Explanation: As Centrum buys PMC Bank, will depositors get their money back?
Updated: Jun 19, 2021 6:53:27 PM
The Reserve Bank of India (RBI) on Friday granted Centrum Financial Services Ltd (CFSL) approval “in principle” to create a small finance bank (SFB), paving the way for take control of the scam-infested Punjab and Maharashtra Co-operative (PMC) with its partner BharatPe, a digital payment company.
At present, PMC depositors are eagerly awaiting the details of the program and hope to finally get their money back.
So, will PMC depositors get their money back?
While the RBI paved the way for a Centrum and BharatPe joint venture to take over the ailing PMC Bank, the central bank has not disclosed details of the proposed PMC Bank acquisition. If past cases of bank mergers are valid, depositors at PMC Bank will likely end up getting the blocked money back in the form of term deposits.
However, banking experts say that while the RBI is used to fully securing depositors in such cases, reimbursement to depositors will depend on the plan agreed between the RBI and Centrum-BharatPe. The main issues are whether the RBI will allow Centrum to convert part of the liabilities (deposits) into equity or whether investors will only recover the insured amount from the Deposit Insurance and Credit Guarantee Corporation (DICGC ). “While the heart of this acquisition is to protect the interests of depositors, one would expect depositors to make certain sacrifices. This is a rare case where an NBFC acquires a bank, but it is the only way to go 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 depositors expect from this acquisition?
Abhizer Diwanji, partner and national leader in financial services, EY, said there are two possibilities when it comes to paying depositors. Depositors may need to have their hair cut or be required to accept a deferred payment. “In this case, a lot depends on the deal negotiated between RBI and Centrum-BharatPe. First, the bank’s equity will be written off and after deducting equity, if the bank’s realizable net assets are greater than the net liabilities, then all depositors will be guaranteed. But if the bank’s net assets are less than the net liabilities, depositors will be guaranteed to the extent of the DICGC regime of Rs 5 lakh. So, if a depositor has deposits over Rs 5 lakh, he may need to write off the balance or get deferred payments depending on the deal Centrum-BharatPe negotiated with RBI, ”Diwanji said.
Until now, the RBI has been used to fully guaranteeing the interests 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 bank’s EOI last year, investors looking to acquire will ideally need to bring in the capital required to enable the bank to meet the required minimum risk-weighted capital-to-risk ratio (CRAR) of 9%. “However, investors can explore the possibility of restructuring part of the deposit liabilities / equity instruments. The bank can also approach the DICGC for its support in paying up to Rs 5 lakh (insured deposits) to depositors, ”said the EOI.
Depositors are concerned about these terms and conditions. If the new owners convert the deposits into capital or only repay up to Rs 5 lakh insured with the DICGC, the depositors will lose. The listing of the new small financial bank on the stock exchanges will take a few years.
What is the current financial situation of the bank?
PMC Bank has total deposits of Rs 10,727.12 crore and total advances of Rs 4,472.78 crore. It has gross non-performing assets (NPA) of Rs. 3,518.89 crore as of March 31, 2020. The bank’s share capital is Rs 292.94 crore. However, the bank recorded a net loss of Rs 6,835 crore in 2019-2020 and has a negative net worth of Rs 5,850.61 crore. When the RBI sacked the board of PMC Bank in 2019, it initially imposed a deposit withdrawal restriction of Rs 1,000 per account, which was later raised to Rs 50,000. About 78 percent of depositors have since been allowed to withdraw their deposits up to the withdrawal limit of Rs 50,000. Although this limit was further increased to Rs 1 lakh in June of last year, many depositors who have larger amounts parked at the bank are still not able to get their money back.