PMC Bank: Is Resolution Really In Sight?
Account holders line up at troubled PMC Bank branch. (Source: PTI)

PMC Bank: Is Resolution Really In Sight?

More than a year after Punjab and Maharashtra Cooperative Bank was put under restrictions, the Reserve Bank of India will begin scrutiny of potential investors who have expressed interest in the insolvent lender. A successful conclusion of the process, however, remains uncertain given the onerous fit and proper criteria the regulator typically applies to investors in deposit-taking institutions.

On Friday, the RBI said it’s reviewing the viability and feasibility for four proposals it has received for a potential equity investment in PMC Bank. It also extended the limit of Rs 1 lakh placed on withdrawals for another three months till March 31.

While the regulator did not disclose the names of those that have submitted expressions of interest, according to two people with direct knowledge of the developments, a consortium of fintech firm BharatPe and Centrum Group, U.K.-based Liberty Group and two business houses have expressed interest in PMC Bank. Business Standard first reported the development on Monday morning.

The process is still in its preliminary stages and the bidders will be able to submit a formal resolution plan after their due diligence is completed, the people quoted above said. The RBI-appointed administrator had sought expressions of interest in November.

BharatPe’s Chief Executive Officer Ashneer Grover and Liberty Group declined to comment on the developments. “We confirm that the Centrum Group and BharatPe have jointly submitted an Expression of Interest (EOI) for a potential investment in PMC Bank,” a spokesperson for Centrum Group said, declining to add anything further.

Will Any Of The Interested Parties Make The Cut?

Since PMC Bank is a deposit-taking body, any interested parties will first and foremost be subjected to the RBI’s fit and proper criteria.

The winning bidder for PMC Bank will have to undergo three major hurdles before being able to successfully take over the bank, according to Satish Marathe, a central board member of the RBI, who has long experience in the cooperative banking sector. “The first being passing the regulator’s stringent fit and proper guidelines, the second is to ensure that the business plan for PMC Bank does not in any way affect the interest of the depositors and the third is to help investigative agencies with the fraud probe,” Marathe said.

While precise details of the two business houses could not be ascertained, should they have large interests in the corporate sector, the RBI may not be in favour of permitting them to own a large stake in PMC Bank. An internal working group has suggested allowing corporates into banking, but the regulator has not yet approved this and suggested changes to the Banking Regulation Act have also not been made.

Liberty House, which has also expressed an interest, has a checkered track record in India. The Sanjeev Gupta-promoted group has been pulled up by financial creditors of Amtek Auto where it submitted a bid to buy the insolvent auto ancillary manufacturer and later wanted to back out. The financing structure of the group has also been opaque as highlighted by the Financial Times.

"As far as Liberty House is concerned, we have to remember that they are a stressed asset investor seeking to buy manufacturing assets in the country. Especially since the investor has had cases where they pulled out of sale processes at the very end, the RBI's supervisory team would have to be doubly careful," said Hemindra Hazari, an independent banking analyst.

The last of the four potential bidders is the consortium of the Centrum Group and BharatPe. The Centrum Group is a non-bank lender, in which banker Jaspal Bindra holds 26% stake. Bindra was the Asia head at Standard Chartered Bank till February 2016. Similar to a number of Indian lenders, Standard Chartered’s Indian operations saw a surge in bad loans due to heavy corporate lending in the years after the global financial crisis, which came to light after the asset quality review in 2015.

In the case of non-bank lenders, the RBI has followed a case-by-case approach in permitting them to enter banking. While some like Capital First Ltd. were allowed to merge with IDFC Bank, others like Indiabulls Housing Finance Ltd. were not permitted to go ahead with a planned merger with Lakshmi Vilas Bank.

Amit Tandon, founder and managing director at proxy advisory firm IiAS, said that the regulator is opening up to the idea of non-bank lenders entering the banking sector. “These are businesses which have experience in lending and recovery so it would make sense to allow them to go ahead and transform into banks. But this also creates a question for NBFCs backed by large industrial houses and how the RBI is going to treat them,” said Tandon, adding that the regulator has indicated that it will also be closely looking at the holding structures proposed.

Could A Quicker Solution Have Been Found?

In the 14 months since PMC Bank was put under the restrictions, the RBI has had to step in to resolve two other banks — Yes Bank Ltd. and Lakshmi Vilas Bank Ltd. While a consortium of lender came together to acquire the former, the latter was merged with DBS Bank India. What made these rescues easier was that they were universal banks, which fall completely under the purview of the RBI.

In contrast, PMC Bank is a multi-state cooperative bank, which falls partly under state laws.

One option for the regulator was to merge PMC Bank with a larger cooperative bank. In December 2019, it was reported that the Maharashtra government was proposing a merger of PMC Bank with Maharashtra State Cooperative Bank.

However, a person familiar with the matter said the state never followed through on the idea. MSC Bank had written a letter to RBI proposing to take over PMC Bank in October 2019 but a concrete proposal was never submitted, this person said speaking on condition of anonymity.

According to DK Mittal, former financial services secretary, a good way to resolve the situation was to ensure that a universal bank was brought in to save PMC Bank.

“We could have asked any large commercial bank to take over the assets of PMC Bank and given them special dispensation on certain aspects of takeover and also get some funding from DICGC. Previously solutions have been found like that. The more you delay, the more is the harm to the depositors,” Mittal said.

Previously, in 2010-11, Bank of Baroda took over the assets and liabilities of Mumbai-based Memon Cooperative Bank, while Indian Overseas Bank took over Pune-headquartered Suvarna Nagari Sahakari Bank, the RBI noted in its annual report.

According to the person quoted above, after the Memon Cooperative and Suvarna Nagari mergers, a number of credit societies had submitted requests for mergers. Then in 2014, the RBI came out with guidelines stating that in such mergers, the acquiring bank should not face any losses and all such losses will have to borne by the big depositors of the cooperative bank, by sacrificing a portion of their deposits.

A former deputy governor of the RBI said that the acquisitions done previously were voluntary. Even in cases where the RBI comes out with resolution schemes like with Lakshmi Vilas Bank and Yes Bank, it does so after informally considering proposals and getting consent from the acquiring banks. It is not that the RBI just pushes two banks to merge, the former deputy governor said, speaking on condition of anonymity.

The relatively lesser control that the RBI has over cooperative banks has also been a hindrance in speeding up the resolution process. It was only in October 2020 that the government brought into law a proposal to allow RBI full supervisory powers, including the power to force mergers in the interest of depositors. This was after an ordinance to this effect was passed by the President of India was passed in June.

“We have been consistently representing to the government to allow better supervisory powers to the RBI even since before the PMC Bank crisis erupted. It took the government a few months before it could get an ordinance to be approved,” said Marathe, who is also a director at National Cooperative Development Corporation.

What Next?

Since deposit withdrawals of up to Rs 1 lakh are permitted, more than 80% of depositors by number have been allowed to withdraw their funds. As such, the bank’s deposit base has also shrunk.

As per the annual report for the financial year ended March 31, 2020, PMC Bank had deposits worth Rs 10,727 crore and loans worth Rs 4,4473 crore. A year before that deposits and loans stood at Rs 11,617 crore and Rs 8,383 crore respectively.

As of March 31, the bank had a negative net worth of Rs 5,850.61 crore, the sale process document on PMC Bank’s website said.

A new investor into PMC Bank will have to bring in fresh equity and will also be required to work with the Deposit Insurance and Credit Guarantee Corporation. The DICGC insures deposits up to Rs 5 lakh for its member banks. According to details available on the DICGC website, apart from when a bank goes into liquidation, the corporation is also allowed to pay banks when a reconstruction or amalgamation plan is being implemented.

Should a new buyer not emerge, is liquidation the eventual option?

Ajay Shaw, partner at DSK Legal said that even if liquidation is considered, it is likely going to be a long drawn process with stakeholders likely to take a hit on their payouts.

“All liquidation processes depend on the sale of assets and payments on the basis of a waterfall mechanism, as specified in the laws governing the specific company being liquidated. Liquidation is not really an option under the resolution mechanism, but an admission that all options have failed,” Shaw said.

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