"The problems unfolding at PMC (Punjab and Maharashtra Co-operative) Bank is but the tip of the iceberg of larger, unresolved problems in India's banking sector," wrote Prof V Dahejia. The crisis came to light when RBI (Reserve Bank of India) administrator JS Mattha filed a complaint of default on loans of Rs 43.55 billion by one particular company. "The primary beneficiary to the losses suffered by the bank was the HDIL group of companies and bank officials in connivance with HDIL who were involved in the loans being offered and disbursement despite non-payments on various occasions." This is a recurring story. In this case "depositors' money was used to fund the lavish lifestyle of the father-son duo of Rakesh and Sarang Wadhawan -- the promoters of real estate firm Housing Development and Infrastructure Ltd (HDIL) who had borrowed heavily from PMC Bank". "There has been a well established precedence of companies using bank funds to shore up their equity. But the brazen manner in which the Wadhawans lived it up marks a turning point." The question is why this continued for so long when the RBI, as the regulator, regularly inspects books of banks. "In fact, the RBI officials who conducted inspection of PMC Bank prior to 2017, did not even bother to check details of stressed legacy account, reveals the confession from Joy Thomas, now-suspended managing director of PMC Bank." "The stressed legacy accounts belonging to this group (HDIL) 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 the RBI." Which means that PMC Bank officials put in a lot of labor to slice the loan into small slices to deceive the RBI. This happens because public sector banks "are used as piggy banks for well-connected politicians and others," wrote Dahejia. The Finance Minister recently announced forced loans to agriculture and small businesses to artificially boost the economy. The Mumbai Police's Economic Offences Wing (EOW) found that "most of the fictitious accounts created by the bank to hide the loans advanced towards the bankrupt realtor HDIL, belonged to dead account holders." In response to the scam the RBI placed a withdrawal limit of Rs 1,000 which was raised to Rs 10,000 in response to the outcry which followed and has been further raised to Rs 25,000. Seems very unfair that the Finance Minister can force banks to dish out loans without proper due diligence, while the RBI is preventing genuine depositors from withdrawing their own money. Bankers do not report frauds because of "reputational risks, interference of probe agencies, and the instinct of self-preservation". Former Governor of RBI Urjit Patel tightened rules regarding bad loans but "Unfortunately, RBI under his successor appears not to have stuck to the path laid out by Patel, but has hewn closer to the government's position of laxer regulation, especially under the Prompt Corrective Action (PCA) framework." When the government encourages loot why blame anyone who takes up the offer. Just make it open to all of us.
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