The Reserve Bank of India has released a draught scheme for the merger of PMC Bank with Unity Small Finance Bank; PMC depositors will be paid in full over a ten-year period

On November 22, the Reserve Bank of India made a draught scheme for the merger of the Punjab and Maharashtra Cooperative (PMC) Bank and the Unity Small Finance Bank public (USFB).

The proposal envisions USFB taking over PMC Bank’s assets and liabilities, including deposits, in accordance with the scheme’s requirements, providing better security for depositors.

“It can be seen that USFB is being set up with capital of around Rs 1,100 crore as against a regulatory requirement of Rs 200 crore for setting up a small finance bank under the guidelines for on-tap licensing of small finance banks in the private sector dated December 5, 2019, with provision for further capital infusion at a later date after amalgamation,” the RBI said.

According to the draught scheme, Unity Small Finance Bank issued equity warrants worth Rs 1,900 crore to the promoters on November 1, 2021, which can be exercised at any moment throughout an eight-year period.

The RBI has extended the deadline for comments on the draught scheme till December 10. After that, a final decision will be made, according to the statement.

When will depositors of PMC Bank receive their funds?

According to the draught scheme of merger, depositors of Maharashtra-based PMC Bank will get their money back over a three to ten-year period.

As a result, the acquiring bank will pay depositors up to Rs 5 lakhs in DICGC-guaranteed funds.

The bank will pay up to Rs50,000 in addition to the payment already made at the end of two years, up to Rs one lakh at the end of three years, Rs three lakhs at the end of four years, Rs 5.5 lakhs at the end of five years, and the total remaining amount at the end of ten years.

The RBI stated that interest on any interest-bearing deposits with the transferor bank (PMC Bank) will cease to accrue after March 31, 2021.

“No further interest will be payable on transferor bank’s interest-bearing deposits for a period of five years from the appointed date.” According to the scheme, no interest shall be paid to account holders on balances in any current account or any other non-interest bearing account.’
For institutional depositors, on and from the appointed date, it is suggested that 80% of the uninsured deposits outstanding be converted into Perpetual Non-Cumulative Preference Shares (PNCPS) with a 1% annual dividend payable annually.

“After 10 years from the appointed date, the transferee bank may explore further incentives for such PNCPS holders, such as giving a step up in coupon rate or a call option, subject to Reserve Bank approval,” the scheme suggests.

Furthermore, the scheme stated that all employees of the transferor bank shall be retained on the same compensation and terms and conditions of service for a period of three years from the appointed date.

How things transpired

The Maharashtra-based PMC Bank was placed under business limitations with effect from the close of business on September 23, 2019, and the RBI superseded the bank’s board due to fraud, resulting in a significant decline in the bank’s net worth.

It was discovered that the bank had reportedly been operating fraudulent transactions for several years in order to ease lending to HDIL through bogus accounts and in violation of single-party lending laws

Real estate firm HDIL had taken almost 70% of its total loan book of Rs 8,383 crore as of March 31, 2019.

PMC Bank had total deposits of Rs 10,727.12 crore, total advances of Rs 4,472.78 crore, and a gross NPA of Rs 3,518.89 crore as of March 31, 2020. The bank’s share capital was Rs 292.94 crore. In 2019-20, the bank recorded a net loss of Rs 6,835 crore and a negative net worth of Rs 5,850.61 crore.

On June 18, this year, the RBI announced that it has decided to grant Centrum Financial Services in-principle clearance to establish a small financing bank. “This in-principle approval has been granted specifically in response to Centrum Financial Services Limited’s offer dated February 1, 2021, in response to the Expression of Interest notification dated November 3, 2020, published by the Punjab & Maharashtra Co-operative Bank Ltd., Mumbai,” the RBI stated.

The instructions were last extended by the central bank in a June 25 decision until December 31, 2021. “Given the PMC Bank’s financial situation and the lack of offers for capital infusion, the bank was not viable on its own.” In that case, the only option would have been to cancel its license and liquidate it, with depositors receiving payments up to the insurance ceiling of Rs 5 lakh,” the RBI stated.