PMC Bank shocker: Save Banking System

Yesterday, I responded in the media about RBI action against PMC Bank. Moneylife and The Hindu Business Line published my response online. Print edition of HBL and Business Standard who received my response in letter format opted not to publish today. Today, I have sent the following to them again:
M G Warrier
September 26, 2019
Save Banking System
This refers to your editorial “Strengthen co-operative banks ” (September 26). This time around, one is afraid, the inept handling of PMC Bank mess may have an impact on the trust people had in the Indian Banking System since 1960’s. With the nationalization of major commercial banks (1969) and extension of coverage of the Banking Regulation Act to cooperatives (1966), common man believed that someone is in control of the banks in India and his savings deposited in banks were safe.
Obviously, the action initiated by RBI imposing restrictions in the functioning of the PMC Bank is with good intentions and aimed at protecting the interests of bank’s depositors. One objective of imposing a ceiling on withdrawal from deposit account with the bank is to guard against panic withdrawals which may cause a run on the bank. Fair enough. The ceiling of Rs1000 during the coming 6 months, possibly the result of a ‘cut and paste’ approach to drafting directions needs immediate review More transparency in such measures is needed, as today, the public trust in the financial system is not very high. The inadvertent efforts to destabilize the institutional system including the limbs responsible for regulation and supervision have also contributed to the present unenviable situation. The laws applicable to primary (urban) cooperative banks with multi-state presence and large clientele need immediate overhaul. “Cooperatives” remaining a state subject should not come in the way of regulating cooperative banks under the provisions of B R Act.
A related issue is, for the savers, the statutory provisions stipulating capital and reserves requirements including maintenance of liquid assets and the existence of deposit insurance (with a ridiculously low limit of Rs one lakh per account, though) are not found helpful in such situations. In this context, just as RBI has got its Economic Capital Framework (ECF) studied by an expert group chaired by former RBI governor Dr Bimal Jalan, GOI and RBI may consider appointing a panel of experts to study the capital and reserves framework of all banks including cooperative banks. The expert panel may also make suggestions on maintaining a national deposits protection fund under the aegis of DICGC to provide immediate relief to depositors in situations like this. A wholesale review covering adequacy of capital, liquid assets and reserves and realignment of their components may prove beneficial to the economy, as the exercise may release liquidity into the market.
M G Warrier, Mumbai


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