The downfall of the Punjab and Maharashtra Cooperative or PMC was caused by a single account that originated in Sion Koliwada in 1984 and then grew to 137 branch network, with most of them in the Mumbai Metropolitan region. The RBI has imposed a strict set of rules and regulations on the bank for the next six months and they are primarily due to regulatory lapses and under- reporting of the non- performing assets. It had also given a loan of INR 2500 crore to the now bankrupt real estate firm, the HDIL or Housing Development and Infrastructure Limited.
The PMC bank’s auditor had not classified the loan to HDIL as an NPA also they were defaulting on repayments and the RBI had finally put it down as a complete loss. The RBI guidelines indicate that in such cases, it is up to the bank to make provision for the loss. The cash reserve of the PMC Bank stands at INR 1000 crore, which is well below the amount that was granted to HDIL.
The RBI had also rejected the demand for an appellate authority and stated that there were mathematical formulas to classify an asset as an NPA. So, when banks are told to make provisions for the NPAs, they are basically told to deduct the NPAs from their profits.
Key developments worth noting
On the other hand, no HDIL spokespersons were available to respond to the queries and the RBI has also refused to divulge the details. However, it is more or less confirmed that the RBI agrees that the loan to HDIL will have to be completely written off. In case the RBI felt it was not a total loss, them the PMC Bank would have to make provision for 10% of the total loan as it had resources for that.
Some of the major restrictions that have been put on the bank are as follows. Withdrawals have been capped at INR 1000 crore for a six months period and the bank will not be able to give any new loans. It will also not be allowed to grant any loan in advance, make any investment or renew any loans. It will not be able to incur any new liabilities by borrowing any new funds or accept fresh deposits or disburse or agree to disburse any payment without the consent of the RBI. Also, the banks will not be able to enter into any sort of new arrangement for sale, transfer or to dispose of any of its properties or assets although the RBI clarified that the bank’s license was not being cancelled. The annual report of the bank showed that the marginal profit declined by 1.2% to ONR 99.69 crore and he net SNPAs has more than doubled to 2.19%.
This announcement comes at a time when the economy is already going through a slowdown and there are job losses galore. Inflation of commodity prices has driven the final nail in the coffin. Hundreds of depositors made a beeline in front of the banks on hearing the news. Many of them have their life savings there and they broke down when they heard they cannot collect more than INR 1000. The bank eventually had to call for police protection.