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Host Shray Chandra (Director) and Deepak Shenoy (CEO) discuss in detail about the troubles at the Punjab and Maharashtra Cooperative (PMC) Bank, the role of RBI and what options do PMC bank’s depositors have.
Here is our detailed article on PMC bank: The Troubles at PMC Bank, And Your Options as a Depositor
You can also listen to our podcasts on our app: www.capitalmind.in/podcast
Shray: Hi, Deepak, so welcome back from Singapore in the Formula One. While you were away, we were convinced that the thing we’d bug you about as soon as you are here were the corporate tax cuts and how happy it is we are here again, that obviously hasn’t been the case and we’ve rushed into your office today because well, good times really aren’t here and we seem to be in the midst of an actual potential banking failure and after hearing too big to fail for all these months and years, now we have something that might not be big enough to save so Deepak. What just happened? PMC bank, our first podcast episode, you told us about how debt funds weren’t necessarily the same thing as fixed deposits and debt funds came with some risks. Well, now it looks like fixed deposits aren’t really what we thought they were either. So what just happened?
Deepak: Hi, Shray and of course good to be back here from Singapore. And you know, looking at what seems to be a crazy time in the market. So I mean in the midst of all the fact that you get tax breaks, apparently the word tax break has now meant that you might not actually get enough money to need to pay taxes in the first place. For some people it who are depositors at this bank called Punjab, when Maharashtra cooperative bank a fairly large bank if you think of it as a cooperative bank has been put under water, RBA calls the directions, which is called word for, Oh my God, it’s going to fail and I want to protect the world from its failure and therefore you as a depositor can get to withdraw only thousand rupees in it, not not 40 not 4, a thousand rupees. That’s it.
So if you’ve got 10 thousand you get thousand, if you’ve got 5,000 you get a thousand that’s it. The thousand rupees is a fixed amount that you can withdraw because RBA is like, we have no idea where this is happening in this bank. So let’s figure that out. Let’s give it six months, six months, a lot of time, but six months. And effectively this is a prelude to potentially seeing a field cooperative bank this is not the first time this has happened. We have seen a lot of cooperative banks fail, we have seen a lot of cooperative banks owned by, people who are on the politicians and who use it as a conduit to take money from the poor. And typically the small worker that has put money in there. And, but the difference with PMC bank is it’s a fairly large bank.
It’s hold 11,000 grows in deposits, a eight thousand three hundred thousand loans. He does 3000 cores worth of government bonds. And it’s a fairly large bank in the sense that it’s almost as big as Equitas, which is a small finance bank or just sort of as big as with Ujjivan, which is again a small finance, but it’s not small from a systemic perspective. 11,000 cores or deposits is a lot of deposits. And if we were to consider that, you know, these deposits have been used by given by thousands and thousands of people, there’s a lot of people that are going to be hurt by this because not because it’s a thousand rupees that they lost. or that they’re able to withdraw. It’s because this potentially see that nearly all of their money may no longer be available to them at regardless of whether it takes six months or nine months, they have seen the prospect of not getting their money back.
Shray: Demonetization daily ATM withdrawal limits, those were higher.
Deepak: And yes, you are in the monitor, you’ve got more time. And so if you look at it from the perspective of a caste system among banks, among financial institutions, you always talked that certain entities we’re always at of a, at a fear. So you saw the NBFCs, you saw our triple B rated in NBFCs and said, okay, that’s a bad NBFC and it’s our double a rated or a AAA rated NBFC, see that is a good NBFC. And then when I left, this crashed from being ILFS and AAA, you said, Oh my God, these rating agencies don’t know what they’re talking about. The AAA has become default but everybody told us one thing. Oh NBFCs were always risky, fine, understood. You’re allowed to know, use the word bank about word bank means that you are somehow protected, some own, have better lead in the NBFC.
So why is it that a cooperative bank is allowed to go down like this? Whereas an Indian overseas bank, which is a public sector bank owned by the government has 20% bad loans, I mean it’s literally 20% of all the loans given out are bad. Was never given such a direction. It was never told that, listen, you can’t allow your depositors to take out money. It was told that you can’t lend anymore money to new people. You have to come out, I’ll put you under a regulatory framework that doesn’t allow to lend, but the depositors were not told that you can’t take your money out during demonetization too limits were higher.
Why a thousand? It’s like, give them zero. Most of these people will say, Oh thousand rupees, one time thousand withdrawal is not going to end. My life is just going to make me feel like, well, you know what, at least I got a thousand rupees on mile 54.9 lacks left in my little deposit that I have to somehow convince them to remove and I’m 65 old and come on find me a better way. Thousand will do nothing. You know? So-
Shray: So I mean you’re talking about differences in banks and what the word bank means. So when I looked at this, I always knew the a PSU and private sector banks. Clearly that’s not the whole universe. And this cooperative banks, as you mentioned over here, so what is a cooperative bank? What does the word schedule mean? And in addition to that, when the PNB monstrosity happened, I don’t remember anyone losing sleep over that in terms of not being able to get their money back. So what’s the deal over there?
Deepak: Yeah, that’s the strangest thing about the banking system, it’s built on faith. And when you erode that faith in some way, our demonetization did that people lost their faith in currency nodes because of the fact that currency notes were being torn that they will no longer be valid. But luckily we are an alternative. We have the bank deposit, we can put the money in a bank deposits safe. Nothing will happen. Even in PNB goes to our 12,000 core loss. You look at it and say, don’t worry, it’s PNB. The government will protect it.
If a yes bank chose a 3000 core loss, we say, Oh, don’t worry, it’s a bank. It’ll raise money. It has been able to as well. The idea of this entire faith system is that people have faith in the monetary system so they transact, they don’t try to hoard, they don’t try to convert their assets into gold and they don’t try to move their money into things which are not in the banking system like even moving it over into currency notes is part of a non banking transaction if you may because once I start transacting with people who need physical notes, there is no record of it.
There is no banking element in it at all, so a, it remains outside of the system and therefore outside the purview of everything else. But shady old banks were primarily created as part of the RBI. There’s a part of the second schedule where banks come under the regulation of the RBI, but again, there’s a caste system here. RBI regulates heavily certain sort of banks, lightly the cooperative banks, because the cooperative banks have a joint regulation between RBA and the state government approximately.
In many cases the state governments have control over a certain set of things and RBI has control over others. If RBI had been doing annual, you know, quality reviews, the way they do it for banks, they might have an arrow to identify this earlier. I have no idea why RBI has the jurisdiction to shut down a bank like this, but not to conduct annual court quality reviews because that is the core of the banking system. So the real fear now is like unlike PNB, you lay or letting a bank go down, which is reasonably large in size and you are eroding faith in the financial system and your rolling fee is never a good thing.
Shray: One way of building faith in the financial system comes with insurance, deposit insurance of different kinds. I remember during the 2008 crisis in the US I think the limits were lower back then, but you were still insured up to number as large as $100,000 per account at that time and now that’s been revised to $250,000 per person. In India, I believe it’s called the DICGC and the numbers are much lower. It’s at one lakh per account. Is that a number that you think makes sense for us, economy right now? When given the way we’ve grown?
Deepak: Sure, yeah. I think the problem really is, it’s not one lakh, it’s one lakh per person. So it doesn’t mean one lakh per account. It doesn’t mean that if you have three accounts are going to get three lakhs out. It’s like as a single person as part of one entity. So I have-
Shray: Almost like a ban.
Deepak: Almost, though well not exactly like a ban. The reason for that is that if you owe, if you represent a company and then you have another account as a company, then you get two lakhs. So depending on the NTD or representing, is it an A to F, is it a single individual lens on, but having said that, there is actually a problem because it’s one lot number is not being increase for decades and the ACC continues to give that insurance and an insurance payment is made by the bank.
By the way, one of the payments that PMC bank can continue to make is insurance payments should the SEGC.
Deepak: Ironically they can pay the insurance company, but not you, as a depositor.
Shray: I see.
Deepak: So it’s a strange situation because having come to a point where they cannot pay you, you can’t even access the insurance that they are paying for by not paying you in a very complex way. The whole thing works to your disadvantage, simply because you have insurance only if the bank fails, this bank has not failed. It’s just that I’m not going to give your money back. That doesn’t mean I’m failed to a layman, this is a failure. If you can give me my money, which I placed with you because you’d demonetized my notes in the first place.
I should have the faith that I can take it out whenever I want. Now you don’t allow me to take it out. You have an app that probably shows me mobile app. This is a very technology savvy bank. This has a core banking system with an internet application. You could even register it online with it on a mobile bank, on internet banking and use an EFT and so on. But in spite of all of this technology now, you can’t withdraw money from it. And you don’t have access to insurance, which means the insurance, which is supposed to be either one lakh rupees at least, we’re not saying it’s good enough, but only one lakh rupees is allowed. And even that is not available to you because according to them, the bank hasn’t failed yet. So there is no point of insurance if you can’t access it during a crisis.
Deepak: It doesn’t matter that you’re not paying for it. But to tell us that we have insurance on our bank accounts is meaningless if you can’t access this insurance or if should make us wait. Six and a half years. Rupee cooperative bank, another bank which was a cooperative which went down in February, 2013 has still not been resolved. It’s been six and a half years. It has been given 13 extensions. The latest being August 30 year 2019 only one person was allowed to be withdrawn after three years. 20,000 was a lot of people and in total and it still remains and under law it is all bang. They are looking to merge it with some other cooperative banks so that can be taken over but depositors have still not got their money back. So if you make people in TMC, I mean the PMC bank, wait another a six and a half years.
Many of them are going to be so disappointed, I mean and angry and they’re going to be outraged and rightfully so because you’re getting no feedback on how long this process will take. What has actually gone wrong. Remember PMC rank actually had only 2% in PS. Compare that with even some private sector bankers are 3% net in peers. Okay. So comparatively it was doing well. It is 12% capital, which means the capital it has is adequate, is about 12% of its total book. So the idea is that it is not very heavily leveraged. To again comparison, capital of national bank is only about 7% even after this merger with all these other banks. And not considering the fraud amounts that it has had too, which will still take over in the next few years.
Deepak: Even with that, BNB depositors are allowed to go and 12% capital adequacy ratios, two percent gross NPs and at 3.76% gross. NPs and net NPs are 2.0%.
So what has changed in six months? This was six months ago. It was an audited report. Some auditor signed up with it. Obviously RBA should’ve seen this coming as well. I mean I’m outraged by the fact that you could do this from hero to zero in six months without giving any kind of empathy to the depositors who you acknowledge are the poorest and the lowest section of society, I mean lowest economic strata of society for a very long time you were allowed cooperative bank saying, listen, we can’t solve those peoples who let cooperative banks hold them and then you go dish them this high handed treatment, which you wouldn’t do with an IOB or a Punjab national bank. So we’re telling people that it is not RBIs fault is not a problem, just technical verbiage. But in reality it is really RBIs responsibility and therefore that RBIs fault that this has come down to this.
Shray: So fair enough. I mean, from a systemic point of view, from a financial system point of view, what is the solution here? I mean, what does say someone like the RBI come in and do, I mean, how do you both either in this case or going forward so that the next one doesn’t happen. What do we have to change?
Deepak: So it’s interesting here that we don’t know what has gone wrong in the first place. So attempting to, for me to say I’ll fix it by doing x is possibly me taking a high handed stand in the first place.
Deepak: But I think we have the right to demand more transparency saying, why are you doing this? If I have borrowed from you as a bank, why will they return you any money if you don’t give me my more than thousand rupees of my deposit back? I’m not going to hand you my money right? So you have taken a loan from you, most likely have a savings account with you, and you’ve not sequestered that savings account. So I’ll say dude even if your NPS was ten, two percent it suddenly became 20% automate because roughly half are borrowers or even 20-25% was not or are simply not going to return your money back.
The remaining may already be in trouble and so you’ve taken a 2% NBN, made of 40% NPN and literally automate. You may have a problem where you said, okay, listen, these guys haven’t revealed the right NPS scores. What did you do when the same thing was done with their yes bank? You send them a warning notice for three years, then you fired the CEO. And in the Diaz bank, you still didn’t tell them that depositors can’t be paid. You changed the CEO, why don’t we do the same thing over here? So RBA should have a calibrated process to understand the bank failure, provide transparency, rules of work, how much time it will take don’t tell us what went wrong because I understand you can’t tell us that. Listen, some Mr.Power didn’t pay some Mr. other power and therefore you are in trouble because that will obviously lead to political problems and also with the fact that you need to keep secrecy alive.
The issue really is that you don’t give us a ready resolution schedule, so you need to give us a resolution schedule and stick to it in a sense. Give us a six month time frame and say, listen, in six months, if you don’t resolve it, I will give you this deposit insurance money at the very least.
Second, I will give you a way to track what’s happening. So for instance, 25% of all the deposits in BMC bank are held in common bonds, 25 to 30% so roughly 3000 cores. Technically that means I can give you at least 20% of your money back because I can lose all the remaining loans I have. But 20% of the money’s guaranteed to come back because it’s government bonds, these government bonds are valued as of March 30th from then to now their value would have only increased because the number amount of government bonds and the yield that they head, the yield is fallen, the prices of the bonds have increased.
So the obviously the 3000 would have increased but, assuming it didn’t 20% can still be paid back. Why doesn’t RBA issue this as a clarification saying, listen guys, 20% of your money is definitely safe. I will tell you how much of the remaining is safe in a few months right now. Please don’t go around assuming that 99% of our money’s gone. Because that’s the second.
Third biggest thing is that insurance limits are only one lakh. I think we need to increase those rewards, but maybe it’s also time for private insurance to come in and play a part here because you can help private insurers, can provide more influence on the system by saying that listen, we will provide insurance to your bank deposits. It’s almost free money for the most part. You don’t find banks failing every day, but a systemic effect like this will cause people to desire options which have private insurance as well.
I mean one of the things the RBA I think really needs to do is to understand that they are not a silo. That actually what they should be forced to do is put all their deposits into the every individual RBI person should be told to have a deposit at every single bank in the country. That means, and I believe this is true for everybody, that you should have deposits in multiple banks. I’ll come to that, but let our RBIs in, to people above a certain candidate. I’m talking about not that are obviously managerial candidate and everybody should have at least how many more than a thousand rupees in every single bank. Minimum. Okay. Not thousand because you give back a thousand rupees, so maybe 5,000 rupees. And you should do this at every single bank in the country.
Now you try telling the same people, your own employees that you can’t withdraw your money. The minute you start doing that and suddenly it’s like, Ooh, wait a minute I can feel the pain, because my people are feeling the pain and therefore, so let’s do that perhaps. And because we invested in stocks. I invest in the same stock. I’ve actually invested in the Capitalmind PMS, which means if capitalmind again loses money, I lose money. I feel the pain. And this is good for me because then I won’t do things where I will feel more pain, or pain that I can’t handle. If RBI were to do this and for them there is no impact at all as employees of RBI. So you have 160 banks in the second schedule, let’s see, or a hundred banks in second schedule.
Invest in every single one of them and force a small amounts of deposit. Even if you lose 500 rupees, you are going to hurt. And even if you have 1,500 rupees in every bank, that would only mean what one and a half lakhs. That’s the rent of a two bedroom apartment in Bandar Norris. So really if you have RBI, employees scattered their deposits across all the banks and over time we’ll find that. I think maybe that’s one solution to this problem of high handedness. I’m not talking about bank failure bank failures will happen, but high handedness in terms of telling people that you can only withdraw a thousand rupees for six months. I think that kind of stuff, when deposit insurance exists should not be allowed to happen.
Shray: Now it’s been awhile since we quoted Buffet, so we have to do it now. The tide seems to be going out increasingly on many fronts that funders are losing money, banks are failing and stuff like this. So when we’re trying to see now who are the people who are swimming naked? One question which comes to mind to me, so as Capitalmind business, should we now say that today it was cooperative banks tomorrow, I mean we’re not banking at cooperative banks, so we were not exposed, but should we also now start considering moving our money around and open accounts at multiple banks even with means dealing with more relationship managers?
Deepak: You know, actually I have personally about 12 bank accounts. I mean, maybe in total.
Shray: That is absurd.
Deepak: I use about six bank accounts on a regular basis. Not for anything else because I have some bank account for certain purpose. I have some credit cards from banks, which I have a savings account only to be able to pay that bank back it’s money. But one of the reasons I have it is because one of my banks, the one bank that I used to use very commonly suddenly start charging me for stuff. It didn’t start until in June versus wasn’t charging me earlier. I got angry with it and then I said, let me open a bank or bank account at some other bank. So let’s call it bank two and okay, I’ll give you the example. It was actually, you know, I started off with X bank and then I went to Industrial bank and I opened another account there and I said, let me see what happens.
So when, one day when I wanted a foreign exchange, a remittance of some SAR, my primary bank stalled, and they gave me lots of excuses, they returned the money back to the sender and I had to ask the sender to send it again. True. But this time I chose Industrial bank this in Bangalore much easier and you know, more smooth. So I said, you know what? It’s so easy for me to transfer. But in one bank and the other using, in that time it was INPS. UPA wasn’t as popular, so I started to create relationships with multiple banks all for multiple purposes. I have a high school reunion. We create another bank account for that and then the money goes there and then the money’s dormant. Nothing to do. There’s not no money in there because we use it all up, all the money, but I have a bank account.
I use it for that. I use it for something else, so I’ve now created multiple bank accounts and moving money between one and the other is very, very easy. I get one lack of deposit insurance protocol, so now if I have 10 lakhs, I might as well have 10 bank accounts with one lakh of busy jobs, one lakh will be fixed deposit or something like that. Each. I don’t keep my money in bank account deposits. I actually moved them to mutual funds even then I spread it around because I got some in short term funds, I’m going to defer a different candidate funds and so on. I think it’s important to have multiple accounts because even if the bank doesn’t fail one bank starts dipping you by charging you too much, adding a layer of fees, which you didn’t imagine, you can quickly now switch over. Most banks allow you to just send a copy of a checkbook or a statement to be able to switch.
So even a mutual fund, I can withdraw into a different bank con by just, sending a screenshot of a statement and after a few days it’ll allow that to be enabled so now again, we don’t do any bank account by choose. So given that, I feel that it’s important for us to have multiple bank accounts, like Buffet says, it’s only when the tide goes down that you find out who’s swimming naked. At this point, there are so many people swimming naked it’s almost like you’re wondering, if you’re in a nudist beach. So by mistake, because literally, everybody seems to be like the party’s on. Let’s just carry on as if nothing bad will happen, things bad are happening. Even if you’re with a public sector bank, I don’t think you should consider it as Uber safe. And what you should do is therefore have your deposits mobile. Things go bad and look, you got to protect yourself.
When I tell you don’t put your money into any cooperative bank, it doesn’t mean that the cooperative bank that you are with is not safe. It’s that RBI believes now that it’s high handed, I mean it can do high handed approach to cooperative banks. That means no matter how good your bank is, if it’s in trouble, RBI is not going to rescue you. RBI is going to just cut you off. Whereas if you’re a public sector bank or whatever or bigger private sector banks, so even Ujjivan small finance or you know any of those banks, if they are in trouble, RBI is going to deal with you much in a much nicer way. Either we did with IOB or perhaps some other private banks, even GTB global trust bank, no depositor lost a rupee of his money.
So even then you had a functioning bank even though it was almost nearly bankrupt, and yet people continue to have faith in the system because the bank was taken over. Now given that approach, if any part of it is eroding right now, you need to have an account with multiple banks. So you can at least move.
Shray: Well, I hope everyone has less than 12 at the end of this exercise because that might get a little unwieldy to manage. But I think common sense diversification does make sense as you just pointed out. Well I think that’s it for today, so thanks everyone. We’ll be back to talk about those corporate tax cuts sooner rather than later. Thank you very much
Deepak: and thanks Shray it has been. One thing I want to add about this before we go, we’ve been discussing these topic on Capitalmind premium. We’ve been talking on Slack about investments, debt funds, which exposures are to which company and we’ve been lucky enough to avoid a lot of the bad stuff. Suffice it to say if it’s too high in interest rate, don’t assume that it is risk free because only the risk is free because in the end what you’re really doing is risking your money for no purpose. The reason why we’re unhappy about BMC bank is that deposits were only 7.5% so because it was not even too high in deposit rate to be so exciting that you caught this old widow orphan and put their money into it, it was not even a ridiculous rate. So I think RBI is being a little high handed here.
But having said that, don’t put your money where you feel the risk is a non-existent because of reason X or Y or RBAI will protect it or the government will protect it. You have to protect yourself, diversify, move things around and when things don’t look good in the market and you’re getting bad news about certain red funds, certain stocks, a particular interest and walk away when the time is right there’s no shame in doing so. You’re not being anti national or anything with that. I leave it at that. So thanks all for listening. We’d love to hear you again.