The trouble at Punjab and Maharashtra Cooperative Bank (PMC) highlight a governance deficit in the country's financial sector. Governance and transparency in India's financial institutions lag its larger international peers, according to global rating agency Standard and Poor’s (S&P).
The Reserve Bank of India (RBI) has appointed an administrator and superseded the board of directors at PMC, after the discovery of major financial irregularities, failures of internal control and systems, and wrong/under-reporting of exposure.
PMC 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. 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,” S&P said.
Last year's discovery of fraud at Punjab National Bank involving almost $2 bn also reflected lack of internal controls.
The RBI's assessment of non-performing loans for a number of banks was higher than the latter's in the past.
Such divergence underscores the poor transparency, says S&P.
While it does not expect the stress in co-operative banks to spill over to the broader banking sector, it also says contagion risk cannot be ignored in a market when paranoia sets in.