PMC Depositors and Employees
Amalgamation of PMC Bank with Unity SFB:
Whether depositors and employees of PMC protected?
RBI placed in public domain a draft scheme of amalgamation of The Punjab and Maharashtra Cooperative (PMC) Bank with Unity Small Finance Bank Ltd. (USFB). The regulator appear to specialise in being different each time, when reconstruction/ amalgamation schemes are announced for rescuing depositors and employees of ailing banks.
The reconstruction plan of Yes Bank, a private sector bank, was carried out protecting all depositors, equity share holders, employees and other creditors with the exception of Tier-I Bond holders, whose claims were written off. In the case of LVB, a private sector bank again, its depositors, employees and other creditors were protected, but the claims of equity shareholders and Tier-II bond holders were nullified. In the case of South Indian Co-operative Bank (SICB) (merged with Saraswat Bank), while depositors holding money up to Rs.1 lac were fully paid, those who held money in excess of Rs.1 lac had a haircut of 35%.
Salient features of the draft scheme are as under:
I. Depositors’ Claims:
(i) The depositors are categorised into
- “retail depositors” (depositors who hold deposits in the bank in their individual capacity, either singly or jointly with other individual(s) and include proprietorship firms, partnership firms and Hindu Undivided Families (HUFs)) and - “institutional depositors” (corporations, companies, societies, Association of Persons, Trusts, and all other depositors who are not retail depositors)
(ii) All eligible depositors of PMC Bank (transferor bank) (in both the categories above), will be paid an amount equal to the balance in their deposit accounts or Rs.5 lacs, whichever is less, by the transferee bank (as received from DICGC)
(iii) Within five years from the appointed date (the effective date of amalgamation as may be specified by the Central Government), the retail depositors, on demand (to be made by them), will get an amount equal to the balance in their deposit account in excess of Rs.5 lacs or up to Rs.10 lacs, (over and above Rs.5 lacs already paid) whichever is less, from the transferee bank. (In instalments as specified in the scheme to be paid at the end of 2nd year, 3rd year and 5th year)
(iv) Retail Depositors holding deposits in excess of Rs.15 lacs (Rs.5 lacs from DICGC and Rs.10 lacs from USFB as defined above) will get their balance amount from USFB at the end of 10 years.
- 80% of their deposits will be converted into Perpetual Non-Cumulative Preference Shares (PNCPS) of transferee bank with dividend of one per cent per annum payable annually. After ten years, the transferee bank may consider additional benefits such as step up in coupon rate or call option, with due approval from the regulator.
(vi) No interest will accrue on the interest bearing deposits of the retail depositors after March 31, 2021. Any balance remaining to be settled after five years (depositors holding balance in excess of Rs.15 lacs) will be paid interest at the rate of 2.75 per cent per annum from the end of fifth year after the appointed date.
II. DICGC Right of Subrogation:
DICGC shall pay to the transferee bank the amount due to the eligible depositors (as on appointed date) of the transferor bank, in accordance with the provisions of the Deposit and Credit Guarantee Corporation Act, 1961 (Act 47 of 1961), and the Regulations made thereunder. Notwithstanding anything contained in the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (Act 47 of 1961) or any other law for the time being in force, the transferee bank shall have time up to 20 years from the appointed date, to repay the amount received from DICGC towards payment to the insured depositors, which can be done in one instalment or in several instalments. The transferee bank shall create a reserve account in its books and make periodical transfers to it as may be approved by Reserve Bank, for the purpose of discharging its liability towards DICGC in accordance with the provisions of this Scheme.
III. Employees of Transferor Bank:
All the employees of the transferor bank shall continue in service on the same remuneration and terms and conditions of service for a period of three years from the appointed date. They are entitled to the same remuneration and the same terms and conditions of service as are applicable to the other employees of corresponding rank or status of the transferee bank, after the expiry of the aforesaid three years, subject to certain conditions to be defined.
Interesting Issues: The draft scheme appear to protect the welfare of the employees and the terms are similar to other reconstruction/mergers carried out in the past. However, the scheme is different in settling the claims of the various depositors and also provides for full payment to DICGC in respect of claims settled by it over a period of time. Some issues that may arise on account of the variance in settlement include the following:
1. Depositors differentiated in settlement method chosen:
While no distinction is made in respect of eligible depositors, covered under DICGC cover, to get up to Rs.5 lacs, clear distinction is made between retail depositors and institutional depositors for getting the money not covered under DICGC. Retail depositors are entitled to get back their full money in excess of Rs.5 lacs, in instalments as per stipulated intervals from the transferee bank (USFB); however institutional depositors will be getting only PNCPS bonds and equity warrants in respect of their deposits, not covered under DICGC. At least a portion of the deposits held by institutional depositors (say 25% of deposits not covered under DICGC) could have been considered for cash payment and the balance converted into PNCPS/equity warrants.
2. Definition of Retail and Institutional Depositors looks arbitrary: Association of individuals, societies and trusts are generally for the benefit of individuals and are non-profit organisations. When proprietorship and partnership firms are reckoned along with individuals to be classified as retail depositors, the same benefit should have been made available to associations, societies and trusts, which are formed for the benefit of individuals defined in their bye laws.
2. Retail Depositors denied interest for more than 5 years for their deposits in excess of Rs.5 lacs: While interest bearing deposits up to Rs.15 lacs will not carry interest for retail depositors, any balance in excess thereof will carry interest at 2.75% from the end of 5 years, till the entire balance amount is paid at the end of 10 years. Depositors are crying foul, as they are denied eligible interest. But the retail depositors should feel satisfied that there are no haircuts to the principal amount, which was the case, when other co-operative banks were liquidated/amalgamated with another co-operative bank in the past. Of course, they remain unsecured and have to rely on the commitment in the scheme of amalgamation to be given by the transferee bank.
4. Dividend at 1% on PNCPS is too low: The bonds are perpetual and the chances of the same getting listed look remote. Only at the end of 10 years, the transferee bank may consider enhancement in coupon or a call option. As the money is locked in the books of the transferee bank permanently, redeeming after a period of 10 years is an uncertain event and is at the discretion of the issuer (with approval from the regulator), the dividend on the PNCPS should have been at least equivalent to the 10-year g-sec.
5. Tier II Bonds to be converted into PNCPS and equity warrants in 80:20 ratio: In the case of Yes Bank, Tier-I bonds were written off but the liability on tier-II bonds was continued. In the case of LVB, Tier-II bonds, though write off was not envisaged in the draft scheme announced, was written down based on the terms and conditions governing the bonds issue. Now PMC Tier-II bonds will be converted into PNCPS and equity warrants in 80:20 ratio; 80% of their money become perpetual bond and carry dividend at 1% as against the original tenor and coupon rate. The remainder issued as equity warrant may remain illiquid till USFB goes for an IPO. The question is - why RBI should give different treatment for Tier II bonds, each time?
6. Position of DICGC: While there is cheer for DICGC that the money settled towards the depositors of the transferor bank will be settled in full in twenty years time, the amount that have to be paid upfront will be huge and may well be the highest claim settled by the insurance company since its inception. It is also not clear, whether the realisation from the assets of PMC, on which DICGC holds the right of subrogation, will be settled immediately or the transferee bank will get the right to retain the money realised from assets account and transfer it in a different way.
USFB, the transferee bank, should be relieved, per se, as no cash needs to be paid upfront from its capital funds to depositors, as eligible depositors will get their claims settled by DICGC and it has a time limit of 2-10 years to settle the balance amount for retail depositors. As settlement for institutional depositors will be through bonds and warrants, no cash outlay is involved here as well. Operating expenses in the form of employee cost, branch and administrative overheads will be taken care of from the capital brought in. With the capital brought in, new deposits canvassed and nil NPAs in its books, it can concentrate on new business apart from following up with the stressed assets of the transferor bank for maximum realisation.
V.Viswanathan.
26th November 2021.
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