View: UCBs are no more RBI’s stepchildren | Economic Times

Some banks are more precious than others. Some bank depositors are more equal than others. Many ordinary savers whose money is stuck in Punjab & Maharashtra Co-operative (PMC) Bank may wonder why they are different from customers of other failed banks such as Yes Bank and Lakshmi Vilas Bank (LVB) whose depositors were fully protected by swift rescue actions blessed by RBI and GoI.For most depositors, a bank is a bank — you choose the one that offers a little higher interest on deposits, or has a branch close by, where the family has accounts, or one that holds the salary account and promises quick loans. Few give it a thought, because banks, they know, don’t fail — till it does. For PMC depositors, that moment of truth came on September 23, 2019, when RBI, after stumbling upon a massive fraud, clamped down on the bank holding ₹10,500 crore of depositors’ money.After an agonising 20 months, last week PMC depositors found out while there was finally a taker for their bank, they would have to wait for at least another six months before they know how much of their money can be salvaged, and by when. Like customers of failed urban cooperative banks (UCBs) in the past, PMC depositors have learnt the hard way that such banks, despite being part of the financial market and payment system, are country cousins of better known, yet broken, lenders like Yes Bank and LVB.The troubles with Yes Bank were as much a reflection of questionable loans as it was of regulatory lapses. Letting a large, new-age bank collapse, or amalgamate with a PSU lender, would have embarrassed RBI as well as gone against New Delhi’s professed stand to end the age-old practice of bailing out private banks with taxpayers’ money.So, State Bank of India (SBI) and a few others were roped in and a sweetener was added for the new investors by forcing hundreds of Yes Bank bondholders to sacrifice their investments — an unheard of decision, where a class of bonds were written down to entice a group of equity investors. A different solution was found for the Chennai-headquartered LVB. It was handed over to the Indian arm of Singaporean bank DBS, and curbs on deposit withdrawal were lifted in the run-up to the Tamil Nadu elections.Despite the bond write-down, there is no law today that allows knocking off a slice of customer deposits to save a commercial bank (like Yes Bank and LVB). The Bill to bring such a law is on hold for obvious reasons. But, unbeknown to many, such a regulation requiring a sacrifice — a ‘haircut’ — already exists for UCBs like PMC. On September 3, 2014, RBI, under Raghuram Rajan, had laid down that for transferring assets and liabilities of a stressed UCB to a commercial bank, big UCB depositors with more than ₹1 lakh (now raised to ₹5 lakh) will be required to ‘sacrifice in proportion to the deposit erosion’ of the UCB.So, PMC depositors will get back ₹5 lakh while a sizable part of their funds may be locked in for some years, converted into bonds or instruments like non-cumulative preference shares (which give no voting rights, but raise a bank’s capital) and the balance may have to be foregone.The degree of sacrifice will be spelt out in the amalgamation scheme to be drafted by RBI, and cleared by GoI. Centrum and BharatPe — the acquirers have to chip in ₹500 crore at the start of business, raise the capital to ₹ 900 crore in a year, and commit another ₹900 crore over 3-5 years — may have told RBI the minimum haircut depositors would have to take.PMC depositors constitute too small a group to make a difference politically. But the ‘reconstruction’ of PMC will go down as a test case. About 8.5 crore depositors have ₹4.5 lakh crore savings with close to 1,475 UCBs; 600 UCBS have over 80% of the business. Many of these banks will need investors, a helping hand. If the PMC experiment flops, reviving other UCBs could be tougher.It’s all happening when new rules have given RBI far greater powers to regulate and supervise UCBs. For years, RBI kept an uneasy distance from UCBs that are often controlled by powerful politicians and self-serving directors. A former RBI governor used to abruptly end meetings with UCB delegations. A banker, now CEO of an UCB, once said RBI considers co-op banks the way ‘RSS views Gandhi’. It can’t, any more. UCBs are now RBI’s baby — just like Yes Bank and LVB are.