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Mumbai: A day or two before Reserve Bank of India (RBI) Governor Shaktikanta Das used Twitter to report that he tested positive for Covid-19 on October 25, the official who had become a central banker turned met with an officer from the RBI, who is in charge of banks in the Department of Banking Regulation. The meeting lasted several hours.
Less than a month prior to that, Lakshmi Vilas Bank (LVB) shareholders had voted seven board members, including the managing director, at the bank’s annual general meeting, prompting the RBI to appoint a board of directors. of three members to manage the daily affairs of LVB.
It is unusual for the RBI governor to hold a lengthy meeting with a mid-level official, central bank sources said, referring to Das’s move last month.
When such interactions occur with an official in the regulation department, it is understood that some significant development is coming, probably related to licensing, one of the most important functions of the banking regulator in a country where entry costs are prohibitively high.
“That was probably the moment when a decision was made about the future of LVB,” said a source.
“First it is the supervision department that sends its report on the viability of a (private) bank. If the intervention of the central bank is felt to be necessary, then the regulatory department is involved to outline the contours for a resolution, “added the source, referring to the process that the central bank follows for forced mergers.
On Tuesday, an hour after putting the old-generation private sector bank into moratorium, the RBI announced the ‘proposed merger scheme’ with DBS Bank India Ltd (DBIL), the subsidiary of DBS Bank of Singapore.
The speed at which a resolution is announced after putting a lender in default is unprecedented.
“This was to ensure there is no panic. In this case, after deciding on a suitor, RBI announced the moratorium, ”said the source. In the past, after announcing a moratorium for a troubled lender, the RBI typically took days to announce the suitor.
Read also: Another private lender in crisis, but a rescue mission is underway at Lakshmi Vilas Bank
Why RBI took quick action
The private sector lender has been under close surveillance by RBI for some time. His financial position deteriorated due to continued losses over the past three years, which eroded his net worth. The bank was unable to raise capital.
The RBI noted that Lakshmi Vilas Bank was experiencing continuous deposit withdrawals and low levels of liquidity. There were also governance issues with the Tamil Nadu-based lender. LVB was under the RBI’s Rapid Corrective Action (PCA) framework since September 2019.
At the other end of the spectrum, DBS was one of the first foreign lenders to opt for a wholly owned subsidiary (WoS) route, converting its branches into an Indian subsidiary, DBIL, in March 2019.
India’s top three foreign banks (Citibank, Standard Chartered and HSBC) have not yet taken the subsidiary route.
As a policy pioneered by former Governor Raghuram Rajan, the RBI has been lobbying foreign lenders for local incorporation for the past five years. Local incorporation allows effective control by the RBI. The subsidiary route also means that the foreign lender is engaged in its lending business at home rather than being restricted to high-value commercial banking and credit card business.
The central bank has been liberal with branch authorization policies with foreign lenders that have embraced the WoS route, the hallmark of its carrot and stick policy on foreign lenders. The regulator has barely granted additional branch licenses to foreign banks that have not yet joined the local entity.
The DBS Advantage
Noting that DBIL has the advantage of a ‘strong affiliation’, the RBI said in a statement Tuesday that the bank has a healthy balance sheet, with strong capital backing.
DBIL will provide a capital of Rs 2,500 crore “upfront” to support the credit growth of the merged entity. It has a capital adequacy ratio (CAR) of 15.99 percent versus the regulatory requirement of 9 percent, and the CAR of the merged entity will be 12.51 percent without taking into account the additional capital contribution.
As a result of the WoS adoption, DBS is in RBI’s “good books,” central bank sources said.
Aside from the “strong affiliation,” a healthy capital position made him a suitable candidate to take over the capital-starved Lakshmi Vilas Bank. And it has an impeccable record when it comes to governance.
DBS was created by the Singapore government and is controlled through Temasek Holdings, Singapore’s second-largest sovereign wealth fund.
The PJ Nayak Committee, which was created by Rajan, to review the governance of banking boards in India, had noted that the DBS board is fully empowered and that neither the Singapore government nor Temasek have a role in the appointment of the CEO. .
Read also: Ray of hope for PMC Bank’s revival as investors show interest
Why LVB works for DBIL
Lakshmi Vilas Bank also fits perfectly into DBIL’s scheme of things primarily due to its reach among micro, small and medium-sized enterprises (MSMEs) clients, especially in one of the country’s most industrialized states – Tamil Nadu, said a second source. of the central bank.
“With the government’s policy for the growth of the MSME sector, many private banks have expanded their portfolios to this segment,” said the source. This would have encouraged DBIL as it has been expanding in India with a presence in 24 cities in 13 states.
“The proposed merger will bring stability and better prospects to Lakshmi Vilas Bank’s depositors, customers and employees after a time of uncertainty. At the same time, the proposed merger will allow DBIL to scale its customer base and network, particularly in South India, which has long-standing and close business ties with Singapore, ”DBS said in a statement Tuesday evening. .
DBS will obtain 653 branches of LVB after the merger.
Sources said that DBS had been doing due diligence on LVB for a while. The foreign lender realized that LVB’s human resources in the future, in addition to senior management, are efficient.
One of the key challenges of the merger will be the integration of human resources.
Lakshmi Vilas is an old generation private bank, while DBIL is a tech savvy lender in youthful garb. “In any merger, integrating human resources is key,” said a senior banker at a public sector bank who was among 10 of those banks merging into 4 earlier this year.
NBFC suitors that didn’t work out
LVB was the target of several non-bank financial companies (NBFC), those that have the ambition to become a universal bank.
Indiabulls Housing Finance was one of those shadow lenders, but the RBI was not in favor of such a proposal, mainly due to comments from investigative agencies that had kept a close eye on the mortgage lender, the sources said.
CLIX Capital, a shadow bank co-founded by former Genpact CEO Pramod Bhasin, was in talks at LVB for a merger. But according to RBI sources, the regulator is more comfortable with a bank that merges with another bank rather than an NBFC.
“The NBFCs have a different culture than traditional banks. Mainly due to the differential regulatory architecture, “said another source, referring to the lenient regulatory framework that shadow banks are subject to compared to banks.
It’s no wonder that the central bank decided to choose DBS to pour out its blessings this Diwali for Lakshmi Vilas.
Read also: Prime Minister Modi’s Speech to Global Investors: Put Your Money Into India’s Urbanization and Mobility
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