The Reserve Bank of India’s decision to impose restriction on withdrawals and lending in Punjab and Maharashtra Cooperative (PMC) Bank reportedly because of under-stating of bad loans brings the regulation of cooperative banks into the limelight. Cooperative Banks have played a crucial role in bridging the lacuna between formal finance and unbanked, but, reckoned too little to create any systematic damage, are relegated to the administrative back burner. The Cooperative Banks are regulated jointly by the state government and the RBI. RBI supervises the banking operations of UCBs (Urban Cooperative Banks) and all the norms followed by other banks are also applicable here while only the ownership and control are in the hands of the state registrars. However, the customers were unaware that even being under the RBI’s supervisory glare, the bank was being milked by the players of real estate led by Housing Development & Infrastructure Ltd (HDIL) with the convenience of some bank officials.
Let us look into the history of PMC bank before going into further detail on what went wrong that forced RBI to impose restrictions.
Background of PMC Bank
PMC bank was established in 1984. It was the youngest bank to be given the status of scheduled bank in the year 2000 and an authorised dealer category1 licence in 2011 for forex business by the Reserve Bank of India. A total of 137 branches are there of PMC bank across India with 81 branches in Mumbai, Thane, Navi Mumbai and Phalgar regions, 10 branches in Pune & 12 branches in other parts of Maharashtra. PMC has many small scale business firms, institutions and housing societies as its customers. The bank was very popular among the Sikh community as a few of the original promoters hailed from the Mumbai based community.
Now let’s see what went wrong.
What went wrong?
Everything was looking hunky-dory from the Balance Sheet and the Annual report. The bank had a capital of approximately Rs 11000cr with a net profit of Rs 99.69cr in the financial year 2018-19 compared to 100.90cr in 2017-18. The bank revealed 3.76% of advances as gross non-performing assets in March 2019. This was a good performance in comparison to other public sector banks that recorded more than 10% gross non-performing assets.
But, subsequently it came to light that the bank had understated and suppressed its sticky assets, the amount of bad loans could be as high as Rs 2000-2500cr. It was rather impossible for the bank to make provisions against such high amount of bad loans. Although, the issue was not flagged by the bank’s auditor in the Annual report for the year 2018-19 yet the RBI became stricter in the wake of immense divergence in bad loan reporting.
It was alleged that from behind the curtains, the bank was involved in funding a clutch of companies led by HDIL. HDIL had already been declared as a defaulter by the commercial banks. The chairman of HDIL is Rakesh Kumar Wadhawan and Sarang Wadhawan, his son, is the Vice Chairperson & Managing Director. Joy Thomas, Managing Director of PMC, reported that Wadhawan was sanctioned loan by the bank even after the company was declared a defaulter of loans by other commercial banks and the company was taken to NCLT (National Company Law Tribunal) for proceedings of insolvency. However, MD of PMC claimed that the amount of loan sanctioned was much less than Rs 2500cr as was rumoured.
NCLT had admitted an insolvency plea on 20th August 2019, moved against HDIL by the Bank of India (BOI) in connection to a loan default amounting to Rs 522cr. It is surprising that even after HDIL was taken to NCLT for insolvency proceedings, PMC bank sanctioned Rs 96cr for a settlement at BOI. However, MD of PMC claimed that it was given on behalf of personal guarantee assured by Wadhawan. But, loan being sanctioned to a firm despite being a defaulter also somewhere evince a lax in RBI’s supervision. These issues must had been flagged a long before. RBI was compelled only after HDIL was taken to NCLT for proceedings of insolvency and was at not condition of repaying the loans & the bank was incompetent to create provisions.
Under the Lens
The plight of depositors of PMC bank across Maharashtra, Goa, Karnataka, Gujarat, MP, AP and Delhi and the impunity with which administrators flouted norms brings up several questions on management of 1500 urban co-op banks with deposits amounting to approximately RS4.5 lakh cr.
Co-operative banks are classified under two heads based on their region of operations: Urban co-operative banks& Rural co-operative banks. Urban co-op banks are further classified into scheduled & non-scheduled banks. There are three important differences between co-operative banks and scheduled commercial banks. First, unlike the commercial banks, RBI partly regulates the UCBs. RBI supervises their banking operations which lays down their risk control, capital adequacy and lending norms while the management & resolution in distressed situations is regulated by Co-operative Societies’ Registrar under the Central or State government. Second, UCBs are structured as co-operatives in comparison to commercial banks that are structured as joint stock companies. Third, between the borrowers and shareholders of the commercial banks, there remains a clear distinction. There are no such distinctions in UCBs and hence the borrowers get the opportunity of doubling up as shareholders.
In the event of failure of UCBs, Deposit Insurance & Credit Guarantee Corporation of India covers the deposits upto 1lakh per depositor. This is same as even for commercial banks.
Based on the region of operations, urban co-op banks are further grouped under two tiers. Tier-2 category comprises of 31% of them and accounts for 85% of advances and deposits. Several small co-op banks and co-op societies keep their deposits in the large urban banks as they usually offers higher rates of interests than the state run banks. Hence, it is worrying that if the lender fails to return the money, these smaller banks, nearly 130 in count, who have kept their deposit, have to mark everything as NPAs. Operation margins of co-op banks are very thin thus NPA will mean a total loss, thereby triggering a wider crisis.
Now, at this stage the question that should strike our mind is what led cooperative to be overseen & what might have allowed the PMC bank escape the blame of such huge bad loans for years?
To find the answer, we have to once again dig the history. In 1966, Co-operative banks directly came into the radar of RBI but faced the issue of dual regulation. RCS or the Registrar of Cooperative Societies controls the management elections, administrative issues and even auditing. RBI guided them to Banking Regulation Act in accordance with cooperative societies, which comprised of all the regulatory facets namely maintaining of cash reserve, granting of licence, capital adequacy and statutory liquidity ratios and proper time-bound inspection of all these banks. Therefore, it is apparent that UCBs had been within the radar of RBI, but due to the issue of dual regulation, it could not fully control the banks in cases of supersession of boards or director’s removal, as the RBI can do in case of private sector banks.
After encouraging the UCBs initially to spread up all over the country for financial inclusion, the RBI started to look into the issue of poor governance from 2005 when it stopped giving licences to new branches and bank entities. With several of these banks failing, and the central bank pushing the weak ones to get merged, the number of operating UCBs in the country reduced to 1551 in 2018 from 1926 in 2005. The central bank also tried to enhance the administration of these banks by establishing a Board of Management to control them. But the case of PMC bank depicts that a lot of shenanigans even now slips away from the RBI’s sight and thus demands for and urgent reformation in the Cooperative banking sector.
Presently, J B Bhoria has been appointed by the RBI as PMC’s administrator and has been given the task of bring back the bank into proper tracks. However, looking at the present scenario of these banks, as mentioned above, it is essential to bring in an urgent reformation for efficient, smooth and robust environment among the Cooperative banking sector.