Reserve Bank of India Department of Co-operative Bank Supervision Mumbai Regional Offico Inspection under Section 35 of the Banking Regulation Act, 1949 (AACS) - Punjab and Maharashtra Cooperative Bank Ltd., Mumbai Financial Position as on March 31, 2016 1, Introduction & Overview The XXI inspection of Punjab and Maharashtra Co-operative Bank Ltd., Mumbai, a multi- ‘state scheduled co-operative bank, was conducted between August 12 and September 07, 2016 with reference to its audited financial position as on March 31, 2016 (Date of Present Inspection-DPI). The bank was last inspected with reference to its audited financial position as on March 31, 2015 (Date of Last Inspection-DLI). The inspection report is based on the audited books and records of the bank, the statutory returns and other information furnished by the bank and information obtained from other sources believed to be reliable. 2. Paid-up Capital, Capital Adequacy, Solvency and Net worth 2.4 Solvency ? 2.1.1 With the real or exchangeable value of paid-up capital and reserves at 257522.81 lakh, the bank was considered to have adequate assets to meet its liabilities as required under Section 22(3) (a) of the Banking Regulation Act, 1949 (AACS) and also complied with the requirement of minimum capital and reserves prescribed under Section 11(1) of the Act, ibid. 2.1.2 The assessed value of the net worth further showed that with teference to the book value, the paid-up share capital of the bank was intact, reserves and surplus. 2.2 The details of total assets, risk-weighted assets {including off-balance sheet items), capital funds and CRAR are furnished below: (in lakh) Si. ‘As reported by the bank ‘As assessed bylO No. Particulars 31.03.2015 31.03.2016 | 34.03.2015 | 31.03.2016 41_| Total Assets 798956.15 | _906956.37 798956. 906956.37_ 2 | Risk Weighted Assets 504300.75 | 598979.27 505805.77 594295.59 | 3_| Tier | Capital AT982.97 57845.38 45749.37 ‘$4120.40 (“4 ier I Capital 1430773 | _45242.08 | 15755.28| __17497.63 Total Capital Funds 62290.70 7308746 61504.65 71547.93, Capital Ratios 5_| Tierl (%) 9.57 9.66 9.04 9.44 6_| Tier tl (%) 2.86 264 3.12 2.93 \_7 | Overall CRAR (%) ___ 12.43] 12.20 | 42.16 12.04 2.3 The assessed CRAR of the bank declined from 12.16% as on DLT to 12.04% as on DPI, mainly due to additional provision suggested for loan losses (843.88 lakh) and provision for interest capitalised on NPAs identified by 10 (1366.60 lakh).3. Funds Management 3.1 The profile of the deposits, borrowings & lending of the bank for the last two years are as under: (2 In lakh) Particulars [As onDLI |AsonDPI | increase! | % | _ | Decrease _| Variance Deposits 687031.93 a 1114.62 13.26 Term deposits | 562055.89 | 633351.46 | 70395.57 12.50 CASA Deposits __|-424076.04 | 144795.10 | 20719.06 16.70 | Top 20 Depositors 68035.12| 63647.21 | (9.90%) (8.18%) |__-4987.91 6.45 | Borrowings 9342.11] 4496.47 | 6154.36 73.17 | Lending 70989.80| _20984.89| 9995.09 90.95 | 3.4.4 The bank had availed refinance amounting to 4496.47 lakh (as on DPI) from NHB at an average cost of 9.27%. 3.1.2 The bank had revised its rates of interest on domestic fixed deposits downwards twice during the PPR and the rates ranged between 4.0% and 8.75% with an additional interest of 1% and 0.25% to the staff and senior citizens (for deposits of 1 year & above) respectively. The bank had launched a special deposit scheme (PMC -100) from June 1, 2018 to October 25, 2016 with an interest rate of 7.50% and garnered deposits of "6508264 lakh. 3.4.3 The average cost of deposits of the bank decreased from 8.64% as on DL to 8.28% as on DPI due to increase in CASA deposits and downward revision of interest rates during the PPR. The total matured deposits outstanding stood at '5841.14 lakh as on DPI for which the bank had provided for interest liability of "650.54 lakh. 3.4.4 The credit-deposit (CD) ratio of the bank increased marginally from 71.02% as on DLI to 71.03% as on DPI due to increase In advances by 13.29% against increase in deposits by 13.26% as on DPI. 4, Investments 4.4.4 Classification: The bank had classified its investments under Held to Maturity (HTM), ‘Available for Sale (AFS) and Held for Trading (HFT) categories. (Zin lakh) Du DPI carecory| SLR NON SLR SLR NON SLR im | 114,023.37 0.00 113,912.79 | 0.00 ars| 34,868.62 3,206.11 ___ 65,278.34 3,231.10 wT] 8,043.22 000) ___0.00 0.00 Total 156,935.21 3,206.11 179,187.43 3,231.104.1.2 The bank had adhered to the limits for prudential interbank (gross and single) exposure during the PPR. 4.1.3 Shifting/depreciation/tra \g/valuation/amortisation/income recognition, etc. 4.1.3.1 The bank had a system of automatic Shifting of securities from HFT to AFS. category ‘on completion of 80 days holding period for which it had obtained post facto approval from the Board periodically. It had provided an amount of “368.86 lakh as there was a diminution in the value of securities on the respective date of transfer. 4.1.3.2 The securities held under AFS/HFT categories were subject to monthly valuation, The bank was holding an amount of ‘50.23 lakh under the head Investment Depreciation Reserve (IDR) a8 on DPI as against required IDR of °0.36 lakh for NPI shares of NDCC Bank. 4.1.4 Scope & Coverage of concurrent audit: ‘The bank’s investment operations were subjected toa concurrent audit by ‘on a monthly basis. The coverage did not include the observation to be made by the auditors to the effect that the sale and purchase transactions were done at rates beneficial to the bank. (Action) 4.1.5 Half-yearly review of Investment Portfolio. The half-yearly reviews (as of March 31, and September 30) of its investment portfolio were forwarded to RBI within the stipulated time. However, the review placed before the Board Gid not clearly indicate and certify adherence to the laid down intemal investment policy andl Procedure and RBI's guidelines: as required in terms of para. 15.3 of the DCBR BPD (PCB) MC.No.4/16.20.000/2016-16 dated July 1,'2018 (Master Circular on Investments by Primary (Urban) Co-operative Banks), Z (Action) 4.4.6 The bank held an Investment Fluctuation Reserve (IFR) of € 4064.64 lakh as on DPI which formed.5.93% of aggregate book value of AFS & HFT portfolio of 268505.44 lakh, 4.1.7 The quarterly certificates of physical holding of securities certified by internal auditor ‘were regularly submitted to RBI. No deficiency was observed with regards to broker related ‘transactions. 5. Loans, Fixed Assets and Other Assets 5.1 Loan Assets 5.1-1 Compliance with statutory and regulatory norms: There was a divergence between figures as reported by the bank and as assessed by'the IO wir. adherence to various, ‘exposure norms as detailed below, (a) Exposure to Housing, Real Estate (RE) and Commercial Real Estate (CRE) Sector: There was a divergence between the exposure to housing, RE and CRE sector as reportedby the bank ('75037.22 lakh) and as assessed by the IO ('75975.18 lakh) to the tune of 937.96 lakh which was on account of nen-classification of loans sanctioned for the purpose of housing repairs / renovation under the product codes 3009, 3085 and 3086 (i.e. gold loans and loans against deposits sanctioned for housing repair 7 renovation purpose) as real estate exposure. (LOI). Consequently, the bank's assessed exposure towards housing, RE and CRE sector formed 9.55% of the previous year's net total assets ('795243.22 lakh) and thus was within the extended permissible limit of 10% + 5%. (Action) (b) Lending to Priority Sector and Weaker Sections: The bank had incorrectly classified several loan accounts under priority sector (LOI). On account of this, there was a divergence between the exposure to priority sector as reported by the bank ('119294.13 lakh) and as assessed by the IO ('105716.77 lakh) to the tune of °1:3577.36 lakh. The assessed priority sector lending of the bank formed 22.04% of the previous year's adjusted net bank credit (ANBC) ('479566.95 lakh) and thus the bank had led to achieve the target of 40% as stipulated in para 3.2 of RBI circular no. DCBR.BPD. (PCB). Cano: 11 /09.09.001/2015-16 dated July 01, 2015. Further, the bank’s lending to weaker sections stood at "31860.38 lakh and formed 6.64% of the previous year's adjusted net bank credit (ANBC) and thus the bank had failed to achieve the target of 10% as stipulated in para 3.2 of RBI circular no. DCBR.BPD. (PCB). MC.No: 11 /09.09.001/2015-16 dated July 01, 2015. (Action) {c) Loans to individuals for repairs / alteration / addition / renovation to house: The bank had violated the prescribed limit of °6.00 lakh for loans to individuals for repairs / alteration / addition / renovation to house in terms of para 5.3 of RBI circular no. DCBR.BPD. (PCB) MC No.9/09,22,010/2015-16 dated July 01, 2015 which permits UCBs to extend need-based credit up to a maximum of 8.00 lakh in urban areas for the specified purpose (Lon. (Action) 5.1.2 Debit cards issued to loan account holders: The bank had issued debit cards to Joan account holders which was not permitted in terms of para 3 of Annex | of RBI circular no. UBD (PCB) Cir No. 6 /09.18.300/2007-08 dated July 13, 2007 (LON). (Action) 5.1.3 Credit Administration: The bank's appraisal system needed improvement on account of the following deficiencies:(@) Deficiencies in loan documentation: The bank had not obtained the latest insurance Copy in some vehicle loans while in some cases, copies of RC book were not held on record (Lon. (Action) (b) Deficiencies in Term loans / Project Loans / Cash credit accounts: (i) The bank had not fixed Date of Commencement of Comniercial Operations (DCCO) for Project loans at the time of sanction in case of some large value project loans as required in terms of para 2.2.6 of RBI circular no. DCBR.BPD. (PCB) MC No.12/09.14,000/2015-16 dated July 01, 2016 (LO). (Action) (ii) End-use of funds was not ensured in some large value cash credit accounts (LOI). (Action) (©) Special Mention Accounts: Certain account specific major deficiencies including evergreening of a non-performing asset observed are listed in LOI. (Action) 5.1.4 Quality of loan portfolio (a) Adherence to Income Recognition and Asset Classification (IRAC) norm The asset quality of the bank had deteriorated as compared to the previous year. The bank hhad not strictly adhered to IRAC norms as prescribed by RBI vide circular no. DCBR, BPD. (PCB) MC No.12/09.14.000/2015-16 dated July 01, 2016 as several instances of divergence were observed during the course of inspection. The bank and the Statutory Auditor had declared gross NPAs at "7652.33 lakh (1.38%) whereas the present inspection had assessed the same at "17824.27 lakh (3.22%) as’on DPI. Thus, there was a divergence of “1017194 lakh between gross NPAs as declared by the bank and as assessed by the 10. Further, the present inspectiorhad assessed shortfall in provision required for loan losses to. the tune of 843.88 takh. The interest capitalized on the NPAs identiied by 10 of "1366! 60 lakh was required to be reversed from net profit. Instances of divergence. in asset classification observed in the current inspection are listed under Annex-V. (Action) (b) The profile of advances portfolio as on the DLI and the DPI is given below. (& in lakh) ‘March 31, 2075 (DLI) March 31, 2016 (DPI) Particulars, ‘AS per As per [ate Asperio | “pre As per 10. (G) Standard Assets | 482651.76 |" 473701.54 | 645102.04 | _534930.10 (2) Sub-Standard Assets "| 1802.84[ 6999.49 | 260.49 6336.42 (3) Doubtful Assets = 3498.91 [7172.50 | 6007.31 | 1147232 (4) Loss Assets age 15.53 15.33 15.53 16.53 (6) Gross NPAs 5257.28 | 14187.52| 7652.33 | 47824.27 (%4 of Gross NPAs) (4.08) (2.90) | __(1.38%) | _(8.22%) (6) Gross Advances "| 487909.06 | 487909.06 | _852754.37 | 58275437 7) BDDR 2 3060.18 |" 3060.18 |" 3810.18; 3810.18Unrealized interest] a =| capitalized and included in loans and advances shown as bisa outstanding : | __ Ee [(@) Net Advances 484848.68 547577.64 (10) Net NPAs 41127.34- 3842.15! 12647.49 ((% of Net NPAs) |” (0.45) 2.30) __(0.70%)|__(2.31%) | The bank's assessed gross and net NPAs stood at 3.22% and 2.31% respectively as on DPI, As can be'seen from the above table, the assessed gross and net NPAs had increased in absolute as well as percentage terms since the DLI. (Action) 5.4.5 Recovery: The position of recoveries and NPAs during the last three years (as assessed by IO) is given below. (in lakh) NPAs at the | Recoveries! x NPAs at the |Year | beginning | Upgradation | Write-off Aaaitions | end of the \ ofthe year _| effected 7 year * 2013-14 6885.65) ‘1010.28 | 766.06 T9286 | _—_ 12032.87 2014-15 12232.87 1620.29 = 3474,04| 1418752 | 2015-16 44187.52 2146.56 5783.31 | __17824.27 | ‘The banks recovery efforts were off-set by fresh slippages To the tune of €5763.31 lakh (including the diversion detected by the Inspecting Officer) during the period under review. (Action) 5.2.1 Other Assets {a) The interest capitalized in NPA accounts identified by the present inspection was “4366.60 takh’ which was suggested for erosion in assessment of net profit, net worth and CRAR. Additionally, the IO had assessed shortfall in BDDR provision to the tune of "843.88 lakh which was also eroded from net profit, net worth and CRAR. (Action) (b) Out of the other assets, legal expenses receivable for the suit fled cases (207.36 lakh) were treated as an intangible for which the bank had made adequate provision. 5.2.2 Fixed Assets Certain deficiencies w.r.t. purchase of fixed assets by the bank are highlighted in para 6.1.2. (Action) 6. Management 6.1. Deficiencies relating to constitution of BoD / Corporate Governance 6.1.1 The BoD had representation of women (3 women directors in terms of its by-laws) and SCIST (one director) and two Professional Directors. The bank had amended its Bye-laws to give representation to members beyond the district, and beyond the state as envisaged in para 1 of Annext to para 1.4 of circular UBD.CO. BPD. MC. No.8/12.05.001/2014-15 July 1,2014 in its AGM held on August 28, 2016 and it was in the process of seeking approval from the Central Registrar of Co-operative Societies as on the date of inspection. 6.1.2 The BoD meetings were well attanded and the board functioned in a cohesive manner. From the data of owned premises provided by the bank, it was observed that the bank had purchased some premises over the years from _ ce =a a listed company, on the Board of which the bank's present was a director upto March 23, 2015, It is pertinent to note that had been a director of the bank since June 1999 while he was a director on the Board of from the period April 27, 2006 to March 23, 2015. The table given below provides the details of such owned premises of the bank: [Name oF owned] Date of | Purchase | Seller | Whether Whether premises purchase | Consider i | ation (in & was a was : Lakh) director on the in the seller BoD company's Board at the | deliberating time of| purchase of purchase _ of | said property { ‘said property 5 The bank's Central | 27.12.2007 | 3016.09 Yes No Office located at shee 3® floor, Dreams v Mall, Bhandup (W) . Kurla Exotica br. | 31.12.2012 | 674.62 ‘Yes Yes Shop nos. 63 to) 16.06.2014 | 870.75 Yes No 68, Goregaon (W) : Shop nos, 35: to| 16.05.2016 | 193.32 No Yes 39, Goregaon (W) The director involved therefore, had not ensured adherence to the Do's and Don'ts Prescribed for Board of Directors regarding not Participating in the Board discussi Jn, if a Proposal in which they are directly or indirectly interested, comes up for discussion/ to disclose their interest, well in advance, to the Chief Executive Officer and the: Board.of the bank, vide para 2.3 (b) of RBI circular no. DCBR.BPD (PCB/RCB) Cir.No.2/14,01.062/2015-16 dated July 01, 2045. (Action) 6.1.3 The reviews placed before the board were generally in conformity with RBI instructions. 614 ~ were elected as Chairman and Vice-Chairman respectively on March 25, 2015. There, were four sub-committees of the Board Le, Executive Committee (5 meetings), Loan & Investment committee (8 meetings). Audit committee:(7 meetings) and Recovery committee (7 meetings). The performance ofwoe Bu ¢ the committees was generally satisfactory. However, the audit committee had neither reviewed the implementation of guidelines regarding audit issued by RBI nor submitted a note there on to the Board at quarterly intervals as envisaged in para 7.3 of the DCBR.CO.BPD. (PCB) MC. No.3/12.05.001/2015-16 dated July 01, 2015. Further, several paras of the concurrent audit in the bank were pending for closure. Also, the compliance to the audit paras (medium and high risk) was also pending for closure. (Action) 6.1.5 was the Chief Executive Officer (CEO) of the bank since March 02, 1987. The CEO was designated as Managing Director. 6.1.6 The bank had got approval from RBI to set up 15 Regional Offices on March 30, 2015. As on DPI, the bank had opened 12 ROs. 7. Earnings Appraisal 7.A Segment-wise analysis of Earnings: 7.4.4 Though the growth of net operating profit was 15.25%, there was a decline in profit before tax (EBPT) by °54.54 lakh (0.44%) mainly due to decrease in non-operating income (in the form of reverse back of provisions, BODR and IDR) from "2266.44 lakh in 2014-15 to 7658.84 lakh in 2016-16. 7.4.2 The bank had reported a net profit of “7847.78 lakh for 2015-16 as against &7809.72 Jakh during’ 2014-18, However, the 1.0 had assessed the net profit of "5637.90 lakh on account of additional provision for loan losses “843.88 lakh and reversal of capitalized interest in NPA accounts to the tune of “1366.60 lakh. (Action) 7.4.3 The bank had undertaken peripheral activities in the form of mutual fund advisory business, life and non-life insurance business, energy bill collection facility on behalf of BEST/ Reliance Energy, bill collection facility and vendor. services (franking). It had earned 2 153.89 lakh (1.96% of the net profit) on account of such peripheral services during 2015- 16 as against €130.08 lakh during 2014-15 for the same activities. 7.2 Key Earning Ratios The details of assessed net profit and certain profitabil ratios are fumished below.Other Overheads to Total Income Ratio (%) 15.53 13.62 14.49 Return on Average Total Assets (%6) * 1.43 1.63 1.23 Return on Average Earning Assets (%) * 1.60 1781.38 (Assessed PBT) ‘The marginal increase in net interest margin (NIM) was due to growth in the net interest income (NII) by 20.80% compared to growth of 20.52% in the average total assets during the year 2015-16. The increase in cost-income ratio was due to increase in staff costs and other overhead expenses. The ROA and ROE declined from 1.63% and 1.78% to 1.23% and 1.38% respectively mainly because of additional provision aggregating "2210.48 lakh for loan losses and interest capitalized on NPAs identified by 1.0. and also due to lower growth of profit (0.49%) compared to growth of 20.52% and 17.36% in the average total assets and average earning assets respectively during PPR. 7.3 Adequacy of provisions and retained earnings: 7.3.4 The percentage of retained eamings to the net distributable profit had declined from 74.08% during 2014-15 to 69.32% during 2015-16 due to increase in dividend payment and ex-gratia in absolute terms. 1,3.2 The bank had adhered to the guidelines relating to appropriation of profit to ‘statutory reserve, and other reserves. 8. Liquidity 8.1.1 The bank had maintained required cash reserve ratio (CRR) and statutory liquidity ratio (SLR) during the PPR. However, the computation of NOTL was found to be not in ‘compliance with Section 42(1) of the RBI Act, 1934 as it had reckoned balance in the ‘nostro ‘accounts as inter-bank assets which was. set- off against the inter-bank liabilities to arrive at Net inter-bank liability. (Action) 8.1.2 The bank had prepared the statement of Structural Liquidity on a, fortnightly basis instead of daily, as prescribed and forwarded to RBI with a delay during the year 20 15-16. Similarly, the short term dynamic liquidity statement was prepared on a fortnightly. basis instead of daily and put upto the ALCO. The statement of Interest Rate Sensitivity was Prepared on a monthly basis and forwarded to RBI with a delay. Further, the bank had not included the unavailed portion.of Cash.credit limit and forward contracts while reckoning the ‘mismatches in the structural liquidity statement/and the interest rate sensitivity statoment. (Action) 8.2 The bank's ALM policy and composition of ALCO was in accordance with RBI guidelines. 8.2.1 As per the statement of interest rate sensitivity as on March 18, 2016, there were Negative gaps of 122.00 %, 25% and 214% in 3-6 months, 6 months-1 year bucket and over 1 year and upto 3 years buckets respectively. The bank had neither ‘set any prudentiallimits on the individual interest rate sensitivity gaps nor set Earnings at Risk (EaR) as required in terms of para 8. of the enclosure to the circular UBD. No.POT.SUCB Cir No.9/9.120,00/2001 dated April 15, 2002. (Action) 8, Systems and Control 9.1 KYC, AML and CFT E 9.1.4 Policy Adequacy and Adherence thereof a) The bank was doing risk categorization of its customers based on the nature of job/activity, income range related details, etc furnished by the customer in personal information sheet. It was also doing periodical review of risk categorization risk profiling of its customers. However, it was observed on a sample scrutiny of account opening forms that the income parameters were neither filled in nor entered in the system (LOI). (Action) ») Reporting to FIU-IND The bank had filed CTR and NTR statements with a delay for some months during 2015-16 which was not within prescribed time schedule of 15" of the succeeding month-as required in terms of para 8 (B) of Master Circular UBD (PCB) MC. No 46/12.05.001/2012-13 dated July 1, 2015 (LO!). (Action) ¢) The bank had installed the Combat Risk Platform software supplied by . for generating: alerts of suspicious transactions. During the PPR, the bank had reported 27 STRs to FIU-IND, Delhi with a delay i.e. not within the given timeframe of seven days on which the transactions were concluded to be of suspicious nature by the principal officer. (Action) d) The bank had reported 63 batches of CCR to FIU-IND and RBI (Issue Department) involving 849 pieces of fake currency note of various denominations. ) A separate audit was conducted for AML cell. The concurrent audit was divided into two areas, KYC and Credit, on a monthly reporting basis. There were high (1), medium (665) and low (1291) observations for 2014-15 pending for closure (LO!). Similarly, 1504 observations in vatious tisk categories relating to 2015-16 were pending for closure (LON). (Action) 1 Joint General Manager was the Principal Officer and Managing Director, was the Designated Director for KYC and AML. However, their functioning needed improvement in view of the deficiencies pointed in para (a) and (b) above. (Action) ‘Compliance level 1) The number of customers pending for KYC updation were 1,71, 245 ie., 20.45% of the total customers (837226), of which 38,281 (4.57%), 11,631(1.09%) and 1, 21,993(14.49%) accounts were active, inactive and dormant respectively: The bank had frozen the debits in respect of inactive and dormant accounts.b) A few deficiencies were observed in KYC documentation (LOI), (Action) ¢) The bank's current account opening form had a provision for declaration whether the customer had credit facilities with other banks, if so details needed to be provided. However, in majority of the accounts the same was left blank or details of facilities with other banks were not given. The bank was thus not following the instruétions contained in para 4.3 of Master Circular on Management of advances dated July 01, 2015 (LOI). (Action) Further, in some of the current account opening forms, only the name of the other bankers were specified by the customer without indicating the nature of such account. The bank had not further enquired to ascertain the nature of facilities availed by the prospective customers as envisaged in para 4.3 of RBI Master Circular on Management of Advances dated July 01, 2045 (LO!). (Action) 4) The bank had allotted UCIC.te its customers. ‘e) No irstancé of issuance of DD above £50, 000 through cash ‘was observed. 9.2 Audit & Control 9.2.1 Control mechanism The bank had formulated an audit policy and had put in place an Audit-and Inspection Department to oversee the function of audit and inspection. All the branches of the bank were covered: under concurrent audit on an ongoing basis by different chartered accountants. 9.2.2 Scope and coverage of all kinds of audit and its compliance: The coverage of audits was satisfactory. However, it was observed from the audit data of the bank that the reports from the auditors and compliances thereof by the branches were received with @ delay. Tho ACB reviewed the same with a delay of 2-3 months from the month to which it pertained to (LOI). As per audit policy para L, the bank had fixed the time frame for closure of the audit paras as. per their audit risk rating. It was observed that 54 medium risk and 19 low risk observations of 2014-15 were pending for closure (LOI). _ (Action) ‘The bank had received the report.on August 8, 2016 it had yet to submit the compliance to the statutory audit. 9.2.3 Compliance to RBI Inspection ‘The RBI Inspection Report was received by the bank on January 1, 2016. The bank submitted first compliance on February 2, 2016 and second compliance on April 21, 2016. The following observations were found to be persisting, (i) The bank had not achieved the target of Priority sector and weaker sections lending. {li) The bank needed to ensure strict adherence to IRAC norms. {ii) The functioning of the Audit committee was not considered effective. (Action)9.3. Information Technology Risk 4) During the PPR, the bank (Central Office as well as branches) migrated from the old application (OMNI) to the Finacle CBS system w.e¥. April 19, 2018. ISAAC conducted the Data Migration audit of the Core Banking implementation project during the months of June — August 2015. As stated in the audit report, the mismatches in data comparison of source and destination systems were identified and resolved by The coverage of IS audit included software aucit, functional audit, firewall and network ‘audit, web application assessments, data contre audit, branch operations IS aucit, adherence to SLA terms by vendors and disaster recovery in tune with RBI guidelines. The IS audit during the PPR was conducted by wherein functional testing of Finacle-CBS application and Finacle Treasury application was done. Data centre ‘audit was carried out in Dec 2015. Pending position in respect of IS Audit were as follows: () tntemet banking aplication (web app security assessment) - 1 high-risk para, 4 medium risk paras and 1 low-risk para. (ii) Finacle Core Web Application assessment - 2 high-risk paras. (ji) Mobile banking Android App assessment - 3 high-risk pares. (iv) Fini Mobiconnect Mobile App ~ 1 high-risk, + medium-risk and 2 low-risk paras (Action) ¢) Inthe Vulnerability assessment of Servers of PPR, IS audit observed sample of missing patches related to the Operating System for which an average of 20 patches were pending to be applied pertaining to high risk, an average of 19 patches pending to be applied of medium-risk and 2 patches pending to be applied of low-risk. (Action) d) The INFOSEC Cornmittee meeting was held on December 23, 2015 which was attended by Senior Management personnel, Chief Audit Officer and IS Aucit manager. Web filtering policy, Acceptance usage policy, Password policy, Accéss Control Policy. Clean Desk Policy, Change Management Policy and Business Continuity poliey were finalised and crevlated, However, the Physical and Environmental Security Policy placed for discussion during the meeting was pending for review and finalisation. (Action) 9.4 Management Information System ‘The exception report generated from the system showed the folowing 7 items pending with the vendor for resolution: surrender value issue, Gold loan limit, Loan ECS OW debit, ‘TDS on deposit interest, CASA Accounts, User profile and CRM Escalation matrix. (Action) 9.5 House-keeping “The quality of housekeeping was found to be satisfactory 9.6 Frauds and vigilanceot (a) The bank had reported four cases of fraud during PPR involving amount of 20.52 lakh in respect of fraudulent transactions carried out through VISA debit card on September 17, 2015. The bank had reported these transactions to RBI on September 30, 2015. It had blocked the card and reported to VISA. The bank had debited the fraud amount to profit and Joss account. As on DPI, ten cases of frauds were outstanding Involving an amount of 240.08 lakh for which the bank had made full provision. (b) The bank had a staff accountability policy which was reviewed on March 31, 2015. During the PPR, there were 13 cases. involving 46 staff_members for which action was initiated as follows; (a) issue of warning letter (41 staff) (b) stoppage of increments (2 staff), (©) reversion to lower grade (1 staff) and (d) two staff members resigned from services of the bank on initiation of disciplinary action. 9.7 Customer Service ‘Customer Service in the bank was’ generally satisfactory 9.8 Complaints The bank had a pol on redressal of customer complaints, During PPR, the bank had not received any complaint through RBI. However, it had received twelve complaints through the Office of the Banking Ombudsman (OBO) which were resolved. Fifty eight complaints were received from customer help. desk and fifteen complaints directly from customers to Head Office of the bank. As on DPI, five such complaints were yet to:be resolved. (Action) 9.9 Use of abridged name: The bank was using abridged name, PMC Bank, along with its full name Punjab and Maharashtra Co-operative bank in. various stationery items and Publicity materials: The font size for the full name was smaller than the: one used for abridged name. 10 Foreign Exchange Business 10.1 The bank had been granted an Authorised Dealer Category:t license to conduct the full- fledged forex business which was renewed and valid till August 22, 2017. It had one category, two “B" category and 112 °C” category branches as on the DPI. 10.1.1 Maintenance of non-resident accounts ‘The bank had been submitting monthly statements in form STAT 8 to RBI through XBRL. 10.1.2 Trading and merchant turnover and income earned therefrom, analysis of income and exchange profit ‘The foreign exchange tumover of the bank for the last two years is fumished below. o (in @ lakh) ee 2014-15 2015-16 _ Merchant |" Interbank | Merchant Interbank |[Purchases : 74104.80 | 5884450 | 25027307 Sales - 2798730 | 6220.70 Total _ $30145.00 | 4275017.00 | [Forex treasury income | — 24.70 | ‘Trade Finance income z 34.70] [Income from forex operations | 59.40 | The merchant to inter-bank turnover had dectined from 3.21 times during 2014-15 to 2.41 times during 2015-16 and forex income declined by 210.50 lakh during 2015-16 due to decline in merchant to inter-bank turnover and introduction of amortisation of commission income on Import LCs and buyers credit during the year. 10.2 Internal control guidelines for forex business, management of different types of risk 10.2.4 The bank had an integrated Dealing Room consisting of Front Office and Back Office, The mid-office had started functioning w.e.f February 2016. It had voice"recording system for recording conversation. The dealers did not adhere to the compulsory two-week continuous break during 2015-16, (Action) 10.2.2 RBI had fixed net overnight open position limit (NOOP) of the bank at € 650.00 lakh and Aggregate Gap limit at USD 50 million which were generally adhered to by the bank. The bank had fixed internal limit! exposure limit for market risk management such as; day light limit, counterparty exposure limit, VaR limit (2239.00 lakh), and Individual Currency Gap Limit (IGL). It had generally adhered to these limits except counterparty exposure limit and daylight limit on a few occasions which were ratified by the Joint General Manager/Managing Director. The bank was seiding Gap staterrients to FED, MRO in the form of FTD and GPB daily which contained details of their open positions, AGL maintained, and VaR computation. 10.2.4 The System Audit of Dealing Room operations in terms of 8.2 of the FE.CO.FMD. No,18380/02.03.137/2010-11 dated February 03, 2011 (intemal. Control Guidelines) was conducted by Chartered Accounts belatedly in August 2016 and it had submitted the report on August 20, 2016. However, compliance was yet to be submitted by the bank. 410.3 Management of funds in Nostro account, reconciliation All the five nostro accounts were reconciled as on DPI. 10.4 Export & Import Business No deficiency was observed. 10.4.4 Bill of Entry (BEF) & Export Outstanding (XOS) ‘The bank had'submitted Form BEF statement in XBRL on a half-yearly basis in time. As per the BEF statement for the half-year ended June 30, 2015, one importer viz failed to submit Bill of entry. The importer had informedthe bank that the order was cancelled and had received only part refund of USD 620126. Further, bills of entry in respect of advance remittance made towards imports of less than US. $ 1.00 lakh as on DPI were yet to be submitted by 28 customers. (Action) The bank was regular in submission of statement of Unhedged Foreign Currency exposure of Corporates during 2016-16, As per the XOS statement, three export bills (more than 1 year and less than 2 years) amounting to 215.20 lakh were unrealised as on DPI (Action) 10.4.2 MTSS business: The bank was acting as sub-agent under Money Transfer Service ‘Scheme (MTSS) of for which RBI approval was obtained vide letter dated March 28, 2016 and was valid til February 22, 2017. 11. off-Balance Sheet Business 11.1 Bank guarantees: There were four bank guarantees aggregating °6571.36 lakh invoked by the beneficiaries which were paid by the bank by closing the fixed deposit offered as a Security, The total guarantees outstanding as on DPI were within the 10% prescribed limit. There were no ‘unsecured guarantees issued by the bank. However, the bank guarantees were not issued in ‘security forms serially numbered as prescribed vide para 1.3 of RBI circular no, DCBR.BRD. (PCB) MC No.8/09.27.000/2015-16 dated July 01, 2015, (Action) 14.2 Letters of Credit ‘There were 87 domestic LICs aggregating "49254.89 lakh. outstanding as on DPI. No inland LC had devolved on the bank during 2015-16, 11.3 Advance payment /Buyers’ Credit The bank had disbursed a loan against advance import remittance of US $ 8,40,000 to in November 2014. The emittance was effected to overseas supplier through two transactions involving USD 700,000 and USD 140,000. respectively on November 07; 2014, Later, the borrower hhad cancelled the order placed to overseas supplier due to delay in the project. The funds which were to be received:from the borrower due to cancellation of the above order were remitted to on June 04, 2015 (US $ 5,29,125 or Rs.337.93 lakh) but were not deposited back into the account of PMC bank as USD 310,875 were yet to be received by the bank. Further, 8 buyers’ credit aggregating 2638.23 lakh in respect of were outstanding as on DPI (Action)[_—Paricutars Date of # Under sec 22 of BR Act 1949(AACS) Go the RBI ACT 1994. T TK. Profile of the bank amar Registration 180/2014 Multi State Bank) | MSCSICRI ( Co-operative T issuing | licence? DBOD.U- BD. MH 370P inclusio nin 2x8 schedul of January 29, 2000 Last Inspection (OL) March 37, | 2018 nt Present Inspection (DPI) | “March 31, 2076. Unistate/Multistate/Area of ‘operation Multi-State. The area of 9 peralion confined to the States of Maharashtra, Delhi. Kamataka, Gujarat Andhra Pradesh, Madhya Pradesh and Goa, Number of| branches/extension ‘counters ‘As on DLT : March 31, 2015) ‘Opened during, period covered under inspection Closed during period covered under inspection ‘As on DPI (March 31, 2016) 103 Hi Nik: 114 Reason for closing down of branch / branches / extension counters during the period covered under present inspection, Wil ‘Any bank merged / ‘amalgamated during the year and if yes, no of branches Total number of ATs Onsite ‘Offsite 4 Pe} Dale of Election of the Board Next Election March 25, 2075 March 2020 Name of thie Chairman ‘As on DL During the period under review ‘Changes in the constitution of Board since last inspection. Members inducted by co-eption Jelection —In place of... 70. ‘Name of the CEO As on DLT As on DPI m1 12, Committees of the Board Date of superseding of the Board (if applicable) No iB. Letter number and date advising superseding of the Board ({t applicable) 14, 76. ‘Whether RBI has issued any directions / operational instruction/supervisory action under SAF No Name of the Statutory ‘Auditor (Rating) ‘Audit RatingD. Compliance: (Amount in * lakh) Sr. | Parameter Prescribed | DLT DPI ‘Assessed | Complian | No. | Norms (%) (%) [amount | ce j Assessed _ (YesiNo) | IfNO | whether : he persisting | 7. | Borrowing Nominal 20% of the i117% | 1289% | 12.89% T Yes | Members to Regular | regular L Members members ; 2 | Adherence to share ‘As the bank had declared capital to wskiweighted assets | NA linkage norms: ratio (CRAR) of 12 per cent on a continuous basis, it is ‘exempted from the mandatory share linking norms ‘| Capital to Risk Weighted | Minimum 8% 120%] 12.21% | 122%] Yes Assets Ratio (CRAR) 4, | Applicable NDTL ‘74001874 | “ea627582_| 8627582 i 5. | Section 22(3)(@) ofthe | Assessed 7479.48 |" 65898.70 | 5808.70] Yee | Banking Regulation Act, | networth to be 1949 (AACS) Greater than I 2000 || Section 7701) ofthe Assessed Net 57479.49 | “65898.70 | 65668.70| Yes Banking Regulation Act, | worth to be 1949 (AACS) * 1,00 lakh and | above CRR 4% of NOTL Yes Yes Yes ‘Yes, SLR Investments 21.5% ofthe (Ba2i%) | (@a0A%) | BB.OaE)T Yes! ‘applicable 179187.13 | 248475.53 | 248475.53 | | NOTL 9. | Non'SLR Investments") 70% of previous | (047%) | —(0se%) | (ESR) T Ver year deposits 9231.10 4528.60| 4528.60 TO] invesimentin HT 25% of the (15.39%) | (1.98%) | C7 Yes category applicable 113912.78 | 106185.29 | 106185.29 | NoTL. 11] Prudential inter-bank | 20% of folal (3.56%) | (3.47%) | ~ (ATH) | Ves (Gross) Exposure Limit | deposit liabities | 24442.33| 2702.43 | 2709049 | of the previous year | 12} Prudential Inter-bank 8% of its total Within the | Withinthe | withinthe| Yes! ‘Counter Party Limit deposit liabilities limit lint limit of the previous | year | ppt cra TOOGTAS | — SAS02 D2 | GIDETE | Yaw ‘unds |B] Exposure an individual | 18 per 8000.00 ‘9500 Within [Yes |] borrower cent of capital applicable funds finn 14] Exposure to a group of | 40 per 21800 25500 | Within | Yes borrowers cent of capital applicable funds i timit Director related cans Loans/Guarantees To dieclors 6xcept those sancloned NIL against FDs/Life Insurance policies standing in their own name ; ‘Applicable Net Total 79824322 | 604201.02 | 894201.02/ > L__ | Assets: ee i76] Exposure to Housing, | 10% of net total 44%) | (834%) | (6.34%) | Ves ] Real Estate and | assets 7803722 | 74563.56 | 74563.56 | | Commercial Real Estate | of the previous | | year | | (4.85%) |- (2.24%) | (2.24%) Housing Loans upto * | An additional 38542.80 | 2002352] 20023.52 | Yes pean limit of 5% for the purpose of grant of housing loans Up to "25 lakh 17] Limits for individuar y 5.00 500 | 5.00 Yes Borrower and Group | 028 #khto Borrower for unsecured 5.00 lakh advances depending upon the DTL and CRAR 76] Details of Directors Two Category | RETs Bye- Laws] Existing professional Guidelines | I Girectors with | Woman : z z adequate representation | Professional S 2 a from women & | Directors SCIST community. | SC/ST - 1 1 ‘OBC Total - 18 14 (BOD) Remarks 7a] Aggregate Celing on | 10 per cent of WsI%)] — (O4a%)] (044%) | Yes Unsecured Advance Not total assets 4087.74 3011.11} 9914.11 as on 31 March of the preceding Financial yeer.20] Total | 40 percent of (24.45%) | (16.04%) | (16.01%) [Ne | Priority ‘Adjusted Net 400204.13 8866667 | g8515.57 | Sector Bank Credit | | | or credit “ANBC as | *ANBCas | «, SuaSt | aenet) cohwGe* | sans oe] mount of Of: Rs, | Ra.ss27sa | Pet bank = | Balance 487909.06 37 2 | Sheet lakh lakh ae) Exposure, as on takh | | March 31 of the | previous year ‘whichever is higher Bil Advances to 10 percent of (54%) | (6.69%) | _ (69%) | No Weaker ANBCorcredit | 31860.38/ 2037488 | 20374.88 | Sections, equivalent amount of Of | *ANBGas| “*ANBCas| “ANBC as Balance Sheet | perbank-| per bank—| . per bank — Exposure as.on Rs, | 5.552754. | Rs.552754, March 31 ofthe | 487909.06 37 |* 37 Previous year, lakh lakh lakh whichever is higher 22] Guarantees 10 per cent of 02%) | 19%) | (aA9%) | Yes the total owned 7439.92 | 19380.16 | 19380.16 resources of the bank comprising paid up capital, eserves and deposits 23) Transfer of funds to O58 885.21 | 885.21 | Yes DEAF E 24l Payment of DIGGS Half yearly T8707 875.25 | 875.25) Yes | Premium ;Confidential Reserve Bank of India Department of Co-operative Bank Supervision Mumbai Regional Office © Inspection under Section 35 of the Banking Regulation Act, 1949 (AACS) - Punjab and Maharashtra Cooperative Bank Ltd., Mumbai Financial Position as on March 31, 2016 Summary of findings 1. Introduction and Capital Adequacy 1. The bank had complied with Section 11(1) and Section 22(3) (a) of the Banking Regulation Act, 1949 (AACS) with the assessed net worth of °57522.81 lakh as on March 31, 2016 (Date of Present Inspection - DP). The bank had complied with the minimum prescribed regulatory requirement for capital of 9% with assessed CRAR of 12.04% as on DPI. ‘The borrowing nominal members were within the permissible limit of 20%, Credit Management : |. The bank had failed to achieve prescribed targets for lending to. priority sector and weaker sections with the assessed lending at 22.04% and 6.64% respectively of ANBC Of previous year. li, There was a divergence between the exposure to housing, RE and CRE sector as ‘reported by the bank ('76037.22 lakh) and as assessed by the I ('75975.18 lakh) to the ture of 937.96 lakh. ‘The bank had Issued debit cards to loan account holders. 'v. The bank had not fixed DCCO in sone of the project loans. ¥. The system and quality of post disbursement supervision and documentation inthe bank needed improvement. | vi. There was shortfall in provision required for loan losses to the tune of 849.88 lakh and interest capitalized on NPAs identified by 1O of Rs.1366.60 lakh. 3. Investments |. The bank had complied with the requirement of investments in SLR and non SLR securities. ji, The bank had adhered to the limits for prudential interbank (gross and single) exposure. Page 1 of 3Quarterly certificate of holding of investments and the half yearly review of investments were submitted to RBI. Functioning of Board of Directors The bank had not adhered to the Do's and Don'ts prescribed for Board of Directors of the bank while purchasing properties from a company in which one of the directors of the bank was interested in. The reviews placed before the board were generally in conformity with the RBI instructions. ‘The BoD meetings wore well attended and the board functioned in a cohesive manner. Earnings Analysis ‘The ROA and ROEA declined from 1.63% and 1.78% to 1.23% and 1.38% respectively mainly because of additional provision aggregating "210.48 lakh for loan losses and interest capitalized on NPAs identified by 1.0. _ The bank had reported a net profit of 7847.78 lakh for 2015-16 as against %7809.72 lakh during 2014-15. The LO had assessed the net profit of 5637.30 lakh on account of additional provision for loan losses “843.88 lakh and reversal of capitalized interest in NPA accounts “1366.60 lakh. Liquidity ‘The computation of NOTL was found to be not in compliance with Section 42(1) of the RBI Act, 1934 as it had reckoned balance in the nostro accounts as inter-bank assets which was set- off against the inter-bank liabilities to arrive net inter-bank liability, ALM statements were submitted to RBI with a delay. ‘Systems and Controls, Forex business and Off Balance Sheet business ‘The bank had filed CTR, STR and NTR statements with a delay during 2015-16. ‘Several risk paragraphs were pending for closure w.rt. concurrent audit reports for 2014-15 and 2015-16. KYC updation was ponding in 171245 accounts, out of which 38281 were active accounts.