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  • 04 October, 2019

  • 3 Min Read

The current crisis at PMC Bank serves the country a warning.

GS-III: The current crisis at PMC Bank serves the country a warning.


The crisis unfolding at PMC Bank is a tip of the iceberg of larger, unresolved problems in India’s banking sector.

Roots of the cause:

  • The roots of the crisis in the banking sector go back to the unresolved problem of non-performing assets (NPAs).
  • These are magnified in the case of cooperative banks due to lax governance and a dicey business model.

Other problems with the cooperative sector:

  • Bad loans and poor governance.
  • The business model offers depositors high-interest rates and lends money to borrowers of dubious credentials at low interests.
  • It can easily run into difficulty due to the resultant wafer-thin profit margins.
  • Poor regulatory response – it has so far been symptomatic and shows little understanding of the underlying disease.

Way ahead for cooperative banks:

  • Fundamentally reformed governance so that a crisis such as this one does not occur in the future.
  • The long-run health of the banking sector requires short-run transitional costs. This dichotomy between long-run and short-run cost—is at the root of many deferred or unfinished reforms.
  • Rationalizing taxes is a good start. But it cannot serve as a fix to the sort of problems that we are seeing at PMC Bank and other troubled banks.


The fundamental political economy problem is that public sector banks serve multiple masters and, as a consequence, loan decisions are not always based on economic and financial logic.

Source: Live Mint

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