PMC Bank customers panic after RBI restricts withdrawals
Panic-stricken customers have been gathering in front of Punjab Maharashtra Cooperative Bank (PMC Bank) branches after the Reserve Bank of India (RBI) restricted withdrawals.twitter

The Punjab & Maharashtra Cooperative Bank (PMC Bank) crisis forcing the Reserve Bank of India (RBI) to curtail withdrawals and stop the processing of loans was a long time in the making, reports suggest. Along with issues plaguing non-banking finance companies (NBFC), the PMC Bank trouble points to the need for closer RBI supervision of the cooperative banking and NBFC space.

Apart from the inconvenience that the customers of the Mumbai-based PMC Bank with 137 branches spread over half a dozen states have been put through, some experts fear the crisis could trigger a chain reaction in other cooperative banks across the country. The curbs drove panicked customers to gather at the branches demanding their money back. In India, where the rural areas are inadequately served by the mainstream nationalised and commercial banks, the cooperative banks are the lifeline. Most rural customers keep their entire life's savings in a single cooperative institution and its collapse could mean penury for them.

The RBI has since eased the restriction on withdrawal limit to Rs 10,000 from Rs 1,000 which some sources claim would allow 60 percent of accounts to withdraw their whole amount. But the restrictions on the bank in processing new loans or accepting or releasing fixed deposits continue keeping many customers on tenterhooks.

Finance Minister Nirmala Sithraman, meanwhile, has hinted at closer supervision of the shadow banking space. After a meeting with private banks, Sithraman said the government did not see any major liquidity issues with private banks. Sitharaman has been holding meetings with various segments of the economy in a major growth push for realizing Prime Minister Narendra Modi's slogan of making India a $5-trillion economy by 2025.

Reserve Bank of India headquarters in Mumbai.Reuters

Cooperative banks are the lifeline of the rural financial system an erosion of people's faith in them will have major repercussions on the rural economy, which is already in the grip of a severe slowdown. The rural slowdown caused by a fall in agricultural production is thought to be the main reason behind the slump in economic growth rate.

Media reports show that PMC Bank chairman S Waryam Singh's connection with the troubled real estate company Housing Development and Infrastructure (HDIL) was long known. Singh was on the board HDIL to which the PMC Bank had lent Rs 2,500 crore.

The bank refused to declare the advance a non-performing asset (NPA) despite several defaults on the part of the borrower, a report in the India Today shows. "There is a problem with the way banks are run but the bigger problem is supervision. No lessons have been learned," the report quoted journalist and entrepreneur Sucheta Dalal as saying. "It's a serious problem which points at serious regulatory issues. Regulators in India are not doing their job. They have to focus on regulators and make them accountable," Dalal said.

Some suggest that the bad loan issue runs deep through the cooperating banking sector just as in NBFCs because of lax supervision. The RBI has not yet extended the 'fit and proper' doctrine to the books of the shadow banking system leading to frequent missteps.