When news filtered in that the shareholders of Lakshmi Vilas Bank (LVB) were warring among each other, I spoke to the bank manager of the branch where I had placed a substantial amount as fixed deposits from my after-tax earnings. I wanted a premature closure.
The banker wanted to know why and a little taken aback, I explained to him the circum-stances. He told me that the news was a figment of the media’s imagination and I had to pull my CA hat to say to him that I knew a bit of financial analysis. He somehow convinced me to hold on to the deposit until it matured, about a month or so away. Against my better judgment, I did that.
And then the shit hit the roof. When the RBI announced that deposits of LVB customers were being placed on deep freeze, my heart sat in my mouth. I could now understand how the deposit holders in the Punjab and Maharashtra Co-operative Bank (PMC) would have felt when their bank went belly up. I consoled, reminding myself of what my grandfather, a war veteran who I have never seen, told my father. “If it’s your legally earned hard toiled money, nobody will take it away, even if it is placed on the wide road.” Of course, he lived in very different times, but you know these small things help you maintain your sanity.
In the end, my grandpa was right in my case. LVB was taken over by DBS and I spoke on the very second day of the takeover to the
manager, asking for my money back. Banker being a banker he sang the same song, indicating how the money was now super safe. I had no quarrel with him on that, but I was pissed off by his earlier comment that all was hunky-dory among shareholders. Long story short; I withdrew my money.
PMC STORY
So why am I playing out this tune? The provocation is the terms of resolution now drawn up by the RBI in the PMC case. Before that, a quick recap of PMC.
The crisis had first blown on people’s faces when the company’s managing director admitted to concealing the default on loans to the tune of Rs 6500 crore taken by real estate firm Housing Development and Infrastructure Ltd (HDIL).
The defaults were not reported to RBI because of fear of reputational risk. And 50 per cent of all advances were to HDIL, its managing director had indicated in a letter to the RBI. Classifying it as non-performing assets (NPAs) would have meant getting down to income provisioning, which would have hit the bottom line and affected the bank’s apple cart. The stressed legacy accounts belonging to HDIL were replaced with dummy accounts to match the outstanding balances in the balance sheet and the auditors bought into it.
Now the RBI has announced a resolution plan. Under it, retail depositors with over Rs 15 lakh in PMC will have to wait for 10 years to get all their money. There will be staggered payments, but a substantial part of it will come a decade later. And the interest rate will be 2.75 per cent on outstanding deposits after five years from the date of notification of the scheme. Phew…
The now-defunct bank is merging with the newly formed Unity Small Finance Bank (SFB).
Institutional depositors will have 80 per cent of their funds converted into perpetual non-cumulative preference shares with a dividend of 1 per cent/annum. A call was given to the bank to decide after 10 years if it wants to increase the premium or repay investors. That’s equity without dividends. And there is unlikely to be any excellent capital appreciation.
The good news comes from the company, which is promoted by Centrum and Bharat Pe. They said that 96 per cent of all depositors will get immediate access to their deposits and 99 per cent will get paid in full by the fifth year. It added that the scheme saves the bank from liquidation and protects the interest of stakeholders.
The bottom line is simple: no investment today is free of risk. Many are turning out to be lotteries.
Look at how Paytm has tanked 37 per cent since listing. The only guy laughing his way to the bank is the promoter and those who sold on the OFS. That’s a story, which we need to come back to later.
