PMC Bank trying to use the escape hatch used by tiny cooperative banks

But with a deposit base of more than Rs 11,600 crore, PMC is not a small cooperative bank and has therefore attracted public attention

Punjab and Maharashtra Co-operative Bank’s (PMC) proposal to convert deposits into equity is not a novel idea, but certainly the most visible one.  

Although not reported anywhere, every year depositors of one or two tiny cooperative banks undergo this fate. In most cases, deposits are converted into subordinated debts, to be serviced over at least 10 years, or the banks are merged with other cooperative banks and deposits beyond a certain amount are converted into equity with a deep discount. Both the options are done after getting consent from the depositors. The harassed depositors prefer the debt route as liquidating the equity is next to impossible. Besides, if the merged entity incurs loss, which is more often than not, then the equity holders have to bear the loss too. This erodes their deposits even further.

But with a deposit base of more than Rs 11,600 crore, PMC is not a small cooperative bank. And therefore, PMC’s conversion to equity has attracted public attention.  

Could it be a test case for resurrecting the throttled Financial Regulation and Deposit Insurance (FRDI) Bill of 2017? Possible, as PMC could work as the large test case for a ‘bail-in’ clause of the bill, and without involving the Finance Ministry in it. PMC comes under the Ministry of Agriculture and Cooperatives, and not the Finance Ministry. And so, the finance ministry can effectively piggyback on the ministry of agriculture for a backdoor introduction of the FRDI Bill, and hope not to attract controversy in the process.

That PMC Bank would try to convert its deposits into equity should not come as a surprise, but the success of such a proposal is far from guaranteed. The bank, sources say, is now a battleground of inter-factional political jostling. Large depositors, some of whom were even directors in the bank, are not really concerned about their crores in deposits, but are targeting hefty returns on their investments.  

These large depositors, who possibly have kept their nest eggs in many other banks, are up against a wall of depositors who trusted their life savings with the PMC Bank and cannot afford to see their deposits erode both in absolute and in nominal terms.

It is, after all, a fairly large multi-state cooperative bank and even the Reserve Bank of India’s (RBI) employees have kept Rs 190 crore of their pension money with the bank. A conversion to equity will see resistance from the RBI union itself, no matter what the RBI's own decision on this would be.  

Another important consideration here is that roughly 83 per cent of the depositors have withdrawn their money already as the central bank allowed up to Rs 1 lakh of withdrawal.  

Of the remaining, up to Rs 5 lakh of deposits is guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance cover. However, such funds can be availed only after PMC is officially declared ‘bankrupt’, which it is not.  

The PMC scam was unearthed in September 2019. Till then, the DICGC cover was of up to Rs 1 lakh. Since PMC was a going concern, it managed to enhance the cover up to Rs 5 lakh as revised by the government in early February this year. This cover is for per depositor, not per account.  

If this Rs 5 lakh cover is considered, roughly 95 per cent of the bank’s depositors are covered. These depositors (who hold between Rs 1 lakh and Rs 5 lakh) get to lose the most if their deposits are converted into equity, and resistance from this class can scuttle the whole proposal.  

Now, there are roughly 250-253 accounts that have deposits of more than Rs 5 crore. Many of them would want to see PMC Bank getting converted into a small finance bank so that they can liquidate their holdings once the bank gets listed. But it is some sort of a last ditch effort by them, they realise.  

The bank had initially said they had enough assets to pay all the depositors. Sources say, upon close inspection, it is found that most of the assets thought to be as security or lien of PMC against loans actually don’t have proper charges spelt out in the agreement. There is not much assets to liquidate to pay everyone.  

Investors who would be willing to take over the bank, of course, will be well aware of this, and the valuation would certainly reflect that. That would not be a good outcome for the large depositors.  

But the important question remains – who would want to take over the troubled bank? And even if someone buys it, will the public have the courage to deposit money again with the bank?