The Reserve Bank of India on Monday released a draft proposal of a merger between Punjab and Maharashtra Co-operative Bank (PMC Bank) and Union Small Finance Bank (USFB).
The USFB is promoted by Centrum Financial and BharatPe, and got its banking license from November 1. According to the draft, the merger of UFSB and PMC Bank will take place according to the latter's books as on November 22. The central bank has invited comments on the merger from the public till December 10, after which a final call will be taken on the amalgamation proposal.
Depositor funds
The amalgamation scheme means good news for PMC's depositors as they are likely to get their money back in its entirety. According to the draft prospectus, they will get it back during a period ranging from three to ten years from an appointed date, which will be specified by the Government of India in due time, depending on the assets that they have with PMC Bank.
Here's how the proposed breakdown is:
- Initially, the bank (the acquiring bank) will pay ₹5 lakh guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which insures bank accounts in India
- Above this, the bank will pay up to ₹50,000 at the end of two years.
- It will pay up to ₹1 lakh at the end of three years
- It will pay up to ₹3 lakh at the end of four years
- The bank will pay ₹5.5 lakh at the end of five years
- The remaining will be paid at the end of 10 years
However, interest on interest-bearing deposits will not accrue beyond March 31, 2021.
Also Read: Explained: Your Bank Deposits Are Insured Up To Rs 5 Lakh
Institutional depositors will get their share too. 80% of the uninsured deposits to the credit of these depositors will be converted into perpetual non-cumulative preference shares of USFB, with a fixed dividend of 1% annually. After 10 years from the appointed date, USFB may consider adding benefits to these preference share holders. To clarify, the owner of these non-cumulative preference shares are entitled to a fixed dividend from the company's profits every year not available to ordinary shareholders. However, in case the company does not make profits in a particular year, these shareholders cannot claim dividend from future profits.
The remaining 20% shall be converted into equity warrants of ₹1, which will be converted into full equity when USFB goes in for an IPO.
The draft also includes clauses with respect to the existing employees of PMC Bank. According to this, all employees of the bank will be entitled to service of three years at the same compensation as they were receiving before.
If the merger goes through, it would provide a huge relief to depositors of PMC Bank. The bank has been under a moratorium since September 2019 since the RBI deemed it to be financially unstable for being the vehicle for fraudulent transactions and fictitious lending to Housing Development and Infrastructure Limited, a now defunct NBFC. The depositors of the bank were left in the lurch, since PMC Bank was under continuous moratorium, but was not liquidated, while prevailing deposit insurance provisions required banks to be liquidated for depositors to benefit.
However, the government amended this provision during this year's Monsoon Session of Parliament, thereby allowing extension to those depositors whose funds are stuck with banks under moratorium or restrictions.
While depositors of PMC Bank had to wait for a long time for a possible resolution, other banks like Yes Bank (March 2020) and Lakshmi Vilas Bank (November 2020) - who went under RBI moratorium after PMC Bank - were dealt with swiftly and have long been resolved.
Find the proposal here.