The RBI unleashes a plethora of measures whenever a bank goes bust. But knee-jerk reactions won’t help. Recently, about a dozen of the Punjab and Maharashtra Cooperative Bank (PMC) depositors have died, unable to stand the shock of the bank’s failure. Nor could the RBI’s prescriptions target the root causes of the crisis; the steps it took as a sequel to Madhavpura Mercantile Cooperative Bank (MMC) failure in 2001 could not stop further catastrophes.

The PMC, a multi-state UCB, found a place among the country’s top ten UCBs. It maintained a capital adequacy ratio of 12.62 per cent, higher than the RBI’s norm of 9 per cent. It has shown decent profits, ₹100 crore last year and a low net NPA, of 2.19 per cent. It earned ‘A’ rating from the auditors. But the dazzle of the PMC was window-dressing, which came out only in an RBI inspection following an insider tip-off. More than 70 per cent of the bank advances were NPAs.

The bank has advanced to a single group, the promoters of Housing Development and Infrastructure Ltd, a huge amount of ₹4,635.62 crore — equal to 55 per cent of the bank’s outstanding deposits of ₹8,383 crore. It created 21,049 fictitious accounts. The depositors were shocked when the RBI restricted their withdrawals — first to ₹1,000 for six months, while gradually enhancing the limit to ₹50,000. Their maximum relief is ₹1 lakh from the DICGC.

Banking system maze

People can’t be blamed for selecting the wrong bank, in the absence of complete information. At one level, there is a valid complaint on the inadequacy of bank branches; just 1,45,871 (June 2019 figure) branches in the country with above 1.3 billion people. At another, there are innumerable types of commercial banks, including SBI and its Associates (with 22,033 branches), nationalised banks (65,493), foreign banks (301), regional rural banks (21,835), local area banks (93), private sector banks (32,083), small finance banks (3,238) and payment banks (795).

The cooperative sector has another 98,163 branches. Of them 1,551 are urban banks with two components: scheduled UCBs (54) and non-scheduled UCBs (1,497) and 96,612 are rural, which include primary agricultural credit societies (95,595).

The RBI imposes several restrictions like statutory liquidity and cash reserve ratio on the banks limiting their lending and assesses their performance through CAMELS (Capital Adequacy, Asset quality, Management, Earnings, Liquidity and Systems) and controls. The regulation inspires the trust of the people to invest in banks. The goal of the cooperatives the world over, since the first-ever cooperative was set up in 1844 in Rochdale, England, is organising the collectives for the mutual benefit of the members; not collecting deposits from non-members.

Unfortunately, the cooperative banks including urban cooperative banks do the deposits business with the RBI’s permission. The fraud-hit PMC bank has only 51,601 members, whereas it has 16 lakh depositors. The cooperative movement has become a route for back-door entry into banking — first forming an urban cooperative society and later transforming it into a UCB with the RBI’s permission.

Having permitted the UCBs to accept deposits, the RBI is duty-bound to protect depositors. Since it has never cautioned people against depositing money in the UCBs, it cannot evade its responsibility to rescue them when the bank fails.

The writer is a development economist and a commentator on social and economic issues