Home / Money / Personal Finance /  Should PMC Bank case worry co-operative bank customers?

Banks have long been considered a safe place to put your money away. Even as equity investments have flooded the market, some investors, especially seniors, still prefer to keep their money safe in savings accounts and fixed deposits. But the recent stir caused by the Reserve Bank of India restricting PMC Bank from engaging in any business for six months and capping withdrawals, panic and rumours spread like wildfire among customers of both commercial and co-operative banks, despite reassurances from the regulator. Nilanjana Chakraborty asks experts if depositors in co-operative banks need to be worried

Raj Khosla
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Raj Khosla

Raj Khosla, managing director, MyMoneyMantra

Indian banking system resilient so there’s no need to worry

Depositors should not worry as the overall health of the Indian banking system is fine, for now. Our banks are resilient enough. We have successfully fought back even the most vicious global downturns. The regulatory framework is good enough as far as depositors’ protection is concerned.

Co-operative banks are regulated by RBI and by respective state governments and, therefore, oversight procedures frequently fall between two stools. Additionally, co-operative banks have indeed been plagued by weak corporate governance and as such are not as safe as commercial banks.

RBI mandates banks set aside 4% of total deposits as CRR (cash reserve ratio), and invest 18.75 % of deposits in government securities. Banks are also required to insure deposits of 1 lakh for each depositor under the Deposit Insurance and Credit Guarantee Corporation (DICGC).

In cognizance of consumer protection, RBI recently decided to provide relief to depositors by increasing the withdrawal limit to 25,000. With this, over 70% of depositors will be covered for their entire account balance.

Adhil Shetty
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Adhil Shetty

Adhil Shetty, CEO, BankBazaar

RBI is attentive to depositors, but evaluate your bank

The RBI has always been attentive to customer’s interests, especially on small savings in co-operative and commercial banks.

Like commercial banks, co-operative banks are also mandated to set aside 4% of their total deposits as cash reserve ratio (CRR) with RBI. They also need to invest 18.75% of total deposits in government securities that are highly liquid like banks. Investments in central and primary co-operative banks are also insured for up to 1 lakh by DICGC.

That said, co-operative banks are usually slow in technology adoption. Their complex regulatory and administrative structure makes them less transparent and also put stress on effective corporate governance.

As a depositor, evaluate your bank. In the financial statements, look for a minimum capital adequacy ratio of 10.87%, profitability numbers and non-performing assets. A decline on any of these could mean the bank is facing difficulties. As per RBI norms, scheduled commercial banks are required to maintain a CAR of 9%, and public sector banks 12%. But corporate governance of commercial banks is tighter than that of co-op banks.

Mukesh Jain
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Mukesh Jain

Mukesh Jain, Corporate lawyer and founder, Mukesh Jain & Associates

When it comes to co-operative banks, grey areas remain

A commercial bank is significantly different from a co-operative bank. Co-operative banks are under the dual control of the Reserve Bank of India (RBI) and the ministry of corporate affairs, whereas commercial banks are under RBI only.

As per reports, in the case of PMC Bank, RBI had cautioned the ministry of corporate affairs that the chairman was not a “fit and proper" person. In case of commercial banks, RBI has the power to appoint and remove the chairman or whole-time directors without any interference from any other agency. Moreover, the depositors of commercial banks are protected by an implicit sovereign guarantee. Hence, while there have been cases of co-operative banks going bankrupt, no commercial bank has gone bust since independence.

A weak bank is generally merged with a stronger bank. Even with co-operative banks, reforms such as merger of district co-operative banks with state co-operative banks are initiated. Still, grey areas remain and if a co-operative bank is liquidated, depositors have recourse only to a DICGC guarantee of 1 lakh.

Mona Khetan
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Mona Khetan

Mona Khetan, Senior analyst, banking, Reliance Securities

Co-operatives vulnerable due to sheer numbers

From a depositor’s perspective, banks were synonymous with safety and convenience. Both these have been shaken post the PMC debacle. Interest rates and location of a branch were the two key considerations for a depositor earlier, but at least in the interim, if not for a longer term, the bank’s fundamentals and financials will matter as well. Moreover, coverage under deposit insurance at 1 lakh, which was last raised in 1993, remains among the lowest for India.

As for whether customers of co-operative banks are more at risk, that was always the case. This is a result of the limited scrutiny by RBI. It also has to do with the sheer number of co-operative banks. There are more than 30 state cooperative banks and over 1,500 urban co-operative banks in the country. Compare this to the number of public sector banks, which stands at 12, down from 19 earlier, and just over 20 private sector banks in India.

The sheer number of cooperative banks, as well as the duality of regulation that exists with regard to them makes them more vulnerable than commercial banks.

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