RBI clampdown on PMC Bank: Central bank's action will have cascading effect on other co-op banks, erode customer confidence

If one goes by past evidence, the Reserve Bank of India (RBI)’s clampdown against Punjab and Maharashtra Co-operative (PMC) Bank under Section 35A of Banking Act citing irregularities would culminate in a forced merger with some stronger bank. That is unless PMC manages a miraculous recovery in the given time rectifying alleged irregularities and improving financials. The imposition of Section 35 A for a period of six months is to make sure that there is no panic run on the bank post the regulatory action. The sad part is that the RBI hardly gave any warning to the customer what is coming. PMC Bank has public deposits worth Rs 11,600 crore and close to 140 branches; this money will be safe in either case but till a resolution happens, customers will be constrained to use their own money in the bank. Cash withdrawals have been capped at Rs 1,000 for the six-month period means those who have significant deposits in the PMC Bank will be in a tough spot. In case of emergencies, such customers will find it difficult to get their money back when they need it. The deposit insurance scheme guarantees just Rs 1 lakh to the depositor in the event of a bank collapse. [caption id=“attachment_7400291” align=“alignleft” width=“380”] Representational image. News18[/caption] PMC Bank, which is a multi-state co-operative bank with operation in at least six states, has also been barred from taking fresh liabilities and issuing loans without the RBI permission. In effect, the RBI has ordered freezing the operations of PMC Bank leaving customers in considerable uncertainty. But, this isn’t the first time cooperative banks are coming under regulatory action. Hundreds of cooperative banks have been closed down or were forced to merge in the previous years on account of financial irregularities and dubious style of functioning. Cooperative banks aren’t big banks when seen against commercial banks but, over years, they have gained size and reach in rural areas, where the density of larger banks is less. These banks are also highly influenced by local politicians and state governments and RBI’s monitoring is light in relation with commercial banks. Many times, the RBI action comes at the final hour without much warning to the depositors like in the case of PMC Bank. According to data from NABARD, there are 33 state cooperative banks, 363 district central cooperative banks as on 31 March 2018. The number of primary agricultural credit societies (PACS), the smaller ones, as on 31 March 2017, stood at 95,595, as per the latest data available. Since 2010, the RBI and NABARD had conducted a review of the cooperative banks that resulted in the cancellation of licences of many loss-making banks. Since then, the performance of the remaining lot has improved. But, these entities have clearly not come out of danger zone. According to data from NABARD, state cooperative banks across the country have deposits to the tune of Rs 1,23,534 crore as on 31 March 2018 as against Rs 1,22,039 crore as on 31 March 2017. These lenders have a total loan outstanding of Rs 1,31,934 crore as on 31 March 2018 with an impressive loan recovery percentage almost 95 percent. Of the total, 32 state cooperative banks posted total profit of Rs 1,037 crore during 2017-18 as against Rs 970 crore by 31 state cooperative banks during 2017-18. Their non-performing assets (NPAs) stood at 4.72 percent of their total loans and advances outstanding as on 31 March 2018 as compared to 4.10 percent as on 31 March 2017. These banks’ accumulated losses decreased to Rs 605 crore as on 31 March 2017 from Rs 527 crore as on 31 March 2018. Are cooperative banks important? Without doubt, these institutions have played a critical role in offering banking services to the low-income groups, mainly farmers, especially given that the banking correspondents (BCs) model hasn’t worked well in the hinterland. Banking correspondents are agents of banks who operate in areas where there are no bank branches.

In the light of PMC Bank-like incident, what should an average customer do? Clearly, it is important to approach these banks with caution particularly when someone decides to park a significant chunk of his savings in such banks hoping for higher interest rates compared with large commercial banks. As they say, don’t put all your eggs in one basket. It’s always a good idea to park your investments in multiple institutions rather than relying on just one bank. Separately, the PMC Bank episode is also a crucial reminder to the RBI and the government to begin the process of identifying big ones among cooperative banks and bring them under tighter regulation, perhaps mandatorily converting them to small banks or commercial banks. The PMC Bank clampdown will likely have a cascading effect on the operations of other cooperative banks and erode customer confidence further.