The death of two depositors of Punjab and Maharashtra Cooperative Bank — Fattomal Punjabi and Sanjay Gulati — within 24 hours of each other due to stress — and the protests outside the BJP office on October 10 bring to the fore the drawbacks of allowing banks to shut shop. The closure of banks was not alien to Indians in the old days. This is the reason why most Indians, by and large, felt it was better to park their savings in gold or real estate rather than deposit it in the banks.
However, the nationalisation of most of the banks by the Indira Gandhi government in 1969 changed the scenario. The banks thereupon never shut, giving confidence to ordinary people to park their money in savings accounts or fixed deposits. Whenever a bank got close to insolvency, the Reserve Bank and the Centre acted in unison to get stronger banks to acquire the weaklings to protect the interests of depositors. Nevertheless, the present government is found to be wanting in its resolve to quickly put the PMC issue to rest to end the high levels of anxiety among depositors.
While Maharashtra CM Devendra Fadnavis has cited the Election Commission’s model code of conduct, which is in force in the state ahead of the Assembly elections, as a reason for his inability to quickly resolve the PMC crisis, the government’s policy decisions, including the aborted Financial Resolution and Deposit Insurance (FRDI) Bill, appears to suggest that it wants to gradually deprive bank customers of the protection that they have been enjoying for the past few decades. Any policy decision — whether brought in explicitly through a bill like FRDI or implicitly by policy indifference to crashing banks — would invite the people’s wrath and would erode their trust in institutional lenders.
The government should also go beyond the immediate issue of bailing out PMC Bank depositors by addressing the issues that led to the `4,355-crore fraud at the Mumbai-based lender. The fact that the bank had lent 77 per cent of its loan book to one real estate developer — Housing Development and Infrastructure Ltd (HDIL), by creating 21,000 fake and non-existent borrowers, shows the failure of existing audit and regulatory mechanisms. Due to its close links with HDIL promoters, PMC Bank continued to lend money to the Mumbai-based real estate company despite its project being delayed and facing liquidity issues since 2013. Though the company claimed in 2015 it was on the recovery path, the demonetisation in 2016 seems to have finally broken its back. According to industry watchers, there are several real estate firms facing liquidity issues, with `4.47 lakh crores in stalled projects. Unless the government and the RBI take timely action to address these issues, the demonetisation- and slowdown-hit real estate firms could lead to an Indian version of the sub-prime crisis.