Advocate, Managing Partner – Abhay Nevagi and Associates
On 24th September, 2019, the Reserve Bank of India imposed strict restrictions on PMC1 after finding certain irregularities in the bank. These irregularities went unnoticed in the inspections conducted by RBI, the Apex bank vested with powers for monitoring the banking system of the country. This raises a subsequent question regarding the responsibility of RBI in such scenarios.
The PMC Bank debacle is the latest and yet another proof that the Reserve Bank of India has miserably failed in fulfilling its legal mandate. The Reserve Bank of India Act of 1934 vested extensive powers in the RBI for effective monitoring of the entire banking sector. The Banking Regulation Act, 1949 places all banks under the direct governance of the RBI. It is mandatory for all scheduled banks to abide by the regulatory norms laid down by the RBI which has the express authority to safeguard public interest.
From 1966 co-operative banks have also come under the purview of the Act. There is a dedicated Department of Co-operative Bank Supervision (DCBS)2 within the RBI that is entrusted with the role of carrying out regular on-site and off-site inspections of Urban Co-operative banks (UCBs) to ensure compliance with RBI directives and regulations, through its nineteen regional offices. UCBs are required to file various kinds of returns with the DCBS that helps the RBI maintain a regular surveillance of the functioning and the financial position of the bank. Based on these periodical reports the RBI can initiate supervisory actions, take punitive measures and impose penalties, as and when necessary. In general, it is the direct responsibility of the RBI to streamline and closely monitor the operations of the UCBs to protect the interests of the depositors.
After the Ketan Parekh securities scam unfolded in March 2001, involving what was then the largest UCB in Gujarat, the Madhavpura Mercantile Co-operative Bank (MMCB)3, the RBI was forced to tighten its surveillance of UCBs in a big way by issuing several circulars. After investigations and efforts of restructuring MMCB that went on for eleven years, in 2012, the bank finally went into liquidation. Depositors received only a fraction of their monies. Other banks and the government itself suffered massive losses. Over the last two decades the number of such instances of co-operative banks going defunct due to mismanagement has grown frighteningly large and yet, to the grave misfortune of ordinary citizens the RBI is still not waking up.
Even after hundreds of co-operative banks have become bankrupt and several lakh common investors have lost their hard-earned savings during the last few decades, the banking surveillance system still remains unresponsive. This is not just the failure of the RBI in fulfilling its legal mandate but it is also a failure of the Central Government. The RBI is controlled by the Central Government. Frauds occurring in the banking sector ultimately have a cascading impact on the entire monetary system of the country. Hence the Central Government is equally responsible for this sorry state of affairs. The Central Vigilance Commission (CVC) tried to identify the reasons behind banking sector scams in its study of a hundred banking frauds that had occurred up to 31st March 20174. Still, the RBI missed the red flags in the PMC Bank case. When the Rs. 4355 crore scam came to light in September 20195, it was not because of the rigorous vigilance system of the RBI but because the bank’s management could no longer endure the stress of keeping it secret and decided to confide in top RBI authorities.
The letter submitted by the Managing Director of the PMC Bank on 21st September 2019 to the RBI is indirectly a “certificate” given to the RBI for its own negligence6. This letter indicates that fraudulent activities were on at the bank since 2008 or from even before that, from as early as 1986. When you read this letter carefully it appears that from 1986-87 the bank was run like a private bank. Wadhwan Group’s close relations with the managing body of the bank played a major role in the scam building up to a monstrous scale gradually and it is surprising that the RBI never hauled up the bank for several norms that were being flouted. The letter mentions that due to “their time constraints” the statutory auditors were carrying out a superficial checking of only “the top few borrower accounts” until 2015. When in 2017 the RBI started asking for greater details in its inspection reports, 21000 dummy accounts, which were never even created in the Core Banking System, were falsely shown to cover up outstanding dues of stressed legacy accounts. This massive fraud was never detected. In other words, the inspections carried out by the Apex bank were themselves a sham. According to the PMC bank website, the RBI seems to have gone further and highly commended the functioning of the bank and held it up as a role model for other banks.
Unfortunately, the Supreme Court7 has ruled in 2004 that the RBI cannot be held liable to compensate for the losses that may have been incurred due to its negligence. Today in 2019, that ruling needs to be revisited.
The aftermath is a tough situation for thousands upon thousands of small account-holders and depositors of PMC bank. The Sikh community has entrusted their funds in a large measure with this bank out of their feelings for Punjab. The bank has over Rs. 110008 crores in deposits and the depositors include lakhs of ordinary citizens, small businessmen, gurudwaras, educational institutions and housing societies. Many of them were banking solely with PMC. Hence urgent steps need to be taken by the RBI and by the Central Government to reconstruct the bank or to take some decision regarding it, so that the small depositors are rescued immediately. No measures seem to have been taken in this direction during the last fortnight.
Whenever co-operative banks have gone defunct, barring a few stray exceptions of successful restructuring, most of the depositors have lost their entire amounts. When so many co-operative banks are going bankrupt, the RBI and the Central Government have still not worked out any definitive policy decision about merging ailing co-operative banks with nationalized or private banks. Several years ago a well-known credit society from southern Maharashtra called Bhudargad Urban Co-operative went into liquidity9. The petitions have been heard at the High Court for over a hundred times during the course of the last fifteen years but the process of retrieving depositors’ money is still incomplete. Several banks and credit societies have collapsed, their properties have been auctioned at low prices, people on the boards of directors have been put in jails or they have died but depositors are still waiting for their money to be returned. So much so that even insurance amounts of up to one lakh, for deposits insured by the Deposit Insurance Credit and Guarantee Corporation (DICGC)10, which is a part of the RBI itself, have not been released due to administrative lethargy.
There are many useful precedents to look at. In 2005, the RBI had entrusted a similarly stranded Ganesh Bank of Kurundwad11 to Federal Bank12 even when 97% of the banks consumers had opposed the decision. Suvarna Co-operative Bank from Pune was merged with Indian Overseas Bank in 2009. If the RBI can merge Bank of Rajasthan and Sangli Bank in ICICI, if it can merge weaker nationalised banks with strong nationalised banks it can certainly act decisively and work towards restructuring or merger of PMC Bank. It is certainly possible for the RBI to appoint a committee immediately, as in the case of IL&FS and start the process of reviving the bank.
PMC is a bank with a number of positives that work in its — a multi-state network of 137 perfectly functional branches with decent computer operating systems, an impressive client base of depositors and account holders, a wide network of ATM centers and the capacity to offer services 24×7. Therefore if the RBI takes stock of these factors methodically, gets an evaluation made and pitches the case of the bank in professional terms, even private banks may show an interest in taking it over. The sentiments, solidarity and support of the Sikh community will be an added strength for PMC to be able to tide over these rough times. However, if the RBI continues to demonstrate its inefficiency and apathy the anger and the unrest among depositors will definitely explode one day. Perhaps one can hope that only a judicial struggle will force the RBI to wake up.
- RBI (vide Directive dated September 23, 2019) placed PMC under Directions according to which depositors would be allowed to only withdraw a sum not exceeding ₹ 1,000/- of the total balance in every savings bank account or current account. The limit was revised on October 14,2019 to Rs. 40,000/-https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=48218 Accessed on 14/10/2019, 3:30PM)
- RBI circular no. 001/12.17.001/2015-16 https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=10408&fn=2755&Mode=0 (Accessed on 14/10/2019, 3:30PM)
- Madhavpura Mercantile Cooperative Bank (MMCB) was a Gujarat-based interstate cooperative bank that became defunct and lost its license after it was unable to pay back the money it owed public depositors. Reserve Bank of India cancelled its license in June 2012 under section 22 of the Banking regulations Act, 1949
- Analysis of top 100 Bank Frauds, Central Vigilance Commission, New Delhi http://www.cvc.nic.in/sites/default/files/new1111.pdf (Accessed on 14/10/2019, 4:00PM)
- https://indianexpress.com/article/business/banking-and-finance/pmc-bank-fraud-mumbai-police-files-fir-pegs-losses-at-rs-4355-crore/ (Accessed on 14/10/2019, 6:00PM
- https://indianexpress.com/article/business/banking-and-finance/pmc-bank-fraud-case-several-red-flags-fluttered-right-under-rbis-nose-6061451/ (Accessed on 14/10/2019, 6:00PM)
- Pramod Malhotra And Ors vs Union Of India And Ors 2004(3)SCC415
- https://www.news18.com/news/business/mumbai-police-files-case-against-former-pmc-bank-officials-for-hiding-crisis-info-from-rbi-sit-formed-2328871.html (Accessed on 14/10/2019, 6:00PM)
- https://www.business-standard.com/article/finance/kolhapur-credit-society-in-throes-of-financial-crisis-102080301058_1.html (Accessed on 14/10/2019, 5:45PM)
- Deposit Insurance and Credit Guarantee Corporation (DICGC) was launched on 15th July 1978. DICGC is one of the subsidiaries of the Reserve Bank of India. This corporation was derived by combining two corporations namely, Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India Limited (CGCI). DICGC aims to provide insurance for deposits and to guarantee credit facilities to the customers of banks. The role of DICGC helps establish trust in the banking function amongst customers and depositors in India.
- Ganesh Bank Of Kurundwad Ltd is a Private incorporated on 26 January 1949. It is classified as Non-govt company and is registered at Registrar of Companies, Pune.
- RBI announces amalgamation scheme to Federal Bank https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=14135 (Accessed on 14/10/2019, 5:45PM)