Lakshmi Vilas Bank-DBS merger gets Cabinet nod, effective November 27

After the Cabinet approved the amalgamation of Lakshmi Vilas Bank (LVB) with the Indian arm of Singapore’s DBS Bank on Wednesday, the Reserve Bank of India (RBI) said the moratorium on the crisis-ridden private-sector lender will be lifted as the merger takes effect on November 27, much before the scheduled date of December 17. Consequently, the restriction on cash withdrawals by a depositor beyond Rs 25, 000 will also be lifted on Friday. LVB branches will operate as those of DBS Bank India (DBIL) once the moratorium ends. As part of the amalgamation, DBIL will infuse fresh capital of Rs 2,500 crore into LVB.

The beleaguered LVB’s paid-up share capital will be written-off and the shares and debentures of the bank will stand de-listed upon the merger. Meanwhile, the number of DBIL branches in India is set to leap to about 600 from just about 33 now, as a result of the merger. Responding to the merger approval, shares of Lakshmi Vilas Bank jumped 4.8% on the BSE on Wednesday, reversing a slide earlier in the day.

Global rating agency Moody’s has estimated that DBS India’s customer deposits and net loans will increase by about 50-70% following the merger. Fitch Ratings said LVB’s balance sheets amount to less than 1% of DBS’s risk-weighted assets, assets and equity, “meaning it will not immediately affect the group’s asset quality, profitability or capitalisation and, consequently, its credit ratings”. In a notification on Wednesday, the central bank said:”Customers, including depositors of the Lakshmi Vilas Bank Ltd. will be able to operate their accounts as customers of DBS Bank India Ltd. with effect from November 27, 2020.”

Earlier in the day, the government said the swift move to prepare and approve the LVB’s amalgamation plan well before the deadline was aimed at minimising depositors’ woes. On November 17, after the Centre’s clearance, RBI had superceded the board of directors of LVB for 30 days owing to “serious deterioration in the financial position of the bank” and to protect interests of the depositors.

Given its comfortable capital base, the combined balance sheet post the merger would remain robust with CRAR at 12.51% and CET-1 capital at 9.61%, without taking into account the infusion of additional capital, the RBI said. LVB had been exploring a merger with Clix Capital.

The bank’s financial position has worsened steadily with the lender incurring losses over the last three years, eroding its net-worth. It was being overseen by a three-member committee appointed by RBI. The bank slipped into a crisis in late September after shareholders blocked the appointment or re-appointment of seven directors to the board, including that of S Sundar, MD & CEO. They also voted against the re-appointment of statutory auditors P Chandrasekar LLP, chartered accountants and branch auditors.

LVB, which has been placed under the RBI’s prompt corrective action since 2019, had narrowed its losses to Rs 112.28 crore for Q1FY21 from a net loss of Rs 237.25 crore in Q1FY20. The approval for the LVB amalgamation comes at a time when the government’s toying with the idea of a more vibrant role for the private sector in the country’s banking space that has been dominated by the public-sector lenders. While it’s weighing a proposal to divest its stake in some of the stressed banks, an RBI working group recently recommended that corporate houses be allowed to own banks.

However, former RBI governor Raghuram Rajan and ex-deputy governor Viral Acharya argued against the working group’s suggestion, saying it would allow non-financial businesses to gain easy access to financing and encourage connected lending and because it could lead to further concentration of economic and political power in certain business houses. In a LinkedIn post, Rajan and Acharya also laid out likely motivations for the recommendations, the first being to enable the privatisation of PSU banks.