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PMC Bank and the present status of operation and supervision of urban cooperative banks in India

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The Reserve Bank of India has put limitations on the withdrawal of deposits by account-holders of the Mumbai-based Punjab and Maharashtra Co-Operative Bank (PMC). The restrictions remain in force for a period of six months starting the end of business hours on September 23. The Reserve Bank of India also restricted PMC Bank from making any advances or loans to its customers. The Reserve Bank of India has however said that the restrictions imposed by it should not be interpreted as cancellation of PMC’s banking licence. The regulator has also appointed an administrator for the bank. PMC, a cooperative bank with 137 branches and at least 51,000 members spread over seven states of the country including Delhi and Punjab, has deposits of about Rs 11,617 crore, making it among the country’s top five urban co-operative banks.

PMC’s collapse is unlikely to impact financial markets or other private or public sector banks as co-operative banks have meagre dealings in money markets as they largely depend upon deposits.

Normally, the RBI initiates the action after a regulatory supervision exposes wrongdoing and if it feels that the financials are weak for it to continue. Here, some whistle-blower wrote to RBI pointing out the wrongdoings so that things could be brought back to order, if at all it could. The bank has unusually huge exposure (about 73% of its total assets.) to one of the real estate firms, HDIL, which filed for bankruptcy recently. The amount of outstanding loan to HDIL is about Rs. 6500 Crore. PMC’s chairman S Waryam Singh was on the board of HDIL in and up to 2015.

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PMC’s results in FY19 show no issues with the bank, with net NPAs of 2.19% and capital adequacy ratio (CAR) of 12.62% — above the RBI’s 9% threshold. It was among the top five co-operative lenders in India, with a loan book of Rs 8,383 crore. However, this exposure excludes the bank’s Rs 6,500-crore hidden loans to HDIL as of March 2019. It is clearly a case of financial fraud and a criminal case has been filed recently against the top management of PMC and promoters of HDIL.

Urban cooperative banks are registered as cooperative societies either with the State Cooperative Societies Act of each state or under the Multi-State Cooperative Societies Act of 2002. They are regulated and supervised by the Registrar of Cooperative Societies of states or by the Central Registrar of Cooperative Societies. The RBI only regulates and supervises their banking functions and thus has less control on management and carries out on-site inspections and off-site surveillance on them. In fact, some time ago, RBI suggested that the Chairman be removed, but it was not acted upon.

The central bank’s decision to put withdrawal limits for account-holders of PMC led to protest by depositors outside the bank’s main branch in Mumbai’s Bhandup area and various other branches. Now, there is a PIL in Delhi High Court seeking lifting of restrictions on cash withdrawal. The petition also submitted that a full insurance cover of the depositors’ money was the need of the hour. Apart from that, it further seeks exhaustive and comprehensive guidelines to safeguard banking and cooperative deposits in the eventuality of an emergency financial crisis.

Deposit Insurance and Credit Guarantee Corporation, a subsidiary of RBI has the mission to contribute to financial stability by securing public confidence in the banking system through provision of deposit insurance, particularly for the benefit of the small depositors. The insurance limit currently is 1,00,000/- and there is now a need to review the insurance limit.

Regarding exhaustive and comprehensive guidelines to safeguard banking, the legal and institutional framework for bank supervision in India is provided under the Banking Regulation Act, 1949. Amid concerns over the RBI’s recent regulatory record, the RBI is set to unveil a separate vertical for supervision .and regulation to focus on improving oversight for banks, non-banking finance companies and urban cooperative banks.

The writer is a long-standing commentator on contemporary issues.

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