The Devil’s Laugh at Corporate Governance: The Case of Punjab and Maharashtra Co-operative Bank (PMC Bank) India

Abstract

The trust of depositors in the Indian banking system was shaken in September 2019 when the five-page confession letter written by Joy K Thomas, Managing Director and Chief Executive Officer of Punjab and Maharashtra Co-operative Bank (PMC Bank), one of the ten largest co-operative banks in India revealed gross financial irregularities, collusion and fraud in banking operations of PMC Bank from 2008 onwards. The Reserve Bank of India (RBI) came into swift action and placed curbs on routine banking activities and restricted the withdrawal of money to a limited amount. Succumbing to the shock, depositors protested at several places and even, eleven depositors lost their lives. With a huge exposure of 73% of the overall loan portfolio to a single borrower, Housing and Development Infrastructure Ltd (HDIL) & group companies, that too facing insolvency proceedings, the recovery of full money was almost impossible. The malice at PMC Bank is the classic case of crony capitalism, collusion and fraud, and failure of corporate governance. The case draws important lessons for reforming co-operative banking sector and strengthening banking supervision in the country.

Keywords

Co-operative banks India Punjab and Maharashtra Co-operative Bank corporate governance collusion and fraud liquidity crisis

Introduction

It was a black Monday on 23 September 2019 in the history of Indian Banking Sector when the Reserve Bank of India (RBI)¹ under Section 35A of the Banking Regulation Act, 1949² placed moratorium³ for six months on the Mumbai-based Punjab and Maharashtra Co-operative Bank (PMC Bank), one of the ten largest multi-state urban co-operative banks in India. The effect of this moratorium was to place restrictions on PMC bank on lending and accepting fresh deposits from public. Not only this, current depositors of the bank were also restricted with a limit of US$20 up to which they could withdraw their savings from the bank. This news came as a shock to everyone, particularly bank depositors who started making a lot of hue and cry over the limit placed on withdrawal of their own money from bank accounts. It came to light, that the RBI action was the result of a whistle-blower complaint⁴ on September 19 and later on, a five-page confession letter written by PMC Bank’s Managing Director and Chief Executive Officer, Joy K Thomas to RBI in which he admitted financial irregularities along with mis-reporting and concealing 44 loans accounts to the tune of US$1.24 billion that is a whopping 73% of total bank advances of US$1.7 billion, to a real estate developer, Housing Development and Infrastructure Ltd (HDIL) and group companies, through dummy and fictitious 0.020 million accounts⁵ from 2008 onwards. The PMC Bank, which had 1.7 million depositors with a deposit base of over US$2.4 billion, never classified the non-payment and overdue loan accounts of HDIL and group companies as non-performing assets (NPAs)⁶ in its books of accounts. Imposing the criminal action, main accused, PMC Bank Chairman, S. Waryam Singh, PMC Bank Managing Director and Chief Executive Officer, Joy K Thomas, HDIL Chairman Rakesh Wadhawan and HDIL Vice-Chairman and Managing Director, Sarang Wadhawan (son of Rakesh Wadhawan), were arrested and put behind bars. The depositors did not stop staging large scale protests outside the office of RBI, then Chief-Ministers’ residence and at other public places. Even eleven depositors lost their lives owing to non-availability of their own money for either, the treatment of their medical conditions or because of a sudden shock or else, suicides committed by them. Looking into the panic state of depositors, RBI had to increase the limit of withdrawal from US$20 per depositor to US$200, then US$500, then US$800 and finally US$1,000 in different phases to ease out the grim situation. Not only this, the Deposit Insurance and Credit Guarantee Corporation (DICGC)⁷ which protects depositors up to the limit of US$2,000 was also increased to US$10,000.

To deal with the PMC Bank crisis, RBI appointed an ex-RBI official, Jai Bhagwan Bhoria as an administrator⁸ with a three-member committee to look after the affairs of the bank. While RBI placed restrictions on PMC Bank for a period of six months, the case was also under investigation with Economic Offences Wing (EOW)⁹ of Mumbai Police and Enforcement Directorate¹⁰ of the Government of India. The RBI Governor Shaktikanta Das assured PMC bank depositors of taking all necessary measures so that their interests remain protected.

Co-operatives in India: History and Background

The dawn of co-operatives¹¹ in India dates back to the early twentieth century when the Co-operative Societies Act was passed in 1904 and later on, amended with the Co-operative Societies Act, 1912. Co-operative societies are founded on the fundamental principles of co-operation, that is—mutual help (one for all and all for one), democratic decision-making and open membership. Co-operatives emerged as a new and alternative approach to the other forms of organisation, namely proprietary firms, partnership firms and joint-stock companies which are primarily commercial in nature.

Grounded with the principles of co-operative, Co-operative Banks were started to provide relief from the age-old exploitative practices of village moneylenders (also known as, sahukars) with whom villagers were mostly getting into a debt-trap¹² and exploited because of their inabilities to repay back (Shivappa, 2019). Co-operative banks, though formed by a co-operative and the banking license, perform routine functions like deposit and lending as like a commercial bank to both members as well as non-members of that co-operative. Co-operative banks filled the void especially in rural areas where branches of commercial banks were not available (Heiko & Martin, 2007).

Figure 1.

Source: RBI, Report on Trend and Progress of Banking in India,¹³ 2019.

Co-operatives are classified broadly into two categories: Urban Co-operatives and Rural co-operatives. According to the RBI, there were 1,544 UCBs and 96,248 rural co-operatives in the country as of March 2019. Structure-wise, UCBs are further classified into Scheduled UCBs¹⁴ and Non-scheduled UCBs. Of the total UCBs, 54 are scheduled and the remaining 1,490 are non-scheduled.

As for rural co-operative banks, they are classified into five different categories. These are: State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies, State Co-operative Agriculture and Rural Development Banks, and Primary Co-operative Agriculture and Rural Development Banks. Out of the above classification, PMC Bank is the scheduled urban co-operative bank (Figure 1).

Co-operatives in India are registered under the Co-operative Societies Act of a particular state. The incorporation, registration, management, amalgamation, reconstruction or liquidation of single-state UCBs is done with State Registrars of Co-operative Societies (RCS) and for, multi-state UCBs (like PMC Bank), with Central Registrar of Co-operative Societies (CRCS). The banking related functions such as issue of license to start new banks/branches, matters relating to interest rates, loan policies, investments and prudential exposure norms¹⁵ are regulated and supervised by the RBI under the provisions of the Banking Regulation Act, 1949, and Banking Laws (Co-operative Societies) Act, 1955.¹⁶ Therefore, there is the problem of duality of regulation for co-operative banks as RBI has no powers for constituting boards of UCBs, removal of directors, supersession of BoDs, auditing of UCBs or winding up and liquidation of UCBs because these powers remain in the hands of RCS/CRCS.

PMC Bank is not the first and only case of failure of co-operative banks in India. The number of UCBs which were 1926 in March 2004 fell sharply to 1,544 in March 2019 (Figure 2 shows the fall in UCBs across years). At the end of March 2019, according to the RBI data, all UCBs had recorded deposits at Rs US$96.8 billion and advances at US$60.6 billion; while the gross NPAs of the UCBs have risen substantially. At the end of March 2019, gross NPAs of UCBs was recorded at US$4.31 billion against US$4.02 billion at the same time in previous year. Huge NPAs, failure in recovering loans, fall in interest income, political interferences and weakness in administration and even multiple frauds crippled UCBs in India (Kumar & Srivastava, 2020; Sapovadia, 2020). A detailed account of major challenges of UCBs has been given in Table 1.

Figure 2.

Source: RBI, Report on Trends and Progress of Banking in India, 2019.

Table 1.

Major Challenges Faced by Indian Co-operative Banks.

Major Challenges	Implications
Small capital base	Difficulty in maintaining working capital; they cannot raise share capital via public issue
Political interferences	Politically elected Board of Directors (BoDs) and undue favours in sanctioning of loans; become political vote bank during elections
RBI supervision	Less stringent; on-site inspection once a year; off-site reporting on quarterly basis
Dual control	‘Management’ functions controlled by RCS/CRCS; ‘Banking’ functions controlled by RBI
Professional management	Lack of Professional Management; lack of training; weak corporate governance
Technological advancement	Usually backward in adoption of new technology such as computerisation and core banking solutions (CBS)
Dependence for financing	Heavily dependent on RBI, NABARD¹⁷ and government for refinancing of capital
Financial stress	Fall in interest income; large NPAs; failure in recovery of loans
Banking frauds	Easy target for banking frauds; multiple frauds reported in the past

Source: The author.

Though confronted with too many challenges, the importance of the co-operative banking sector in Indian banking landscape cannot be ignored as RBI mentioned in a report,

Although this sector accounts for just 10.6% of the commercial banking sector, the need to strengthen it from the financial stability point of view is emphasised, given its predominant domestic orientation, its massive financial inclusion quotient¹⁸ and its sheer presence across the country, especially in lower-tier towns and villages. In view of this important role, there is a need to undertake reforms aimed at upgrading corporate governance and strengthening their finances. (Asher, 2007)

Accordingly, from time to time, RBI constituted many committees in the past, for example, Madhava Das Committee (1978), the Marathe Committee (1992), the Madhava Rao Committee (1999), Malegam Committee (2011) and R Gandhi Committee (2015) (Report of High-Powered Committee on UCBs, 2015, RBI). The main recommendations of the two important committees, namely Malegam Committee (2011) and R Gandhi Committee (2015) have been presented in Table 2.

Table 2.

Major Committees and Recommendations.

Major Committees	Recommendations
Malegam Committee (2011)	In addition to BoDs (Board of Directors), establishment of BoM (Board of Management) with 12 members including a CEO who should have professional knowledge, skills and practical experience; BoDs to be supervisory board while BoM to take-up as an executive board (Focus would be on securing Professional Management and raising the level of Corporate Governance)
R Gandhi Committee (2015)	Conversion of UCBs with business size of US$ 4 billion or more, voluntarily into commercial banks; other smaller size UCBs can be converted to small finance banks¹⁹; increased power of RBI to wind-up and liquidate banks without involving other regulators under the cooperative societies’ laws

Source: The author.

Besides committees, multiple working Groups (WG) were also constituted, for example, WG to examine issues relating to augmenting capital of UCBs under the Chairmanship of N S Vishwanathan (2006), WG on Information Technology (IT) Support to UCBs under the Chairmanship of R Gandhi (2007) and WG on Umbrella Organisations²⁰ for UCBs under the Chairmanship of V S Das (2008).

Despite the fact that multiple committees and working groups were formed by RBI, and their recommendations for bringing about reforms in the co-operative banking sector were well communicated, much could not be implemented and done till now to cure ailing co-operative banking sector.

PMC Bank, Wadhawan Empire & PMC Bank-HDIL Nexus

PMC Bank

On 13 February 1984, PMC Bank began its operations in a small room at Sion, Mumbai as a single branch bank and with a capital of just US$20,000. In a span of over 35 years, PMC Bank had grown to a multi-state scheduled urban co-operative bank with 137 branches and its operations spread across the states of Delhi, Madhya Pradesh, Gujarat, Maharashtra, Goa and Karnataka. Table 3 lists important milestones, awards and achievements of PMC Bank.

Table 3.

Milestones, Awards and Achievements of PMC Bank.

Milestones achieved by PMC Bank

Youngest Bank to get ‘Scheduled Bank’ status from RBI in 2000

Bagged ‘Multi-State’ status from Central Registrar of Cooperative Societies in 2004

Received ‘Authorised Dealer Category I’,²¹ license from RBI for forex business in 2011

Counted as one among the top ten co-operative banks in India owing to its size of deposits and scale of operations

Awards and Achievements of PMC Bank

Appreciation of ‘Work Ethics oriented to Depositors Service’ in 1999 from All India Bank Depositors Association, a well-known body of the bank depositors

‘Best Bank Award’ in the category of deposit of US$ 400 million & above from Brihan Mumbai Nagari Sahakari Banks Association Ltd for consecutively 2 times

‘Padmabhushan Vasantdada Patil Award’ for being the ‘Best Urban Co-operative Bank’ conferred upon by the Maharashtra State Co-operative Banks Association Ltd for nine times

Source: The author.

With the scale of growth achieved and the history of acclaims so earned by PMC Bank, nobody ever expected to hear someday of such a shocking news of restrictions being imposed by RBI on withdrawal of money owing to crisis at PMC Bank. The Managing Director and Chief Executive Officer, Joy K Thomas, in his five-page confession letter to RBI mentioned that the PMC Bank did not disclose the wrong-doings at bank because of ‘reputational risk’.²² Ironically, what he said was right, PMC Bank was managing a good reputation for itself, for which the price was ultimately paid by gullible and innocent depositors.

The Wadhawan Empire

Dewan Kuldip Singh Wadhawan who was a refugee from Lahore in Pakistan, after the Partition of India in 1947, settled in Mumbai and later on, founded ‘The Wadhawan Group’ in 1973 along with his sons, Rajesh Wadhawan and Rakesh Wadhawan for land aggregation, development and construction of residential, commercial and retail units, townships and infrastructure.

Further, looking into the massive demand for affordable housing23 in India, Dewan Housing Finance Corporation Ltd. (DHFL) was founded in 1984 by his elder son, Rajesh Kumar Wadhawan with a vision to provide financial access to the lower- and middle-income segment of the society to accomplish their dream of buying a house for their families, rather than living in a rented accommodation. Soon, DHFL became one of the leading housing finance companies in India with a network across 405 locations, catering to the semi-urban and rural belts of India. After Rajesh Wadhawan expired, his sons Kapil and Dheeraj Wadhawan took over DHFL.

In 1995, Maharashtra government created a new body called the Slum Re-development Authority²⁴ to re-settle slum dwellers in an apartment complex built elsewhere, usually in the outskirts of the city, by vacating the prime land which the slums occupied, and re-develop that area. To take advantage of this opportunity, Housing Development and Infrastructure Ltd (HDIL) was born in 1996 by younger son, Rakesh Wadhawan. HDIL, soon established itself as one of the India’s premier real estate development companies, with significant operations in the Mumbai Metropolitan Region. HDIL also became a public listed real estate company in India with shares traded on the BSE & NSE²⁵ Stock Exchanges. HDIL group completed more than 100 million sq. ft of construction in all verticals of real estate and rehabilitated around 30,000 families. The son of Rakesh Wadhawan, Sarang Wadhawan also joined him in the business. The problems of HDIL started in 2011–2012 when the real estate market started falling and demand for its re-developed properties vanished. Not only this, owing to the change in Maharashtra government policy, restrictions were imposed on re-sale of transferable development rights²⁶ which rendered the slum re-development project near the Mumbai airport incomplete and later on, terminated. This added much to the financial woes of the company.

The Wadhawan’s empire had a split through a mutual agreement in 2008–2010 owing to which the DHFL (run by Kapil & Dheeraj Wadhawan, sons of Late Rajesh Wadhawan) and HDIL (run by Rakesh Wadhawan and his son, Sarang Wadhawan) lost inherited family bonding and created their separate existence.

Despite the financial mess in which they were, Wadhawan’s always known to be living a super-rich and luxurious lifestyle with top-level connections with many of the political bigwigs, bureaucrats and Bollywood celebrities, hosting lavish parties and rubbing shoulders with them (Mumbai Mirror, 2019). As per an insider report, a number of plush houses in posh locations in Maharashtra were also given to politicians to seek undue favours.

Now, DHFL and HDIL, both companies have been facing insolvency proceedings²⁷ owing to their promoters’ inabilities to carry on the family legacy forward, a lot of mis-management and wrong-doings done at their companies with malafide intentions and a complete lack of governance (Rajput et al., 2019).

PMC-HDIL Nexus: Quid Pro Quo

It was a five-page confession letter written by Joy K Thomas, Managing Director and Chief Executive Officer of PMC Bank, which revealed how PMC Bank and HDIL favoured each other on quid pro quo basis from a long time, that is, 2008 onwards.

It all started way back when PMC Bank was into difficult times; Wadhawan family including the promoters of HDIL came to rescue the bank and put money into the bank and saved the bank from bankruptcy. Elaborating the same, Joy K Thomas quoted,

In 1986–87, just two years later PMC Bank started operations, it was on the verge of closure when the second generation Wadhawan’s Rajesh Kumar Wadhawan and Rakesh Kumar Wadhawan parked big volume of deposits into the bank to help the bank build its credibility among depositors. Similarly, in 2004, Wadhawans deposited more than US$20 million in PMC Bank so that it can recover out of liquidity crunch. (Dugal, 2019)

Surviving under the patronage of Wadhawans particularly HDIL and group companies, PMC bank also ensured that they never stuck in any financial trouble, lending them money as and when they needed without even performing necessary due diligence. Even when HDIL was dragged into insolvency proceedings by other banks such as Bank of India and Union Bank of India in 2019, PMC bank came forward and favoured HDIL by lending US$20 million so that the company can make one-time settlement with those banks and recover out of insolvency.

Shockingly, out of US$2.4 billion of deposits of 1.7 million depositors, 73% (US$1.24 billion) of its loan portfolio of US$1.7 billion was exposed to HDIL and group companies. PMC Bank left no stone unturned to give cover to HDIL and hide all NPAs associated with HDIL from a long time, which was of course, not possible without collusion and nexus between top banking officials of PMC Bank and promoters of HDIL (Outlook, 2019).

Effect of PMC Bank Crisis on Society, Markets and Economy

The success of banking sector of an economy is due to the active contribution and trust of its depositors, which was cruelly breached in the case of PMC Bank. The loss of depositors’ trust, if spreads like a contagion or ‘domino effect’²⁸ on the depositors of other banks, it may create havoc in the whole banking system (Gupta, 2014; Mohan, 2019). The outbreak of PMC Bank crisis and the restrictions placed on PMC Bank depositors in withdrawing their own money, created a lot of fuss and public outcry. As a consequence, depositors ran from pillar to post. They staged their protests in almost every place wherever they could, that is, outside various branches of PMC Bank, outside the RBI office in Mumbai, outside Matoshree, the residence of Maharashtra Chief Minister, Uddhav Thackeray and other public places. In their protests, depositors including men and women of different age groups, were holding placards, chanting slogans, even some women protestors used copper plates and wooden sticks to sound their protests.

What gave deep shock, agony and mounted anger was the death of eleven account holders of PMC Bank who lost their lives because of various medical reasons, mostly cardiac arrest. Besides, many of the businessmen were not able to run their businesses and pay utility bills and salary to employees. On the other side, the PMC bank crisis affected the most to those retired people and differently able, who were dependent for their survival on the interest earned out of their deposits in the bank. Furthermore, many of the children were deprived of their studies for not paying school fees, while others could not meet out their medical expenses (Mengle, 2019).

Many co-operative housing societies in Maharashtra had parked their funds in PMC Bank, because until 2013, it was mandatory for them to deposit their funds in co-operative banks only and also, the interest earned out of these deposits was tax-free. With amendments in Maharashtra Co-operative Societies (MCS) Act, 1960, co-operative societies were allowed to deposit their money in Nationalised or Regional Banks also, however interest on bank deposits was taxable. Many of the co-operative societies did not move their deposits from co-operative banks to Nationalised or Regional Banks, either because the tax-free interest was a much lucrative option for them or else, they were not aware of the amendment done in the Act. Therefore, out of nearly 35,000 co-operative housing societies registered in Mumbai, around 2,000 had their funds deposited in various PMC Bank branches. These co-operative societies came under deep financial crisis and unwanted pressure to meet out their routine maintenance expenses including salaries of housekeeping staff, etc. (Krishna, 2019).

The stock markets also did not remain unaffected. In a strong reaction to news of PMC Bank crisis due to huge exposure of bank portfolio to HDIL, HDIL stock hit the lower circuit limit²⁹ on the Bombay Stock Exchange (BSE) and then, later on, plummeted to an extremely low level on 31 October 2019. The same share was trading at 18 times higher on 1 April 2019.

While RBI imposed the restriction on withdrawal of public deposits up to US$20 on 23 September 2019; owing to depositors’ protests and huge public outcry, it was increased to US$200 on 26 September, then, US$500 on 3 October, US$800 on 14 October and finally, US$1,000 on 5 November, respectively. With US$1,000 set as the withdrawal limit, it was claimed that up to 78% of the PMC Bank depositors could withdraw their entire deposits from the bank. Not only this, owing to the grim situation, government too came into action and the limit of US$2,000 (for principal amount as well interest amount) up to which bank deposits of account holders are routinely insured under the protection of DICGC, was also increased to US$10,000 with effect from 1 February 2020.

The banking system of a country works as a primary means of capital formation by channelising savings of general public towards productive activities of businesses. PMC Bank made a heavy dent on the reputation and credibility of banks particularly co-operative banks, due to which depositors might lose their trust as well as interest into the banking system of the country causing reduction in the rate of capital formation and less availability of money for the economic growth of the nation (Merwin, 2019).

PMC Bank Imbroglio: Who Should Be Held Responsible? A Reflection

The PMC Bank Imbroglio is the classic case of the dire deficit of corporate governance. What lies beneath the crisis is the saga of crony capitalism,³⁰ collusion³¹ and fraud and political malice in governing these public institutions. The case also questions the efficacy of the auditing practice, the banking supervision from the RBI as well as management control from the Registrar of Co-operative Societies (RCSs) in India. The case necessitates the need for governance and regulatory reforms in the country.

Statutory Audit

The two auditing firms Lakdawala & Co and Ashok Jayesh & Associates were the main statutory auditors of the PMC Bank in the last five years. On account of unsatisfactory explanation of questions replied by them related to the auditing of books of accounts of PMC Bank by investigation agencies, auditors from these auditing firms were put behind bars.

The suspended Managing Director and Chief Executive Officer of PMC Bank, Joy K Thomas, put serious allegations on statutory auditors by saying, ‘The statutory auditors did shallow auditing of the books of PMC Bank due to time constraints; therefore, they validated the incremental loans and advances only and scrutinised the accounts which were shown to them by the bank’. On the other side, there had been serious allegations on PMC Bank for appointment of auditors on the basis of recommendations from promoters of HDIL (Business Standard, 2019).

The mandatory annual statutory audit³² is the seal of assurance and commands absolute trust and confidence of all stakeholders over the financial statements of any company or institution, once audited. There is a general perception about auditors that they remain ‘gatekeepers’ or ‘watchdogs’ of company affairs; and they inspect and scrutinise the financial statements in utmost good faith, accordingly raise red flags or early warning signals,³³ in case of discrepancies (Gupta, 2020). However, the same could not hold true in the case of PMC Bank; the question remained as to how did auditors pass the books of accounts of PMC Bank for so many years without any qualifications?³⁴ Is it auditors’ negligence or should it be tantamount to an auditing fraud?’ In either of the situations; auditors are liable to be under scrutiny and face stiff actions and penalties, even debarring them from auditing any other company for a period deemed appropriate by the Institute of Chartered Accountants of India (ICAI),³⁵ the regulatory body of auditing profession in the country.

Notwithstanding, the mess within PMC Bank was also the failure of internal controls. The RBI and the ICAI had finalised an indicative format for seeking independent audit reports for multi-state UCBs and for UCBs registered under the Maharashtra Co-operative Societies Act (1960) like PMC Bank, as they were aware of the anomalies in working of these banks and wanted to address the issue of divergences in assessment of NPAs between statutory auditors and the central bank’s inspection reports. However, the same could not be implemented in time. Had the same being implemented, the PMC Bank crisis must have come to notice much early and could be avoided.

Bank Management

In 2018–2019, the PMC Bank had reported a net profit of US$20 million in its annual report. Also, the bank had shown only 3.76% (i.e., US$64 million) of total advances (US$1.7 billion) as gross non-performing assets (Gross NPAs), which was deemed to be a good performance as compared to other public-sector banks³⁶ in India which had much higher Gross NPAs; therefore, nobody questioned and never had any idea about the grave realities. ‘The question is why did the management disguised the actual financial position of the bank? Was it not the responsibility of the management of the bank to report the true and honest picture of the financial position of the bank?’ It looks that the deeds of financial (mis-)management were no misnomer in the case of PMC Bank. The Bank had a free hand in disbursing loans to stressed group companies of HDIL as and when they needed, without conducting necessary due diligence. There were reported to be many cases of roundtripping of loan,³⁷ fudging credit approval memorandum,³⁸ loans given on personal guarantees without sufficient collateral and also, evergreening of loan default accounts.³⁹ In an investigation carried out, it came to notice that the PMC Bank used more than 21,000 fictitious (dummy) loan accounts to hide 44 loan accounts made to a single realty firm (HDIL and its group companies). There were special codes used to hide and restrict the visibility of actual loan accounts through these fictitious (dummy) loan accounts; all this was done to escape the eyes of auditors and also, inspections from RBI (Jadhav & Anand, 2019).

Hiding the true financial position of the bank and perpetuating such a massive fraud was never possible without involvement of the top banking officials (Roy & Panda, 2019). One of the prime accused was S. Waryam Singh, the Chairman of Punjab & Maharashtra Co-operative Bank (PMC Bank) who was into a serious ‘Conflict of Interest’ into his role at PMC Bank because of his association with Wadhawan family & HDIL group companies, in which he occupied positions of Board Member/Vice-Chairman/Director, etc., at different point of times in last 25 years (Chatterjee & Kamath, 2019). The man who played accomplice to S Waryam Singh, was Joy K Thomas, the Managing Director and Chief Executive Officer of PMC Bank who abused his official position to cover-up the whole fraud (Panda, 2019; Singh, 2019).

While corporate governance builds and strengthens the accountability, credibility, trust, transparency and integrity of an institution; with banks being the public institution and the backbone of the economy, maintaining high standards of corporate governance is an utmost necessity, wherein any deficiency straightaway endangers financial and economic stability of the country. A bigger question is now, who would believe in thousands of bankers in this country with trust and due respect; and not as ‘the Wolf in the Sheep’s Clothing’?

RBI

Being the regulator of banking institutions and the guardian of financial stability in the country, RBI faced severe criticism in the wake of PMC Bank crisis. ‘How RBI could not pick-up the early warning signals and could not initiate timely actions while collecting quarterly reporting and annual inspection of PMC Bank?’ Nobody would doubt that the PMC Bank malice owing to a very large exposure to a single client was not an overnight development; rather, it was continued for a long time. Further, the Department Committee on Banking Supervision (DCBS)⁴⁰ of RBI has special powers to lay down prudential norms on capital adequacy ratio,⁴¹ classification of assets and loan loss provisioning⁴² along with additional powers to impose penalty in case of any irregularity; while PMC Bank could flunk all exposure norms and managed to remain at bay (Rajawat, 2019).

Many analysts criticise the dual control of co-operative banks in India for being responsible for the PMC Bank crisis. Under dual control of co-operative banks, management and supervision of co-operative bank are looked after by the respective state while banking related functions are taken care of by RBI. Because of political interferences in management and supervision of co-operative banks, RBI find itself constrained if it wants to suppress the board or remove the directors, as RBI do in the case of commercial banks (Dhoot, 2019). In aftermath of PMC Bank crisis, there has been a debate at National Level of handing over full control of all deposit-taking institutions including UCBs to RBI, if not, then at least large UCBs like PMC Bank can be brought under the single-handed control of RBI. As an alternative measure, many people were also demanding to set-up an independent regulator for UCBs; while others were in favour of improving the inspection and quality of audit with more professionalism within the current structure (Kelkar, 2019).

While the decision on reforming the regulation of UCBs would take some more time, it was decided in a quick fix to bring UCBs with assets of US$100 million and above under the ambit of Central Repository of Information on Large Credits (CRILC),⁴³ a reporting framework of RBI, which was completely missing for UCBs till now; however, it was in existence for scheduled commercial banks to strengthen off-site supervision and early recognition of signals of financial distress. Now, UCBs have to submit CRILC report to RBI on a quarterly basis (Ghosh, 2019).

Registrar/Central Registrar of Co-operative Societies

The Registrar/Central Registrar of Co-operative societies (RCSs/CRCS) have been proved ineffective in ensuring proper management of co-operatives in India. Being under the control of the respective state or centre, there are multiple political interferences too (D’Souza, 2019). There is a need for urgent attention to bring about reforms in the Co-operative Societies Act and in the management of co-operative institutions in the country.

Recovery of Depositors’ Money: A Big Task Ahead

In a hunt to seize properties of Rakesh and Sarang Wadhawan, the Enforcement Directorate conducted raids at many places and identified around US$0.8 billion of assets. Among the assets seized, there was a business class private jet, several luxury cars, All Terrain Bikes (ATBs), a speedboat, two golf carts, heirloom jewellery, plush 22-rooms luxurious bungalow in 2.5 acres⁴⁴ at Alibaug (coastal area near Mumbai) and a 5 acres bungalow in Mumbai. Besides, several properties of Wadhawans in Gulf countries and in the United Kingdom were also found. A yacht worth million was also traced in the Maldives (Business Standard, 2019). Professional valuers were involved in valuation of these assets. The assets seized would be sold out and money would be realised to repay back money of depositors of PMC Bank. However, the task in hand is a very tedious one and it is going to take a lot of time.

Besides HDIL promoters, several bank accounts of Joy K Thomas as well as S Waryam Singh were also seized. The high valuation properties worth millions, owned by them were identified. Also, the Demat account of S Waryam Singh having investments of more than US$20 million was seized. All this was put under scrutiny and investigation by agencies.

Unlike commercial banks, RBI has limited powers related to the reconstruction of a co-operative bank as they are mainly registered under Co-operative Societies Act. Despite this fact, RBI is trying to work out a scheme for revival of the bank in the interest of the depositors and the stability of the overall banking sector.

At the time of PMC Bank crisis, HDIL and its group companies were facing insolvency proceedings and they had multiple liabilities towards other lenders as well as their employees. ‘Though the money would be realised out of selling assets, an alarming question is whether it would be sufficient enough to repay all liabilities?’ To answer this billion-dollar question, the process is on and we need to wait till the final settlement (Sarkar, 2019).

Conclusion

A forensic audit⁴⁵ has been initiated by the RBI to uncover the corporate fraud. On the other side, the Enforcement Directorate submitted around 7,000 pages of charge sheet in a special court set-up under the Prevention of Money Laundering Act (PMLA)⁴⁶ and the case for forgery, cheating and criminal conspiracy was filed against top management officials of PMC Bank and promoters of HDIL. There must be stiff penalties, exemplary punishments and effective enforcement of the law done with the right spirits. Besides, the standards of corporate governance need to be raised to a higher level, so that such instances would not get repeated again in the future (Lele, 2019).

Footnotes

Declaration of Conflicting Interests

Funding

The author received no financial support for the research, authorship and/or publication of this article.

Notes

Reports

Report of the Committee on Urban Co-operative Banks, 1978 (Madhava Das Committee).

Report of the Committee on Licensing of New Urban Co-operative Banks 1992 (Marathe Committee).

Report of the High-powered Committee on Urban Co-operative Banks, 1999 (Madhava Rao Committee).

Report of the Expert Committee on Licensing of New Urban Co-operative Banks, 2011 (Malegam Committee).

Report of the High-powered Committee on Urban Co-operative Banks (UCBs), 2015 (R Gandhi Committee).

Report on Trend and Progress of Banking in India2018–2019, RBI.

Websites

www.pmcbank.com

www.hdil.in

www.rbi.org

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