You are here: Home » Companies » News
Business Standard

Lakshmi Vilas Bank failed and this time India is getting a rescue right

India called upon called upon a foreign institution to take over Lakshmi Vilas Bank's assets and liabilities. That should stoke interest of other global banks

Topics
Lakshmi Vilas Bank | Indian banking sector | DBS

Andy Mukherjee | Bloomberg 

DBS, Capri Global among suitors for cash-strapped Lakshmi Vilas Bank
Only Lakshmi Vilas Bank's deposits will appear on the books of the India unit of DBS Group Holdings Ltd., Singapore’s biggest bank

Another Indian bank has failed, the third collapse of a major deposit-taking institution in 15 months and the first since the onset of the coronavirus pandemic. But instead of allowing a zombie lender to linger after a half-baked rescue, the central bank has wisely decided to put Ltd. out of its misery. Better still, it’s called upon a foreign institution to take over the assets and liabilities. That should stoke interest of other global banks.

The moth-eaten LVB will cease to exist, its equity completely wiped out. Only its deposits will appear on the books of the India unit of Group Holdings Ltd., Singapore’s biggest bank. This is a much cleaner solution than how the handled the implosion last September of Punjab & Maharashtra Co-operative Bank Ltd., whose loan book was basically tied to one bankrupt shantytown developer. The scam-tainted lender is trying to sell itself, though it’s unclear why anyone would touch it with a barge pole. More than a year later, larger PMC depositors still remain trapped, under orders from the RBI.

The refusal to give a decent burial to a failed institution was visible in the messy bailout of Yes Bank Ltd. in March. Without wiping out the existing equity, authorities permanently wrote down $1.2 billion of Yes Bank’s liabilities, the first complete loss imposed by any country on Additional Tier 1 bondholders. They then leaned on government-controlled State Bank of India to inject some more capital. Once a major corporate lender, Yes was destroyed from within by its previous management’s dubious underwriting. Whether it has finally been saved may not be known before March 2022. Until then, Covid-19 has provided a convenient regulatory cover to delay recognising stressed assets.

LVB was struggling to survive even before the March lockdown. The resulting dislocation dragged down the Tier 1 capital ratio to minus 1.83%, putting the lender beyond redemption. By swallowing assets and liabilities of the 94-year-lender, gets 563 branches, 974 ATMs and a $1.6 billion franchise in retail liabilities.

The institution was the second foreign bank after SBM Group of Mauritius to turn its India operations into a wholly owned subsidiary. Yet, Bank India Ltd. hasn’t really expanded outside major metropolises. LVB will help it penetrate deeper into the more industrialised southern state of Tamil Nadu, where Singapore’s ethnic Indian minority has an ancestral connection. Faster growth in the country could even open up the possibility of a stock-market listing in Mumbai for the India subsidiary, says Bloomberg Intelligence analyst Diksha Gera.

The deal nixes speculation that the RBI might turn to the state-run Punjab National Bank to rescue LVB if it couldn’t find an acceptable rescuer on its own. Punjab National, allegedly taken for a $2.1 billion fake loan-guarantee ride by an uncle-nephew jeweler duo, is hardly the picture of operational strength and financial vitality depositors want to see in a white knight.

To that extent, the RBI’s decision to broaden the search beyond a “national team” is a good sign. It shows that the regulator wants control of banking assets to be in strong hands. If they incorporate locally, overseas institutions will be considered at (almost) par with homegrown ones.

DBS’s rivals like Standard Chartered Plc, Citigroup Inc. and HSBC Holdings Plc have deeper India ties and bigger branch networks. But their interest in establishing local subsidiaries never perked up because of the stipulation that 25% of new branches in any year should be in unbanked rural areas. However, now that DBS is getting to build scale in India’s capital-starved banking system via an amalgamation blessed by the regulator, there may be similar opportunities in store for others, particularly HSBC.

The British bank needs to cut its excessive reliance on the Hong Kong market, where it’s caught in the middle of a financial cold war between China and the U.S. DBS Chief Executive Officer Piyush Gupta has put the balance sheet of the bank’s Indian unit to use and promised to bring in an extra $336 million in capital. Noel Quinn, his counterpart at HSBC, should take time off from his cost-cutting agenda and weigh the opportunity. LVB was just a small private-sector bank, but the Indian government also wants to consolidate its 12 state-run lenders into four. There could be an M&A prize for becoming Indian.

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Wed, November 18 2020. 11:39 IST
RECOMMENDED FOR YOU
.