PMC Bank Fraud: Lessons from Sanjay Gulati’s story

  • PMC Bank depositors have been affected by RBI restrictions after a Rs 4,355 crore scam came to light.
  • Five depositors have died after RBI imposed withdrawal restrictions on PMC Bank.
  • This could happen to us too! What are the lessons to be learnt from this?

PMC Bank Fraud

Published: October 22, 2019 at 11:10 am

Last Updated on

On Sep 24th 2019, the RBI placed Punjab and Maharashtra Cooperative Bank under directions due to “weak financial health”. The withdrawal limit was first only Rs. 1000. Amidst confessions of fraudulent accounts to hide NPAs to the tune of Rs. 4,355 crores, the RBI, has subsequently increased the withdrawal limit to Rs. 25000 on Oct 3rd 2019 and then to Rs. 40,000 on Oct 14th due to pressure from depositors. Sanjay Gulati, whose family has about Rs. 90 lakh in deposits with PMC died the same day due to heart failure.

At the time of writing this article, there are four more victims due to PMC bank fraud. The most recent, Bharati Sadarangani, again heart attack, and this time the family had, hold on to your chairs, 2.5 crores worth of deposits in the bank!

According to a press release by the bank, “the financial position of the bank has been substantially impaired due to fraud perpetrated on it by certain persons” and with the Rs. 40,000 withdrawal limit, “ about 77% of the depositors of the bank will be able to withdraw their entire account balance”.

With Rs. 11,000 crores of depositor money, the Oct 14th RBI directive was due to the pressure from protesting depositors. Sanjay Gulati and his father were among them. When something like this happens, it is inevitable that we ask, “why did they put so much money in one bank and that too a co-operative one?”, “what if it happens to us? 

The problem is, we (including our regulators and the government) are always reacting. Instead of being pro-active. The what if it happens to us question should be considered before trouble strikes. What can we learn from these episodes besides the usual do not pull all your eggs in the same basket aka concentration risk? Regular freefincal author Srivatsan writes about lessons from the Sanjay Gulati story.

This is a guest post by regular freefincal contributor Srivatsan. His most famous pieces are:

It could happen to you! – Are you ready?

As they say, fact is stranger than fiction. Here are the mind-blowing aspects of the Sanjay Gulati story.

  1. For the last 6 months, he was unemployed as Jet Airways went bankrupt
  2. His family had close to 1Cr deposits in PMC bank (one of the largest co-operative banks in the country)
  3. The bank goes kaput and he cannot withdraw the money
  4. His 80+ year old father participated in a protest with him
  5. He has a son with disabilities
  6. He was 51 years old and died of cardiac arrest

My first gut reactions to reading this story are:

“Hope he had enough insurance; Hope the widow doesn’t get the claim rejected due to a fine print that says he was in a protest / anti-social activity”

“An 80-year-old guy goes to a protest march? He is alive and his son is dead? “

Fooled by randomness, Risk of exposures & Devastating Sequence of risks:

Let me digress. Take a breath. Think for a moment.

What is the probability a 50yr old engineer loses a job? In my father’s days it was impossible. Nowadays, it is highly probable but still, it should be small right?

What is the probability that your top co-operative bank where you had major savings goes kaput? Nowadays this is becoming more common but same as above?

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What is the probability an 80-year-old father is fit and his 50-year-old son dies of heart attack?

What is the probability that a person has a special needs child? Typically, it is something like 1 in 1200 if the parents are under 30.

What is the probability that all the above 4 happening together to the same person? Really miniscule right?

What we forget is though the probabilities are miniscule, but non zero, the impacts are deadly – close to minus infinity! The product (Expected value) becomes a huge negative number.

Think of the chain of events that led to his stress-induced death. Special needs child->job loss at 50->losing access to 1Cr cash in your bank->huge mental stress->heart attack

Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. One is capable of unwittingly playing Russian roulette – and calling it by some alternative “low risk” game.” – Taleb

I urge the readers to check out this presentation on Non-Ergodicity and its implications and do play the coin toss game at the end!

Let’s come back.

What are the issues that we straightaway see here with respect to personal finance?

  1. Importance of adequate term insurance coverage + spouse knowing where it is actually located!
  2. Emergency fund to cover job loss in current scenarios
  3. Importance of side gigs and secondary source of income
  4. Having a separate corpus for special needs children’s care – bumping up an emergency fund and insurance adequately
  5. Longevity issues – Father outliving his children and probably his money!
  6. The notion of false security with “government” or financial institutions. The undeniable fact that banks are NOT secure! Risk of piling deposits with a single bank. How many of us know that our FDs are backed only up to the limit of 1 lakh in case of a bank default?
  7. Risk of having the money but not able to touch it when you need it the most
  8. Last but not least, taking care of your mental and physical health


I leave with you with the following questions. Put yourselves in their shoes.

  • What should/can the widow do now? For herself, for the child?
  • What should/can the father do now?
  • Is there anything SG could have done differently to have a different outcome?

I will be interested to know responses from readers as well as advisors from the blog.

Please join me in thanking Srivatsan in yet another insightful piece. In my opinion, chasing returns in equity is a known devil unlike chasing returns in fixed income. More on this in today’s video on YouTube. Subscribe to be notified

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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  1. What should/can the widow do now? For herself, for the child?
    What should/can the father do now?
    Assuming that the funds in the PMC bank are unavailable now and no info reg when they will be available, we need to look at —– any other funds available, any insurance benefits, possibility of selling the existing house and re-locating to a Tier II or Tier III town, possibility of wife getting employment full time or part time– tough decisions, but need to consider.
    Is there anything SG could have done differently to have a different outcome?– for the life of me, I cannot fathom how somebody can leave such large amount in FD’s–surely cooperative banks pay only about 0.5% more than regular banks– I have been repeatedly telling all people I come across about how bank FD’s actually rip off the customer by paying measly rates which don’t even match inflation–this example just reinforces the need for financial awareness , even in big cities like Mumbai where one would expect people to be more financially literate. The very least SG could have done would be to keep these FD’s in different banks– spreading the risk , so to speak.

  2. can similar thing happen to mutual fund also, even index fund has to depend on private player like HDFC or Motilal what can we do to better prepare for it. compare to FD mutual funds has more money so effects will be bad. equity will be converted to debt close to goals and again debt has to be with these banks and similar to PMC may happen.

  3. The author has wonderfully captured the lessons to be learnt.

    I would like to add one more lesson. Physical Assets. This case highlights the importance of Physical Assets. Ofcourse they have their own risk, but its always better to have some portion in assets like Real Estate, physical Gold etc. Since PMC Scam, I have now started shifting some of my portfolio to physical precious metals. There is certainly a lobby against assets like Physical Gold like coins etc (and infavour of MF’s etc) as it does not give recurring income to anybody !! However PMC scam only reinforces the importance of such assets.

  4. The tragic chain of events has left the survivors with very few options but survive & fight, they must.

    To get back the control on life (so missing at this point in time) would need as much mental fortitude as financial intelligence. The 80 year old needs to be the leader once again, to allow the younger survivor to be able to pull the family back to financial safety. Together, they should
    – shore up their financial knowledge immediately,
    – get hold of any ‘white knight’ in their social circle (if any),
    – consolidate the finances & make best of the financial options available (a bit like ILFS),
    – wife to become the earning person (if not already) sooner than later in the skill area she possesses plus get updated in knowledge area with more future potential,
    – pull down monthly expenses to bare minimum,
    – take health & term insurances (to the extent possible).

    Most of the time, we do not realize what we are truly capable of. Wish & pray to GOD that the family does so & soon gets back to its’ feet.

  5. There can be indirect impact even if the investments are made in debt mutual funds. Even though the probability of the example given by me is rare, it can’t be ruled out. Let’s say one invests in a very good debt mutual fund; even AAA rated. The risk is reduced (compared to FD) since the mutual fund has the underlying investments spread in multiple instruments. Now unfortunately, let’s say the bank where one has the bank account using which the investment was made in the mutual fund runs into issue. At the same time if the person wants to redeem some money from the debt fund. Even though the debt fund doesn’t have any issue, the redemption amount would be credited to the bank which already is running into issue and one may or may not be able to withdraw the amount from the bank due to the restriction(s). Very corner case example, but it can happen. In this example, if an investor has invested the amount in the mutual fund from his SB account in PMC, while redemption the amount would be credited to the account in PMC which the person might not be able to withdraw fully. Even though we can say that one can provide a new bank mandate, change the bank account with the AMC and request the redemption amount to be credited in a different bank, it all requires lots of effort.

    The simple solution which everyone knows including the government is to increase the deposit insurance. Unfortunately in our country, anything which needs to be paid to the government would have revision to adjust for inflation (example: property/income/road tax increase); but, when it comes to anything related to the commoner, the inflation adjustment would take it’s own sweet time (deposit insurance, exemption for childrens education, etc.,).

  6. Considering the above scenario, I have a very simple question ! What happens to the money (investments) in demat accounts of such banks (eg. Axis bank & Axis securities, HDFC bank & HDFC securities)? Are they protected by Sebi ? Can these be redeemed in case of such crisis ? Does the nominee has control over redemptions directly in hand or it goes into the bank and gets stuck there (since withdrawls are restricted) ?

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