How to fix the PMC Bank crisis

'Put the assets of PMC Bank and the personal assets of the HDIL promoters and head of PMC Bank in an escrow account and ring-fence it from the ad hoc action of the revenue departments and creditors,' recommends Debashis Basu.

A few weeks ago, the Punjab & Maharashtra Cooperative Bank suddenly collapsed.

It has Rs 11,500 crore (Rs 115 billion) in deposits from more than 300,000 people and had lent more than Rs 6,500 crore (Rs 65 billion) to the bankrupt real estate group HDIL Ltd, which was surreptitiously controlling the bank through common directorships and shareholding.

The Reserve Bank of India has restricted the amount depositors can withdraw.

The anger and desperation of depositors are mounting.

Social media is abuzz with the supposed insensitivity of the finance minister who unfortunately responded to heart-rending stories of life savings being wiped out with the claim that cooperative banks did not come under the finance ministry.

In the heat of the Maharashtra assembly elections, the chief minister assured that he will find a solution in 'a month'.

The RBI governor has made the extraordinary claim that he will not let any cooperative bank go down when the past data tells us the one of them goes belly up every few months and there are over 1,000 of them.

We haven't had one sensible move to fix the problem because we do not have a template for resolving such crises.

Here are some ideas on how to fix the PMC Bank crisis and what needs to be done to prevent such occurrences.

It will require the ministry of finance and RBI to act fast and bend some rules which, of course, this government can easily do whenever it wants to.

In any financial crisis, the first job is to move quickly to protect the value of tangible and intangible assets.

For this, we need a set of rules or we can make rules as we go, as was done in the case of Satyam and Infrastructure Leasing & Financial Services.

It has been a few weeks since the PMC Bank crisis erupted and there is no move in that direction.

This is not surprising because netas and babus have no skin in the game and do not care about protecting asset values.

Unfortunately, there are some practical difficulties too.

You would notice that whenever there is a crisis, multiple agencies swoop down: The revenue departments, enforcement directorate, economic offences wing, serious fraud investigation office, etc.

Some of them start seizing assets.

While politicians love the media optics of freezing and seizing assets, such moves are against the interests of depositors and creditors -- the only two sets of people who should benefit from any resolution.

The RBI or the ministry of finance must immediately constitute a panel with a short finite life.

It would have the mandate and powers to put the assets of PMC Bank and the personal assets of the HDIL promoters and head of PMC Bank in an escrow account and ring-fence it from the ad hoc action of the revenue departments and creditors -- just as it has done for IL&FS.

The most important question is who should head the panel.

Give it to a run-of-the-mill bureaucrat or a banker and it will be a waste.

It was Deepak Parekh who oversaw the Satyam resolution.

It is Uday Kotak who is overseeing the IL&FS mess.

For PMC Bank it can be Mr Parekh or Aditya Puri of HDFC Bank, both tough, no-nonsense bankers with an understanding of finance and real estate.

Apart from securing tangible assets, the panel would focus on extracting value for its main asset -- extremely well-run branches and the depositor base.

This should be attractive to any bank without much of a presence in Mumbai.

But it will be truly valuable to a fit-and-proper, well-capitalised finance company wanting a banking licence.

While this will secure a large part of the deposit base, the shortfall must come from the government.

There is absolutely no reason for bank depositors to suffer any loss when the ministry, the state government concerned, and the RBI are jointly responsible for the failures of cooperative banks, by perpetuating a weak regulatory regime for decades and failing to act on various recommendations.

PMC Bank depositors are far more in need of government largesse than central government employees, who just got a thoroughly undeserved 5% additional dearness allowance!

Regulators know what needs to be done to fix the cooperative bank mess.

Over the past several decades, guess how many government committees and working groups have been set up to improve the functioning of urban cooperative banks.

The Madhava Das Committee (1978), the Marathe Committee (1991), the Madhava Rao Committee (1999), the Malegam Committee (2010), and the R Gandhi Committee (2015).

The working groups include one on augmenting capital (2006), one on information technology support, and one on umbrella organisations for urban cooperative banks (2008).

The reason we still have urban cooperative banks failing is because each time we were trying to apply band-aid.

Also, most of the sensible recommendations have been ignored.

What we need is a simple principle to be applied here: All deposit-taking organisations should come under the sole supervision of the RBI.

The ineffective registrar of cooperative societies should have nothing to do with regulating deposit-taking organisations, that too ones calling themselves banks.

Urban cooperative banks should be forced to become small finance banks and/or merge with other SFBs, and list on the stock market.

During this process, we need free and easy mergers among cooperative banks and SFBs.

There is a saying -- never waste a crisis.

PMC Bank is a great opportunity to not only fix the cooperative bank mess once and for all, but, along with IL&FS, set up a template for resolving sinking financial institutions in future.

Debashis Basu is the editor of www.moneylife.in

Photograph: ANI Photo