Draft Scheme of Amalgamation of PMC & USF Bank: RBI

• 23 Nov 2021

Why in News

Recently, the Reserve Bank of India (RBI) released a draft scheme of amalgamation of Punjab and Maharashtra Cooperative (PMC) Bank and Unity Small Finance Bank (USF).

• Earlier, PMC was put under restrictions on account of fraud that led to a steep deterioration in the networth of the bank.

Key Points

• About:
  
  • According to the draft scheme of amalgamation, following the amalgamation, depositors of PMC Bank will get their money back over a period of 3-10 years.
  • The interest on any interest-bearing deposit with the transferor (PMC) bank will not accrue after 31^st March 2021.
• Significance:
  
  • The takeover of assets and liabilities of PMC Bank, including deposits, by Unity, will give a greater degree of protection for the depositors.
    
    • USF Bank is being set up with capital of about Rs 1,100 crore as against a regulatory requirement of Rs 200 crore for setting up a small finance bank under the guidelines for on-tap licensing of small finance banks in the private sector.

Merger of Banks

• About:
  
  • In a Merger, banks are benefited in combined business operations and ventures. Together they are able to increase shareholder value and cater the needs more effectively.
  • Bank consolidated procedures are provided under the Banking Regulation Act,1949. Section 45 in the act empowers RBI to apply to the Central Government for suspension of business by a banking company and to prepare a scheme of reconstitution of amalgamation.
• Recent Examples:
  
  • In 2019 the Finance Minister announced the biggest consolidation plan of Public sector Banks (PSBs)- merging 10 of them into just 4.
  • In January 2019 Cabinet Committee on Economic Affairs (CCEA) approved the merger of state-run Vijaya Bank, Bank of Baroda and Dena Bank.
  • In April 2017, 5 associate banks were merged with SBI – State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Travancore, State Bank of Mysore and State Bank of Patiala.
  • Government also initiated amalgamation of Regional Rural Banks under Phase 3 consolidation, bringing them down from 56 to 38.
• Benefits:
  
  • Competitive: The consolidation of Banks helps in strengthening its presence globally, nationally and regionally.
  • Capital and Governance: The government's intention is not just to give capital but also give good governance. The financial system of the enlarged institution will be more profitable and protected.
    
    • The lending capacity of the banks will increase and their balance sheet would also be strong.
  • Efficiency: It has the potential to reduce operational costs due to the presence of shared overlapping networks. And this enhanced operational efficiency will reduce the lending costs of the banks.
  • Technological Synergy: All merged banks in a particular bucket share common Core Banking Solutions (CBS) platform synergizing them technologically.
  • Self-Sufficiency: Larger banks have a better ability to raise resources from the market rather than relying on State exchequer.
  • Monitoring: With the number of Banks coming down after the process of merger – capital allocation, performance milestones, and monitoring would become easier for the government.
• Challenges:
  
  • Decision Making: The banks that are getting merged are expected to see a slowdown in decision making at the top level as senior officials of such banks would put all the decisions on the back-burner and it will lead to a drop in credit delivery in the system.
  • Geographical Synergy: During the process of merger, the geographical synergy between the merged banks is somewhat missing. In three of the four merger cases, the merged banks serve only one specific region of the country.
    
    • However, the merger of Allahabad Bank (having a presence in the East & North region) with the Indian Bank (having a presence in South) increases its geographical spread.
  • Slowdown in Economy: The move is a good one but the timings are not just apt. There is already a slowdown in the economy, and private consumption and investments are on a declining trend. Hence, there is a need to lift the economy and increase the credit flow in the short-term, & this decision will block that credit in the short-term.
  • Weak Banks: A complex merger with a weaker and under-capitalized PSB would stall the bank’s recovery efforts as the weaknesses of one bank may get transferred and the merged entity may become weak.

Source: IE