Journal Club Indian Financial Sector

History Rhymes-Will it repeat?rnPMC Collapse – Case

History rhymes: Past two decades India has witnessed similar collapse in the banking industry, however there are several other collapses too but we need a microscopic view to catch them and never a buzz in media. In 2001, due to stock market crash, Madhavpura Mercantile Co-operative Bank disclosed that its 90% exposure is in stock markets, a large no of deposits was given to a single broker who had gone bad. RBI had put several restrictions on the operations of the bank and suspended the board. RBI came up with several schemes of reconstruction, but with no improvements the license of the bank was cancelled. In October 2018, i.e. after 17 years the depositors received back their deposits of 2 lakhs and amount was also released to other co-operative banks who deposited their money with Madhavpura.

Later in 2004, a Global Trust bank which was a private sector bank was put under moratorium by the government when it declared that 13% of its exposure was in capital markets and therefore its NPA rose 25% in three years. Eventually it was merged with oriental bank of commerce. However, none of the depositor lost their money.

Last week, another large co-operative bank, PMC Bank, the 5th largest in India with Rs117 bn of deposits, disclosed 73% of loans to a single group HDIL (a real estate company). RBI stepped in and impose withdrawal restrictions and the promotors of HDIL are arrested. rnWith all of these collapses, there had been huge trust deficit in the system and looking at the history of last two decade there needs more stringent governance with respect to corporative banks.