PMC Bank and Unity SFB Merger Scheme

In News

• The Reserve Bank of India (RBI) released a draft scheme of amalgamation of fraud-hit Punjab and Maharashtra Cooperative (PMC) Bank and Delhi-based Unity Small Finance Bank.

Major Highlights

• Unity small finance bank:
  • Unity SFB is a joint venture between Centrum Group and BharatPe.
  • It commenced operations as a small finance bank (SFB).
  • Unity SFB 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.
• Draft scheme of amalgamation:
  • 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.
  • According to the scheme, deposits of up to 5 lakh can be claimed by depositors over a period of three to 10 years.
  • The RBI said the entire remaining amount will be paid after ten years.
  • Further, the central bank has clarified that interest on these deposits shall not accrue after March 31, 2021 for five years.
• Significance of this merger: 
  • The takeover of assets and liabilities of PMC Bank, including deposits, by Unity, will give a greater degree of protection for the depositors.

Advantages of Merging Banks

• The merger will reduce the cost of banking operations.
• Merger will help in improving the professional standards.
• Provides a better efficiency ratio for operations as well as banking operations which is beneficial for the economy.
• Multiple posts get abolished, resulting in substantial financial savings and banking mergers improve risk management.
• The merger helps the geographically concentrated regionally present banks to expand their coverage.
• After these mergers, the lending capacity of the Public Sector Banks will increase and their balance sheet would also be strong.
• These big banks would also be able to compete globally and increase their operational efficiency by reducing their cost of lending.
• The merger would help in better management of banking capital.

Disadvantage of Merging Banks

• Acquiring banks have to bear the burden of weaker banks.
• Very challenging to manage the people and culture of different banks.
• Large banks are more vulnerable to global economic crises.
•  Mergers may make it difficult for private banks to gain faster market share as most anchor banks are large.
• It also destroys the idea of decentralization as many banks have a regional audience to cater.
• Other issues includes:
  • Chances of a Bank going Bankrupt.
  • No past experience
  • Risk of fraud and robberies.
  • Risk of public debt.
  • Strict assessment.
  • Complications.
  • Governance issues.
  • Financial aspects.
  • Need of collateral.

Way Forward

• India needs investment in huge quantities to turn India into a 5 trillion economy. If banks have sufficient money to fund big projects then the economic development of the country would speed up.

Source: IE