Key Facts: Why RBI has abruptly placed restrictions on PMC Bank?

The Reserve Bank of India has imposed caps on withdrawals made by customers of Punjab and Maharashtra Cooperative Banks for 6 months. The imposition was invoked by the central bank under Section 35 A of India’s Banking Regulation act, 1949.

PMC is spread across 6 states and has a network of 137 branches.

What are the restrictions imposed?

During the period of restriction, the customers of PMC bank are not allowed to withdraw more than Rs 1,000. RBI has also imposed restrictions on lending by cooperative bank. The notification issued by RBI said that the PMC banks cannot grant or renew loans, make investment, borrow funds, accept fresh deposits, agree or disburse payments without prior permission from the central bank. The bank said that the restrictions will be eased according to the performance of PMC banks. However, the bank license had not been withdrawn.

Why were the restrictions imposed?

The restrictions were a precautionary measure to prevent a run on the bank. The gross bad loans of the bank account to 3.76% of its advances and PMC discloses it is much higher than this. Also, these restrictions are precautionary measures while the central bank completes its audit on PMC. Though auditing of cooperative banks are done by state government, RBI has power to audit cooperative banks once a year.

The bank reported profit of 99 crores in 2019 as compared to 100 crores in 2018. Similarly the NPAs of the bank increased largely. It was 1.05% in 2018 and increased to 2.19% in 2019. The capital adequacy ratio was 12.29% in 2018 and increased to 12.62% in 2019. Capital Adequacy ratio is the measurement of bank’s available capital in terms of percentage of bank’s risk – weighted credit exposures. It is calculated by dividing the bank’s capital by its risk weighted assets.

What is Section 35 A of India’s Banking Regulation act, 1949?

Section 35A of the Banking Regulation act provides powers to RBI to give directions to banks. It enables RBI with the power to take action in order to prevent a banking company acting detrimental to the interests of the depositors.

Is PMC a scheduled bank?

Yes, PMC is a scheduled bank. It was provided the status of scheduled bank in 2000. The banks that are accounted in the second schedule of RBI act, 1934 are called scheduled banks. The banks with reserve capital more than 5 lakhs rupees are qualified to become scheduled banks. The banks should also satisfy RBI that its affairs are carried out in a way with no harm to the interest of the depositors.

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