Restrictions Imposed By RBI on PMC Bank

Why in News?
In recent developments in Mumbai, the Reserve Bank of India (RBI) has imposed sanctions on the functioning of the Punjab and Maharashtra Cooperative Banks for six months and capped depositor withdrawals at Rs. 1,000.

About the Sanctions
Owing to tight economic conditions in the last six months, the measure of defaulters appears to have increased for the PMC Bank. This was coupled with defaults regarding huge sums of loan given to real estate companies in Mumbai. Such cases have made the banks difficult to meet its commitments.

The sudden sanctions on the functioning and capping of withdrawal limits ahead of the Dussehra season is all set to upset the market balance both for the customers and retailers. Maharashtra is a state which relies heavily on the cooperative bank structure to provide service to its million odd population in the villages.

The development is also ill-timed for the state government ahead of the state election scheduled in October. The major political parties of the state do have a strong support among the customers of cooperative banks and this is sure to upset their calculations.

PMC being a cooperative bank is unlikely to impact the financial markets or any other public and private sector banks as cooperative banks have small dealings in money markets. The depend more upon the deposits made by the customers.

Effects of the Sanctions

  • The depositors will be allowed to withdraw only upto a sum of Rs. 1, 000 of the total balance in every savings bank account or current account.
  • Without prior approval in writing from the RBI, the PMC bank will not be able to grant or renew any loan or advances, make any investment, incur any liability including borrowal of funds and acceptance of fresh deposits.
  • Savings upto Rs 1 Lakh is guaranteed by the deposit insurance but anything beyond that would be repaid depending on the recovery under the RBI-appointed administrator.

Irregularities in the PMC Bank
It is a cooperative bank with 137 branches and atleast 51,000 members spread over seven states including Delhi and Punjab, has deposits of Rs 11,617 crore, making it among the country’s top five urban cooperative banks.

It’s bad loans have almost doubled up to 3.76% of gross advances by March 2019. The membership has also taken a hit to be down by almost 10,000 customers.

The bank has been put under Regulatory restrictions under Section 35A of the Banking Regulation Act for a period of six months due to irregularities disclosed to RBI. The RBI on its part has suggested a plan of action to the state government and leaves it to the discretion of the state as the bank should continue or wind up its operations.

The collapse of the bank seems to be sudden and is wrapped in suspense as the bank management themselves approaching the RBI regulator to initiate the action instead of the other way round.

Bottomline
Cooperative Banks are the weakest link in the financial system with their supervision and administration falling within the purview of both state government and RBI. IT remains to be seen as to how the Maharashtra Government tackle the issue ahead of the polls and we can hope to a revamped PMC Bank functioning once the six-month restrictions are lifted.


Source: The Economic Times



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