PMC Bank Rescue: Don’t Let Perfect Be The Enemy Of Good

Depositors of PMC Bank outside the RBI headquarters in Mumbai. (Photograph: PTI)

PMC Bank Rescue: Don’t Let Perfect Be The Enemy Of Good

BloombergQuintOpinion

It was September 2019. Many blinked in disbelief as developments unfolded at Punjab and Maharashtra Cooperative Bank. The multi-state cooperative lender had just been put under RBI restrictions. The circumstances which had led to that left everyone shocked.

The bank, as it emerged through a confession letter of the then chief executive Joy Thomas, had 70% of its advances given to one group — the HDIL group. Fake accounts had been opened to route this lending, which was well beyond the group exposure limits permitted by the Reserve Bank of India. When these loans turned bad, that too was hidden. Thomas, in a press briefing, described this as “small delay.”

Six members of the bank’s staff were in the know and masterminded the operation which went on for years as detailed in this report based on Thomas’ confession letter.

They eventually blew the whistle on themselves because, as Thomas put it in his letter, they had to “undergo a lot of stress due to concealment of information.”

As the scam ran out of the steam, the Reserve Bank of India was left with a mess on its hands.

It has taken the regulator a little less than two years to resolve that mess. In the meantime, about 15% of the bank’s depositors waited to get their money back while those with deposits of up to Rs 1 lakh were slowly allowed to withdraw their funds.

The largest issue the RBI faced in the PMC Bank case was that it was a multi-state cooperative bank. These banks came under the dual regulation of the RBI and the Registrar of Cooperative Societies. But when push came to shove, it was for the Reserve Bank to handle the mess.

Unlike in the case of a private bank, this dual regulation meant that the RBI did not have a free hand in stitching together a shotgun merger with a larger, stronger bank. This was done in the case of Yes Bank via a consortium of lenders and for Lakshmi Vilas Bank via a merger with DBS Bank.

For PMC Bank, a quick merger option was not available.

No infusion of capital was forthcoming from the dispersed shareholder base. The Maharashtra government toyed with the idea of attempting a merger with the Maharashtra State Cooperative Bank but backed down.

Finally, in November last year, the administrator for PMC Bank put out advertisements seeking expressions of interest. Alongside three non-serious bids, one came in from a consortium of Centum Financial Services and Bharat Pe.

The RBI has now paved the way for the Centrum-Bharat Pe consortium to take over PMC Bank, even though purists could argue that this has permitted a backdoor entry for both into banking.

Remember that before a non-bank gets a universal banking licence or a small finance bank licence, it has to go through a full application process. As part of this, the RBI assesses the fit and proper status of shareholders and also the performance of the non-bank lender over the years.

In fact, a whole list of entities are currently in the queue for a small finance bank licence. There are others, like Sachin Bansal’s Navi, that have been waiting for months for a decision on their universal banking license application.

Also, not all non-banks have been permitted to transition via the merger route. Remember the multiple attempts made by Indiabulls Housing Finance? Others like Capital First found their way into universal banking via a merger but there a banking licence already existed with IDFC Bank.

Centrum Financial and Bharat Pe have managed to cut the queue and get to the front simply by offering a solution that the RBI desperately needed. Perhaps, the regulator realised that accepting an imperfect but available option was better than waiting for a yet-to-emerge perfect solution?

The one good thing that did come out of the PMC Bank crisis was a change in legislation, giving the RBI greater oversight of urban cooperative banks and multi-state cooperative banks.

In February 2020, the government approved bringing both these categories under the direct supervision of the Reserve Bank of India. This improves the ability of the regulator to supervise and regulate over 1,500 of these lenders, with a depositor base of 8.6 crore.

The dual control doesn’t completely go away but the RBI now has greater oversight. This includes the power to supersede and take control of these banks if the bank's financial health deteriorates. These lenders will also need RBI approval for CEO appointments from here on.

Over the past 12-18 months, supervision over urban cooperative banks has been tightened in other ways too.

These lenders are now required to report large exposures to the RBI's central repository, exposure limits have been reviewed, amalgamation guidelines put in.

That’s the good that has come out of the PMC Bank crisis.

Then there is the unresolved agenda — the lack of a proper framework to deal with bank stress.

Whether it is Yes Bank or Lakshmi Vilas Bank or PMC Bank or one of many smaller cooperative banks that have gone into liquidation, the resolution plan is always been ‘made-to-order’. There is no official template for size or risk based solutions, no yardstick to decide which bank gets rescued and which gets liquidated.

You can argue that the RBI has always, eventually ‘figured it out’ but it may be about time we get an institutional framework in place.

The now buried Financial Resolution and Deposit Insurance was intended to do just that. We should dust the cobwebs off from those files, resolve some contentious issues like deposit bail-ins and bring the framework back on the table.

Unfortunately, we have had enough use-cases for a legislation of that nature in recent months.

Ira Dugal is Executive Editor at BloombergQuint.

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