PMC Bank Issue Explained

Are Your Deposits Safe in Co-operative Banks?

Introduction

In this article, we are going to discuss the issue in PMC bank (Punjab & Maharashtra Co-operative Bank), which is one of the top 10 co-operative banks in India. After the PMC bank crisis, are your deposits safe in a co-operative banks?

PMC Bank Issue | Is Your Money Safe in Co-operative Banks?

Commercial Bank v/s Co-operative Bank

• Commercial Banks :
  • They are regulated under the RBI’s Banking Regulation Act, 1949 and their business model is designed to make profit.
  • Their primary function is to accept deposits and grant loans to the general public, corporate and government.
• Co-operative banks :
  • They are registered under the Cooperative Societies Act, 1912 and they are run by an elected managing committee. Their objective is to provide service on no-profit no-loss basis.
  • Basically, it is a financial entity engaged in the business of collecting deposits and lending – like any other commercial bank.
  • But they function on the principle of cooperation and sharing profits with members. They offer services essentially to members who are shareholders of the bank.
  • They mainly serve Agriculture-based activities, entrepreneurs, small businesses and self-employment mainly in rural areas.

PMC Bank Details

• Punjab & Maharashtra Co-operative Bank (PMC bank) is a Mumbai-based co-operative bank established in 1984. It is one of the top 10 co-operative banks in India.
• The name of PMC bank came into the limelight when the RBI recently ordered freezing of operations and imposed limits on withdrawals of funds by depositors.
• The bank is having a total loan book of Rs.8,383 Cr as on March 2019. PMC’s annual report shows it to be a profitable lender with a capital adequacy ratio higher than the 12% minimum requirement and a bad-loan ratio of under 4%. This is almost respectable by the current standards of India’s banking industry.
• According the Financials for 2018-19, PMC bank shown NPA of just 2.19% which around Rs.160 Cr.

Then how can the bank have bad loans of Rs.6,500 Cr?

• As much as 73% of PMC bank’s loan book was tied to just one borrower group – Housing Development and Infrastructure Ltd. (HDIL). HDIL is a Mumbai-based real estate developer that’s facing bankruptcy proceedings at NCLT. Thus, the bank’s exposure to bankrupt HDIL has been pegged at Rs.6,500 Cr, which is 73% of the bank’s total assets.
• At least 21,049 dummy accounts were used by the Punjab and Maharashtra Co-operative Bank to hide accumulated non-performing assets of realty firm Housing Development and Infrastructure Limited (HDIL).
• The size of the reported advance is far in excess of the bank’s capital. This goes beyond a failure of oversight, and would require top-level complicity.
• As the outstandings (loans) were huge and if these were classified as NPA, it would have affected the bank’s profitability and the bank would have faced regulatory action from RBI.

Are Your Deposits Safe in Co-operative Banks?

• The nature of regulation is different for co-operative banks. Although RBI regulates co-operative banks from the financial aspects, the management supervision is done by state and central governments.
• In other words, RBI can prescribe the best practices to run a bank but cannot make any changes in the bank management, barring an emergency. As a result, these banks have been subject to a high level of political interference.
• Many small cooperative banks and cooperative societies keep their deposits in large urban cooperative banks. The urban cooperative banks (UCBs) often offer slightly higher interest rates than state-run banks and aggressively seek deposits from housing societies.
• Deposits with a co-operative bank are eligible to get protection of up to Rs.1 lakh per deposit if
  • The bank is covered under the Deposit Insurance and Credit Guarantee Scheme
  • Provided the bank has subscribed to the protection cover
• Only a fraction of a depositor’s money can get insurance cover. If a commercial bank is in trouble, there are legal provisions to protect the depositors’ interest by merging the troubled bank with another. But the same is not true in case of a cooperative bank.