PMC Bank rescue: Housing societies still left high and dry by deposit insurance act

The resolution for PMC Bank is inching closer, according to a recent statement made by the Reserve Bank of India (RBI) Governor, Shaktikanta Das. The RBI proposed an amalgamation with Unity Small Finance Bank, in order to give relief to the PMC depositors whose money has been stuck with the bank for a long time.

While the PMC Bank deadlock seems to be headed for resolution, the long wait for other crisis-hit co-operative banks’ customers, particularly co-operative housing societies, continues.

What happens to the deposits made by several co-operative housing societies in banks such as Sri Guru Raghavendra Sahakara Bank and Kapol Co-operative Bank?

Housing societies’ corpus face uncertainty

While the DICGC act of 1961 takes cares of individual deposits, this regulation is silent how such type of depositors (housing societies) will be treated. Technically it is an account on behalf of the members. The funds are pooled for the benefits of members and certain funds are required to be created statutorily. More importantly it may be difficult to raise funds in case huge repair work is to be undertaken for the building. If the funds which are accumulated over the years get wiped off, the members will be at a loss in undertaking further activities and raising such funds will be difficult. Besides, the building will deteriorate if the repairs are not undertaken in time.

Protecting individual depositors

As per the DICGC Act, in the event of the winding up or liquidation of an insured bank, every depositor is entitled to payment of an amount equal to the deposits held by him at all the branches of that bank put together in the same capacity and in the same right, standing as on the date of cancellation of registration (i.e., the date of cancellation of licence or order for winding up or liquidation) subject to set-off of his dues to the bank, if any [Section 16(1) read with 16(3) of the DICGC Act]. However, the payment to each depositor is subject to the limit of the insurance coverage fixed from time to time. The limit at present is Rs 5 lakh. The question remains whether the deposits held by a cooperative housing society are also considered as one depositor and will be paid only Rs 5 lakh.

Quite a good number of housing societies  have deposits with cooperative banks running into lakhs of rupees, representing building repair, sinking and depreciation funds, apart from members’ deposits etc. The size of deposits vary according to the number of members in the society. Although housing societies were permitted to open accounts with other banks, most of them preferred to continue with cooperative banks for two reasons.

-Higher rate of interest offered by the cooperative banks

-Convenience. Some cooperative banks had branches that were closer to the societies, facilitating ease of operations.

If the license of such a bank is cancelled, the society can’t pay salaries of the staff deployed. Payments to contractors for repairs and maintenance would be impossible. The Rs 5 lakh received may not be adequate at all. Neither the Act nor the DICGC has specified how such type of depositors will be treated.

There are several such housing societies in the country that maintain huge funds with cooperative banks. Should such accounts not be treated as funds of each member?

To start with a formula to protect deposits of housing societies need to be drawn – say 50 percent of the total deposits with a maximum ceiling of Rs 50 lakh .This will at least give comfort to the members.