Recently a big scam took place in Punjab and Maharashtra Co-operative Bank (PMC) which is not a new thing now for India as there are many other similar instances happened in past like Nirav Modi PNB Scam, Vijay Mallaya UB Group and the list is huge. The accounts of these Corporate have turned NPA due to one or the other reasons.
At the outset we should first understand the term ‘NPA’
‘NPA’ stands for Non-Performing Assets of a bank or financial institution on which either the Interest or Principal remains due for more than 90 days. They are termed as Non-Performing because the bank has stopped earning any revenue on such accounts and hence are classified as bad loans in their balance sheets.
It is also to be understood the reasons for NPA as whether it is due to falsification of books or genuine business failure.
But the question here is that why should General Public face the heat without any fault..?
Let us understands the same..
The principal business of a bank is to do lending and borrowing and they borrows mostly from Public in the form of our deposits with the bank. And it is very saddened that the money of Public stuck in to such bad loans.
Either it is a Public Sector Bank or a Private Sector Bank doesn’t matters because first it is a Public Institution of supreme national importance and they should not be allowed to put the Public money at risk for their failures.
There is no doubt that banks can not stop lending but despite of various checks and balances by regulators how can this happen due to which public faces the heat. In past there have been instances of stock market crash due to bank’s failures.
The Latest PMC Case
As per the media reports the PMC Bank has extended substantial part of its loans to a single Company HDIL (Housing Development and Infrastructure Limited) a real estate company which is itself in a bad condition. As the bank is not very large the extension of such huge proportion of credit facilities to a single borrower is under question. It has been reported that the top management has siphoned off the public funds to this Company to favor their personal interests.
They allowed opening of around 21000 dummy accounts to disburse the loans to a single customer of the bank i.e HDIL.
The enforcement agencies have seized the assets of HDIL and has arrested some top executives. The bank has violated several norms including limit of exposure to a single party.
But the ultimate sufferer are the small deposit holders holding their accounts in the bank who cannot withdraw their own money for no mistake of their own.
The bank’s management played a role in hiding the NPA accounts and actual exposure to HDIL through window dressing of its books and creation of bogus accounts.
HOW IT CAME TO THE KNOWLEDGE OF REGULATORS..?
As per media reports the scam was exposed by some whistle-blower(s) who reported certain manipulations in the books of bank to the RBI. Thereafter RBI suspended management and appointed administrators to look after the affairs of the bank .
RBI also imposed restrictions on withdrawal of cash by the holders. A thing to note is that there were huge withdrawals in the accounts just before the restriction imposed by RBI. Initially the limit was Rs 1000 Per Account later on the limit was increased to Rs 40000 due to public pressure.
HOW IT HAPPENED DESPITE MULTIPLE REGULATIONS….?
The question here is that PMC is regulated by both the Registrar of Co-operative Societies and RBI. A bank is an institution that has strict checks at every level but despite the fact this happened. This is a question..?
INSURANCE FOR DEPOSITORS
As per the extant guidelines every depositor in the bank is insured up to a maximum amount of Rs 1 lacs only clubbing all his deposits whether Savings, Term Deposit, etc.
The limit is per bank and not per branch meaning all the deposits held under any branch of a bank is insured up to Rs 1 lacs only under DICGC (Deposit Insurance and Credit Guarantee Corporation) a subsidiary of RBI.
The only way to mitigate the risk is to put the funds in multiple banks up to Rs 1 lacs per bank to avoid any financial loss.
CONCLUSION-The failure of a banking institution is in itself a big question mark but what more saddened is that the account holders bears the actual loss as they cannot withdraw their own hard earned money which lies stuck in these financial scams. The regulators must understand their feelings and hardships faced by the Common Man.
There is a need for ethical banking instead of Phone Banking which some unethical businesses and banks do. These kind of scams should be curtailed if the regulators have to maintain the people trust in the banking system which is the founding stone of any economy. An Institution in itself is not bad only the people running it are good or bad and as such an institution is represented by its people.
As we can not clap with a single hand similarly it is the need of the hour to strengthen the Corporate governance Practices of the borrowers as well.
The Author CS Himanshu Goyal may be contacted at email@example.com.
DISCLAIMER: Absolute care is taken to prepare this article however inadvertently if any errors occur then neither the author nor publisher shall be held responsible for any such cause. The purpose is to spread awareness and it shall not be construed as rendering of any Professional advice. Further the content is an original work of the author and it should not be used for any commercial purpose. The author extends his thanks to the readers of this article.