The collapse of PMC exposes the fracture in the financial system

A simple search on the Reserve Bank of India (RBI) website on urban co-operative banks (UCBs) currently shows that 24 such local area lenders from all four corners of the country have either been placed under fresh central bank directions or have received an extension, requiring them to freeze lending and cap withdrawal of deposits. These include Bidar Mahila Cooperative Bank from Karnataka, Sri Anand Co-operative Bank from Pune, Kolikata Mahila Co-operative Bank from Kolkata and Hindu Cooperative Bank from Punjab. These banks have been placed under directions at different times during the year, with a similar Rs 1,000 per account withdrawal limit for depositors. These curbs didn’t draw media attention. However, the sudden near-collapse of Punjab Mumbai Co-operative Bank (PMC) last week has once again put the spotlight on UCBs — and risks and problems associated with them. PMC is the largest cooperative bank to be put under RBI watch since the 2001 Madhavpura Bank crisis that was linked to a stock market scam. Both tell similar tales of profligacy and risk exposure. At PMC, about two-thirds of loans are to allegedly a single — and now bankrupt — client in the property business. The central bank defines both as ‘sensitive’ sectors. PMC’s results in FY19 show no issues with the bank, with net NPAs of 2.19% and capital adequacy ratio (CAR) of 12.62% — above the RBI’s 9% threshold. It was among the top five co-operative lenders in India, with a loan book of Rs 8,383 crore. However, this exposure excludes the bank’s Rs 6,500-crore hidden loans to HDIL as of March 2019, which is facing insolvency proceedings in the NCLT. In other words, PMC’s official exposure to HDIL constituted more than 75% of the bank’s total loans. The bank management replaced 44 loan accounts with 21,049 dummy accounts, the police FIR says.   

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