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RBI action on PMC amounts to penalising depositors. Regulatory framework governing cooperative banking needs relook

Updated: September 27, 2019 4:52:40 am
pmc bank rbi curbs, reserve bank of india pmc bank restrictions, Punjab and Maharashtra Cooperative Bank (PMC) Reportedly, the crux of the problem is the bank’s exposure to a real estate firm, which itself is currently undergoing insolvency proceedings.

On Tuesday, the Reserve Bank of India (RBI) imposed curbs on the activities of the Punjab and Maharashtra Cooperative Bank (PMC) for a period of six months. The decision came after the central bank discovered certain irregularities in the bank, including the under-reporting of non-performing assets (NPAs).

The RBI had initially allowed depositors to withdraw only Rs 1,000 over a six-month period. But, on Thursday, following public outcry and panic responses, it revised this limit upwards to Rs 10,000, observing that with this relaxation, more than 60 per cent of depositors would be able to withdraw their entire account balance.

While the restrictions imposed by the regulator, under section 35A of the banking Regulation Act, are aimed at safeguarding depositors interest, and preventing a run on the bank, such moves, which are seen as penalising depositors, can end up having the opposite effect, denting trust in cooperative banks and increasing the risk of a contagion.

Reportedly, the crux of the problem is the bank’s exposure to a real estate firm, which itself is currently undergoing insolvency proceedings. But, the bank’s financials for the year ended March 2019 do not provide any indication of financial stress. On its part, the regulator has appointed J B Bhoria, a retired senior RBI official, as administrator of the bank. A forensic audit could shed light on its asset-liability mismatch.

It could reveal the true extent of the problem — whether it’s a question of just one account or whether there are larger concerns over the bank’s financial position or its governance structure, as is the case in many of these banks. If the review suggests that the bank is better health than what is believed, it could open the window for the RBI to further ease the withdrawal limits. Alternatively, the RBI could also explore the option of merging PMC with another healthy cooperative bank to avoid any instability, as it has done so in the past.

This episode, once again, raises questions on not only the governance structures at these cooperative banks, but also on their supervision. Cooperative banks are under joint supervision of the RBI and states. And while the RBI has signed MoUs with state governments, unless state governments cooperate in effecting regulations, supervision is likely to be ineffective. Clearly, there were no early warning signs of trouble in this case.

Instances such as these are likely to raise calls for reviewing this regulatory framework and giving more powers to the RBI to oversee these entities. These need to be attended to. The RBI should also examine the long-term feasibility of their business models in light of the rapid technological changes in the financial sector. But the larger question over the absence of a framework for timely resolution of financial firms remains.

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