This nightmare, one quiet September Tuesday started for 16,000 hapless account-holders with a rude shock. The PMC Bank, was in no position to allow withdrawals of amounts more than a thousand rupees. A whistle-blower in this case, supposedly none other than a very senior insider, had pointed out extremely serious glitches in the Bank’s numbers. The financial statements of the Bank were said to be smartly dressed up and that significant amounts of bad loans were concealed. These loans were in fact Non-Performing Assets (NPAs) and would never be recovered. (In accounting parlance, a loan given is an ‘asset’).
The now-suspended Managing Director on being questioned by the RBI, had reportedly admitted to the bank’s actual exposure to just one borrower, viz Housing Development Infrastructure Limited (HDIL) (which is in bad days fighting insolvency cases at the tribunal) of over Rs 6,500 crore four times the regulatory cap or a whopping 73 per cent of its entire published loan book of Rs 8,880 crore. (Under RBI regulations, a bank cannot have exposures to a single group exceeding 20%). RBI immediately put brakes on PMC Bank with Prompt Corrective Actions (PCAs) stopping all banking transactions forthwith, pending investigations.
Seeing the panic created amongst account holders, the Government in its true “Roll-Back-Gear” finally raised the limit of withdrawals to Rs 40,000 but not before seven people had died and thousands sitting in Dharna, reportedly in anxiety over the Bank crisis.
Background: Now, before I proceed further a little bit of background would do good. This bank had a director in common with HDIL till some time ago. The amounts of exposure to the company in question was built up over a period of some years perhaps when the company used to have good slum development orders. The difficult part of the chess board is, the figures published look so innocuous – it would be extremely difficult to make out at this moment, without proper forensic study exactly how much was actually appropriated. I gather from the national media, this was carefully planned thru a maze of Related Companies borrowing from the bank and passing them on between themselves and on due dates a new loan being granted for repayment of the old one – a processed referred to as “evergreenng”!
While we wait for RBI’s investigations to determine exactly which pawn played what role on the chess-board, I have a few observations on the systemic debacle that the World was witness to.
Thomas Jefferson (a founding father of USA and its 3rd President) on his retirement from Washington had written to John Taylor, famed author, “I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Little did anybody know, two centuries thenceforth a few cases similar, were actually on way to a faraway country!
The Early Signals: When this bank had 73% bad loans (at least) – its Annual Report even in March 2019 was disclosing an NPA of just 2.19% where the average NPA rates in Public Sector Banks was 12%. In my view, this itself would have been an early warning signal…something somewhere was greatly amiss. Secondly, the Capital Adequacy Ratio (Capital and Risk relation) declared is a whopping 12.6% where the RBI norms itself is 9%. And the last point is if you see the HDIL Consolidated Annual Report of March 2019, PMC Bank is not even named as a banker – its name figures in only 4 places in the report disclosing loan balances totaling to just Rs 1.2 crore. The huge amount of Rs 6500-crore-strong-loan was missing…if it hid under some other account, it would be one of the best kept secrets in the industry, I think! Surprisingly both HDIL and PMC Bank declare profits and positive operational cash flows!
Let’s now take a look at the various regulatory bodies tasked with protecting the interests of those 16,000 account holders. The Finance Ministry – they were in fact so happy perhaps, with the performance of this bank that they were reportedly planning to merge 2 of Goa’s non-performing banks with them – jut understand the precious levels of information our regulators seem to be armed with! Second: the RBI – I wonder whether anybody made conscious efforts to reconcile loans given and loans outstanding between the hitherto-fore related parties and confirm balances. Thirdly: The Central Registrar of Cooperative Societies – what inspections did they do on the Bank? Fourthly: The Independent Auditors. They not only never state in their report, non-disclosure of related-party transactions, in grave violation of banking laws, they state incompliance with their “ethical requirements” …the Financials presented are in order. Lastly: The Management – and they assert having a “robust” Internal Check and Control and Risk Management System.
My take: If a bank in a country’s financial sector cannot be trusted – who can? – isn’t that the question the world would be asking? Side by side with the investigative process, I think each of these authorities should agree on points where each have failed the account-holders – and in a time-bound manner come up with a set of apolitical corrective actions. This would be important and exemplary. RBI in my view, should coordinate the process to its logical conclusion.
And in conclusion: Enough is enough in my view! We have put up with too much of ‘creativity’ with numbers in our system – let’s not add a single case to the ones piling up and let’s not ask tax payers to…pay up in posterity, under the name of funding, – Jefferson’s definition of large-scale “swindling”!!
(Binayak Datta is a
Finance Professional)
