From UPSC perspective, the following things are important :
Prelims level : Banking Regulation Act
Mains level : Need for stringent banking regulation
RBI imposed curbs on the activities of the Punjab and Maharashtra Cooperative Bank (PMC) for a period of six months. This came when certain irregularities in the bank were discovered, including the under-reporting of non-performing assets (NPAs).
- The crux of the problem is the bank’s exposure to a real estate firm, which itself is currently undergoing insolvency proceedings.
- The bank’s financials for the year ended March 2019 does not provide any indication of financial stress.
- Initially, RBI allowed depositors to withdraw only Rs 1,000 over a six-month period.
- After a public outcry, it revised this limit upwards to Rs 10,000. With this relaxation, more than 60% of depositors would be able to withdraw their entire account balance.
- The restrictions imposed by RBI under section 35A of the Banking Regulation Act, are aimed at safeguarding depositors’ interest and preventing a run on the bank.
- These measures are seen as penalising depositors. But they can end up having the opposite effect of denting trust in cooperative banks and increasing the risk of contagion.
- RBI has appointed J B Bhoria as an administrator of the bank.
- A forensic audit could shed light on an asset-liability mismatch and reveal the true extent of the problem.
- RBI could also explore the option of merging PMC with another healthy cooperative bank to avoid any instability, as it has done so in the past.
Issues that arise
- It raises questions not only on the governance structures at these cooperative banks but also on their supervision.
- Cooperative banks are under the joint supervision of the RBI and states.
- While the RBI has signed MoUs with state governments, unless state governments cooperate in effecting regulations, supervision is likely to be ineffective.
- There were no early warning signs of trouble in this case.
- It is likely to raise calls for reviewing this regulatory framework and giving more powers to the RBI to oversee these entities.
The RBI should also examine the long-term feasibility of their business models in light of the rapid technological changes in the financial sector. The larger question over the absence of a framework for the timely resolution of financial firms remains.
The Banking Regulation Act, 1949 is legislation in India that regulates all banking firms in India.