Explained: For PMC Bank depositors, restrictions on access to funds, interest

What is RBI's scheme for PMC Bank depositors? What are the restrictions, and what happens to other deposits? 

In a setback to depositors of the Punjab and Maharashtra Cooperative (PMC) Bank, the Reserve Bank of India, in its draft scheme of amalgamation of the bank with Unity Small Finance Bank Ltd (USFB), has placed multiple restrictions on access to deposits beyond Rs 5 lakh that depositors can receive from the Deposit Insurance and Credit Guarantee Corporation (DICGC). Also, no interest will be payable on interest-bearing deposits in the transferor bank (PMC Bank) for five years.

The RBI has, however, invited suggestions and objections until December 10 from members, depositors and other creditors of the transferor bank and transferee bank (USFB).

What is the scheme?

The scheme of arrangement states that depositors of PMC Bank will receive up to Rs 5 lakh (depending upon the balance in their account) from DICGC in accordance with the rules. However, those with higher deposits in PMC Bank will face restrictions. Retail depositors will have access to additional amounts up to Rs 50,000 at the end of two years from the appointed date, up to Rs 1 lakh at the end of the third year, up to Rs 3 lakh after four years, and up to Rs 5.5 lakh after five years.

Beyond this, they will receive no amount for the next four years. Only after 10 years will they receive the rest of their deposit.

What are the restrictions on interest?

After March 31, 2021, interest shall not accrue on any interest-bearing deposit with the transferor bank for five years. In respect of balance in any current account or any other non-interest bearing account, no interest shall be payable. An interest of 2.75% per year shall be paid on retail deposits of the transferor bank, which shall remain outstanding after five years from the appointed date.

What happens to other deposits?

From the appointed date, 80% of the uninsured deposits outstanding to the credit of each institutional depositor of the transferor bank shall be converted into Perpetual Non-Cumulative Preference Shares (PNCPS) of USFB with a dividend of 1% per annum payable annually. At the end of 10 years, the transferee bank may consider additional benefits for such PNCPS holders, either in the form of a step-up in coupon rate or a call option, after getting RBI approval.

The remaining 20% of the institutional deposits will be converted into equity warrants of USFB at a price of Rs 1 per warrant. These will further be converted into equity shares of USFB at the time of the Initial Public Offer.

In respect of every other liability of the transferor bank, USFB shall pay only the principal amounts, as and when due, to the creditors in terms of agreements entered between them prior to the appointed date.

What happened at PMC Bank?

After a fraud was detected, in September 2019, inspections showed complete erosion of capital and substantial deposit erosion of the bank. The RBI issued ‘All Inclusive Directions’ to the bank under Section 35A read with Section 56 of the Banking Regulation Act, 1949 (10 of 1949) with effect from close of business of September 23, 2019 to protect the interest of the depositors. It also superseded the bank’s board of directors on September 23, 2019 and appointed an administrator in its place. RBI then decided to prepare a scheme of amalgamation.

In February 2021, Centrum Financial Services Ltd as promoters, along with Resilient Innovation Pvt. Ltd as ‘joint investor’, expressed interest in acquiring PMC Bank through a suitable amalgamation scheme with a new small finance bank to be registered. On October 12, the RBI granted a licence to USFB Ltd, and it started transacting business from November 1. USFB has been set up with capital of about Rs 1,100 crore, with provisions for further infusion of capital.

What does it mean for fixed deposits?

Unlike equity and bond investors, bank depositors enjoy the highest levels of safety on their funds. However, there is an element of risk: If the bank collapses, there can be a delay in redeeming their FDs, they may not be able to withdraw beyond Rs 5 lakh, or they may face a write-down in certain cases. In recent times, depositors have faced trouble in getting immediate access to their funds in PMC, Yes Bank and Lakshmi Vilas Bank.

While the RBI puts in withdrawal restrictions to get time to stitch together a resolution plan for the failing bank, it can shake depositors’ faith in the banking system. To ensure funds are safe, a depositor with, say, Rs 15 lakh can park Rs 5 lakh each in three banks, giving full safety to the entire amount. For those with higher deposits, it’s better to put the money in large banks, as they usually have a more effective risk culture.

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What about deposit insurance?

Currently, in the unlikely event of a bank failing, a depositor can claim a maximum Rs 5 lakh per account as insurance cover. The cover is provided by the DICGC. Depositors with more than Rs 5 lakh have no legal recourse to recover funds if a bank collapses. Deposits in public and private sector banks, local area banks, small finance banks, regional rural banks, cooperative banks, Indian branches of foreign banks and payments banks are all insured by the DICGC. The premium is paid by banks to the DICGC, and is not to be passed on to depositors. Banks currently pay a minimum of 12 paise on every Rs 100 worth deposits to the DICGC as premium for the insurance cover.

Last year, the government raised the insurance amount to Rs 5 lakh from Rs 1 lakh.

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