Behind Closed Doors: What The PMC Bank Rescue Will Look Like
Nearly two years after the Punjab & Maharashtra Cooperative Bank ran aground, a rescue plan is now being mounted.
The Reserve Bank of India, on June,18, granted in-principle approval to Centrum Financial Services Ltd. to set up a small finance bank, after it offered to rescue PMC Bank. The non-bank lender is partnering with digital payments firm BharatPe to set up the small finance bank.
"After careful consideration, the proposal from Centrum Financial Services Ltd. (CFSL) along with Resilient Innovation Pvt. Ltd. (BharatPe) has been found to be prima facie feasible," the RBI said in a statement on Friday.
Together, the two have been granted up to 120 days to set up the small finance bank, after which a scheme of arrangement will be put together to take over the assets and liabilities of PMC Bank.
To complete all the work involved in the process the RBI, on Friday, announced that the restrictions on PMC Bank will be extended to December 31. Earlier, the restrictions were to end on June 30.
According to Suhail Sameer, group president at BharatPe, the small finance bank will be operational before the end of 2021, after which the process of acquiring PMC Bank’s assets and liabilities will begin.
“We will create a small finance bank where BharatPe and Centrum will hold 50-50 stake. The banking entity will be operational in next 3-4 months,” Sameer told BloombergQuint in an interview.
In a previous interview, Jaspal Bindra, the executive chairman at Centrum Group, had said the small finance bank will be set up much sooner than the 120-day timeline given by the regulator.
Internally, the partners are working with a 60-90 day timeline, a person in the know said.
The small finance bank will have an initial capital base of Rs 500 crore, compared with the regulatory requirement of Rs 200 crore, Bindra had said. Together, the two partners will infuse another Rs 1,300 crore into the bank, Bindra had told BloombergQuint.
The Ownership Structure
The licence issued will eventually be in the name of the small finance bank, jointly owned by Centrum and BharatPe, said Sameer, adding the name of the entity is yet to be finalised.
While Centrum Group is owned and controlled by resident Indians, BharatPe’s position is a little more complex. Apart from founders and employees who own 25% of the company, global funds Sequoia Capital and Coatue Management own 33% of the company together. They are the largest institutional shareholders.
Other foreign funds which have invested in BharatPe include Beenext, Ribbit Capital and Amplo Management.
According to the RBI's guidelines for on-tap licensing of small finance banks, applicants for a small finance bank license can either be resident individuals with over 10 years experience in banking and finance, or existing non-bank lenders, microfinance companies, local area banks and payments banks controlled by residents.
According to Sameer, the foreign ownership in BharatPe will not run into RBI restrictions.
At 50% shareholding in the small finance bank, the foreign ownership problem does not exist, since Centrum is fully Indian owned and controlled.Suhail Sameer, Group President, BharatPe
Still investors in Bharat Pe will end up with material shareholding in the new bank.
According to a person in the know, BharatPe is looking to raise funds in the near future, which will dilute Sequoia Capital’s stake in the company from the existing 20%. Owing to BharatPe’s 50% ownership in the small finance bank, Sequoia’s step-down holding in the bank would come down to below 10%, meeting RBI’s requirements.
As per the RBI’s on-tap guidelines for small finance banks, individuals and entities other than the promoters will not be permitted to have shareholding in excess of 10% of the paid-up voting equity capital of the bank.
Transfer Of Existing Business
Once the small finance bank is set up, the lending businesses of Centrum Group will have to be merged with it, as per regulatory guidelines which say that a holding company of a bank cannot separately engage in a business permitted within the bank.
As such, much of Centrum Financial will be absorbed into the new entity.
BharatPe however will continue as an independent entity, Sameer said.
“We do not have a product which is mandated to be merged into the bank. Centrum Financial Services’ lending business will be merged into this and we will bring our digital capabilities to the bank,” Sameer said.
According to him, BharatPe will aid the new small finance bank with QR code on-boarding, payment flows and the digital tech stack required to better underwrite loans. Centrum will focus on things like lending, underwriting and branch operations, where it excels, Sameer said.
But then a digital payments firm like BharatPe could have continued to offer these services to the small finance bank without investing in it. So why does BharatPe want to become a large shareholder in a bank?
We don’t make any money on the payments. The plan was always to provide lending services... Why should we lend where we get a dealer commission? We can route it to through the small finance bank and a part of the economics will flow to us because of the ownership.
This is not the first time that BharatPe has attempted to enter the lending business.
In August 2019, BharatPe had applied for an NBFC license to the RBI, which was not granted as the regulator tightened guidelines governing investments from jurisdictions under the Financial Action Task Force.
“This was an industry wide issue and nothing specific to BharatPe,”BharatPe co-founder and chief executive officer Ashneer Grover told BloombergQuint in an email response. “There was relaxation to this in March 2021 and now we can technically pursue our NBFC application if we need to, but we are first focused on operationalising our small finance bank license.”
What About The Depositors?
The most crucial part of the PMC Bank rescue is the treatment of depositors by the new small finance bank. The current limit of deposit withdrawals, set at Rs 1 lakh, allows about 85% of depositors to access all their funds. Large depositors, however, have not been able to do so.
As of March 2020, the total deposit base for the bank stood at Rs 10,727 crore. This included smaller retail depositors, high net-worth individuals, housing societies, trusts as well as other banks.
According to Sameer, the details of how depositors will be treated will emerge from the reconstruction plan, the RBI will announce.
“PMC reconstruction plan is being currently made by the RBI,” he said. “Once the small finance bank is operational, RBI will decide the best course of action for the PMC Bank's business, and we will go with their suggestion.”
According to two people in the know, the RBI has already held multiple discussions with the two bidders on treatment of depositors.
The proposed solutions include allowing full withdrawals for depositors with deposits worth up to Rs 10 lakh and issuing long-term equity or debt securities to larger depositors. Those with deposits worth up to Rs 10 lakh constitute Rs 7,000-8,000 crore worth deposits, one of the two people said.
However, the regulator is not in favour of deposits being swapped for bonds or equity in the case of depositors who may not be equipped to deal with these instruments. For instance, while inter-bank deposits could be converted to long-dated securities, the solution may not work for trusts or housing societies.
Independent banking analyst Hemindra Hazari sees this solution as the best of the worst options.
“Since none of the larger banks wanted to take over PMC Bank and considering the constraints the regulator was working with, a creative solution to the depositor problem was necessary,” Hazari said. “This is probably the first time we may see the conversion of bulk deposits into long-term securities.”