GS-3, Indian Economy, Uncategorized

Punjab and Maharashtra Cooperative Bank Ltd (PMC Bank)


  • The Reserve Bank of India has placed Mumbai-based Punjab and Maharashtra Cooperative Bank (PMC Bank) a Leading Cooperative Bank headquartered in Mumbai under directions and has slapped restrictions on its operations
  • RBI imposed curbs on the activities of PMC for a period of six months.


  • Founded in 1984, PMC Bank was the youngest bank to get the status of a scheduled bank in 2000 and a licence of authorised dealer category 1 in the year 2011 for forex business by the RBI.
  • The bank has several small businesses, housing societies and institutions as its customers.

Why was it placed under restrictions?

  • The decision came after the central bank discovered certain irregularities in the bank, including the under-reporting of non-performing assets (NPAs).
    • The bank had suppressed the sticky assets and under-reported them
  • The bank was funding a clutch of companies, mainly in the troubled real estate sector, led by Housing Development & Infrastructure Ltd (HDIL). Commercial banks have already declared HDIL a defaulter.


  • This episode, once again, raises questions on not only the governance structures at these cooperative banks, but also on their supervision.
    • Cooperative banks are under joint supervision of the RBI and states.
    • And while the RBI has signed MoUs with state governments, unless state governments cooperate in effecting regulations, supervision is likely to be ineffective.
    • Clearly, there were no early warning signs of trouble in this case.

Steps taken by RBI

  • The RBI has appointed J B Bhoria as administrator of PMC Bank; he is expected to take appropriate measures to bring the bank back on the rails.

Restrictions imposed by the regulator can do more harm than good?

  • The constraints imposed by RBI, under section 35A of the banking Regulation Act, are aimed at safeguarding depositors interest, and preventing a run on the bank, such moves, which are seen as penalising depositors, can end up having the opposite effect, denting trust in cooperative banks and increasing the risk of a contagion.

Way forward

  • Instances such as these are likely to raise calls for reviewing this regulatory framework and giving more powers to the RBI to oversee these entities. These need to be attended to.
  • The RBI should also examine the long-term feasibility of their business models in light of the rapid technological changes in the financial sector.
  • The RBI could also explore the option of merging PMC with another healthy cooperative bank to avoid any instability

Cooperative banks

It is defined as small-sized units in the co-operative sector, operate both in urban and non-urban centres. These banks have mostly been centered on 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.

How are they regulated?

  • Cooperative Banks are registered under the Cooperative Societies Act.
  • The 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 pledged (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.

Why people save their money in cooperative banks over commercial banks?

  • 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.

Non Compliance a major Problem

  • 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.

2. Can the Indian economy ride out the storm?


Please read it here:


  • India is currently witnessing slowdown. It is not because we are not able to produce enough or that we have run out of capacity to produce; it is because there is not enough demand.

Steps that can be taken up

  • To give a boost to the export sector supply-side measures like trade facilitation, removing bottlenecks, reducing the GST refund period delay, or even managing the exchange rate, but fundamentally if the global slowdown is a reality, then export demand cannot pick up quickly.
  • It should identify the cause of the structural slowdown and address it directly. Indirect instruments would not work in the case of structural constraints.
  • To pull India out of the current economic slowdown, the government can loosen its purse strings, make pending payments, give GST refunds quickly, and revamp MGNREGA to put more money in the hands of rural consumers
    • Make MGNREGA truly demand-driven, make the wage indexation meaningful and involve social audits which were successful in some States like Andhra and Rajasthan.
    • Involve social audits to ensure effectiveness, and also focus on the dual objective of asset creation wherever possible.
    • But primarily it should be about putting some income in the hands of rural consumers.
  • The unorganised sector has been hit now for a long time and unless rural incomes are revived, and that is where 70% of our population is, consumer demand is not going to grow
    • If the Government intends to fix that structural break, it needs to bring back rural income to some semblance of normalcy.

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