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“With great power comes great responsibility” should be replaced with what is more apparent, “With great power comes greater scams”. Latter is the mantra followed in India which is proved via stories of politicians getting named in large scams and then using their power and authority to sway the decisions of government bodies for their own cynical needs. The cycle repeats itself tirelessly.

This is not the first time a major scam has been unearthed in a cooperative bank leaving the bank and its depositors in complete shambles. Name it misgovernance or blindsight of the management, borrowing from one bank to repay another bank is a common practice in India, be it the Wadhawan group or Ruchi Soya. Fraud to the tune of Rs.6500 crores was found in the books of PMC Bank. All of which were loans extended to only a single borrower, i.e., the HDIL group, and it was way beyond the statutory limit set by the RBI for lending to a single group, yet the management kept quiet until they were thrown under the bus by their CEO in a confessional letter to the RBI.

Walking through the past

Relations between the Wadhawan group and PMC bank prevailed since the 80's. The group had saved the bank multiple times from financial collapse by infusing capital and keeping the majority of their deposits with the bank, aiding them to maintain liquidity and create fresh deposits. But every story has an end.

As HDIL’s business started to grow and their capital requirement grew multifold, the group started to transact with other large banks to meet their needs and this hindered the profitability of PMC bank as the majority of their revenue could be attributed to the transactions happening in the group’s accounts. Hence, upon request, the group started banking with PMC again after a short span of time.

Things went awry when a few of the projects undertaken by HDIL were shelved and due to the resultant liquidity crunch, the bank started defaulting on all the loans it had taken from different banks. Initially, due to the past repayment record of the group, the bank continued to treat the loan as a standard loan. It was later when the loan amount snowballed to more than 73% of the bank’s total exposure, the issue came into the limelight and a strict moratorium was put upon the bank. Initially barring all the depositors to withdraw more than Rs 1000, now the withdrawal limit has been capped to Rs 1,00,000 per depositor until further directions. In addition to the FIR filed, the Board of Directors were suspended and the Wadhawan’s arrested. The ED even seized movable and immovable assets worth about Rs 4000 crore in connection to the case.

What lies ahead?

The news of RBI approving the bid of Centrum Financial Services (CFS) and BharatPe to jointly take over the crisis-driven bank has provided some respite to the depositors. A sign of relief for the depositors came from the BharatPe group president as well, as he quoted, “One thing was clear in our discussion with RBI that interest of depositors is supreme.” he also added that they will aim at allowing the depositors to withdraw as much as possible.

Giving an in-principle nod to set up a small finance bank, though formerly reluctant, RBI has receded on to provide a lot of other statutory reliefs to the new entity to be jointly formed. CFS and BharatPe are set to infuse a total of Rs 500 crores each into the new entity when starting over and increase the capital up to Rs 3000 crores in due course. The joint venture is likely to form a good synergy with BharatPe, a fintech firm, having a strong footprint in the digital lending space and CFS, and NBFC with strong holdings and a good history in providing credit to MSMEs.

Though there are still a lot of roadblocks faced by the new owners before the SFB is set up. According to sections of the Banking Regulation Act, only mergers between banks are allowed and hence the SFB set needs to be made operational in the next 2-3 months to move ahead. Apart from that, the subsidiaries of Centrum namely Centrum Housing Finance, Centrum Microcredit are in the same business as the small finance bank set up by them will be in. Hence, this poses a hurdle for Centrum as one cannot have 2 of its entities doing the same business. Either it will have to sell its majority stake/merge the subsidiaries or not enter the microcredit and home loan business from the SFB set up.

The RBI had called for sweeping changes in the Banking Regulation Act post the fiasco and must actively look into the regulation of cooperative banks to avoid such future debacles.


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