At PMC Bank, Spotlight on Lender’s Troubling Connections to Real Estate Developer Widens

With the RBI set to file charges against suspended MD Joy Thomas, more questions have arisen over chairman Waryam Singh’s connections to HDIL and the Wadhawans and whether the central bank wanted him removed in 2018.

New Delhi: In the last two days, the link between the crisis-hit Punjab and Maharashtra Cooperative Bank and beleaguered real estate developer HDIL (Housing Development Infrastructure Ltd) has become more controversial.

It started on Friday, with former PMC managing director Joy Thomas holding a bizarre press conference in which he admitted that what had been furiously speculated over the last week – the bank’s exposure to HDIL, which grew rapidly and improperly in the last seven years, had not been properly reported to the Reserve Bank of India (RBI).

Speaking to reporters, Thomas indicated that while HDIL had stopped servicing its debt properly in the last few years, there was adequate security to cover the loans.

He also denied allegations that the bank had been pressured or influenced into granting these loans.

HDIL is run by businessman Sarang Wadhawan and his father Rakesh Kumar Wadhawan, who are members of the wealthy and influential Wadhawan clan, one branch of which runs the crisis-hit Dewan Housing Finance.

“I am not going to tell you how it (HDIL’s exposure) got hidden; it is that they have not seen,” media reports quoted Thomas as saying.

When asked about the reason for under-reporting of these loans, Thomas noted that PMC Bank wanted to grow its advances fast and that reporting the exposure may have led to a run on the bank. “We thought that if there was a run on the bank then the depositors, employees will face a lot of problem,” he said.

According to the suspended PMC Bank MD, the exposure was not reported since 2012-13, and the lender’s management team came clean to the RBI ten days ago in a meeting with Rabi Mishra, the central bank’s executive director. Thomas claims that PMC’s management apprised Mishra of the situation and sought more time to regularise the account.

“We sought time for a resolution plan and the executive director had agreed that they will conduct a normal inspection, which was due. Mishra had told us that normally during inspection, banks get two months’ time till it carries on and we also thought we had time,” he added.

Also read: Is Our Dodgy Insurance Protection History to Blame For the Woeful Promise Made in the PMC Bank Case?

The next day, Thomas claims, the RBI’s inspecting officers came and collected all the information and on the evening of September 23, the central bank issued its restrictions, making the crisis public.

Strangely, the former PMC boss appeared miffed with the RBI, noting that the regulator could have managed the issue in a “better way” without causing “harm to the depositors”.

Former PMC Bank MD Joy Thomas. Photo: PTI

To top it off, Thomas saved what is potentially the most controversial piece of news for the end. PMC Bank apparently sanctioned a loan of Rs 96.5 crore to the HDIL Group so that it could repay loans that it had taken from Bank of India and avoid bankruptcy proceedings.

The Rs 96.5 crore loan was not sanctioned by the cooperative bank’s board of directors.

While not illegal, the practice of taking out new loans to repay old loans is frowned upon, as it often is used to mask loan default and in some cases even fraud. In recent times, it has become a serious red flag for the RBI and the auditing community.

On Saturday, news started filtering out that the RBI is all set to  file a criminal case against Thomas and potentially other senior PMC Bank officials on charges of fraud (misrepresenting the lender’s books) and understating the exposure to HDIL.

Central bank-appointed administrator J.B. Bhoria has confirmed that he is in the process of filing a complaint with the Economic Offence Wing of the Mumbai Police.

Board-level leak?

Meanwhile, PTI on Sunday evening reported a slightly different version of the events that led to the RBI cracking the whip on PMC Bank.

According to PTI, Thomas was forced to “confess” to the central bank, after a board member leaked the actual details of the cooperative lender’s balance sheet to the regulator.

In his letter, Thomas also allegedly admitted to the RBI that PMC Bank’s exposure to the bankrupt HDIL is a whopping Rs 6,500 crore – which is four times the limit that a bank is allowed to lend to a single account and slightly over 70% of the lender’s actual assets of Rs 8,000 crore.

PTI’s report, which quotes anonymous sources, also claims that Thomas’s letter to the RBI also puts the bank’s net NPA figures at anywhere between 60% to 70%, against the actual reported figure of 2.19% as of March, 31 2019.

How is it possible that this went undetected? It appears that the bank mislead auditors and the RBI by replacing HDIL’s legacy accounts with dummy accounts in order to make sure the balance-sheet didn’t raise any concerns when grossly under-reporting the real estate developer’s loans.

Waryam and the Wadhawans

Even as HDIL slowly starts to reveal itself as the primary source behind the cooperative lender’s woes, the spotlight has also started to shift to PMC Bank chairman S. Waryam Singh’s links to the bankrupt realty developer.

Until September 2017, Singh actually held a nearly 2% stake in HDIL. The 67-year-old businessmen joined the HDIL board in 2005 and quit in 2015, which is when he returned to the bank as chairman.

While Singh was a non-executive director at HDIL, corporate data shows he was listed as one of the promoters of the company and has had relations, including shareholding, with several other entities controlled by the members of the Wadhawan family who founded HDIL.

The late Rajesh Wadhawan, who was chairman of Dewan Housing Finance and Rakesh Wadhawan’s brother, has also served on the board of PMC Bank in the past.

Also read: How Should India Resolve the Fault Lines in its Shadow Banking System?

On Sunday night, another report put out by PTI alleged that the RBI actually knew of that PMC Bank’s irregular exposure to HDIL back in 2018 and wanted Waryam Singh to be removed.

“During the FY2018 annual inspection, the RBI had found that chairman Waryam Singh, who was on the board of HDIL, had been favouring the realtor by sanctioning loans without proper due diligence and much above the regulatory caps,” PTI quotes sources as saying.

According to the report, the RBI’s recommendation for Singh’s removal was sent to the Registrar of Cooperative Societies of Maharashtra, which has legal and administrative control over all cooperative banks in the state.

Singh, however, continued to remain the chairman until the bank was placed under administrative control by the RBI on September 24.

In the 2017-18 inspection, the RBI had also reportedly asked the bank to classify the entire HDIL accounts as NPAs. At that time, the bank had said the loans to the group was only ₹258 crore and the exposure was fully provided for with collaterals.

This picture, however, unraveled two weeks ago, leading to the central bank’s restrictions on the cooperative lender.