PMC Bank Crisis: What RBI Could’ve Done Instead of ‘Cruel Joke’

Here’s what RBI could’ve done instead of playing a ‘cruel joke’ on depositors, with its Rs 1,000 withdrawal limit.

Short of technically cancelling Punjab and Maharashtra Cooperative Bank’s (PMC) banking license, the RBI, via its 23 September 2019 directive, has virtually stopped it in its tracks from doing further banking business for six months.

While the directive is not unique and has precedents — this month itself — it has extended such sanctions under Section 35 (A) for Osmanabad-based Vasantdada Nagari Sahakari Bank, Vithalrao Vikhe Patil Co-operative Bank in Nashik, and Karad Janta Sahakari Bank — PMC’s size is what makes it a warning to depositors.

PMC Bank’s Annual Report Reveals Signs of Stress in FY 2019

PMC Bank is a multi-state scheduled urban co-operative bank with its area of operation spreading across Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhya Pradesh. Founded in 1984, PMC Bank has now grown to a network of 137 branches in six states, and ranks among the top 10 cooperative banks in the country.

Its balance sheet size is Rs 13,600 crore which rivals many small finance banks, and is even comparable to say the Catholic Syrian Bank (total asset base of about Rs 16,000 crore), which is expected to come out with its IPO soon.

As of March 2019, PMC Bank has a deposit base of Rs 11,600 crore. This is far higher than the deposit base of say Equitas or Ujjivan Small Finance Bank (Rs 8,000-9,000 crore). Of PMC Bank’s total deposits, Rs 2,300 crore is savings and current account deposits, while Rs 9,300 crore is fixed deposits.

The bank’s annual report reveals tell-tale signs of stress in FY19, with a sharp Rs 303 crore addition to a bad loan book of Rs 148 crore on the back of sizeable exposure to builders and priority sector lending chiefly to farmers.

Dangerous Tendency of ‘Bailing Out’ a Failing Cooperative Bank

But none of these is going to assuage the sense of mental and financial hurt of the depositors in PMC who cannot withdraw more than Rs 1,000 for the next six months, thus making them vulnerable to defaults in meeting their own EMIs and other commitments. This could set off a possible contagion effect on the entire financial system. The deposit insurance of Rs 1 lakh per depositor in a bank is grossly insufficient, given the excessive dependence of senior citizens and other risk-averse people on the perceived safety of bank deposits.

Cooperative banks beckon more with their neighbourliness, and a slightly higher rate of interest on fixed deposits. The RBI has played a cruel joke on the depositors with its Rs 1,000 limit on withdrawals. It would have been in the fitness of things had it clamped down on further loans and investments, as well as on further acceptance of deposits by PMC.

The clampdown on withdrawal in excess of Rs 1,000 points to the dangerous tendency to bail out — albeit partially — a failing cooperative bank, with the help of depositors’ money.

Nothing can shake the confidence of depositors in the banking system more than this incipient tendency. Chastened depositors might also start thinking in terms of not putting all their deposit eggs in one basket — just 1 lakh in a bank — and if you have 22 lakhs, open accounts with 22 different banks!

Here’s Why Cooperative Banks Need to Fully Come Under RBI’s Charge

The Supreme Court interceded for the benefit of the homebuyers in the Amrapali group of companies. It should similarly take up cudgels for depositors in cooperative banks, whose plight is as grave as these homebuyers.

There is no reason why credit rating should not be made mandatory for cooperative banks accepting fixed deposits.

Cooperative Banks are registered under the Cooperative Societies Act. Thankfully, banking laws were made applicable to cooperative societies in 1966 through an amendment to the Banking Regulation Act, 1949. Since then, banking-related functions are regulated by the RBI, and management-related functions are regulated by respective state governments/central government.

Powers have also been delegated to the National Bank for Agricultural and Rural Development (NABARD) to conduct inspection of state and central cooperative banks. Thus, cooperative banks are amenable to pulls and pressures of the state government and powerful politicians in the local area of their influence, much to the detriment of depositors who are often blissfully unaware of this lurking danger. It is time RBI got full and complete oversight over cooperative banks.

(S. Murlidharan is a Chartered Account, and has also written extensively for The Hindu Business Line between 1996 through 2013, and later started contributing regularly to Firstpost on a range of issues like business, economic, tax. He is currently based in Chennai. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)