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Business News/ Industry / Banking/  RBI brings in DBS’ India unit to save Lakshmi Vilas Bank
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RBI brings in DBS’ India unit to save Lakshmi Vilas Bank

Regulator seizes control of lender, forces merger with local unit of foreign bank, caps withdrawals

Lakshmi Vilas Bank’s gross non-performing assets (NPAs) widened sharply to 10.73% as of June 2018, from 3.78% as of end-June 2017. Photo: Priyanka Parashar/MintPremium
Lakshmi Vilas Bank’s gross non-performing assets (NPAs) widened sharply to 10.73% as of June 2018, from 3.78% as of end-June 2017. Photo: Priyanka Parashar/Mint

The banking regulator on Tuesday seized control of the struggling Lakshmi Vilas Bank (LVB) and forced a merger with the local unit of Singapore’s largest lender DBS Bank, the first time the central bank has tapped a bank with a foreign parent to backstop an Indian rival.

As part of the merger process, the Reserve Bank of India (RBI) said the Union government, on the request of the regulator, has capped deposit withdrawals at 25,000 at LVB for a month.

The Reserve Bank’s surprise intervention to force the capital-starved private lender to merge with a stronger rival came after watching the bank struggle to find a suitor to help it meet minimum capital buffers.

The bank’s problem intensified after RBI shot down its proposal to merge with Indiabulls Housing Finance Ltd in October last year. Thereafter, a proposed merger with Clix Capital Ltd also collapsed.

However, the merger is bad news for LVB’s shareholders, who were betting on a revival of the bank. The entire capital of the bank will be written off post the merger with DBS Bank India Ltd (DBIL).

“According to the draft scheme of amalgamation, on and from the appointed date, the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the LVB, shall stand written off," the RBI notification said. “The transferor bank (LVB) shall cease to exist by operation of the scheme, and its shares or debentures listed on any stock exchange shall stand delisted."

Graphic: Mint
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Graphic: Mint


Following the supersession of the bank’s board on Tuesday, RBI named T.N. Manoharan, a former non-executive chairman of Canara Bank, as the administrator of LVB.

This is the third time in a little more than a year that RBI has seized control of a bank. The other two were Punjab and Maharashtra Co-operative (PMC) Bank and Yes Bank Ltd.

DBIL, a wholly owned subsidiary of DBS Bank Ltd, Singapore, has the advantage of strong parentage, the Reserve Bank said.

“Although DBIL is well-capitalized, it will bring in additional capital of 2,500 crore upfront to support credit growth of the merged entity," RBI said, adding that the combined balance sheet of DBIL would remain healthy after the proposed amalgamation, with capital to risk-weighted assets ratio (CRAR) at 12.51%, without taking into account the infusion of additional capital.

“The proposed amalgamation will allow DBIL to scale its customer base and network, particularly in south India, which has longstanding and close business ties with Singapore," DBS Bank India said in a statement, adding that the capital infusion into LVB will be funded from its existing resources.

As on 30 June, DBIL’s total regulatory capital was 7,109 crore, and its gross non-performing assets (GNPAs) and net NPAs were at 2.7% and 0.5%, respectively. The lender’s CRAR was at 15.99%.

The latest available numbers show that LVB had deposits of 20,973 crore and a loan book of 13,505 crore. However, 24.45% of its total advances turned sour as on 30 September. As of 31 March, the 20 largest depositors of the bank had 1,580 crore in the bank, comprising 7.37% of the bank’s deposits.

Lakshmi Vilas Bank has been gasping for capital. Not only did its capital adequacy ratio fail to meet regulatory norms, but the ratio had also turned negative in the September quarter. Its capital adequacy ratio (CAR) as per Basel III guidelines shrank to -2.85% as on 30 September, as against a regulatory minimum of 10.875%.

The bank’s loss widened to 397 crore in the September quarter from 357 crore in the year earlier. LVB, which has been under RBI’s prompt corrective action (PCA) since September 2019, said on 8 October that it had received an indicative non-binding offer from Clix Capital.

“The financial position of Lakshmi Vilas Bank Ltd (the bank) has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth. In the absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue," the central bank said.

LVB is also experiencing a continuous withdrawal of deposits and low levels of liquidity, RBI said. “It has also experienced serious governance issues and practices in recent years, which have led to a deterioration in its performance."

The development comes soon after the Parliament in July amended the banking regulation law to allow the central bank 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 government and RBI’s coordinated action also took the bank’s employees’ union by surprise, and a senior member declined to comment as they are yet to see the details of the scheme.

During the moratorium, the bank will not be allowed to make any payment above 25,000 to depositors, without the written permission from the central bank.

The bank is also not allowed to make payments to any creditor exceeding 25,000, without the permission of the banking regulator.

However, the Reserve Bank may allow the bank to make payments of more than 25,000 to its depositors to meet ‘unforeseen expenses’, which would include medical treatment costs of the depositor or his dependents, higher education costs, obligatory expenses with respect to marriage or other ceremonies of the depositor or his children or any dependent or any unavoidable emergency.

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ABOUT THE AUTHOR
Shayan Ghosh
Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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Published: 18 Nov 2020, 05:43 AM IST
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