The PMC Bank Scam (2019): Anatomy of India’s Cooperative Banking Crisis

In September 2019, the Punjab and Maharashtra Co-operative Bank (PMC Bank) was at the center of the largest urban cooperative banking fraud. The PMC Bank fraud burned the trust of the Indian banking sector, especially urban cooperative banks, a signal of the ultimate failures of corporate governance, regulatory accountability, and internal controls defects in the world of cooperative banking.

PMC Bank incorporated in 1984 with the aim to be a multi-state scheduled urban cooperative bank, serving 137 branches distributed across the whole of Maharashtra and in other states including Delhi, Goa, Gujarat, Karnataka, Madhya Pradesh and Andhra Pradesh. It won the ‘Best Bank Award’ from various State cooperative banking associations for best customer service and operational efficiency.

Unveiling the Scam

In September 2019, a whistleblower notified the Reserve Bank of India (RBI) about the fraud being committed by the management of PMC Bank by setting up phony accounts to conceal non-performing assets. The frauds were mostly committed and done to conceal loans given to the real estate company Housing Development and Infrastructure Limited (HDIL).

Key findings included:​

Loan Exposure:PMC bank had an overall exposure and extended loans to HDIL is around Rs. 6,500 crore, which represents approximately 73% of its total loan book of 8,880 crore.

Regulatory Breach:The bank contravened the RBI's exposure limit of a single borrower which disallows cooperative banks from lending more than 15% of their capital funds to a single borrower.

Concealment Tactics: Management manipulated the banking application software of the bank to conceal exposure of the bank to HDIL. An estimated figure around 21,000 fictitious accounts were created to hide the NPA’s.

Regulatory Response and Legal Actions

​

Upon discovery, RBI had imposed operational and transactional restrictions on PMC Bank under Section 35A of the Banking Regulation Act, 1949 for 6 months. Hence, the bank account holders could not make any withdrawals more than ₹1,000 from their accounts during this period. On 26 September 2019, a relaxation was observed in this regard, and a total of ₹10,000 can be withdrawn by the customers. The limit later increased to ₹1 Lakh. Joy Thomas the man behind the game (also known as Junaid Khan and serving as the MD of the bank, was suspended after acknowledging and admitted the exposure the overall experienced the aura of the bank to the troubled and in difficulty distressed realty company HDIL and also stated  and conceded that the company had been violating and breaching the rules and regulations set by RBI for 5–6 years.

Subsequent legal actions included:​

Arrests:  Key individuals arrested included Joy Thomas (Managing Director of PMC Bank), Rakesh and Sarang Wadhawan (Chairman and Managing Director of HDIL, respectively), and several former directors of PMC Bank.

Judicial Proceedings: In order to conclude this, the High Court appointed a three-members for the administrative high committee to oversee the sale of the assets of HDIL in order to pay the depositors of PMC Bank. HDIL along with its promoters Rakesh and Sarang Wadhawan, and  along with a few former officials are accused of committing fraud on PMC Bank. Public interest litigation filed in the high court that aims to seek the setting up of a committee to speed up the auction of HDIL's assets to pay depositors, has claimed that the realty firm or real estate firm owed ₹4,635 crore to the bank. According to the court verdict, there is condition required and imposed that if the proceeds from the sale and asset sales were insufficient and did not generate enough to pay or settle the dues implied, the committee would identify and dispose of the properties and liquidate other Wadhawans linked companies that were mortgaged or pledged with the PMC Bank.

Impact on Stakeholders

The scam had profound repercussions:​

Depositors: Thousands of depositors faced financial challenges as withdrawal restrictions and risk of losing deposits exceeding 1 lakh caused public protest and court cases.

Banking Sector: The incident damaged trust in cooperative banks. This has led to a surge in regulatory oversight to check cooperative banks.

Regulatory Oversight:  The RBI got flack for not detecting the fraud earlier, and has admitted that the supervisory framework needs to be strengthened.

Resolution and Merger

Similarly, to safeguard or in order to protect the interests of depositors and restore the confidence in the banking system, RBI had permissibly approved amalgamation of PMC Bank with the Unity Small Finance Bank Ltd. On January 25, 2022, ensured that all branches of PMC Bank were to be merged under the Unity banner, so as to restore normalcy and confidence among the stakeholders.

Conclusion

But even more importantly, what the PMC Bank scam has done is to raise serious issues of public trust, with deep weaknesses in India’s cooperative banking eco-system, from lax oversight, to technical manipulation , from corporate greed to delays in regulatory submission.

For thousands of middle-class Indians, it wasn’t a question of numbers on a spreadsheet -- it was about losing their retirement, education funds, or medical deposits -- and the damage it has done has continued to shape the way small banks operate and how depositors view the system today.​