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Preamble and Background

After a big fraud that was reported, in September 2019, inspections conducted by RBI 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56 of the Banking Regulation Act, 1949 (10 of 1949) with effect from close of business of September 23, 2019, It superseded the bank's board of directors on September 23, 2019, and appointed an administrator in its place. PMC Bank was put under restrictions since September 2019 currently extended to Dec 31, 2021 (on account of fraud which led to a negative net worth of the bank).

When restrictions were imposed PMC Bank had then 137 branches and deposits of around Rs 11,600 crore.

The RBI has been finding a solution to PMC since September 2019. The directions on the bank extended to December 31, 2021. Given the financial condition of the PMC Bank and in the absence of proposals for capital infusion, the bank was not viable on its own. Under the circumstance, RBI had two options. 1. Cancellation of its license and its liquidation 2. Amalgamate (on softer terms) with existing bank involving for the first time DICGC to step-in the manner possible without the bank taking to liquidation. RBI has now proposed a draft scheme of amalgamation to merge Punjab and Maharashtra Co-operative (PMC) Bank with the newly formed Unity Small Finance Bank Ltd (USFB). In June, RBI gave in-principle approval to Unity SFB, a joint venture of Centrum Financial Services and Resilient Innovations Pvt. Ltd to take over PMC.

If a bank goes into liquidation, DICGC is liable to pay to the liquidator the claim amount, of each depositor up to Rupees five lakhs within two months from the date of receipt of the claim list from the liquidator. The liquidator has to disburse the claim amount to each insured depositor corresponding to their claim amount.

However, if a bank is reconstructed or amalgamated/merged with another bank DICGC pays the bank concerned, the difference between the full amount of deposit or the limit of insurance cover in force at the time, whichever is less and the amount received by him under the reconstruction/amalgamation scheme, within two months from the date of receipt of claim list from the transferee bank /Chief Executive Officer of the insured bank/transferee bank as the case may be.

DICGC doesn't directly deal with the depositors of failed banks. In the event of a bank's liquidation, the liquidator prepares a depositor-wise claim list and sends it to the DICGC for scrutiny and payment. The DICGC pays the money to the liquidator who acts as a pass-through and pays it to the depositors. In the case of amalgamation/merger of banks, the amount due to each depositor is paid to the transferee bank.

What PMC bank’s different classes of depositors, creditors would get if the proposed Scheme of amalgamation is approved   

This case is different. Meger amount could have been fetched by disposing of the assets of the failed entity and it would have taken years for the depositors to receive differential amount towards their claim from DICGC. Govt has facilitated the speedy redressal by timely introducing section 18A (1-7) to the DICGC Act as DICGC (Amendment) Act, 2021 and made it effective to outstanding cases as well.

In the case of PMC bank, it was difficult to steer since there was no proposal for amalgamation from any existing bank. I am sure RBI did hectic work to rope in a new applicant seeking on Tap license offer different soaps to finally work and propose this scheme of amalgamation.

Reserve Bank of India has prepared a draft scheme of amalgamation. The draft scheme is placed on RBI's website for suggestions and objections if any from members, depositors, or creditors of PMC Bank not later than 10th Dec 2021

I wish people likely to be impacted should at least write to RBI/Government the concern so at a later date, if not addressed, one can take it up through the different channels available. Otherwise, both will duck/shirk stating that no such concern was referred to when the comments were sought from the members, the depositors, etc. It is a different matter whether these concerns would be finally addressed?

Not withstanding above each impacted & affected person at least needs to know the proposed scheme of amalgamation placed by RBI to Govt for approval after 10-12-2021 (which may get suitably amended if RBI and Govt are convinced) and will be effective from the date or a later date mentioned in Gazette.

Under the scheme, each eligible depositor in a bank is insured up to a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest amount `held by him in the same right and same capacity as on the date on which the scheme of amalgamation comes into force would receive money in full subject to certain conditions as proposed in the draft scheme through the USFB (transferee bank).

DICGC would pay a sum equivalent to the amount of such liability held by USFB (transferee bank) in its books as a soft loan. It may accordingly get reflected in the books of DICGC and Unit Small Finance Bank. DICGC will have an agreement with the bank concerned and USFB (transferee bank) who would receive 'the money as a pass-through and pay it to eligible depositors.

An effort is made in this writeup to cover if brief some important concerns of eligible and retail depositors and that of LTD, issues of non-insured and partly insured depositors, LTD paper holders (like non-transferable debenture holders). In the end, an attempt is made to examine to whom it is beneficial. I have planned to highlight concerns and suggestions to RBI (as sought by it) on the scheme of the merger in the next 1-2 days based on these matters. If readers also write to RBI in time probably one can hope for some amendments.

Draft Scheme of Amalgamation is attached to this write-up for easy reference of readers.

Unlike last time the regulator seems to be in no hurry to complete the process of approval of the scheme of amalgamation (for comments on the proposed Scheme of reconstruction of Yes Bank hardly 2 working days time was allowed). Time of 14 working days is given to express objections, comments, suggestions, etc. Reasons for it should be best known to RBI and the Government.

Incidentally, I may mention that: no information is available in the public domain as to what happened to the multiple cases filed against the scheme of reconstruction approved and implemented for the revival of Yes Bank Limited.

To facilitate discussion and for understanding, I wish to go point by point to the propsed scheme.

 

First, it is relevant to note the terminology used in the draft/proposed Scheme and incomplete information, if any.

In chapter –I certain terms are defined under 2 (d)2 (e) and 2(f). The statements relating to the scheme have direct relevance to it. Hence they are mentioned for the convenience of the readers.

"eligible depositors" means depositors whose deposits are insured under the DICGC Act, 1961++

"institutional depositors" means corporations, companies, societies, Association of Persons, Trusts, and all other depositors who are not retail depositors;

"retail depositors" means depositors who hold deposits in the bank in their individual capacity, either singly or jointly with other individuals (s), and include proprietorship firms, partnership firms, and Hindu Undivided Families (HUFs);

FAQ No 2. DICGC website

What does the DICGC insure**?

  • The DICGC insures all deposits such as savings, fixed, current, recurring, etc. deposits except the following types of deposits
  • Deposits of foreign Governments;
  • Deposits of Central/State Governments;
  • Inter-bank deposits;
  • Deposits of the State Land Development Banks with the State co-operative bank;
  • Any amount due on account of and deposit received outside India
  • Any amount, which has been specifically exempted by the corporation with the previous approval of the Reserve Bank of India

My Observations/concerns

Going by the above one may assume institutions with deposits up to Rs.5 lacs are not insured. If you read FAQ 2 (DICGC website) you may know that only a few forms of institutional deposits are not covered. According to the definition and for the scheme 'institutional deposits' are carved out of retail depositors. An institutional deposit can be an eligible deposit as well and should be entitled to the full amount of the claim settled depending on the outstanding amount (principal and interest).

Thus unless exempted by DICGC with prior approval of RBI and notified even a PF deposit/ Trust/Society Deposit account with any amount outstanding would be entitled to a cover of up to Rs 5 lacs (principal and interest put together). Amount over and above it would remain uninsured. Thus if the eligible depositor**has deposits over Rs. 5 lacs (in the same right and same capacity) some portion would get fully settled while the balance portion may fall under the other brackets and have to be processed under those norms.

Let me take a simple example

Individual 'A' has a deposit of Rs.6 lacs (including interest). He should be paid as an eligible depositor up to Rs.5 lacs and a balance of Rs.1 lac may fall under retail deposit (as the term defined under the scheme) and receive the treatment accordingly for that portion.

Let me take another example

Natural Person 'A' has one LTD Rs 600000/- (LTD is akin to Tier-II debenture/bond instrument issued by PMC bank) and three Fixed deposits held as under:

  • 'A' + 'B' Rs 4 lacs (including interest)
  • 'A' only Rs 4 lacs (including interest)
  • 'A' , 'B' & 'C' (jointly held) Rs 6 lacs

(Many will have such pattern of holding/deposits especially, senior citizens)

In this case, the LTD will have different treatment as envisaged in the proposed scheme

Claims of all 3 term deposits would be settled up to Rs 5 lacs each as these three deposits are held in different capacities and different rights (in conformity with the example given on the DICGC official website). Thus they are 3 insured deposits (eligible) notwithstanding first named is 'A' for income tax purposes etc. In respect of the 3rd deposit held jointly under names A, B & C Rs 6 lac, Rs 5 lacs would be eligible and paid by DICGC. Balance Rs1 lac [Rs 6 lacs - Rs 5 lacs] should fall under retail deposits (as the scheme defines).

The term 'Uninsured' deposit is not correctly defined*. However, is used in the context of uninsured institutional deposits. Probably intent of the RBI/proposer is that it to be used in the context of Long Term Deposit (it is not eligible to DICGC irrespective of its size) of the transferor bank (PMC Bank). It is akin to Tier-II bond/debenture. Few institutional deposits (as defined for this scheme) could be insured or some portion of it could get partly settled under eligible deposits as per FAQ 2 (above). If the intent is different it should be mentioned. If one reads the draft scheme together with the blanket/blatant/omnibus provisions Point 12*** and 16** of the scheme (given below for quick reference) you will understand the gravity.

 

Point 12: Legal proceedings against Central Government, Reserve Bank, Transferee bank or Transferor bank:

***No suit or other legal proceedings shall lie against the Central Government, the Reserve Bank or the transferee bank, or the transferor bank for anything which is in good faith done or intended to be done in pursuance of the Scheme.

My Observations/concerns

How can the proposer of the scheme of amalgamation and the approver of the scheme isolate themselves from any litigation arising out of the flaws from the scheme of amalgamation

** Point 16: Interpretation of the provisions of the Scheme:

If any doubt arises in the interpretation of the provisions of this Scheme, the matter shall be referred to the Reserve Bank and its views on the issue shall be final and binding on all concerned

My Observations/concerns

No doubt might have been put aiming to reduce unnecessary disputes but it is certainly an infringement of the fundamental right of aggrieved.

Now, let us come to proposed provisions about retail depositor (a term as defined in the Scheme)

Chapter-III point 6 (C)

This clause refers to the scheme of payment and distribution of money to eligible depositors + retail depositors

The transferee bank will pay -

  1. the amount received from DICGC to all the eligible depositors of the transferor bank, which would be an amount equal to the balance in their deposit accounts or Rs.5,00,000 (Rupees five lakh only), whichever is less, in accordance with the rules of distribution of such amounts;
  2. at the end of two years from the appointed date, over and above the payment already made, an additional amount equal to the balance in their deposit account or Rs.50,000 (Rupees fifty thousand only), whichever is less, on-demand only to the retail depositors of the transferor bank,
  3. at the end of three years from the appointed date, over and above the payments already made, an additional amount equal to the balance in their deposit account or Rs.1,00,000 (Rupees one lakh only), whichever is less, on-demand only to the retail depositors of the transferor bank,
  4. at the end of four years from the appointed date, over and above the payment already made, an additional amount up to the balance in their deposit account or Rs.3,00,000 (Rupees three lakh only), whichever is less, on-demand only to the retail depositors of the transferor bank.
  5. at the end of five years from the appointed date, over and above the payment already made, an additional amount up to the balance in their deposit account or Rs.5,50,000 (Rupees five lakh fifty thousand only), whichever is less, on-demand only to only the retail depositors of the transferor bank.
  6. the entire remaining amount of deposits (after making payment as mentioned in clause (I), (II), (III), (IV) and (V) above in the accounts of the retail depositors of transferor bank after 10 years from the appointed date, on-demand.

My Observations/concerns

If one reads point C (I) with point C (II to VI) one will get confused

From point C (I)

"The amount received from DICGC to all the eligible depositors of the transferor bank, which would be an amount equal to the balance in their deposit accounts or Rs.5,00,000 (Rupees five lakh only), whichever is less, in accordance with # the rules of distribution of such amounts]";

# Rules of distribution of such amounts (not disclosed).

As regards the interest payout to eligible depositors, clarity is absent.

It is not clear as to who will pay interest at a contracted rate till the claim settlement date ( applicable to cases where principal + interest don't exceed the ceiling of Rs 5 lacs) as prescribed under DICGC Act as there are many dates [ 22-11-2021, appointed date, settlement date]?

The eligible depositors and as well as retail deposits up to the portion up to Rs 5 lacs should get in full from DICGC or the transferor/transferee bank (such depositors interest should/can not be compromised in the process of the scheme of amalgamation as otherwise also under liquidation such amount would have been received by such depositors from a liquidator). If anybody holding more than Rs 5 lacs deposit is pushed to the retail depositor category he/she will have to wait for 10 years and adhere to the schedule drawn.

To put it in simple terms: All depositors should be paid upto Rs. 5 lacs whether the depositor falls under complete cover or partial cover (eligible, retail or institutional) category. For the so-called 'eligible deposit' category principal and interest should be paid till the date of discharge of the corporation's guarantee. In all cases of retail or institutional category where cover is available for Rs lacs the balance should be paid as per the approved scheme of amalgamation.

Point 6 (C) II to VI

For clarity, I repeat: There could be many retail deposits that may partially qualify as 'eligible deposit' and thus needs to get settled to the extent of deposit insurance cover (again under guiding principle 'same capacity and same right"). It should be made clear to all that this rule (clause II to VII) applies to the balance/remaining/uninsured portion of such insured deposit.

In the 2nd example referred to above, the claim of depositors holding a deposit of Rs 6 lacs (A, B & C jointly) should not come under other retail deposits. Rs 5 lacs would come under eligible deposit and balance Rs. 1 lac scheme clause 6 (C ) II to VI would apply

Clause 9 (ii) of the draft scheme: states about Long Term Deposits (Tier II Capital instrument) held by both retail depositors (individuals) and institutional investors like PF etc.

It states: as on and from the appointed date, the entire amount outstanding in the Long Term Deposits (Tier II Capital instrument) of the transferor bank will be converted into PNCPS and will be accorded the treatment mentioned in clause 6 (1) (e) of this Scheme (below).

Clause 6 (1) (e): On and from the appointed date, 80 percent of the uninsured deposits outstanding (aggregate in various accounts) to the credit of each institutional depositor of the transferor bank shall be converted into Perpetual Non-Cumulative Preference Shares (PNCPS) of transferee bank with a dividend of one percent per annum payable annually.

After ten years from the appointed date, the transferee bank may consider additional benefits for such PNCPS holders either in the form of providing a step-up in coupon rate or a call option, upon receipt of approval from the Reserve Bank.

Both clause 6(1)(e) and clause 6(1)(f) apply to institutional deposit

Clause 6 (1) (f): The remaining 20 percent amount of the institutional deposits will be converted into equity warrants of transferee bank at a price of Re.1 per warrant. These equity warrants will further be converted into equity shares of the transferee bank at the time of the Initial Public Offer (IPO) when the transferee bank goes for public issue. The price for such conversion will be determined at the lower band of the IPO price.

Observation/Concern

Long Term Deposits ($ LTD) [Tier II Capital instrument] should rank later than uninsured deposits (even in liquidation). As per the terms of issue debt, capital instruments rank second to last (before normal equity as there are no outstanding PNCPS) While Reserve Bank is compelling through this scheme of amalgamation uninsured depositors to accept 80% of outstanding as PNCPS and 20%

In clause 6 ( e) RBI has used the term 'uninsured deposits' while it is referring to the remaining portion of 20% clause 6 (f) it is referring to 'institutional deposit'. If uninsured/institutional deposits are to be treated as same (irrespective I merged it for convenience of discussion) and are split PNCPS 80% and equity warrants 20% how under the scheme of amalgamation Long Term Deposits (Tier II Capital instrument) are destined to get PNCPS for entire 100% outstanding on the appointed date. Uninsured/institutional deposits are given equity to extent of 20% while Long Term Deposits (Tier II Capital instrument) are destined to get PNCPS (a higher ranking instrument).

Since terminology, uninsured deposits, institutional deposit, retail deposit, eligible deposit not adequately/effectively defined (nor covered under any relevant Acts, to rely upon) it is in the mess, especially when it comes to implementation it is completely in a mess

One has to necessarily approach RBI for clarification (I am sure most of the readers having experience of dealing with RBI will agree that clarification will not be given at all or for months together or will get tossed between various departments of RBI like [in many cases one approaches CEPD RBI, CEPD RBI refers it to BO, BO dismisses it askes to file the case on the website (in prescribed format), once you file a case disposes of it routinely using one of the handy provisions to indicate outside case is the scope of BO. The aggrieved consumer finds an alternate solution, regrets or forgets] I have experienced on many occasions.

In this case, if you peruse clause 16 you will observe that you cannot approach anybody. You hit the wall as clause 16 reads If any doubt arises in the interpretation of the provisions of this Scheme, the matter shall be referred to the Reserve Bank and its views on the issue shall be final and binding on all concerned

Thus: firstly all concerned have to agree to reality RBI's decision is final.

Secondly, you cannot proceed against Govt and/or RBI for what it has done or intended to be done in pursuance of the Scheme [clause 12]

Loose, overlapping, open for interpretation definitions like eligible depositors" institutional depositors" "retail depositors under any scheme of this nature will certainly pose administrative problems and real beneficiaries may suffer. The staff of the transferor bank, as well as the transferee bank, should be appropriately trained to avoid the grievances and harassment of many.

I feel the statement 'no interest' will be payable on interest-bearing deposits of transfer bank for five years from the appointed date should not apply to 'eligible deposits' covered under DICGC but would be applicable for 'retail deposits' as defined and 'institutional deposits' and liabilities otherwise it will shake principle of deposit insurance up to Rs 5 lacs (principal and interest put together).

I don't think Section 45(3)(d)(ii) and Section 45(5) to Section 45(7) or Section 46(10) of Banking Regulation Act,1949 gives all-encompassing powers over all existing specific laws and conventions in an omnibus manner right/s to Central Govt and RBI collectively or to RBI individually to draw the scheme amalgamation of a banking company unless such power is explicitly given to CG/RBI under the law.

Clause 12 coupled with clause 16 of the draft scheme could prove very dangerous. I appeal to RBI & Central Govt to revisit aspects [this objection cum suggestion is coming from an affected depositor of the bank {Sec 45(6)(b)}] so that RBI / Govt will not face awkward moments in courts in near future.

comprehend concern I had highlighted minimal issues concerning this point 'definition'(actually there are many). Proper definition and documentation are a must. Once the scheme is approved under relevant provisions of the Banking Regulation Act and notified in the Gazette of India the interpretation not consistent with it would pose serious administrative issues. The loose use of terms should be done away with.

$ Long Term Deposit (LTD): RBI's directions to cooperative bank on issue of specific unrated loan/debt product to qualify for tier-II capital of such bank [mis-tiltled by RBI as Long Term Deposit (LTD)] are 'pathetic'. It is a debt procurement instrument with several severe conditions about repayment attached to it. It is a surrogate of bond/debenture by whatever name RBI/coop banks may call it to be. You may notice observe that 'LTD' is a high-risk debt capital instrument issued by co-op banks and is heavily missold. Several retired gullible personnel are investors. No risk disclosures were done adequately and people were trapped unaware due to misdirecting nomenclature. I had raised serious protest a few years ago against this issue and got certain things changed through the intervention of the Bombay High Court (funds to raised in the future are going to be huge). It is not a 'deposit' per se.

Grievances/Objections in general

I have carefully gone through the scheme of amalgamation and I feel that RBI and Govt should re-look the tenability of RBI's absolute right to interpret the provisions of reconstruction and overriding specific provisions under other different Act/Laws encompassing the other jurisdictions and synchronize the timeline decide applicability/effective date for the scheme vs gazette notification date.

It is not clear who will and at what point of time interest amount as a component of the amount due to the eligible depositor would be computed as this would form the basis for the correct 'pass through' amount from DICGC to USFB. It is giving the impression that no interest would be paid after a certain date/appointed date/31st March 2021.

No eligible depositor should get less than what he could have received from DICGC had PMC Bank gone into liquidation and the claim amount was settled through an official liquidator. This triangular arrangement should not cost the DICGC full cover eligible depositors.

It appears due thought has not been given while drafting the scheme and technical terms used in the draft are loosely defined. Such ambiguity should be addressed. I am confident that due attention would not be given to the concerns raised (as depositors too may not pursue the matter aggressively) and it will be pushed through despite these anomalies as RBI and Govt will be always get shielded due to the provision of clauses 12 and 16 (above) unless it is successfully challenged in the competent court. The success rate and time frame one can imagine.

Any deposit liability above Rs 5 lacs per 'retail depositor' (in the same right and same Capacity) would be subjected to payment in parts as mentioned in clauses 6(c) (II to VI) of the scheme after getting the settlement on par with 'eligible depositor' (as defined in the scheme document)

LTD/Tier2 bonds holders have to remain contended with non-convertible preference shares as proposed. However, contrary to the risk marker it is getting a better deal than institutional depositors (who are not LTD/Tier2 bondholders)

Institutional depositors would get non-convertible preference shares (80%) and equity shares (20%) of outstanding and would be impacted severely.

One needs to closely observe whether depositors who have been holding deposits in a 'different capacity and different rights' as mentioned in DICGC Act and FAQ do get their rights recognized and get the amounts for each such set of holding from USFB and as a separate eligible insured deposit.

I am aware, I have brought it to notice of RBI with proof that while settling the claims of depositors of Madhavpura Mercantile Cooperative Bank, multiple deposits held by the first name person along with others was not considered while the claims were lodged and scrutinized [principle of different capacity and different rights] was overlooked.

This was probably due to a lapse on the part of the official liquidator or certifying audit team or scrutiny at the level of DICGC. If such a thing happens and remains unnoticed such depositors would be deprived of the legitimate amounts (which otherwise is due to them under the scheme of amalgamation).

In very recent matters, where I have direct knowledge, a couple of Co-op Banks refused to accept different DICGC claim forms from 'eligible depositor/s' having deposits in 'multiple name combinations' (name of the first depositor was common in such cases), in utter disregard to the prescribed DICGC, due to lack of proper knowledge.

The reason: the aggregate of all such multiple deposits was far more than Rs.5 lacs (while each deposit case did qualify for full coverage as such deposits were held in a 'different capacity and different right' though first named depositor was 'sequentially common' [each set deposit was falling under 'eligible deposit category'].

Lack of proper training could result in denial of amounts to eligible depositors. If 'USFB' staff lacks proper compilation or due to inadequacy of knowledge don't consider the deserving cases the amount claimed and received from DICGC on an appointed date would be short and such normal claims would end with long disputes at the transferee or the transfer Bank.

Impact of the proposed scheme of amalgamation on associated

An attempt has been made to analyze the impact in 3 groups: 1 DICGC, RBI Bank staff 2. Depositors & alike Creditors, Transferee Bank (USFB), on a realistic note. One may agree unless there is considerable benefit the transferee will not proceed with the deal. However, the depositors should not get a raw deal which was the purpose of the whole exercise.

Benefit to DICGC

It is clear from Chapter-IV clauses 7 and 8 of the draft Scheme that DICGC will process 'funding to USFB' like settlement of claims on the 'appointed date' based on data it would receive from USFB. However, it would not be parting of funds 'once for all. It is like a soft loan to the Unity Small Finance Bank (USFB).

It is clear from the scheme document that money given by the DICGC is 'an advance payment' and could be equated with refinancing to the transferee bank 'with 0% rate of interest for a certain period' and repayment to DICGC could be up to twenty years (even at one go).

Hence, in this case, DICGC will not lose the funds permanently (as it could have happened under liquidation there is a scope of return of money later) and will be a soft loan. since the bank has not failed but to be amalgamated compulsorily as per the scheme of merger proposed by RBI and approved by the Government of India the amount is paid by DICGC to the transferee bank, as a pass-through, would be one ultimately repaid by the transferee bank to the DICGC.

Benefit to RBI

The second level beneficiary is RBI itself as it would take the credit for addressing complex co-op banking problems by amalgamating this Bank with Unity Small Finance Bank (USFB) with no huge cost of actual settlement of claims to DICGC (except free funding for 20 years approx sum Rs.4000 Crs)

In the process of amendment to BR Act, RBI got full control to regulate are cooperative banks which hitherto it was contemplating with the government aggressively

Benefit to Employees

Though last year their pay packet was reduced by 30-35% there is an assurance of retention for 3 years

Benefit or loss to 'eligible depositors'

Eligible depositors may not have extra benefits at all. They are likely to lose if the scheme of the merger is not amended to cover the interest on their deposits from 31-3-2021 till the date of payment (if such amount of principal + interest does not exceed Rs.5 lac). Unless the draft scheme is amended to exclude eligible depositors from not getting the interest from 31st March till the date of settlement say (January/February 22), I wonder why the insured depositors should bear the loss

It was a difficult chance to revive. Hence had the bank been liquidated the eligible depositors would have received the amount of claim from DICGC more than a year ago and a few depositor's death due to financial/medical reasons could have been prevented. Depositors would have received interest on outstanding money at contracted rate/s, till the payment date. DICGC Act,1961 was amended with the insertion of section 18 A.

Benefit to 'retail depositors'

Some benefits as 'eligible depositors' do accrue to retail deposits holding deposits 'same right and same capacity) + portion above Rs. 5 lacs will be paid in a staggered manner in 10 years with off-market (reduced rate of interest for a certain period and no interest for a considerable certain period).

Benefit /loss to institutional depositors

I do not know why institutional deposits (other than from banks/Govt etc as specified by DICGC FAQ:2) up to the eligible amount of Rs 5 lacs are excluded from the full and immediate payout in this scheme. Is it legitimate?

Institutional Depositors (other than holding 'LTD') should get a better deal than LTD holders. As stated above they are getting a raw deal as compared to LTD holders (LTD rank higher risk categorization)

Benefit to LTD Bond Holders (issues in brief)

LTD / Bondholders (actually they are unknowingly debt papers akin to debentures/bonds) mis-sold by these banks and with casual documentation (thanks to RBI is not regulating this) are getting PNCPS ( a better proposal than losing entire 'at a stroke of a pen' as was in Yes Bank reconstruction case)

Benefit to Transferees/USFB

1. Unity small finance Bank who got the license of about 137 branches including 28 branches in greater Mumbai (with many owned premises at strategic locations in big cities), trained banking staff at reduced pay packet. You may know that these employees will have to continue for 3 years with the same salary (their salaries were cut down by 30-35 % last year). The manpower is suitable for Small Finance Bank

2. USFB will pay Rs 4000 odd crores to the eligible depositors that it will receive from DICGC need to be repaid on or after twenty years, with nominal rates of interest after twenty years.

It is clear from Chapter-IV clause 7 and 8 (text available elsewhere in the document) of the draft Scheme that:

My Observation

Clause 7 &8 Transferee bank cannot hold the money it received from the DICGC on an appointed date beyond reasonable time* and that DICGC is going to apply its yardstick to process the claims

Clause 8 USFB shall have time up to 20 years from the appointed date, to repay the amount received from DICGC towards payment to the insured depositors. It means USFB will receive money as pass through to be repaid by USFB at the most after 20 years ( I feel it would be treated in the books USFB and reserve free funding like refinancing with 0% interest

3. Bank has a preference share capital permission from day one. PNCPS will be at a negligible cost for a considerable period.

4. Preferential treatment from RBI in many operational issues in the future as the bank helped are behind in addressing a systemic issue.

Difficult for any fintech or NBFC to get a universal banking license in the current scenario. The bank will be close to getting a full-fledged/universal bank license after five years of functioning as a small finance bank and can go for listing, increase the capital and receive appreciation in the price of investment

Summing up

Existing stakeholders who are severely affected may challenge the scheme of amalgamation in the court of law and the matter will be open for courts scrutiny. To stand on firm grounds RBI may not like to keep any loose ends. The system can get real benefit if the reconstruction sails through smoothly.

RBI may relook at the action concerning 'LTD' (Tier-II like debenture –a debt instrument) i.e complete write down (abruptly) completely as the terms of these issues were silent about this kind of event.

Like the Yes Bank Scheme of Reconstruction, this scheme of Amalgamation will be pushed for approval with no or minimal amendments

Like the 'specified staff' of PMC Bank RBI is also responsible for the mess, given the fact that RBI inspections caused did not find these lapses. Even if one recognizes the concept of functional autonomy, RBI may reiterate it is not answerable to the public in general, affected depositors, in near future, could take it to the court.

It is not clear who will verify the data submitted by USFB and many qualified cases of DICGC claims may not be submitted due to the lack of proper knowledge and skills (after quality staff leftover uncertain future). Many depositors like me who had deposited money in different name combinations for a variety of reasons (mostly keeping the first name to be that of the IT assessed as funds belong to him/her) to maximize the deposit insurance cover. It is a perfect and legitimate way of investing.

Unless the computation and verification of the notional claim amounts are right there will be many instances that may need rectification later. However, once DICGC pays the amount on the appointed date it will be the funeral of the management of USFB taking over the reins.

Due to multiple instances of fraud, many things would surface later. DICGC may not keep its 'soft loan claim/book open' and accommodate new cases. There is a dire need to have absolute clarity over the associated matters, educate the staff associated with the working of notional DICGC claims, etc, accurate and detailed audit, etc. The appointed date should be announced later after complete groundwork is ready, after the scheme's gazette notification date by making suitable enabling provision in it.

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