The Reserve Bank of India has placed ailing lender Lakshmi Vilas Bank (LVB) under moratorium citing mounting losses and rising bad loans. The moratorium has been imposed for 30 days effective Tuesday, and withdrawals during this period will be capped at Rs 25,000.
Simultaneously, the RBI announced a draft scheme of amalgamation of LVB with DBS Bank India Ltd, a wholly owned unit of Singapore’s DBS Bank.
“The financial position of The Lakshmi Vilas Bank has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth. In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue,” the central bank said in a statement.
The RBI also said that the bank had experienced serious governance issues and practices in the recent years and there had been continuous withdrawal of deposits.
In the July-September quarter, LVB had reported a net loss of Rs 397 crore, compared with a loss of Rs 357 crore a year ago. In the year ended March 2020, the lender reported a net loss of Rs 836 crore. Its net NPAs stood at 7.01 per cent and deposits had fallen to Rs 20,973 crore at the end of September from Rs 27,864 crore a year ago.
The bank’s auditors noted post the results that LVB’s tier 1 capital ratio had turned negative, at -0.88 per cent, -1.83 per cent and -4.85 per cent as at March 31, June 30 and September 30, 2020 respectively, as compared to the minimum requirement of 8.875 per cent.
“This requires the bank to take urgent effective steps to augment its capital base in the year 2020-21,” the auditors had said.
LVB has been looking to strike a deal with potential investors for some time now. In October 2019, RBI had rejected the bank’s merger with Indiabulls Housing Finance. LVB was placed under the RBI’s prompt corrective action (PCA) framework in September 2019.
More recently the bank has been in talks for a merger with Clix Capital Service. On November 7, LVB said it had made “significant progress” with Clix Group over the proposed amalgamation. However, Clix Capital’s CEO told a newspaper last week that it could walk away from the proposed deal if discussions continued to drag on.
The RBI said on Tuesday that LVB failed to submit any concrete proposal to the Reserve Bank and the bank’s efforts to enhance its capital through amalgamation of a non-banking financial company with itself appeared to have reached a “dead end,” and therefore there was no alternative but to place it under a moratorium.
Under the moratorium, LVB shall not make any investment, incur any liability or agree to disburse any payment, whether in discharge of its liabilities and obligations or otherwise. Furthermore, only certain expenses like employee salaries, rent, taxes, stationary, printing and legal expenses not exceeding Rs 50,000 will be allowed.
The RBI has now proposed a merger of LVB with DBS Bank India, which it says has a healthy balance sheet. As of June 30, 2020, DBS Bank India’s net NPA stood at 0.5 per cent and gross NPA was at 2.7 per cent. Its common equity tier 1 capital was at 12.84 per cent, well above the requirement of 5.5 per cent.
RBI has now sought suggestions and objections on the proposed merger, which will be received by November 20, after which the central bank will take a final view.
In March this year, the central bank had superseded Yes Bank and placed it under a moratorium. In that case, the RBI acted swiftly and under the Yes Bank Reconstruction scheme, a clutch of lenders led by the country’s largest bank State Bank of India invested Rs 10,000 crore in the private sector bank. Prashant Kumar, the CFO of SBI was appointed as the MD and CEO of Yes Bank.
Yes Bank has since additionally raised Rs 15,000 crore via a further public offer of shares and reported a profit after tax of Rs 129 crore last quarter.
LVB depositors and stakeholders would be hoping for a similarly swift rescue of their bank.