PMC Bank case fallout: RBI asks UCBs to make higher provisions
The Reserve Bank of India established new provisioning standards for urban cooperative banks' inter-bank exposure as well as the valuation of their permanent non-cumulative preference shares and equity warrants on Friday, requiring them to continue making 20% provisions for such exposures.
Following the bankruptcy of the corrupt Punjab & Maharashtra Cooperative Bank (PMC) in September 2019 and the subsequent merger of the cooperative bank with Unity Small Finance Bank, which took effect on January 25, 2022, the banking regulator issued these guidelines.
Similar orders were previously given after the RBI succeeded the board of the largest cooperative bank and additional circulars on these subjects were issued on April 20, 2020 and January 25, 2022.
"Until the actual allotment of PNCPS (Perpetual Non-Cumulative Preference Shares)/equity warrants, UCBs shall continue to make provisions on inter-bank exposures emanating from ongoing uninsured deposits, as per the April 20, 2020 circular," the RBI stated on Friday.
It further stated that the new rules apply to all Urban Cooperative Banks (UCBs) and are effective immediately.
The RBI stated that the new circular was justified because UCBs had met the previous standards.
The PMC Bank amalgamation scheme, as well as the caps on conversion of PNCPS and equity warrants and other inter-bank exposures that resulted, allowed for the conversion of outstanding uninsured deposits, including interest accrued to the credit of institutional depositors until March 31, 2021, into PNPCS and equity warrants of Unity Small Finance Bank as of the appointed date.
"However, it has been noted that institutional depositors have yet to get PNCPS and equity warrants in their accounts. As a result, until the actual allotment of PNCPS/equity warrants, UCBs must continue to make provisions on inter-bank risks originating from existing uninsured deposits, as required by the April 20, 2020 circular "According to the central bank.
The regulator further stated that after the allotment of PNCPS/equity warrants, provisions made on deposit exposures will only be reversed if such provisions are greater than the loss, if any, caused by the treatment of PNCPS and equity warrants.
It stated that equity warrants will be valued at Re 1 per warrant, with the valuation based on market values as and when they are converted into equity shares.
As a result, no provisions for investing in stock warrants are required at this time.
Previously, the RBI had asked all UCBs to fully provision for their PNCPS investments, and had also allowed them to spread their provisions for PNCPS investments, net of extant provisions made on exposures arising from outstanding uninsured deposits, over two financial years, so that the entire loss is fully provided for by March 31, 2024.
Furthermore, the regulator stated that these PNCPS and equity warrants will be categorised as non-SLR investments and will be excluded from any additional restrictions set forth in the master circular on UCB investments, which was issued on April 1, 2022.
The RBI has capped UCBs' risk for deposits put under all-inclusive directions and non-performing exposures emanating from discounted bills drawn under a letter of credit provided by a UCB at 20% for the next five years in the April 2020 direction.
Furthermore, if UCBs chose to convert such deposits into long-term perpetual debt instruments, which may be recognised as capital under a UCB restructuring/revival scheme, no provision on the percentage of deposits converted into such instruments is required.
