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Business News/ News / India/  How does the LVB crisis impact you?
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How does the LVB crisis impact you?

Every crisis strikes at the root of the confidence in the banking system, but the LVB bank episode has been managed well and there is no contagion or broader impact

Your bank is safe as a custodian of your deposits--this is not a crisis that is spreading. So, ignore the Whatsapp forwards that tell you to exit from banks. Photo: Sonu Mehta/HTPremium
Your bank is safe as a custodian of your deposits--this is not a crisis that is spreading. So, ignore the Whatsapp forwards that tell you to exit from banks. Photo: Sonu Mehta/HT

Indian households, looking for a safe space to put their money in, have been hurtling from crisis-to-crisis past few years. Banks have failed, debt funds saw uncharacteristically deep losses and in March 2020, we saw six debt funds frozen. People who trusted nobody and kept cash under the mattress, lost it during demonetisation.

The latest story that is spooking bank depositors is the moratorium on their money in Lakshmi Vilas Bank (LVB), ahead of its amalgamation with DBS Bank. LVB is a small bank and the impact on overall banking will be marginal, but the loss of confidence in banking escalates with every crisis. And banking is all about the trust that your money will be there when you need it.

Households must understand the difference between their avatars as depositors and shareholders. The Reserve Bank of India (RBI) has moved fast to announce that no depositor will lose money, that it will be available post the moratorium. The fixed deposits will be safe as well—the rates could change as DBS as the new owner will decide on this. The losses will go to the shareholders. The share values are slated to go to zero.

There is no contagion to other banks due to LVB. This is a crisis well managed like the earlier Yes Bank crisis. Shaken savers need to only look at the history of banking to understand that depositor money in scheduled commercial banks has not been lost.

Your bank is safe as a custodian of your deposits--this is not a crisis that is spreading. So, ignore the Whatsapp forwards that tell you to exit from banks. However, investors in shares of banks, and into bonds such as the AT1 bonds, need to understand the risk. A bank share and a bank deposit are two different instruments. Don’t get mauled by the risk if you don’t understand it.

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Published: 17 Nov 2020, 09:08 PM IST
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