SBI Research Suggest Ways To Avert PMC Bank-Like Crisis

On account of massive under-reporting of bad loans, Punjab and Ma Maharashtra Cooperative Bank (PMC Bank) was put under the RBI scanner for six months on September 23. And with it there was a threat on the fate of customers deposit at the time. The scam resulted in few people dying from the shock and while RBI has relaxed the withdrawal amount allowed for depositor, the fate of the bank still hangs in a lurch.

SBI Research Suggest Ways To Avert PMC Bank-Like Crisis

In brief there was a diversion of fund found at the bank to the tune of Rs. 4355 crore to HDIL.

In its wake, SBI Research has come out with a report on how to avoid such PMC bank like scams. Here are the details on the report that you should know:

In its Ecowrap report, , "The Indian financial system's regulatory architecture has its complexity - both in terms of the sheer number of regulating bodies and also because of their overlapping spheres of concern and influence. An example of this is the regulation of cooperative banks in India with their regulation largely left to the registrar of cooperatives."

"Though RBI has the expertise, it does not have the regulatory power to regulate these institutions, and the registrar of cooperatives though not having the expertise regulates such entities. The result, creation of PMC type behemoths," it added.

Further it suggested that Urban Cooperative Banks or UCB registered under the multi-state Cooperative Societies Act, 2002 should be on an immediate basis be considered for transition to commercial banks or SFBs.

Also, these are not regulated as they should be and have more of relaxations.

There should be a business size restriction with a cap of say Rs. 20000 crore. And if it exceeds this benchmark, it should necessarily be converted into CBs/SFBs. Also, no powers vest on the RBI for constituting the board of UCB, removal of directors, auditing as well as liquidiation or winding up of the business of these UCBs.

So, rules be changed such that RBI is given an authority to regulate these banks at par with commercial banks. There should also be set up an UO such that depositor's confidence is enhanced as well as such entities are rendered more resilient. Such a umbrella organization will provide capital support, provide infrastructure for sharing of data as well as help UCBs increase their product and services at a lower cost.

GoodReturns.in