On 22 November 2021, a scheme of rehabilitation of the Punjab and Maharashtra Cooperative (PMC) Bank has been put out for public comments by the Reserve Bank of India (RBI). The depositors, who were desperately waiting for justice, have been shell-shocked by the terms of the new plan.
They have been in the wilderness for well over two years and now realise that they have reached a dead-end with RBI’ scheme, with only an open well for them to jump into!
These depositors, who had their life time savings stuck in the Bank, have been borrowing money at usurious rates to conduct marriages in the family and meet medical expenses. The overlap of the pandemic during this period literally drove many, who thought they had their savings to help them in hard times, to the streets.
The scheme is analysed clinically later but the headline shocker is that a deposit, which is in excess of Rs5 lakh is not payable immediately; a deposit of say Rs10 lakh will take four years to get redeemed; and a deposit of say Rs25 lakh will be liquidated over 10 years only.
The injustice is not limited to the elongated period but made worse many times over with no interest being paid for the first five years and a piddly 2.75% interest per annum thereafter!
To rewind to the forgettable history of this sordid case-
PMC Bank became illiquid to repay its maturing deposits sometime in September 2019 and RBI stepped in to put a freeze on withdrawals beyond the specified limit of Rs50,000 and later Rs1 lakh, leaving most of its 900,000 depositors in the lurch.
The Bank, which had produced a very healthy balance sheet signed by its auditors on 9 September 2019, within a matter of a few days, collapsed like Humpty-Dumpty had a great fall!
The Bank’s management had colluded with a real estate company that had an incestuous relationship at the promoter level. It camouflaged its financial position for many years and finally became unstuck when the concerned promoter was booked in a major fraud and manipulation in the real estate company.
Neither the department of the central registrar of cooperatives in New Delhi, the nodal agency, nor the local department in Maharashtra overseeing the cooperatives had the vaguest clue of what had happened. They continued to exist in their safe enclosures in air-conditioned comfort, leaving the desperate depositors dejected on the streets.
As of March 2019, the Bank’s accounts showed a net worth of over Rs1,200 crore and a deposit base of about Rs12,000 crore, of which about Rs9,300 crore was in term deposits. There is no break-up of the portion pertaining to the individual depositors.
The amounts involved being no small change, and while RBI escaped by virtue of the cooperative sector not being under its vigilance, its culpability to not have anticipated due to oversight, a calamity like this in leaving the cooperative banking sector, which almost accounted for about Rs15 lakh crore of the deposit base, is an issue that has been little talked about.
Against this background, the regulator had a job on hand to resolve the tangle and the scheme announced on 22nd November, which was much awaited by all the affected parties, is projected as a solution. This is like band-aid to treat multiple fractures!
A new entity named Unitus Small Finance Bank Ltd, a special purpose vehicle (SPV) created by an interested investor, acquires the business of PMC Bank from an appointed date to be notified.
While the compulsions of an investor are obvious when he comes to take over a bank that has potentially a book with non-performing assets (NPAs) of over 70%, the terms are extremely adverse to the depositors and, more worryingly, couched in a complex language that can be a challenge even to an experienced lawyer or an accountant to make sense of!
The regulator has miserably slipped in making the terms of the takeover, especially the manner of settling the depositors, transparent and easy to comprehend by a lay depositor.
The picture created, of the deposits getting fully paid, is patently misleading. To imagine a premier regulator resorting to camouflage is most obscene!
The relevant clauses of the terms of repayment of the non-institutional depositors are extracted for ready reference.
(c) The transferee bank will pay –
(I) the amount received from the Deposit Insurance and Credit Guarantee Corp (DICGC) to all the eligible depositors of the transferor bank, which would be an amount equal to the balance in their deposit accounts or Rs5 lakh, whichever is less, in accordance with the rules of distribution of such amounts;
(II) at the end of two years from the appointed date, over and above the payment already made, an additional amount equal to the balance in their deposit account or Rs50,000, whichever is less, on demand only to the retail depositors of the transferor bank,
(III) at the end of three years from the appointed date, over and above the payments already made, an additional amount equal to the balance in their deposit account or Rs1 lakh, whichever is less, on demand only to the retail depositors of the transferor bank,
(IV) at the end of four years from the appointed date, over and above the payment already made, an additional amount up to the balance in their deposit account or Rs3 lakh, whichever is less, on demand only to the retail depositors of the transferor bank.
(V) at the end of five years from the appointed date, over and above the payment already made, an additional amount up to the balance in their deposit account or Rs5.50 lakh, whichever is less, on demand only to only the retail depositors of the transferor bank.
(VI) the entire remaining amount of deposits (after making payment as mentioned in clause (I), (II), (III), (IV) and (V) above in the accounts of the retail depositors of transferor bank after 10 years from the appointed date, on demand. (d) The interest on any of the interest-bearing deposits with the transferor bank shall not accrue after 31 March 2021 except in the manner provided hereunder. No further interest will be payable on the interest bearing deposits of transferor bank for a period of five years from the appointed date.
In respect of balances in any current account or any other non-interest bearing account, no interest shall be payable to the account holders, Provided further that interest at the rate of 2.75% per annum shall be paid on the retail deposits of the transferor bank which shall be remaining outstanding after the said period of five years from the appointed date. This interest will be payable from the date after five years from the appointed date.
The convoluted conditions are not sought to be paraphrased or explained in simpler terms, apparently to save space.
In a nutshell, a deposit above Rs5 lakh that does not enjoy the cover of DICGC is paid in instalments over a period of 10 years. No interest would accrue for the first five years and interest at 2.75% per annum is payable from the expiry of the fifth year only.
This structure is a commercially driven way of funding the acquisition for the investor in an optimal manner. But, in essence, it is a disguised way of making the depositors bleed in an unspecified fashion.
In a simple example of a depositor with Rs25 lakh of deposit outstanding, the formula given in the scheme results in a financial loss of about Rs7 lakh over the 10 years assuming that the depositor could have earned interest at 7% per annum on the outstanding amount.
Is it not a subterfuge to create a false impression that the deposits are finally repaid in full with no loss? It would have fallen foul of the regulator’s own rules if a commercial bank or a non-banking finance company (NBFC) were to advertise a scheme of a similar nature seeking deposits on these terms of repayment stating that it is a capital guaranteed scheme!
The right way is to rewrite the value of the deposits by applying the assumed commercial internal rate of return (IRR) applicable to its tenure, the bank’s credit rating, and other factors that influence the interest rate. For example, a private bank, which is almost a hundred years old having A- rating for its Tier-1 bonds, raised money some months ago at 13.75% per annum (pa)!
Readers may work out the revised value of the deposit of Rs25 lakh assuming an IRR of 13.75% and discover that more than half the value of the deposit suffers a hair-cut!
Another lacuna is that the appointed date of the scheme has not been decided. However, no interest accrues on deposits after 31 March 2021! Add some more discounting to the equation!
The institutional deposit-holders have the most outlandish dispensation. The condition is extracted below:
On and from the appointed date, 80% of the uninsured deposits outstanding (aggregate in various accounts) to the credit of each institutional depositor of the transferor bank shall be converted into perpetual non-cumulative preference shares (PNCPS) of transferee bank with a dividend of 1% per annum payable annually.
After ten years from the appointed date, the transferee bank may consider additional benefits for such PNCPS holders either in the form of providing a step-up in coupon rate or a call option, upon receipt of approval from the Reserve Bank.
(f) The remaining 20% amount of the institutional deposits will be converted into equity warrants of transferee bank at a price of Re1 per warrant. These equity warrants will further be converted into equity shares of the transferee bank at the time of the initial public offer (IPO) when the transferee bank goes for public issue. The price for such conversion will be determined at the lower band of the IPO price.
If a student of accountancy in standard 11 in any school, public or private, is given a problem to ascertain the implications of an investor swapping, say, a Rs10 crore deposit on the above terms, except those who are sentimental and superstitious where a Re1 value will be considered, the right answer would be zero for the intended terms of this scheme!
To further expand on the matter and bring out the anomality of this structure, it is questionable if preference shares can be perpetual. A typical company cannot issue such an instrument. The most outlandish step is to fix a coupon rate of 1%, which does not reflect any prevailing rate in the Indian financial markets where even government borrowings are 6%+!
To cap it all, the clause that the acquirer can, at its option, give some benefits to the PNCPS holders after 10 years, is most ill-fitting in a document like a merger or an acquisition scheme. It is like writing a legal document that one of the parties can do something at its will and pleasure!
Clearly, the regulator has been very poorly guided and advised in this matter, and if this is the standard of application of the mind on such an important issue, the public needs to be realistic on what to expect from this agency!
It should be examined by lawyers whether this document is at all done with the seriousness it deserves and the institutional depositors who are affected should take it up in litigation to challenge the arrangement.
This structure is seen smuggled from the case of two famous NBFCs that belonged to two pedigreed business groups that had gone bankrupt in the 1990s and were merged into a top private bank as a face-saving measure to avoid liquidation!
The PMC Bank scheme has very poor disclosures of assets like cash balance and government securities that are key to any bank’s functioning. As of 31 March 2019, the Bank had cash of Rs708 crore, balance with scheduled banks of Rs409 crore and government and other securities of over Rs3,000 crore. Isn’t it essential in public interest to amplify how the valuation has been done to justify the present terms of paying the depositors?
Overall, the standard of disclosure in the draft scheme falls far short of what a private enterprise is obligated under the SEBI (Securities and Exchange Board of India) rules if it was to carry out a merger scheme. Considering many depositors are uninformed of commercial and financial niceties, the regulator comes out in the poorest light in this instance, and the belated step to assume jurisdiction over these cooperative banks after sleeping over the problem for ages doesn’t count for a responsible response in itself.
Most importantly, there is no guarantee of any sort that money will be returned in the stated period. Small finance banks don’t have a tested business model and, given the volatility in the financial sector, 10 years is too long to assume that the Bank will exist as it is. It can transform in an acquisition or merger and the new owner will not be bound by these terms.
To protect against any contingency where the repayments can get threatened, the scheme should provide that the ownership can be changed only when all the dues have been cleared.
It is important that the financial press should squeal in support of the depositors and seek the scheme to be changed to reflect the truth. It is also necessary that the new bank acquiring is made to keep a sufficient amount in government securities to repay the depositors and waive the statutory liquidity ratio (SLR) condition.
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(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)