PMC Bank Crisis - What You Need to Know
The PMC Bank Crisis, which came to light in September 2019, highlights the unethical business practices and poor corporate governance of the Indian banking system. In this learning video, we will understand the series of events that led to the collapse of the cooperative bank.
Founded in 1984, Punjab & Maharashtra Co-operative Bank Limited (PMC Bank) is a multi-state co-operative bank, registered under the Cooperative Societies Act and regulated by RBI. PMC Bank has 137 branches across India, with majority of it in Maharashtra. PMC Bank & HDIL had a long-standing relationship dating back to 1987, when Rakesh Wadhawan, Director of HDIL, rescued the bank from closure by pumping in Rs 13 lakhs. In 2004, HDIL deposited over Rs 100 cr to help the bank overcome a liquidity crunch. By 2007, HDIL got listed and cleared all its outstanding dues of PMC Bank and began approaching bigger banks for larger capital requirements. But PMC Bank requested HDIL to continue banking with them, as it would adversely affect the bank's profitability if they lost HDIL as a client. In 2011, PMC Bank had deposits of Rs 2,824 cr and advances of Rs 2,000 cr, out of which Rs 1,026 cr was lent to HDIL Group. Between 2011 to 2013, HDIL suffered a series of setbacks, severe liquidity problems and started defaulting on all bank loan payments. That's when the trouble started. As the loans outstanding to HDIL were huge and kept growing, PMC Bank did not classify it as NPAs, despite non payment, so as to maintain profitability levels while avoiding any regulatory scrutiny and action from RBI. PMC Bank had allegedly replaced 44 stressed loan accounts of HDIL with over 21000 fictitious accounts to conceal HDIL's repeated defaults. In September 2019, when the scam came to light, PMC Bank's loan book stood at Rs 8,383 cr, out of which HDIL's exposure alone was Rs 6,226 cr. As much as 74% of the bank's advances went to HDIL as against RBI's exposure norm of 15%. Hence, RBI imposed operational restrictions and withdrawal limits on PMC Bank. PMC Bank's management and promoters of HDIL had committed this fraud and hid it from auditors and RBI.
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