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The PMC debacle and the rise of the new age banks

The bad loans history of Indian banks goes long back. In recent development, another bank will be rescued due its bad management programme, but interestingly, not buy the government this time, but by the NBFC sector. In recent developments uncovered, BharatPe and Centrum would rescue the significantly distressed PMC bank. As SFB would acquire assets and liabilities of PMC bank, both the promoters are now permitted to start a small finance bank (SFB) in an equal ownership joint venture.

The ill-omened bank’s gross NPA of 3.76% and net NPA of 2.19% was discovered by 2019. The reason for default in payments and bankruptcy, yet again, remains the same: financial irregularities and misreporting of loans given. History bears testimony to the fact that majority of Indian banks have treaded on the road of bankruptcy with their ill-suited and ill-omened loans that are handed out without thorough inspection of the credibility of the borrower.

In the case of PMC, the bank had erroneously handed out loans to bankrupted real estate developer HDIL. Like all the other times, this time too RBI used its underperforming problem-solving mechanism to counter the problem and dissolved the board and took the administration of the bank under its purview. The quantum of loans to a single borrower was against banking guidelines.

It is to be noted that RBI’s KYC principal guidelines are issued to maintain and identify financial frauds in banks but with PMCs large proportion of assets under trouble with almost nil recovery, it can be rightly stated that RBI needs to strengthen its monitoring and fraud detection policy, if it wants to stop the vicious cycle of NPA defaults.

Subsequently, RBI issued orders, very promptly, to restrict withdrawals to ₹1000. Given the current state of the economy, with depositors and stakeholders investments in the bank, such a measure could have an adverse impact on the economy and depositors reeling under the pandemic wrath. As a lot of people have invested their hard-earned money, this decision created a serious liquidity crunch for them.

Thus, keeping this in mind such concerns, the restriction was later relaxed to ₹1 lakh to avoid money drain.

Amidst all the other rhetoric, what will acquisition mean for different stakeholders?

Talking about the Shareholders and members of the PMC Bank, according to reports there are more than 50,000 members of PMC bank. Since this transition is part of a rescue operation by RBI and the bank has a significant negative net-worth, post this transition, members are expected to lose their invested money. Having talked about shareholders, one cannot leave behind the depositors of the PMC Bank. Given the present circumstances, the bigger and humongous amounts would get their principal amount back. However, it is to be noted that there might be some haircut in interest earned or some cap on withdrawal limits to defer complete withdrawal. Given the present credit crunch, the RBI shall truly work to safeguard the interest of depositors.

As aforementioned, SFB will be formed with an initial capital of ₹500 crores. As per reports, within 1 year of its operation, additional capital of ₹400 crores can be infused. Thus, in a phased manner the financial management of the company will be altered. Due to this, initially, the promoters would have more than 40% of ownership, which would be diluted in due course of time due to RBI regulations and we may expect SFB to be listed within a couple of years from the launch of the operation.

Although many might argue that the deal would be loss-making for new promoters who would be infusing Rs. 900 crores after a year and due to increased regulatory capital requirements and absorption of negative net worth, but it is to be noted, that the new promoters would benefit from a large customer base and a cheaper source of funds from the first day. This emphatically means that the new entity would easily leverage from bank existing infrastructure, customers and staff.

But this begs a question that is PMC the first bank to be reorganized in this manner? Certainly not. Lakshmi Vilas Bank (LVB) too was acquired by DBS on 27 Nov 2020. Like PMC, LVB too was listed full-fledged commercial bank with a stressed balance sheet of GNPAs amounting to 24% and negative capital adequacy ratio. Secondly, in other round of NPA woes, five banks namely  Shivajirao Bhosale Sahakari Bank, United Co-operative Bank Ltd, Bhagyodaya Friends Urban Co-operative Bank Limited, Shivam Sahakari Bank Ltd and Vasantdada Nagari Sahakari Bank Ltd too got their license revoked recently due to losses and unsustainability. This emphatically shows that RBI might need to ramp up its monitoring game. Given the economic status of the country, such defaulting nature of the banks can certainly spell doom for the economy.

About the author

Shivani Khanna

A woman who believes in equal rights and aspires to inspire people through her writings. I aspire to contribute to the economic world and society with diligence and thus being an economic advisor tops my career ambitions . I currently am pursuing Economic honours ( at undergrad level) from delhi university.

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