Why is Lakshmi Vilas Bank troubled, what’s next for the lender

The Reserve Bank of India (RBI) on Tuesday seized control of the Lakshmi Vilas Bank (LVB) due to a “serious deterioration” in its finances. Withdrawals from the bank, which has been looking for a partner since last year to meet minimum capital buffers, had also been capped at Rs 25,000 temporarily, the government said.

Amid mounting bad loan and governance issues, the central bank has forced LVB’s merger with DBS Bank India Limited (DBIL), the local unit of Singapore’s largest lender DBS Bank. This is the first time that RBI has tapped a bank with a foreign parent to safeguard an Indian rival.

Here’s everything you need to know about the Lakshmi Vilas Bank’s crisis and RBI’s action plan:

1. Over the past three years, LVB’s financing standing has taken a hit with the bank incurring continuous losses leading to a drop in its net-worth, the RBI said. The central bank also mentioned LVB’s inability to come up with a plan to counter its negative net-worth and continuing losses. “In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses,” the RBI said.

2. Chennai-headquartered LVB’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. Clix had submitted a non-binding offer for LVB in June but RBI on Tuesday said that the troubled bank had failed to submit any concrete proposal, following which it appointed an administrator and superseded the bank’s board.

3. LBV was placed under an order of moratorium on November 17 this year. The order is effective up to December 16, 2020, under section 45 of the Banking Regulation Act, 1949.

4. The central bank’s proposed scheme of amalgamation of LVB and DBS Bank’s India unit is under the special powers of the government and RBI under Section 45 of the Banking Regulation Act, 1949.

5. The merger will provide stability and better prospects to Lakshmi Vilas Bank’s depositors, customers and employees following a period of uncertainty, the RBI has said.

6. If the merger scheme gets the nod, DBS will inject Rs 2,500 crore into DBIL, which will be fully funded from DBS’ existing resources. The Singapore-origin bank will wait for the final decision on the proposed scheme from RBI and the Indian government and announce further details later.

7. The DBS Bank, which has only 20 branches across India, will be able to expand its footprint in the country with the plan proposed by RBI as LVB has a vast network of more than 550 branches and 900-plus ATMs across the nation.

(With agency inputs)