Mumbai: The Reserve Bank of India (RBI) put severe curbs on Punjab and Maharashtra Co-operative (PMC) Bank on Tuesday, including on cash withdrawals, amid a probe into accounting lapses, sparking speculation that the regulator may force a management change through a merger.

Cash withdrawals were capped at 1,000 per account for six months, spreading panic among depositors. PMC Bank has also been barred from making fresh loans and taking deposits.

The restrictions under Section 35A of the Banking Regulation Act are aimed at preventing a run on the bank that could end up endangering the stability of the entire financial system because of a contagion effect.

“Since cooperatives come under the purview of state governments, neither does RBI participate too much into it, nor can they keep away because of deposit holders. With so many cooperative banks facing problems, it is always the deposit holders that suffer ultimately," said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services. “The RBI must... compulsorily convert systemically important cooperative banks into small finance banks and universal banks."


Gross under-reporting of bad loans is one of the reasons for the restrictions on PMC Bank, two people aware of the development said on condition of anonymity.

The regulator is currently looking into the books of the bank, they added.

While the bank’s gross bad loans, according to its FY19 annual report, were at 3.76% of its advances, the bank has now disclosed that the figure is much higher, one of the two people said.

The second person said RBI is doing an audit of PMC bank to look into alleged irregularities.

A cooperative bank is typically audited by the state government. RBI also does an inspection of the books of cooperative banks every 12 months.

If RBI’s past actions after exercising Section 35A are any indication, it usually merges the bank put under restrictions with a healthy bank. This is done to secure depositors’ funds and to avoid systemic instability.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

Even before Tuesday’s development, there were news reports about Goa-based Mapusa Urban Cooperative Bank’s merger with PMC Bank. Following RBI’s intervention, there is a possibility that new banks might be in the fray.

Under Section 35A, RBI can issue directions to banks to “prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or to secure the proper management of any banking company generally".

Instances of bank mergers under Section 35A include Bank of Rajasthan with ICICI Bank, and Benares State Bank with Bank of Baroda.

In 2001, Ahmedabad’s Madhavpura Mercantile Cooperative Bank went bust. That landed another 210 urban cooperative banks, which kept money with Madhavpura Mercantile, in trouble and some of them had to be liquidated.

The Deposit Insurance and Credit Guarantee Corp., which offers insurance cover to individual deposits of up to 1 lakh, had to pump in thousands of crores to rescue stranded depositors. Since then, RBI has launched a clean-up operation to revive the health of cooperative banks. It has merged several banks and liquidated many more.

As on 31 March, the Mumbai-based PMC Bank had deposits of 11,617.34 crore and loans of 8,383.33 crore.

With a network of 137 branches, the multistate scheduled urban cooperative bank has presence in Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhya Pradesh.

In a press release on Tuesday, RBI said it also barred the bank from granting or renewing loans and advances, making investment and incurring liability, like accepting fresh deposits.

The first person cited earlier said the central bank will review these directions after six months, although this could be earlier as well, depending on what the audit reveals.

According to a text message sent by PMC Bank to its customers, managing director Joy Thomas took responsibility for the “irregularities disclosed to RBI".

“As the MD of the bank, I take the responsibility and assure all the depositors that these irregularities will be rectified before the expiry of six months. All efforts are made to remove the restrictions by rectifying the irregularities. I know it is a difficult time for all of you and any apology may not restore the pain you are undergoing," said the text message seen by Mint.

It was not immediately possible to reach Thomas as he was in meetings with RBI officials.

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