RBI’s Moves on Punjab and Maharashtra Cooperative Bank
iasparliament
September 26, 2019
Why in news?
The RBI has slapped restrictions on Punjab and Maharashtra Cooperative Bank Ltd (PMC Bank).
It has also appointed an administrator and superseded its board of directors.
What are the implications of the decision?
The PMC bank is a leading urban cooperative bank headquartered in Mumbai.
The decision sent shock waves among thousands of its depositors.
Panic-stricken customers rushed to bank’s branches across the state and were unable to withdraw more than Rs 1,000.
The Bank has a deposit base of Rs 11,617 crore and operations across 7 states.
It has been put under the scanner by the RBI after “irregularities” were disclosed to RBI.
It ranks among the top 10 cooperative banks in the country.
Moreover, the RBI restrictions will remain in force for 6 months.
Given these, the unrest among customers is likely to continue.
What went wrong?
Reporting - With a deposit base of just over Rs 11,000 crore, PMC bank reported a net profit of Rs 99.69 crore in 2018-19 as against Rs 100.90 crore in 2017-18.
The bank showed 3.76% (or Rs 315 crore) of advances (Rs 8,383 crore) as gross nonperforming assets (NPAs) in March 2019.
This was a good performance considering that public sector banks recorded over 10% gross NPAs.
But, it was learnt that the bank had suppressed the problematic assets and under-reported them.
With this, the total bad loans could be between Rs 2,000-2,500 crore.
Though this was not flagged in the Annual Report of 2018-19, the RBI was following it in the wake of huge divergence in bad loan reporting.
HDIL - The bank was funding a clutch of companies, mainly in the troubled real estate sector, led by Housing Development & Infrastructure Ltd (HDIL).
Rakesh Kumar Wadhawan is the Chairman of HDIL and his son Sarang Wadhawan is the Vice Chairman and MD.
Notably, the Wadhawans of HDIL group had close links with PMC Bank for a long time.
PMC had given loan to Wadhawan even after HDIL defaulted on its loans to other banks.
Notably, commercial banks have already declared HDIL a defaulter.
HDIL was also taken to National Company Law Tribunal (NCLT) for insolvency proceedings.
Recently, NCLT admitted an insolvency plea moved by the Bank of India against HDIL in connection with a Rs 522-crore loan default.
PMC, however, claimed that the loan was much lower than Rs 2,500 crore quoted in the media.
The loans given to HDIL and other entities were suppressed by the PMC despite defaults.
What should be done?
The RBI-appointed administrator of PMC Bank is expected to take appropriate measures to bring the bank back on track.
Going by the RBI’s actions on the co-operative banking front, one option is for PMC Bank to be merged with another bank.
Notably, between 2004 and 2018, the RBI has merged 72 cooperative banks in Maharashtra alone.
Across the country, the number of urban co-operative banks has fallen from close to 1,920 to around 1,550 in the last 15 years.
If the bank is liquidated, which is less likely, depositors will get Rs 1 lakh irrespective of the amount they had deposited.
Small depositors need not worry as the bank has Deposit Insurance and Credit Guarantee Corporation cover, under which deposits up to Rs 1 lakh are covered.
The bank has also claimed it has enough assets to cover the liabilities.
