Yes To Yes, No To PMC: What Gives?

The safety of depositors’ funds in a bank is vital for uninterrupted running of the economy. It is most often taken for granted, but is, to an extent, vague and subjective. For a perspective, the global financial crisis is referred to as the Lehman crisis, as Lehman was the first institution to go bust, which triggered the domino effect. To think of it, there were quite a few financial institutions in the US that were bailed out. The reason why they were bailed out is popularly believed to be the too-big-to-fail (TBTF) theory. The first biggie that was ‘allowed’ to fail was Lehman, which was the trigger.

One saved, the other allowed to fail

When Punjab and Maharashtra Cooperative Bank (PMC) went belly up, there was a lot of heartburn, and rightfully so. The finger of accusation went towards the RBI and there was lot of criticism of RBI’s handling of the situation, most of which was logical. That the machinations practiced by PMC’s management (e.g., thousands of fictitious accounts) went past RBI’s audit was obvious: one employee cooperative federation of RBI had a deposit of Rs 100 crore-odd, which met the same fate as that of other regular depositors. The extent of bad loans at PMC was substantial, as a percentage of the total loan book size; hence, bailing out would have meant using public money for compensating for almost the entire deposits.

For Yes Bank, the situation was different. The RBI got a hint of what was coming, about a couple of years ago. They pulled up Yes Bank for under-reporting bad loans, refused the re-appointment of the MD, placed a nominee director on the Board, and ensured that a new Board is in place. Still, there was an undercurrent of diffidence and there were significant withdrawals by depositors, leading to pressure on the bank. Things came to a pass when there were more of bad loans to be recognized than disclosed, which would wipe out the capital of the bank. The RBI had to step in at that point, when the moratorium was placed and the restructuring was executed.

The differential treatment of Yes and PMC by the regulator is not out of whack. One reason is straightforward; PMC is a cooperative bank with duality of control: the Registrar of Cooperative Societies and the RBI. The Registrar looks after incorporation, management, audit, supersession of board, liquidation, etc. and the RBI takes care of functions such as maintaining cash reserve and capital adequacy. The office of the Registrar of Cooperative Societies is a function of the respective State, and the ethos of a State government at a given point of time are a function of, to an extent, the ruling political dispensation. Whenever any individual or organization is subject to multiple controls, it willy-nilly becomes nobody’s baby.

The relative importance of Yes Bank

The other reason is the vague or subjective aspect mentioned earlier: how important the organization is, or how important it is perceived to be, by the regulators. Any collapse will have a systemic impact; whether it is acceptable to the authorities and whether someone will take a decision to pump in public money. In the example cited above, the organizations that were bailed out by the US authorities, other than Lehman and the many other failures, were either thought of to be TBTF or worthy of being bailed out. In our case, Yes Bank, being one of the leading private sector banks, there would be systemic impact and the confidence on banks would be shattered. Hence it had to be bailed out, without much of a choice for the Central Government or the RBI.

A relevant point, from the perspective of safety of your deposits in banks: messages are floating around that the insurance cover of Rs 1 lakh under DICGC, now increased to Rs 5 lakh, is per bank, hence you should spread your money across multiple banks. As an example, if you have Rs 50 lakh and you spread it over 10 banks, you have your money covered. This is technically correct, but the DICGC insurance cover may not be of much practical significance. It is applicable only in case of liquidation; i.e., till the bank is liquidated, it does not kick in. There are multiple cases of cooperative banks, including PMC, lingering in the courts of law. It may take years.

An amendment has been proposed to the Banking Regulation Act to give more powers to the RBI to regulate cooperative banks. Once passed, cooperative banks will be audited as per RBI’s rules and the central bank can supersede boards. From your perspective, you have to be clear as to why you are opening an account with a particular bank. If it is about location proximity, in today’s digital age, it can take a back seat to the safety of your money.


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