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Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

DBS India’s rescue of Lakshmi Vilas Bank shows RBI has learnt finesse

  • RBI announced a merger scheme for LVB within minutes of putting the bank under a moratorium
  • The contours of the amalgamation scheme show that RBI has been careful in selecting the suitor

Lakshmi Vilas Bank Ltd (LVB) will be the third bank to be rescued by the Reserve Bank of India (RBI) in a span of a year. The fact that three banks went under highlights the unsavoury weak points of India’s banking system. But the speed of resolution this time shows that the RBI has learnt from past instances. For LVB, RBI announced an amalgamation scheme within minutes of putting the bank under moratorium. This was in contrast with what transpired with Punjab and Maharashtra Cooperative (PMC) Bank, where depositors’ pain continues. Troubled Yes Bank Ltd had to wait two weeks for a rescue mission after going under moratorium. Yes Bank’s size necessitated a quick resolution, but putting together a scheme was challenging. For LVB, however, the regulator vowed to ensure that the merger with DBS Bank India Ltd (DBIL) will be quick so that the bank’s 2 million depositors do not suffer. To be sure, the bank is under a moratorium for a month and depositors cannot withdraw more than 25,000 until it is lifted.

The contours of the merger package showed that RBI has been careful in selecting the suitor, as well as in treating various financial instruments. The equity holders of LVB will find their value written down to nil and just as well, given its negative net worth.

Rescued in time
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Rescued in time

“The writing was on the wall for investors for quite some time now. Investors had put money for speculative purposes and some are even genuine, but they all stand to lose," said Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services.

DBIL will pay LVB’s depositors fully if they do not wish to continue to remain with the lender post-merger. Even employees are protected as far as the draft merger scheme goes.

But what this merger scheme signals mostly is that RBI is warming up to foreign capital in the banking sector. DBIL’s eagerness to expand its Indian operations has gotten it a prized merger.

In fact, analysts already expect DBIL to benefit immensely through this merger notwithstanding the problem of hacking away at an ugly 24.45% of bad loans. “In our view, the merger of LVB (563 branches) with DBS Bank (33 branches), which is trying to expand its base in India, will be a long-term positive for the latter," wrote Emkay Global Financial Services Ltd analysts in a note.

However, Jefferies India Pvt. Ltd analysts warned about the bad loan pile. “The assessment of LVB’s stressed loans would be the key for DBS’ profitability," they wrote.

The success of this merger still leaves the central bank on a steep learning curve in supervision. The fact that three banks went under, in addition to the two large lenders—Infrastructure Leasing & Financial Services and Dewan Housing Finance Corp. Ltd—shows that regulatory supervision is yet to fortify itself. The bigger challenge for RBI is to anticipate trouble rather than keep fighting fires.

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