The Finance Ministry issued a gazette notification on January 25, 2022, and it pertains to Punjab Maharashtra Co-operative Bank Ltd (Amalgamation with Unity Small Finance Bank Limited) Scheme, 2022.
As per the scheme of amalgamation, which can into effective on January 25, all the assets and liabilities of erstwhile Punjab Maharashtra Co-operative Bank (PMC Bank) will be transferred to Unity Small Finance Bank (USF). This amalgamation has been arranged at the instance of Reserve Bank of India.
Earlier, after detection of certain instances of fraud by Housing Development and Infrastructure Ltd (HDIL) and its group companies in PMC Bank in September 2019 and the consequent inspections, the precarious financial condition, including complete erosion of capital and substantial deposit erosion of that bank, was revealed.
As this was considered as a case of management failure at the board level of PMC BankP the RBIR in exercise of the powers conferred under sub-sections (1) and (2) of section 36AAA read with section 56 of the Banking Regulation Act, 1949 (10 of 1949), superseded the board of directors of the bank on September 23, 2019, and appointed an Administrator in its place.
Now, the scheme of amalgamation has been put in place.
Bank failure is not something new in India. After the formation of Reserve Bank of India in 1935, up to the period of the country getting Independence (1947), there were 900 bank failures. From 1947 to 1969, 665 banks failed. The depositors of all these banks have lost their money.
Even after 1969, 36 banks failed but these were rescued by merging them with other government banks. This included even bigger banks like Global Trust Bank. Recently, we have seen the failure of old generation Lakshmi Vilas Bank and new generation YES Bank. In all these cases, the government and the RBI ensured payment to depositors.
But now this amalgamation of PMC with USF is done with a different prescription and apparently big individual depositors are going to get badly hit — not only in terms of not getting their deposit money in time but also on account of losing interest.
As per the scheme of amalgamation, depositors will be paid on the following terms: Based on DICGC settlement, ₹5 lakh will be paid now. Then, ₹50,000 each will be paid at the end of first and second years. And, ₹1 lakh after three years, ₹2.5 lakh after four years, and ₹5.5 lakh after five years. The balance, over and above the ₹15 lakh, will be paid after 10 years.
Importantly, no interest will accrue on these deposits for the first five years. This means, it is interest-free deposit for the USF.
On the face of it, it may look like the depositors are going to get back their deposits after a time gap. But a closer look will reveal the amount of loss the depositors are going to take.
Present value
Money has time value. Today’s money and tomorrow’s money are not the same. To know the present value of future receipts, we may have to take into account a discount for the same. Assuming a nominal interest of 6 per cent, the present value of ₹50,000 the depositor is going to get after a year is worth ₹47,169 today.
In the same way, the ₹5.5 lakh which the depositor is going to get after five years will be worth only ₹4,10,992 (present value). This working is based on annual interest payment, whereas term deposits are actually paid quarterly interest. From this, one can imagine the loss to the depositors. Depositors who are having deposits of more than ₹15 lakh will be severely hit as they will get back the amount only after 10 years. Of course, this will carry interest of 2.75 per cent per annum after five years.
Bank failures do not happen overnight. The regulators should have noticed incipient sickness. When commercial banks are fully under the supervision and regulation of the RBI, co-operative banks are under dual control — of the State Government concerned and the RBI.
Failure of these banks should be considered as failure of regulators to act in time and they should be made accountable for the same. Making depositors the scapegoat will the banking system losing its credibility. It is time the government came to the rescue of the depositors and acted against the lethargy of the regulators.
The writer is a retired banker