Editorial

Forced rescue

| Updated on June 23, 2021

Is there light at the end of tunnel for PMC Bank depositors?   -  REUTERS

RBI and the Centre must do their best to ensure that the PMC Bank resolution works

Afer 20 months of being left out in the cold, there is finally some light at the end of the tunnel for depositors in the beleaguered Punjab and Maharashtra Co-operative Bank (PMC Bank) as the Reserve Bank of India (RBI) has granted in-principle approval to Centrum Financial Services to start a Small Finance Bank (SFB), which will take over the operations of PMC Bank. While allowing Centrum, an NBFC with roots in investment banking and wealth management, and BharatPe, a three-year old payments startup, to take over a traditional banking operation like PMC’s is certainly not the ideal solution, RBI was probably left with little choice in the matter. Its calls for bids from potential acquirers in November 2020 elicited just three responses of which two were from the UK-based Liberty group with interests in steel, and the Ideal group in real estate. The fact that the Centrum-Bharat-Pe combination was keen on a SFB license and showed willingness to shell out the ₹900 crore immediately needed to bail out PMC, is likely to have weighed with RBI. Most bank bailouts it has brokered in the recent past, after all, have involved unwilling suitors.

However, the acquirer’s keenness to be in banking notwithstanding, PMC Bank’s turnaround is unlikely to prove an easy task. As per its latest published numbers (March 2020), PMC Bank held a loan book of ₹4,472 crore against a deposit base of ₹10,700 crore. A confession letter from its suspended MD admitted that over three-fourths of those loans were to a defaulting real estate player in violation of RBI norms. Given that the bank’s stress can be traced to such blatant fraud and supervisory failure, efforts must be made to protect depositor interests and ensure immediate lines of liquidity to depositors, at least up to the insurance limit of ₹5 lakh. If this bailout is to work, RBI and the Centre must also grant regulatory immunity to the new promoter and management from the bank’s past actions. The bank must be granted reasonable runway to comply with prudential capital and lending norms, after a clean-up of its books.

The PMC Bank case also suggests that it is about time the Centre and RBI came up with a formal resolution process for failing Indian banks, instead of relying on ad-hoc shotgun weddings. From the recent instances such as IDBI Bank’s bail -out by LIC, YES Bank’s rescue by a hotch-potch of banks and private investors and the handover of Lakshmi Vilas Bank to a foreign acquirer, it is increasingly evident that when large banks falter, a ready suitor in the form of an established public or private sector bank to bail out the entity is no longer a given. It is perhaps time to reconsider the non-controversial portions of the shelved Financial Resolution and Deposit Insurance Bill that dealt with an early warning system and phased resolution process for banking stress.

Published on June 23, 2021

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