It isn’t an exaggeration to say that in the real world, cooperative bank customers never get equal treatment when compared to those of regular commercial banks. This difference becomes apparent during bank failures. In the case of a commercial bank failure, the Reserve Bank of India (RBI) acts quick, the government steps in and the whole system works to find a resolution at the earliest.
The reason cited is the larger systemic connect of these banks. There are two recent examples in front of us - Lakshmi Vilas Bank and Yes Bank. This sense of urgency is, however, not seen in the case of a cooperative bank failure. While the argument of systemic issue is valid, the question arises about equal justice for all bank customers. Whether they are cooperative banks or commercial banks, the concerns of a depositor are no different. Still, the time for resolution is way different in both the scenarios.
Take the case of Mumbai-based Punjab and Maharashtra Cooperative Bank (PMC). Even after 18 months, there is no immediate resolution in sight. The last update from the RBI on PMC Bank came on Friday (March 26) when the regulator said the validity of directions imposed on the bank (first in September 2019) are extended by another three months and the reconstruction of the bank may take more time.
The RBI placed all-inclusive directions under sub-section (1) of Section 35 A read with Section 56 of the Banking Regulation Act, 1949, after finding a big hole in the bank’s books and evidences of serious mismanagement.
According to the bank, it had total deposits of Rs 10,727.1 crore, total advances of Rs 4,472.78 crore and gross NPA of Rs 3,518.9 crore as on March 31, 2020. The share capital of the bank is Rs 292.9 crore. The bank registered a net loss of Rs 6,835 crore during 2019-20 and has a negative net worth of Rs 5,850.61 crore. The RBI said it is yet to find an investor for the bank, but is engaging with potential suitors who have submitted binding offers in response to the Expression of Interest floated by PMC.
Who will emerge as the final winner for PMC Bank? We don’t know it yet. In January, Payments services company, BharatPe said it is keen on acquiring Punjab and Maharashtra Cooperative (PMC) Bank. In an interview to CNBC-TV18, the company confirmed its plan to acquire the lender.
On January 16, BharatPe and Centrum submitted a combined offer for the troubled lender. As per reports, in the joint bid for PMC Bank, BharatPe and Centrum would pay back 100 percent to retail depositors, who want to withdraw their money.
To put the facts in perspective, a majority of depositors, in numbers, has got their money back. However, there are many depositors who still await a resolution so that they can get their money back. These are people with higher amounts deposited in the bank.
After the RBI took over the board of PMC Bank, deposit withdrawal restrictions were imposed on the bank (initially Rs 1,000 per account which was later increased to Rs 50,000). About 78 percent of the depositors have since been allowed to withdraw their deposits within the withdrawal limit of Rs 50,000. Even though this limit was further enhanced to Rs 1 lakh in June last year, many depositors who have bigger amounts parked in the bank are still not able to get their money back.
While enhancing the withdrawal limit to Rs 1 lakh, the RBI had said that more than 84 percent of the depositors of the bank will be able to withdraw their entire account balance. But, as this column has highlighted before, that still leaves out some depositors who have bigger amounts stuck in the bank. Indications are that the PMC Bank will soon get an investor.
But, the fact remains that for around a year and a half, the suffering of the PMC Bank depositors continued and might be so for some more time. At the time of crisis, PMC Bank had over 9 lakh depositors. Several suicide cases have been reported in connection with PMC collapse. This event has been a depressing episode in the history of cooperative banking in India.
The RBI shouldn’t delay PMC Bank resolution. Cooperative banks have been playing an important role in spreading financial inclusion both in rural and urban areas. These banks are an important component in India’s financial system. In this backdrop, the final outcome of PMC Bank case is being looked by depositors across the country with eagerness. Already, repeated cooperative bank failures have hurt the customer confidence in cooperative banks. Any further delay in the PMC Bank resolution will have devastating impact on customer confidence.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)