The only thing we learn from history is that we don’t learn from history. Otherwise, why would scams like the Punjab and Maharashtra Cooperative Bank (PMC Bank) repeat themselves with sickening regularity; and with neither the consumer nor the government learning from past mistakes?
The PMC Bank going under the direction of Reserve Bank of India (RBI), and depositors’ money frozen with maximum withdrawals of Rs 10,000 allowed, has left a trail of financial disorder and despair. From being the friendly neighbourhood bank, the branches of PMC Bank have now become hubs of protesting depositors trying to get their money out.
Cooperative housing societies, who under the Maharashtra Cooperative Act, are mandatorily required to bank with local cooperative banks, are the worst hit. Ironically, among those whose funds are stuck is the RBI Officers Cooperative Society that has invested Rs 105 crore in term deposits with the PMC Bank.
Initial reports seem to point to one single account — that of the builder, Housing Development and Infrastructure Ltd (HDIL) — triggering the crisis. As much as Rs 2,500 crore of the bank’s Rs 8,000 crore in advances had been lent to HDIL, which has defaulted.
The question that comes begging is how was PMC Bank allowed to breach the RBI regulation that caps exposure to a single borrower at 15 per cent of its portfolio?
Interestingly, HDIL is promoted by the same Wadhawan family that has controlling stock in Dewan Housing Finance Ltd (DHFL), a non-banking financial company (NBFC) entity that sparked a payments crisis last September after mutual funds found they could not retrieve their invested money.
PAST RECORD
Cooperative banks, loosely managed and preyed upon by political and financial scamsters, have always been vulnerable; but little has been done to stop the rot.
Nothing was learnt from the bust of Gujarat’s oldest cooperative bank, the Madhavpura Mercantile Cooperative Bank. Disgraced stockbroker, Ketan Parekh, had skimmed off Rs 1,200 crore in pay orders from Madhavpura in 2001 and spun hundreds of crores from a bull run he himself generated.
When the dotcom bubble burst and the stock market tanked, Parekh was unable to pay back his debt. Madhavpura Bank collapsed wiping out more than Rs 1,000 crore of 50,000 depositors. On investigation, it was found the bank had violated every rule in the book.
No collateral was sought. The borrowing limit of Rs 15 crore for stockbrokers was flouted. It was difficult to believe that regulators did not know what Madhavpura was up to.
Another Pune bank, Rupee Cooperative Bank, has been under the Central bank’s direction since 2013, and its license has been extended from time-to-time on the hope that it can be merged with Maharashtra State Cooperative Bank. Even after a six-year wait, half a million depositors are still waiting for their money.
These are not isolated cases. Action of superseding the board under Section 35 (a) of the Banking Regulation Act has been taken against as many as 23 cooperative banks this year. The names include Kapol Bank, City Cooperative Bank, CKP Bank and Mercantile Cooperative Bank. Some of these have large operations.
The PMC Bank is amongst the five largest cooperative banks with deposits of more than Rs 11,600 crore, and with 137 branches across seven states.
HIGH-RISK ZONE
There are as many as 1,500 urban cooperative banks operating. They still continue to enlarge their base on the promise of higher interest rates on both demand and term deposits. Most of these banks are in the high-risk zone as they are run by promoters who have little professional training and who are part of political cartels.
In case of PMC Bank, it has now emerged that just weeks before the Reserve Bank of India took over, it sanctioned a personal loan of `96.5 crore to HDIL director Sarang Wadhawan, who in turn used the money to settle loans and stall bankruptcy proceedings initiated by Bank of India. Relationships between banks and borrowers are incestuous too. S Waryam Singh, chairman, PMC Bank, held a stock of 1.91 per cent in HDIL, the real estate company that sank the bank, till September 2017.
There is also a regulatory flaw that makes monitoring of cooperative banks difficult. The urban cooperative banks are registered under the Cooperative Societies Act.
Though the Central bank exercises oversight after banking laws were made applicable to cooperative societies in 1966, the management functions of these banks are regulated by the cooperative department of state governments.
This makes for poor monitoring; and the Central bank intervention, when it does happen, is at the final stage when it is too late. While consumers have to become wiser and learn not to fall prey to the promise of high-interest rates, the government too will have to take steps to tighten the regulatory screws.
A trail of financial disorder continues
Rs 105 crore: Invested in term deposits with the PMC Bank by RBI Officers Cooperative Society
Rs 96.5 crore: Amount of personal loan was sanctioned by PMC Bank to HDIL director Sarang Wadhawan