Too big maybe, just a matter of time.

A year after the collapse of Infrastructure Leasing and Financial Services Ltd (IL&FS), "Officials at Punjab & Maharashtra Co-operative (PMC) Bank admitted in an explosive letter that they had cooked their books to avoid recognizing bad loans to a major client -- trouble ridden real-estate developer Housing and Development and Infrastructure Ltd (HDIL)." Not only did the bank provide loans to HDIL despite having defaulted on repayment, it also provided a loan of Rs 965 million to the promoter of the company. According to the police, promoters of HDIL Rakesh Wadhawan and his son Sarang took loans from PMC bank by falsifying documents. "The PMC issue came to light when a whistle blower from the bank wrote to the Reserve Bank (RBI) about the bank's hidden exposure to the HDIL group." Over 75% of the bank's total loans went to HDIL. To hide that, "The bank management replaced 44 loan accounts with 21,049 dummy accounts, the police FIR says." The PMC Bank maybe tiny but this will create a severe lack of confidence and the RBI would do well to resolve the crisis expeditiously, wrote A Mukherjee. Perhaps to prevent a run on the bank, the RBI initially restricted withdrawals to Rs 1,000 per depositor but after an enormous outcry raised to Rs 10,000 and then to Rs 25,000. Withdrawal limit was then raised to Rs 40,000. A few people committed suicide and some died after heart attacks, apparently because they could not afford treatment. There are around 1500 urban cooperative banks where people often deposit their life savings because they offer slightly higher rates of interest. Last year IL&FS collapsed with debts of Rs 910 billion and a "debt-to-equity ratio of 18.7". To escape notice "IL&FS employed several serving and retired bureaucrats and also distributed largess such as jobs for their children", wrote G Haldea. In January Cobrapost alleged that promoters of Dewan Housing Finance Ltd (DHFL) had siphoned off Rs 310 billion. They are Kapil and Dheeraj Wadhawan, cousins of Sarang, of HDIL fame. The scam was "pulled off mainly by sanctioning and disbursing astronomical amounts in secured and unsecured loans to dubious shell companies, related to DHFL's own primary stakeholders". "Meanwhile, analysts have warned that the shadow banking crisis could mean a spike in bad loans for conventional banks, which fund the shadow banks." To compound the problem "The capital adequacy ratio (CAR), a metric that foretells a bank's ability to absorb losses using its own capital, is much lower for India than it is for most large economies, shows data from the International Monetary Fund (IMF)." Which means banks are lending money they do not have. With conventional banks unable to lend while weighed down by bad loans, worse than Pakistan and Botswana, the economy has been surviving on shadow bank lending. Hence, "China's shadow banking may be a lot bigger than India's, but India's is already too big to fail," wrote A Mukherjee. Not a question of if, but when.