Confession Letter Of PMC Bank’s Former MD: The Story Of A Decades-Long Relationship Gone Wrong

Confession Of PMC Bank’s Former MD: The Story Of A Decades-Long Relationship Gone Wrong

Customers stand outside the Punjab and Maharashtra Cooperative Bank at GTB Nagar in Mumbai. (Source: PTI)
Customers stand outside the Punjab and Maharashtra Cooperative Bank at GTB Nagar in Mumbai. (Source: PTI)

The relationship between businesses promoted by the Wadhawan family and Punjab and Maharashtra Cooperative Bank goes back to the mid-1980s. It started small and eventually grew to proportions that forced the Reserve Bank of India to supersede the bank’s management and board and impose deposit restrictions to prevent a run on the bank.

In his confession letter to the Reserve Bank of India, former managing director of PMC Bank Joy Thomas details the build-up in the banking relationship between the lender and the Wadhawan family, which eventually took the lender down. BloombergQuint has reviewed a copy of the letter, which is part of the First Information Report filed by the Economic Offenses Wing of the Mumbai Police on Monday.

Joy Thomas, Former MD of PMC Bank. (Source: PTI)
Joy Thomas, Former MD of PMC Bank. (Source: PTI)

Back To The 1980s

Thomas wrote that the Wadhawan family first helped out the bank in 1986.

The lender had seen its net worth being eroded within two years of starting operations in 1984. To help the bank out, late Rajesh Kumar Wadhawan, infused capital of Rs 13 lakh into the bank in 1986-87. The family also kept “a huge quantum of deposits for the revival of the bank,” the letter states.

This wasn’t the only time that the family came to the support of the bank.

According to Thomas’ letter, the bank was facing a run on deposits once again in 2004. Rajesh Kumar Wadhawan once again deposited Rs 100 crore to tide over the liquidity crunch being faced by the lender, the letter states.

In the period between 1986-87 and 2004, the family had also started borrowing from PMC Bank. The relationship started small and expanded as the company grew its business.

“Since the time Rakesh Kumar Wadhawan (Director of Housing Development & Infrastructure Ltd.) started banking with the bank and the performance of all his accounts was good. More than 60 percent transactions of the bank were from this group,” Thomas wrote in the confession letter. He added that from time to time, these accounts would be overdrawn but would get regularised in “due course of time.” In the process, “our bank used to charge 18-24 percent interest from their accounts and earned very good profit,” Thomas said.

Thomas’ lawyer Rakesh Singh declined to offer any comment on behalf of his client.

In a clarification sent to stock exchanges on Tuesday, HDIL said that it is unaware of any action against HDIL or its promoters. The statement further added that HDIL has availed of banking facilities from PMC Bank under normal course of business and with adequate security cover. All the books of the company are audited and reflect a true and fair picture, the statement said.

In relation to borrowings from PMC, we have already issued letters requesting an appointment with the administrator in-charge of the bank to put forth the true and correct picture, as also to discuss a strategy whereby the interest of all stakeholders and, in particular, PMC Bank and its depositors is protected. We shall also take all necessary steps and extend full cooperation with any and all agencies during this period.
HDIL Statement To Stock Exchanges

The Tables Turned

After a period when the Wadhawan family helped PMC Bank, the tables turned.

Thomas’ letter states that the group started to face liquidity pressures around the 2012-13 period. One factor behind this was the cancellation of the HDIL Group’s slum rehabilitation project near Mumbai airport, wrote Thomas. About this time, the group also started to default on its dues, he added.

“As the loan outstandings were huge and if these were classified as NPA, it would have affected the profitability of the bank and the bank would have faced regulatory action from the RBI also. Further this would have created reputational risk for the bank. As the HDIL Group had a good track record of clearing their dues with certain delays, we continued to report all the accounts as standard accounts,” Thomas wrote.

In his letter, Thomas stated that the board of the bank was not aware of these matters.

How Did It Escape Detection?

Thomas has confessed to the RBI that the total amount of loan given to the HDIL Group is close to Rs 6,500 crore or nearly 70 percent of the bank’s loan book, PTI first reported on Sunday. A person familiar with the matter confirmed the same to BloombergQuint.

How did such a large amount go unnoticed by the auditors and regulators?

According to Thomas, statutory auditors, due to their time constraints, were checking only the incremental advances and scrutinised accounts shown by the management.

Prior to 2015, the RBI inspectors checked only the top accounts. Loans to HDIL, which were across multiple entities, did not figure in these inspections, wrote Thomas. Starting 2017, when RBI inspectors started looking into the “advances master”, “legacy accounts belonging to this Group were replaced with dummy accounts to match the outstanding balances in the balance sheet,” Thomas wrote. “As these loans were mentioned as loans against deposits and were of lower amounts, they were never checked by the RBI,” he added.

Thomas closed his letter by saying that over time the concealment of the true state of accounts was becoming too much for the six employees who were in the know. This prompted them to approach the RBI. He added that “all decisions for granting overdrawals to these accounts were as per my instructions...”

Every year during the course of RBI inspection we undergo into a lot of stress due to concealment of information from RBI. It was worrying each of us. We six members of staff, who were fully aware of the situation decided to bring it to the notice of the highest authority in the Reserve Bank of India.
Confession Letter of Joy Thomas, Former PMC Bank MD

What Next?

Prompted by a complaint filed by the RBI-appointed administrator of the bank, the Economic Offences Wing of the Mumbai Police, on Monday, filed a First Information Report in the case. The FIR alleges that the bank’s top management deliberately hid details of the loans given to entities related to the HDIL Group and also the status of these loans. The preliminary estimate of loss to the bank has been pegged at Rs 4,355 crore in the FIR.

The RBI is conducting its own investigation into the bank’s affairs. For now, the bank remains under the regulator’s directions and deposit withdrawals are restricted.

This story has been modified to add a statement from HDIL issued to stock exchanges on Tuesday morning.