India, Chennai — Last week, it was 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).

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.

Not only did LVB’s capital adequacy ratio fail to meet regulatory norms, but the ratio had also turned negative in the Sep quarter. 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.”

With the merger, DBIL will get around 566 bank branches and about 4,000 employees from LVB. 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.

Bloomberg described the merger as a “rescue effort” by DBS Bank. An institutional investor advisor also told Bloomberg that LVB was “pretty much insolvent” and that “the writing has been on the wall for a while”.

Commotion at LVB branches

As part of the merger process, RBI has capped deposit withdrawals at LVB to Rs25,000 (S$450) per month. LVB will not be allowed to make any payment above Rs25,000 to depositors, without the written permission from the central bank.

The Indian media Financial Express has reported that commotion was seen at LVB branches as depositors “throng to withdraw money”. It was reported that many depositors could not withdraw their money due to technical glitches and were told that the software was still to be “re-calibrated” to meet the newly imposed withdrawal limit of Rs25,000.

“Commotion was witnessed at various branches of Lakshmi Vilas Bank (LVB) across the state on Wednesday (18 Nov) as depositors flocked in large numbers to withdraw money in the wake of the bank being put under moratorium. Adding to the woes of customers, ATMs were inactive throughout the day,” Financial Express said.

Senior citizens and women formed the bulk of customers who rushed to LVB branches upon hearing the news of merger with DBIL.

“Visibly upset customers were seen questioning the staff over their inability to provide cash withdrawals. Customers complained that at many branches, staff were not able to give them satisfying explanations regarding the number of withdrawals within the cap of Rs25,000,” Financial Express added.

A senior citizen, Rethnavel Pandian, told the media that he had deposited a big amount since the bank offered higher returns compared to other lenders.

LVB urged depositors to stay calm and said that the withdrawal curb is only temporary. It added that every single rupee of the customers is safe in LVB. “Gradually, the system is getting re-calibrated factoring in the cap, so that customers are able to withdraw their money,” said LVB’s administrator T N Manoharan.

In any case, DBS Bank India has promised to inject S$450 million into the merger with LVB.

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