- Date : 18/11/2019
- Read: 5 mins
RBI addresses the PMC crisis by restricting its business operations, the cause and effects of the PMC episode.
Recently, the Reserve Bank of India ordered the Punjab and Maharashtra Co-operative (PMC) Bank not to engage in any business for six months, following the discovery of Rs 4,355-crore scam. They have also set a limit on withdrawals from its branches. PMC Bank will need prior approval in writing from the Reserve Bank, to grant or renew any loans and advances, make any investment, incur any liability including disbursal of funds and acceptance of fresh deposits.
The direction shall remain in force from the close of business of the bank on 23 September 2019. This RBI direction doesn’t imply the cancellation of a banking licence and the bank will continue to undertake banking business with restrictions till further notice. This may include modifications depending upon circumstances. This direction is imposed in accordance with the powers vested in the RBI under Sub-section (1) of Section 35A of the Banking Regulation Act, 1949 read with Section 56 of the said Act.
Related: RBI issues red alert on fraud through digital banking platforms
Overall effect of the PMC direction
The immediate effect of the PMC direction is that the depositors will be able to withdraw not more than Rs. 25,000 from their savings or current accounts. This limit was raised from Rs. 1,000 to Rs. 10,000 on 27 September 2019. On 3 October 2019, the RBI reviewed the liquidity position of the bank and raised the withdrawal limit to Rs. 25,000. More than 70% of the PMC account holders will be able to withdraw their complete deposit.
Account-holders should not panic because of the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance cover. All commercial and cooperative banks must be mandatorily insured under the DICGC. The coverage assured under this insurance extends to Rs. 1 lakh for each depositor of a bank. Thus, each depositor in a bank is insured up to Rs. 1 lakh against the principal and interest amount. In the case of PMC, small depositors are therefore covered under the DICGC scheme. However, it may take some time for them to recover the 1 lakh if at all PMC goes into liquidation.
What happens to account holders' money after such a bank crisis?
- In case of bank account or investments: The blanket cover of DICGC is applicable to all bank accounts of the depositor, even if they are across different branches of the same bank. However, if the accounts are in two different banks, the cover will be Rs.1 lakh per bank, irrespective of the number of accounts held therein. Account here can mean deposits held in savings or current account and other investments like fixed deposits.
- In case of joint account: In case the same depositor maintains two accounts in the same bank, but in an individual capacity and another as a joint account holder, a separate DICGC insurance cover will be available in both the cases.
- In case of investments linked with the bank: In case depositors had linked their mutual fund or demat account with a PMC bank account, the bank account will not receive any amount from such linked accounts. Any dividend pay-outs or redemption receipts will not be transferred by the mutual fund company. Either you will have to link them to a new account with a different bank or the RBI will have to lift the restriction over PMC.
- In case of a loan and its repayment: If there is a loan payable to PMC Bank or any bank that is facing such crisis, the EMI for the same will be deducted from the bank account of the depositor, if any. An RBI notification stated that if the balance in your account is insufficient to meet the loan liability to PMC, you will be liable to pay the balance amount.
- In the case of ECS mandate: In case the depositor has set an ECS mandate for monthly debits against SIPs, insurance premiums, bill payments or EMIs, the same will not continue. So in case of PMC, the account holder will have to register a new bank mandate for ensuring that their monthly ECS debits continue.
- In case of gold kept in a locker: If gold is kept in a bank locker, the liability of the bank is similar to that of a landlord, as per an RBI reply. The bank is not liable to compensate the customer in case of theft or natural calamity, which is not the case with PMC.
Thus, it is apparent that the RBI direction tries to keep the financial uncertainty of the depositor minimised. As a depositor, you need not worry about the solvency of the bank yet. Besides, the Home Minister has clarified that eventually, all the customers will get their money back. Here in such a situation, the intention of RBI is to stop any malpractices and give time to the bank to repair itself financially.
Related: RBI asks banks to provide free facilities to savings bank account holders
Next steps
Cooperative banks have been able to avoid active RBI supervision, largely because RBI operates in a manner that deemed them less important, compared to PSU banks and private banks. RBI is known to be much more observant when it comes to PSU banks and private banks, and not necessarily so with cooperative banks. Hindsight may have, however, altered this stance of the Central Bank as 24 fresh urban cooperative banks across India are known to have received directions or an extension, with instructions similar to the ones given to PMC. As far as depositors are concerned, they would be better off not opening all their accounts in the same bank and keeping an eye on the financial health of the bank that they hold their accounts in. Here are 5 things to do if your financial information is stolen
Recently, the Reserve Bank of India ordered the Punjab and Maharashtra Co-operative (PMC) Bank not to engage in any business for six months, following the discovery of Rs 4,355-crore scam. They have also set a limit on withdrawals from its branches. PMC Bank will need prior approval in writing from the Reserve Bank, to grant or renew any loans and advances, make any investment, incur any liability including disbursal of funds and acceptance of fresh deposits.
The direction shall remain in force from the close of business of the bank on 23 September 2019. This RBI direction doesn’t imply the cancellation of a banking licence and the bank will continue to undertake banking business with restrictions till further notice. This may include modifications depending upon circumstances. This direction is imposed in accordance with the powers vested in the RBI under Sub-section (1) of Section 35A of the Banking Regulation Act, 1949 read with Section 56 of the said Act.
Related: RBI issues red alert on fraud through digital banking platforms
Overall effect of the PMC direction
The immediate effect of the PMC direction is that the depositors will be able to withdraw not more than Rs. 25,000 from their savings or current accounts. This limit was raised from Rs. 1,000 to Rs. 10,000 on 27 September 2019. On 3 October 2019, the RBI reviewed the liquidity position of the bank and raised the withdrawal limit to Rs. 25,000. More than 70% of the PMC account holders will be able to withdraw their complete deposit.
Account-holders should not panic because of the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance cover. All commercial and cooperative banks must be mandatorily insured under the DICGC. The coverage assured under this insurance extends to Rs. 1 lakh for each depositor of a bank. Thus, each depositor in a bank is insured up to Rs. 1 lakh against the principal and interest amount. In the case of PMC, small depositors are therefore covered under the DICGC scheme. However, it may take some time for them to recover the 1 lakh if at all PMC goes into liquidation.
What happens to account holders' money after such a bank crisis?
- In case of bank account or investments: The blanket cover of DICGC is applicable to all bank accounts of the depositor, even if they are across different branches of the same bank. However, if the accounts are in two different banks, the cover will be Rs.1 lakh per bank, irrespective of the number of accounts held therein. Account here can mean deposits held in savings or current account and other investments like fixed deposits.
- In case of joint account: In case the same depositor maintains two accounts in the same bank, but in an individual capacity and another as a joint account holder, a separate DICGC insurance cover will be available in both the cases.
- In case of investments linked with the bank: In case depositors had linked their mutual fund or demat account with a PMC bank account, the bank account will not receive any amount from such linked accounts. Any dividend pay-outs or redemption receipts will not be transferred by the mutual fund company. Either you will have to link them to a new account with a different bank or the RBI will have to lift the restriction over PMC.
- In case of a loan and its repayment: If there is a loan payable to PMC Bank or any bank that is facing such crisis, the EMI for the same will be deducted from the bank account of the depositor, if any. An RBI notification stated that if the balance in your account is insufficient to meet the loan liability to PMC, you will be liable to pay the balance amount.
- In the case of ECS mandate: In case the depositor has set an ECS mandate for monthly debits against SIPs, insurance premiums, bill payments or EMIs, the same will not continue. So in case of PMC, the account holder will have to register a new bank mandate for ensuring that their monthly ECS debits continue.
- In case of gold kept in a locker: If gold is kept in a bank locker, the liability of the bank is similar to that of a landlord, as per an RBI reply. The bank is not liable to compensate the customer in case of theft or natural calamity, which is not the case with PMC.
Thus, it is apparent that the RBI direction tries to keep the financial uncertainty of the depositor minimised. As a depositor, you need not worry about the solvency of the bank yet. Besides, the Home Minister has clarified that eventually, all the customers will get their money back. Here in such a situation, the intention of RBI is to stop any malpractices and give time to the bank to repair itself financially.
Related: RBI asks banks to provide free facilities to savings bank account holders
Next steps
Cooperative banks have been able to avoid active RBI supervision, largely because RBI operates in a manner that deemed them less important, compared to PSU banks and private banks. RBI is known to be much more observant when it comes to PSU banks and private banks, and not necessarily so with cooperative banks. Hindsight may have, however, altered this stance of the Central Bank as 24 fresh urban cooperative banks across India are known to have received directions or an extension, with instructions similar to the ones given to PMC. As far as depositors are concerned, they would be better off not opening all their accounts in the same bank and keeping an eye on the financial health of the bank that they hold their accounts in. Here are 5 things to do if your financial information is stolen
