PMC Bank and Unity SFB Merger Scheme

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    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.

     

    What is a Merger of banks?

    • A situation in which two banks pool their assets and liabilities to become one bank.
    • Because this can have a significant impact on the financial industry, the Federal Reserve subject’s mergers involving bank holding companies to more intensive regulation.

    Objectives of a merger

    • To meet Tax purposes
    • To have effective Diversification policies to reduce financial risks
    •  Acquiring Resources
    • Incentives for managers to bring motivation factor for them
    •  To increase and enhance the wealth of their shareholders
    • Thus, Mergers are done to look after the Financial Perspective to create competent and valuable organizations, both for shareholders and for the consumers.

    Why do Banks Merge?

    •  It will be easier for the government to keep a check over the enlarged institution.
    • The financial system of the enlarged institution will be more profitable and protected.
    •  To develop the capacities to meet the demand for loans and sustain economic growth.

    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