Indian co-operative bank’s woes heighten after RBI takeover

The Punjab and Maharashtra Co-operative Bank branch was taken control by the Reserve Bank Of India and announced  withdrawals would be limited to Rs 1000 per account  for the next six months.  The limit first to Rs 10, 000 and then to Rs25, 000, which RBI says will allow about 70 per cent of PMC’s depositors to extract all their funds.

The customers with higher savings have little prospect of recovering their money soon, if ever in a violation of legal exposure limits, PMC lent most of its money to single Mumbai-based real estate company, Housing development and Infrastructure which is now in bankruptcy proceedings.

 

The crisis at PMC with deposits of over $1.5bn is another painful jolt to the country’s fragile financial system, still struggling after last year’s collapse of the triple –A rated infrastructure lender IL & FS put the squeeze on  the shadow banks that had provided much of the consumer credit powering the economy.

PMC’s woes have  brought to front the murky dealings of the country’s loosely regulated co-operative banks, which are popular among savers for offering higher interest rates than mainstream banks but do not draw the same degree of regulatory scrutiny.

India’s co-operative banks, with their roots in agricultural co-ops have traditionally played an important role both in encouraging savings and providing credit to groups that may otherwise struggle to access mainstream banks.

Co-operative banks accounted for 11 per cent of banking system assets at the end of March 2017 according to RBI, but the sector is highly fragmented with more than 1, 551 urban co-op banks and around 96, 600 rural co-operative banks. When Co-op banks have collapsed in the past their relatively small size kept the impact contained in distinct local areas and ensured that it did not attract widespread public attention. “each co-operative bank by itself was too small to jeopardise the system, so the RBI did not lose too much sleep about it, but in totality these banks are significant” according to one RBI source.

The drama at PMC had ripple effect about trouble at similar lenders, prompting RBI to Tweet last week that  the “Indian Banking system is safe and stable”.