What RBI Should Do To Bail Out PMC Depositors

Mumbai, October 16: On Tuesday, a doctor in Mumbai who had over Rs 1 crore worth deposit in the scam hit Punjab & Maharashtra Cooperative Bank died of overdosing on sleeping pills, a media report said. In one more such incident, another PMC depositor died of heart attack, merely days after taking part in protests. The PMC Bank Depositors’ Association in consultation with legal experts was planning to file a writ petition in the Bombay High Court.  

So how and what impact this writ petition will have on the ongoing investigation into the Rs 4,355 crore banking fraud? Mumbai police’s Economic Offences Wing (EOW) has said this was an initial figure and the fraud amount may further go up as the investigation further moves up.

Mukesh Jain, corporate lawyer and founder of Mukesh Jain & Associates, said the filing of the writ petition shall at least ensure judicial notice. He added while an inquest may not yield any result as far as the depositors are concerned, the writ court shall definitely act as a watchdog to oversee the pace of investigation as well as the ameliorative steps being taken by the RBI and the government.

Restore people’s confidence in banking system

“Hence, in order that the confidence of the general public in banking system remains intact, it is important that RBI steps in to bail out depositors.” A systemically important bank duly licensed by the RBI to undertake banking business is perceived by public at large to be an extension of the commercial banking system covered by the implicit sovereign guarantee.

“The small depositor does not discern the nuanced distinction between a commercial bank governed by the RBI and a cooperative bank under dual control of the RBI and department of cooperation,” he explained.

A package can be worked out wherein Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the RBI, large institutional depositors and the government chip in to mitigate a part of the loss. “This will restore balance of the balance sheet of PMC Bank and make it an eligible target for take -over by another commercial or a large cooperative bank, thus protecting the retail customers,” Jain said.

Going forward, the only remedy is that like HFCs (Housing Finance Companies) which have recently been brought under the exclusive control of the RBI, large cooperative banks should also be brought under direct and exclusive control of RBI so that the central bank has a hand in appointment of the CEO, whole time directors and the Chairman of the board of cooperative banks. “Besides, the operations of these banks shall also be under better monitoring and control. The rot set by political meddling and a general air of arbitrariness permeating the functioning of these banks may then be stemmed,” Jain said.

This by itself may not plug the ills plaguing banking sector in general. Nonetheless, it shall insulate the cooperative banks against additional dangers mentioned above. The focus however needs to be on providing succour to small depositors while the powers to be may indulge in a slugfest and a blame game.