RBI proposes the merger of Lakshmi Vilas Bank with DBS Bank India – Quartz India
The Reserve Bank of India (RBI) has decided to intervene to stop the dismantling of a small 93-year-old private bank that could have destabilized the Indian banking system Rs97 lakh crore ($ 1.3 trillion).
the the central bank proposed (pdf) to merge Chennai-based Lakshmi Vilas Bank (LVB), which is grappling with allegations of poor governance and a growing bad debt problem, with DBS Bank India, which is part of the Development Bank of Singapore. The RBI also put a ceiling of Rs25,000 on the withdrawal LVB customer accounts until December 16.
“The rapidly deteriorating financial situation of the LVB with respect to liquidity, capital and other critical parameters, and the absence of any credible capital injection plan, have compelled the RBI to take immediate action in the public interest and in particular in the interest of depositors, “the RBI said in a statement.
September 25, LVB shareholders ousted Managing Director and Chief Executive Officer S Sundar as well as seven directors on allegations of mismanagement and governance. Sundar was appointed to the bank in January of this year.
Even though LVB is a fairly small player in the Indian financial sector, analysts have been worried for several weeks that an implosion at the bank could have had a disproportionate impact at a time when the industry is reeling from the challenges related to Covid-19 . The Indian banking system is facing a new wave of bad debts triggered by the Covid-19 crisis. Moreover, the collapse of Punjab Maharashtra Cooperative Bank (PMC), Yes Bank, and IL&FS have pissed off the financial system over the past two years.
“The Reserve Bank of India has let Lakshmi Vilas Bank linger for too long. He cannot afford another crash in the financial sector after IL&FS, PMC and Yes Bank, ”Institutional Investor Advisory Services (IiAS) said last month.
The big banking mistake
The implosion at LVB did not happen overnight. In fact, the rot had been setting in for a long time.
The bank was founded in 1926 by a group of businessmen in the state of Tamil Nadu, in southern India, with the aim of financing small businesses in the region. With this principle at the base, the bank continued to gradually increase its loan portfolio, posting decent profits and paying a good dividend to its shareholders.
But between 2008 and 2017, he decided to change his unique strategy and copy what the big banks were doing.
At the time, major Indian private lenders like ICICI Bank and Axis Bank were focus on the actors of the company to expand their loan portfolios. LVB joined the bandwagon and initially found success.
It has grown rapidly by providing loans to large companies. Between 2008 and 2017, LVB’s loan portfolio increased by 515% while deposits quadrupled.
However, the strategy turned badly when a group of bank borrowers went into default. This resulted in a sharp increase in bad debts or non-performing assets (NPA) on LVB’s books.
LVB now has an exposure of around Rs2,000 crore to some of India’s biggest failing companies such as Nirav Modi, Coffee Coffee Day, Long-term care housing financing, Religion, Jet Airways Group, and Cox and the Kings.
The bank’s gross NPAs represent a whopping 24.45% of the total portfolio and its Tier 1 capital buffer (protection against risky assets) is in negative territory, well below the 8.75% requirement of the Indian central bank.
The bank says a large portion of these APMs come from companies in the infrastructure sector.
The increase in NPAs has taken a heavy toll on LVB’s finances as it has to put money aside to fund these bad debts. The high provisioning has led the bank to record losses in three of the last five years.
In September 2019, LVB was placed under the control of the Reserve Bank of India (RBI) prompt corrective action (PCA) to try to revive it. PCA is a set of operational guidelines created by the central bank for banks with high NPAs, losses and insufficient capital.
But the program hasn’t done much for LVC as it continues to grapple with its issues. And the recent shareholder vote has only made matters worse.
Before the intervention of the RBI, certain players in the financial sector had expressed their interest in LVB.
Since October, the bank had been in talks with non-bank finance company (NBFC) Clix Capital about a merger. Last year the RBI had rejected a proposal merge LVB with Indiabulls Housing Finance, another NBFC.
DBS might be the right choice as it can absorb LVB losses.
According to the RBI statement, DBS India has a healthy balance sheet, with strong capital backing. The bank’s gross bad debt and net bad debt stood at 2.7% and 0.5% respectively in June. “This will provide additional capital of Rs 2,500 crore at the start to support the credit growth of the merged entity,” the RBI said.