The recent directive issued by the Indian banking regulator, Reserve Bank of India (RBI), prohibiting depositors from withdrawing a sum of more than ₹1000 (revised later to ₹10,000) from their deposit accounts in Punjab and Maharashtra Cooperative Bank (PMC bank), has sparked the debate on efficiency of existing legal framework for banks in India.

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On September 24, the RBI restricted withdrawals, grant and renewal of loans, investments, acceptance of fresh deposits, etc. from the PMC bank for a period of six months. Such directions were issued abruptly, without providing any reasons. There are many articles and pictorial representations on the anxious customers. Soon thereafter, another direction was issued on September 26, increasing the withdrawal limit from ₹1000 to ₹10,000, owing to the panic that was caused by the earlier direction. An administrator has also been appointed superseding the existing board of the PMC bank. The new press release came in citing reasons for issuance of such directions and stated, “major financial irregularities, failure of internal control and systems of the bank and wrong/under-reporting of its exposures”.

Issuance of sudden directions, without supplying it with reasons, letting the market speculate and the depositors panic, was a poor move by RBI and raises concerns over the manner of use of powers given to RBI under the banking laws. In fact, amendment of its own directives within two days shows how hurriedly they were issued at the first place, without putting appropriate thoughts into the impact it will have. The hardship that would be caused by both the restrictions would be irreversible, as deposits have been frozen, but there is no moratorium on payments to the bank. In other words, a person borrowing money on EMIs to purchase an autorickshaw will continue to be obliged to make his EMI payments but will be unable to withdraw money to pay his CNG expense.

The banks are subject to regular inspection and very high scrutiny by RBI. It is strange that despite such strict control over the banking industry, the RBI was unable to detect any irregularity in the working of the PMC bank earlier, leading to such sudden and harsh actions.

Earlier this year, a major fraud was discovered at one of the largest public sector banks in India, the Punjab National Bank. That, followed by RBI’s tussle with Yes Bank and Kotak Mahindra Bank on management and promoter related issues, respectively, and now the ongoing PMC Bank issue, has raised some concerns on regulation of banking industry.

The distrust and uncertainty caused in the economy, has also warranted relooking into the RBI’s DICGC (Deposit Insurance and Credit Guarantee Corporation), whereby the deposits of each depositor (cumulative of current account, savings account, fixed deposits, etc.) are secured up to ₹1 lakh. Although DICGC comes into picture only after a bank is declared insolvent, however, the limit of ₹1 lakh requires reconsideration, and should be increased. In the USA this limit is $250,000.

Finally, as there is a legal backstop for this ₹1 lakh, the ability of depositors should be extended to creditors to prevent irreversible harm to them.

Sandeep Parekh is the managing partner and Deepika Goyal is an associate at Finsec Law Advisors.

First Published:Oct 1, 2019 1:08 PM IST