Centrum Capital is planning to raise funds aggregating up to ₹ 1,500 crore, possibly to fund the proposed small finance bank venture of its step-down subsidiary, even it reported a consolidated net loss of ₹ 5.54 crore in the fourth quarter ended March 31, 2021 against a consolidated net profit of ₹25.05 crore in the year ago period. .
The fund raising in the backdrop of Centrum Financial Services Ltd (CFSL) getting ‘in-principle’ approval from the Reserve Bank of India to set up a small finance bank, which in turn is expected to takeover the scam-hit Punjab and Maharashtra Co-operative (PMC) Bank.
NCD issue
Specifically, the board of directors of Centrum Capital on Tuesday approved an enabling resolution for raising funds through the issuance of non-convertible debentures, up to ₹1,000 crores, subject to the approval of shareholders.
Further, the board also approved an enabling resolution for raising of funds through issue of equity shares through qualified institutional placements up to ₹ 500 crore subject to approval of the shareholders/ regulatory and/or statutory authorities as applicable.
Jaspal Bindra, Executive Chairman, Centrum Group, last week said that CFSL and BharatPe will commit ₹900 crore to the SFB in the first year. As and when required, the partners will commit ₹900 crore more. CFSL and BharatPe will be equal partners in the proposed SFB.
The minimum paid-up net worth requirement for starting an SFB is only ₹200 crore. Once CFSL takes over PMC Bank, it would get a ready-made branch network of about 100 branches in Mumbai and in a few States.
In FY21, Centrum Capital reported a consolidated net loss of ₹41.8 crore against a net profit of ₹71.57 lakh in FY20.
The Reserve Bank of India (RBI) may have paved the way for the resolution of PMC Bank by granting an in-principle approval for small finance Bank (SFB) to Centrum Financial Services, but its executive chairman Jaspal Bindra says the business interest was not driven by PMC Bank alone. In an Interview with Ankur Mishra, he says the new bank is going to have all of the Centrum’s NBFC business, a good portion of BharatPe’s business, and PMC will also fold into the bank. He also says PMC Bank depositors will have to wait for clarity till the amalgamation scheme is finalised by the regulator. Excerpts:
What has been the reason for showing interest in PMC Bank?
We looked at it on a standalone basis and thought it (PMC Bank) is resolvable. We basically wanted to find a resolution which was better than liquidation for the lender. Our business interest was not driven by PMC Bank alone. We have looked at it as a bank which will also have PMC as a component. The new bank is going to have all of the Centrum’s NBFC business, a good portion of BharatPe’s business, and PMC will also fold into the bank. The reason for looking for a banking licence was to get a deposit franchise.
What was your proposal for the resolution of PMC Bank?
We are putting in some amount of capital. Now it is for RBI to draft a scheme and the government of India to approve it.
How much capital you are going to put into the new bank?
We have underwritten Rs 1,800 crore between partners (CFS and BharatPe), before we start diluting. Whether we dilute or not, Rs 1,800 crore is underwritten by us, of which Rs 500 crore will be there on Day one. Another Rs400 crore will be there within the first year, and other Rs900 crore will be available on tap from the partners. We will increase it as and when required depending on the growth of the business.
How will the procedure of acquiring PMC Bank work out?
Before we can amalgamate the PMC Bank, we will have to be an operational bank. Under Section 45 of the Banking Regulation Act, one can only prepare a merger scheme between two banks and therefore the process will start only once we have been converted into a bank. So, you need to necessarily become a bank first. Then an amalgamation scheme will be proposed to the government of India and then final notification will come after approvals.
How soon can we see small finance bank shaping up?
Our effort is to do as soon as possible, but there is some procedural time in terms of an EGM has to be called, and we have to incorporate our company. Some of these timelines are beyond our control. However, we are hoping to complete it as soon as possible. It will definitely happen within 120 days timeline.
You would have gone through the latest balance sheet of PMC Bank in detail. What are the immediate pain points and how you are going to deal with it?
In terms of pain points, there is a negative net worth and that is an issue in any financial institution. How I am going to deal with it? I cannot tell, because a lot of it will depend on what gets approved in the amalgamation scheme. So, the biggest pain point is the negative net worth which was created due to poor management and fraudulent transactions in the lending side. Otherwise, the bank was well known for good service. And that is what is really hurting depositors, because their money got misused.
What should PMC Bank depositors expect from new owners What is your intent to deal with depositors?
The intent is to start, we must get to a point which is better than liquidation. How much that will be dependent on the scheme.
Was there any discussion with RBI on PMC depositors?
Till this time, the clock was on standstill for PMC Bank depositors, and now at least the clock has started. Now, the question for depositors is when and how much they will be able to withdraw? I think after getting the licence we will be in position to discuss it with RBI.
How will you control PMC depositors moving out of the bank? What is the strategy there?
We will not want to stop PMC depositors. However, we will convince them that there is a new management and a new set-up. We will be able to manage things better. We will try that to an extent that is possible. However, one of the reasons we have been given licence is that if somebody calls for money, we will have to pay.
Is there any incentive you have planned for the depositors?
Over the next four months, we will be giving a thought to these kinds of things to create some incentives. Is there a way we can create some financial incentives? We will work on that. SFBs anyway pay higher than the market even today to depositors.
BharatPe, a barely three-year-old payments start-up, is going to be the half-owner of a bank in India — a prize that has eluded many of the country’s pedigreed tycoons.
It’s a lucky break. Even Jaspal Bindra, who’ll own the other half, has had to wait six years for this chance, ever since his reign as the top Asia banker at Standard Chartered Plc ended amid a heap of losses in India and Indonesia.
The in-principle approval for BharatPe and Bindra is a marriage made in heaven, or rather the capital-starved hell that has been the country’s banking system for much of the past decade. The regulator is rewarding the duo for agreeing to help remove the debris of a scam-tainted small lender. Punjab & Maharashtra Co-operative Bank collapsed after it made 70 per cent-plus of its loans to one bankrupt shantytown developer. To prevent a run, the Reserve Bank of India had to stop PMC depositors from freely accessing their money.
That was in September 2019. After two years and two waves of a pandemic, the stuck savers finally have a resolution: BharatPe and a unit of Bindra’s Centrum Capital Ltd will put their financial businesses into a newly licensed bank tasked with making small-ticket loans to unbanked segments of the population. For the privilege of getting that license, the new lender will have to assume at least some of the liabilities of the troubled PMC, as well its moth-eaten assets.
It’s unclear how much of the past baggage the new bank can be expected to carry. PMC’s March 2020 deposit base of ₹10,700 crore ($1.5 billion) may have shrunk after the RBI relaxed re strictions on withdrawals in June last year. But it doesn’t have many good assets left to earn a return: About 80 per cent of its ₹4,500-crore loan book had gone bad by March last year. Depending on the deal the regulator strikes on their behalf, one option may be to sweeten PMC depositors’ take — beyond what they’ll be paid out by the deposit guarantee corporation — with some equity in the new bank.
Beyond that, it’s a clean slate. BharatPe, which allows merchants to accept payments from any of the several apps popular with consumers, is yet to join the unicorn club of start-ups with at least $1 billion in valuation. TechCrunch has reported a Tiger Global-led fund-raising round that will take it comfortably past that hurdle. The money will also come in handy in creating a new-age bank. Gauging retailers’ creditworthiness from real-time customer data, and making that the basis for pricing working capital loans, will preclude the need for a costly physical branch network.
Tens of millions of India’s small retail shops rely on personal relationships with wholesalers for credit. Bringing them under the ambit of formal lending will also draw them into the tax net, helping ease the resource crunch for a government that has seen its debt explode because of the Covid-19 crisis. For Bindra, it’s time to try something different from the old corporate banking model of financing empire-building by large conglomerates. In India, taking errant corporate debtors through a formal bankruptcy process or coming to a settlement with their politically influential owners was always like pulling teeth. Of late, extraction of capital from failed businesses has become a painful joke — yielding recovery rates of 4 per cent to 6 per cent for creditors.
In the absence of a formal mechanism to deal with bank failures, expect more bespoke arrangements. Inviting Singapore’s DBS Group Holdings Ltd to take over the assets and liabilities of struggling Lakshmi Vilas Bank Ltd offered a strong hint that the Indian central bank had learned its lesson from unsatisfactory half-rescue of YESs Bank Ltd., a major corporate lender that was allowed to hobble along as a standalone lender.
BharatPe’s unexpected bonanza could well set a template for post-Covid recapitalisation of Indian lenders. The RBI responded to the pandemic by slashing interest rates and making available nearly 7 per cent of GDP in easy liquidity. When that cheap money is eventually unwound, more banks with depleted capital coffers may need new homes. If RBI Governor Shaktikanta Das is going to reprise the anxious Mrs. Bennet from Pride and Prejudice, maybe other fintech suitors, too, will get to play Mr. Darcy.
(This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.)
For Jaspal Bindra, who headed Standard Chartered Bank’s Asia operations in his 40s, the road back to banking is a challenging one. Bindra, who exited StanChart to turn entrepreneur by acquiring a stake in Centrum in 2016, will have to build a bank by merging operations of a failed local cooperative, a non-banking finance company and a new age digital lender.
For Bindra, who has been pursuing a bank licence for some time, the RBI’s quest for a white knight for Punjab and Maharashtra Cooperative Bank (PMC) provided that opportunity. The RBI has granted Centrum 120 days to convert itself into a bank with fintech player BharatPe as an investor who will merge its payment business with the bank. “We are seeing it as a bank which PMC will be a part of and not a takeover. We are capitalising it abundantly so that we will have room to do other things and PMC’s operations will not dominate the new bank,” said Bindra.
“As against the Rs 200-crore minimum capital required for a small finance bank, we are committing to bringing in Rs 900 crore in the first year and we have further committed Rs 900 crore from both of us. In all, we are committing Rs 1,800 crore,” said Bindra. He added that currently the partners are self-sufficient for capital and funds would be raised only at a later day.
Bindra agrees that PMC Bank has a large hole in its books which Centrum examined in January before making the bid. It is not yet clear to what extent the hole will get filled as the Deposit Insurance and Credit Guarantee Corporation would pay out depositors only after the RBI invokes Section 45 of its Act which has the same effect as a bankruptcy resolution and does not leave scope for any additional payments outside the plan notified by the government.
Both Centrum and Bharat Pe will have to follow RBI’s diktat and undertake all financial businesses within the new bank and not in group companies. This means that the bank will begin with Centrum’s sizeable loan book and BharatPe’s large payment business.
“The PMC loan book is wholesale which is not part of our business, and this will be a runoff. This will not exist in our future as we want to be a pure digital play with over 85% of business being done on the digital platform. The offline presence will be for only those segments of society without digital access,” said Bindra.
The government notification will also determine the terms for the staff of PMC Bank. “For PMC staff we will have to see what comes in the government notification. For our existing staff, we are going to choose the best person between Centrum, BharatPe and the market. We are going to plan talent for the longer term. It does not mean that there will be layoffs as there will be jobs outside the bank for Centrum and BharatPe,” said Bindra.
While there is no guarantee that customers will retain their deposits once the new bank opens its doors, Bindra sees value in the retail deposit franchise. “The branch network is relevant from deposit collection point. They were quite exceptional in their service quality, and we will be happy to have the staff as a valuable addition to the group. They have Finacle which is a leading software platform,” said Bindra. Besides the amalgamation of unlikely partners, the PMC resolution is an experiment at several levels. This is the first time that the RBI is using the lure of a bank licence to refloat a failed bank. This would also be the first time that an old-world business is being moved onto a digital system.
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