Mumbai: The Reserve Bank of India on Tuesday explained to the Bombay High Court how it failed in its job to detect the scam in the PMC Bank.
The apex bank has stated on an affidavit that it could not correctly diagnose the financial health of PMC despite coming across certain irregularities in its transactions.
The RBI filed its affidavit through Rajlaxmi Sethi, the assistant general manager of RBI’s cooperative bank supervision department, before a bench of Justices Satyaranjan Dharmadhikari & Riyaz Chagla.
The affidavit highlights how the PMC bank’s senior officials manipulated the data, which was picked up by the RBI’s auditing team with its eyes closed.
“The PMC bank submitted fraudulently manipulated data to the RBI for sample checks and this sample did not contain undisclosed HDIL related accounts. The disclosed HDIL accounts were seen and the majority were assessed to be non-performing accounts (NPAs),” the affidavit reads.
It further states that despite this fraud, PMC chairman Waryam Singh, who was also a former director of the HDIL, tried to show that the firm’s accounts were not NPAs, by sanctioning new loans to regularise the earlier NPA accounts.
“The PMC, through its chairman Waryam Singh, sanctioned mortgage overdraft limits to HDIL, which was earlier headed by the same Waryam Singh, who also chaired a board meeting to ratify the approval for this mortgage.
This is a clear conflict of interest and also in violation of the RBI rules,” the affidavit reads.
Interestingly, the affidavit further states that the RBI’s inspection team established the relationship between Singh and the HDIL promoters, which might have acted as the primary consideration for sanction of credit facilities and to pay off one-time settlement dues with other lenders.
The affidavit goes on to underscore that despite the RBI coming across ‘certain’ irregularities, it failed to foresee the financial health of the PMC bank.
“The scale of violation and lending that could be established based on available records was of much lesser extent due to the camouflaging resorted by the PMC bank.
What was noted was flagged but was not observed to be impacting the financial health of the bank in any significant manner,” the affidavit reads.
Accordingly, the RBI sent its team to conduct the Annual Financial Inspection (AFI) in September and focused on the transactions pertaining to the HDIL group.
“The preliminary findings of the inspection revealed that on account of the financial irregularities, PMC’s net worth had turned negative and deposit erosion was significant,” the affidavit stated.
The affidavit then goes on to explain in detail the alleged “modus operandi” used by the PMC senior officials for keeping off record the details of all the accounts related to HDIL.
It stated that the officials had tampered with the Management Information Systems and NPC Identification Process, by which only 15 senior officials could access the HDIL accounts.
The officials, according to the RBI, excluded HDIL accounts from the mechanism which generated reports of the NPA accounts. It further claimed that PMC’s own software did not list these undisclosed loan accounts of the HDIL.
Surprisingly, the monthly audits carried out by the ‘concurrent auditors’ could not zero in on these irregularities. “The irregularities were not highlighted by the PMC’s concurrent auditors at the Sion branch, where all these undisclosed accounts were parked despite the fact that the concurrent audits were carried out every month,” the RBI has claimed.
The RBI has further said that the PMC officials did not mention these undisclosed accounts of HDIL in any of its records be it the Loan Committee, Recovery Committee, or the Board of Directors.
The RBI has stated that the inspection of PMC records have shown huge loss and significant deposit erosion.
“This was hidden by the bank by fictitiously showing profits and using the same to declare dividend and pay higher salaries. This profit came by treating the NPA accounts as standards – non-NPA,” the RBI has alleged.
Finally, the RBI states that it could come across these irregular and illegal transactions only after an anonymous person from the PMC bank itself, complained of the same.