The Punjab and Maharashtra Co-operative Bank Scam

Posted on November 16, 2022

The Scam

Punjab and Maharashtra Cooperative Bank(PMC) allegedly colluded with Housing Development and Infrastructure Limted (HDIL) promoters to draw loans from the bank’s Bhandup branch. PMC bank officials did not classify these loans as non-performing advances, despite defaults by HDIL over the years.

About PMC

Punjab and Maharastra Co-operative Bank Ltd. (PMC) is a multi-state bank. It began operations in 1983. Reserve Bank of India regulates the bank. It is registered under the Cooperative Societies Act.

PMC has 137 branches in 6 indian states – Karnataka, Goa, Delhi, Madhya Pradesh, Gujarat and Maharashtra. There are 100 branches of this bank in Maharashtra alone.

Genesis of the Scam

Housing Development and Infrastructure Limited is a limited liability company started in 1996. It is a primarily a slum rehabilitation developer.

The partnership of Wadhwan family, who manages HDIL, and PMC can be traced back to 1986 – 1987 when the HDIL infused Rs. 13/- lac. into the Cooperative bank. In 2004 the Wadhwan family again deposited Rs. 100 cr. into PMC to help the bank tide over a financial crunch. Such activities only strenghthened the close bond between the two.

But things started to go bad for HDIL after an airport slum project was cancelled. A Rs. 6,500-crore Mumbai International Airport Limited (MIAL) project of rehabilitation and in turn generate development rights of 43.4 million sq. ft of real estate did not see the light of the day. Financial crisis led to defaulting in the year 2012 – 2013.

What happened?

HDIL turned to PMC for loans and the latter obliged. PMC gave more than Rs. 6,700 cr. loans to HDIL over the years, the amount being 73% of its total loans, in violation of RBI norms.

To understand the quantum of exposure PMC had of HDIL loans, the total loans of PMS stands at Rs. 9,000 cr. and the deposits at Rs. 11,610 cr.

The MD of PMC, Mr. Joy Thomas and Chairman Waryam Singh played a key part in the scam. PMC management under-reported the Non Performings Assets of the bank along with entry of fake deposits, fudging of loan accounts and evergreening of loans. [kkk]

The scam came to light after a whistleblower informed of the mess at PMC to RBI on 17 September 2019.

The accusations

PMC under-reported Non-performing assets.
PMC entered fake deposits and fudged loan accounts.
The amount of loan given to HDIL was more than 70% of total loans in PMC, in violation of RBI norms.
Many of the bank’s top borrowers were related to the director of the bank and even top bank executives.
Bank executives were asked to intentionally manipulate the accounts to facilitate loans that were sanctioned by creating fresh proprietary firms.
In spite of defaults in payments, HDIL group continued to receive loans from time to time.

The Methodology

Over the years loans were given to 44 HDIL Group entities. The bank officials broke up these loans into 21,000 dummy loan accounts. The bank was over exposed to HDIL. They sought to hide this fact from auditors and RBI. The auditors checked only 50 -100 accounts of the 21,000, allowing the scam to perpetrate.

PMC ran on a Core Banking System software(CBS). This system can be used to prepare financial and non-financial reports. It has layered access. Information can be hidden or exposed with higher level access. This CBS was compromised in PMC and certain reports were not released to, or were hidden from auditors.

Role of the auditors

Lakdawala and Co, the auditors for PMC Bank had given it an audit classification of ‘A’ rating. This indicated that everything was running smoothly at the bank when in reality there was clearly large-scale manipulation of accounts. Why and how the auditors certified PMC as clean is anyone’s guess.

The accused

Joy Thomas – MD, PMC
Waryam Singh – Chairman
Rakesh Wadhawan – Director of HDIL

Whistleblower

A letter as early as 11th January was sent to RBI where an insider had forwarned the Central Govt. Agency of financial irregularities at the bank.

The letter highlighted the bank’s dealings with the Housing Development Infrastructure Ltd (HDIL) and Dewan Housing Finance Corporation (DHFL). The cosy relationship between the bank and Wadhwan’s who controleed HDIL and DHFL were underlined in the letter.

The whistleblower also exposed the under-reporting of NPAs, fudging of accounts, entry of fake deposits and evergreening of certain loan accounts. All these violated terms laid down by the RBI.

Exposure

It is certainly strange that it took 9 years to expose the scam. It is reported the due to this letter the MD of the bank, Mr. Joy Thomas was asked to investigate the matter. But later it was found out the MD himself was complicit in the matter. Mr. Joy Thomas changed his religion to muslim in order to marry his assistant and also gifter her 9 flats in Pune.

The Aftermath

The bank in under regulartory and investigative actions by Central agencies. RBI put regulatory restriction on the bank. Withdrawl limit was restricted to Rs. 1000 initially but now has been increased. RBI also appointed Jai Bhagwan Bhoria as the administrator of the bank, superceding its board. MD Joy Thomas was suspended.

The Economic Offences Wings of the Maharshtra Police (EOW) has arrested 5 persons connected with the scam. That includes former MD Joy Thomas, Chairman Waryam Singh, former director Surajit Singh Arora and promoters of HDIL, Rakesh Wadhawan and Sarang Wadhawan.

Properties of HDIL worth around Rs. 3,500 has also been seized by the Economic Offences Wing of Mumbai police. The police also seized one demat account of Wayram Singh reported to be Rs. 100 cr. in value.

The EOW has also seized Rs 60 crore worth jewellery, a business jet, 15 cars, two fixed deposits worth Rs 1.5 crore and Rs 10 crore from Wadhwans.

The Enforcement Directorate is also probing the allegation that promoters of HDIL diverted Rs. 160 cr. of loan to three hotels in Delhi – Hotel Conclave Executive, Hotel Conclave and Hotel Conclave Comfort.

References:
[kkk] https://www.news18.com/news/business/pmc-bank-scam-fake-accounts-undereporting-of-npas-rbi-got-a-letter-eight-years-back-3903917.html