Five questions that PMC Bank depositors should be asking

Waiting for ‘Godot’?

Depositors of the multi-state cooperative bank, PMC Bank aka Punjab Maharashtra Cooperative Bank Ltd. are anxiously praying for their deposits in the bank to be safely returned to them. Their hopes soared when they saw RBI and other banks saving Yes Bank. Please read my blog on this at  https://www.bankingscape.com/2020/04/the-yes-bank-rescue/. Their hopes have got dashed again with RBI issuing a press release on March 21, 2020, extending the moratorium restrictions to June 22, 2020. The depositors of PMC are hoping that their bank will also be saved like Yes Bank or at least, their deposits will be returned to them in full.  Will this happen? Or will it be a case of ‘Waiting for Godot’ ? In this post, I will examine whether this is likely or not.

Who is ‘Godot’?

I am reminded of a play which I had read during my college days. Many of you may also have read Samuel Beckett’s famous tragicomedy ‘Waiting for Godot’. In this play, two characters, Vladimir (Didi) and Estragon (Gogo), wait for the arrival of someone named Godot who never arrives, and while waiting they engage in a variety of discussions and encounter three other characters. One of them gets so frustrated waiting for Godot to arrive, that he even attempts suicide. Unfortunately the belt on which he is trying to hang, breaks! Will a solution for PMC Bank depositors never arrive, like Godot in the play? How many depositors will have to lose their life or get impacted by the loss of money, especially in the times of Covid-19, before a solution emerges? Will PMC Bank get a suitor and get merged or will it go the liquidation way?

 The RBI press release says that 78% of the depositors have been repaid.  A general observer will think that 78% of the deposits of PMC Bank have been repaid by the Bank. We must note here that 78% of the depositors have been paid and not 78% of the total deposits of PMC Bank. These are customers who had less than Rs.50,000 in their savings/fixed/RD accounts who have been paid.  There are a lot of customers who have invested their life savings or their entire Provident Fund money received after retirement. Some of the deposits also belong to Employee Cooperative Credit Societies of organisations, where employees of that organisation deposit their money and these Societies, in turn, have aggregated the amounts so deposited and kept large fixed deposits with PMC Bank. These amounts would obviously be more than Rs.50,000.  These depositors would need their money now since the threat of mounting health care costs, wage cuts and unemployment looms large on them, in the aftermath of the Covid-19 pandemic.

‘The Duality of Control’ Conundrum

Governance in cooperative banks in India has suffered largely because of the problem of duality of control. Co-operative banks are governed by the Registrar of Co-operative Societies, who is their primary regulator. The Registrar is supposed to look after incorporation, management, audit, supersession of Board, liquidation etc. Since these cooperative societies are in the business of banking, RBI comes into the picture. RBI is supposed to look at aspects of cash reserves, capital adequacy, directed lending, financial inclusion, risk management, payments & settlements etc. For the purpose of retaining duality of control, overall control and oversight of these banks is sacrificed and falls in the ‘no-mans-land’ between the two authorities, leading to much finger-pointing and passing on the buck.  The header on the page of the RBI website is a reflection of what is actually needed to be done.  

“REGULATING CO-OPERATIVE BANKING

This role is, perhaps, the most unheralded aspect of our activities, yet it remains among the most critical. This includes ensuring credit availability to the productive sectors of the economy, establishing institutions designed to build the country’s financial infrastructure, expanding access to affordable financial services and promoting financial education and literacy.”

See picture below.

This jurisdiction of RBI applies to all cooperative banks whether multi-state, rural or urban cooperative banks, as long as they are in the business of banking. 

Now, PMC is a multi-state cooperative bank. You may refer to https://mscs.dac.gov.in/BankList.aspx  to see the list of multi state co-operative banks registered under the Multi-State Cooperative Societies (MSCS) Act 2002. PMC Bank is at serial no. 33 in this list. This list has many large, supposedly better run multi-state co-operative banks like Saraswat Cooperative Bank  at no. 35 and Shamrao Vithal Cooperative Bank at no.49.  This list also has many smaller but multi-state, cooperative banks that are facing directions under Section 35A of the Banking Regulation Act and in a similar situation as that of PMC Bank.  Whenever RBI finds that the Non Performing Assets (NPAs) of these banks are going above the prescribed limits resulting in erosion of capital of the bank, it imposes restrictions on conducting banking business under Section 35A of the Banking Regulation Act. It does this to prevent further erosion of capital and protect the interest of the depositors  It typically starts with the imposition of restrictions under Section 35A, followed by various directions from time to time especially on allowing depositors to withdraw certain sums from their accounts. Attempts are then made to resolve the problems by fresh capital infusion or merger with another bank or liquidation of assets. The latest multi-state cooperative bank wherein such a process was followed, is Mapusa Urban Cooperative Bank Ltd., whose banking license was cancelled on April 16, 2020 . Section 35A was imposed on Mapusa Urban Cooperative Bank in June 2015, followed by periodic extensions  of restrictions. Attempts at merging with other banks failed and finally, the  banking license issued to the bank was cancelled on April 16, 2020. The bank has gone into liquidation after almost five years since the restrictions were imposed, and will be disposing off its assets to pay off its depositors. It remains to be seen whether all depositors will get their money in full.

5 questions that depositors of PMC Bank should ask

PMC Bank which was placed under Section 35A restrictions in September 2019, awaits a resolution.  The depositors of the bank, who have not been refunded their deposits so far,  should be asking the following questions to the regulators and the Government:

1. If Yes Bank can be considered ‘too big a private sector bank to fail’, does PMC Bank not qualify for ‘too big a co-operative bank to fail’?  Hasn’t the failure of PMC Bank affected the confidence of the depositors on the cooperative banking sector  as a whole? Then why is there no apparent action to get PMC Bank functioning again, like they did for Yes Bank?
2. Don’t customers of a cooperative bank deserve a more considerate treatment than the depositors of a private sector bank, from the socio-equity perspective? Don’t they come from largely different social and economic classes?
3. There is a view that the depositors of cooperative banks should not have got lured by the extra 0.5% interest that they offer over and above the other banks. That they took the risk of depositing money in a cooperative bank and hence they should not cry foul when they lose their deposits. But then, shouldn’t RBI have introduced a system of rating deposits of various banks, similar to the credit rating given by rating agencies like ICRA, CRISIL, CARE etc. for various financial offerings of corporates? How would an ordinary depositor know if something is wrong with a bank? In the case of PMC Bank, there were no warning signals apparent to the ordinary depositor. PMC Bank branches are in prominent locations, the interiors are well  done-up, branches function very well and give services that are on par or sometimes, even better than the high-profile private sector banks.  Before the imposition of restrictions, there was hardly anything adverse in the media on PMC bank. So how would an ordinary depositor know if something is wrong? In the case of Yes Bank, there were warning signals more than six months before the moratorium. Depositors had enough time to take a decision on their deposits. In the case of PMC Bank, it came as a surprise and shock to most depositors. And yet, the depositors of Yes Bank were saved and PMC Bank depositors are still hoping to be rescued.
4. There are banks that are interested in taking over/merger of the extensive network and ideal location of PMC Bank branches. Maharashtra State Cooperative Bank (MSCB) has proposed a branch merger of PMC Bank branches in Maharashtra and has sent a note to the Finance Ministry in February 2020.  Is there any action being taken in this regard by the Government?
5. To strengthen the cooperative banks and prevent such shocks to the banking system in March 2020 the Finance Minister had proposed an amendment to the Banking Regulation Act which will bring full  regulatory oversight of co-operative banks under RBI. Administratively, these co-operative banks will continue to be under the Registrar of Cooperative Societies. While this amendment will help RBI monitor and control the co-operative banking sector going forward,  what about the current situation for banks like PMC Bank and other banks in a similar position? When and in what manner, will the FRDI  (Financial Resolution & Deposit Insurance) Bill resolve the issue?

Whither FRDI (Financial Resolution & Deposit Insurance) Bill?

While the Insolvency and Bankruptcy Code 2016 (IBC)  governs corporate bankruptcy, the legal framework for bankruptcy or financial distress in financial institutions  like banks and NBFCs in India,  is not adequate. While commercial banks can at least hope to recover their secured loans under  SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Act) 2002, the cooperative banks were left out of the ambit. It was only on May 5, 2020 that a constitutional bench of the Supreme Court has given a judgement that the SARFAESI Act is also applicable to co-operative banks. This direction will help the distressed cooperative banks, since they will be able to recover their secured loans that have gone bad, by disposing off the security provided, thus reducing their Gross NPAs. But what if a bank is still unable to recover from its dire financial situation and has to go in to liquidation? If a bank goes into liquidation, while it can use SARFAESI Act for recovery of secured loans, it will need to recover money loaned to its unsecured borrowers as well, so that it can repay its depositors. A strong legal framework for this process is lacking today.  

 Readers may recollect that in August 2017, the then Finance Minister, the late Sh. Arun Jaitley, had introduced a bill called the FRDI Bill in the Lok Sabha. The Bill proposed a comprehensive resolution framework for revival or closure of financial institutions, including commercial banks, insurance companies, NBFCs and co-operative banks. This Bill came in for a lot of opposition due to one ‘bail-in’ clause (not ‘bail-out’ clause, please note). It was felt that this would harm the depositors of financial institutions. The Bill was withdrawn after it created a furore in the Parliament. Work is supposedly going on to make necessary amendments to the Bill and to reintroduce the same.  The Honourable Finance Minister, Nirmala Sitharaman had, in March 2020 said “We are working on the FRDI Bill, but not sure when it can get through the House”.  

Dear Madam Finance Minister, the FRDI bill is needed sooner than later, since there are banks, NBFCs, cooperative banks and  other financial institutions that are already in  deep distress and will need a strong legal framework for a fair and transparent liquidation process.  

In Conclusion

The required legislation to ensure a fair and transparent liquidation process for banks and other financial institutions is taking time to materialise. The investigating authorities in India are looking into the matter of the loans said to be given to the Wadhawan family, the promoters of HDIL (Housing Development and Infrastructure Ltd.) in a layered and circuitous manner. The key accused Rakesh Wadhawan, chief promoter of HDIL is lodged in jail and has been denied interim bail. In the meanwhile, the Government and RBI should look at solutions to give relief to the desperate PMC Bank depositors, just as they did for Yes Bank. Till such time, the PMC Bank depositors have no choice but to keep waiting for their ‘Godot’. Hopefully ‘Godot’ will come, sooner than later!

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