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More than two years after the faltering Punjab and Maharashtra Co-operative Bank (PMC) was seized by the Reserve Bank of India (RBI) and PMC depositors lost access to their money, a resolution of its crisis is in sight. On Monday, RBI issued a draft plan for its amalgamation with Unity Small Finance Bank, under which retail depositors would get their deposits back fully over 10 years. This includes deposits of up to 5 lakh—the maximum insured by the Deposit Insurance and Credit Guarantee Corp—to be given right away and sums beyond that returned in increments of 50,000, 1 lakh, 3 lakh and 5.5 lakh at the end of the second, third, fourth and fifth years respectively. With 15 lakh thus repaid by the end of five years, any residual sum owed will reach former PMC account holders at the end of the tenth year. This way, some 96% of them are expected to get all their money back upfront and 99% by the fifth year; only 1% will have to wait for a decade. Interest accruals up to 31 March 2021 would be paid, with none for the five years that follow and then at a rate of 2.75% thereafter. As individuals must not be left in the lurch, lest doubt spreads on the general safety of our banks, the payback schedule looks fairly reassuring. The proposal’s relative novelty is its differential treatment of institutional depositors. Under the circumstances, this part seems fair, too, though its complexity disappoints.

While individuals would be pleased that they don’t have to take a big haircut, which is how it should be, given the accumulated savings many of them must have had in PMC’s custody, it is likely they would’ve been mostly appalled or bewildered if offered a conversion of their deposits into shares of Unity SFB. About half a decade ago, a legislative effort to enable such bank rescues had encountered stiff resistance. Equity issuance in lieu of debt, however, is a standard tool of bankruptcy relief globally, and bank customers who are financially savvy should not resist it. In principle, it is arguably a good idea for PMC’s institutional depositors to be given claims on its successor’s profits instead of what it sorely lacks—cash. The RBI proposal would have preference shares issued to them for 80% of what they are owed and equity warrants for the rest that will entitle them to common shares at the lower end of the stock’s price band once Unity SFB goes public. Since preferred stock delivers pre-set dividends (of 1% per year in this case) before other shareholders get any, it resembles debt—so long as the bank survives and profits are made. This debt-like risk profile makes it better suited than regular equity as compensation for entities that had effectively lent PMC money by placing deposits.

These entities may or may not wish to become shareholders of the resurrected bank, of course, but such a scheme beats imposing a major haircut on all big depositors. A simplified version of this plan may even serve as a model for future cases of insolvent-bank bailouts. An 80:20 split between preference and ordinary shares, however, could be avoided to reduce complexity. Once a firm precedent is set for turning a bank’s entire liability to other entities into assets of ownership offering a conditional-but-priority yield, say, client-creditors would be clear about what to expect. Retail repayment schedules should also be less jagged. All said, a simpler plan could shape people’s perceptions of how money gets recovered from bust banks that are taken over. This would boost public confidence.

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