On Friday, 11th October, Mumbai Mirror
, a local tabloid, published an exclusive report claiming that 200-odd ‘big depositors’ of the failed Punjab and Maharashtra Cooperative Bank (PMC Bank), which had stringent regulatory restrictions imposed on it, have come forward with a bizarre proposal. They have promised to maintain an untouched deposit of Rs5 crore each, if the Bank was allowed to resume operations and start to function normally.
The paper projected this as a brilliant new effort to 'save' the bank and said that it has the support of the administrator appointed by the Reserve Bank of India (RBI). The decision was apparently taken at a meeting of 30 big depositors at the Dadar Gurdwara.
It is important to understand and analyse the implications of such a weird proposal. In a nutshell, large depositors are coming forward to help salvage/revive the Bank. On hearing just the basics of it, MG Bhide, former chairman of Bank of India (RBI) and former board member of the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) spontaneously exclaimed - this is a ‘bail in’.
Effectively, the depositors are offering to ‘bail in’ the bank, while smaller depositors get back their money.
This “bail in” is slightly different and with dubious portends for Indian bank depositors in general. ‘Bail-in’ of banks by their depositors is a highly controversial and contentious proposal which the government of India has been trying to push, in line with an international commitment at the G-20 summit.
A bail-in, as opposed to a ‘bailout’ by the government, involves converting depositors’ funds into equity, so that the bank shores up its capital and continue operations. If the bank survives and is able to turn around, the rise in equity prices may allow the depositors to profit.
In PMC Bank, this proposal to retain deposits will only yield Rs1,000 crore. It is not clear how that would be enough to revive the Bank, when the capital is eroded, the dubious loan extended to the HDIL group is anywhere between Rs4,500 crore to Rs6,500 crore and it is unclear what extent of the other loans are recoverable.
In fact, such dangerous kite flying, which reportedly has the approval of the RBI-appointed administrator, holds out false hope to depositors, while the banking regulator itself has remained resolutely silent since 23rd September.
On that day, its draconian order to limit withdrawals to Rs1,000 triggered blind panic among depositors. RBI has since increased the limit twice while offering no indicator whether the decisions were driven by political pressure at election time or based on its financial assessment of the banks loans and assets.
The bigger worry here that the finance ministry, will use the PMC Bank example as an example of how depositors should be “willing to make sacrifices” to save their banks.
Remember, the finance ministry is working at re-introducing the controversial FRDI Bill (Financial Resolution and Deposit Insurance bill). It was withdrawn in August 2018 from the Lok Sabha, a year after it was introduced, when it created panic among depositors of nationalised banks.
In the past two weeks, there are reports that a modified version of the bill
is going to be introduced in the forthcoming session of parliament. It may increase deposit insurance. Re-introduction of the disastrous ‘bail-in’ idea even will derive greater force, if depositors of PMC Bank provide proof that they are willing to make such sacrifices.
This, of course, has a terrible side-effect. It let’s off corrupt bank managements who sink their banks, and the regulator for failing to supervise.
In case of PMC, RBI has failed to regulate, inspect and detect conflict of interest in how the shady HDIL group and other large industrialists have bailed out the bank from time to time.
In fact, the more one digs, it emerges that PMC Bank, while showing a good profit, has been running a fairly precarious operation that has needed repeated bailouts.
Now let us look at this in the context of various pieces of information available. PMC Bank may have been a well-run, cooperative bank but the RBI, by claiming helplessness about dual regulation, has kept alive several banks whose networth has been fully eroded, says Mr Bhide, who was on DICGS’s board.
This means depositors’ money is being used to pay salaries, he says, while the burden is being deliberately passed on to DICGC.
Now consider the fact that India had 1,551 cooperative banks in 2018-19 and Maharshtra alone has over 72 such, which the finance minister claims is not its responsibility.
But their assets have increased from Rs1.3 lakh crore to Rs5.6 lakh crore in the same period. In Maharashtra alone, 130 urban cooperative banks were merged into 72 entities.
At the other end of the spectrum, the super safe and large State Bank of India has admitted in response to a Right to Information (RTI) filing that it has written off a colossal Rs76,000 crore in bad loans of only 220 defaulters who owed it over Rs100 crore each.
We also know that banks are ruthless in recovering money when it comes to small borrowers. How does this square with the sacrifice the PMC Bank depositors are offering to make?
Does it mean that duious and corrupt bankers who lend recklessly to big industrialists will go scot free while while rich depositors will need to keep coming forward to ‘bail in’ banks?
If this is the future, there will be an uproar and a loss of confidence in the banking system.
Hopefully, the rich depositors of PMC Bank, who are willing to make a sacrifice for the banks’ revival and RBI, will consider the larger consequences of rushing into an action without understanding and analysing the implication for the banking system.