PMC Bank Crisis: Should Depositors Worry About Co-operative Banks?

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The Reserve Bank of India, which has placed the Punjab and Maharashtra Cooperative Bank (PMC Bank) in Mumbai for six months, has rocked depositors, who will not be able to withdraw more than 1,000 from the total balance of each savings account or account or any other deposit.

As of March 2019, PMC Bank had outstanding deposits of Rs 11,600 crore, of which demand deposits were nearly Rs 2,300 crore and the balance was term deposits.

If you are depositing with another cooperative bank, the recent incident must have upset you. But PMC Bank is not an isolated case. The regulator has repeatedly issued instructions against other cooperative banks. While it might not be fair to paint all co-op banks with the same brush, there are a few things to keep in mind before you park money at your friendly neighborhood co-op bank.

Is it regulated?

Cooperative banks, defined as small units within the cooperative sector, operate in both urban and non-urban centers. These banks have mostly concentrated around communities and localities lending to small borrowers and businesses. Traditionally, the cooperative structure is divided into two parts: rural and urban.

The rural cooperative credit system in India is primarily mandated to ensure the flow of credit to the agricultural sector. The short-term cooperative credit structure operates with a three-tier system – Primary Agricultural Credit Societies (PACS) at the village level, Central Cooperative Banks (CCBs) at the district level, and State Cooperative Banks (StCBs) ) at the state level.

Primary Cooperative Banks (BPCs), also known as Urban Cooperative Banks (UCBs), serve the financial needs of clients in urban and semi-urban areas.

Cooperative banks are registered under the Cooperative Societies Act. Fortunately, banking laws were made applicable to cooperative societies in 1966 by an amendment to the Banking Regulation Act of 1949. Since then, banking functions have been regulated by the RBI and management related functions are regulated by the respective state governments / central government. Powers have also been delegated to the National Bank for Agricultural and Rural Development (NABARD) to inspect state and central cooperative banks.

However, note that primary farm credit companies do not fall under the scope of the Banking Regulation Act 1949 and therefore are not regulated by the RBI.

Regulatory controls in place

Many regulatory standards that apply to a commercial bank also apply to cooperative banks, which is reassuring. For example, cooperative banks must also set aside 4 percent of their total deposits as CRR (cash reserve ratio) with the regulator. They also need to invest an additional 18.75 percent of their total deposits in government securities, which are very liquid and can be easily pledged (or sold) to raise funds.

The RBI also put in place a Supervisory Action Framework (SAF) in 2012, much like the Rapid Corrective Action (PCA) on commercial banks. Here too, the trigger points for initiating corrective actions on banks are based on certain financial parameters such as capital adequacy, gross non-performing assets, concentration of deposits and profitability.

Keep track of finances

Despite regulatory oversight in place, weak corporate governance, unprofessionalism, reluctance to adopt technology are some of the concerns that continue to plague the industry, according to various documents released by the RBI.

So what can you do as a depositor to avoid getting caught up in the sudden restrictions the RBI has placed on your bank?

One of the main draws for people who wish to park money in cooperative banks is the relatively higher rates that these banks offer on deposits than commercial banks. But before you let yourself be swayed by attractive rates, it may be a good idea to look at a few key financial metrics to assess the strength of your bank.

Most of the banking websites of these cooperative banks disclose financial statements. For UCBs, the RBI annually provides banking data on the performance of certain key indicators, making it even easier to filter out good cooperative banks or at least those that can be avoided due to weak finances.

So which metrics should you be tracking?

Indicators to be taken into account

The first key parameter to watch is the bank’s capital situation. The key aspect of a bank’s capital is its ability to absorb losses in the normal course of its operations. Since a large part of the activities of banks are financed by deposits and must be repaid at a future date, it is imperative that a bank has sufficient capital to remain viable. Cooperative banks must maintain a minimum capital adequacy ratio (CRAR) of 10.875%.

According to data released by the RBI in March 2018, three UCBs – Rupee Cooperative Bank Ltd, The Kapol Cooperative Bank Ltd., Mumbai and Mapusa Urban Cooperative Bank of Goa Ltd., Mapusa had a negative CRAR. This could serve as a warning signal for depositors.

Second, profitability, which can be measured by return on assets (ROA) and which is disclosed by the RBI as one of the financial metrics, can also give an indication of your bank’s condition. A bank with an ROA reading of 1% and above is generally considered healthy (of course after taking all other parameters into account).

Finally, bad debts can also have significant implications for the financial health of your bank.

Bad debts are loans for which a borrower is unable to repay what he owes the bank. Technically, a bank classifies these loans as non-performing assets (NPL), and is then required to set aside a portion of its income as provisions. Therefore, a large increase in NPAs can erode a bank’s profits.

In the case of PMC Bank, while the capital ratio (12.62% in March 2019) was higher than the RBI requirements, there was a sharp increase in GNPA to 3.79% from 1.9% l previous year, which had an impact on profits. The bank’s ROA had fallen to 0.75% in March 2019.

Deposit insurance

One of the many safety nets put in place to protect depositors is the deposit insurance company of the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). All state, central and urban cooperative banks are covered by the DICGC. But it is important to remember that each depositor is only insured up to Rs 1 lakh (for principal and interest) on all accounts of the same bank. So be sure to spread your deposits across different banks, instead of putting all the eggs in one basket.

So far in India, the beneficiaries of the deposit insurance system have been mainly urban cooperative banks, many of which go bankrupt every year. During the period 2017-2018, DICGC settled claims of Rs 43 crore against 18 cooperative banks.

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