PMC Bank jitter may trigger second round of crisis

MUMBAI: The trouble in Punjab and Maharashtra Cooperative Bank, one of the top five in the segment, is threatening to trigger a second round of crisis of confidence in the sector. Many depositors are playing it safe and choosing to spread their investments and several cooperative societies are reviewing their decision to keep a bulk of deposits with cooperative banks.
PMC Bank, whose operations have been frozen by the RBI, held the accounts of 1,754 cooperative credit societies, 216 urban cooperative banks and 15,000 cooperative housing societies and cooperative entities.Also, PMC Bank was to play white knight to two other cooperatives — City Cooperative Bank and Mapusa Urban Cooperative Bank.

What is making it worse this time is social media which is accelerating the spread of rumours.
For instance, messages continued to be circulated even after the RBI issued a clarification denying the messages. In 2009, a leading private bank was able to pursue the origin of rumours through forwarded text messages and get the originator arrested. Now, with internet-based social media, it is not possible to trace the origin.
While there have been over a dozen cooperative banks that were placed under directions this fiscal, PMC Bank’s case is the first instance of such a major fraud taking place in a cooperative with core banking and regularly inspected by the RBI.

Customers of PMC can withdraw up to Rs 10,000 as of now and their deposits up to Rs 1 lakh are covered by deposit insurance which will come into play at the time of resolution. But this will bring little relief to the institutional investors who hold deposits of hundreds of investors.
For those in the RBI, the crisis is reminiscent of the Madhavpura Mercantile Cooperative Bank fraud in 2003 which resulted in the sector going through a crisis phase. The fraud at Madhavpura, which was engineered by stockbroker Ketan Parekh, had resulted in cooperative banks losing market share. In the subsequent period many smaller lenders folded up and the number of UCBs declined from 1,926 in end-March 2004 to 1,770 by end-March 2008.