Trust Deficit

GS-III: Trust deficit

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It has been a nightmare of a week for thousands of customers of the Punjab and Maharashtra Co-operative Bank (PMC), who were told last Tuesday by the RBI that no more than Rs.1,000 could be withdrawn from their accounts for a period of 6 months.

What are the implications of the decision?

The PMC bank is a leading urban cooperative bank headquartered in Mumbai.
The decision sent shock waves among thousands of its depositors.
Panic-stricken customers rushed to bank’s branches across the state and were unable to withdraw more than Rs 1,000.
The Bank has a deposit base of Rs 11,617 crore and operations across 7 states.
It has been put under the scanner by the RBI after “irregularities” were disclosed to RBI.
It ranks among the top 10 cooperative banks in the country.
Moreover, the RBI restrictions will remain in force for 6 months.
Given these, the unrest among customers is likely to continue.

What went wrong?

Reporting - With a deposit base of just over Rs 11,000 crore, PMC bank reported a net profit of Rs 99.69 crore in 2018-19 as against Rs 100.90 crore in 2017-18.
The bank showed 3.76% (or Rs 315 crore) of advances (Rs 8,383 crore) as gross nonperforming assets (NPAs) in March 2019.
This was a good performance considering that public sector banks recorded over 10% gross NPAs.
With this, the total bad loans could be between Rs 2,000-2,500 crore.
Though this was not flagged in the Annual Report of 2018-19, the RBI was following it in the wake of huge divergence in bad loan reporting.
HDIL - The bank was funding a clutch of companies, mainly in the troubled real estate sector, led by Housing Development & Infrastructure Ltd (HDIL).
Notably, the Wadhawans of HDIL group had close links with PMC Bank for a long time.
PMC had given loan to Wadhawan even after HDIL defaulted on its loans to other banks.
Notably, commercial banks have already declared HDIL a defaulter.
HDIL was also taken to National Company Law Tribunal (NCLT) for insolvency proceedings.
Recently, NCLT admitted an insolvency plea moved by the Bank of India against HDIL in connection with a Rs 522-crore loan default.
PMC, however, claimed that the loan was much lower than Rs 2,500 crore quoted in the media.

Way Forward:

RBI shares regulatory responsibilities over such banks with stares register of co-operative society further mires the problem .With over 1,500 urban co-operative banks operating the country and a few of them already under RBI imposed restrictions , a new road map is essential for their future course.

Source: THE HINDU

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