There is a sense of grim déjà vu surrounding the crisis at the Punjab and Maharashtra Co-operative (PMC) Bank where two-thirds of the loans were allegedly due to a single bankrupt client engaged in the property business. Clearly, no lessons have been learnt from the previous instances of the collapse of cooperative banks in several parts of the country in the past. Such scams, occurring with unfailing regularity, expose the loopholes in regulatory mechanism in the banking industry. The impunity with which the PMC Bank officials flouted norms, throwing thousands of depositors across several states into deep misery, raises serious questions over the efficacy of the present supervisory framework. As a result, the management of all 1,500-odd urban cooperative banks, with total deposits of nearly Rs 4.5 lakh crore, has now come under scanner following the PMC crisis. The RBI prescribes methods to run a bank, but does not make changes in managements and supervision is done mostly by the State and Central governments. Better systems and better governance will be needed to prevent such scams. The biggest worry is the cascading effect that the latest crisis may have on the sector. The cooperative banks struggle to invest the funds raised as deposits and end up extending risky loans. They typically offer marginally higher interest rates than the State-run banks and aggressively seek deposits. About 130 smaller banks have deposits at PMC Bank, and if the lender is unable to return their money, all these small banks will have to mark their deposits as NPAs, triggering a wider crisis.
The Reserve Bank of India (RBI) had put in place a Supervisory Action Framework (SAF) in 2012, similar to the Prompt Corrective Action (PCA) on commercial banks. Here too, trigger points for initiating corrective action on banks is based on certain financial parameters such as capital adequacy, gross NPAs, concentration of deposits and profitability. Despite the regulatory check in place, weak corporate governance, lack of professionalism, reluctance in technology adoption are some of the concerns that continue to plague the sector.
As per the RBI data, there are 1,542 urban cooperative banks operating in the country as of March this year. Of these, 46 UCBs had negative net worth and 26 UCBs were under directions of the RBI. Spread over seven States with 137 branches and 51,000 members, PMC Bank has deposits of around Rs 11,617 crore. It is among India’s top five urban co-operative banks. Having small capital base is one of the reasons for the failure of cooperative banks which are sometimes hijacked by vested political interests, leading to sanctioning of fraudulent loans. It is time the central bank came up with a better road map for oversight of these banks.