On Tuesday morning (24th September), depositors of Punjab and Maharashtra Cooperative Bank (PMC Bank) woke up to news that they can withdraw only Rs1,000 from their accounts, for the next six months. The harshness of RBI’s (Reserve Bank of India’s) action on a profitable, dividend-paying bank raises an important question: What is the Bank, and the banking regulator, hiding? How bad is the situation, that it warrants such draconian action and punishes the innocent and ordinary depositors so harshly?
Although PMC Bank is largely unknown outside Mumbai, it has a unique character and is very well known to senior central bankers. But more about that later. The Bank’s customers are mainly small and medium businesses that will be devastated by RBI’s seemingly thoughtless action at a time when almost every business is facing a liquidity squeeze and financial constraints. According to sources, one businessman who had just deposited Rs10 lakh to make payments to suppliers fainted on hearing that his money was frozen.
When would such a draconian action be warranted that an administrator is appointed? Well, only if the accounts were totally fudged and its books cooked, like at Satyam Computers.
The Bank’s financials for the year ended 31 March 2019, certified by the statutory auditor, Lakdawala & Co, are excellent. It earned a net profit after tax of Rs99.69 crore and declared a dividend of 11%. Its non-performing assets (NPAs) are only 2.19%, doubtful assets are Rs26 crore and its statutory auditor’s report is squeaky clean. (See below). Is the report pure fiction? What are the dangerous ‘irregularities’ that warrant such drastic action?
All that the depositors know has come as two messages from the Bank’s managing director (MD), Joy Thomas, informing them that the Bank had been put ‘under regulatory restriction’ for six months, promising that all effort would be made to rectify irregularities and remove restrictions in that time. Another message assured depositors that their money is safe. Later in the day, the MD claimed to Zee Business that there was an issue with the Bank’s advances and they hoped to realise their assets.
How does this mild and benign statement warrant such harsh action that hurts customers and could even cause permanent damage to small businesses? Clearly, there is a lot more and the rumour mills on social media have been working overtime.
A business channel has reported that PMC Bank may have exposure to a tottering non-banking finance company (NBFC). However, a twitter-thread dating back to November 2018, probably, provides a more plausible clue.
It says that the notorious HDIL Ltd (Housing Development and Infrastructure Ltd), which has gone into liquidation, owns 1% of PMC Bank and that it has received loans on concessional terms from PMC Bank in the form of overdraft facilities (OD).
It further says that Ravi Jyot, a financial subsidiary of HDIL, has raised money on similar lenient terms from PMC Bank. Since HDIL filed for insolvency in August 2019, these dangerous OD facilities will end up as unsecured lending and could vanish. There could be others.
This realty company, with a shady reputation, has been in deep trouble for a while. An Economic Timesreport says that it has previously settled bankruptcy actions by Jammu & Kashmir Bank and Andhra Bank.
Can one realistically expect PMC Bank to be able to close out these irregular ODs and recover the money in six months? The RBI action indicates otherwise. With the HDIL before the NCLT (National Company Law Tribunal) and being run by a resolution professional, it is unlikely that the company will have any leeway to return PMC Bank’s money ahead of others. Given that the RBI has pressed the panic button and, literally, stopped all lending activity of the Bank, one can only assume the worst.
Ravi jyot (An old subsidary of HDIL) has also raised funds from PMC with similar lenient terms on their land reflecting the close ties of promoter group with the bank
15. The debt to equity ratio of the company is still low, albeit due to how inventory is accounted for. But that will allow PMC bank to issue debt at lenient terms to HDIL for a very long time and a lot of it. Refinancing old debt till projects go through should never be an issue
Assuming the HDIL connection is correct, until RBI or the Bank provide any clarity, we have no idea about the size of this exposure and whether it is large enough to wipe out the Bank.
However, the next day, on 25th September, Mumbai Mirror reported that exposure to HDIL is a massive Rs2,500 crore, which would certainly take the bank down. There is no official confirmation on this.
If true, this would make PMC Bank’s case similar to that of Madhavpura Mercantile Cooperative Bank, which was brought down by its dubious lending of over Rs800 crore toscamster Ketan Parekh in 2000-01. Despite all the efforts to save it, the Bank was finally liquidated and its licence cancelled in 2012. With elections around the corner, RBI had broken its own rules to release the Rs1 lakh per depositor that is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) even before the Bank was liquidated.
One of RBI’s responsibilities is to ensure there is no run on the Bank through misinformation and worse. But the banking regulator is silent. Some senior journalists have been told that RBI alone is not responsible for the regulation of cooperative banks. They are under joint regulation of RBI and the registrar of cooperatives; neither bothers to do its job.
And, yet, there is a nice revolving door that allows senior RBI officials in the urban banks department to accepting lucrative consulting assignments with the very same cooperative banks that they supervised (or failed to supervise) after retirement.
These are accepted after a perfunctory two years and top central bankers turn a blind eye to it. Retired central bankers tell us that this is true of PMC Bank, too, and we know it is true of Bombay Mercantile Cooperative Bank.
The irony is that this Bank, under former chairman, the late Charanjit Singh Chadha, used to sponsor the MR Pai Foundation Awards, in the name of the crusader for bank depositors rights. The programmes have invariably had senior central bankers as chief guests as well as awardees.
PMC Bank had a high reputation for customer service. It was open 360 days a year and had a sharp focus on computerisation and digitisation. Many cooperative housing societies had their corpus and accounts with the Bank. A look at the annual report would show that it is a Sikh community bank, which means that it had a large number of traders and businesses as customers.
As trustees of Moneylife Foundation, a not-for-profit organisation engaged in spreading financial literacy, we have always emphasised that people should not keep their money with cooperative banks, except to the extent of Rs1 lakh which is covered by the DICGC.
The failure of one of the most reputed cooperative banks would only underline what we have been saying. Unfortunately, most depositors fail to understand the serious implications of poor regulatory accountability in India.
With elections round the corner in Maharashtra, it will be interesting to see whether RBI is again prevailed upon to bypass rules and release insurance. Or will it find a way to force those who enjoyed the ‘irregular’ advances to return the money?
The best way out will be to remove the incumbent management and find a quick buyer for the bank. Its size, past reputation of customer service and investment in technology will make it a good acquisition.
But it is important that RBI calms depositors and allows a quick deal, like it did with Global Trust Bank, which also collapsed in the Ketan Parekh scam. Once the bad loans are quantified, there should be a lot of interest in this Bank. It will ensure that no depositor or customer suffers a loss.
Restrictions imposed on PMC Bank
1. Withdrawals of only Rs1,000 per account, also account-holders who owe the Bank money will have it adjusted from their deposits. Term deposits can be rolled over on maturity in the same name.
2. PMC Bank cannot make any fresh loans, renew loans and advances or make any investment without prior RBI approval.
3. It cannot borrow funds, accept fresh deposits or disburse funds or incur any liabilities without RBI approval.
6. Regulatory restrictions will be in force for the next six months.
7. If account-holders have any liability towards the Bank, the amount in their Bank accounts will be first used to adjust the relevant borrowing account.
8. The Bank can make investments only in government-approved securities.
Those customers who have been making rounds of their bank to get back their hard-earned money after a failed transactions (usually in ATMs or online), here is a good news. The Reserve Bank of India (RBI) has asked all banks to pay a penalty of Rs100 per day for the delay in crediting money in customer's account after a failed transaction.
"It has been observed that a large number of customer complaints emanate on account of unsuccessful or ‘failed’ transactions. Wherever financial compensation is involved, the same should be effected to the customer’s account suo moto, without waiting for a complaint or claim from the customer. Customers who do not get the benefit of redress of the failure as defined in the turn around time (TAT), can register a complaint to the Banking Ombudsman of RBI," the central bank said in a notification.
However, these directions are applicable only for domestic transactions or where both the originator and beneficiary are within India.
A ‘failed transaction’ is one that has not been completed due to any reason not attributable to the customer, such as failure in communication links, non-availability of cash in an automated teller machine (ATM) and time-out of sessions. Failed transactions also include credits, which could not be effected to the beneficiary account due to lack of full information or lack of proper information and delay in initiating a reversal transaction.
For failed transactions like cash not dispensed from ATMs, RBI has asked banks to auto-reverse the transactions within transaction date (T)+5 days. For any delay after this period, the banks is mandated to pay a compensation of Rs100 per day to the customer, automatically.
At the same time, for several online transactions, like card to card transfer, immediate payment system (IMPS), unified payments interface (UPI), Aadhaar payment bridge system (APBS), National Automated Clearing House (NACH) and prepaid payment instruments (PPIs) including cards and wallets, the banks are mandated to reverse the transaction within T+1 days.
Here is the list of transactions, its TAT and compensation to be paid to customer...
In a move that has caused panic among depositors, the Reserve Bank of India (RBI) on Tuesday imposed strict restrictions on the Mumbai-based Punjab & Maharashtra Cooperative Bank Ltd (PMC). It has been barred from carrying out a majority of its routine business transactions for six months, and depositors can withdraw only Rs1,000 from their accounts.
This has sent shock waves in Mumbai’s banking and business circles since the Bank used to be considered very ethical and was known for its high service quality.
PMC Bank is one of the top 10 cooperative banks in India and offers 360 days of banking, including on Sundays and holidays. The regulator’s sudden action, with absolutely no warning, has led to heart-rending stories. K Mehta, a professor and person with disabilities, has tens of lakhs in deposits with the Bank’s branch which is the most accessible to her. R Singh, who just deposited Rs50 lakhs of his life savings in the Bank two days ago, broke down on hearing the news. His children’s accounts to cover their school fees are also at the Bank. A businessman fainted when Rs10 lakhs deposited with the bank for payments to suppliers got cleared, just before the Bank announced the RBI moratorium.
The failure of the Bank, once again, points to RBI’s careless regulation of cooperative banks, followed by sudden, draconian action that only hurts depositors. Given PMC Bank’s high reputation and the trust that it enjoyed, this ought to lead to some serious thinking about the future of cooperative banks and the quality of their regulation.
Update at 4.47pm 24/09/2019
Dear Customers, we assure you that your money is in safe hands. Please give your support & trust us at this crucial moment. The restriction is only for Temporary period.
-Managing Director, PMC BANK
According to the RBI directions, depositors will be allowed to withdraw only Rs1,000 of the total balance in every savings bank account or current account or any other deposit account from PMC Bank. "The PMC Bank will also not be able to grant or renew any loans and advances, make any investment, incur any liability including borrowal of funds and acceptance of fresh deposits, disburse or agree to disburse any payment whether in discharge of its liabilities and obligations or otherwise, enter into any compromise or arrangement and sell, transfer or otherwise dispose of any of its properties or assets except as notified in the RBI directions on 23 September 2019. The directions will remain in force for a period of six months from the close of business of the bank on 23 September 2019," says Yogesh Dayal, chief general manager of RBI, in a release.
Described as a multi-state cooperative banking entity, the PMC Bank has branches in Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhya Pradesh.
Founded in 1984 by S Gurcharan Singh Kochhar, in a small room in Mumbai, it has now grown to a network of 137 branches in six states and ranks among the top 10 cooperative banks in the country.
As on 31 March 2019, PMC Bank had total deposits of Rs11,617.34 crore and advances of Rs8,383.33 crore. For FY18-19, the lender earned total revenues of Rs1,297.98 crore, higher than Rs1,170.49 crore it earned in the previous fiscal.
However, during FY18-19, its non-performing assets (NPA) jumped twice to 2.19% from 1.05% in the past year.
The PMC Bank has been barred from granting, renewing and loans and advances, making any investments, incurring any liability, including borrowing of funds or accepting fresh deposits without the prior written approval from RBI.
In a statement on Tuesday, the PMC Bank's managing director (MD) Joy Thomas said the bank had been put under regulatory restrictions by the RBI owing to irregularities disclosed to the apex bank. "As the MD of the Bank, I take full responsibility and assure all the depositors that these irregularities will be rectified before the expiry of six months," Mr Thomas told to thousands of distressed customers of PMC Bank.
Thousands of anguished depositors rushed to the PMC Bank's head office in Bhandup, northeast Mumbai and its branches in different parts of the city to make withdrawals even as police were deployed around the branches to avert any untoward incidents.
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