The failure of Punjab and Maharashtra Cooperative Bank (PMC Bank)—a relatively small multi-state cooperative bank—is a test for the reformist Narendra Modi government. Remember, Modi sarkar has waged a war on cash and wants us to keep our money in banks. The public fell in line, because it had no choice. The government cannot, now, try to distance itself from direct responsibility for a bank failure, as the finance minister (FM) has tried to do.
The Reserve Bank of India (RBI) has appointed a retired chief general manager (CGM) as the administrator of PMC Bank and a team of faceless retired bankers to help him. It has also commissioned a forensic audit by Grant Thornton which will take anywhere between four to six weeks, at the earliest, to submit a report. This is too slow, given that the stress and anxiety has already led to several depositors losing their lives.
What PMC Bank needs is a Satyam-like quick resolution by a team that is savvy and fully empowered to ruthlessly push for a solution that is in the best interest of a majority of stakeholders. For this, speed is of the essence. RBI does not seem to understand that it does not have time on its hand and delays are going to worsen the situation.
Crisis resolution cannot be handled by a retired central banker; most of them operate out of an ivory tower, with very little understanding or empathy for issues faced by people—especially businesses and non-salaried professionals. I say this without any disrespect to specific individuals; but it needs to be stressed that it requires a different skill-set and higher level of influence.
Delay in resolving the crisis will erode depositors’ money as the Bank pays salaries to its employees at the 137 branches that continue to function. One also assumes that the fees paid to the administrators and forensic auditors will come out of deposits with the Bank.
Loans to the Wadhwan group of HDIL, which caused the collapse, are variously estimated at between Rs2,500 crore and Rs6,500 crore. What is the status of nearly Rs2,000 crore that the Bank has lent to others? Are these loans secured? Has PMC Bank issued letters of credit (LCs) or given guarantees? If so, are these being honoured?
Nearly a month after the crisis, there is no clarity on the financial status of the Bank, while depositors’ money gets depleted every day that it remains in suspended animation. A forced takeover of the Bank— as some people are demanding—will be nothing short of a scandal, especially when there are 1,500 cooperative banks out there, apart from some giant finance companies, that are tottering dangerously.
Fortunately, RBI governor Shaktikanta Das is a lot more open and receptive than his predecessors. On 15th October, on behalf of Moneylife Foundation, we highlighted some of these issues to governor Das. Many of them need to be addressed with the same speed that was shown in making changes during demonetisation. Here are five moves that RBI should make urgently.
1. Statutory Dues: PMC Bank has business accounts of tens of thousands of small businesses where it was their sole banker. Its failure has set off a chain of alarming issues in relation to payment of statutory dues. Remember, defaults—even if they are not the customers’ fault—have been criminalised by this government.
Payments by PMC Bank were abruptly stopped on 23rd September. This means businesses would have failed to make payments of advance tax, GST (goods and services tax) and tax deducted at source (TDS) that may have already been deducted from employees or creditors. There may be provident fund dues to be paid.
Failure to make these statutory payments is a jail-able offence. Under the new rules, this may affect the ability of unconnected businesses to get GST credit, if any supplier in the chain is a PMC Bank creditor and has failed to deposit GST. The finance ministry needs to step in and ring-fence PMC Bank victims from needless harassment and prosecution for being unable to make payments due to the Bank’s failure.
2. Individual Payments: What is the status of salaried employees or professionals who had standing instructions with the Bank for payment of credit card dues or EMIs (equated monthly instalments)?
In a week or two, depositors who are unable to make payments, despite having funds, will be marked defaulters for no fault of theirs. The system has no provision to provide any leeway for this.
RBI needs to ensure that innocent depositors are given time to get back on their feet and the Bank’s failure is not allowed to affect their credit scores until then. This requires a systemic solution that should apply in all such cases.
3. HDIL Dues: A press release by the Enforcement Directorate (ED) states that it has seized assets and properties valued at Rs3,830 crore and another 80 properties around Mumbai that have yet to be valued. This caused elation among depositors.
But it is unclear how many banks and lenders will stake a claim to these assets and whether the same asset has been pledged to multiple lenders. More importantly, ED’s seizures could land up in court under the PMLA (Prevention of Money Laundering Act), unless a different approach is adopted that allows for quick resolution and repayment to PMC Bank.
4. Finding a Buyer: When the PMC Bank debacle first erupted, its reputation as a well-run bank with 137 branches across states attracted attention. A large cooperative bank even toyed with the idea of making an acquisition offer, but got cold feet once it learnt of the enormity of the fraud.
Even today, PMC Bank would find buyers if there is a quick estimation of losses and amount recoverable. A leading banker, who prefers to remain unnamed, told me, “The key would be to find a potential buyer who would be considered ‘fit and proper’ by RBI to run a bank and has deep pockets to acquire one.”
Such a buyer may be willing to pay anywhere between Rs1,500 crore to break into the banking business with a network of 137 branches and trained staff on board. But if the losses are higher, there will be no takers.
A less attractive option would be to sell the branch network, maybe to banks looking to expand into key geographies where PMC Bank operates. Again, this needs quick action, smart decisions, well-structured bids and willingness of RBI to play ball.
5. Changing the Rules: Finally, one hopes that the PMC Bank debacle is a harsh lesson to the government and a realisation that the cooperative bank structure has long outlived its utility; most of them are badly exploited by politicians.
The government must use the crisis to convert these into scheduled commercial banks with stringent oversight and supervision by a single regulator. The structure of deposit insurance has to be reworked. Collection of insurance premium from all banks cannot work when the risks involved are vastly different. In the past 25 years, all payments/settlements by the Deposit Insurance and Credit Guarantee Corporation have been for failed cooperative banks. Isn’t it ironical that these banks attract depositors by offering higher interest on deposits?
Clearly, they need to pay a risk-based insurance, as recommended by the Jagdish Capoor committee (but ignored for decades), instead of being clubbed with nationalised banks and large private banks. The same is true for payment banks and small finance banks. Of course, this will not work when there is outright fraud, as in the case of PMC Bank.
So, a quick resolution template with appropriate empowerment of RBI is a necessity at a time when the government is moving towards more privatisation. Each of the above-mentioned moves requires speed; but this understanding seems to be missing, so far.