Did RBI miss an early sign that PMC Bank was in trouble?

Annual reports show the bank’s PSL portfolio fell sharply between March 2015-March 2019

The steep fall in its priority sector lending (PSL) portfolio over the last four years was possibly one of the strongest signals that the Mumbai-based Punjab and Maharashtra Co-operative (PMC) Bank sent out to the Reserve Bank of India’s inspectors to indicate that it was in trouble.

According to the bank’s annual reports of the last five years, its PSL portfolio, comprising loans to micro and small enterprises, housing, micro credit, agriculture, education, and the weaker sections, declined sharply to 15.06 per cent as at March-end 2019 from 40.21 per cent of total advances as at March-end 2015.

This decline in the PSL portfolio suggests that the bank’s loan portfolio underwent a major shift over the last four financial years in favour of corporate lending, an area that urban co-operative banks (UCBs) avoid venturing into due to the inherent risks.

PMC Bank’s PSL portfolio saw the steepest decline to 24.25 per cent in FY2016 of total advances (from 40.21 per cent in FY2015) and to 16.04 per cent in FY2017.

PMC Bank: An outlier on PSL

The contraction in the PSL portfolio over the last four years to 15.06 per cent of total advances in FY2019, should be seen in the context of UCBs usually exceeding the PSL target of 40 per cent of advances.

For example, in FY2017, PMC Bank’s PSL portfolio was at 16.04 per cent of total advances against UCBs’ average of 45.6 per cent. In FY2018, the bank’s PSL portfolio was at 16.58 per cent of total advances, against the segment average of 46.6 per cent.

The data shows that PMC Bank was an outlier among UCBs vis-a-vis PSL lending. That it was behind the curve in this category of lending for four years on the trot probably should have set the alarm bells ringing in the regulatory establishment.

If the changing complexion of the loan portfolio was red-flagged at the right time and corrective action initiated promptly, PMC Bank’s depositors and borrowers would not have been put to trouble due to the regulatory restrictions.

HDIL exposure: 30% or 73% of total loans?

Joy Thomas, former MD & CEO, admitted last Friday that PMC Bank has an exposure of Rs 2,500 crore to real estate developer HDIL. This exposure works out to about 30 per cent of its total advances.

“The loans that were granted by us were not reported during the last six-seven years…We ourselves went to the RBI on September 19 and apprised the Executive Director of our situation and asked for some time to regularise the loans,” he added.

“The exposure that we reported to the RBI was to the HDIL Group….We have only exceeded the exposure norm, for which we have asked for a resolution plan,” Thomas said at the press meet.

A news agency report on Sunday said the bank’s exposure to this group is reportedly a whopping 73 per cent of its total advances of Rs 8,383 crore. This huge group exposure, however, could not be confirmed.

The sharp drop in PSL loans ties in with the jump in the bank’s corporate loan exposure, including that to HDIL.