People deposit their hard earned money in a bank and the last thing they want to see is their bank failing and their money getting locked. Last year, the Punjab and Maharashtra Cooperative (PMC) Bank was put under administration. In March, it was the privately held Yes Bank, which was taken over and now, eight months after that episode, another privately held lender—Lakshmi Vilas Bank—has been put under administration.
In all the three cases, the issues were similar. Their financial condition had deteriorated, non-performing assets were rising and the central bank also raised governance issues. There had also been a sustained outflow of deposits. All the three banks were put under a moratorium, which capped the money deposit holders could withdraw.
In the Yes Bank case, the Reserve Bank of India (RBI) acted swiftly and the lender was rescued after a consortium of banks led by State Bank of India pumped in Rs 10,000 crore in the bank. SBI’s CFO Prashant Kumar was named the MD and CEO of Yes Bank. Under his watch, the bank has been able to further raise capital and is now on a far more stable footing.
The PMC Bank stakeholders haven’t been lucky. Up until recently, RBI didn’t have complete control over cooperative banks and the registrar of cooperative societies in each state also had a lot of jurisdiction. While the law has been changed recently to give more powers to RBI over cooperative banks, PMC Bank still remains under administration and the account holders are still waiting to get money, which is stuck in the bank.
In India no scheduled commercial bank has ever been allowed to collapse. In the Lakshmi Vilas Bank case, too, the depositors may not have to wait for long as their counterparts in PMC have had to.
The RBI has acted swiftly in the LVB case, too. Just as it announced that it was superseding the LVB board of directors and appointed T.N. Manoharan, former non-executive chairman of state-owned Canara Bank as the administrator, it also released a draft scheme of amalgamation, whereby it proposed the merger of LVB with DBS Bank India Limited. This will be the first such instance where a unit of a foreign bank is being roped in to bail out a troubled local lender.
“Given the small size of LVB, the RBI seems to have chosen the route of amalgamation with another foreign private bank instead of a unique restructuring scheme as in the case of Yes Bank, where investors including banks were called upon to infuse capital and thus revive it independently,” said Anand Dama, research analyst at Emkay Global Financial Services.
Chennai-based LVB’s net loss had widened to Rs 397 crore in the July-September quarter, from 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 in September and deposits had fallen to Rs 20,973 crore at the end of September from Rs 27,864 crore a year ago as worried depositors were pulling out their funds.
The central bank has tried to assure the deposit holders that their money will be absolutely safe and there is no need for a run on the bank. “The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic. In terms of the provisions of the Banking Regulation Act, the Reserve Bank has drawn up a scheme for the bank’s amalgamation with another banking company. With the approval of the Central government, the Reserve Bank will endeavour to put the scheme in place well before the expiry of the moratorium and thereby ensure that the depositors are not put to undue hardship or inconvenience for a period of time longer than what is absolutely necessary,” it said.
LVB had earlier proposed a merger with Indiabulls Housing Finance, which was shot down by the RBI in October 2019. More recently, it had been in merger talks with Clix Capital. However, those talks too had seemingly hit a dead end. Having failed to submit any concrete proposal, the RBI finally stepped in with a plan of its own.
In DBS Bank India, the central bank has found a stable contender to take over the troubled LVB. DBS Bank India is a wholly-owned subsidiary of Singapore’s DBS Bank, which in turn is owned by DBS Group Holdings, one of the largest financial services groups in Asia.
As on June 30, 2020, DBS Bank’s total regulatory capital was Rs 7,109 crore, against capital of Rs 7,023 crore as on March 31; its gross NPAs at 2.7 per cent and net NPAs at 0.5 per cent were low.
Furthermore, its capital to risk weighted assets ratio (CRAR) was comfortable at 15.99 per cent against requirement of 9 per cent; and common equity tier-1 (CET-1) capital at 12.84 per cent, well above the required 5.5 per cent.
“Although, DBS Bank India is well capitalised, it will bring in additional capital of Rs 2,500 crore upfront, to support credit growth of the merged entity. Owing to a comfortable level of capital, the combined balance sheet of DBS Bank India would remain healthy after the proposed amalgamation, with CRAR at 12.51 per cent and CET-1 capital at 9.61 per cent, without taking into account the infusion of additional capital,” RBI said.
The central bank has now invited suggestions and objections, if any, from members, depositors and other creditors of LVB and DBS Bank India, on the draft scheme. The draft scheme of amalgamation has also been sent to both the banks for their suggestions and objections. These will be received by the regulator by November 20 and after that will it take a final view.
The minority shareholders of LVB, though, may not be so lucky as the deposit holders. It is always stated that buying stocks is subject to market risk and shareholders always come last in queue when it comes to getting their money back.
“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 transferor bank, shall stand written off. On and from the appointed date, the transferor bank shall cease to exist by operation of the scheme, and its shares or debentures listed in any stock exchange shall stand delisted without any further action from the transferor bank, transferee bank or order from any authority,” states the draft scheme of amalgamation.
Not surprisingly, LVB shares hit the lower circuit on Wednesday; the stock was down 20 per cent at 12.40. It has declined 51 per cent since June 30, when the stock had hit a 52-week high of Rs 25.18.
For DBS Bank India, which had been granted a banking license on October 4, 2018, the merger of LVB will help it add more than 550 branches to its existing small network, thus giving it somewhat scale, say analysts.
“The merger of LVB (563 branches) with DBS Bank (33 branches), which is trying to expand its base in India, will be a long-term positive for the latter, while putting to rest concerns around a potential merger with a healthy large private bank as it has been the case in the past (for example, Bank of Rajasthan merger with ICICI Bank),” said Dama of Emkay Global.