Whom to TRUST (PMC Scam)?

As we know that cooperative institutions plays significant roles in credit delivery

to unbanked segment and the primary significance is FINANCIAL INCLUSIONS.
But when it comes to trust we (General Public) have to bear all repercussions.

What happened at PMC Bank?

The Enforcement Directorate has filed a money laundering case in the PMC Bank
scam. According to an FIR filed in the case, HDIL promoters allegedly colluded
with the bank management to draw loans from the bank's Bhandup branch. Bank
officials did not classify these loans as non-performing advances, despite non-
payment. Reports estimate the bank’s overall exposure to the HDIL group at
around Rs 6,500 crore, or over 73 per cent of all of the bank’s advances — and all
of this is not being serviced. The bank also allegedly created fictitious accounts of
companies which borrowed small sums of money, and created fake reports to hide
from regulatory supervision. There are many speculations about banks connections
with other companies also.

When it started?

In late September, The Reserve Bank of India (RBI) imposed restrictions on

withdrawals from the Punjab and Maharashtra Cooperative (PMC) Bank, one of
the largest UCB (Urban cooperative bank) leaders. Over the last past week, bank
customers have been in a state of panic and the central bank has sought to assuage
concerns about banking sector’s health.

Is it Regulatory Dilemma?

We have to go back to our past. Cooperative banks came directly under the RBI’s
radar in 1966 but faced the problem of dual regulation. The Registrar of
Cooperative Societies (RCS) is in charge of management regulations and many
administrative issues as well as auditing. RBI brought them under the Banking
regulation Act as applicable to cooperative societies, which included all the
regulatory aspects like licensing, maintaining cash reserve, SLR, and most
importantly is inspections. Because of dual regulations RBI did not have much
control over these banks in terms of removal of directors, as the RBI has over PSB
(private sector banks).

What Now?

As RBI already given options to urban cooperative banks to convert into small
finance banks that maybe the best option for those UCBs to raise capital as we
know that primary trouble of these small banks to raise capital. Secondly these
banks must come in RBI regulatory. As our FM is suggesting. Because it gives real
time authority to reform the small cooperative banks. Thirdly there was a
committee H.Malegam which recommended a board of management of fit and
proper persons, other than the board of directors. Directors are elected by members
and very often the borrowers get to nominate their own persons, while depositors
are not really represented as these banks accept deposits from non-members. So,
the idea was to have a board of management in actual control of operations as
opposed to elected directors. Which actually give sense to general public’s
representation at management level.