PMC is one of some 97,000 cooperative lenders in India, which hold a combined $130 billion of deposits.

Punjab & Maharashtra Co-operative (PMC) Bank was able to dupe regulators about its growing exposure to a single property developer for at least a decade before the firm filed for insolvency, according to a letter written by the lender's managing director, who has since been removed.

PMC Bank used "dummy accounts" and other methods to hide its oversized loans to Housing Development & Infrastructure from the Reserve Bank of India, Joy Thomas wrote in the letter, a copy of which was seen by Bloomberg News.

"Every year during the course of RBI inspection we undergo into a lot of stress due to concealment of information from RBI," Mr Thomas wrote in his letter dated September 21 and addressed to a senior supervisory official at the central bank. He said he also hid the true exposure from the PMC board and the bank's auditors.

Last week, the RBI took the rare step of limiting withdrawals from PMC, causing depositors to besiege the bank's branches to retrieve their money. It also removed the former management, including Mr Thomas, citing major financial irregularities, a failure of internal controls, and inaccurate reporting that understated exposures.

PMC is one of some 97,000 cooperative lenders in India, which hold a combined $130 billion of deposits according to CLSA -- nearly a tenth of the wider industry's total.

Among that plethora of lenders, only the 54 biggest are monitored by the central bank and investors are now trying to figure out whether they pose a new threat to a banking system hobbled by a 9.3 per cent bad-loan ratio, the highest in the world.

Mr Thomas said he stopped reporting to the RBI on the bank's large exposures from 2008 "because of reputational risk." By 2011, the exposure to HDIL stood at 10.2 billion rupees ($144 million), or more than half the bank's total advances of 20 billion rupees, according to the letter. The RBI restricts single borrower exposures to one-fifth of the total.

Had the bank classified the assets as non-performing, "we would have had to stop charging interest on these accounts and we could have made losses," Mr Thomas said in the letter. "The growth path of the bank would have got hampered."

Prior to 2015, PMC was able to conceal its HDIL exposure because RBI officers would only inspect a few of the largest borrower accounts, Mr Thomas wrote. When the RBI started to ask for more details around 2017 "the stressed legacy accounts belonging to this group were replaced with dummy accounts to match the outstanding balances in the balance sheet," he said.

HDIL has sought a meeting with the administrator of PMC Bank to "put forth the true and correct picture," the company said in an exchange filing on Tuesday. Lenders, led by Bank of India, dragged the real estate developer into bankruptcy proceedings in August.

The Press Trust of India reported on Sunday that Thomas had told the RBI that HDIL accounted for 73 per cent of the bank's total loan book. Mr Thomas couldn't be reached for comment on Tuesday. The RBI didn't immediately respond to a request for comment.

"This event might create a chain reaction among other lenders and they might turn more circumspect in lending to the real estate sector," said Karthik Srinivasan, head of financial sector ratings at ICRA, the local unit of Moody's Investors Service. "That is likely to increase the liquidity crunch among real estate companies."

The drumbeat of bad news in country's banking market is affecting shares of lenders on speculation that the scandals will prompt savers to switch to larger banks. Yes Bank plunged 23 per cent, IndusInd Bank dropped 6.2 per cent, while RBL Bank lost 9 per cent.

Country's cooperative banks, set up to serve areas where banking services aren't widely available to all people, typically cater to poorer, less creditworthy customers.

There are rumours in some locations about certain banks including cooperative banks, resulting in anxiety among the depositors. RBI would like to assure the general public that Indian banking system is safe and stable and there is no need to panic on the basis of such rumours. — ReserveBankOfIndia (@RBI) October 1, 2019



The RBI monitors only the cooperative banks, including PMC, that are considered systemically important. Even the larger ones aren't as intensively supervised as the commercial banks, however, because their respective state governments play a role in regulation.

Mr Thomas said the close relationship with HDIL dated back to 1986 when the company founders rescued the bank by infusing capital and maintaining large deposits.

HDIL's cash flow began drying up when a large project to develop land near Mumbai's airport was scrapped following a change in government policy, according to Mr Thomas's letter.