PMC: can paranoia sets in?

The troubles at a large Indian cooperative bank highlight the governance deficit in the country’s financial sector, believes S&P Global Ratings.

Governance and transparency in India’s financial institutions lag larger international peers, said the rating agency on 7 Oct 2019.

The Reserve Bank of India (RBI) has appointed an administrator and superseded the board of Punjab and Maharashtra Cooperative Bank Ltd (PMC), which has US$1.6 billion in deposits.

The RBI’s action came after it discovered major financial irregularities, failure of internal control and systems, and wrong/under-reporting of PMC’s exposures.

The bank appears to have exceeded prudential norms in extending loans to a single customer, a distressed real estate company.

Cooperative banks generally have less onerous regulations, according to S&P.

The sector itself is fragmented, with 98,163 entities.
According to the RBI, cooperative institutions have been losing market share, which declined to 11% of the total assets of scheduled commercial banks at the end of March 2017, from 19% at the end of March 2005.

Cooperative bank failures in the past haven’t spilled over to the broader banking sector.

“India’s financial sector needs to raise its governance standards and restore trust,” said S&P.

In the past few years, several instances of fraud and irregularities have emerged. In 2018, fraud at Punjab National Bank involving almost US$2 billion reflected lack of internal controls.

The RBI’s assessment of nonperforming loans (NPLs) for a number of banks was higher their own in the past. Such divergence in NPL assessments underscores the poor transparency in India.

The RBI has refused the reappointment of some bank CEOs due to these issues. A few years earlier, the chairman and managing director of another public sector bank was charged with taking bribes.

In addition, National Housing Bank, the regulator for housing finance companies, estimated Dewan Housing Finance Ltd’s capital adequacy ratio at 10.24% as of 31 March 2018, compared to the company’s reported figure of 15.3%. The company’s auditors had highlighted a number of gaps too.

That said, several financial institutions in India have strong corporate governance and good risk management and underwriting standards.

These factors are also reflected in their equity market valuations, which are some of the highest in Asia, S&P pointed out.

“We do not expect the stress in cooperative banks to spill over to the broader banking sector.

“Nevertheless, contagion risk cannot be ignored in a market when paranoia sets in,” it cautioned. fiinews.com