To dodge the regulator, PMC Bank replaced large legacy accounts with dummy accounts to match the outstanding balances in the balance sheet.
It took a bunch of senior bank officials, thousands of dummy accounts and over ten years of misreporting to execute probably the biggest case of skulduggery at an Indian cooperative bank.
Initial inspection showed that 44 accounts were replaced by 21,049 dummy accounts.
The troubled-Punjab and Maharashtra Cooperative (PMC) Bank, that is currently under inspection by the banking regulator and investigation initiated by the Economic Offences Wing, owes it all to its cordial relations with a real estate group-Housing Development and Infrastructure Ltd. (HDIL).
Initially, the group supported the bank with capital infusion and large deposits. In return, the bank extended loans to the group companies via multiple accounts and chose to overlook the non-repayments when HDIL started facing difficulties in business.
Typically, a bank's transactions go through five layers of scrutiny, including internal checks. But the management found ways to keep the loans from being detected.
"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 validated the incremental loans and advances and scrutinised the accounts which were shown by us," suspended MD Joy Thomas said in his confession letter to the Reserve Bank of India (RBI).
When it was the banking regulator's turn to carry out annual inspections, Thomas said that it used to check mostly top few borrower accounts reported branchwise.
It was in 2017 when the RBI started digging deeper. To dodge the regulator, PMC Bank replaced large legacy accounts with dummy accounts to match the outstanding balances in the balance sheet. As an additional shield, the bank mentioned these loans as loans against deposits to make them appear less risky.
"Some of the large accounts were not reported to RBI from 2008 because of fear of reputational risk," Thomas said, adding that classifying these loans as bad loans would amount to loss in interest charges leading to losses.
"The growth path of the bank would have got hampered," he added.
The First Information Report (FIR) registered by the Economic Offences Wing of Mumbai Police pegs the losses at Rs 4355.43 crore incurred due to the fraudulent activities of Thomas and other senior executives.
Thomas, in his confession letter, stated that all the decisions for granting of overdrawals to these accounts were under his instructions, while the executives had no role in allowing them.