Wadhawans and PMC – The Saga of a Corporate Quid Pro Quo.
As news reports of scams pour in one after the other, it is becoming clear that credit administration in India’s public sector banks is a near-sham. With the Punjab & Maharashtra Cooperative (PMC) Bank adding to another crisis in the banking sector in India, an economic fallout seems quite within our reach.
The 5 pager confession letter of the now suspended
MD of PMC Bank Joy Thomas shows how the 2 organizations helped each other
survive for over 3 decades. The roots of the PMC saga date back to 1986 when
the Wadhawans threw a life jacket for the drowning PMC Bank. The brothers’ duo
Rajesh and Rakesh Wadhawan infused a capital of 13 lakhs and bailed out the
bank of the negative net worth position. In another turn of events, during the
2004 cooperative banks’ crisis, the bank found itself trying hard to keep head
above water, as the customers panicked to withdraw their deposits. The
company’s liquidity position was deeply bruised with these moments of crisis.
This was the time when Mr. Rajesh Wadhawan, among others, infused more than Rs.
100 Crores to tide over the liquidity crunch. The family had become a major
customer of the bank with more than 70% share in the bank’s transactions.
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For HDIL & PMC winter arrived in
the year 2011-12 when HDIL had to face the challenges of changing government
policies, burnt its hands on some of its large projects and started defaulting.
HDIL had a share of more than 70% in the bank’s loan exposure a
whopping Rs. 6,226 Cr (apart from the outstanding interest of Rs.
2,260 Cr) and this was a well-kept secret from RBI for over a decade.
With HDILs back against the wall, Joy saw this opportunity as a time to repay the favors done
by the Wadhawans and orchestrated a well-planned fraud to siphon off thousands
of crores and forward the same via multiple routes to HDIL. Various dubious
transactions in the bank were kept hidden since 2008 and the accounts were
managed in a way that neither the statutory auditors nor the periodical
scrutiny by the RBI could catch the wrongdoings at the bank.
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Joy had a free hand when it came to
sanctioning loans to HDIL and also allowing overdraws from the company’s
accounts. The 44 loan accounts of HDIL and its group companies were fragmented
into 21,000 fictitious loan accounts by tampering with bank software to camouflage
the extent of outstanding balances. These masked accounts were created merely
as a means to escape the radar of RBI, no trace of which could be found in the
CBS. Little did he know that he was formulating a recipe for disaster.
Loans were forwarded in smaller
amounts to these fictitious accounts which were either fake entities or those
controlled by the Wadhawans. One of the modus operandis adopted by Joy was
to debit the amounts from the accounts of the HDIL holding companies, the cash
withdrawn was sent through “hawala channels” to a Dubai resident, identified by
the police as Mehta, who sent the money back to PMC as deposits.
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With a crashed real estate sector, defaults at an all time high, fall in employment levels, slowing GDP rates, crash in the investment markets and credit agencies like NBFCs, etc government intervention in the task of accelerating economic growth is the need of the hour. But this is not possible without finding a solution to the problems that confront the banking sector. India needs a safe and efficient banking system to service the needs of a growing economy. The banking sector is vital for the functioning of any modern economy and any crisis in the banking system has spillover effects on the economy which can lead to an economic crisis. There is ample scope for improving performance within the framework of public ownership. What is needed is a determined focus on the part of the government.
Only time will tell.
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