It was earlier reported that India’s central bank, the Reserve Bank of India (RBI), has seized control of the struggling Lakshmi Vilas Bank (LVB) based in Chennai and “forced a merger” with DBS Bank India Ltd (DBIL), which is wholly owned by DBS Singapore (‘Indian govt seizes Chennai bank with “serious governance issues” and “forces” merger with DBS Bank India‘, 18 Nov).

This is said to be the first time the central bank has brought in a foreign-linked bank to rescue a local Indian bank through a merger.

According to RBI, the financial position of LVB has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth. With declining advances and mounting non-performing assets (NPAs), LVB is expected to make continual losses, opined RBI. The bank is also experiencing a continuous withdrawal of deposits and low levels of liquidity.

Hence, LVB is 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 the regulatory minimum capital requirement of 10.875%.

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.”

Nevertheless, it was disclosed that DBIL will inject an additional capital of Rs2,500 crore (S$450 million) upfront into the merged entity.

LVB has 566 branches and 4,000 employees

With the merger, DBIL will get around 566 bank branches and about 4,000 employees from LVB. Currently, DBIL only has 35 branches in India.

While the merger announcement did not mention any employee rationalisation of LVB, it is likely that it will happen to some extent. The central bank has given DBIL the flexibility to merge any branches of LVB it deemed necessary. “It (DBIL) may close down or shift the existing branches,” said RBI.

At the same time while the merger was announced by RBI, the employee union of LVB, the All India Bank Employees’ Association (AIBEA), also released a statement.

AIBEA has called for a probe on RBI’s role in not taking timely action. C H Venkatachalam, the General Secretary of AIBEA, said, “This announcement has come as a shock to the bank’s customers and general public. This will create panic and doubt in the minds of people about the stability and dependability of banks because people keep their hard earned savings with them.”

Venkatachalam also alleged that some top management officials of LVB are responsible for the huge bad loans in the bank and they should be held responsible.

He added that the LVB management was responsible for bad loans of more than Rs2,000 crore (S$360 million) to borrowers like Religare, Jet Airways, Cox and Kings, Nirav Modi group, Coffee Day and Reliance Housing Finance.

All these undesirable loans were known to RBI as it had its nominee as Director on LVB’s Board, Venkatachalam pointed out. “Unfortunately, a very long rope has been given to the bank and today, the RBI has announced a moratorium,” he added.

RBI has said that there have been “serious governance issues and practices” in LVB in recent years but did not elaborate any details of such issues and practices. Whatever they are, it looks like DBIL will be inheriting them from LVB as well, courtesy of the merger.

India’s banking union and analysts expressed reservations about the deal

India’s banking union as well as a handful of banking analysts have expressed reservations about the potential DBS deal, as reported by Reuters.

The All India Bank Employees’ Association (AIBEA), which represents about half a million bank employees, protested against the proposed amalgamation, and has demanded a merger with a public sector lender instead.

“Government must preserve the essence of an Indian bank and give it to a national lender instead of handing it over to a foreign bank,” said CH Venkatachalam, general secretary at AIBEA.

Besides cultural differences – given that DBS staff are trained in digital skills and strong underwriting processes at a multinational bank, while LVB has a more traditional client-focused approach – Macquarie analyst Suresh Ganapathy noted that there are other issues at play.

“DBS employees will have far better capability in terms of digital banking, credit appraisals, and underwriting,” said Mr Ganapathy.

Additionally, analysts have also highlighted that DBS has a strong track record in acquisitions, such as its takeover of a failed Taiwanese bank in 2008 and the acquisition of ANZ’s wealth management and retail businesses in five Asian markets, completed in 2018.

Reuters cited one fund manager who said that the deal was a strategic fit, though there is room for a potential culture clash.

“The key unknown at this stage is execution especially for a turnaround acquisition like this where Lakshmi Vilas Bank, which appears to have been operating under a different risk appetite and intensity of internal controls, will need to be aligned with DBS’s prudent and conservative culture,” said Xin-Yao Ng, Asian equities investment manager at Aberdeen Standard Investments, which holds DBS shares.

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