Saving Deposit Money: How to stop PMC Bank-like crisis? SBI Research suggests these points

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Published: November 11, 2019 11:17:25 AM

SBI Research has suggested several points to implement to avoid Punjab & Maharashtra Co-operative (PMC) Bank like crisis that has hit thousands of depositors.

pmc bank crisisSBI Research suggests step to stop PMC Bank-like crisis. Representational image

SBI Research has suggested several points to implement to avoid Punjab & Maharashtra Co-operative (PMC) Bank like crisis that has hit thousands of depositors. Currently, the regulation of cooperative banks is left with registrar of cooperatives, which do not have the expertise like RBI. The central bank doesn’t have the power to regulate the cooperatives. This complexity has resulted in the creation of PMC Bank-like crisis and this needs to be changed, SBI Research says in its recent Ecowrap report. SBI has made four suggestions:

1. Conversion of cooperatives: SBI Research said, “UCB/ Urban Cooperative Banks registered under the Multi-state Co-operative Societies Act, 2002 may be immediately considered for conversion to SFB/ Small Finance Banks/ CB/ Commercial Banks.” At present UCBs enjoy more regulatory than Small Finance Banks. Hence, they want to convert. SBI Research said, “Currently, UCBs has more relaxation in regulation compared to SFBs, and hence they don’t convert and hence there is an urgent need to cap the business size of UCBs (say Rs 20,000 crore). Thereafter the UCBs has to mandatorily convert into a CBs/SFBs. RBI may come out with a detailed scheme in this regard.”

2. RBI should regulate cooperatives: Currently, RBI doesn’t have the power to constitute boards of UCBs, remove its directors, audit etc. This should change, said SBI Research. “At present, no powers are available with RBI for constituting boards of UCBs, removal of directors, supersession of BoDs, auditing of UCBs and winding up and liquidation of UCBs. Government should amend the desired laws and empower RBI for supervision and regulation of UCBs by RBI at par with commercial banks.”

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3. Organisation for cooperative banks: SBI Research said that in line with the recommendations of several committees, RBI should now form an Umbrella Organization (UO) for UCBs in India to make them more financially resilient and to enhance depositor’s confidence. “As prevalent in many countries, the UO will extend liquidity & capital support to the member UCBs, setup IT infrastructure for shared use and enable them widen their range of services at a lower cost. The UO can also offer fund management and other consultancy services,” it said.

4. Change Deposit Insurance: The report said that “apart from increasing the limits of deposit insurance and given that banks in India are already being monitored by RBI under Risk Based Supervision (RBS) it would be prudent and sound to introduce a risk based pricing model for deposit insurance in India.”

A calculation by SBI Research suggests that Banking Industry can add at least Rs 3641 crores to their bottom-line if the DGCIC introduces differential risk based premium.

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