RBI tells public ‘no need to panic’ as mid-sized bank fails

The Reserve Bank of India has told the public there is “no need to panic” despite the abrupt collapse of a mid-sized bank in late September.

The RBI said in a short statement on October 1 that there were rumours circulating “about certain banks, including co-operative banks, resulting in anxiety among the depositors”.

“RBI would like to assure the general public that Indian banking system is safe and stable and there is no need to panic on the basis of such rumours,” the central bank said.

The intervention comes in the aftermath of the collapse of the Punjab and Maharashtra Co-operative Bank (PMC Bank), a mid-sized lender that was one of India’s larger co-operative banks. The bank held deposits worth around $1.6 billion as of March this year, its annual report shows.

The bank’s troubles only came to light when the RBI intervened on September 24 to limit withdrawals from accounts with PMC Bank to 1,000 rupees, or just $14. The action triggered a rush to pull out money from the ailing lender.

Two days later, under mounting public pressure, the RBI agreed to raise the limit to 10,000 rupees, acknowledging the need to alleviate “hardship” suffered by depositors. The statement that accompanied the move also shed more light on the bank’s predicament, saying “irregularities” had been found in its business.

“The directions were necessitated on account of major financial irregularities, failure of internal control and systems of the bank, and wrong/under-reporting of its exposures,” the RBI said.

The Press Trust of India, a local news agency, reported that as much as 73% of PMC Bank’s loan book was to a single infrastructure finance firm, Housing Development and Infrastructure, which is undergoing bankruptcy proceedings.

If the report is accurate, the losses would be more than enough to wipe out PMC’s capital. The bank had outstanding loans worth around $1.2 billion in March, against $137 million in shareholder capital and reserves.

PMC Bank’s board has now been suspended and administrators appointed. Depositors are protected to up to one “lakh”, or 100,000 rupees, worth around $1,400, but may not be able to access their money for several months as the bank is resolved.

There has since been speculation in the Indian press that the vulnerabilities that sank PMC could afflict other banks, particularly links to infrastructure firms.

The infrastructure finance sector in India is a key link between the core banking sector and shadow banks. In 2018, the RBI was forced to step in with additional liquidity support for the financial sector after one major infrastructure finance firm, IL&FS, defaulted on its debt, triggering a credit crunch.

The RBI was also forced to respond to alleged wrongdoing at a major state-owned bank, Punjab National Bank, when a group of employees were accused of fraud in early 2018. The bank was later merged with two others.