The Reserve Bank of India has imposed a moratorium on Lakshmi Vilas Bank, capping deposit withdrawals at ₹25,000 till 16 December 2020, while ordering its merger with Development Bank of Singapore. Mint explores what this resolution plan means for depositors.What does moratorium mean for LVB deposits?A moratorium is essentially a temporary suspension of an activity or law until future considerations warrant the lifting of the levied suspension. Typically, they are lifted once the problems that led to a moratorium have been resolved. In the present scenario, the central bank has put Lakshmi Vilas Bank under a moratorium and capped its deposits at ₹25,000. This has been done to find a resolution for the troubled lender, while protecting the interests of its depositors. There are limits on withdrawals for now, but the deposits with the bank will continue to be protected under the proposed resolution.What brought LVB to its present situation?The lender’s current situation is largely an outcome of ongoing troubles and its deteriorating financial position. The erosion of capital because of successive losses and an increase in non-performing assets (NPAs) led to an urgent need for the bank to infuse capital to ensure that it meets the capital adequacy norms and that it could continue to serve the needs of its depositors. For that, it tried to merge with several large players, none of which worked out. The plan to merge with Indiabulls Housing Finance Ltd was shot down by the central bank and the proposal to merge with Clix Capital Ltd also collapsed.What will the new proposed merger with DBS achieve?The new proposal to merge LVB with DBS’ India unit will ensure that deposits with LVB are safe. Effective the merger date, LVB’s fixed deposit holders will also get the interest rates offered by DBS. The foreign bank’s India unit is expected to inject ₹2,500 crore into the bank from its existing resources, which will help turn the situation around.What does this mean for LVB shareholders?Typically, during bank mergers shareholders are issued fresh shares of the merged entity based on a pre-determined formula. However, in this situation, the capital position of the lender has eroded and with the bank having a negative worth, its shareholders will find their value to be written off. Unlike Yes Bank, this is a merger of two entities and thus LVB will cease to exist post the merger and its debentures, shares would subsequently be delisted. Its employees, depositors will become depositors and employees of DBS.What’s in store for the other smaller banks?India’s financial system has had its fair share of troubles since the IL&FS crisis. In the last one year, we have witnessed rescue attempts of three deposit taking institutions, PMC Bank, Yes Bank, and LVB. However, the pace at which RBI and the government has handled these points to an active approach in addressing the vulnerabilities. The approach towards protecting the interest of depositors is also reassuring. The clean-up of the system and swift resolution will improve financial sector’s stability.Karan Bhasin is a policy researcher.