As a past banking sector analyst, I couldn’t stop myself commenting on this. The views are strictly personal.
The Reserve Bank of India (RBI) restricted Mumbai based Punjab and Maharashtra Cooperative (PMC) Bank from the close of business on September 23, 2019, for a period of six months.
PMC is a large co-operative bank with deposits of Rs 11,600 crore and advances of Rs 8,383 crore as on March 31, 2019. The bank has a network of 137 Branches across 7 States – 81 in Maharashtra alone.
The typical customer profile of PMC include – small businesses and their family, co-operative housing societies.What does the restriction mean?
If you are a deposit holder (savings, current or term) of the bank you are not allowed to withdraw your hard earned money from the bank till the time restrictions are in place. (Yes, you are allowed to withdraw Rs 1,000 per account but does that even matter !)Why is this done?
A bank is normally put under restriction when it’s feared that there can be a run on the bank – that is people will line up to withdraw their deposits and the bank would not have sufficient funds to meet it’s repayment obligations.
Why such a fear for PMC?
The wide speculation is that PMC bank has significantly under reported it’s bad loans.
Please note that the bank reported a bad loan ratio (NPA) of 3.8% as on March 31, 2019 – which per se is comparable with the industry average and much better than many other larger banks.
However, the speculation is that this number is grossly under reported. One media report mentions this under reporting to the extent of Rs 2,500 crore (given to HDIL – a real estate builder), which itself translates to 30% of the outstanding loans as on March 31, 2019.
Including this, the bad loan number shoots upto 34% creating a significant mismatch between PMC’s assets and liabilities.Is putting restriction the correct approach to resolve the mess?
Firstly, I don’t know why RBI suddenly felt that there could be a run on PMC bank. Run happens when you communicate to the public that bank is getting closed or they don’t have money to payback the depositors.
High NPAs on their own never lead to a run on the bank. Besides, as mentioned before, reported NPAs are well within limits and there is no formal confirmation on the speculated NPAs by the management or the regulators.
RBI should soon issue a statement on why they feared a run on the bank.
It’s interesting to also note here that till a week back, on the contrary, there was news floating that PMC being a large and strong bank is looking to merge couple of Goa based weaker co-operative banks with itself !
I personally have never been a big supporter of putting restrictions on a bank especially on the liability side i.e., the money that is owed to the depositors.
- Banking is a faith business – if customers loose faith on a bank, it becomes almost impossible to revive it back.
- Deposit holders are unassuming, innocent people who have neither any idea about how a bank functions nor have any tool to influence a bank’s decision making. For them bank means – the most safest place to keep their money – equivalent to giving money to the government.
- History tells you that putting a bank under restriction has rarely ensured a time bound effective resolution.
What could have been the approach?
In the current economic environment and upcoming festive season, it further leads to confusion and uncertainty.
To try answer this, let me first ask you…
Why is it that mostly small banks are put under restriction? Why not large banks?
We have seen many large public and private banks over years’ accumulating significant NPAs and still being able to come out of the mess either through government support or restructuring their operations. E.g., ICICI Bank, Axis Bank, SBI, PNB and the list goes on.
Large banks pose systemic risk and have wider global implications so better not to let them go down.
Large banks have proved that alternative approaches work and are more effective.
I am sure you must be wondering – why to then even allow smaller banks to get licence and operate? Correct question – to which I could never have an answer !
Now coming back to the approach that I think should be ideally followed
- As a first step, RBI should ensure the requisite liquidity support and give confidence to the public. Once public gets the confidence there would not be a run and the actual liquidity infusion by RBI would not be that large. RBI keeps contingency provisions for these.
- Parallelly, detailed inspection and audit should be carried out on the books of the effected bank, to arrive at the actual position and mismatch.
- Some mismatches can be corrected in the normal course of the business and only require a cautious controlled approach for some time.
- If the mismatches are huge, other approaches can be explored e.g., what mutual funds did with some of their doubtful debt investments – defer payments of the doubtful portions but take investors into confidence and give them a choice – payment now with some haircut or accept later maybe with full payout.
Who are the culprits?
For PMC, even if I assume speculated 35% bad assets to be the real issue, equity of 12% would imply a hit of not more than 10-15% of the total deposits. So why to create uncertainty over 100% of deposits?
People who have lapsed in following the well laid out procedure – bank’s management, auditors and regulators. These kind of frauds/ misreportings don’t happen overnight. It requires years’ of continued inefficiencies and false reporting.What should depositors do now?
Nothing, pray to god and hope that RBI resolves the mess quickly.
Given the upcoming Maharashtra state election, I personally hope and expect that the PMC issue gets addressed quickly.