Punjab and Maharashtra Co – Operative Fiasco?

An FIR was filed against the Management of PMC Bank (Punjab and Maharashtra Co – Operative Bank Ltd.) and the Promoters of HDIL today evening for forgery, cheating and criminal conspiracy against the administrator appointed by RBI.

The Case

On 23rd September, 2019, PMC Bank was hit with a slew of restrictions imposed by the RBI. The deposit limit was capped at Rs. 1,000 which was then later on increased to Rs. 10,000. The Bank had also imposed restrictions on Fresh Lending and Accepting Fresh Deposits and Investments. RBI had stated that these restrictions “were necessitated on account of major financial irregularities, failure of internal control and systems of the bank and wrong / under- reporting of its exposure.”

The case is based on Collusion between the Promoters of HDIL and the Bank Management to draw loans from the Bank’s Bhandup Branch. According to sources, PMC Bank’s exposure to HDIL (Housing Development and Infrastructure Ltd.), is at Rs. 6,500 Cr., or 73% of its Total Book of Rs. 8,800 Cr. This is almost 4 Times the permissible RBI Exposure Limit of 15% to a single entity or 20% to a group entity.

HDIL, after a failure of a few of its key projects in the city, was left with nowhere to go but the Bankruptcy Courts. Currently undergoing Bankruptcy proceedings, HDIL, which constitutes almost all of PMC Banks Loan Book isn’e left with any money either. Although the Ex – MD Thomas suggests that HDIL will sell off some of its real estate assets which will be enough to cover the interest component on the loan currently.

The Ex MD of PMC Bank, Joy Thomas, has admitted that PMC Bank was breaching the exposure limits since 6-7 years. He had also admitted to various other instances of financial irregularities and misconduct.

Where it all Started:

A Whistle – Blower Board Member of PMC Bank had approached the Central Bank and had provided all the information to them about the happenings at the Bank. That is the first instance of an eye being raised at PMC Bank.

Warning Signals

In its Annual Report for the year ended 31st March, 2019, PMC Bank had reported Gross NPA’s of only 2.19 % as opposed to the actual numbers of around 60 – 70 % due to its exposure to HDIL and HDIL itself being bankrupt. This will be one of the Highest Ever reported NPA for any bank in India if the reports turn out to be true.

The Annual Report of the Bank also shows that the Priority Sector Lending of the Bank had fallen drastically for the last 5 years (March 2015 – 19), which shrunk to a mere 15.06% of the Loan book on 31st March, 2019, as opposed to a 40.21 % share of the Loan Book in March 2015.

The fall in Priority Sector Lending should’ve caught the eyes of the investors. This was the first hint at danger associated with the Bank.

Conclusion

Although the RBI has taken over PMC Bank for now, it needs to take action swiftly and firmly as any delays would cause huge losses and an air of uncertainty would loom over the depositors of the bank.

Despite being an unlisted and small enterprise, the RBI will ultimately find a way to either Merge or Liquidate the entity and make the depositors whole again. But whatever the Bank decides, they need to decide fast because this will have an adverse impact on the economy and other banks with exposure to Junk Grade Firms.

HDIL’s Bankruptcy portrays the situation of the Real Estate Firms competing in the Economy. Leveraged to the Brim, Real Estate firms are left with no cash flows and delays in the delivery of projects just add to their woes. Their debt troubles Shadow Banks, which are themselves are hit with a Liquidity Crisis, who are looking to refinance their debt to builders but cant.

A conclusion needs to be derived, and it needs to be done so immediately.