Unraveling the Punjab & Maharashtra Bank crisis

PMC bank was barred from carrying out a majority of its routine business transactions for six months, and with a limit on the amount a depositor can withdraw in a day.

September 27, 2019 11:07 IST | India Infoline News Service
PMC Bank
It all started on Tuesday, after the banking system watchdog Reserve Bank of India (RBI) imposed operational restrictions on Punjab and Maharashtra Co-operative Bank (PMC). The RBI monitors the financial health of banks and issues such directions in case there are concerns over the economic health of a bank. The bank was barred from carrying out a majority of its routine business transactions for six months, and with a limit on the amount a depositor can withdraw in a day. Let us take a quick look at how the events unfolded.

What did RBI do?
The central bank placed Mumbai-based PMC Bank under directions for six months from the close of business of the bank on September 23, 2019. The following were the curbs put on the urban lender:
  • The depositors will be allowed to withdraw a sum not exceeding Rs1,000 of the total balance in every savings bank account or current account or any other deposit account by whatever name called, subject to conditions stipulated in the RBI Directions. The limit has since then been hiked to Rs10,000 as of September 26, 2019.
  • PMC bank without prior approval in writing from the Reserve Bank, will also not be able to grant or renew any loans and advances, make any investment, incur any liability including borrowing of funds and acceptance of fresh deposits, disburse or agree to disburse any payment whether in discharge of its liabilities and obligations or otherwise, enter into any compromise or arrangement and sell, transfer or otherwise dispose any of its properties or assets.
  • The restriction will remain in force for a period of six months from the close of business of the bank on September 23.
  • The bank will continue to undertake banking business with restrictions until further notice/instructions. The bank regulator may consider modifications of these directions depending upon circumstances.
  • A copy of the new RBI directive will be forwarded to each depositor and will displayed on bank's website.
The RBI said the directions are imposed in exercise of powers vested in it under Sub-section (1) of Section 35A of the Banking Regulation Act, 1949 read with Section 56 of the said Act. The RBI has also clarified the issue of the directions should not, per se, be construed as a cancellation of a banking license by the central bank.

What does Section 35A entail?
Section 35A of the Banking Regulation Act, 1949 vests power in the RBI to give directions to banks and can take action, "to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company”. The RBI under the act can also impose restrictions on banks to ensure better governance and control.

What is PMC bank’s reach?
Founded in 1984, PMC Bank was the youngest bank to get the status of a scheduled bank in 2000 and a license of authorized dealer category 1 in the year 2011 for forex business by the RBI. PMC Bank has 137 branches spread across seven states with 81 of these in Mumbai, Navi Mumbai, Thane and Palghar regions, 10 in Pune and 12 in the rest of Maharashtra. With a network of 137 branches, it ranks among the top 10 cooperative banks in the country. As of March 31, 2019, PMC Bank had deposits and advances aggregating Rs11,617cr and Rs8,383cr, respectively. The bank has several small businesses, housing societies and institutions as its customers.

Why did RBI place restrictions on PMC?
When RBI puts a bank under its directions, it is practically taking over the bank's operations. The bank's management is superseded and the board is dissolved. This happens when the regulator is not satisfied with the bank's functioning and takes the step to safeguard the interest of borrowers. Though the central bank has not explicitly given reasons for the curbs, the lender’s managing director Joy Thomas has reportedly written to its customers, where he has mentioned that RBI had took notice of some irregularities at the bank which would be rectified before the expiry of the six-month timeframe. As of FY19, the bank reported gross non-performing assets (NPA) of Rs315cr from advances of Rs8,383cr which is not particularly bad. However, reports suggest that the NPA number could in actuality be in the range of Rs2,000-2,500cr. The central bank is currently doing an audit of the bank to look into the alleged irregularities. The Bank regulator generally does an inspection of the books of cooperative banks every 12 months. There are also reports that the bank had huge exposure to stressed real estate companies, which defaulted on repayments.

What comes next?
The 36th annual general meeting of PMC Bank that was scheduled to be held on September 28 in Mumbai has been called off. The bank’s MD Joy Thomas notified the development to stakeholders late on September 25, citing restrictions by the central bank. The RBI has appointed J B Bhoria as administrator of PMC Bank; he is expected to take appropriate measures to bring the bank back on the rails. The 14-member board of the bank headed by Waryam Singh has been superseded. Mr Bhoria on his part has said that his role will be to find out the extent of damage and take appropriate action. As an administrator, he will take over as the chairman of the board of directors. However, his powers in terms of running the business are limited, considering that the RBI has already put restrictions on the bank’s business.

After six months, RBI will take a call on whether to relax some restrictions or extend the period based on the bank's books. If the discrepancies found can be corrected over the course of time, by sale of assets or other measures, the bank's functions will be reinstated. In the interim, the central bank will try to clean up the bank's balance sheet and fix its asset-liability mismatch. PMC bank on its part has said that they have ample assets to cover all liabilities of the depositors.

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