RBI brings in DBS India unit to save Lakshmi Vilas Bank
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.
RBI’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.”
Following the supersession of the bank’s board on Tuesday, the 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 the 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, RBI said.
“Although DBIL is well-capitalised, 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 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 June 30, 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 capital to risk-weighted assets ratio (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 September 30. As of March 31, the 20 largest depositors of the bank had ₹1,580 crore in the bank, comprising 7.37% of the bank’s deposits.
LVB 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 September 30, 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 since September 2019, said on October 8 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. During the moratorium, the bank will not be allowed to make any payment above ₹25,000 to depositors, without written permission from RBI.
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