Former Punjab and Maharashtra Co-operative Bank (PMC) Managing Director Joy Thomas has admitted to hoodwinking the auditors, bank’s board and the RBI for many years by concealing the default on loans to the tune of Rs. 6,500 crore taken by real estate firm Housing Development and Infrastructure Ltd (HDIL).
In a letter addressed to the Reserve Bank of India (RBI), Thomas has also explained the circumstances in which he took such decisions, besides taking full responsibility for his actions. He said that the bank is “still very optimistic on the repayment plan of the HDIL group”. He also presented a “roadmap” for recovering part of its dues and bringing the things back on the track.
According to Thomas, he decided to conceal the information as disclosing it would have resulted in loss of reputation for the bank as well as for HDIL, which gave the majority of business to the bank, and had maintained a good track record of servicing their loans since 1990s.
Declaring the loans availed by HDIL – the firm started defaulting after it suffered a series of setbacks in the business -- as NPAs would have caused further loss to the bank as it could no longer earn interest from those accounts.
“Some of the large accounts were not reported to RBI because of fear of reputational risk. The size of the bank in 2011 was around 57 branches with deposits of Rs 2,824 crore and advances of Rs 2,000 crore. The exposure to HDIL group then was Rs 1,026 crore,” Thomas wrote in the letter dated September 21, 2019.
“Further, had we classified them as non-performing assets (NPAs), we would have to stop charging interest on these accounts and we could have mad elosses. The growth path of the bank would have got hampered. The HDIL group always promised to clear the dues and also gave adequate security to back their loans,” he added.
The PMC Bank’s relationship with HDIL started in 1986-87 when the bank had come on the brink of closure due to some “unlawful deeds of some of the borrowers”. At that time, Rakesh Wadhawan (present director of HDIL) and many other companies run by the Dewan family came to the rescue of the bank. They infused capital and saved the bank, according to Thomas.
Again, in 2004, Rakesh’s elder brother Rajesh Wadhawan deposited more than Rs 100 crore to help the bank tide over the liquidity crunch. After that HDIL started banking with PMC and more than 60 per cent transactions of the bank were from this group, he said.
After HDIL became a listed company in 2007, it cleared all the dues of PMC and moved on to other banks as its requirements of the capital had become manifold.
“The Bank (PMC) approached and requested HDIL to continue banking with it as it had started impacting the profitability of the bank as a huge portion of advances were repaid by the company. So, HDIL again started their operations with our bank after 5-6 months,” the letter read.
Currently under suspension, Thomas he also has been named in the FIR registered in the case. The RBI also put sanctions on the withdrawal of money from the bank to just Rs 1,000 per customer for the next six months, sending the small account holders into tizzy. The limit was raised to Rs. 10,000 but angry customers have continued to protest.
Between 2011 and 2013, the infrastructure developer suffered a series of setbacks as their projects and started facing liquidity crunch and started defaulting on “all dues of all banks”.
Thomas further explained: “As the loans outstanding were huge and if these were classified as NPA it would have affected the profitability of the bank and the bank would have faced regulatory action from RBI also…We continued to report all accounts as standard accounts. Though some of the accounts were not performing well, it was not brought to the notice of the notice of the Board. The subsequent overdues of various loans were also not reported to the Board.”
“Since the bank was growing, the statutory auditors, due to their time constraints, were checking only the incremental advances and not the entire operations in all the accounts. They scrutinised the accounts which were shown by us. The stressed legacy accounts belonging to this group (HDIL) were replaced with dummy accounts to match the outstanding balances in the balance sheet. As the loans were mentioned as loans against deposits and were of lower amounts, they were never checked by the RBI,” he admitted.
Speaking to reporters last week, Thomas assured the bank’s customers that they would not lose their money.
"Whatever has happened is not a fraud. Nobody has run away with the money without providing security. It is a technical matter which could have been managed better,” he said.