RBI puts a cooperative bank on hold for six months

Customers gather inside the Punjab and Maharashtra Cooperative Bank at Kolshet in Thane on September 24.

The Reserve Bank of India (RBI) has ordered the Punjab and Maharashtra Cooperative (PMC) Bank to stop conducting business for six months. In an announcement on September 25, the RBI placed several restrictions on the bank, the worst being that depositors will not be allowed to withdraw more than Rs.1,000 per account. Additionally, the lender cannot give fresh loans oraccept fresh deposits during the period.

It is believed that the bank has defaulted on loans up to Rs.2,500 crore that was lent to the now-bankrupt Housing Development and Infrastructure Limited (HDIL). The bank had not shown signs of distress and, on the face of it, seemed to have a low non-performing Asset (NPA) figure. It is another case of a cooperative bank going belly up because of mismanagement of funds and corruption, says an investment banker.

The announcement caused a wave of panic. Depositors formed serpentine lines to get their money out or to find out what to do. A retail banker says there are other issues such as equated monthly installments (EMIs) and other automated payments such as systemmatic investment plans(SIPs) to consider. Sadly, being a cooperative bank, most of the bank’s customers are from the lower-middle-income category, who may have an account with just this one bank..

The RBI has assured PMC’s customers that the Deposit Insurance and Credit Guarantee Corporation (DICGC) covers deposits up to Rs. 1 lakh. Financial advisers have also made reassuring statements that the move does not indicate that the bank is in deep trouble. It is probably a way for the bank to correct itself.

The RBI says these restrictions are imposed when there are three consecutive years of adverse supervisory report. In a statement to its customers, PMC Bank managing director Joy Thomas says: “PMC Bank has been put under regulatory restriction under Section 35A of the Banking Regulation Act for a period of six months due to irregularities disclosed to RBI. I take responsibility and assure all the depositors that these irregularities will be rectified in six months. I know it is a difficult time for all of you. We assure [you] that we will definitely overcome this situation and stand strong.”

According to industry reports, the PMC Bank has 137 branches and at least 51,000 members, spread over seven States, including Delhi and Punjab. It has deposits of about Rs. 11,617 crore, making it among the country’s top five urban cooperative banks. The crisis has clearly stemmed from bad decisions by the management. The crisis exposes the vulnerability of cooperative banks and, more importantly, could potentially destroy the lives of people in the lower income bracket, says the investment banker.