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CASE STUDY ON RBI

The Reserve Bank of India has ordered Punjab and Maharashtra Co-operative
(PMC) Bank not to do any business for six months and capped depositor
withdrawals at Rs 1,000, throwing the lives of thousands of traders, self-
employed and daily wage earners into disarray. The regulator has also
appointed an administrator for the bank.

Defaults appear to have surged in the past six months amid tight economic
conditions and some lumpy loans to real estate companies located in the
financial capital that turned sour, making it difficult for the bank to meet its
commitments, two people familiar with the matter said.

The sudden freeze ahead of the festival season is set to upset calculations of
customers and deal a big blow to a state that is heavily reliant on the
cooperative bank structure to service millions of customer in its villages. The
development comes at an awkward time for the state government in
Maharashtra, the BJP, and other political parties such as the NCP and the
Congress, which are known to have a strong support base among the
customers of cooperative banks. The state goes to polls in October.

“Depositors will be allowed to withdraw a sum not exceeding Rs 1,000 of the

total balance in every savings bank account or current account,” RBI said in a
statement.

“Without prior approval in writing from the Reserve Bank, (PMC Bank) will
also not be able to grant or renew any loans and advances, make any
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investment, incur any liability including borrowal of funds and acceptance of

fresh deposits,” the statement said.

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.

Savings of up to Rs 1 lakh is guaranteed by the deposit insurance but

anything beyond that would be repaid depending on the recovery under the
RBI-appointed administrator.

“I would like to tell the public that there is no need to get panicky because we
have DICGC (Deposit Insurance and Credit Guarantee Corporation) cover
through which deposits of up to Rs 1lakh are covered,” JB Bhoria, the RBI-
appointed administrator told ET Now. “Besides, we have our own assets which
are liquid. We are trying our best to sort out the situation. Prima facie there
appears to be some NPAs, but I am told that they are all secured by the
assets…”

The collapse appears to have been sudden and is shrouded in mystery with
the bank management voluntarily approaching the regulator to initiate the
action instead of the regulator initiating the process which is the practice.

“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,” said
a person familiar with operations. “Here, the bank came to the RBI and
demanded that it freeze the business so that things could be brought back to
order, if at all it could.’’

Industry experts say there were also mismatches between the data uploaded
on the RBI server and manual entry data maintained by the bank. Speculation
was rife that the bank had an exposure of Rs 400 crore to one of the real
estate firms, HDIL, which filed for bankruptcy recently. PMC Bank’s chairman
S Waryam Singh was on the board of HDIL in 2015.

“And what should the account holder do on receiving this message. Rs 1,000
are all that we can withdraw over 6months. We stopped keeping cash at home
because you encouraged online transaction and now we can’t even withdraw
our own hard-earned money,” tweeted Amruta Lokhande, a depositor with the
bank.
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WEAKEST LINK
Cooperative banks are the weakest link in the financial system with their
supervision and administration falling within the purview of both state
governments and the RBI. At the end of March 2019, 1,542 urban cooperative
banks were operating in the country, out of which 46 had negative net worth
and 26 were under RBI administration. The year before, 39 had negative net
worth and 20 were under RBI administration.

While the central bank cannot take any action unilaterally, it suggests a plan
of action to the state government and leaves it to the discretion of the state on
whether the lender should continue to operate or wind up.

PMC Bank has been put under regulatory restriction under Section 35A of the
Banking Regulation Act for a period of six months due to irregularities
disclosed to RBI,” the bank’s managing director Joy Thomas said in a message
to depositors. “I take responsibility and assure all the depositors that these
irregularities will be rectified in six months. I know it is a difficult time for all
of you. We assure (you) that we will definitely overcome this situation and
stand strong.”

PMC Bank, 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.

Its bad loans almost doubled to 3.76% of gross advances by March 2019, from
1.99% a year earlier. PMC Bank’s membership shrunk to 51,000 in March
this year from 62,000 a year earlier.