PMC Bank Scam

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Context

  • Punjab and Maharashtra Cooperative Bank kept under withdrawal cap by RBI after it was found that the Bank has lent over 70% of its loans worth Rs. 9000 crore to Housing Development and Infrastructure Limited (HDIL) which is facing bankruptcy.

What is PMC bank and issue at hand

  • It is a cooperative Bank with branches spread over multiple states like Maharashtra, Goa, Karnataka, Delhi, Gujarat, Madhya Pradesh.
  • It has been found that PMC Bank has lent close to 70% of its total loans of Rs. 9,000 crore to Housing Development and Infrastructure Limited (HDIL) i.e. about 6,300 crore loaned to HDIL which is way above the limit of loan exposure to a single entity of 15% to an individual borrower and 40% to a group of borrowers.
  • Also, now HDIL is facing bankruptcy, then how could loans be sanctioned by the Bank repeatedly to an ailing firm.

Causes of this crisis

  • Collusion of bank officials and HDIL.
  • Regulatory failure as RBi couldn’t catch the loans extended to HDIL above the prescribed limit.

Cause of regulatory failure

  • Multiple Acts of regulation :  Co-operative banks are registered under state cooperative Societies Act of States or Multi State Cooperative Societies Act, 2002. License is issued by RBI under Banking Regulation Act, 1949. Also, cooperative banks are subject to Banking Laws (Application to Cooperative Societies) Act, 1965.
  • Dual control system: A co-operative bank is regulated under CAMELS framework. The acronym “CAMELS” refers to the six components of a bank’s condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The Management component is regulated by State Registrar of Co-operative Societies/ Central Registrar of Co-operative Societies. Rest is regulated by RBI. This dual control is hindrance in effective regulation of Cooperative banks.
  • Lack of authentic data: There is less computerisation and technological means to arrive at authentic data to regulate cooperative banks on real time basis. In PMC Bank scandal, one of the loans was broken into 22,000 small loans of different borrowers.

Solutions

  • Consolidation of provisions of different Acts and Rules and preparing one single Act for regulation of Co-operative banks
  • Single regulator RBI.
  • Computerisation, capacity building and training of Co-Opertative banks and RBI Officials for effective regulation of Co-operative banks.

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