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PMC Bank Resolution Plan Opposed By Cooperative Bank Umbrella Organisation

PMC Bank rescue plan: Sahakar Bharti, an umbrella body of cooperative banks, has opposed provisions of the plan.

<div class="paragraphs"><p>Depositors and investors gather outside Bhandup Branch of the Punjab &amp; Maharashtra Co-operative (PMC) Bank, in Mumbai. (Photo: BloombergQuint)</p></div>
Depositors and investors gather outside Bhandup Branch of the Punjab & Maharashtra Co-operative (PMC) Bank, in Mumbai. (Photo: BloombergQuint)

The umbrella body of cooperative banks in India — Sahakar Bharti, has opposed provisions of the draft PMC Bank rescue plan. In a letter to the Reserve Bank of India, the organisation has argued that proposals to stagger out deposit payout and not pay interest on these for a period of time is against the interest of depositors.

The Sahakar Bharti said that none of the categories of depositors are satisfied with the proposed scheme of amalgamation and have made representations to it.

"The depositors of PMC Bank, both retail and institutional have been defrauded and it was expected that the resolution of PMC Bank crisis would be to protect the interests of the hapless depositors," the umbrella body wrote in its letter, a copy of which has been reviewed by BloombergQuint.

On considering the draft scheme one comes to a conclusion that the entire loss suffered by the PMC Bank is being thrust on the shoulders of the depositors.
Sahakar Bharti Letter TO RBI

As per the scheme, deposits up to Rs 5 lakh, which are insured, will be paid out by the Deposit Insurance And Credit Guarantee Corp. However, Unity Small Finance Bank, the entity which will be taking over the assets and liabilities of PMC Bank, has proposed that deposits beyond that will be paid out in a staggered manner over 10 years.

Depositors, whose deposits are not fully paid out via deposit insurance, shall not accrue any interest on deposits for the first five years, the plan proposed. 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 draft scheme said.

The Sahakar Bharti opposed this and suggested the following revised plan:

  • Depositors should be paid as early as possible, but not later than five years from the appointed date.

  • Depositors should be paid interest at least equal to the average inflation rate per annum, but minimum 6% till repayment.

  • Alternatively, with the consent of the depositors, a part or full, of their deposits be converted into bonds with maturity of maximum seven years.

  • These bonds should be rated and listed so that depositors will get an option to receive their monies at an early date. These bonds should carry interest rate equal to deposit interest rate of State Bank of India or the 10-year government bonds.

The PMC Bank draft rescue plan set a new precedent for treatment of depositors. Not only did it stagger out deposit payouts, it also introduced differential treatment for institutional depositors. Such depositors will see their deposits converted into Perpetual Non-Cumulative Preference Shares. The instruments were to carry an annual interest rate of 1%.

The Sahakar Bharti opposed this too and suggested the following:

  • Dividend rate of PNCPS should be at least equal to the rate of average inflation during the last 10 years to safeguard its monitory value. There should be definite repayment plan specified.

  • Further, the 20% amount of institutional deposits should be converted into equity shares of Unity Small Finance Bank. These may come with lock-in-period of seven years or till IPO, whichever occurs earlier.

Comments on the draft scheme had been invited till Dec.10, 2021, following which a final scheme will be released.

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