As part of the merger process, the Reserve Bank of India (RBI) said that the Union government, at the request of the regulator, has limited withdrawals of deposits in ₹25,000 in LVB for a month.
The Reserve Bank’s surprise intervention to force the capital-hungry private lender to merge with a stronger rival came after watching the bank struggle to find a suitor to help it meet minimum capital buffers.
The bank’s trouble escalated after RBI rejected its proposal to merge with Indiabulls Housing Finance Ltd in October last year. Thereafter, a proposed merger with Clix Capital Ltd also collapsed.
However, the merger is bad news for LVB shareholders, who were betting on a reactivation of the bank. The entire capital of the bank will be canceled after the merger with DBS Bank India Ltd (DBIL).
“According to the merger scheme project, on and from the date indicated, the total amount of paid-up capital stock and reserves and surplus, including balances in the LVB’s share / securities premium account, will remain canceled, “The RBI notice said.” The transferor bank (LVB) will cease to exist due to the operation of the scheme, and its shares or obligations listed on any stock exchange will be excluded from the list. “
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Following the replacement of the bank’s board on Tuesday, RBI appointed TN Manoharan, a former non-executive chairman of Canara Bank, as LVB’s trustee.
This is the third time in just over a year that RBI has taken control of a bank. The other two were Punjab and Maharashtra Co-operative (PMC) Bank and Yes Bank Ltd.
DBIL, a wholly owned subsidiary of DBS Bank Ltd, Singapore, has the advantage of a strong affiliation, the Reserve Bank said.
“Although DBIL is well capitalized, it will bring in additional capital of ₹Rs 2,500 crore upfront to support the credit growth of the merged entity, “RBI said, adding that DBIL’s combined balance sheet would remain healthy after the proposed merger, with a capital to risk-weighted asset ratio (CRAR ) at 12.51%, without considering the additional capital infusion.
“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 Bank India said in a statement, adding that the capital injection in LVB it will be financed with its existing resources.
As of June 30, DBIL’s total regulatory capital was ₹Rs 7,109 crore, and its gross non-performing assets (GNPA) and its net non-performing assets were 2.7% and 0.5%, respectively. The CRAR of the lender was 15.99%.
The latest available numbers show that LVB had deposits of ₹20,973 million rupees and a loan book of ₹13.505 crore. However, 24.45% of its total advances soured on September 30. As of March 31, the bank’s 20 largest depositors had ₹Rs 1,580 crore in the bank, comprising 7.37% of the bank’s deposits.
Lakshmi Vilas Bank has been looking for capital. Its capital adequacy ratio not only failed to meet regulatory standards, it also turned negative in the September quarter. Its capital adequacy ratio (CAR) under Basel III guidelines fell to -2.85% on September 30, compared to a regulatory minimum of 10.875%.
The bank’s loss was extended to ₹397 crore in the September quarter ₹357 million rupees in the previous year. LVB, which has been under RBI’s immediate corrective action (PCA) since September 2019, said on October 8 that it had received a non-binding indicative offer from Clix Capital.
“The financial position of Lakshmi Vilas Bank Ltd (the bank) has seen a steady decline and the bank has incurred continuous losses over the past three years, eroding its net worth. In the absence of a viable strategic plan, declining progress and increasing non-performing assets (NPA), losses are expected to continue, “the central bank said.
LVB is also experiencing continued deposit withdrawals and low liquidity levels, RBI said. “It has also experienced serious governance problems and practices in recent years, which have led to a deterioration in its performance.”
The development comes shortly after Parliament in July amended the banking regulation law to allow the central bank to prepare a reconstruction plan, without having to make a moratorium order, other than deposit withdrawals. Before the amendment, the merger plan could only be prepared during the moratorium.
The coordinated action by the government and the RBI also caught the bank’s employee union by surprise, and a senior member declined to comment because they have not yet seen the details of the scheme.
During the moratorium, the bank will not be able to make any earlier payments. ₹25,000 to depositors, without the written permission of the central bank.
The bank also cannot make payments to any creditor that exceed ₹25,000, without the permission of the banking regulator.
However, the Reserve Bank may allow the bank to make payments of more than ₹25,000 to its depositors to meet ‘incidental expenses’, which would include medical treatment expenses of the depositor or their dependents, higher education expenses, mandatory expenses with respect to marriage or other ceremonies of the depositor or their children or any dependents or any emergency inevitable. .
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