PMC Bank-Unity merger: What does the final scheme mean for depositors?

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#PMC Bank, government approving , Moneycontrol said in an earlier article

The RBI crackdown on co-operative banks continues in 2021 as well. [Representational Image]

With the government approving the final amalgamation scheme of Punjab and Maharashtra Bank (PMC Bank) depositors, the 39-year-old lender will cease to exist.

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Starting Wednesday, all PMC Bank branches have become Unity Small Finance Branches (USFBL), marking an end to a two-year uncertainty on the bank’s future.

The obvious question at this hour comes as what does the scheme mean for PMC Bank depositors. The broader points in the government-approved scheme is largely similar to the draft scheme except certain minor tweaks in the repayment schedule to PMC Bank depositors.

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When do depositors get money back?

According to the scheme, all eligible depositors will get Rs 5 lakh under the deposit insurance credit guarantee scheme (DICGC) as the first round of payment. After that, there will be staggered payments over a period of 10 years. During this period, the depositors will get amounts ranging from Rs 50,000 to Rs 5.5 lakh from the first to fifth year and the remaining at the end of 10 years.

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As Moneycontrol said in an earlier article, the good news is that all depositors will get their money back. There is, finally, an end to the long uncertainty. And the bad news is that the depositors will get their full amount only over a period of three to 10 years. That is too much of a wait, particularly, for some of the elderly depositors of the bank.

What about the interest payments?

The scheme says no interest on any of the interest bearing deposits with the transferor bank (PMC Bank) shall accrue after March 31, 2021 for a period of five years. After that, a simple interest at the rate of 2.75 per cent per annum will be paid at the end of each year for the amounts remaining outstanding which shall be payable from the date after five years from the appointed date.

In respect of balances in any current account or any other non-interest-bearing account, no interest shall be payable to the account holders, except that after a period of five years, simple interest at the rate of 2.75 per cent per annum, which shall be paid to the balances of the retail depositors in the same manner, as applicable to interest bearing deposits.

What about institutional depositors?

As per the scheme, 80 per cent of the uninsured deposits outstanding (aggregate in various accounts) to the credit of each institutional depositor of the transferor bank will be converted into Perpetual Non-Cumulative Preference Shares of transferee bank with dividend of 1 percent per annum payable annually.

At the end of the 10th year from the appointed date, Unity Small Finance Bank will use net cash recoveries (net of expenses related to such recoveries) from assets pertaining to Housing Development and Infrastructure Limited (HDIL) Group in excess of the principal amount of advances to Housing Development and Infrastructure Limited Group outstanding as on March 31, 2021 to buyback Perpetual Non-Cumulative Preference Shares at face value on a pro rata basis, according to the scheme.

Why PMC Bank was merged with Unity?

The RBI superseded PMC Bank board in September 2019 following a major fraud and irregularities in operations. About 70 percent of its total loan book of Rs 8,383 crore as on March 31, 2019, had been taken by real estate firm HDIL. The bank had Rs 11,600 crore in deposits. The police arrested Joy Thomas, former managing director of the PMC Bank, in October. The investigators have since made a few more arrests.

During investigations, it was found that the bank had been allegedly running fraudulent transactions for several years to facilitate lending to HDIL through fictitious accounts and violating single-party lending rules. The RBI imposed restrictions on deposit withdrawals and superseded its board after the fraud was detected.

PMC Bank had total deposits of Rs 10,727.12 crore, total advances of Rs 4,472.78 crore and gross NPA of Rs 3,518.89 crore as on March 31, 2020. The share capital of the bank was Rs 292.94 crore.

The delay in resolution had irked PMC Bank depositors during the two-year period. There have been several cases of suicides linked to PMC Bank crisis. PMC Bank depositors moved to various courts seeking urgent resolution. The RBI facilitated the takeover of the bank by permitting the Centrum-BharatPe consortium to set up a small finance bank – Unity SFB – which will eventually take over PMC Bank.

So, should PMC Bank depositors be happy about the provisions of the merger scheme? In a way, yes. The amalgamation puts an end to the long uncertainty on whether the PMC depositors will get their money back. There is a clear assurance now that their money will be returned. But surely, some of them have a long wait ahead. “In real terms, many depositors will have significant value erosion by the time they get their money back,” said Vivek Dixit, a senior lawyer and one of the PMC Bank depositors.

The long wait will be painful especially for senior citizens who had parked their lives’ savings in PMC Bank hoping for good returns.

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