Depositors bailed-in

The Reserve Bank of India’s attempt to cobble together a formal resolution plan for the ailing Punjab and Maharashtra Co-operative Bank (PMC), by proposing a draft scheme of amalgamation with Unity Small Finance Bank, is unlikely to go down well with with depositors and shareholders. The draft plan on which public comments are due by December 10, envisages haircuts for both shareholders and institutional creditors, while depositors are being subjected to contentious ‘bail-in’ provisions.

The scheme proposes that all liabilities and assets of PMC Bank, after a revaluation exercise, be transferred to Unity SFB, a newly incorporated bank promoted by Centrum Financial Services and Resilient Innovation. Creditors are expected to take partial haircuts, which is acceptable. PMC shareholders, as has come to be expected in bank bailouts, are expected to take complete write-offs. In a first for a bank bail-out, PMC Bank’s depositors are being segregated into retail and institutional categories for differential treatment. Retail depositors will receive payments for insured deposits up to ₹5 lakh with sums beyond this subject to staggered repayments stretching on for 10 years or more. Given that depositors have already suffered withdrawal restrictions on their money since September 2019, this seems an unkind cut. No interest will be paid on these deposit dues in the next five years. Institutional depositors are expected to forego their dues almost completely, with 80 per cent to be converted into Perpetual Non-Cumulative Preference Shares bearing 1 per cent dividend and the remaining into equity warrants. The retail depositor repayment plan has many imponderables. Unlike other bank bail-outs where deposit liabilities were taken over by an established bank, PMC Bank’s operations are being transferred to a newly licensed entity. Unity SFB’s initial capital base at ₹1,100 crore, appears small in relation to the liabilities it is acquiring (PMC’s last reported deposit base was at over ₹10,000 crore) and this raises questions about its ability to stick to its repayment schedule. This begs the question of why PMC Bank’s depositors, who are providing Unity SFB with CASA to kick-start its operations, must forfeit interest and suffer long lock-ins.

Overall, RBI’s attempt to introduce some transparency and structure to the resolution of failed co-operative banks with a public consultation process, is to be lauded. In the past, a majority of co-operative banks were simply liquidated with depositors left in the dark about the settlement of their dues. But PMC Bank depositors would still be getting a raw deal compared to their peers in failed commercial banks which have seen full protection of their rights post-bailout. Given that it is not just the depositors’ chase for high returns, but also supervisory failure on the part of the State and the regulator that contributed to PMC Bank’s downfall, it appears fair that RBI retain an open mind on altering this draft scheme to offer better terms to retail depositors.

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