Money & Banking

PMC Bank depositors dismayed by move to deny them interest

K Ram Kumar Mumbai | Updated on November 23, 2021

File image of PMC Bank depositors protesting outside the troubled bank’s branch in Mumbai   -  PTI

Question RBI’s rationale for clause in bank’s draft scheme of amalgamation

Distraught depositors of the scam-hit Punjab and Maharashtra Co-operative (PMC) Bank have a simple question for the Reserve Bank of India (RBI): “How can a bank take a deposit and not pay interest on it?”

They are irked by a clause in the draft scheme of the bank’s amalgamation with Unity Small Finance Bank (transferee bank) that says, “no further interest will be payable on the interest-bearing deposits of transferor (PMC) bank for a period of five years from the appointed date”.

The clause appears at odds with the Reserve Bank of India (Interest Rate on Deposits) Directions, 2016.

PMC’s 1,100 employees can heave a sigh of relief

The master direction says that scheduled commercial banks (SCBs) cannot “accept interest-free deposit other than in current account or pay compensation indirectly”.

Co-operative banking experts opine that the treatment of bank depositors should be evenhanded, irrespective of whether it is an SCB or a scheduled urban co-operative bank.

‘Sweetener for transferee’

S Ravi, Founder and Managing Partner of the chartered accountants firm Ravi Rajan & Co. LLP, said: “It is a sweetener for the transferee bank, giving it access to interest-free cash flow for five years.

“In the case of Yes Bank and Lakshmi Vilas Bank, the bondholders lost their money. Similarly here, the depositors are losing interest. Probably, this is also a way to discourage people from coming into co-operative banks.”

The RBI may have to revisit the “no further interest” clause in the scheme of amalgamation due to its master direction.

According to the RBI’s interest rate framework, SCBs shall pay interest on deposits of money (other than current account deposits) accepted by them or renewed by them.

PMC depositors with over ₹5 lakh disappointed with draft scheme

Further, the interest rates shall be reasonable, consistent, transparent and available for supervisory review or scrutiny.

Chander Purswani, President, PMC Depositors Forum, said depositors felt shortchanged and would submit their objections to the RBI.

He observed that the 10-year period prescribed for withdrawal of large retail deposits from Unity SFB was too long and suggested halving it.

Red flag and after

As at March-end 2021, PMC Bank had deposits aggregating ₹10,535 crore. Of this, about 70 per cent are retail deposits and the rest are institutional deposits, including other urban co-operative banks (216) and co-operative societies (1,750).

PMC Bank came to grief in 2019 as its high exposure to real estate company HDIL turned non-performing.

The central bank red-flagged the fraud and/or financial irregularities in the bank and the manipulation of its books of accounts.

In October 2021, the RBI granted a banking licence to Unity SFB, established jointly by Centrum Financial Services Ltd (CFSL) and Resilient Innovations Private Limited (BharatPe), to carry out SFB business in India.

The RBI had on June 18, 2021, given an “in-principle” approval to CFSL, a wholly-owned subsidiary of Centrum Capital Ltd, to set up an SFB.

The “in-principle” approval was specific to CFSL’s February 2021 offer in response to PMC Bank’s November 2020 expression of interest (EoI) notification.

Unity SFB commenced operations on November 1, 2021.

Published on November 23, 2021

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