The crisis hit Punjab and Maharashtra Cooperative (PMC) Bank is now facing another burden from the income tax department which has asked the bank to pay tax deducted at source (TDS) on interests paid on deposits, it has been reported.
The Reserve Bank of India last year imposed restrictions on depositors from withdrawing their own money from the PMC bank after the bank’s fraudulent operations came to light, sending shockwaves across the cooperative banking sector. Official data shows how vulnerable the sector is, at a time when both the government and the RBI are struggling to resolve the existing crises.
The RBI appointed administrator Jai Bhagwan Bhoria of the PMC bank in September last year had sought exemption in payment or deduction of tax on interest on deposits. However, citing official sources, Business Standard reported that the tax officials are now demanding the PMC bank to pay back TDS dues. “After the scam, the bank is left with only Rs 200 crore in its account. Now, the tax department is taking out money from this kitty, citing TDS. Instead of getting a bailout, the bank is losing more money,” the source was quoted as saying.
Also read: PMC Depositors Protest at RBI in Delhi, Demand Full Withdrawal
The said fraud at PMC bank pertains to illegal financial transactions with real estate firm Housing Development and Infrastructure Ltd (HDIL) that went bankrupt last year. Presently, the Economic Offences Wing (EOW) of the Mumbai Police is investigating the case and has already arrested the top management of PMC and the promoters of HDIL. Reports suggest that the bank had loaned over 70% of its total loans (over Rs 9,000 crore) to the bankrupt HDIL.
Although, the RBI has for several times increased the withdrawal limit of PMC depositors from Rs 1,000 to Rs 50,000 so far, it is certain that over three lakh more customers across 137 branches in various cities have their hard earned money frozen with the bank.
Meanwhile, the central government is planning to bring in new amendments to the Banking Regulation Act concerning the cooperative banks and has also announced in Union Budget 2020-21 to raise the insurance cover on saving deposits to Rs 5 lakh from existing Rs 1 lakh.
Struggling Cooperative sector
According to a recent report by the RBI, cooperative banks—both rural and urban—are struggling due to internal weakness in administration, fall in interest incomes, increase in non performing assets and slowdown in profitability among others.
Presently, there are 1,544 urban cooperative banks (UCBs) and 96, 248 rural cooperative banks functional in the country. UCBs account for 64.7% of the total assets of co-operatives.
At the end of March 2019, according to the RBI data, all UCBs had recorded deposits at Rs 4.84 lakh crore and advances at Rs 3.03 lakh crore. While the gross non performing assets (NPAs) of the UCBs have been substantially increasing. At the end of March 2019, gross NPAs of UCBs was recorded at Rs 21,559 crore against Rs 20,077 crore at the same time previous year.
Also watch: PMC Bank Scandal: Private Profit, Public Loot
RBI noted that the increasing competition from not only scheduled commercial banks but also from small finance banks and payments banks, and vulnerability stemming from internal weaknesses including the inability to prevent frauds are the two key challenges of the cooperative sector. “Although this sector accounts for just 10.6% of the commercial banking sector, the need to strengthen it from the financial stability point of view cannot be overemphasised, given its predominant domestic orientation, its massive financial inclusion quotient and its sheer presence across the country, especially in lower tier towns and villages. In view of this important role, there is a need to undertake reforms aimed at upgrading corporate governance and strengthening their finances,” stated the RBI.
So far, over the years, RBI has been imposing similar restrictions on all cooperative banks, PMC Bank being the latest in the line of fire.
In 2001, the RBI had frozen depositors’ withdrawals in the Ahmedabad-based Madhavpura Mercantile Cooperative Bank after massive corruption came to light. It was after 17 long years, in 2018, that those who had deposits upto Rs 2 lakh got their money back. And in other cases, similar directives were imposed on the Indian Mercantile Co-operative Bank Limited, Lucknow, in June 2014 and Kopal Co-operative Bank Limited, Mumbai, in March 2017.