System failure

Regulatory issues, lack of corporate governance and political interference make cooperative banks a mess difficult to clean up.

- NACHIKET KELKAR

WHEN A CRISIS erupted at the cash-strapped Yes Bank a few weeks ago, the Reserve Bank of India was uncharacteristically swift in resolving it. The Central bank quickly floated a reconstruction plan, with the State Bank of India as the anchor investor. The plan was immediately approved by the government and Yes Bank resumed full operations in two weeks.

About six months ago, Mumbai-based Punjab and Maharashtra Cooperative (PMC) Bank, one of the large cooperative banks in India, had a similar problem, and it has left thousands of depositors in the lurch. The rescue of Yes Bank raised their hopes. However, to their dismay, the RBI extended the restrictions on PMC Bank by another three months on March 21.

“Why can’t someone come and put money in PMC Bank?” asked Jitsu Sheth, who had deposits worth ₹28 lakh in the bank. With the funds tied up, Sheth’s small business has come to a standstill: the past six months have seen her virtually taking to the streets to get the money back. “All I had was this money and now am dependent on help from relatives,” she said. “I can’t go begging on roads now.”

PMC Bank had loaned money to the now bankrupt real estate developer HDIL and it had allegedly used dummy accounts to hide the exposure, which was about 73 per cent of its total loanbook. The bank’s MD and CEO Joy Thomas, several of its board of directors, and HDIL’s promoters Rakesh Wadhawan and Sarang Wadhawan were arrested. The Bombay High Court had ordered the sale of HDIL’s assets to repay the bank. However, that order was stayed by the Supreme Court.