Author : Urmi Dnyandeo Sawant , Adv Balasaheb Apte College Of Law
To the Point
Banks are, by their very design, meant to be sanctuaries for our money, institutions where the common man can confidently deposit his earnings, accrue interest, and secure his family’s future. They are the wheels that keep the economy turning, facilitating everything from small daily transactions to major life investments. But what happens when these very sanctuaries become dens of deceit? This horrifying reality materialized for countless Indians with the emergence of the PMC Bank scandal in September 2019. What started as a beacon of financial security quickly devolved into a collective nightmare, as a multi-crore fraud left ordinary depositors grappling with frozen accounts and a profound sense of betrayal.
Abstract
The PMC Bank scandal, uncovered in September 2019, represents a chilling narrative of sophisticated financial fraud and betrayal. At its core, the conspiracy involved the concealment of over ₹6,500 crore in bad loans, primarily extended to the real estate firm Housing Development and Infrastructure Limited (HDIL). This was not an accidental oversight; investigations revealed that top PMC Bank management, including MD Joy Thomas and Chairman Waryam Singh, colluded directly with HDIL promoters Rakesh and Sarang Wadhawan. This unholy alliance systematically bypassed banking norms, leading to a gross violation of RBI’s single borrower exposure limits by funneling an astronomical proportion of the bank’s loan book to a single, defaulting entity.
To maintain the artificial façade of the bank’s solvency and profitability, the accused engaged in elaborate deceit. They orchestrated the creation of over 21,000 fictitious accounts – a phantom ledger designed to disguise HDIL’s massive outstanding debts and hide the true extent of the bank’s Non-Performing Assets (NPAs). Further, the bank’s core banking software was deliberately manipulated to falsify financial statements, presenting a misleadingly healthy picture to auditors and regulators for several years prior to the scam’s exposure. The RBI’s immediate and severe restrictions on the bank were devastating, freezing withdrawals and making 1.6 million depositors’ life savings inaccessible, causing immense distress. The eventual resolution involved the bank’s amalgamation with Unity Small Finance Bank in January 2022, initiating a phased repayment structure for depositors and ongoing efforts by agencies like the EOW and ED to recover assets and pursue criminal cases for fraud, criminal conspiracy, and money laundering against those involved.
Use of Legal Jargon
Non-Performing Assets (NPAs): Non-Performing Assets (NPAs) are loans on which interest or principal payments haven’t been made for a specific period, usually 90 days.
Criminal Conspiracy (BNS Section 61(2)): The concerted action by multiple individuals (bank officials and HDIL promoters) to commit an unlawful act.
Cheating (BNS Section 318): Deceiving depositors and regulators to induce them to part with their money or maintain trust in a fraudulent institution.
Criminal Breach of Trust (BNS Section 316): Misappropriation of funds entrusted to the bank by its depositors.
Forgery (BNS Section 334): Anyone who creates a false document or electronic record with the aim of causing harm, supporting a claim, getting someone to give up property, entering into a contract, or committing fraud.
Falsification of Accounts (BNS Section 344): Intentionally altering, mutilating, or destroying books, papers, or securities with intent to defraud, typically by a clerk, officer, or servant.
Prevention of Money Laundering Act (PMLA), 2002: The Enforcement Directorate (ED) invoked PMLA as the proceeds of the fraud (the fraudulently disbursed loans) constituted “proceeds of crime.” Asset attachments and freezing by the ED are actions taken under this Act.
Banking Regulation Act, 1949 (Section 35A): The RBI exercised its powers under this section to issue directions to the bank, including imposing withdrawal restrictions and superseding its board, due to the bank’s financial instability and grave irregularities.
The Proof
The case against those involved in the PMC Bank scandal rests on a formidable array of evidence, initiated by a crucial whistleblower testimony. This tip-off led to extensive forensic audits that painstakingly revealed the bank’s deep-rooted financial manipulation. These audits provided concrete proof: identifying 21,000 fictitious accounts used to mask enormous Non-Performing Assets (NPAs), primarily from HDIL, and exposing how the bank’s core software was tampered with to falsify financial statements for years.
The prosecution’s case was significantly strengthened by direct admissions, particularly the confessional statement from then-MD Joy Thomas, who acknowledged his role in concealing the fraud. This was further corroborated by compelling digital and documentary evidence, which included manipulated internal records, communication trails, and detailed fund tracing that exposed how money was siphoned from the bank to HDIL. Additionally, consistent interrogation and witness statements from various individuals within the bank and related entities corroborated the conspiracy. This overwhelming body of evidence formed the basis for the First Information Reports (FIRs) filed by the Mumbai Police EOW and subsequent money laundering investigations by the Enforcement Directorate, building a strong foundation for the legal proceedings.
Case Laws
1. Dharani Sugars and Chemicals Ltd. vs. Union of India, (2019) 5 SCC 480.
While this case primarily dealt with the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act and struck down an RBI circular on stressed asset resolution (the “February 12, 2018 Circular”), it involved a deep analysis of the RBI’s powers under Section 35A. The Supreme Court clarified the distinction between the general powers under 35A and specific powers under 35AA/35AB, reaffirming that 35A grants broad powers to issue directions in the public interest or to protect depositors.
2. Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274.
In this case, the Supreme Court quashed an RBI circular prohibiting regulated entities from providing services to cryptocurrency businesses. In quashing the circular on the grounds of proportionality, the court’s judgment thoroughly examined the RBI’s authority under Section 35A to regulate banking in the public and banking interest. It confirmed that the RBI’s powers under this section are indeed extensive.
3. Union Bank of India vs. State of Karnataka (2024 SCC OnLine Kar 117):
A recent Karnataka High Court judgment, it affirmed that while RBI holds significant regulatory power under Section 35A, this does not extend to directing investigative agencies (like CBI) in criminal matters. This clarifies the boundary between regulatory oversight and criminal investigation mandates.
Conclusion
The PMC Bank scandal serves as a profound and painful reminder of the fatal consequences when trust, corporate governance, and regulatory oversight fail within the financial system. The sophisticated deception, involving the concealment of thousands of crores in NPAs through a web of fictitious accounts, not only defrauded the institution but also inflicted severe hardship on millions of unsuspecting depositors.
The intervention by the RBI, though initially distressing for depositors, ultimately paved the way for resolution through amalgamation with Unity Small Finance Bank. However, the repayment plan and ongoing legal battles underscore the long road to full restitution and justice. This fraud has undeniably spurred critical regulatory reforms, notably the Banking Regulation (Amendment) Act, 2020, granting the RBI more stringent powers over cooperative banks.
Beyond these regulatory enhancements, the PMC Bank saga forcefully highlights the pressing need for the government to significantly increase India’s deposit insurance limit. While the current ₹5 lakh cover (increased from ₹1 lakh post-PMC) offers a crucial safety net for small depositors, it proved woefully inadequate for many who had invested their life’s savings, often exceeding this cap. A substantial increase in the Deposit Insurance and Credit Guarantee Corporation (DICGC) coverage is essential to truly bolster depositor confidence, particularly in the cooperative banking sector, and to provide a more meaningful shield against the devastating impact of such financial malfeasance in the future. The PMC Bank saga stands as a powerful testament to the perpetual need for unwavering vigilance, robust internal controls, and swift, decisive regulatory action to safeguard the integrity of India’s financial ecosystem and, most importantly, the financial security of its citizens.
FAQs
What was the fundamental of the PMC Bank fraud?
PMC Bank fraudulently lent huge sums to real estate firm HDIL, concealing these loans (which became NPAs) through fake accounts and manipulated records.
What was the immediate impact on depositors?
The RBI’s move to freeze withdrawals and implement strict restrictions had a devastating impact, rendering depositors’ life savings inaccessible and causing widespread distress.
What is a Non-Performing Asset (NPA)? A Non-Performing Asset (NPA) is a loan where the borrower has failed to make interest or principal payments for a specified period, typically 90 days.
How was the PMC Bank case resolved for depositors?
PMC Bank was merged with Unity Small Finance Bank, and depositors are being repaid in phases, with smaller depositors prioritized. Assets of HDIL and its promoters were also attached for recovery.
