There is an American English TV series known as ARROW, in which the hero would pronounce a punch line in front of the culprits, whenever he meets them. The punchline statement reads similar to “Mr…………, You have failed Starling City.”
Let us discuss whether there is a similar analogy in relation to the Punjab and Maharashtra Co-Operative Bank Ltd.
The banking industry is subject to control systems which take the role of watchdogs that are meant to ensure integrity of the banking and financial institutions. There are three major categories of watchdogs that have been charged with the responsibility of identifying frauds and enforcing and implementing effective governance in any bank. They are: the management; auditors (internal as well as statutory); and the Reserve Bank of India
Let us relate the roles they have played based on the information that has been shared by Joy Thomas, former MD of the Bank, in public, and the FIR filed by the police, as quoted by newspapers.
HDIL Group had taken loans, which it had repaid subsequent to listing as a public limited company. Repayment of the loans resulted in lower profit for the bank. The bank approached the Wadhawan Group for re-establishing the relationship with the bank. It is not illegal to approach the customers for business.
However, the moot point is if the company had cleared the loans from the bank by utilising the public issue proceeds, understandably there would not have been any need to go in for higher loans. Hence what is the need to persuade the company to borrow money from the bank. This leads us to believe that ‘The Principle of Agency’ has been misinterpreted for the sake of one’s own goal. Probably, the bank could have deposited the money that was available by repayment in other permitted investment avenues.
In order to avoid being reprimanded by the central bank, PMC had been showing all the group accounts as standard accounts, which is a gross violation of the prudential norms applicable to the banking industry.
Systems failure
There has been internal information system failure, which resulted in non-reporting of overdues to the board, auditors and regulators. This means calibration of the information system has taken place to suit a pre-designed agenda.
It is claimed by the former MD that due to constraints, the auditors were checking only the incremental advances and not the entire operations. What this means is that the auditor’s mandate had been decided by the management of the bank and not by the shareholders/members, by-laws and professional standards which bind the statutory auditors or even by the auditors themselves.
As loans were mentioned as LADs, they were not checked by the RBI and hence the central bank could not sense ‘stress signals’
So, can the statutory auditors take shelter under the above aspects and the public repose faith in the ability of the auditors in performing the audits based on the professional standards that have been designed and released by the Institute of Chartered Accountants of India which has been empowered under an Act passed by the Parliament?
Going by the history of events that have taken place, one has to say that there is a ‘multi-organ failure of the control systems’ in the context of PMC. Hence, it is apt to conclude that the depositors have the right to say “Watchdogs! You have failed the PMC”
The writer is Professor, Alliance School of Business