FPJ Explains: Everything you need to know about Lakshmi Vilas Bank crisis

The government on Tuesday imposed a 30-day moratorium on Lakshmi Vilas Bank, restricting cash withdrawals at Rs 25,000 per depositor, and simultaneously announced a scheme to merge the cash-strapped lender with DBS India.

The step was taken on the advice of the Reserve Bank of India (RBI) because of the private sector bank's deteriorating financial health. RBI also superseded the board of Lakshmi Vilas Bank (LVB) and appointed T N Manoharan, former non-executive chairman of Canara Bank, as its administrator for 30 days.

The RBI also unveiled a draft scheme to amalgamate private sector lender Lakshmi Vilas Bank (LVB) with DBS Bank India Ltd (DBIL). DBS Bank India, in a statement, said the proposed amalgamation will provide stability and better prospects to LVB's depositors, customers and employees.

LVB is the second private sector bank after Yes Bank which has run into rough weather during this year. In March, capital-starved Yes Bank was placed under a moratorium. The government rescued it by asking state-run SBI to infuse Rs 7,250 crore and take a 45 percent stake in the bank.

Why has the bank been brought under moratorium?

The step was taken by the government, on the advice of RBI, in view of the declining financial health of the private sector lender. RBI said the financial position of LVB 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, it said, adding the bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, it is experiencing the continuous withdrawal of deposits and low levels of liquidity. It has also experienced serious governance issues in recent times. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019 amid soaring NPAs.

The bank's troubles started after it shifted its focus to lend to large businesses from SMEs. Its loans of nearly Rs 720 crore to the investment arms of Malvinder Singh and Shivinder Singh, former promoters of pharma major Ranbaxy and Fortis Healthcare, against fixed deposits (FDs) of Rs 794 crore made with the bank in late 2016 and early 2017, also turned the bank turtle.

LVB had sought the RBI's nod to amalgamate itself with Indiabulls Housing Finance and Indiabulls Commercial Credit in May 2019 to meet its capital requirements. However, the deal could not get regulatory approval because of the RBI's aversion to let realty-focused entities into commercial banking.

On June 15, 2020, the bank had signed a preliminary, non-binding letter of intent with Clix Group for a possible merger. LVB posted a net loss of Rs 836.04 crore in the year to March 2020. The bank had recorded a net loss of Rs 396.99 crore during the second quarter ended September of this fiscal, up from Rs 357.17 crore in the same quarter a year ago. Net NPAs or bad loans stood at 7.01 percent of the net loans at end of September 2020, as against 10.24 percent as on March 31, 2020 and 10.47 percent by September 2019.

What’s next for the bank?

The bank is likely to be merged with DBS Bank India Limited, a wholly owned subsidiary of DBS Bank Ltd, Singapore.

The Reserve Bank of India (RBI) on Tuesday unveiled a draft scheme to amalgamate private sector lender Lakshmi Vilas Bank (LVB) with DBS Bank India Ltd (DBIL). The proposed scheme of amalgamation is under the special powers of the Government of India and RBI under Section 45 of the Banking Regulation Act, 1949.

According to RBI, the proposed amalgamation will provide stability and better prospects to Lakshmi Vilas Bank's depositors, customers, and employees following a time of uncertainty. "At the same time, 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," it said.

To support the amalgamation, DBS will inject Rs 2,500 crore (SGD 463 million) into DBIL if the scheme is approved. This will be fully funded from DBS' existing resources. DBS will await final decision on the proposed scheme from RBI and the Government of India, and will announce further details at a later stage.

(Inputs from Agencies)

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