Scam-Tainted PMC Bank, And Unity Small Finance Bank Merge; Branches Now Operating Under Latter's Tag

Punjab and Maharashtra Cooperative Bank Limited (PMC Bank) merged with Unity Small Finance Bank (Unity SFB) on Tuesday (25 January), and its branches have begun operating under the Unity SFB tag.

The assets and liabilities of PMC Bank have been taken over by Unity SFB under the provisions of the scheme.

PMC Bank had been in trouble after it was unable to recover loans from real estate company HDIL. These loans made up 70 per cent of the loan book of the bank, which stood at Rs 8,300 crore as of March 2019. The Wadhawan family that runs HDIL is closely related to the Wadhwan family that runs Dewan Housing Finance Limited.

While DHFL was sold off to the Piramal Group after it defaulted on its loans, PMC Bank was taken over by the Reserve Bank of India (RBI). Since banks cannot have high exposure to a single client, loans were extended to HDIL in several fraudulent ways that included taking out loans through fictitious accounts as well.

Depositor money was being used to finance fraudulent lending to HDIL. The promoters of HDIL were connected to Waryam Singh, a former Chairman of PMC Bank, who held shares and a board seat in HDIL.

Depositors had put in a total of Rs 10,727 crore in PMC Bank, while the NPAs alone stood at more than Rs 3,500 crore. It had a negative net-worth of Rs 5,850 crore as of the financial year 2020.

While a large percentage of borrowers could withdraw money from the bank after withdrawal rules were loosened, certain accounts would only be able to withdraw money after some time.

Unity Small Finance Bank is promoted by Centrum Financial Services. BharatPe would be partnering with Centrum on the deal, as it looks to move forward in the finance business.

While the deal would see BharatePe’s parent company and Centrum being equal partners initially, the RBI has instructed both parties to reduce the stake as the business progresses.

Centrum could hold up to 40 per cent of the company, but BharatPe would have to reduce its stake to 10 per cent. However, some of the rules have been relaxed, given the background of the situation.

For instance, the SFB would not have to file for an IPO after three years after achieving a net-worth of Rs 500 crore. Unity could go ahead with an IPO six years after it achieves the milestone.

With BharatPe’s expertise in the merchant lending space, it can acquire merchants and provide technology, while Centrum looks after financials and other administrative functions.

In total, Rs 1,800 crore would be infused to recapitalise the bank and nurse it back to health, with half of the monies infused during the first year. A banking licence allows BharatPe to access funds at a lower cost, while generating higher revenues and profits through the partnership.

Just acting as a front end for lenders does not generate revenues commensurate to the cost for payment companies — a reason why investors and companies have been pushing towards a model where fintechs lend on their own books.

The deal would help nurse PMC Bank back to health as Centrum provides a group of experienced leaders, such as Jaspal Bindra.