Finance Ministry insiders claim the sudden crisis enveloping the PMCB depositors has forced the government to put the state-owned banks, cooperative banks and also private banks on high alert.
NEW DELHI: An old guideline freshly stamped by officials of banks on passbooks of its customers has rattled hundreds of thousands of account holders. It says in as many as four lines that the bank will not be responsible for the loss of your cash in the event of a fraud and that you will get only Rs 100,000.
Those who have seen the message are shocked, the rest still live in hope that the Reserve Bank of India (RBI) will bail out the state-owned banks if there is an eventuality. No one knows what will be the fate of the private banks which have also started stamping the message on the passbooks of its customers for the last one month.
It is reliably learnt that the move follows the recent dustup at the scam that surfaced at the Punjab & Maharashtra Co-operative Bank (PMCB) where hundreds of thousands of depositors have been left in the lurch by a scam. The bank, which had Rs 11,617 crore in deposits as on 31 March 2019, had violated RBI norms to lend heavily to one client-real-estate firm Housing Development and Infrastructure Limited (HDIL), which itself is facing bankruptcy proceedings. The RBI has imposed lending restrictions on PMCB, at Rs 10,000 per customer for six months, the move creating panic among depositors. Distraught authorities have now booked the former chiefs of the bank and the promoters of HDIL for cheating, issued lookout notices.
By the end of this year, all banks will have this mandatory stamp on their customers’ passbooks.
“The rules for customers were always there in place. We felt there is an urgent need to reinforce it,” a senior official of the banking division of the Ministry of Finance told this reporter. He said it was important for the government to highlight the rules and regulations of banking in India where vaults in banks are granted with conditions of no responsibility.
“The customers presume nothing will go wrong with such big institutions. They feel the state-owned banks are covered by the RBI and the private banks are too big to fail. But that’s a misconception,” the official further said.
The official said all banks will soon put this alert on their system to inform their clients, mainly standard depositors. India has an estimated 50 million bank account holders. The total savings deposits with commercial banks, including foreign ones, stood at Rs 41 lakh crore in 2018-19.
Finance Ministry insiders claim the sudden crisis enveloping the PMCB depositors has forced the government to put the state-owned banks, cooperative banks and also private banks on high alert. “The politician-banker-corporate nexus is a malaise that needs to end. It has hurt Indian banking for long. The RBI is worried about the clout politicians have in large cooperative banks. The politicians wield immense clout in order to please corporate honchos and take favours in return. Today, state-owned banks have run into bad loans worth over Rs 8 lakh crore, and much of this can be attributed to this nexus,” the official further said.
What is alarming is the fact that cooperative banks remain largely out of the public eye as most of them are unlisted. As per data available with RBI, India had 1,551 urban cooperative banks in 2018, down from 1,926 in 2004. What is alarming is the fact that such banks routinely start on a small capital base, as low as Rs 25 lakh, making them all the more vulnerable. Consider the case of PMCB, which had an exposure of Rs 6,500 crore to HDIL, four times the mandatory cap fixed by RBI, amounting to over 70% of the bank’s entire assets. Worse, former PMCB chairman Waryam Singh also held a stake of 1.9% in HDIL till September 2017 and was a non-executive director of the real-estate company in 2005-15. And it was around the time the bank was sanctioning loans to HDIL. The official said it was clear that the bank’s auditors and also the RBI were caught napping. In 2015, an RBI panel under R. Gandhi, former RBI deputy governor, proposed several reforms for the cooperative banking sector. Gandhi stressed on the need for an umbrella organisation for cooperative banks and instituting a board of management over and above the board of directors. He also wanted changes in the Banking Regulation Act to give more powers to the RBI over cooperative banks, empowering the apex bank to wind up and liquidate banks independent of other regulators under the cooperative societies’ laws, and allowing urban cooperative banks to be converted into small finance banks under the RBI’s supervision. The suggestions are still gathering dust in files.
“PMCB used 21,049 dummy accounts to hide NPAs, which is daylight robbery,” says former SBI chairperson Arundhati Bhattacharya. Speaking recently at a conference in Mumbai, she said a far stringent watch is required and the mandatory annual inspection needs to be scrapped because it is not enough. “The main concern is that of the depositors, they need to get their cash back quickly. But that does not happen because the process is extremely slow. In the case of the Madhavpura Mercantile Cooperative Bank scam in 2001, some 45,000 depositors had to wait till last year to get an assurance that they will get their money back.”
Bhattacharya should know. The RBI says an unprecedented 6,801 frauds, totalling Rs 71,500 crore, were detected in FY19. That amounts to a 15% rise in volume and 80% climb in value from last year. This rise eclipses the FY18 banking fraud at Punjab National Bank (PNB), the most infamous in India’s history when it was revealed diamond merchants Nirav Modi and Mehul Choksi allegedly siphoned off Rs 13,000 crore. For the record, out of these frauds, 73% were large ticket corporate frauds worth over Rs 100 crore. PSU banks originated 92% of those fraudulent loans. Many of these frauds took place at least five years ago, and some over a decade ago. What is shocking is that the average time for a fraud over Rs 100 crore to be detected was 55 months.
Bhattacharya, now chairperson, SWIFT, says bulk of the frauds getting reported are credit-related, and they are not black and white like operational frauds. She said it is difficult to follow the money trail once the cash crosses borders through India’s big, infamous hawala system.
The official said there continues to be a huge problem of underreporting stems due to a reluctance to engage with the prescribed system of due diligence. And this very reluctance stems from reputational risks, interference of probe agencies, and the instinct of self-preservation. Sometimes, even failure by the third-party ecosystem, such as credit rating agencies or auditors to highlight risks is also to blame.
Wrote former RBI Governor Raghuram Rajan in his 22-page note to Parliament on NPAs in September 2018: “Frauds are different from normal NPAs in that the loss is because of a patently illegal action, by either the borrower or the banker.” Rajan knew the Indian system. He said without any precedent of recovery or successful prosecution of alleged fraudsters, the classification of an account as fraud will mean nothing in a billion-plus nation. “Unfortunately, the system has been singularly ineffective in bringing even a single high-profile fraudster to book. As a result, fraud is not discouraged. The investigative agencies blame the banks for labelling frauds much after the fraud has actually taken place. The bankers are slow because they know that once they call a transaction as fraud, they will be subject to harassment by the investigative agencies without substantial progress in catching the crooks,” Rajan said.
Since the AQR to check the financial health of its banks, more than Rs 10 lakh crore, or roughly 25% of the loans to the corporate sector, were declared toxic in 2017, which prompted the RBI to issue its now famous 12 February 2019 circular on restructuring of bad loans.
The stamping process is continuing at a fast pace in the banks.