The right way to sell a troubled bank

The right way to sell a troubled bank

The RBI did well to invite expressions of interest for takeover of the troubled Punjab and Maharashtra Cooperative (PMC) Bank, rather than nominate a buyer. Competitive bidding, subject to the fit and proper criteria being met, will ensure fairness and bring about transparency in the acquisition process.

Four suitors have responded, including a combination of BharatPe and the Centrum Group, besides Liberty House. After evaluation of the bids, the viable proposal would be sent to RBI, to prepare a draft scheme for reconstruction. The way PMC Bank is being sold should serve as a model for the takeover of other troubled banks, in the absence of a statutory framework for resolution of financial institutions, as proposed in the Financial Resolution and Deposit Insurance Bill that lapsed with the last Lok Sabha.

Ideally, a more transparent competitive bidding route ought to have been followed for the acquisition of crisis-ridden Lakshmi Vilas Bank (LVB) that has a network of 560-odd branches. Its assets could have been attractive to other foreign and domestic investors too. LVB was amalgamated with Singapore based DBS (via an Indian subsidiary) that wiped out the equity of existing shareholders. The amalgamation scheme, issued by the Centre under Section 45 of the Banking Regulation Act, has now been challenged in various high courts.

PMC Bank, which under-reported bad loans, registered a net loss of Rs 6,835 crore during 2019-20 and has a negative net worth of Rs 5,850.61crore. A deal for PMC Bank will mark a shift in the sector that has played an important role in extending the reach of formal finance to the unbanked, but where failures have become rampant due to poor corporate governance and inadequate supervision and remedial action.