What made the Punjab and Maharashtra Cooperative Bank trust a shantytown developer with almost 70% of its loan book?Even as the Mumbai Police on Monday filed an FIR against the PMC Bank, a confession letter by suspended managing director Joy Thomas has exposed just how comfortable the relationship between the bank and Wadhawan family had become over the years.According to the reports, PMC Bank did not report its exposure to Housing Development and Infrastructure Limited (HDIL) for six to seven years. How the auditors could be hoodwinked for such a long time is a case ripe for investigation.PMC Bank’s cozy relationship with Mumbai-based slum developer HDIL goes much beyond the location of its corporate office on the third floor of Dreams Mall, a landmark building, developed by the Wadhawan-promoted firm.In a five-page letter, Thomas revealed how the bank virtually acted as the in-house banker of the company, even when it was facing insolvency proceedings in the National Company Law Tribunal (NCLT).The relationship between the Wadhawan family and the PMC Bank can be traced back to the mid-1980s, when the late Rajesh Kumar Wadhwan - the then director of Land Development Corporation - rescued the bank multiple times. This was also when the family started banking with the PMC Bank and infused family capital into it to help bring the bank's net worth from negative to positive.In his letter to the RBI, Thomas has given a detailed account of the growing relationship between the lender and the Wadhwan family, which eventually took the bank down.In 2004, when the bank faced another liquidity crunch, Wadhawan once again deposited Rs 100 crore to tide the bank over. Soon, more that 60% of the bank's transactions were with the HDIL group alone. Thomas, in his letter, said: "Since the time Rakesh Kumar Wadhawan started banking with the bank, and the performance of all his accounts was good, more than 60 percent transactions of the bank were from this group."He added that from time to time these accounts would be overdrawn but would get regularised in "due course of time.” During this process, PMC used to charge 18-24% interest from these accounts paving the way for a "very good profit", he wrote.The tables turned around on the bank, when in 2012-2013 the group started facing liquidity pressures after the cancellation of their slum rehabilitation project near the Mumbai airport. According to Thomas, this was also the time when HDIL started to default on its dues.How did PMC’s board, its auditors, and the central bank remain clueless for so long?The bank started to look the other way on these defaults due to the fear of risking their reputation, Thomas admitted."As the outstandings (loans) were huge and if these were classified as NPA, it would have affected the bank's profitability and the bank would have faced regulatory action from RBI," Thomas said in his letter.Thomas' confession letter to RBI revealed that the bank's exposure to bankrupt HDIL was pegged at Rs 6,500 crore, which is over 70% of the bank's total assets.It took six senior bank officials, almost 21,049 dummy accounts and over ten years of misreporting to execute what is probably the biggest case of swindling at any cooperative bank in the country.Typically, a bank's transactions go through five layers of scrutiny, including internal checks. But the management found ways to keep the loans from being detected. The bank’s statutory auditor Lakdawala & Co validated only incremental loans and not all the accounts of the bank, which further helped the management to cover up the defaults."Since the bank was growing, the Statutory auditors, due to their time constraints, were checking only the incremental advances and not the entire operations in all the accounts. They validated the incremental loans and advances and scrutinised the accounts which were shown by us. Loans to HDIL, which were across multiple entities, did not figure in these accounts," wrote Thomas.The Pandora's box opened when the Reserve Bank of India clamped down on the bank's operations after receiving a letter from a whistle-blower on September 17.Thomas wrote that over time the concealment of the true state of accounts was becoming overwhelming for the six employees who were in the know. This prompted them to approach the RBI. "Every year during the course of RBI inspection we undergo into a lot of stress due to concealment of information from RBI. It was worrying each one of us."He closed his letter saying the bank was still optimistic about the repayment of loans by the group.The default at the PMC bank comes a year after a mega default rocked another national bank.When state-run Punjab National Bank was scammed out of over Rs 14,000 crore, it emerged that the lender was incurring liabilities on behalf of jeweller Nirav Modi and his uncle Mehul Choksi. It was doing so by sending instructions to overseas branches of other Indian banks over Swift - the global system used by banks to transmit payments. But the liabilities weren’t getting captured in PNB’s internal accounts.The PMC saga, in contrast, points to the possibility that the very core of the cooperative bank’s operations was rotten.