CFSL as new SFB and PMC Bank Depositors
CFSL as new SFB and PMC Bank Depositors
CFSL: CFSL is a step down subsidiary of Centrum Capital Ltd (CCL). From its website, it is in the business of lending to MSMEs. It acquired L&T Finance in 2018, which had an assets under management (AUM) portfolio of Rs.650 cr. The AUM of CFSL as on 31.03.2021 is around Rs.900 cr. (Rs.823 cr. is given as loans). The assets are supported through equity at Rs.302 cr. and debt securities/borrowings at Rs.753 cr. Its revenue from operations in the last two years is averaging at Rs.140 cr. and net profit for FY2020-21 was Rs.2 cr. (Rs.8 cr last FY). The debt security and bank borrowings are rated BBB (investment grade) (down graded from A- in Sep 20)
Fresh
Equity: CCL
said they will bring in Rs.500 cr on day 1 and raise Rs.900 cr. in the first
year. But whether this will be sufficient to meet the claims of the depositors
of PMC Bank?
Liabilities of PMC Bank: As per audited financials as on 31.03.2021, the liabilities (Rs.11297 cr.) of PMC Bank are in excess of its assets (Rs.8506 cr.) by Rs.2791 cr. Immediately realisable assets aggregate Rs.3,076 cr. (Cash, Bank balances and Investments).
Then how the claims of depositors will be met? It will be a tall order for the new SFB to meet the claims of the depositors (Rs.10000 cr. plus) with the internal accruals of CFSL and the new equity of Rs.500 cr. to be brought in on Day 1. However, the EoI issued by PMC Bank and how the claims depositors of co-operative banks were met in the past, probably suggest the likely solution.
As per EoI issued by PMC Bank, (i) the investors may explore the option of restructuring a part of deposit liabilities into capital/capital instruments and (ii)The bank may also approach DICGC for its support for payment up to Rs.5,00,000(Rupees Five lakh only) (insured deposits) to depositors”
Past Merger: South Indian Co-operative Bank (SICB) was merged with Saraswat Bank in 2008. In respect of deposits held up to Rs.1 lac, which were insured under DICGC at that time, Saraswat Bank undertook liability up to 65% and DICGC paid the balance 35%. For deposits above Rs.1 lac, Saraswat Bank settled 65% of the deposit from the proceeds of immediately realisable assets. (DICGC will pay only if the settlement paid by Saraswat Bank was less than Rs.1 lac). The balance will be paid, if the recoveries from the remaining assets of erstwhile SICB exceed the amount paid by DICGC and Saraswat Bank. In effect, depositors holding money in excess of insured amount of DICGC, faced a hair-cut of up to 35%.
One
Possible Scenario:
1.
Customers holding
deposits upto Rs.5 lacs, may continue their deposits in the new entity, if they
so desire. However, if they want to
close, their claims upto Rs.5 lacs will be fully paid. Of the above, claim sharing ratio (loss) between the new SFB and DICGC depends on the readily saleable
asset portfolio of PMC Bank and the amount that shall be committed by the new
SFB in the scheme of amalgamation towards meeting the claims of the depositors of PMC Bank.
2.
Customers holding
deposits above Rs.5 lacs, may get a part of the deposits (above Rs.5 lacs) as
cash from the readily saleable assets of PMC Bank and the amount
committed by the new SFB towards the claims of depositors. (The claim share ratio
of the new SFB with DICGC in deposits up to Rs.5 lacs might be the percentage
of cash that will be committed to depositors above Rs.5 lacs). For the balance amount payable to these depositors, the bank might offer new equity/Tier I/Tier II
Bonds on terms and conditions that might be outlined in the scheme of
amalgamation.
Under
the above scenario, the depositors may not face any hair-cut per se, as the
amount not paid in cash is also converted into equity/Tier-I/Tier-II Bonds.
While
depositors of Yes Bank and LVB, SCBs, were fully
protected with the reconstruction and merger plans respectively, depositors holding
balance above Rs.1 lac with SICB, a cooperative bank faced haircuts, when it was merged with
Saraswat Bank. What is in store for the
customers of PMC Bank holding deposits above Rs.5 lac? We will wait for the
scheme of amalgamation of PMC with the new SFB, to be operationalized within
120 days
21st
June 2021
SWISS CHALLENGE METHOD COULD HAVE BEEN ADOPTED AND OTHER CONCERNS
Business Line dated 22nd June 2021 reported my observation "RBI could have tried *SWISS CHALLENGE* method for the proposed amalgamation /merger of PMC Bank, giving an opprtunity to other NBFCs to better CFSL's bid" Some of my friends wanted to explain this aspect in this article. My above article was confined to what might be in store for PMC depositors. Inserting my views on Swiss Challenge method into the article might confuse the reader. So, I give below my reasoning on this aspect separately as under: CCL - Some anxieties:
1. Concerns:
Though CCL, the holding company is in existence since 1997, its entry into micro credit, msmes and affordable housing lending activities started in a significant way only since 2017. CFSL acquired the current scale only after taking over L&T Finance assets of Rs.650 cr. in 2018. It is not clear whether the businesses of micro credit, affordable housing now carried thro other subsidiaries will be subsumed into the new SFB, as they are prime activities for a SFB. A point of concern is also CCL has 17 subsidiaries engaged in different financial services . Incidentally it has an International subsidiary for fund services to investors. Related party transactions, keeping arms length when dealing within the group are some important concerns that should be addressed clearly and in a transparent way from the beginning of commencing the SFB.
When the amalgamation scheme comes into effect, with large scale withdrawals from depositors, the total business of PMC Bank, which is 15000 cr plus now, is likely to be reduced to a few thousand cr. At that time, managing the fixed expenses viz. operating expenses involving staff, branches, ATMs, centralised computersation, etc. will involve recurring expenditure without revenue back up. Whether this can be met by the new SFB with the propsed equity as it will be quite some time before deposits accrue for lending activities.
2. What would have happened had RBI followed Swiss challenge method
An imaginary situation
- CFSL assess that 3000 cr can be realised immediately. 500 cr fixed assets are available. Liab to depositors 10500 cr.
- Based on the above it offers that 35% of depositors' claim woll be met by them. Means DICGC loss will be 65% for deposits upto 5 lacs. Deposiotrs above 5 lacs will get 35% cash for bal above 5 lacs. Balance either a loss or will be converted into equity/bonds.
- Under Swiss Challenge, this will become the base quote. Since 100 branches, computerised environment and experienced staff are available, a bigger NBFC might offer to meet 40% of depositors liability. Some other cash rich NBFC or who is desperate to enter Maharashtra may offer 50%.
- Since CFSL is the original bidder, it will be asked to match the counter offer. If it is not able to match, the bid will go the new bidder.
- Any improvement in the offer thro swiss challenge method -brings down the amount to be met by DICGC for claims upto 5 lacs and - increases the cash component for depositors holding above 5 lacs. It is win-win for DICGC as well as depositors.
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