The Reserve Bank of India (RBI) proposed on Tuesday to merge private sector lender Lakshmi Vilas Bank (LVB) with the Indian subsidiary of DBS Bank of Singapore, even as LVB was put in default for at least a month for the government.
This is a draft proposed merger, and the final decision will be made by the RBI after input and objections from bank members, depositors and creditors, the central bank said on its website.
According to an industry expert, DBS makes logical sense from a systemic point of view. “RBI has been telling foreign banks to incorporate their operations as wholly owned subsidiaries in the country for more than a decade, promising to treat them on par with local banks. Except for DBS and State Bank of Mauritius, no one accepted that offer. “
LVB employees and depositors will be protected, but the draft scheme noted that “the total amount of paid-up share capital and reserves and surplus, including balances in the transferor bank’s (LVB) equity / securities premium account, will be canceled. ” With a share price of Rs 15.50 per piece, LVB’s market capitalization on a fully floating basis is Rs 474.93 crore as on Tuesday, according to BSE.
In February, Commercial standard had reported that DBS India was in talks with LVB to acquire a majority stake.
Considering that the RBI had already appointed a three-member board of directors with discretionary powers of CEO and CEO, the order to place LVB on moratorium was not surprising.
LVB has been in bad weather for a few years now. In September, shareholders voted against seven members of the board, including interim CEO and CEO S Sundar, at the annual general meeting. Additionally, the bank has been struggling to raise capital for the past few years.
In a notification on the Finance Ministry website, the government said the decision to put the bank in moratorium followed a request from the RBI.
The moratorium went into effect at 6:00 pm on Tuesday and will last until December 16. During this time, depositors cannot withdraw more than 25,000 rupees.
TN Manoharan, former non-executive chairman of Canara Bank, has been appointed as administrator of LVB by the RBI. Banking unions said the RBI proposal was a “shock to customers” and that the bank should merge with a public sector bank.
FinMin’s order also said that since the bank is now in default, the initiation / continuation of all actions and proceedings against the bank would be stopped, except in necessary circumstances.
Merge logic
DBS Bank India (DBIL) has the “advantage of strong affiliation,” the RBI statement described. Received the banking license on October 4, 2018 and was established on March 4, 2019.
The acquisition of the South India-based bank will expand DBS’s footprint exponentially as LVB has 563 branches and five extension desks with a presence across India. It has 974 ATMs and has installed PoS machines in several commercial establishments.
“Although DBIL is well capitalized, it will provide additional capital of Rs 2,500 crore up front to support the credit growth of the merged entity,” said RBI’s draft scheme for the merger.
“Due to the comfortable level of capital, DBIL’s combined balance sheet will remain healthy after the proposed merger, with CRAR at 12.51% and CET-1 capital at 9.61%, regardless of the additional capital infusion. “. the RBI statement said.
Tug of war
This proposal ends months of speculation and heated negotiations between different parties. The RBI rejected a proposed merger with Indiabulls Housing Finance in 2019, due to its high exposure to the real estate sector. In June this year, LVB signed a non-binding agreement with Clix Group for the merger.
However, that didn’t cut the ice with the regulator for a number of reasons.
“Clix’s loan book was 4.2 billion rupees, of which 2.5 billion rupees of credit assets did not meet bank requirements,” says Shakti Sinha, member of LVB’s board of directors. These loans did not meet the required risk weight and some of them had poor collateral.
“These loans would have been fine for an NBFC, but would have required more capital for banking purposes, for which Clix was not prepared,” said Sinha.
According to a person familiar with it, Clix was considering a 90 percent stake, subsequently reducing it to 80 percent with an exit clause of 60 percent of that stake during the first year of the merger. This may not have ensured regulatory acceptance, the person added.
After the board debacle on September 25, there was a run on the bank, resulting in withdrawals of more than Rs 1 billion. This lasted for three weeks and stability returned in mid-October. “We have made many one-time deals and recovered more than Rs 1 billion to deal with the run on the bank,” Sinha said.
The LVB name is likely to be kept for up to two years. The bank will be called LVB-DBS India during this period, a person familiar with the development said. After this period, the LVB name will cease to exist. The final operational outlines will be presented to the RBI by DBS India, in one week.
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