RBI and the Centre must do their best to ensure that the PMC Bank resolution works
Afer 20 months of being left out in the cold, there is finally some light at the end of the tunnel for depositors in the beleaguered Punjab and Maharashtra Co-operative Bank (PMC Bank) as the Reserve Bank of India (RBI) has granted in-principle approval to Centrum Financial Services to start a Small Finance Bank (SFB), which will take over the operations of PMC Bank. While allowing Centrum, an NBFC with roots in investment banking and wealth management, and BharatPe, a three-year old payments startup, to take over a traditional banking operation like PMC’s is certainly not the ideal solution, RBI was probably left with little choice in the matter. Its calls for bids from potential acquirers in November 2020 elicited just three responses of which two were from the UK-based Liberty group with interests in steel, and the Ideal group in real estate. The fact that the Centrum-Bharat-Pe combination was keen on a SFB license and showed willingness to shell out the ₹900 crore immediately needed to bail out PMC, is likely to have weighed with RBI. Most bank bailouts it has brokered in the recent past, after all, have involved unwilling suitors.
The PMC Bank case also suggests that it is about time the Centre and RBI came up with a formal resolution process for failing Indian banks, instead of relying on ad-hoc shotgun weddings. From the recent instances such as IDBI Bank’s bail -out by LIC, YES Bank’s rescue by a hotch-potch of banks and private investors and the handover of Lakshmi Vilas Bank to a foreign acquirer, it is increasingly evident that when large banks falter, a ready suitor in the form of an established public or private sector bank to bail out the entity is no longer a given. It is perhaps time to reconsider the non-controversial portions of the shelved Financial Resolution and Deposit Insurance Bill that dealt with an early warning system and phased resolution process for banking stress.