PMC BANK SAGA – TWO STATES, ONE BIG MESS

There is so much panic!

The RBI placed the Punjab and Maharashtra Cooperative (PMC) under regulatory restrictions for six months, effective 23^rd September.  If you are an account holder with this bank, there aren’t many choices left. 

RBI directed that PMCs savings account holders cannot withdraw more than Rs 1,000 of their total balance. And if the account holder has any kind of liability towards the bank, the amount in her/his bank account will be first used to adjust the relevant borrowing account.

This apart, RBI also said that PMC cannot grant or renew any loans and advances, make any investment, incur any liability including borrowing of funds and acceptance of fresh deposits or disburse any liabilities without the prior approval from the RBI.

Well, that pretty much means PMC cannot do much banking. Today many branches of PMC witnessed scenes of chaos, anger, tears and a feeling of helplessness. The question everyone is asking – should we also remove money from the other co-operative banks? There is a feeling of unease that banks are not safe; the proposed mergers have also created confusion and now this news. People are feeling that money in the banks is no longer safe as they do not know which bank will go down next.

Well, nationalized banks are safe; this is a relative sense of security – they are safer than the co-operative banks. But then are co-operative banks unsafe? People tend to invest in these urban co-op banks because they give higher interest rates on the deposits. So high risk-high return – that’s the formula and people knowingly go for it, isn’t it?

Mahaveer Bank offers deposits at 8.5% pa for 2-5 year deposits, Saraswat Bank gives 7.6% for 15 months deposit, Bharat Co-op gives 8% for 1-2 year deposits, Janata Sahakari Bank gives 7% for over three years deposits. Clearly these are in no way comparable to the deposit rates given by the nationalized banks, which currently hover at an average of 6 to 6.5%. Thus the need for that extra 1 to 1.5% more has led to a lot of grief today.

The underlying truth here is that it is foolhardy to put all your money in one bank and that too, a co-op bank where credit controls are not as tight as commercial banks. More importantly, you will never come to know if your co-op bank is doing well or not as providing information on the financial health is not mandatory. Thus you end up knowing that the bank is in trouble only when it starts sinking or half sunk.

But in the same coin, the flip side- commercial banks are piling up NPAs, sinking the economy, making losses and we call them safe?

The answer to that – commercial banks are big and in recent times, have you heard of any commercial bank going down or leaving account holders high and dry like this? In commercial banks, the Govt of the India is the guarantor and its constant recapitalizing keeps it afloat; of course there is a new way out now, mergers!. In that sense commercial banks are much better off than co-op banks.

Though commercial banks also, to a large extent are run on the fiefdom of the Govt, in co-op banks it is pretty blatant – politicians run it on proxy, thinking it’s their own household bank. In PMC Bank itself, one of the biggest reasons for its failure is that exposure of Rs.400 crore to HDIL – the quid pro quo here is that PMC Bank’s Chairman, S Waryam Singh was on the board of HDIL in 2015.

Also co-op banks have a small capital of just Rs.25 lakh and RBI inspects their books once a year. The shocking part about PMC is that word is out that the bank itself approached the RBI for this action as its fraudulent loans and other write-offs had gone way beyond its control. See, that’s what we mean when we say RBI control is lax.

Currently four more co-op banks are under similar RBI restriction – Vasantdada Nagari Sahakari Bank, Padmashri Dr.Vitthalrao Vikhe Patil Co-op Bank, Karad Janata Sahakari Bank, Bidar Mahila Urban Co-op Bank.  As recent as May 2019, RBI imposed financial curbs on Goa-based Madgaum Urban Co-operative Bank, capping withdrawals by account holders at Rs 5,000. And on 11^th September, curbs on Indian Mercantile Co-op Bank were lifted - a long road as these were imposed way back in 2014.

The point we are making is – there has been a long history of trouble brewing at co-operative banks. This is nothing new and when you bank you know that the risk is there, only much higher.

Should one stay away from co-op banks? You can invest knowing the risk. And the thing to remember – never put large amounts of money in the co-op banks; keep the bigger chunk in commercial banks. Our sincere advice to those having accounts with other co-op banks – shift majority of it to commercial banks.

What happens to those having account with PMC? They have a long wait. The bank has not gone under; RBI is putting these curbs to help the bank recover. Savings of up to Rs 1 lakh is guaranteed by the deposit insurance but anything beyond that would be repaid depending on the recovery under the RBI-appointed administrator. The bank is sure that it will be able to rectify everything in six months. Till then one can only wait…