The Reserve Bank of India (RBI) on Friday granted “in-principle” approval to Centrum Financial Services Ltd (CFSL) to set up a small finance bank (SFB), paving the way for it to take over the scam-ridden Punjab and Maharashtra Co-operative (PMC) Bank with its partner BharatPe, digital payment firm.
As of now, PMC depositors are keenly awaiting details of the scheme and finally hoping to get their money back.
So will the PMC depositors get their money back?
While the RBI has paved the way for a joint venture of Centrum and BharatPe to take over the troubled PMC Bank, the central bank has not come out with the details of the proposed acquisition of PMC Bank. If past cases of bank mergers are anything to go by, eventually PMC Bank depositors are likely to get back the money stuck as fixed deposits.
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However, banking experts say while the RBI has a history of fully securing the depositors in such cases, the repayment to depositors will depend on the scheme agreed between the RBI and Centrum-BharatPe. The main issues are whether the RBI will allow Centrum to convert part of liabilities (deposits) into equity capital or will investors get back only up to the amount insured with the Deposit Insurance and Credit Guarantee Corporation (DICGC). “While the core of this acquisition is to safeguard depositors’ interest, the depositors could be expected to make some sacrifices. This is a rare case of a NBFC acquiring a bank but this is the only way forward and I expect to see many more such transactions in the future,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services (APAS).
What can the depositors expect from this acquisition?
Abhizer Diwanji, partner and national leader, financial services, EY, said there are two possibilities when it comes to payment to depositors. The depositors may have to take a haircut or will have to accept deferred payment. “In this case a lot depends on the deal negotiated between RBI and Centrum-BharatPe. First the equity of the bank will be written off and after netting off equity, if the net realisable assets of the bank is more than the net liabilities, then all depositors will be secured. But if the net assets of the bank are less than the net liabilities, depositors will be secured to the extent of the DICGC scheme of Rs 5 lakh. So, if any depositor has deposits of over Rs 5 lakh, they may have to write off the balance or they may get some deferred payments depending on the deal negotiated by Centrum-BharatPe with RBI,” Diwanji said.
So far, the RBI has had a history of fully securing the interest of depositors in such cases. When the SBI-led consortium bailed out Yes Bank last year, none of the depositors lost their money.
What did PMC say in its expression of interest (EOI)?
According to the EOI issued by the bank last year, the investors looking to acquire will have to ideally bring in the capital required for enabling the bank to achieve the minimum required capital to risk weighted assets ratio (CRAR) of 9 per cent. “However, the investors may explore the option of restructuring a part of deposit liabilities into capital/capital instruments. The bank may also approach DICGC for its support for payment up to Rs 5 lakh (insured deposits) to depositors,” the EOI said.
Depositors are worried about these terms and conditions. If the new owners convert deposits into capital or return only up to Rs 5 lakh insured with DICGC, depositors will be losers. The listing of the new small finance bank on the exchanges will take a couple of years.
What is the current financial position of the bank?
PMC Bank has total deposits of Rs 10727.12 crore and total advances of Rs 4472.78 crore. It has gross non-performing assets (NPAs) of Rs. 3518.89 crore as on March 31, 2020. The share capital of the bank is Rs 292.94 crore. However, the bank registered a net loss of Rs 6,835 crore during 2019-20 and has a negative net worth of Rs 5850.61 crore. When the RBI sacked the board of PMC Bank in 2019, it initially slapped a deposit withdrawal restriction of Rs 1,000 per account which was later increased to Rs 50,000. About 78 per cent of the depositors have since been allowed to withdraw their deposits within the withdrawal limit of Rs 50,000. While this limit was further enhanced to Rs 1 lakh in June last year, many depositors who have bigger amounts parked in the bank are still not able to get their money back.
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