A sustained campaign by depositors of Punjab and Maharashtra Cooperative Bank (PMC Bank) against the massive fraud that gobbled up their savings has triggered a wider discussion on risks attached to cooperative banks and the need for better deposit insurance cover. Will the outcry and debate lead to reform?
If the past is an indicator, the answer is negative. Every major financial scandal has led to some palliative action by the Reserve Bank of India (RBI), often the setting up of a committee whose recommendations are largely ignored.
It is like a game of wits. Can depositors keep up the pressure of public meetings and legal action (which is expensive, uncertain and long drawn) to force a quick resolution and get their money back? Or will RBI win again by remaining silent and waiting for protests to lose momentum and when depositors back to repairing their broken lives and savings?
This may sound pessimistic, but notice that depositors of every massive Ponzi or collective investment scheme fraud have yet to get any significant refunds. Investors in Saradha (got a refund of only Rs10,000), IMA Gold, Pearl/PACL, QNet, Heera Gold or even all the art and plantation scams of the 1990s, haven’t received their money. For that matter, people who have lost money regularly in corporate fixed deposits have suffered the same fate.
The initial burst of actions, including arrests, investigation, attachment of property, etc, are all meant to appease depositors and cool public anger; but the money returned, if any, has been a pittance and that, too, after long time.
When it comes to cooperative banks, things are a lot worse. The banks are usually too small, and hapless depositors too dispersed, to put up a fight. Cooperative banks fail with shocking regularity—of over one a month; but it doesn’t even make news every time (see DICGC data below).
As a category, cooperative banks is the biggest (over 1949)—more than commercial banks (101), regional rural banks (56) and local area banks (3) put together. But they are under the dual regulation (by RBI and the registrar of cooperative societies) and their deposits are also insured to the extent of Rs1 lakh per person.
The effect of this is perverse. Deposit insurance is mainly collected from nationalised banks and large private banks but payouts are always to the depositors of failed cooperative banks.
The table below show the reality.
If RBI bails out PMC Bank with a forced merger, there will be several others, already under administration or in distress, wanting similar treatment. More importantly, it creates a moral hazard and lets off crooked bank management and failed supervision.
Zombie Cooperative Banks
In all these cases, RBI prefers to create zombie banks. It appoints an administrator and freezes all banking operations except recovery of dues. The banks, often, remain under administrators for years—as zombie banks—technically alive by using depositors’ funds to pay the staff, administrator and the branch expenses. RBI follows the same drill in each bank failure and it fails over and over again.
The bigger the bank, the more funds are sucked by them in the zombie state. In PMC Bank’s case, the depositors were told by the administrator that the cost of running the 137 branches across India and salaries will come at a cost of Rs1 crore a day (Rs27 crore a month or over Rs325 crore a year of deposits burnt up).
Inevitably, any recovery of outstanding loans goes into keeping the zombie alive leaving little for depositors. A swift resolution is imperative; however, until now, despite elections in Maharashtra, the government has apparently been under no pressure to find a solution. But what is the solution? So far, public discussion is focused largely on raising deposit insurance.
Is Deposit Insurance the Panacea?
There is a consensus among commentators that the extent of deposits insured must be raised; but the very basis of the discussion seems flawed. The extent of bank deposits insured per depositor shot up from Rs30,000 (since 1980) to Rs1 lakh (in 1993) after the securities scam took down two small banks and roiled the entire banking system and targeted RBI’s failed supervision.
The sum insured has remained static since then because there were no major failures; but that was not because banking supervision has improved. DICGC (Deposit Insurance and Credit Guarantee Corporation) cover doesn’t even take into account the real cost of keeping Indian banking safe. Let us examine why this is so.
Public Sector Banks (PSB): PSBs contribute the biggest chunk of the deposit insurance premium and also account for 70% of all bank deposits by value. Their depositors have never received a payout from DICGC which is why one committee set up by RBI has pushed for risk-based premium that would mainly affect cooperative banks.
However, the country, as a whole, pays a lot more for keeping PSBs alive. These account for the biggest chunk of India’s bad loans which are now over Rs10 lakh crore. In October 2017, Arun Jaitley, then finance minister, announced a massive Rs2.11 lakh crore for recapitalisation of PSBs over two years. This has been released in instalments, with finance minister (FM) Nirmala Sitharaman announcing an immediate release of Rs70,000 crore in August this year.
While depositors’ money is safest in PSBs, it allows bank managements to lend recklessly, while the entire country, including those who have no access to formal banking, pays the price. It is important to remember that only the richest Indians benefit from bad loans that are systematically written off by PSBs. But there is never a sustained public demand to fix this.
Private Banks: A major flashpoint that exposed poor supervision was in 2001, when a security scam led by Ketan Parekh scam took down Global Trust Bank (GTB) and Madhavpura Mercantile Cooperative Bank (MMCB). At one time, UTI Bank (now Axis Bank) was keen to acquire the failed GTB without adequate information about the losses. It was finally force-merged with Oriental Bank of Commerce which affected the latter’s finances for many years.
In the mid-1990s, a set of new private banks got licences in a highly subjective and capricious process. Several of them stumbled and would have failed but were quickly taken over by larger banks, then on a rapid growth path. RBI’s extreme reluctance to issue new licences to private banks has also ensured that every private bank, even the small ones that flounder, find ready buyers.
This has allowed RBI to continue with non-transparent policies with regard to bank licensing, fit-and-proper criteria and level of promoter shareholding, in addition to very poor supervision. Consider how clueless RBI was about Rana Kapoor’s dubious dealings at Yes Bank which, until a few days ago, seemed on the brink of a collapse with no takers. Infrastructure Leasing & Financial Services and Dewan Housing and Finance Ltd, have exposed RBI’s poor supervision; but the cost is borne by depositors, investors and the financial system.
Cooperative Banks: DICGC’s annual report for 2017-18 mentions how it “had to settle claims for large amounts due to the failure of banks” with the result that it had to raise deposit insurance to 10 paise per Rs100 assessable deposits from 2005-06 to shore up the deposit insurance fund. This was in the aftermath of the Ketan Parekh scam of 2000-01 where the resolution process dragged on for years.
A massive Rs385 crore was paid only to MCCB depositors. Here is a list of claims settled by DICGC that year.
Following the debacle, RBI set up multiple committees to re-examine deposit insurance but has not bothered to implement their recommendations. Although rules for deposit-taking non-banking finance companies are repeatedly tightened and even collective investment schemes are better regulated, the cooperative banking sector remains a regulatory mess and continues to mislead people.
We even have a bunch of unlicensed cooperative banks operating as full-fledged banks! According to an RBI report, when “a primary credit society’s owned funds attain a level of Rs1 lakh, it automatically gets the status of a primary cooperative bank” and has to apply for a banking licence thereafter. Many don't bother to do it and continue to raise public deposits with a capital of just Rs1 lakh.
In November 2014, the National Democratic Alliance (NDA) government even bailed out 23 unlicensed district cooperative banks with a massive infusion of Rs2375.42 crore. In the circumstances, it is a little strange to hear FM Nirmala Sitharaman distance her ministry from the PMC Bank debacle.
Given the flawed structure of deposit insurance in India, successive RBI governors have followed a policy of ‘let sleeping dogs lie’. Moneylife too has been opposed to raising deposit insurance (as suggested by the Damodaran committee on customer services in 2011) without fixing structural and supervision issues in the banking system.
Interestingly enough, this flawed structure has allowed DICGC to collect premium every year as a mandatory fee, without the burden of having to make significant payments. In 2017-18, DICGC collected a massive Rs11,130 crore premium at 0.1% of insurable deposits from each bank; it paid hefty taxes, but did not need to shell out any money for settlements, because banks that collapsed had liquid funds available.
Its deposit insurance fund is a fat Rs81,400 crore due to accumulated premium, while it has paid out only Rs5,000 crore, cumulatively, to settle claims of 345 cooperative banks since inception. Last year, it did not need to shell out any money as settlement premium.
Ironically, DICGC ends up making some recovery after the long-drawn liquidation process. In fact, things move so slowly that many depositors don't even collect the money due to them because they are no longer traceable.
Clearly, the flawed system needs urgent fixing and there is nothing like a big financial scandal to get the regulator and government to work towards a better regulation, supervision and accountability.
RBI should force a conversion of cooperative banks into small finance banks or scheduled banks that are only under its supervision.
RBI inspectors and supervisors must be made accountable through a formal system of questioning their inspections. If independent directors of listed companies have onerous responsibilities, why shouldn’t RBI inspectors be subject to even more stringent rules, given that they doing a public duty?
Bank licensing and fit-and-proper rules should to be more transparent to allow easier acquisition of banks.
We need to put in place a time-bound financial resolution mechanism for the financial sector as a whole and for 1,900+ cooperative banks first.
The Only way out of all this mess, is, we must force our lawmakers to pass a law " RIGHT TO RECALL", then see how even the Aliens from the heavens will want to come and stay on our land.
This article is nailing the bolts hard.. besides the support for pmc bank depositors we should focus hard on getting a 100 percent insurance.. nothing less.. it’s hard earned money.. people should not loose the momentum on the pmc bank crisis and every depositor must file
A criminal case against the RBI for not doing their jo
RBI staff Regulations ignored with impunity. Maybe because punishment does not exist or maybe the opportunity benefits are many times over compared to the token penalty that may be levied by RBI. This needs to be looked into so that all monetary beneits acquired during the said period could be forfeited ten times over. Only then would Indian laws be able to gain a modicum of respect.
Very comprehensive and the article has hit the nail on the head. It is important to specify the functions of the Administrators - who appoints is immaterial - and prescribe timelines. The salary is not affected as the Administrator draws salary plus deputation allowance. If the Administrator does not act according to the manual of instructions - RBI should rework on this - and failure to do so would entail penalties including stoppage of future allowances and perks and recovery of any expenditure incurred in the name of recovery.
The insurance companies have a good business opportunity.
They can offer insurance on individual basis.
If someone has an FD in a PSU bank, premium may be lower and if in Co-op bank premium may be higher.
The premium rates may be proportional to duration and amount of FD.
Instead of waiting for RBI to increase deposit insurance cover, the insurance companies should start offering such policies and make big bucks.
Best idea which our Govt of india must consider to bring relief from future urban cooperative banks busting as UCBs are made for scam only without any clear control of RBI.
Discussions, activism, militancy, badmouthing everything will go on after every scam, where the common man is always at the receiving end. The only way out is we MUST campaign for "RIGHT TO RECALL" our lawmakers through a strong law forced by the voters on our Parliament. Let this law get passed, the country will become so good, that even the Aliens from above the sky would come & settle on our land. Any takers???
None of Authorities even after 38 days, is giving any concrete assurance/statement.
The Land property attached by E.O.W./ED is not known whether it has been mortgaged to other lenders.
Lenders if having already having charge on property attached are silent (may be on States instruction)
People can be fooled as they will get money. Lenders having charge on so called properties will come
forward as and when auction is advertised. Since MD Joy Thomas has stated on national media that this scam is going on since years,
I have consulted my advocate, on the basis of this statement Regulator(RBI) and auditors are accused of criminal conspiracy/negligence(as today is sixth death if it is negligence, they are responsible)
I TOTALLY UNABLE TO UNDERSTAND WHY THIS OPTION IS NOT EXERCISED.
it is considered
opinion as much more people are entangled, faster the issue will be resolved. All concern with FIR will
have to put their pressure/influence to early close the matter. And civil suit and criminal proceedings will go parallel.
Our civil/normal right to receive money from bank will not hurt by this complaint.
But a group is required to fulfill police/court room.
Just go and file criminal complaint. I have filed 3 criminal cases and won when my savings were misappropriated. For lowly people like us that is the only recourse against crooks.
DICGC also settles credit Insurance claims which are eligible for coverage. So it is not that DICGC collects insurance premium on deposits and sits on the money. The cost of covering credit Insurance is passed on to the borrower. The cost of insuring the deposits (re.1 per thousand) is expensive and borne by the banks. HDFC, ICICI, Kotak, AXIS don't cover their deposits with DICGC.
Excellent article. There is definitely a need to raise the quantum of deposits covered to at least Rs 10 lacs or even Rs 20 lacs. This should be funded by raising the deposit insurance premia based on risk category- as there has been no payout for PSU banks, it could be retained at current level, and for other banks it should be doubled. At least 20% of this risk premia should be used to geninuely audit banks.
Further, for banks which fail like PMC, the first step should be to reasssure depositors that their funds are safe by only freezing funds above the deposit insurance limit - with DICGC pumping in funds to meet any shortfalls if depositors choose to withdraw their funds - further, the administrator should take immediate steps to curtail expenses to ensure that depositors funds are not diverted for rent and other expenses.
Once a cooperative bank crosses a certain size - say Rs 1000 cr, it should be required to convert itself into a small bank.
WHEN DICGC HAS SUCH A BIG MONEY AT THEIR HAND, WHY SHOULD NOT IT BAIL
OUT THE DEPOSITORS INITIALLY BY RS. ONE LAC. DATA SHOWING THEIR PAYMENT AND PREMIUM COLLECTION A HANSOME DIFFERENCE. IT SEEMS TO BE
A HANSOMELY EARNING BODY INSTEAD A INSTITUTION TO PROTECT THE INVESTORS
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30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
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A criminal case against the RBI for not doing their jo
They can offer insurance on individual basis.
If someone has an FD in a PSU bank, premium may be lower and if in Co-op bank premium may be higher.
The premium rates may be proportional to duration and amount of FD.
Instead of waiting for RBI to increase deposit insurance cover, the insurance companies should start offering such policies and make big bucks.
The Land property attached by E.O.W./ED is not known whether it has been mortgaged to other lenders.
Lenders if having already having charge on property attached are silent (may be on States instruction)
People can be fooled as they will get money. Lenders having charge on so called properties will come
forward as and when auction is advertised.
Since MD Joy Thomas has stated on national media that this scam is going on since years,
I have consulted my advocate, on the basis of this statement Regulator(RBI) and auditors are accused of criminal conspiracy/negligence(as today is sixth death if it is negligence, they are responsible)
I TOTALLY UNABLE TO UNDERSTAND WHY THIS OPTION IS NOT EXERCISED.
it is considered
opinion as much more people are entangled, faster the issue will be resolved. All concern with FIR will
have to put their pressure/influence to early close the matter. And civil suit and criminal proceedings will go parallel.
Our civil/normal right to receive money from bank will not hurt by this complaint.
But a group is required to fulfill police/court room.
Further, for banks which fail like PMC, the first step should be to reasssure depositors that their funds are safe by only freezing funds above the deposit insurance limit - with DICGC pumping in funds to meet any shortfalls if depositors choose to withdraw their funds - further, the administrator should take immediate steps to curtail expenses to ensure that depositors funds are not diverted for rent and other expenses.
Once a cooperative bank crosses a certain size - say Rs 1000 cr, it should be required to convert itself into a small bank.
OUT THE DEPOSITORS INITIALLY BY RS. ONE LAC. DATA SHOWING THEIR PAYMENT AND PREMIUM COLLECTION A HANSOME DIFFERENCE. IT SEEMS TO BE
A HANSOMELY EARNING BODY INSTEAD A INSTITUTION TO PROTECT THE INVESTORS