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#56 Centrum-BharatPe's Unity
and how depositors of PMC are left feeling the brunt.
Apt for the partnership, Centrum and BharatPe’s joint venture to establish a new-age bank finally has a name now: Unity Small Finance Bank.
I’ve already covered the details on how this merger arrived here.
Cut short to this week, where RBI has published a Draft Scheme of Amalgamation between PMC Bank and Unity Small Finance Bank. For the uninitiated, here’s a quick recap:
Recap: After a huge fraud got exposed at PMC (Punjab and Maharashtra Co-operative) Bank, RBI had put restrictions on deposit withdrawals way back in September, 2019. The bank's liquidation/amalgamation has been in limbo for about two years now. Earlier this year, a joint venture between Centrum Financial Services Ltd. and BharatPe resulted in the creation of a small finance bank (called Unity) with whom PMC Bank is going to be merged. Remember, our deposit insurance authority Deposit Insurance and Credit Guarantee Corporation (DICGC) will only pay out ₹5 lacs of insurance after a successful liquidation/amalgamation/merger event. Two days ago, RBI published the draft scheme. The scheme is yet to be notified by the Government.
Now that the SFB is operational and scheme is published, the next leg of the takeover can officially begin. However, it is very important to understand the details of the scheme as it sets a precedent for Indian Banking.
To make it simple, I’ve explained the scheme with 10 frequently asked questions:
Q1: Is everyone going to get their money back?
A: Short answer - yes.
Long answer - yes, but it is going to be a painfully long wait for depositors who have a large deposit at the bank (such as over ₹15 lacs).
Q2: I have ₹5 lacs spread across different branches of PMC Bank. Will I get my money immediately?
A: Your wait will definitely be much lesser than other large-value depositors, but not immediately. Ideally, Deposit Insurance and Credit Guarantee Corporation (DICGC) is supposed to pay out the insured amount within a maximum period of 90 days. However, they have invoked a special provision where they can take an additional 90 days to pay the amount to Unity. So you can expect this latest by April 2022. Having deposits in multiple branches is not an issue - they will be aggregated to arrive at the total amount.
Q3: I have ₹16 lacs deposited in PMC. When will I get my money?
A: Beyond the initial ₹5 lacs that you're going to get before April next year, here's the timeline for the additional amount that you're due:
After 2 years: ₹0.5 lac (at this point, you've received ₹5.5 lacs)
After 3 years: ₹1 lac (at this point, you've received ₹6.5 lacs)
After 4 years: ₹3 lacs (at this point, you've received ₹9.5 lacs)
After 5 years: ₹5.5 lacs (at this point, you've received ₹15 lacs)
Any remaining amount (in this example, ₹1 lac) is going to be paid after a period of 10 years. For clarity, all these dates are since the day the scheme is notified by the Government (which is pending).
Q4: But Unity is claiming 99% of the depositors will get back their money in 5 years? That's not a bad thing right?
A: 99% may seem like a big number; for context, 20,645 unique depositors have deposits more than ₹10 lacs. 37% of PMC's depositors are senior citizens. Imagine waiting for 5 years for your own money. (7 years if you count since the time RBI put the restrictions). Twitter and Facebook is filled with stories of depositors protesting and some even taking their own lives without access to money.
Q5: Oh shit. That's bad. Could this have been avoided?
A: Yes and yes. If RBI had chosen a stronger lender for the merger (like in the case of Yes Bank or Lakshmi Vilas Bank amalgamation), depositors could have accessed all of their deposits within a matter of a few days. Unity Small Finance Bank has just been brought to existence. If it pays out all the depositors immediately, it will have to start with a blank balance sheet.
Q6: Why didn’t RBI choose a bigger and stronger lender?
A: Well, there’s a couple of things to note here. PMC, at the end of the day, is NOT a scheduled commercial bank. As I’ve mentioned before, not all banks are same. Your deposits are much safer in a scheduled commercial bank (check the official list here) compared to a co-operative bank. Also apparently, PMC is not the only co-operative bank where depositors have had to wait for such a long time to access their funds. It was only on the aftermath of such a huge crisis that the Government amended the Banking Regulation Act to allow RBI greater control over co-operative banks.
Q7: So will the next co-operative bank fall be handled better?
A: No clue.
The biggest complaint from these amalgamations is that there’s no SOP (standard operating protocol). Absence of it allows the central bank to come up with a different solution each time. Some of them work, while some, like the PMC scheme, leaves everyone longing for more.
Q8: What about corporate deposits? Will they suffer the same fate as retail deposits?
A: Well, when it comes to a bank, the common depositor almost always gets a preference over institutional depositors, just like in this case. I’ve pictorially represented what happens to these:
Q9: Wait, what about the interest on these deposits?
A: No interest shall accrue on any deposit for a period of 5 years from the appointed date. Post that period, interest rate of 2.75% will accrue on eligible accounts (i.e. savings, not current accounts). Based on initial response on the draft scheme (RBI is accepting suggestions and objections up to 5.00 PM on December 10, 2021), there’s a small chance this might be rolled back. If lack of funds is an issue, we have Sucheta Dalal asking the hard questions.
According to her report, a few thousand crores of assets have been recovered by the Directorate of Enforcement from the Wadhawan family (the fraudulent promoter group that led to PMC’s collapse). RBI has not mentioned this in the draft scheme.
Q10: What’s next for Unity?
A: As far as the scheme details go, Unity doesn’t have to pay anything now. DICGC is paying the insured amount, to the tune of ₹3100 crore, to 8,80,000 depositors. Unity will however, have 20 years to repay this amount to DICGC.
In terms of employees, all 1,100 of PMC Bank will continue to remain employed with Unity, under the same remuneration and terms and conditions of service for a period of 3 years from the appointed date.
One of Unity’s biggest achievement, I feel, has been the ability to rope in ex-SBI chairman Rajnish Kumar as the Chairman of this merged entity. Rajnish has boatloads of experience:
40 years in SBI
Ramping up their digital arm YONO to what it is today
Managing the merger of Yes Bank with SBI
Unity is going to pitch itself as a technology-first merchant-focused bank. BharatPe has an extensive network of merchants (over 60 lacs) which it can ready tap into to offer small loans.
“We want to be technology first. People should get loans basis their numbers. The same philosophy we would like to translate into the bank as well.” - Ashneer Grover, in an interview to Moneycontrol
That’s it for this week.
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