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A branch of Lakshmi Vilas Bank. (ANI)
A branch of Lakshmi Vilas Bank. (ANI)

RBI resolution plan for LVB to keep contagion at bay, says S&P

  • LVB, with just about 0.2% market share, is the only non-government-owned bank under PCA. Recently, shareholders of LVB ousted 7 directors of the bank, including its MD and CEO. RBI had to step in and appoint three independent directors

MUMBAI: The Reserve Bank of India's (RBI) swift resolution of troubled Lakshmi Vilas Bank (LVB) will keep contagion at bay and help maintain stability in the banking system, global rating agency S&P said on Thursday.

The central bank has proposed merging LVB with the Indian arm of Singapore’s DBS Bank. As part of the amalgamation, DBS Bank India will bring fresh capital of 2,500 crore.

S&P Global Ratings said this deal is positive for India's banking sector and will bring much-needed relief to LVB, which has been struggling for many years.

The RBI had put the private-sector lender under prompt corrective action (PCA, or under watch by the central bank) in September 2019, and the search for a white knight had been on since then.

“We believe the RBI took into account DBIL's healthy balance sheet and capitalization when considering potential suitors for LVB," it said.

The central bank issued a banking license to operate as banking company on 4 October 2018. As on 30 June, DBIL’s total regulatory capital was 7,109 crore and its gross non-performing assets (GNPAs) and net NPAs were low at 2.7% and 0.5%, respectively. The lender’s capital to risk-weighted assets ratio (CRAR) was at 15.99%.

Lakshmi Vilas Bank, which has only a 0.2% market share, is the only non-government-owned bank under PCA. Recently, the shareholders of LVB at their annual meeting ousted seven directors of the bank, including its managing director and chief executive. The RBI had to step in and appoint a panel comprising three independent directors.

“We have always viewed the Indian government as highly supportive of the banking sector. The government has consistently supported weak commercial banks by promoting the merger of distressed institutions with stronger lenders," S&P said, adding that the government has historically not allowed commercial banks to fail and has swiftly stepped in to address trouble.

“In our view, the RBI's decision to consider a foreign bank, beyond just homegrown institutions, to bail out LVB demonstrates its willingness to put control of banking assets in foreign entities."

Earlier this year, RBI called upon India’s largest lender State Bank of India (SBI) and other large Indian banks for capital support.

“The acquisition of LVB will not materially affect the financial position of DBS. LVB is small when compared to DBS, accounting for less than 1% of the group's total assets. That said, LVB will significantly expand DBIL's footprint in India," it said.

As of 30 September, LVB had 563 branches, compared with DBIL's 27. The merger, thus, could provide a DBIL with meaningful physical presence, which we believe is needed to complement the digital strategy the bank is already pursuing in India, the report said.

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