Punjab & Maharashtra Co-operative Bank didn't fail because India lacked banking regulations. It failed because the regulations it was subject to had structural gaps that allowed a determined fraud to persist for years — and because the institutional architecture of co-operative banking made those gaps almost impossible to close.
This article traces the PMC failure through the specific regulatory provisions that should have caught it, explains why they didn't, and maps the reforms that followed to the exact gaps they were designed to fill. It draws on notifications across all three regulatory domains covered in this series — KYC/AML, co-operative bank prudential norms, and (at the edges) FEMA.
What Happened
Between 2008 and 2019, PMC Bank created approximately 21,049 fictitious loan accounts to disguise its exposure to a single borrower group — Housing Development and Infrastructure Limited (HDIL) and its related entities. The actual exposure was approximately Rs 6,500 crore — roughly 73% of the bank's total advances — concentrated in one real estate conglomerate that was already in financial distress.
On September 23, 2019, the RBI imposed restrictions under Section 35A of the Banking Regulation Act, limiting withdrawals to Rs 1,000 per depositor. The limit was gradually raised over the following weeks. Depositors — many of them elderly, many with their life savings in the bank — queued outside branches. At least one depositor died of a heart attack in the queue. The DICGC insurance cover of Rs 1 lakh was wholly inadequate for most depositors.
The Regulatory Provisions That Should Have Caught It
1. KYC and Account Opening (Article 1 Connection)
Every one of the 21,049 fictitious accounts should have been flagged at the point of creation. The KYC framework requires:
"The Board of Directors of the banks should have in place adequate policies that establish procedures to verify the bonafide identification of individual/corporates opening an account." (RBI_819, August 16, 2002)
The UCB-specific KYC circular (UCB KYC Norms RBI/2004-05/302, December 15, 2004) applied the same four-pillar framework — Customer Acceptance Policy, Customer Identification, Transaction Monitoring, Risk Management — to all primary urban co-operative banks.
The 2016 Master Direction (KYC Master Direction (Master Direction - Know Your Customer (KYC) Direct)) further mandated:
"No account is opened in anonymous or fictitious/benami name." (RBI_11566, Para 10)
21,049 fictitious accounts. The KYC framework was in place. It was simply not applied.
2. Exposure Limits (Article 3 Connection)
The director lending ban of April 2003 (UCB Director Lending Ban (Loans and advances to directors, relatives and fir)) prohibited all lending to directors and their related concerns:
"Primary (urban) cooperative banks are prohibited from extending any loans and advances to the directors, their relatives and the firms/concerns/companies in which they are interested." Loans and advances to directors, relatives and firms /concer...
PMC Bank's board members had undisclosed interests in HDIL. The lending wasn't reported as related-party. The fictitious accounts were the mechanism for disguising the concentration.
The exposure limit framework — even before the 2025 consolidation's 15%/25% caps — would have prohibited a 73% concentration to a single group. The problem was that the bank's management information system was doctored to hide the true exposure from both the board and the RBI inspection team.
3. Suspicious Transaction Reporting (Article 1 Connection)
The STR framework required:
"Banks should submit STRs if they have reasonable ground to believe that the transaction involve proceeds of crime generally irrespective of the amount of transaction." (RBI_4325, July 2, 2008)
The creation of 21,049 fictitious accounts to disguise a Rs 6,500 crore exposure is itself a suspicious transaction. It should have triggered multiple STRs. None were filed.
4. Statutory Audit (Article 3 Connection)
The audit framework required concurrent and statutory auditors to verify the accuracy of the bank's books. The concurrent auditor should have detected the mismatch between the reported loan accounts and the actual borrowers. The statutory auditor should have verified the existence of the borrowers whose accounts appeared in the books.
The problem: PMC Bank's management manipulated the core banking system to show fictitious accounts as live, performing loans. The auditors relied on system-generated reports without independently verifying the underlying accounts.
5. The Dual Regulation Gap
This is where the structural failure lies. The RBI regulated PMC Bank's banking operations. The Registrar of Co-operative Societies (Maharashtra) regulated its corporate governance — board elections, management appointments, member disputes.
The RBI could issue directions under Section 35A of the Banking Regulation Act. But it could not:
- Supersede the board (that power came only in 2020)
- Order the bank's amalgamation with another entity (the BR Act didn't empower the RBI to do this for co-ops)
- Remove individual directors (that was the Registrar's domain)
As the February 2005 merger guidelines (Guidelines for merger / amalgamation of Urban Co-o) acknowledged:
"Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank to formulate a scheme with regard to merger and amalgamation of co-operative banks." Guidelines for merger / amalgamation of Urban Co-operative B...
6. Deposit Insurance Inadequacy
When the crisis broke, DICGC insurance covered Rs 1 lakh per depositor. Many PMC depositors had significantly more. The Rs 1 lakh cover had not been revised since 1993 — twenty-six years.
The Reforms: Mapping Each Fix to Its Gap
Gap 1: Board couldn't be superseded → Banking Regulation (Amendment) Act, 2020
Parliament gave the RBI power to supersede co-operative bank boards, initiate resolution, and regulate share capital issuance. Effective from June 29, 2020.
Gap 2: Deposit insurance too low → DICGC Rs 5 lakh (2020)
Cover raised from Rs 1 lakh to Rs 5 lakh. The DICGC Act was further amended in 2021 to mandate interim payments within 90 days of a bank being placed under restriction — so depositors don't wait years for resolution.
Gap 3: Concentration risk undetectable → 15%/25% exposure limits with 2025 Directions
The Credit Facilities Directions 2025 (Reserve Bank of India (Urban Co-operative Banks –) set hard concentration limits:
"The prudential exposure limits for UCBs for a single borrower/party and a group of connected borrowers/parties shall be 15 per cent and 25 per cent, respectively, of their tier-I capital." Reserve Bank of India (Urban Co-operative Banks – Credit Fac...
Gap 4: Governance by cooperative politics → Board of Management (December 2019)
UCB Board of Management Direction RBI/2019-20/128 mandated a professional Board of Management for all UCBs with deposits above Rs 100 crore:
"The persons who manage the affairs of UCBs are professionally competent, devoid of vested interests and subject to supervision and control." Constitution of Board of Management (BoM) in Primary (Urban)...
CEO appointments now require RBI prior approval.
Gap 5: Fraud provisioning unclear → 100% provisioning regardless of security
The IRAC Directions 2025 (Reserve Bank of India (Urban Co-operative Banks –):
"The entire amount due to the bank, irrespective of quantity of security held against the advance, shall be provided for." Reserve Bank of India (Urban Co-operative Banks – Income Rec...
Gap 6: Capital tools inadequate → New instruments (March 2022)
UCB Capital Instruments Direction RBI/2021-22/179 (since withdrawn) added Perpetual Debt Instruments (Tier I) and Long Term Subordinated Bonds (Tier II) to the UCB capital toolkit, with mandatory investor warnings:
"UCBs shall ensure that all publicity material clearly states in bold letters (Arial font, size 14) how these instruments are different from a fixed deposit, and that these instruments are not covered by deposit insurance." Issue and regulation of share capital and securities - Prima...
Gap 7: Tiered regulation missing → Four-tier framework (November 2025)
UCB Capital Adequacy Direction (Reserve Bank of India (Urban Co-operative Banks –): Tier 1 UCBs (deposits under Rs 100 crore) get a 9% CRAR requirement. Tiers 2-4 (deposits above Rs 100 crore) get 12% — reflecting the principle that larger banks pose greater systemic risk.
The Cross-Cutting Lesson
PMC Bank sat at the intersection of three regulatory domains:
- KYC/AML — the fictitious accounts violated every KYC provision in the book
- Co-operative bank prudential norms — the concentration violated exposure limits, the fraud violated audit norms, the governance was captured by interested parties
- The cooperative structure itself — member-elected boards, dual regulation, and statutory gaps that prevented the RBI from acting even when it saw the problem
The November 2025 consolidation attempted to close these gaps by creating a single, integrated regulatory framework — the UCB Credit Facilities Directions (UCB Credit Facilities Direction (Reserve Bank of India (Urban Co-operative Banks –)) now embed KYC compliance by cross-referencing the UCB KYC Directions (UCB KYC Direction (Reserve Bank of India (Urban Co-operative Banks –)), while simultaneously incorporating FEMA provisions for guarantee transactions. The hub-and-spoke structure ensures that compliance in one domain is linked to compliance in others — so that a failure in KYC triggers scrutiny of lending, and vice versa.
Whether this structural fix will prevent the next PMC depends on whether the auditors, inspectors, and boards actually use it. Regulations can close gaps. They cannot, by themselves, prevent fraud.
The RBI's November 2019 enhancement of the withdrawal limit to Rs 50,000 for PMC depositors was one of a series of incremental relief measures issued as the crisis unfolded: RBI enhances withdrawal limit for depositors of PMC Bank to Rs 50,000 (PR_48562).
Last updated: April 2026