Centrum seeks 20 years to repay DICGC for settling depositors' claims

Centrum's role in the small finance bank will be mainly on the asset side and will focus on lending to small and medium business. Bharat Pe will focus on the liabilities side

Centrum Financial – the non-banking finance company which was recently granted ‘in-principle’ license by Reserve Bank of India (RBI) to start a small finance bank after the lender evinced interest in acquiring Punjab and Maharashtra Cooperative (PMC) Bank – has asked for 20 years to repay Deposit Insurance Credit Guarantee Corporation (DICGC) after the insurer settles the depositors claim.

PMC Bank was put under restrictions in September 2019 following financial irregularities. Last year, the RBI-appointed administrator of PMC Bank invited bids from investors for its reconstruction. Centrum had made the bid for PMC, jointly with Resilient Innovations Private Limited, popularly known as Bharat Pe – a fintech company.

After Centrum starts operating as a SFB, a scheme of amalgamation will be drafted by the government and the RBI. After PMC merges with the SFB, PMC depositors will be allowed to withdraw their deposits. Depositors with upto Rs 5 lakh deposits, which are guaranteed by law if a bank goes belly up, will get their full money back. The DICGC, which has been roped in to support the revival process of PMC Bank, will pay the depositors. The amount which DIGCG pays to depositors for claim settlement will become a long-term liability for Centrum.

Sources with direct knowledge of the development said Centrum has asked for 20 years to repay DICGC. This the first instance in recent times that DICGC has been roped in for the revival for a failed bank.

Deposit insurance cover was increased to Rs 5 lakh from Rs 1 lakh during this year’s budget, mainly to facilitate the revival of PMC Bank.

Centrum declined to comment on the issue when asked by Business Standard. An email query sent to RBI remained unanswered till the time of publishing the story.

The deposit matrix

Sources also said while 95% of the depositors will be covered by the insurance scheme, the payout for DICGC will be only Rs 2,230 crore. As of March 31, 2020, PMC Bank’s total deposit base was Rs 10,700 crore. After RBI increased the withdrawal limit to Rs 1 lakh in June 2020, 84% of the depositors were eligible to withdraw deposits. Sources said the amount withdrawn so far is close to the total amount that could have been withdrawn after the limit was raised to Rs 1 lakh, which was Rs 850 crore.

“Smaller depositors have almost withdrawn their entire amount that was allowed,” said a source.

If 95% of the depositors’ claims are to be settled, deposit withdrawal would be around Rs 3,100 crore.

There are 43,000 depositors who have deposits of above Rs 5 lakh. These are mostly individual depositors, though there are about 2,000 cooperative societies and a few hundreds of gurudwaras. Sources said institutions’ deposits are around Rs 2,200 crore. This also means individual deposits of more than Rs 5 lakh constitute nearly 50% of the bank’s deposit base.

There are about 1.3 million depositors of PMC Bank, of which nearly 400,000 opened their accounts under the Jan Dhan scheme. These are mostly zero balance accounts. Effectively there are about 916,000 depositors at present.

Large depositors are worried about a raw deal since there are talks of haircut for deposits of above Rs 5 lakh. How the large depositors are going to be treated will be decided by the scheme of amalgamation, which will be finalised by the government and the RBI.

“We have not invested our life savings in the stock market or in a chit fund. The deposits of more than Rs 5 lakh forms the core, stable deposit of the bank. Why should we take a haircut?” said an aggrieved depositor.

PMC depositors face a double whammy because they have to pay tax on the interest on their deposits, as mandated by the Income Tax Act, even if they are not allowed to withdraw the deposits.

Shareholding

This is for the first time in the recent past that a failed bank will be taken over by two investors jointly – Centrum and Bharat Pe – entities that will have an equal stake in the small finance bank. However, from a regulatory point of view, Centrum is classified as the promoter of the bank, while Bharat Pe is seen as a strategic investor.

According to the plan given to the RBI by these entities, Centrum will have to bring down its stake to 40% from 50% within five years of commencing operations, in line with RBI’s on-tap guidelines of small finance banks.  Bharat Pe, on the other hand, will see a steeper dilution, from 50% to 10%, within five years.

“Bharat Pe’s dilution is much steeper as the entity is not considered as a promoter by the regulator…they are like a strategic investor… entity acting in concert with the promoter,” sources said.

The shareholders of the proposed SFB have committed Rs 1,800 crore capital for the bank – Rs 900 crore for the first year and the remainder as and when required.

“Bharat Pe and Centrum will bring Rs 1,800 crore from their own cash and reserves. First Rs 900 crore will be enough to build the capital adequacy ratio [CAR],” said Suhail Sameer, group president of Bharat Pe. SFBs have to maintain a CAR of 15% on a continuous basis, according to the licensing norms.

“As the bank starts building the assets and the liabilities, we may need to put in additional capital to meet the CAR that is why we kept the additional Rs 900 crore, which can be infused as and when required,” said.

Role of shareholders

Centrum’s role in the small finance bank will be mainly on the asset side and will focus on lending to small and medium business, given their experience in running an NBFC. The branch business will also be looked after by Centrum.

Bharat Pe, on the other hand, will focus on the liabilities side, apart from technology.

“We will get heavily involved in generating deposits for the bank because we have a large base of medium and small businesses on our platform,” Sameer said.

BharatPe recently acquired Payback - a multi-brand loyalty programme - in India from American Express and ICICI Investments Strategic Fund. Payback, which has over 100 million customers, will also be a source for the bank to mobilise deposits.

Sameer also said Bharat Pe’s expertise in dealing with high quality financial investors, will help the SFB in raising capital.

“This bank will need capitalisation. Given our expertise in dealing with high quality financial investors, we will be able to raise capital for the bank,” he added.