Earlier this week, the RBI placed the Punjab and Maharashtra Co-operative Bank (PMC), a ‘multi-state scheduled urban co-operative bank’ operating in multiple states including Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhya Pradesh, under direction.
The bank has been curbed from granting or renewing loans or advances, accepting deposits or disbursing payments without due approval, even though the RBI’s direction itself did not specify the exact reasons why the bank was in crisis. The worst hit are perhaps depositors, who had been allowed to withdraw a maximum sum of Rs 1,000 of the total balance every bank, which has now been increased to Rs 10,000.
Perhaps the most controversial news around the ‘demise’ of PMC has been over the scant deposit insurance money that has been promised to people.
To understand this completely, it is crucial to dip into the history of co-operative banks, a species somewhat different from general commercial banks. In fact, the history of the governance of co-operative banks (which are regulated by the RBI in case of multi-state co-operatives and by state governments in case of single state co-operatives respectively) is rooted in the start of the Deposit Insurance and Credit Guarantee Corporation (DICGC) in the 1960s.
In this context, there are two very important policy issues to be addressed: one on the adequacy of the deposit insurance protection being offered, and the second on the governance of co-operative…