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PMC crisis: Commercial banks subject to greater regulatory rigors of RBI

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By Manoranjan

Of late, banks in India have been in the news for all the wrong reasons-NPAs, continued deterioration in asset quality, grossly inadequate capital levels, etc.

While the PMC is small compared to the size and reach of most commercial banks, it is still the fifth largest cooperative bank. As of FY19 it had 137 branches, deposits of Rs 11,617 crore, advances of Rs 8,383 crore, NPAs of 4%, capital adequacy of 12% and a net profit of Rs 99.69 crore compared to Rs 100.90 crore a year ago. This made PMC seem like a relatively well-run co-operative bank.

After the whistle blower's September 17, 2019 letter, the MD and CEO Joy Thomas wrote a detailed five-page confession to RBI. RBI responding "swiftly and promptly" curbed all activities of PMC Bank and appointed an administrator for six months. It was found that PMC Bank's exposure to the bankrupt Housing Development Infrastructure Ltd (HDIL) was Rs 6,226 crore-four times the regulatory cap with the single exposure limit for banks being 15% of capital fund. It was 73% of the banks entire loan book.

In terms of RBI's sweeping restrictions, curbs were placed on fresh lending, accepting fresh deposits and investments. Customers withdrawal was initially capped at Rs 1,000 (later raised first to Rs 10,000 and again to Rs 25,000) from the Bank, irrespective of the type, total balance or the number of accounts. In the event of emergencies like hospitalisation, etc., the RBI may grant a case-by-case exception, though it is not certain to come through. RBI also sacked the Board and suspended the MD and CEO.

PMC created over 21,000 dummy accounts (mostly of dead account holders), did creative banking and showed large number of project loans and, worst, deliberately delayed computerisation. The FIR shows the modus operandi. HDIL promoters allegedly colluded with the bank management to draw loans from the Bank's Bhandup branch.

Further, PMC Bank had also reportedly granted a personal loan of Rs 96.5 crore to HDIL's promoter Sarang Wadhawan. These aspects forced the bank to go down under.

Generally commercial and cooperative banks are seen to be similarly placed but there are several important differences. Considered in a proper historical and comparative perspective, commercial banks vis-à-vis cooperative banks are subject to greater regulatory rigors of RBI; generally, the levels of manpower and operational efficiency are discernibly higher and they are also required to list on the stock exchanges, thereby subjecting them to market discipline.

The genesis of cooperatives can be traced to the formation of the Fenwick Society on March 14, 1761 in Scotland. Cooperative Banks in India have a long history of over 110 years in India. But unfortunately, they seem to be failing more often. The Madhavpura Mercantile Cooperative Bank failure of 2001 because of Ketan Parekh is a case in point.

Historically, the dual control of the state government and RBI has often been identified as an important reason for the mess. No wonder, the number of cooperative banks have steadily declined from 1,926 in 2004 to 1,551 in 2018.

There have been several Committees, which have attempted to streamline the functions and working of cooperative banks in India, e.g., Satish Marathe Committee (1991), Madhav Rao Committee (1999), N.H. Vishwanathan Working Group on augmenting capital of urban cooperative banks (2005), R Gandhi Working Group on information technology systems in urban cooperative banks (2007-08), VS Das Group on an umbrella organisation for the urban cooperative banking sector (2009), YH Malegam Committee on licensing of new urban cooperative banks (2011), R Gandhi Committee (2015). The R Gandhi Committee recommended, inter-alia, an accelerated winding up/merger process, effective regulation of such banks and meeting the capital needs of urban cooperative banks in a greater measure.

Besides, with deposit insurance limited to Rs 1 lakh per bank account, India is among the countries with lowest protection to depositors in the unlikely event of bank failure. While India's DICGC's scheme covers 70% of bank deposits, accounts with less than Rs 1 lakh together account for only about 8% of cumulative bank accounts.

Issues of contagion effect, short-termism as against sustained growth, corporate governance and conflict of interest also need to be carefully considered for a comprehensive assessment and perspective. RBI's measures like revamping its regulatory and supervisory structure by creating a specialised cadre of supervisory officers, strengthening its analytical vertical and enhancing onsite supervision, market intelligence and statutory auditor roles for supervision and creating an institutional mechanism for sharing of fraud-related information among urban cooperative banks (UCBs) like Credit Fraud Registry (CFR) for commercial banks are contextually significant.

In the ultimate analysis, given the interplay between cooperative banks and the socio-political system, the issue boils down to greater political will to address the fault-lines in a coordinated and concerted manner with a sense of urgency.

(The author is Former general manager, Canara Bank.)