RBI has issued a draft scheme for the merger of PMC Bank with Unity Small Finance Bank; PMC depositors will be paid in full over a ten-year period.

RBI has issued a draft scheme for the merger of PMC Bank with Unity Small Finance Bank; PMC depositors will be paid in full over a ten-year period. On November 22, the Reserve Bank of India made a draught scheme for the merger of the Punjab and Maharashtra Cooperative (PMC) Bank and the Unity Small Finance Bank public (USFB). The proposal envisions USFB taking over PMC Bank's assets and liabilities, including deposits, in accordance with the scheme's requirements, providing better security for depositors. "It can be seen that USFB is being set up with capital of around Rs 1,100 crore as against a regulatory requirement of Rs 200 crore for setting up a small finance bank under the guidelines for on-tap licensing of small finance banks in the private sector dated December 5, 2019, with provision for further capital infusion at a later date after amalgamation," the RBI said. According to the draught scheme, Unity Small Finance Bank issued equity warrants worth Rs 1,900 crore to the promoters on November 1, 2021, which can be exercised at any moment throughout an eight-year period. The RBI has extended the deadline for comments on the draught scheme till December 10. After that, a final decision will be made, according to the statement. When will depositors at PMC Bank receive their funds? According to the draught scheme of merger, depositors of Maharashtra-based PMC Bank will get their money back over a three to ten-year period. As a result, the acquiring bank will pay depositors up to Rs 5 lakhs in DICGC-guaranteed funds. The bank will pay up to Rs50,000 in addition to the payment already made at the end of two years, up to Rs one lakh at the end of three years, Rs three lakhs at the end of four years, Rs 5.5 lakhs at the end of five years, and the total remaining amount at the end of ten years. "No further interest will be due on the interest bearing deposits of the transferor bank for a period of five years from the appointed date," the RBI said. According to the proposal, no interest will be paid to account holders on balances in any current account or other non-interest bearing account. For institutional depositors, it is suggested that 80 percent of uninsured deposits outstanding be converted into Perpetual Non-Cumulative Preference Shares (PNCPS) with a one percent annual dividend payable yearly on and from the appointed date. "Upon receipt of Reserve Bank permission, the transferee bank may consider further incentives for such PNCPS holders after ten years from the designated date, either in the form of giving a step up in coupon rate or a call option," the scheme suggests. Furthermore, the scheme stated that all employees of the transferor bank shall remain in service for a period of three years from the appointed date on the same compensation and terms and conditions of employment. What happened next ? With effect from the close of business on September 23, 2019, Maharashtra-based PMC Bank was placed under business limitations, and the RBI superseded the bank's board of directors due to fraud, causing the bank's net worth to plummet. The bank was discovered to have been conducting fraudulent activities for several years in order to ease lending to HDIL through bogus accounts and in violation of single-party lending laws. Real estate firm HDIL had taken over 70% of its total loan book of Rs 8,383 crore as of March 31, 2019. PMC Bank has total deposits of Rs 10,727.12 crore, total advances of Rs 4,472.78 crore, and gross nonperforming assets of Rs 3,518.89 crore as of March 31, 2020. The bank's share capital was Rs 292.94 crore at the time. In 2019-20, the bank made a net loss of Rs 6,835 crore and had a negative net value of Rs 5,850.61 crore. On June 18, the RBI announced that it has decided to provide Centrum Financial Services in-principle clearance to establish a small financing bank. "This in-principle clearance has been granted in response to Centrum Financial Services Limited's offer dated February 1, 2021, in response to the Punjab & Maharashtra Co-operative Bank Ltd., Mumbai's Expression of Interest notification of November 3, 2020," the RBI stated. The central bank last extended the directives on June 25, extending them through December 31, 2021. "Given the PMC Bank's financial situation and the lack of capital infusion plans, the bank was not viable on its own." In that case, the RBI said, "the sole course of action would have been to cancel its license and liquidate it, with depositors receiving payout up to the insurance ceiling of Rs 5 lakh."