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Why PMC Bank fraud is bigger than Nirav Modi's PNB scam

Why PMC Bank fraud is bigger than Nirav Modi's PNB scam

Why PMC Bank fraud is bigger than Nirav Modi's PNB scam
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By Latha Venkatesh  Sept 30, 2019 7:53:39 AM IST (Updated)

"What is amazing is that even if no one discovered that many of the borrowers are connected to the HDIL group, surely one or more of these layers of supervisors would have detected overexposure to the real estate sector, even if the loan had not turned bad," writes Latha Venkatesh.

The fraud perpetrated at Punjab & Maharashtra Co-operative (PMC) Bank is not much smaller than the one at the Punjab National Bank (PNB).

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PMC’s  exposure to a group of companies affiliated to real estate developer, HDIL, is according to sources, as high as 75 percent of the bank's advances or around Rs 6,000 crore. It is not immediately clear if all of it is principal or includes overdue interest. The bank’s advances, as of its last annual report, is Rs 8,306 crore. So even a sum of Rs 2,500 crore amounts to nearly 30 percent of advances; Rs 6000 crore will amount to 75 percent.
For PNB, with a loan book over Rs 6 lakh crore and implicit guarantee from the government, the Rs 13,000 crore hole was still manageable. But PMC is a cooperative bank where implicit government support is not a given. And even if half of Rs 6,000 crore is already bad loan, then nearly 30 percent of the deposits are wiped out.
Management collusion
What is different from the Nirav Modi case is that while at PNB, only a couple of operators of the SWIFT
It is very difficult to believe that anyone in the bank's board or top management can claim ignorance that the various group companies were not connected. Even a customary Google search reveals that the bank's current chairman Waryam Singh was director on the board of HDIL until 2015, and was earlier director on the board of Dewan Housing Finance Corporation (DHFL) — HDIL and DHFL are promoted by brothers, Saran and Kapil Wadhawan.
Clearly, this is a deep and well-entrenched corporate fraud.
This is yet another instance where all checks have failed: internal controls, board, concurrent auditors, statutory auditors and the Reserve Bank of India (RBI). What is amazing is that even if no one discovered that many of the borrowers are connected to the HDIL group, surely one or more of these layers of supervisors would have detected over exposure to the real estate sector, even if the loan had not turned bad. This leads to the suspicion that the management probably disguised and misreported even the sectors of the borrowers they lent to. But couldn’t statutory auditors catch such subterfuge?
System failure
What of the RBI? The RBI’s cooperative banks supervisory team is relatively less sophisticated because cooperatives normally give smaller denomination loans. It is possible HDIL group created a maze of small companies which escaped attention in the RBI's database of large stressed loans, Central Repository of Information on Large Credits or CRILC.
Typically, smaller cooperative banks are supervised every 18 months but bigger ones like PMC are supervised every year. Whatever the reasons, it is going to be very difficult for the RBI to explain how such a massive violation of rules went undetected.
The need of the hour is to move swiftly and arrest all the fraudsters and recover what is possible of the collateral, which may not be a great amount since HDIL is already headed to the National Company Law Tribunal (NCLT) for bankruptcy proceedings that can take many years before a resolution.
The need of the hour is to also vastly improve the database and upgrade skills available to the RBI so that analytics can be used to detect common ownership, sectoral exposures, et al. It’s a pity that bankers and supervisors are learning the gaps in supervision well after massive crimes have been perpetrated and after gullible depositors have lost their life’s savings.
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