Supreme Court Upholds RBI Scheme For Merger Of PMC Bank With Unity Small Finance Bank

The Supreme Court on Monday refused to interfere with the Bombay High Court's March 9, 2026, judgment upholding the Reserve Bank of India's scheme to merge the crisis-hit Punjab and Maharashtra Co-operative Bank with Unity Small Finance Bank.

It, however, kept open the question of whether, while framing amalgamation schemes for distressed banks under Section 45 of the Banking Regulation Act, the Reserve Bank of India must assess the "interest of depositors" based on the number of depositors or the value of deposits.

A bench of Justices P.S. Narasimha and Alok Aradhe said that it was not persuaded to interfere with the High Court's judgment at this stage, while clarifying that the question of law regarding the interpretation of the expression "interest of depositors" under Section 45 of the Banking Regulation Act, particularly whether it is to be assessed on the basis of the numerical strength of depositors or the value of deposits, would remain open.

"The question of law is kept open.", the court observed. 

Counsel appearing for some of the petitioners contended that the High Court had erred in upholding the amalgamation scheme on the ground that 98% of depositors had been protected. It was argued that while depositors having balances exceeding ₹5 lakh constituted only around 4.5% of the total depositors, they represented nearly 75% of the total deposits, yet were required to wait up to ten years to recover their money. According to the petitioners, Section 45 required the RBI to protect the interests of depositors in terms of the value of deposits rather than merely the number of depositors.

The petitioners further submitted that the issue extended beyond the present dispute and repeatedly arose whenever cooperative banks failed, affecting thousands of depositors, including senior citizens, who were left waiting for years to receive their deposits.

Appearing for the Reserve Bank of India, Solicitor General Tushar Mehta defended the amalgamation scheme, submitting that PMC Bank's net worth had turned negative by nearly ₹6,000 crore, compelling the RBI to invoke its powers under Section 45. He submitted that the RBI had invited expressions of interest, published the draft scheme, considered objections and suggestions received from stakeholders, made appropriate modifications, and thereafter forwarded the scheme to the Central Government for approval, strictly in accordance with the statutory procedure.

"We had to step in. The net worth was minus ₹6,000 crore. We invited expressions of interest. The draft scheme was published for objections and suggestions. Modifications were made and thereafter the Central Government approved the scheme."

The Solicitor General further argued that the classification between different categories of depositors was based on a rational objective of protecting small depositors, whose livelihood and life savings depended upon the deposits and that Section 45 expressly empowered the RBI to reduce or modify the rights of depositors while framing an amalgamation scheme in public interest.

"Small depositors are paid first. Their livelihood and their entire life savings were involved. The classification is correct."

During the hearing, the Bench repeatedly asked the petitioners to identify any specific statutory violation in the framing of the amalgamation scheme, observing that the Court's enquiry was confined to the legality of the decision making process rather than the wisdom or desirability of the policy adopted by the RBI.

"Tell us where the decision-making process has violated. You must show either that the statutory provision has been violated or there is some problem with the scheme."

The Court also observed that schemes framed under Section 45 of the Banking Regulation Act are statutory schemes intended to deal with banks that have virtually become insolvent and therefore cannot be examined in the same manner as ordinary civil disputes concerning private rights.

"These are not to be judged like any other civil law proceedings. These are statutory schemes. We have to look at it holistically in a situation where they have virtually become bankrupt and are on the verge of liquidation. It is some kind of a restitutionary mechanism."

When the petitioners argued that depositors had been deprived of accrued interest and made to wait years for repayment, the Bench remarked that the alternative to the amalgamation scheme would have been liquidation of the bank and dismissed the petitions. 

Background

The case arose from a batch of writ petitions challenging the Punjab and Maharashtra cooperative Bank (Amalgamation with Unity Small Finance Bank Ltd.) Scheme, 2022, which was sanctioned by the Central Government on January 25, 2022 under Section 45 of the Banking Regulation Act.

The petitioners, comprising depositors, co-operative societies and other stakeholders, assailed the scheme as unconstitutional and violative of Articles 14, 19(1)(g) and 300A of the Constitution, particularly objecting to the staggered repayment mechanism and the distinction drawn between retail and institutional depositors.

The dispute traces back to the PMC Bank fraud that surfaced in September 2019, when the RBI received a complaint alleging that the bank had concealed its massive exposure to the HDIL Group by manipulating loan accounts and regulatory data. An RBI inspection commencing on September 19, 2019 revealed extensive financial irregularities, concealed NPAs, a negative net worth, and significant erosion of deposits. To protect depositors, the RBI imposed restrictions on the bank on September 23, 2019, superseded its board and, after exploring alternatives including capital infusion and merger, framed the amalgamation scheme with Unity Small Finance Bank, which came into effect on January 25, 2022.

On March 9, 2026, the Bombay High Court upheld the amalgamation scheme and dismissed all the writ petitions. The Division Bench held that the RBI had acted within its statutory powers under Section 45 of the Banking Regulation Act to safeguard depositors and public interest. It found the classification between retail and institutional depositors and the staggered repayment schedule to be reasonable in the prevailing financial circumstances, observing that judicial review over such economic policy decisions is limited and there was no ground to interfere with the expert regulator's decision.