Q. In the light of recent troubles witnessed by banks like PMC Bank, what should be done to make banking more reliable for consumers?
In the light of now-troubled Punjab and Maharashtra Cooperative Bank (PMC Bank), various important steps need to be taken so as to guarantee and assure the customers of the safety of their money in the bank.
Banks in India are facing the following Issues:
- Opaque auditing mechanisms
- Banks not doing due diligence before extending debts
- Lack of accountability of the board of defaulting bank
- A lower value of deposit insurance
- Lack of participative decision-making mechanisms involving depositors.
- Urban cooperative banks (UCBs): Weak governance, poor internal controls, political interference and dual regulation by state governments and the Reserve Bank of India.
Under the present legal framework, the board of directors (BoD) of a UCB performs both the executive and supervisory roles. It also has the responsibility to oversee the functioning of the UCB both as a cooperative society and a bank.
There can be following ways to tackle the above-mentioned challenges of the banks to reassure the customers of their deposits:
- An immediate triggering of the insurance (deposit insurance under the Deposit Insurance and Credit Guarantee Corporation) pay-out on the imposition of sanctions on any bank.
Presently the pay-out is made only after the bank is liquidated. It can take up years. Making it useless for the purpose of reassuring depositors about the safety of their money.
- Insurance limits need to be raised to reasonable levels like Rs 10 lakh.
- Cooperative banks with fuzzy accountability should not be allowed to accept deposits for more than the maximum limit covered by insurance.
- Either the cooperative banks or their depositors should be required to compulsorily buy commercially priced deposit insurance if the deposits are above the maximum amount covered by the statutory insurance limit.
The premium charged by the DICGC for this excess insurance would be the clearest signal on how safe a bank is.
- Putting in practice the recommendations of Y H Malegam committee, 2011 on the licensing of new urban cooperative banks (UCBs). It has made a case for setting up a board of management (BoM) below the board of directors (BoD).
The BoM will have persons with the requisite professional skills and be entrusted with the responsibility for the control and direction of the affairs of the bank, assisted by the chief executive officer.
The board of directors will be responsible for laying down the broad contours of strategy while the BoM will be vested with the mandate to direct and control the day-to-day operations of the UCB within the limits set by the latter.
It will cut through the legal bureaucracy and give the RBI more powers to control and regulate the functioning of UCBs.
- Y H Malegam committee recommended that 50 percent in the value of deposits should be held by voting members to assure the confidence of proper management among investors.
The R Gandhi(a former deputy governor of the RBI) committee made mention of a feasible structure to put majority voting in the hands of contributors of funds.
- The R Gandhicommittee is of the view that UCBs having a total business of Rs 20,000 crore or more may be considered for conversion into commercial banks for better and stringent regulation.