problems in front of the group from raising money. But the bank continued to report all the accounts as standard accounts because the HDIL Group had a good record of clearing their fees with some delay.
The board of the PMC Bank was informed of the situation. The cover-up of the details was rendered by the board of directors due to fear of the credibility of the organization. But Thomas is not alone to be blamed in this case.
Until there is some clarity on this issue, the 1.6 million depositors of this bank can only pray for some miracle to happen.