It was reported in the Indian media today that India’s central bank, Reserve Bank of India (RBI), has seized control of the struggling Lakshmi Vilas Bank (LVB) and “forced a merger” with DBS Bank India Ltd (DBIL), which is wholly owned by DBS Singapore (‘RBI brings in DBS’ India unit to save Lakshmi Vilas Bank‘, 18 Nov).
Mint, an Indian financial daily, reported, “The (Indian) banking regulator on Tuesday (17 Nov) seized control of the struggling Lakshmi Vilas Bank (LVB) and forced a merger with the local unit of Singapore’s largest lender DBS Bank, the first time the central bank has tapped a bank with a foreign parent to backstop an Indian rival.”
Bloomberg, on the other hand, described the merger as a “rescue effort” by DBS Bank. An institutional investor advisor told Bloomberg that LVB, based in Chennai, was “pretty much insolvent” and that “the writing has been on the wall for a while”.
And according to the Hans India, it reported, “The move (merger) is being termed in the financial world as the fastest resolution of a failed bank.”
LVB gasping for capital while experiencing “serious governance issues”
Mint said that RBI’s surprise intervention to force the capital-starved LVB to merge with the stronger DBIL came after watching LVB struggled to find a suitor to help it meet minimum capital requirement, thereby saving LVB.
The bank has been in a bad shape for some times and desperately gasping for capital. Not only did its capital adequacy ratio fail to meet regulatory norms, but the ratio had also turned negative in the Sep quarter. Its capital adequacy ratio (CAR) shrank to -2.85% as at end Sep, against a regulatory minimum of 10.875%.
The bank’s loss has also widened to Rs397 crore (S$72 million) in the Sep quarter from Rs357 crore (S$64 million) loss a year earlier. It has been under RBI’s radar for prompt corrective action (PCA) since Sep last year.
“The financial position of Lakshmi Vilas Bank Ltd (the bank) has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth. In the absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue,” RBI said.
LVB is also experiencing a continuous withdrawal of deposits and low levels of liquidity, RBI added. More importantly, RBI revealed, “It (LVB) has also experienced serious governance issues and practices in recent years, which have led to a deterioration in its performance.”
LVB’s entire capital to be written off after merger with DBIL
As part of the merger process, RBI has capped withdrawals at Rs25,000 (S$450) at LVB for a month.
It’s entire capital will also be written off after the merger with DBIL. “The entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the LVB, shall stand written off,” a RBI notification said. “The transferor bank (LVB) shall cease to exist by operation of the scheme, and its shares or debentures listed on any stock exchange shall stand delisted.”
That is to say, with the write-off in paid-up share capital and reserves and surplus, the bank’s equity will go down to zero.
This is the third time in about a year that RBI has seized control of a bank. The other two were Punjab and Maharashtra Co-operative (PMC) Bank and Yes Bank Ltd. Many banks are under pressure in India due to bad loans. Going through legal means to get back money from debtors is also tricky in India as court cases can easily drag over 20 to 30 years (‘India’s dysfunctional court system with 40 million pending cases threatens CECA deals‘).
Meanwhile, RBI praises DBIL saying that it has the advantage of strong parentage linking back to DBS Singapore. RBI further disclosed, “It (DBIL) will bring in additional capital of Rs2,500 crore (S$450 million) upfront to support credit growth of the merged entity.”
RBI added that the combined balance sheet of DBIL and LVB would remain healthy after the merger, with capital to risk-weighted assets ratio (CRAR) at 12.51%, without taking into account the infusion of additional capital.
But in case of any debentures, bonds, or any other financial instruments owed to creditors by LVB, DBIL will have to pay the creditors out of its own accounts, according to the terms of the merger.
DBS Bank India welcomes merger with struggling LVB
In a statement, DBIL welcomed the merger. It said, “The proposed amalgamation will provide stability and better prospects to Lakshmi Vilas Bank’s depositors, customers and employees following a time of uncertainty.”
“At the same time, the proposed amalgamation will allow DBIL to scale its customer base and network, particularly in south India, which has longstanding and close business ties with Singapore.”
DBIL added that the capital infusion into LVB will be funded from its existing resources.
The sudden move by RBI to get LVB to merge with DBIL is said to have also taken employees’ union at LVB by surprise. A senior union member has declined to comment as they said they have yet to see the details of the merger.
It’s not known what the unions at LVB would demand from its new owner DBIL.