The Reserve Bank of India placing Mumbai-based Punjab and Maharashtra Cooperative Bank (PMC Bank) under directions for six months, has rattled depositors, who will not be able to withdraw more than ₹1,000 of the total balance in every savings bank account or current 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 were term deposits.

If you are a depositor in another cooperative bank, the recent incident is bound to have distressed you. But PMC Bank is not an isolated case. The regulator has time and again issued directions against other co-operative banks. While it may not be right to paint all cooperative banks with the same brush, there are a few points to be kept in mind before parking money in your friendly neighbourhood cooperative bank.

Is it regulated?

Cooperative banks, defined as small-sized units in the co-operative sector, operate both in urban and non-urban centres. These banks have mostly been centred around communities and localities lending to small borrowers and businesses. Traditionally, the co-operative structure is divided into two parts--rural and urban.

The rural cooperative credit system in India is primarily mandated to ensure flow of credit to the agriculture sector. The short-term co-operative 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 (PCBs), also referred to as Urban Cooperative Banks (UCBs), cater to the financial needs of customers in urban and semi-urban areas.

Cooperative Banks are registered under the Cooperative Societies Act. Thankfully, banking laws were made applicable to cooperative societies in 1966 through an amendment to the Banking Regulation Act, 1949. Since then, banking related functions are regulated by the RBI and management related functions are regulated by respective State Governments/Central Government. Powers have also been delegated to National Bank for Agricultural and Rural Development (NABARD) to conduct inspection of State and Central Cooperative Banks.

However, do note that Primary Agricultural Credit Societies fall outside the purview of the Banking Regulation Act, 1949 and hence are not regulated by the RBI.

Regulatory checks in place

Many of the regulatory norms applicable to a commercial bank also apply to cooperative banks, which is comforting. For instance, cooperative banks too have to set aside 4 per cent of their total deposits as CRR (cash reserve ratio) with the regulator. They also need to invest another 18.75 per cent of their total deposits in government securities, which are highly liquid and can be easily pledge (or sold) to raise money.

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

Keep track on financials

Despite the regulatory check in place, weak corporate governance, lack of professionalism, reluctance in technology adoption are some of the concerns that continue to plague the sector, according to various papers put out by the RBI.

So what can you as a depositor do, to avoid being caught by sudden curbs imposed by the RBI on your bank?

One of the biggest draw for people to park money in cooperative banks is the relatively higher rates these banks offer on deposits than commercial banks. But before getting swayed by attractive rates, it may be wise to look at some key financial metrics to gauge the soundness of your bank.

Most bank websites of these cooperative banks do disclose financial statements. For UCBs, the RBI provides bank-wise data every year, on the performance of certain key metrics which makes it even easier to filter the good cooperative banks or at least ones that can be avoided due to weak financials.

So which metrics do you need to track?

Metrics to take note of

The first key parameter to watch out for is the capital position of the bank. The key aspect of a bank’s capital is its ability to absorb losses in the normal course of operations. Since much of banks’ activities are funded by deposits, and have to be repaid at a future date, it is imperative that a bank carries sufficient amount of capital to remain viable. Cooperative banks have to maintain a minimum capital adequacy ratio (CRAR) of 10.875 per cent.

According to the data put out by the RBI as of 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.

Secondly, the profitability, which can be measured by the return on assets (ROA) and is disclosed by the RBI as one of the financial metrics can also give an indication of the state of affairs of your bank. A bank with an ROA reading of 1 per cent and above is usually considered sound (of course after considering all other parameters).

Finally, bad loans too can have far reaching implications on the financial health of your bank.

Bad loans are loans where a borrower is unable to repay what he or she owes to the bank. Technically, a bank classifies such loans as non-performing assets (NPAs), and is then required to set aside a portion of its earnings as provisions. Hence a sharp rise in NPAs can erode a bank’s profits.

In case of PMC Bank, while the capital ratio (12.62 per cent as of March 2019) was above the RBI’s requirement, there was a sharp increase in GNPAs to 3.79 per cent from 1.9 per cent in the previous year, which had impacted profits. The bank’s ROA had slipped to 0.75 per cent as of March 2019.

Deposit insurance

One of the many safety nets in place to protect depositors is the deposit insurance under the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). All State, Central and urban cooperative banks are covered under DICGC. But it is important to remember that each depositor is insured only upto Rs 1 lakh (for both principal and interest) across all accounts in one bank. Hence ensure you apportion your deposits in different banks, instead of putting all eggs in one basket.

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