PMC Bank Rescue: RBI Draft Scheme Proposes Staggered Deposit Payout
A draft scheme of amalgamation released by the Reserve Bank of India for Punjab and Maharashtra Cooperative Bank Ltd.'s merger with Unity Small Finance Bank Ltd. proposes a staggered deposit payout over 10 years. In addition, it proposes a conversion of institutional deposits into perpetual non-cumulative preference shares and equity warrants of the small finance bank.
The draft scheme lays down the process through which assets and liabilities of PMC Bank will be transferred to Unity Small Finance Bank, promoted by Centrum Group and Resilient Innovations Pvt., the owner of BharatPe.
For Retail Depositors
In case of payments to retail depositors, Unity Small Finance Bank shall pay the insured amount up to Rs 5 lakh received from the Deposit Insurance & Credit Guarantee Corp., according to the existing rules. Unity Small Finance Bank shall have up to 20 years to repay DICGC for these insured deposits in one or several instalments, the RBI has proposed.
For depositors with amounts exceeding the Rs 5 lakh amount, the RBI has proposed a deferred payment schedule:
After two years from the appointed dates, Unity Small Finance Bank shall pay up to Rs 50,000 of excess deposits.
After three years, the bank shall pay up to Rs 1 lakh.
After four years, the bank shall pay up to Rs 3 lakh.
After five years, the bank shall pay up to Rs 5.5 lakh.
After 10 years, any amount pending after the payments detailed above, on demand from the depositors.
For these retail depositors, the RBI has also proposed that interest on their deposits shall stop accruing after March 31, 2021, apart from the manner decided by the regulator.
Depositors shall not accrue any interest on deposits for the first five years, after the appointed date. After this five-year period passes, Unity Small Finance Bank shall pay an interest of 2.75% per annum on the remaining deposits it holds, the RBI said in the draft scheme. This interest shall be payable from the date after the five-year period ends.
In a statement on Monday, Unity Small Finance Bank said that 96% of PMC Bank's retail depositors will receive their full deposits when the DICGC payout happens.
"99% of the retail depositors to be paid in full by 5th year and 100% of retail depositors to be paid in full by 10th year," the small finance bank said.
According to Anand Sinha, former RBI deputy governor, the solution proposed by the RBI has to be seen in the context of the institutions involved.
In the PMC Bank case, the company taking over the assets is not a large financial institution. So you need to give them time to be able to repay retail depositors their full principal amount. This is probably the best solution, keeping in mind the reality of the underlying bank. The depositors have to be a part of the solution here.Anand Sinha, Former Deputy Governor, RBI
Could the RBI have considered a liquidity support window to pay depositors, like it has in the case of private banks previously?
According to a person familiar with the matter, provision of liquidity would require the ability to provide collateral as well as repayment within a reasonable time frame.
The RBI had opened special liquidity windows during the rescue for Yes Bank Ltd. and Lakshmi Vilas Bank Ltd., where the bank could access liquidity to meet depositor payouts and repay the RBI within a specific time period.
For Institutional Depositors
For bulk depositors, the RBI has proposed a different payment scheme in its draft.
The RBI has proposed:
80% of the uninsured deposits held by these institutional depositors shall be converted to PNCPS. These shares will accrue a dividend of 1% per annum.
The remaining 20% of the deposits shall be converted to equity warrants, at a price of Re 1 apiece. Such warrants can be converted to equity shares of Unity Small Finance Bank at the time of its initial public offering, the RBI said. The price for such conversion will be determined at the lower band of the IPO price.
The institutional depositors will see their principal amount protected, with an equity upside in the future due to the scheme, Unity Small Finance Bank said in its statement.
For every other liability of PMC Bank, Unity Small Finance Bank shall pay only the principal amounts, as and when they fall due, to the creditors.
PMC Bank depositors have been awaiting access to their deposits since September 2019, when the RBI put the bank under restrictions. The regulator's action had followed after PMC Bank had seen its financial position deteriorate severely and subsequently, its managing director had confessed to fraudulent activities.
Currently, PMC Bank depositors are allowed to withdraw up to Rs 1 lakh from their bank accounts.
As of March 2020, the total deposit base for the bank stood at Rs 10,727 crore. This included smaller retail depositors, high net-worth individuals, housing societies, trusts as well as other banks.
According to a second person familiar with the matter, about Rs 8,000 crore of the deposit base is with retail depositors. Most will be covered within the insured payout of Rs 5 lakh. The decision to convert deposits into PNCPS and equity warrants was seen as the best option since this could help include them in the future growth of the bank.
This person added that since the bank had no deposits of its own, a staggered payout and some conversion of deposits into other instruments was the best option.
For Employees Of PMC Bank
The employees of PMC Bank shall continue with the same remuneration and other terms and conditions, for a period of three years, after the appointed date for the amalgamation.
Unity Small Finance Bank may discontinue the services of key managerial personnel of PMC Bank, at any time after the appointed date, following due procedure and providing them with compensation, as per their terms of employment.
Members Of PMC Bank
On the scheme being implemented, the entire amount of the paid-up share capital and reserves and surplus of the transferor bank shall stand written off.
The transferor bank shall cease to exist by operation of the scheme.