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.

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.

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.

 

   

One prominent character in the PMC scam is the bank’s Chairman Waryam Singh. He was on the board of HDIL between 2006 to 2015 and then joined PMC Bank as director and was later elected as chairman of the bank. Investigations show that Singh owns multiple properties, with one being a 69-acre land worth Rs. 2,500 Cr in Juhu, among many others. Singh and Joy worked in tandem to perpetrate this fraud and was a part of the events that transpired within the bank and the consequent non-disclosure of accounts to the banking regulator. But, like Joy, he too developed cold feet with concerns about the reputation of both the organizations and never blew the cover off these wrongdoings.



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.

This brings us to a lot of questions. Are we in the midst of an economic crisis? How will this domino effect stop? Is the Core Banking System a sham? Is the banking sector still safe, secure and transparent to serve the needs of this developing nation? How far is the government’s reach in averting the impending tragedy? How exposed is the common man to the flawed economy? Is there any coming out of this vicious cycle that the economy has entered?

Only time will tell.