Stark regulatory approach: Bailout for YES Bank; nothing for PMC Bank

The urgency with which a bail-out package for YES Bank was readied is in sharp contrast to the authorities’ response to the blowout at the Punjab and Maharashtra Urban Co-operative Bank (PMC Bank).

The Reserve Bank of India’s (RBI) freeze on YES Bank was only for thirty days; the entire regulatory apparatus worked overtime to breathe fresh life into it at taxpayers’ expense. PMC Bank has been in quarantine from September 2019 onwards, and you have no game plan as yet — in public domain that is.

Last week, the central bank said that unlike in the case of commercial banks, it has no powers to draw up an enforceable scheme of reconstruction of a cooperative bank.
 

“Nevertheless, in the interest of depositors and the stability of the cooperative banking sector, the RBI, in consultation with various stakeholders and authorities, is trying to work out a scheme for revival of the bank,” it said. And in order to take this forward, it is considered necessary to extend the aforesaid directions for a further period of three month.

It is tough if you are a PMC Bank depositor to be made aware now that you are not mainstream enough; or like say, from a regulatory standpoint, you were parking money in an entity which was only Basel-1 compliant (like all UCBs are). The RBI could have been proactive — a measure like having UCBs report exposures of Rs 5 crore and above to the Central Repository of Information on Large Credits could have been taken ages ago.

The class-divide?

The deposit insurance cover for banks in the country — whatever be their hue — is the same. As before, the recent hike to Rs  5 lakh per deposit holder from Rs 1 lakh extended by the Deposit Insurance and Credit Guarantee Corporation (DICGC), makes for no distinction between classes of banks — be it on financial parameters, or the regulatory architecture they come under.

You also cannot argue that YES Bank was “systemically, a more important entity” than PMC Bank. Assume for a moment, you had double-trouble — involving what the central bank defines as “a systemically important bank (SIB)”, and another which is not.

Let’s take YES Bank itself – it is not an SIB. Which one are the authorities to pick for an early, customised bailout?

The nature of the financial world is such that every entity chases another’s tail. Its inter-connected nature means there will be a contagion — it does not matter how big or small a bank, or any other platform is. And banks are part of the settlement system unlike non-banks. Incidentally, PMC Bank was a “scheduled UCB”. If anything, what the blowout at YES Bank and PMC Bank may lead to is a relook at what is seen as SIBs now.

Playing in the background

The proposed “Umbrella Organisation” (UO) for UCBs is to registered as a non-banking financial company (NBFC) and not as a co-op society. The idea was mooted by the NS Vishwanathan Working Group Report 12 years ago. He was of the view that the UO should ensure access to capital markets for UCBs.

The number of financially weak UCBs in the co-operative sector has declined over the years due to the measures taken by the RBI. The procedure of finding least disruptive exit routes for weak UCBs that do not come up with voluntary merger plans often become lengthy and prolonged. Such merger plans are, therefore, strongly encouraged to safeguard the interest of depositors. The, UO, hopefully, may be the way out.

The other development to watch out for is the issue of minimum networth norms for UCBs. Given the capital structure of UCBs, the matter could be looked at from the liabilities side. It may take the form wherein UCBs are allowed only to raise deposits of a certain size, and in some ways, linked to the insurable amount; this will restrict their ability to grow as in the past.

As for PMC Bank depositors, it would be a miracle if something can be done to pull it out of the mess. Recall, it took almost 16 years for the last depositor of Madhavpura Mercantile Cooperative Bank to be paid off. Now thanks to coronavirus, the entire regulatory bandwidth will now be taken up by mainstream entities.