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With the proposed merger of Lakshmi Vilas Bank (LVB) with DBS Bank India, the Reserve Bank of India has brought to an end an almost two-year tumultuous journey of the 94-year-old lender, which struggled to find a new investor even as its financial metrics crashed and bad loans skyrocketed.

In April 2019, a merger with non-bank financier Indiabulls Housing Finance Ltd was first proposed, but it was eventually rejected by the central bank in October 2019.

Then came an offer from Clix Group, which dragged on for several months with no end in sight.

In the meantime, LVB’s capital position worsened to the extent that its capital adequacy ratio turned negative at -2.85% as on 30 September, as against the regulatory minimum of 10.875%.

The bank’s losses kept mounting and investors grew jittery. It reported a net loss of 397 crore in the September quarter, wider than a year ago.

Its toxic assets also kept pace with the capital crisis, with 24.5% of all loans turning bad in the September quarter from 21.2% in the year-ago period.

That level of sour assets was till now associated with India’s state-run banks whose corporate and especially infrastructure bets went haywire.

The sharp rise in bad loans was a result of the bank’s strategy to shift from retail to corporate loans.

Since LVB was under the RBI’s Prompt Corrective Action framework and facing restrictions on asset growth, its loan book kept shrinking in the past few quarters.

In September, LVB shareholders voted against the appointment of seven directors to its board, including that of S. Sundar as the managing director and chief executive. Besides, LVB’s deal with Clix was taking so long that the latter was ready to walk away if the board delayed the decision further, Mint reported on 28 October.

Experts said the central bank is trying to signal that foreign banks that open Indian subsidiaries will get more opportunities in growing their books.

However, what awaits LVB is no less than a culture shock. An independent consultant said on condition of anonymity that most old private sector banks are way behind other commercial banks in terms of corporate governance.

“There is always a political lobby at play in these banks, depending on where they are based. There are lobbies that control deposits and if things are not to their liking, deposits are pulled out, leading to a major asset liability crisis. With DBS taking it over, those links will have to be severed and that might create some turmoil," said the consultant cited above.

That said, DBS will bring in 2,500 crore capital to the merger, pulling LVB back from the brink and saving its depositors a long-drawn fight for their own funds as is the case in PMC Bank.

To that extent, the simultaneous moratorium and draft amalgamation plan was possible because of a change in legislation.

Parliament in July amended the banking regulation law allowing RBI to prepare a reconstruction scheme, without having to make an order of moratorium, barring deposit withdrawals. Before the amendment, the scheme of amalgamation could be prepared only during the moratorium.

“The RBI has maintained time and again that two of its primary concerns are safety of depositors’ money and financial stability. I believe both those objectives are being met through this deal. This deal is a win-win for both the parties," said Aastha, partner at law firm Argus Partners.

“While LVB gets a lifeline, DBS Bank India gets access to over 20,000 crore of low-cost funds in the form of deposits, should the depositors choose to continue post-merger. For a foreign bank that has opened an Indian subsidiary, reaching this level of deposits in such short period will be an advantage," she added.

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