Reserve Bank takes over scam-hit PMC bank

The Indian central bank governor said the situation at scam-hit Punjab & Maharashtra Cooperative Bank was being monitored after the problems there left nearly 1.6 million customers in the lurch.

Reserve Bank of India Governor Shaktikanta Das said a forensic audit was underway and the bank had been placed under the central bank administrator for six months due to the massive under-reporting of bad loans.

When the central bank puts a bank under its directions, it practically takes over the bank’s operations. The bank’s management is superseded and the board is dissolved. This happens when the regulator is not satisfied with the bank’s functioning and takes steps to safeguard the interests of borrowers.

The cooperative bank had 138 branches spread over seven states and its headquarters was in Mumbai. Its depositors were small-time businessmen and working professionals.

The alleged irregularities are to the tune of 43.55 billion rupees (US$633 million). The bank had diverted a major chunk of its funds (80 billion rupees) to Housing Funds and Infrastructure Limited, which went bust a few months ago.

The collapse of this infrastructure company had a domino effect on various banks and shadow banks, but Punjab & Maharashtra Cooperative Bank was the worst affected, as nearly 70% of its funds were with this failed company, with whom it has been doing business since 1989.

Five people, including promoters of the infrastructure company Rakesh and Sarang Wadhwan, have been arrested.

Several protests have been held by depositors in Mumbai and other towns, including Delhi. At least 10 depositors have died since the alleged scam came to light, as most of them could not withdraw money for medical emergencies.

The central bank had imposed curbs on withdrawals, which initially was a paltry sum of 1,000 rupees and later enhanced to 50,000.

Over the years the bank had window dressed its accounts in such a way that neither the statutory auditors nor the periodical scrutiny by the Reserve Bank were able to detect the bank’s murky links with the infrastructure company.

Business website Moneylife revealed that the Reserve Bank of India, during its inspection in 2014-15, failed to find that Housing Funds and Infrastructure accounted for more than half the bank’s business and had turned it into its captive bank.

Political fallout

This scam acquired political overtones because many directors on the lender’s board have ties to the ruling Bharatiya Janata Party. The political uncertainty in the state of Maharashtra, where Mumbai is located, after the recent election made matters worse. No political coalition has been able to form a government so far.

When a group of angry customers recently met Indian Finance Minister Nirmala Sitharaman, she told them she would talk to the Reserve Bank governor and convey their distress. She also said the Ministry of Finance may not have anything to do with it directly because the RBI was the regulator.

The opposition Congress party has attacked the government for indifference on this issue. They demanded the government come up with a white paper on the Punjab and Maharashtra Cooperative Bank scam.