Crisis is sometimes good because it is sign that somethings need to change, a wake-up call that mandates changes for a better life.

That’s how we need to look at the Punjab Maharashtra Cooperative (PMC) Bank crisis. Thanks to its happenings, RBI was jolted out of its slumber and yesterday came out with a new set of supervisory action framework (SAF) for Urban Co-operative Banks (UCBs). What we understand from this new set of actions is that along with other safeguards, RBI has asked the banks to curtail lending the moment stress is detected. With over 9 lakh account holders of PMC being impacted, this wake-up call was long overdue.

The aim is to make the UCBs more efficient and also bring about expeditious resolution of UCBs experiencing financial stress. RBI will continue to monitor asset quality, profitability and capital / net worth of UCBs under the revised SAF.

Take a look at the main features of the revised SAF:

1: A UCB may be placed under SAF when its Net NPAs exceed 6% of its net advances. 

Based on the severity of the crisis, RBI may take one or more of the following actions:

1. Advising the UCB to submit a Board-approved Action Plan for reducing its Net NPAs below 6%
2. Advising the Board of Directors of the UCB to review the progress under the Action Plan on quarterly/monthly basis
3. Advising the UCB to submit the post-review progress report to Reserve Bank
4. Restriction on declaration/payment of dividend/donation without prior approval of RBI
5. Curtailment of sanction/renewal of credit facilities to sectors/segments having high proportion of NPAs/defaults
6. Reduction in exposure limits for fresh loans and advances
7. Restriction on fresh loans and advances carrying risk-weights more than 100%

2: A UCB may be placed under SAF when it incurs losses for two consecutive financial years or has accumulated losses on its balance sheet.

3: UCB may be placed under SAF when its CRAR falls below 9%.

4: Actions such as imposition of all-inclusive directions under section 35A of the Banking Regulation Act, 1949 (as applicable to co-operative societies) and issue of show cause notice for cancellation of banking license may be considered by the Reserve bank when continued normal functioning of the UCB is no longer considered to be in the interest of its depositors / public

5: The revised SAF will be implemented with immediate effect. Supervisory action already taken under the earlier SAF will be reviewed and revised instructions, if any, will be issued to the UCBs concerned.

This all sounds very good, on paper. But what happens when wrong, falsified information is given? Like in the case of PMC itself, of the Rs.6226 crore exposure revealed to HDIL, the bank disclose only Rs.439 crore to RBI; the huge chunk of Rs.5786 crore – RBI never knew about it.

So along with these norms, the disclosure norms for UCBs also needs to tightened and therein lay the entire crux….