Dear Depositor,
We’re Sorry.
Your Bank has
been Robbed
From threats of mass suicides, to protest rallies and writing letters: beleaguered depositors of crisis-hit PMC bank have tried it all. Yet, even now, they have little clarity
News18 Immersive
Dear Depositor, We’re Sorry. Your Bank has been Robbed
From threats of mass suicides, to protest rallies and writing letters: beleaguered depositors of crisis-hit PMC bank have tried it all. Yet, even now, they have little clarity

Pratiksha Oza scrambled towards the nearest branch of PMC bank in search of answers on the morning of September 24, 2019. It was her mother’s birthday, but the 42-year-old Andheri resident had other things on her mind. Oza had almost Rs 1 crore parked in the Punjab and Maharashtra Cooperative (PMC) Bank. And now she was afraid of losing everything.

“I heard the news of the Reserve Bank of India (RBI) restrictions on PMC on the morning of my mother’s 78th birthday,” recalled Oza. The RBI restrictions implied that the family would not be able to access more than Rs 25,000 from that savings, for at least six months.

“I never miss my mother's birthdays. But, after I received this news, I cancelled my visit to her. I didn't want her to see me cry,” she said.

Oza, who runs a small educational institute, was thinking it was absurd to not be able to access her own money as she rushed to the bank. Once there, she realised she was unlikely to get any answers just like thousands of other distressed account holders gathered outside the PMC branch, many of whom had their life’s savings sealed up in there.

In another part of Mumbai, on the same September morning, a panic-stricken PMC Bank employee looked on as a large and restless crowd gathered outside. "We (the staff) had no clarity about the RBI regulations, just like the customers. Our own money, from fixed deposits to salary accounts, everything is in PMC Bank because we are the employees. So, at the time, we were as stranded as any other account holder,” said the employee, who wished to remain nameless.

‘We didn't know what to do for the first few days, but the staffers supported one another and now things are much better.”

The employees are hopeful things will be fine as their salaries are being processed through another bank. But, for the account holders, hope is a hard commodity to find.

RBI's Solution and its Ripple Effect of Personal Tragedies

The regulations imposed by the RBI on PMC Bank under section 35A of the Banking Regulation Act 1949 was done so that PMC officials cannot continue to conduct its affairs in a way that is “detrimental to the interests of the depositors”, and “the banking company” after one or multiple whistleblowers reportedly alerted the apex institution about financial irregularities.

“Banks are typically fragile institutions and if a bank run were to happen, during which depositors withdraw all their money, then it would collapse," pointed out Sandeep Parekh, managing partner at Finsec Law Advisors.

“Savings and other kinds of deposits can be withdrawn at any time. So, with the withdrawal cap, RBI was trying to prevent that situation for the next six months where depositors take out everything, and the bank collapses immediately," he added. The initial withdrawal cap was set at Rs 1,000, which was later raised to Rs 10,000, and now stands at Rs 25,000.

"An old man collapsed in front of me. All his life's savings is in PMC Bank, and he just couldn't take it"

This solution of RBI to keep the bank afloat, however, generated a ripple effect of personal tragedies in the lives of PMC Bank's big and small depositors, and society at large.

Oza, for instance, hasn't been able to pay her teaching staff this month. Her sister-in-law, who had saved up for years so that her son could study abroad, now has no way to access those savings. She has taken to bed, with high blood pressure. “In every conversation, my sister-in-law ends up crying. Her son's future is ruined because of this scam,” said Oza.

Harpreet Singh Guleria, a 52-year-old depositor at PMC Bank recalls meeting a woman and her eight-year-old daughter outside the Poonam Nagar branch. "The woman's husband was battling with the last stage of cancer, and all their money, which was required for his treatment, was in the bank," he said. "The little girl sat quietly as her mother howled in helplessness."

Guleria said that this sudden RBI regulation impacted several depositors in extreme ways. "An old man collapsed in front of me. All his life's savings is in PMC Bank, and he just couldn't take it. We tried to revive him but couldn't. So, we finally called an ambulance and sent him to Holy Spirit Hospital," he said.

Harbans Singh, a 38-year-old hotelier from Nerul, wondered aloud: “Are the authorities waiting for us to die before taking steps to restore our access to our own money?” Singh's family also has almost Rs 1 crore deposited at the PMC Bank.

“What can a common man do?” he asked. "I meet people during protest rallies, and they are so disheartened that they are saying they would die. I met a man whose kidney transplant had to be put on hold because his funds' worth Rs 7 lakh are stuck in the bank.”

People's entire savings, many senior citizens who depend on the interest on their fixed deposit accounts for their monthly expenses, young couples who were in the process of buying new homes, patients who are undergoing serious medical treatment – so many lives have been turned upside down because of these regulations, observers say.

People wait outside a PMC bank branch to withdraw their money in Mumbai. (Photo: Reuters)

Ashvin Parekh, managing director at Ashvin Parekh Advisory Services (APAS), a global management consulting firm, pointed out that the bulk of the deposits in cooperative banks come from charitable trusts such as gurdwaras, educational institutions, hospitals, as well as cooperative societies, and housing societies, for whom it is mandatory to have accounts in such banks.

"Firstly, these trusts and housing cooperative societies are compelled by law to keep their money in cooperative banks. Secondly, if these banks fail, there is no mechanism for them to get their money back. What kind of a law is that?" he asked.

Parekh pointed out that while individual depositors choose cooperative banks voluntarily for the services offered – like early opening hours, and a higher rate of interest – these charitable organisations, and housing societies have no say in the matter. So, the current situation is doubly unfair to them.

"The money belonging to charitable institutions is for the common good of so many people," said Parekh. So, when a bank goes bust, and the money of such institutions gets stuck, it isn't just individual lives that are affected, but society at large, which is put in harm’s way, he added.

Crime and Punishment; But What About Justice?

On the PMC Bank's website, its motto is said to be, “We enjoy to serve.” Unfortunately, since Housing Development and Infrastructure Limited (HDIL), a real estate construction company, bailed PMC out from the financial crisis of 1986-87, and later in 2004 by capital infusion, the bank has purportedly primarily served the interests of HDIL and flouted many rules to loan out large sums to the realty firm.

A confession letter, written by the ex-managing director of PMC Bank, Joy Thomas, revealed that the bank's exposure to the now-bust HDIL is more than Rs 6,500 crore, which is four times the regulatory cap. In other words, it is 73 per cent of PMC Bank's entire assets of Rs 8,880 crore.

Thomas confessed that HDIL was given loans despite its failure to pay back previous loans. Since the total outstanding loan to the realty firm was massive and would have been categorised as NPA, which would have not only jeopardised the reputation of the bank but also invited regulations from RBI, 21,000 dummy accounts were created by Thomas, and his six other associates, which also includes ex-chairman Waryam Singh, to hide the NPA of HDIL from RBI. The identity of the other four PMC executives is still undisclosed.

The initial police investigation revealed that the bank's losses were around Rs 4,355 crore, since 2008.

"What this PMC management and HDIL people have done is unforgivable. They should not get bail. They should be punished"

On October 3, the Economic Offences Wing (EOW) arrested the HDIL honchos, the father-son duo, namely HDIL's executive chairman Rakesh Wadhwan, and vice-chairman Sarang Wadhwan, for further investigation into the PMC fraud. These arrests were followed by those of Joy Thomas and Waryam Singh.

In the meantime, based on an FIR registered by the EOW, the Enforcement Directorate (ED) has filed a case of money laundering to probe the alleged scam. PMC Bank has also been instructed to conduct a forensic audit by EOW, for which Grant Thornton has been hired.

The outrage among depositors has only amplified as more alleged fraudsters are being named. Several account holders of PMC Bank protested against the Wadhwans outside Esplanade court in Mumbai on Wednesday, demanding stringent punishments for the father-son duo as well as PMC's ex-chairman Waryam Singh, whose police custody was extended to October 14.

"What this PMC management and HDIL people have done is unforgivable. They should not get bail. They should be punished," said Guleria, who has been organising WhatsApp and Telegram groups, as well as rallies to protest against the PMC fraud.

"They are jeopardising the lives and well-being of people. If tomorrow someone passes away, something wrong happens because of the lack of treatment, who will bear that responsibility?” he asked.

PMC bank depositors protest outside Killa Court, in Mumbai, Wednesday, Oct. 9, 2019. (Photo: PTI)

To make matters worse, as PMC account holders struggle to cope with the ramifications of having no access to their own money, reports of the lavish lifestyles of HDIL top bosses are spilling out all over the news, as ED raids various locations and confiscates their private properties. So far, two private jets, a 22-room bungalow at Alibaug, speedboat, and an array of expensive cars have been seized from the Wadhwans.

"They can have their jets and yachts and Rolls-Royce. We aren't jealous of that. But it is not acceptable that they would take away our money," protested Guleria.

It is not only important to bring these alleged fraudsters to the book if and when they are found guilty, say observers, but also to deliver justice to the depositors by giving back their money. While the confiscated properties of the Wadhwans should ideally be used to that effect, Ashvin Parekh said it is a cumbersome and time-consuming process to make that happen.

"In countries such as Israel and the United States, when banks fail, the authorities don't run after borrowers. They run after their assets. But, unfortunately, it takes a long time to get the possession of these assets in India, depending on how strong the collateral offered by them are," said Parekh.

Should RBI be Blamed For Audit and Fraud Detection Failure?

Ever since the news of the PMC fraud grabbed headlines, the RBI drew a lot of flak for its failure to detect the scam at an earlier stage. Therefore, it is clear that the preventive supervision or preventive regulations of the central bank needs to be re-examined, say experts.

However, all the blame cannot be placed on RBI supervisors alone, pointed out Pronab Sen, programme director for the IGC India Programme. Cooperative banks in India have a dual regulation system, where administrative issues, as well as audits of these banks, fall under the purview of the Registrar of Cooperative Societies (RCS) while functions such as granting of the licence, maintaining statutory liquidity, etc, are the domain of the RBI. So, although the central bank’s supervisors also survey the audits, it is generally the second line of defence.

"The general impression that media reports seem to be giving is that the RBI is the statutory auditor. In any banking system, the first line of defence is the internal audit system. The second line of defence is the statutory audit. But, both of these systems can only flag an issue, they cannot investigate. That is not their responsibility," said Sen.

If there is malfeasance, as clearly as in the case of PMC Bank, then the investigative part of it has to be done by some form of a forensic audit, pointed out Sen.

"Now, the question is who triggers that? That is not very clear. By and large, it is the management. But if the management itself is complicit, then, of course, you have a problem,” he added.

Reports say that the PMC Bank's audit firm, Lakdawala & Co, had not raised a single red flag in their investigation report for 2018-19. The bank had an A grading, with supposedly over Rs 11,000 crore deposits, and profits worth Rs 100 crore. The NPA reportedly doubled during FY18-FY19, making the total non-performing assets to be 2.19 per cent. The Institute of Chartered Accountants of India (ICAI) has already initiated disciplinary proceedings in this case and written to the audit firm, as well as the RBI and the Registrar of Cooperative Societies (RCS).

But chances of oversight or complacency by RBI supervisors cannot be completely ruled out, said Parekh.

"The worst thing that has happened in this country is that we have started buying everything on the lowest quote basis. We want services, but we want them cheap," he said.

"If you are going to pay the auditors something like Rs 1,000 or Rs 1,500 per day, there will be no motivation. Some of them may not even go to a branch to prepare the report, so chances of oversight increase considerably. Instead, RBI should gather a panel of chartered accountants, who are motivated and competent," he added.

Parekh suggested that to ensure better auditing system for banks such as PMC, it is also important for RBI to assign supervisors on a rotation basis, instead of making the same set of supervisors in charge of the same bank several times. Whether that protocol was followed will only be revealed after the investigation in the fraud is completed. Recent reports, however, suggest that after the arrests of PMC executives, the auditors are under the scanner too.

Why No Transparency in the System?

The only red flag that the RBI had raised against the PMC Bank last year was the recommendation of the removal of Waryam Singh as the chairperson after it was discovered that Singh had disbursed loans to HDIL, and violated procedures. Also, it was pointed out that Singh was a board member of HDIL, indicating a conflict of interest. The recommendation was sent to the Registrar of Cooperative Societies of Maharashtra. But despite that, Singh retained his position until recently.

"I have been on the board of directors of a bank, and there the rule was that if the bank was going to lend to any company I was associated with, it was my responsibility to resign from the board before that loan could be given. In PMC's case, they were giving the loan to a related party (HDIL), and the chairman of the bank wasn't even disclosing that," said Pronab Sen.

Vishwas Utagi, general secretary of Maharashtra State Bank Employees Federation and vice-president of All India Bank Employees Association, wondered if the shareholders were not informed about this RBI recommendation.

TOP: Depositors of the Punjab and Maharashtra Co-operative Bank (PMC) display placards during a protest over the Reserve Bank of India (RBI) curbs on the bank, outside a RBI office in Mumbai. (Photo: Reuters) BOTTOM: Depositors of Punjab and Maharashtra Cooperative (PMC) bank display placards during a protest over the bank’s crisis, outside the Reserve Bank of India building, in Mumbai. (PTI)

"Were the shareholders of PMC Bank aware that their boss needed to be removed, and that the RBI had demanded it? Now, they are saying that we wanted to change him, but PMC Bank didn't change him. Therefore, they are guilty," said Utagi.

There is no transparency in the way RBI also imposed section 35A, he pointed out. "Almost six days before the RBI regulations came in, most of the political people withdrew their money. How did they know that their money would be sealed by RBI soon?" he asked. After the regulations have been implemented, and administrators appointed, PILs are being filed by several depositors, but how this matter will be resolved is still unclear.

Utagi questioned RBI's decision to raise the withdrawal cap twice, asking that without new liquidity, how are they revising withdrawal caps? and if they could have had a higher cap, why didn't they start with it in the first place?

"Initially, the RBI said Rs 1,000 is the withdrawal limit. Then, after a few days, they raised the withdrawal cap to Rs 25,000. So the question arises, is the RBI taking these decisions politically or based on banking parameters? The people should know," said Utagi.

Are Depositors Just an Afterthought?

Vishwas Utagi said that while the Rs 25,000 withdrawal cap may give some relief to individual borrowers, to institutional depositors – like the gurdwaras, educational and charitable trusts – who make the bulk of the overall deposits in banks such as PMC, it means peanuts.

The RBI regulations were so hastily applied that the depositors are convinced that no party gave any thought to their well-being. "People are queuing up every day for Rs 25,000. The lines are two kilometres long outside some branches of PMC. They allow only two or three people inside at a time, so you have to wait for ages in queues. Why this system? This is another mistake," pointed out Guleria.

"Everyone has an ATM card. They can easily set a limit of Rs 25,000 at the ATMs or offer online services. They have to think of us. They have to organise systems. They have money to hire bouncers to stand outside for the protection of their staff, but they spare such little thought for us," he added.

Harbans Singh, another account holder, said, "We went to the RBI on Sunday too. Now, this is our full-time job, to protest against this injustice."

"While protesting, the security persons of the RBI told us that their money is also stuck in PMC Bank because of this scam. Personal savings of RBI staffs are there. Does the RBI not care?" he asked.

No Insurance, No Assurance

Until now, the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures depositors up to a maximum of Rs 1 lakh for both interest and principal, in case a bank liquidates, or its licence is cancelled/revoked, or it is merged with another bank. However, now as the PMC Bank faces a crisis, the question of higher insurance for depositors is being raised.

According to an SBI report too, the deposit cover should be doubled and raised to Rs 2 lakh for term deposits.

Soumya Kanti Ghosh, SBI's group chief economist, said in the report: "The current upper limit of Rs 1 lakh per depositor, we believe, has outlived its shelf life and there is a need to revisit it. Further, over the years, the composition of the Bank deposits has undergone massive changes in India. In this backdrop, the DICGC coverage should be revised and bi-furcated into 2 categories: 1) Desirable coverage of at least Rs 1 lakh for SB deposits (around 90% of the total accounts), and 2) desirable coverage of at least Rs 2 lakh for Term Deposits (around 70% of the total accounts)."

If implemented, this change will give depositors some assurance in future. But for now, PMC depositors are staring at uncertainty, with no assurance coming in from any quarters. They have already written to every possible politician as well as financial regulatory bodies, be it the prime minister, chief minister, the state finance minister, or the RBI, but they are still waiting to hear back.

"We just need one assurance that our money will be returned to us... Not one single person has any answers. One says that the bank will merge with the SBI, and the other says with HDFC," said a perturbed Harbans Singh. The RBI too hasn't given any definite reply to the account holders except a blanket assurance that the banking sector is safe after panic spread among people that cooperative banks aren't viable anymore.

Although no assurance is forthcoming, the Congress has wasted no time in starting the blame game, looking at the election season in Maharashtra.

Congress national spokesperson Gourav Vallabh has alleged that the BJP has strong links with the scam because about 12 directors on the lending board allegedly have a connection with the party. Priyanka Gandhi too was quick to blame the ruling party.

"The PMC bank scam is the handiwork of powerful people. There have also been reports of many of these powerful people being connected with the BJP," she tweeted.

The fact that there was a nexus between politicians and PMC Bank management is a strong probability. However, who these politicians are, and which party they are affiliated to, is still unclear. A few days back, the ED was led to 'posh houses' that were gifted to politicians by the top management of PMC Bank. But the agency remained tight-lipped about the identities of those politicians.

What is the Way Forward?

In a recent press conference, Reserve Bank of India governor Shaktikanta Das said, "Every such incident is an experience and based on this we will take a fresh regulatory view." Experts believe that in order to ensure smooth functioning of cooperative banks, dual regulations should stop, and the RBI should have sole authority.

Vishwas Utagi, on the other hand, suggests, that much like the case of Aarey Colony, where the court took a suo moto cognizance, maybe in PMC fraud too, which has become a national issue, the Court can step in to plug loopholes in RBI regulations.

The biggest uncertainty moving forward is for the depositors, and whether they would get back their savings. From threats of mass suicides, to protest rallies and writing letters: they have tried it all. Yet, even now, they have little clarity on the current situation. Experts, however, are hopeful that depositors' money will not sink.

Sandeep Parekh, the managing partner at Finsec Law Advisors, said, "Depositors almost always get their money back, at least the smaller depositors anyway... these banks are highly leveraged institutions, the government and the RBI don't want them to fail.”


Produced by — Fazil Khan
Lead Illustration — Mir Suhail