2019-10-12_The_Economist_

TheEconomistOctober 12th 2019 73

1

T

he runon the Punjab and Maharashtra
Co-operative Bank (pmc), a small Indi-
an lender, is now in its third week. At a
branch in Mumbai near the Reserve Bank of
India (rbi), the central bank, depositors
wait in line, scanning their mobile phones.
But the calm is deceptive. A single bank-
rupt borrower, Housing Development and
Infrastructure Limited (hdil), accounted
for 73% of pmc’s loan book. As part of the
elaborate deception it created 21,000 fake
customer accounts.
Posted outside pmc branches is a letter
from the rbi dated September 23rd. A pas-
sage is highlighted in pink: withdrawals
are to be limited to 1,000 rupees ($14) over
six months. That fired the starting pistol
for the bank run. Protesters showed up at
the gates of the rbi. The withdrawal limit
was raised in response, first to 10,000 and
then to 25,000 rupees. That was high
enough to cover the balances of 73% of cus-
tomers, but represents just 7.75% of the
bank’s $1.7bn of deposits. Government-
backed deposit insurance covers just

100,000 rupees per account.

pmc’s chairman, Waryam Singh, as well

as the head of hdil, Rakesh Wadhawan,

and his son Sarang, have been arrested. Lo-

cal papers are plastered with tales of the

Wadhawans’ close relationships with poli-

ticians, lavish parties with Bollywood stars

and assets seized or sought by enforcement

agencies, including Rolls Royces, private

planes and a yacht thought to be in harbour

in the Maldives.

During the past six years the govern-

ment has done much to clean up India’s

banks. Bad loans have been identified and

written off. The bosses of three of the four

largest private banks have been pushed out

because of lax lending practices. On paper,

the bigger ones, at least, look in fine shape.

The 18 banks classified as “public sector”

look weaker, but in August the government

said they would be consolidated into 12 in

the hope of boosting their performance.

But pmc’s collapse has investors on

edge. The shares of all but a handful of

banks have suffered. At another moment,

the failure of a minnow like pmc would

have been seen as a singular tale of wrong-

doing and excess. Now, says one financier

in the midst of the tumult, it seems like

proof of systemic failings. India’s financial

sector needs to restore trust, wrote s&p, a

rating agency, in a recent note. “Contagion

risk”, it added, “cannot be ignored in a mar-

ket when paranoia sets in.”

In the past the authorities have avoided

forcing losses on account-holders after

banks have failed, by arranging shotgun

marriages with healthy institutions. That

solved immediate problems but created

moral hazard. Co-operative banks typically

offer high interest rates in order to attract

funds, but with no salutary past examples

of losses, customers regard high rates as an

opportunity, not a warning. According to

Credit Suisse, just 30% of deposits across

India’s banking system are insured. A bill

that would have allowed failing banks to

force losses on all depositors lingered in

parliament. After criticism it was dropped

last year. Recent weeks have seen calls for

its revival—and vociferous objections.

This moral hazard is just one of the

weaknesses of India’s financial architec-

ture thrown into stark relief by pmc’s trou-

bles. Another is an awkward structure that

pmc shares with many lenders. As a bank it

is supervised by the rbi, but since it is a co-

operative, the state where it is located

shares responsibility. That split too often

means lax oversight—and increases the

Indian banks

Skeletons in the closet

MUMBAI
Banks’ share prices are being hammered. Investors fear there are more horrors
waiting to be revealed

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