PMC Bank and Unity SFB Merger Scheme

November 24, 2021

304

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