Economy

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).

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 three lakh after four years, and up to Rs 5.5 lakh after 5 years.

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 accounting or the 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 every institutional investor of the transferer bank shall be converted into Perpetual Non-Cumulative stock (PNCPS) of USFB with a dividend of 1% per annum due  annually.

·         At the end of ten years, the transferee bank may consider further advantages for such PNCPS holders, either within the form of a step-up in coupon rate or a decision choice, after getting RBI approval.

·         The remaining 20% of the institutional deposits are converted into equity warrants of USFB at a worth of Rs one per warrant.

·         These can more be converted into equity shares of USFB at the time of the Initial Public offer.

·         In respect of each 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.

·         Steps taken by RBI: 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) to protect the interest of the depositors.

·         It also superseded the bank’s board of administrators and can appoint an administrator in its place. RBI then decided to prepare a scheme of amalgamation.

·         Unlike equity and bond investors, bank depositors enjoy the highest levels of safety on their funds.

·         Deposit Insurance: 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 five lakh have no legal recourse to recover funds if a bank collapses.

What kind of deposits is insured?

·         Deposits publicly and personal sector banks, native space banks, tiny 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 isnt to be passed on to depositors.

·         Banks currently pay a minimum of twelve paise on each Rs 100 value 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.