PMC Bank Crisis – Burning Issues – Free PDF Download

COMMERCIAL BANK VS COOPERATIVE BANK

• Cooperative bank is governed by both banking and cooperative legislation, as they are registered under the Cooperative Society Act, 1965
• And regulated by National Bank for Agriculture and Rural Development (NABARD) & Reserve Bank of India (RBI).
• Banking laws were made applicable to cooperative societies in 1966 through an amendment to the Banking Regulation Act, 1949.
• Since then, banking related functions are regulated by the RBI
• And management related functions are regulated by respective State Governments.

• In 2000, it was conferred with scheduled status by the Reserve Bank of India (RBI).

WHAT IS SECTION 35A OF THE BANKING REGULATION ACT, 1949?

• It vests power in the RBI to give directions to banks and can take action, “to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company”.
• The RBI under the act can also impose restrictions on banks to ensure better governance and control.

WHAT HAPPENED ON SEPTEMBER 24?

• Customers of PMC Bank woke up to a shocker, when a message from the bank revealed that it has been put under directions by Reserve Bank of India (RBI) for six months.
• Police officers were deployed at the branches to keep things in order.

WHAT HAPPENED IN PMC BANK’S CASE?

• RBI has not yet given any specific reason for issuing “Direction”.
• But it is said that the regulator found irregularities in lending.
• Under reporting of non-performing assets or higher than permitted exposure to same group accounts.
• An inspection is currently underway.

WHAT ARE THE RESTRICTIONS CUSTOMERS?

• Customers can withdraw only up to Rs 1,000 from the bank, irrespective of the type of accounts.
• They can renew existing term deposits on maturity.
• In case of an emergency expense like hospitalisation etc, the RBI may grant an exception on a case-by-case basis.

RESTRICTIONS ON BANKS?

• The bank cannot accept fresh deposits nor grant new loans without prior approval from RBI.
• ATMs have been taken off the payment network.
• Online banking has been stopped.

PRESENT HEALTH OF PMC BANK?

• Bank’s net profit for 2018-19 stood at Rs 99.69 crore.
• Bank’s total deposits stood at Rs 11,617 crore as of March 2019, whereas total loans and advances stood at Rs 8,383 crore.
• Gross NPA ratio as of March 2019 stood at 3.76%.
• It employs 1,814 people as of 31 March 2019.

WHAT IS THE FUTURE OF PMC BANK?

• After 6 months, RBI will take a call on whether to relax some restrictions or extend the period.
• If the discrepancies found can be corrected over the course of time, the bank’s functions will be reinstated. (even before 6 months)
• However, if RBI believes that it is not in the interest of the bank’s customers to keep it running.
• It may lead to complete closure of the bank. In such a scenario, the bank’s arrangement with the Deposit Insurance and Credit Guarantee Corporation (DICGC) will kick in.
• Under this customers will be eligible to claim up to Rs 1 lakh of their deposits with the bank.

WHAT ARE MAIN PROBLEMS WITH COOPERATIVE BANKS?

• Dual control– This leads to lesser supervision by RBI like on other banks.
• Lot of political influence– as it is also regulated by state governments.

WHAT SHOULD BE DONE?

• Greater financial literacy among people about cooperative banks.
• Better supervision by RBI.
• RBI stepping in an earlier moment.
• State government cooperating with the RBI.

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