[Answered] “Cooperative banks over the years have extended the credit to rural India helping in rural development.” In light of this discuss the impact of recent Punjab and Maharashtra Cooperative (PMC) Bank crisis on overall rural development and lending.

A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Recently, the Reserve Bank of India (RBI) imposed restrictions on withdrawals from Punjab and Maharashtra Cooperative (PMC) Bank, which triggered a panic among bank customers. It has brought to the fore the issue of riskiness of banks, especially co-operative banks and the need to restore confidence among customers.

Issue of Punjab and Maharashtra Cooperative (PMC) Bank crisis:

1. Restrictions imposed by RBI on withdrawals of money from PMC bank highlighted the strong case of malfunctioning in dual regulatory system in urban cooperative banking system.
2. This case reflected 3 major problems- financial irregularities, failure of internal control and system, and underreporting of exposures.
3. Since, PMC has deposits from other smaller cooperatives banks, the financial irregularities which includes governance and transparency issues will likely to have multi-dimensional impact.

Impact of PMC co-operative bank crisis:

1. A crisis of co-operative banks would lead to reduction in consumer’s confidence.
2. This will have an overall negative impact on lending and rural development, and would add up to already slowing down economy.
3. The biggest worry is that this crisis at (PMC Bank) can have a cascading effect. Nearly 130 smaller banks have deposits at PMC Bank, and if the lender is unable to return their money, all these small banks will have to mark their deposits as NPAs. Cooperative banks operate on thin margins and this NPA will mean they will all be in loss, triggering a wider crisis.
4. Further this crisis would hinder the co-operative movement and would lead to extra burden on farmers which depend on co-operatives for loans. They will be forced for being exploited at the hands of money lenders.

Solution to resolve the issue:

1. The merging and converting some of the cooperatives banks to small finance banks and the same in form of scheme for voluntary transition of urban cooperative banks into small finance banks is needed.
2. There is need to set up an independent regulator for Urban Cooperative Banks.
3. A board of management as recommended by H Malegam committee of eligible and proper persons as opposed to elected Directors should be established.
4. RBI should be empowered to implement resolution techniques such as winding-up and liquidating banks, without involving other regulators under the cooperative societies’ laws.
5. Accountability for erroneous audit along with penal action should also be ensured through appropriate statue. Further, the state government should also conduct a forensic Audit of the loan portfolios & purchases of a representative sample of cooperative banks.
6. The RBI must ensure that Cooperative Banks adopt more professionalism in order to retain people’s confidence in the banking sector.

The PMC Bank crisis has also broken out at a time when most cooperative banks and cooperative housing societies are rushing to hold their annual general meetings (AGM) before the September 30 deadline. Though the AGM of PMC Bank has been postponed amid the ongoing crisis, fireworks are likely at meetings of other urban cooperative banks.