PMC Bank: Higher Deposit Insurance Will Only Be At Our Cost, While Regulators Remain Unaccountable
The failure of Punjab and Maharashtra Cooperative Bank (PMC Bank) had led to the usual clamour to increase the extent of deposits that are insured by the Deposit Insurance & Credit Guarantee Corporations (DICGC). 
 
Moneylife and Moneylife Foundation, which work for financial literacy are strongly opposed to it, because it will only mean that regulators and policy makers who are responsible for regulation and supervision are let off the hook. 
 
The price for bank failures will then be paid by the country as a whole, through the exchequers – as we have been paying for decades, in the form or repeated recapitalisation of nationalised banks. 
 
This is the unquantified price of bank nationalisation that nobody is counting. However, as depositors who are the victims of failed checks and balances (failure of regulators, statutory auditors, rating agencies etc), at least our deposits are safe in nationalised banks. 
 
The story of cooperative banks is one of political capture and misuse compounded by Reserve Bank of India’s apathy and disinterest in supervising the sector.  
 
Cooperative Banks come under dual regulation of the RBI and the Registrar of Cooperative Societies. In the case of multi-state cooperative banks, it is the Central Registrar of Cooperative Societies, a sleeping organisation, headed by political appointees, which does not even respond to court order. A public interest litigation filed in the Bombay Mercantile Cooperative Bank is a great example of how nothing can shake this institution. 
 
Over the past two decades, Moneylife Foundation has repeatedly alerted the RBI about this bank, but the only action is band aid, without attempting a real clean up. In 2017, it slapped a small penalty for KYC violations while the real loot remained unchecked. 
 
Here is a case where employees have waged an ineffectual battle at great personal cost for over two decades. Read this article by Moneylife’s editor Debashis Basu in Business standard, where he says, “It is bad enough that most cooperative banks are run by shady politicians and go bust. But what would you say about a case where investors, employees, and shareholders of a bank are blowing the whistle on malpractices for decades, braving victimisation and threats, but nobody would listen? 
 
That is the story of Bombay Mercantile Bank (BMCB), one of the oldest, multi-state minority cooperative banks, which has been robbed and mismanaged at least since the mid-90s. Only the efforts of a few whistleblowing former employees have kept the bank from going bankrupt. 
 
Here is a small sample of the many charges the whistleblowers have slapped, backed by documents:
 
  • A Rs 540-million bank guarantee given against six allegedly fake FD receipts of Rs 90 million each;
  • Loans sanctioned to those close to the directors have gone bad;
  • Evergreening of bad loans by sanctioning fresh loans without security or fake documents;
  • Sanction of loans by the managing director, without the board’s permission, far in excess of his power;
  • Investment of Employees Provident Fund money in unlisted companies, violating norms PF norms;
  • Illegal transfer of tenancy rights of the bank properties;
  • No provision for gratuity and leave fare concessions in the balance sheet in some years, in order to show cash profits;
  • Bogus loans sanctioned against fake documents. These loans were then transferred to nationalised banks and later classified as non-performing.
 
The RBI and Registrar of Cooperative Society are fully aware of what is going on. More than a decade ago with the RBI’s intervention, a former secretary to the government of India was appointed chairman, but mismanagement continued. 
 
Under the RBI’s instructions, RM Khan, a retired district judge, investigated various charges and presented a report to the board. The report confirmed mismanagement. In January 2016, the RBI put in place a new management, which was determined to clean up things.” 
 
By insuring 100% of deposits, we the people will be paying for this mis-management, since insurance costs will soar. Many financial experts too have been quoting the small cost of insurance on every lakh of bank deposits today. 
 
But that is because, insurance payouts in the past decades have only been made for cooperative bank failures. Private banks in trouble have found ready buyers since the 1990s. And nationalised banks are re-capitalised by the exchequer at our cost. If the pay outs increase, insurance costs will soar to the point where banks will either charge customers a hefty sum or lower interest rates to cover the cost. 
 
Either way, we the people will pay, when we ought to fight for better supervision, accountability and timely action. 
 
Here is a list of payouts by the DGCIC last year – please notice that politically controlled cooperative banks are the only recipients.  Those interested can check the archive of payments and also notice the time lag before the RBI issues directions and stops withdrawals and insurance claims are actually settled: https://www.dicgc.org.in/FD_ClaimsSettled_Archives.html
 
 
And here is a list of cooperative banks, where RBI has issued directions under Sec. 35 A, like in the case of PMC Bank. The only difference is that PMC Bank, unlike others has excellent operations, a well trained staff and worked 360 days a year. 
 
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