Deadline extended to December 22, 2020
On the 19th of June, 2020, RBI issued a Press Release allowing Punjab & Maharashtra Cooperative Bank Ltd. (PMC Bank) depositors to withdraw up to Rs.1 lakh from their account and extended the validity of restrictions on operations to December 22, 2020. According to RBI, 85% of PMC Bank depositors would get all their deposits back with this increase in the limit. Two questions arise here. Firstly, what happens to the remaining 15% of depositors who have a sizable amount locked up in this bank? Secondly, is RBI seriously looking for a suitable bank to merge PMC Bank with, or is the bank headed towards liquidation?
Question 1:What happens to the remaining 15% of depositors who are not necessarily High Net-worth Individuals or large Corporations?
a. All depositors are not equal:
I had written a blog on PMC Bank on May 12, 2020 titled ‘5 questions that PMC Bank Depositors should be asking’. I had mentioned in the blog that the percentage of depositors getting their money back is not equal to the percentage return of its total deposits. There are large Employee Cooperative Societies, Cooperative Housing Societies and retired senior citizens who have kept a substantial amount in PMC Bank. For them, the increase in withdrawal limit to Rs.1 lakh, would hardly make any difference. Many housing societies had kept the funds collected for repairs/reconstruction of their building from their residents, as deposits in the bank till such time as the repair work started. They are at a loss on how to manage their building repairs now. The senior citizens need regular income from their deposits. The periodic interest pay-outs from their deposits in PMC Bank have stopped since the last nine months. Also, the employee cooperative credit societies are facing serious cash flow mismatch issues due to the freezing of their deposits at PMC Bank. According to a news item in the Tribune dated June 22, 2020, the seized assets from the Bank’s Directors and the Wadhawan group are more than the value of deposits of PMC Bank. Hence, the large depositors are demanding early return of their money. Of course, this is easier said than done. There is a whole legal and administrative process that is involved in the liquidation of assets, recovery of value and repayment to the depositors.
b. Legal recourse:
The PMC Bank deposit holders had filed a Plea in the Delhi High Court on the delay in return of deposits after RBI announced the moratorium.The petitioners had, further on, objected to the ‘double standards’ of the Authorities who handled the Yes Bank liquidity issue promptly, whereas the very same Authorities have delayed a resolution for PMC Bank. In May 2020, the Delhi High Court had ordered the RBI and the Central Government to appreciate the difficulties faced by PMC Bank depositors with respect to the moratorium on withdrawals. The High Court asked them to decide on the matter in accordance with law, rules, regulations and government policy applicable to the facts of the case. The Order had further mentioned that on receipt of any representation from any individual or group of depositors in this regard, the concerned respondent Authority (RBI/Central Government) should take a decision within a period of four weeks.
The current relaxation of withdrawal limit to Rs.1 lakh seems to be in response to the above Order by the High Court. But this, at best, can only be an interim solution.
Question 2. When will RBI find a suitable bank for taking over PMC Bank, or will they guide it towards a liquidation process?
a. Delay in resolution: According to the Press Release, RBI has engaged with the stakeholders concerned, to explore the possibility of a resolution of the problems of PMC Bank. However, progress has been impacted due to the lockdown on account of COVID 19. Also, the extent of negative net worth of PMC Bank is large and the legal process in recovery of bad debts of PMC Bank is taking time. Thus, according to RBI, a resolution is not likely in the near future. As a result, they have had to extend the Directions under the moratorium by another six months.
b. A legal framework needed for liquidation of financial instituions: Can the think tanks at RBI and the Centre not come up with a solution, the way they revived Yes Bank? If PMC Bank goes into liquidation in the coming months, the process will be hindered due to the lack of adequate legal framework for liquidation of financial institutions. For a smooth liquidation process, the FRDI(Financial Resolution and Deposit Insurance) Bill should become a law soon. This is hugely delayed. For more on the FRDI bill and its impact on financial institutions, please refer to my blog here.
The Centre is very much occupied with handling the economic crisis due to the lock down impact of COVID 19. And now, there is the issue of the economic and other actions to be taken as a result of the crisis with China at the Line of Actual Control (LAC). While the Government has introduced a spate of reforms to take India back on the growth path, this bill also qualifies as a reform that is heavily overdue.
In conclusion: Depositors should keep up the pressure through representations and pleas
According to an article published on Moneycontrol.com website, in the year 2020, RBI has put around 44 cooperative banks under various restrictions of taking deposits and lending, citing erosion of net-worth or serious irregularities in loan dispensation. While, this could be an indication of RBI tightening the supervision of errant cooperative banks, there is a dire need to expedite the resolution of the problems and return the money to the depositors of these cooperative banks to the extent possible.
The moot question now is, come December 22, will we see a resolution and will all the depositors get their money back? In all likelihood, RBI will issue another Press Release extending the date by another six months. They may increase the withdrawal limit as well. But, how much of the large depositors’ money comes back to them, will then depend on the withdrawal limit allowed. Another possibility is that of a merger with a suitable bank. A third possibility is the initiation of liquidation process. If the third possibility comes true, it will surely be a long drawn out process and could also run the risk of a haircut on large deposits.
