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What happened with the PMC Bank?

Created on 27 Sep 2019

Wraps up in 3 Min

Read by 1.6k people

Updated on 01 Oct 2020

It was a shocker in the morning of  24th of September,2019 that 'Punjab & Maharashtra Cooperative Bank' has been taken over by the Reserve Bank of India. Its customers are allowed to withdraw only ₹1000. This news spread like a wild-fire, and the customers ran to the bank in the act of panic. Police were deployed at the bank to maintain the order. Still, 131 branches are under a lot of pressure from people. There are footages on news channels on how people fear their savings stalled with the bank. For some others, it is 'Demonetization 2.0.'

Is this just an outlier or the trigger is pulled…

What RBI has to say?

Unfolding it in the reverse order would answer most of the questions.

RBI told today that they are taking over the bank. This means that RBI would now directly handle the management of the bank. RBI has this right under the RBI Act. Only recently, RBI installed R Gandhi, RBI Deputy Governor, as the independent Director at the Yes Bank.

However, RBI has clarified that it is not a bank run. It is just a preventive measure to avoid any bank run. 'Bank run' refers to a stage when a bank does not have enough cash to meet its daily business.

For example, 100 people put money in a bank. The bank provides loans to others from this money, while it holds some amount to offer you cash when you come to withdraw.

Say, every day only random ten customers go for withdrawal. It would hold money to cater to 20 customers daily. What if someday 25 customers reach and the bank says they cannot give you your money today. It dents the trust! Soon, you and others inflicted would plan to close your account and take all your money out.

Due to this state of sudden panic now ensued, the bank will not have enough money to pay back everyone. Moreover, it holds money for only 20 operations; the rest of the money is out for loans and would return only after a certain period. People would now worry about their money. Nobody would deposit any more money. Banking operations would stall. Bank would later collapse.

Fortunately, it is not yet a bank run here. RBI will oversee the operations hereafter. Rumors may only worsen things

Then, why did PMC see this?

PMC reported that their bad loans were only 3.7% of total loans, but RBI found it was much higher. It is a breach of trust and standards. On the one hand, they did a poor business where their NPAs were mounting, while on the side they lied that NPAs were less.

This is not the issue with only PMC Bank. Cooperatives nationwide are messed up. What is more peculiar is that they are audited and operated under State governments. Not just they become lax in following the standards, there also have significant political interference that forces them to do some bad business. Do you know who the Director of Gujarat District Co-op Bank is? It is Home Minister Amit Shah.

What would happen to PMC?

RBI has decided to keep the status quo for the next six months. The bank is not allowed to loan any more amount. The withdrawal limit may improve over time if banks do better.

However, it is not easy. In April, City Cooperative Bank (Mumbai) faced similar restrictions and only now, the withdrawal limit has reached to ₹20000.

In an extreme state, if the bank cannot function, RBI will dissolve it, and DICGC (Deposit Insurance and Credit Guarantee Corporation) will provide insurance claim eligible to up to ₹ 1 lakh against their deposits with the bank.

The Road Ahead

As told, there is a lot of laxity in the way Cooperative Banks function. The news of their closure is not new. The deteriorating economy is playing even more deleterious.

These banks are located in rural or semi-urban areas mostly. They have the money from the poor. Moreover, they offer higher interest rates than scheduled banks. They should understand their responsibility and even more, that banking lies in the virtue of trust. Their actions would hurt the entire Cooperative banking industry and ultimately, the Indian banking and financial system.

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Deb P Samaddar

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Deb is a keen learner and eager to learn about the finance world. He is that person who would never stop talking, but my oh my, the words he uses, are not something a normal human would in a regular conversation. While the conversations are well, interesting, the write-ups are faultless. With an increased proclivity towards tech and language, he aims to capitalise on his interests as a content writer at Finology.

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