How the PMC Bank scam was kept hidden for many years

The disclosures made by Joy Thomas, former Managing Director at PMC Bank, shows how various dubious transactions in the bank were kept hidden since 2008. The accounts were managed in a way that neither the statutory auditors nor the periodical scrutiny by the Reserve Bank of India were able to catch the ongoings at the bank.

Thomas joined the bank as General Manager in March 1987 and was re-designated as Managing Director in 1999.

PMC Bank commenced operations in February 1984 as a unit bank (with single branch operation) with a capital of Rs 10 lakh. “However, within a couple of years, the board was reconstituted in 1986 due to apprehension of closure due to some unlawful deeds by some of the borrowers/member. This was the time when late Rajesh Kumar Wadhawan, the then director of Land Development Corporation and many other companiesrun by the Dewan family, along with his brother Rakesh Kumar Wadhawan (present director of HDIL), came to the rescue of the bank. The networth of the bank became negative and it was facing troubles. This family-infused capital helped the bank and also brought its networth to positive from negative,” Thomas wrote in his confession letter to the Reserve Bank of India

In 1986-87 they further infused capital of Rs 13 lakh and kept a huge quantum of deposits for the bank’s revival. Since then, the Dewan family started banking with the bank as depositors. The loan and advances relation started in late 1990s. These advances were mostly in the form of overdrawals in current accounts of various firms of the family. These accounts were regularised on a regular basis. The operations in these accounts were good and satisfactory.

“In 2004, there was a run on the bank due to the simultaneous failure of Maratha Mandir Co-op Bank, South Indian Co-op. Bank and Global Trust Bank. “There were huge withdrawals of deposits from August 13, 2004. The bank honoured all deposit payments from August 13 till August 17, 2004. It was on August 17, 2004, that confidence started building up again. At the time of the run, many people helped the bank steady itself with funds and stood behind the bank. Rajesh Kumar Wadhawan was one of them and deposited more than Rs 100 crore to tide over the liquidity crunch faced by the bank,” Thomas wrote.

More than 60 per cent of the transactions were from HDIL group. The Wadhawan group exposure was around Rs 500 crore up to 2006-2007. In July 2007, one of the companies of the family became a listed company. After getting listed, they cleared all their dues with the bank. “The funding requirements of HDIL became huge and after getting listed, they started operating with other banks also. The bank approached and requested HDIL to continue banking with it as it started impacting the profitability of the bank as a huge portion of advances were repaid by the company,” Thomas wrote.

Meanwhile, three weak banks, namely, Kolhapur Janta Sahakri Bank Ltd (Kolhapur), Jaishivrai Sahakari Bank Ltd (Nanded) and Chetna Sahakari Bank (Karnataka) were merged with PMC Bank in the year 2008, 2009 and 2010.

Thomas claims the trouble started in 2011-2012 when the Maharashtra Government came up with a policy change regarding resale of TDR, which was a strong business for the HDIL group. Transferable Development Rights or TDR allows the developer to build over and above the permissible Floor Space Index (FSI) under the prevalent rules of the respective locations.

At the same time, the company’s major slum rehabilitation project near the Mumbai airport was cancelled due to a change in the policy and the subsequent change in the government. In 2013 the project near the airport got terminated due to non-completion. Though the company submitted that it was due to a change in policy, the Government did not take cognizance of the issue.

“This was the time the group started facing a liquidity crunch and also started defaulting on dues to banks. However, they were still managing to partly pay the overdues of the banks. Since they were in default, they could not raise fresh capital or loans and their projects also got stalled. Slowly collections got reduced, therefore, some of the accounts became stagnant,” Thomas admitted.

“As the loan outstandings were huge and if these were classified as NPA it would have affected the profitability of the bank and the bank would have faced regulatory action from the RBI also. Further, this would have risked the reputation of the bank. As the HDIL group had a good record of clearing their dues with certain delays, we continued to report all the accounts as standard accounts,” he added.

Though some of the accounts were not performing well, it was not brought to notice of the board. The subsequent overdues of various loans were also not reported to the board. “The concealment of information from the board, auditors and regulators was due to the fear of reputational loss. The volume in the accounts were huge as the major business of the company was to acquire small pieces of land from farmers and then develop the plots after getting the necessary approvals from the authorities. The information was concealed from the board due to fear of the reputation of the company as the cheques were of small amount. Till 2019 some of the accounts were reported and shown, but many legacy accounts were not reported to the board,” Thomas said.

Thomas added that since the bank was growing, the statutory auditors, “due to their time constraints, were checking only the incremental advances and not the entire operations in all the accounts. They validated the incremental loans and and scrutinised the accounts, which were shown by us,” he revealed.

In the RBI Inspection prior to 2015, officers used to check mostly the top few borrower accounts reported by the bank branchwise, therefore, these accounts did not come into the picture and it was around 2017 onwards when the RBI started asking for indents for the Advances master. “The stressed/ legacy accounts belonging to this group were replaced with dummy accounts to match the outstanding balances in the balance-sheet. As the loans were mentioned as loans against deposits and were of lower amounts, they were never checked by RBI,” Thomas disclosed.

Some of the large accounts were not reported to RBI from 2008 because of fear of reputational risk. The size of the bank in 2011 was around 57 branches, with seposits of Rs 2,824 crore and advances of Rs 2,000 crore. The exposure to HDIL group then was Rs 1,026 crore. “Further, had we classified them as a non-performing asset, we would have to stop charging interest on these accounts and we could have made losses. The growth path of the bank would have got hampered. The bank had created a name for itself in the market. The HDIL group always promised to clear the dues and also gave adequate security to back their loans,” Thomas said.

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