THE GIST of Editorial for UPSC Exams : 12 october 2019 (What PMC means (The Hindu))

What PMC means (The Hindu)

Mains Paper 3: Economy
Prelims level: PMC Bank crisis
Mains level: Regulatory functions of the RBI

Context

• In at least three of the major financial sector scams in the last couple of months in India, featuring Punjab National Bank, IL&FS, some private banks and now the latest, Punjab and Maharashtra Cooperative Bank or PMC, apart from poor governance and fraudulent practices, a common thread has been supervisory failure.

Supervision authority

• The country’s leading financial sector regulator, the RBI, has been shown as flat-footed, responding only after the event.
• Like IL&FS, in the PMC case too, there appears to be culpability on the part of the management and the board of the bank.
• The bank’s loan exposure to a single firm, HDIL, alone constituted 73 per cent of its assets and several dummy accounts were created to camouflage this.
• The issue of dual control by the RBI and state governments has been cited as a hurdle by the regulator for its inability to effectively supervise cooperative banks.
• The limitations in superceding the board of directors or removing directors of these banks, unlike in commercial banks.

Credit delivery abilities by co-operative bank

• The role of co-operative banks in ensuring credit delivery to the unorganised sector and last mile access, especially to small businesses, over the last few decades in an economy where the large banks continue to focus on bigger cities and towns.
• As RBI report shows, fund flows to the commercial sector have declined by close to 88 per cent in the first six months of this current fiscal —that would have surely hurt small businessmen, traders and the farm sector.
• Since liberalisation, it has been the resilience of India’s financial sector, which may also have to do with the dominance of government-owned institutions or lenders and a strong central bank.

Regulatory functions restructured by RBI

• The central bank has already started building an internal cadre for supervision of banks and other entities aimed at enhancing its oversight capabilities.
• This will be complemented by legislative changes which could lead to greater regulatory control and powers for the RBI over cooperative banks and an insolvency regime for financial firms.
• India needs not just a few large banks and lenders with a national or regional presence but also other players such as cooperative banks, small finance and payment banks.
• There are voices seeking greater accountability on the part of India’s financial regulators.
• The risk it holds is the prospect of supervisors swinging to the other extreme while poring over the books of banks and compounding the problem, besides stifling innovation.

Conclusion

• Carving out a separate authority for supervision may only lead to regulators working in silos.
• With a weakening economy, the last thing India needs is the unravelling of more such firms stoking fears of financial instability.

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Prelims Questions:

Q.1) Consider following statements regarding Prime Minister’s Employment Generation Programme (PMEGP)-
1. The scheme is implemented by Khadi and Village Industries Commission (KVIC) functioning as the nodal agency at the national level.
2. Any individual, above 18 years of age can apply.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 Nor 2

Answer: C
Mains Questions:
Q.1) What is the PMC crisis? Discuss the role of credit delivery abilities performed by the co-operative banks? How RBI can restructured their regulatory functions to address issues like this?