RBI to Bail Out Lakshmi Vilas Bank, But What Led to This Downfall?
Lakshmi Vilas Bank: The bank’s net worth has eroded due to continuous losses over the last 3 years, said RBI.
On Tuesday, 17 November, the RBI imposed a month-long moratorium on the Lakshmi Vilas Bank (LVB), capping off withdrawal limit for depositors at Rs 25,000 per month. The cash strapped LVB is the latest in line of a series of banks such as Punjab and Maharashtra Cooperative Bank (PMC) and Yes Bank, to go under, leaving thousands of depositors helpless.
The RBI has superseded the board of directors of LVB for 30 days and appointed TN Manoharan, the former Non-Executive Chairman of Canara Bank as Administrator.
What Does This Mean For Customers?
The capping of withdrawal limit is imposed for 30 days, that is, till 16 December 2020. During this time, customers cannot withdraw money from their savings account, current account, or fixed deposits.
While the capping limit for withdrawal is Rs 25,000, the government has made a provision for depositors to withdraw more than this amount with permission from the RBI for medical treatment, higher education and marriage expenses, reported NDTV.
In its statement, the RBI assured depositors of the bank that their “interest will be fully protected and there is no need to panic” while revealing that scheme for the bank’s amalgamation with another banking company has been drawn up.
The fate of equity shareholders, however, is still uncertain as the bank’s net worth has been eroded.
How Did It Get Here?
Founded in 1926 by a group of seven businessmen, the aim of Lakshmi Vilas bank initially, was to finance businesses and industries in Tamil Nadu. By 1974, the bank set up branches in other states and cities such as, Maharashtra, Karnataka, Kerala, New Delhi, MP, Gujarat and Kolkata.
Over the last three years, however, the bank had reportedly been struggling with bad loans, governance issues and mergers that fell through. The RBI in its press release on 17 November stated that The Lakshmi Vilas Bank Ltd. has undergone a steady decline over the last few years. The bank’s net worth has been eroded due to continuous losses incurred over the last few years.
“The bank is also experiencing continuous withdrawal of deposits and low levels of liquidity. It has also experienced serious governance issues and practices in the recent years which have led to deterioration in its performance,” the RBI added.
In September 2019, the banking regulator had appointed a three-member committee to run LVB, after shareholders voted out seven of its directors. The bank was reportedly desperately looking for an investor over the last one year. It was denied permission to merge with Indiabulls Housing Finance in 2019 by the RBI. Discussion with Clix Capital also did not pull through.
LVB, in its quarterly results released in February had said that its capital adequacy ratio stood at 3.46 per cent at the end of December and percentage of gross bad loans to total assets had inched up to 23.27 per cent, reported NDTV.
From an all time high of Rs 187 per share in June 2017, the bank’s shares dived to Rs 12.40 apiece on Wednesday, 18 November.
What’s the Bailout Plan?
The RBI on Wednesday, 18 November announced a draft scheme of amalgamation of LVB with DBS Bank India Ltd (DBIL). DBIL is a wholly owned subsidiary of DBS Bank Ltd, Singapore (DBS), which itself is a subsidiary of DBS Group Holdings Limited has the “advantage of a strong parentage”, RBI stated.
“DBIL has a healthy balance sheet, with strong capital support. As on June 30, 2020, its total Regulatory Capital was ₹7,109 crore (against Capital of ₹7,023 crore as on March 31, 2020). As on June 30, 2020, its GNPAs and NNPAs were low at 2.7% and 0.5% respectively; Capital to Risk Weighted Assets Ratio (CRAR) was comfortable at 15.99% (against requirement of 9%); and Common Equity Tier-1 (CET-1) capital at 12.84% was well above the requirement of 5.5%.”RBI
The central bank further added that although DBIL is well capitalised, it will bring in additional capital of ₹2500 crore upfront, to support credit growth of the merged entity.
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