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To help restore depositors' confidence in urban co-operative banks (UCBs), these banks should create a deposit redemption reserve for deposits in excess of Rs 1 lakh, say co-operative banking experts.
The suggestion comes in the backdrop of the massive fraud at Punjab and Maharashtra Co-operative (PMC) Bank.
Many depositors of the bank, both individual and institutional, are uncertain about the fate of their deposits of over Rs 1 lakh, which are uninsured. The bank has been placed under Directions due to losses (estimated at Rs 4,335 crore) caused on account of irregular lending to real estate group HDIL.
Currently, depositors in a bank are insured with the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to a maximum of Rs 1 lakh, for both principal and interest amount held by them in the same right and capacity as on the date of liquidation/ cancellation of the bank's licence, or the date on which the scheme of amalgamation/ merger/ reconstruction comes into force.
Debenture redemption reserve
Referring to the debenture redemption reserve (DRR) that all listed corporates, non-banking finance companies and housing finance companies are required to create if they raise funds via non-convertible debentures (NCDs), Vinayak Y Tarale, Expert Director with the Maharashtra State Co-operative Banks' Association, said the central bank could stipulate a deposit redemption reserve requirement for UCBs so that depositors with deposits of over Rs 1 lakh (up to a specified upper limit) are not left high and dry in the event of a bank going belly up.
The DRR requirement for funds raised by all listed corporates, non-banking finance companies and housing finance companies via NCDs was done away with in August 2019, to improve ease of doing business. DRR for unlisted companies has been reduced to 10 per cent of the outstanding debentures from 25 per cent earlier.
Co-operative banking experts say PMC Bank's 'A' audit classification (given by its statutory auditor) was one of the important factors that prompted depositors to place their life savings with it.
With depositors' faith in audit classification belied, it may be time to put in place an additional safety net in the form of a deposit redemption reserve for UCB depositors.
Such a reserve would ensure that if a UCB got into trouble, the balances with it could be utilised to return depositors' money.
According to the RBI's Directions to PMC Bank, its depositors are allowed to withdraw up to ₹ 50,000 of the total balance in their account, enabling more than 78 per cent of the depositors to withdraw their entire account balance.
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