Bad Loans and Regulatory Lapses: What Led to the PMC Bank Crisis

PMC Bank’s NPAs shot up from Rs 148 crore in March 2018 to Rs 315.24 crore in March 2019.

Depositors at a PMC Bank branch in Mumbai.

(Photo: PTI)

The Reserve Bank of India’s (RBI) curbs on the Punjab and Maharashtra Co-operative (PMC) Bank imposed earlier this week sent shockwaves across the banking sector, as the restrictions came without any feelers.

However, a closer look at the goings on in the bank reveal that the development was in the offing and the faultlines lay at more than one level.

Here’s a lowdown on how the crisis came to be and who might be held responsible:

Bad Loans and Worse Vigil

PMC Bank’s earnings reports show that the lender’s gross non-performing assets (NPAs) shot up from Rs 148 crore in March 2018 to Rs 315.24 crore in March 2019.

The initial reports, after the RBI imposed the restrictions, also pointed towards a sudden deterioration in the bank’s books.

However, the more shocking aspect is what might have caused the spurt in non-performing assets (NPAs) of the banks in the first place.

WHAT CAUSED THE BAD LOAN SPIKE?

In August this year, PMC Bank extended a loan worth Rs 96.50 crore to real estate firm Housing Development & Infrastructure Limited (HDIL), Indian Express reported, quoting ‘receipt of two PMC Bank pay-orders’.

The befuddling aspect is that the loan was disbursed despite the fact that HDIL was already facing insolvency proceedings at the NCLT, after it missed repayment of loans worth Rs 522 crore to Bank of India.

HOW DID THE LOAN COME THROUGH THEN?

According to a Business Standard report, the RBI has classified the loan as 'stressed' even as PMC Bank's auditors termed it as 'standard'.

A more serious concern, however, is a potential regulation lapse which allowed S Waryam Singh to be appointed as chairman of the bank, despite him being one of the non-executive directors of HDIL, just before he took over PMC’s reins.

Singh’s involvement in both PMC Bank and HDIL indicates towards a possible case of conflict of interest and the RBI is currently investigating the link between the company and PMC Bank.

Is the Crisis Deeper?

The Indian Express report quotes banking sector sources that PMC Bank's exposure towards real estate, construction business and housing is likely to be in the range of Rs 1,500- 2,500 crore.

The figure is significant as the bank, in its annual report for the financial year 2018-19, pegged the exposure towards the sector at Rs 984.69 crore. Thus, at the end of the ongoing RBI investigation, more loans may turn sour.

Moreover, the industry is now apprehending a contagion effect in other co-operative banks.