The Reserve Bank of India (RBI) giving an in-principle nod to Centrum Financial Services to set up a small finance bank (SFB) was the headline event for the banking industry in the week gone by.
This permit was given in response to Centrum's application to take over crisis-ridden Punjab and Maharashtra Co-operative Bank (PMC Bank) that has been in the ICU for the last 20 months after the RBI superseded the board in September 2019 following a fraud.
The RBI’s June 18 announcement is being seen as the first step towards the resolution of an issue that affects around 9 lakh PMC Bank depositors. A large number of them are still waiting for their money stuck in the bank. Some of them put in their life savings in the bank.
While the RBI announcement is a relief, the resolution and refund to PMC Bank depositors may take a while. The Centrum Financial- BharatPe consortium, which bid for PMC Bank, has a few hurdles to cross.
To begin with, SFB needs to be formed and then an amalgamation programme has to be drawn to merge the newly formed SFB with the co-operative bank.
It is only after the new entity begins operations and infuses capital, that the resolution would be considered done. The process may take around four months or even more, according to initial indications. For depositors waiting to withdraw their money, there is still some time to go.
There are different points of view on RBI's decision to pick Centrum-BharatePe for the takeover of PMC Bank, one of the biggest cooperative banks in India. A section of the PMC Bank depositors is unhappy with the choice. The depositors say that the central bank should have gone for an established, running bank either from the public sector or private sector rather than a new licensee with no direct experience of running a bank.
It is important especially given the fact that the lender has a controversial past and faces a major trust deficit.
In an interview of Moneycontrol, Centrum's executive chairman Jaspal Bindra acknowledged the lack of trust among depositors and said the new promoters would work hard to regain the lost faith. Bindra said he would want to retain existing depositors.
But, convincing the PMC Bank depositors to continue with the bank wouldn't be an easy task for the new leadership team, as Bindra also acknowledged.
The rot runs deep
PMC Bank's failure isn’t just another case of a co-operative bank going bust because inefficient management left the finances weak.
There is a combination of factors at play— alleged collusion with a corporate debtor, fudging of documents and hiding real figures from the banking regulator for years. The bank violated rules with impunity, which not only diminished an otherwise popular bank in Maharashtra but also destroyed trust.
Many Mumbai-based businesses banked with PMC and the fraud shattered their confidence. According to the PMC Bank Depositors' Action Forum, there have been at least 150 deaths in connection with the episode so far. At the end of 35 years of its existence, the bank, which started in a small room in Mumbai’s Sion neighbourhood on February 13, 1984, is everything but what the vision statement said.
Investigations have revealed that the bank’s now-suspended managing director Joy Thomas gifted nine flats to his second wife in Pune. He married her after converting to Islam in 2005. Thomas has been arrested. For many years, the bank’s operations were shrouded in a mystery even to the all-powerful regulator, RBI.
The details available, so far, reveals that out of PMC Bank’s loan book of around Rs 8,383 crore, as on March 31, 2019, about 70 percent of the money was given to real estate firm HDIL. Problems arose when this account began to turn into an NPA (non-performing asset). According to investigators, the bank management hid this stress from the RBI.
No bank can lend beyond a certain percentage of its capital base to a single company, RBI regulations say. This limit can be different for co-operative banks but still, there is no justification for lending 70 percent of the loans to a single company. By doing so, the bank put itself at a huge risk. Were the promoters and the board aware of these acts? Several questions demand answers.
The Centrum-BharatPe will have to infuse significant capital and put in place a strong leadership to guide the bank. Also, to retain PMC Bank customers, the new owners will have to engage with them and convince them that the past won’t cast a shadow on the new entity. Considering the mess, even an experienced bank would have had a gigantic clean-up task at hand, and here we are talking about a newly formed SFB.(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)