The Reserve Bank of India (RBI) on Tuesday proposed to merge private sector lender Lakshmi Vilas Bank (LVB) with the India subsidiary of Singapore’s DBS Bank, even as LVB was put under moratorium for at least a month by the government.
This is a draft merger proposal, and the final decision will be taken by the RBI after inputs and objections from members, depositors, and creditors of the banks, the central bank said on its website.
According to an industry expert, DBS makes logical sense from the systemic point of view. “RBI has been telling foreign banks to incorporate their operations as wholly owned subsidiaries onshore for more than a decade, with the promise to treat them on a par with local banks. Except DBS and State Bank of Mauritius, nobody took that offer.”
Employees and depositors of LVB will be protected, but the draft scheme pointed out that "the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the transferor bank (LVB), shall stand written off.” With a share price of Rs 15.50 a piece, LVB's market cap on a fully float basis is Rs 474.93 crore as on Tuesday, as per BSE.
In February, Business Standard had reported that DBS India was in talks with LVB to acquire a majority stake.
Considering that the RBI had already appointed a three-member committee of directors with discretionary powers of MD and CEO, the order to place LVB under moratorium was not surprising.
LVB has been in rough weather since a few years. In September, shareholders voted against seven board members — including interim MD and CEO S Sundar — at the annual general meeting. Further, the bank has been struggling to raise capital for the last few years.
In a notification on the finance ministry’s website, the government said the decision to put the bank under moratorium followed a request from the RBI.
The moratorium took effect from 6:00 pm on Tuesday, and will remain till December 16. During this time, depositors cannot withdraw more than Rs 25,000.
T N Manoharan, former non-executive chairman of Canara Bank, has been appointed administrator of LVB by the RBI. Bank unions said the RBI proposal was a "shock to the customers", and the bank should be merged with a public sector bank.
The FinMin order also said that since the bank is now under moratorium, commencement/continuation of all action and proceedings against the bank would be halted, except under necessary circumstances.
DBS Bank India (DBIL) has the “advantage of a strong parentage”, the RBI statement described. It received the banking licence on October 4, 2018, and was established on March 4, 2019.
Acquiring the South India-based bank will expand DBS’ footprint exponentially, as LVB has 563 branches and five extension counters with a pan-India presence. It has 974 ATMs and has deployed PoS machines at various merchant establishments.
“Although DBIL is well-capitalised, it will bring in additional capital of Rs 2500 crore upfront to support credit growth of the merged entity,” said the RBI’s draft scheme for amalgamation.
“Owing to the comfortable level of capital, the combined balance sheet of DBIL will remain healthy after the proposed amalgamation, with CRAR at 12.51 per cent and CET-1 capital at 9.61 per cent, without taking into account the infusion of additional capital,” the RBI statement said.
This proposal brings to an end months of speculation and heated negotiations between different parties. A merger proposal with Indiabulls Housing Finance was rejected by the RBI in 2019, because of its high exposure to the realty sector. In June this year, LVB had inked a non-binding agreement with Clix Group for amalgamation.
However, that did not cut ice with the regulator for various reasons.
“Clix’s loan book was Rs 4,200 crore, of which Rs 2,500 crore of loan assets were not banking-compliant,” says Shakti Sinha, member of LVB’s committee of directors. These loans did not meet the required risk-weight and some of them were deficient on collateral.
“These loans would have been okay for an NBFC, but they would have required more capital for banking purposes, which Clix was not ready for,” Sinha said.
According to a person in the know, Clix was considering a stake of 90 per cent, subsequently reducing it to 80 per cent with an exit clause for 60 per cent of such stake during the first year of merger. This may not have secured regulatory acceptance, the person added.
After the board debacle on September 25, there was a run on the bank, resulting in withdrawals of over Rs 1,000 crore. This lasted for three weeks, with stability returning by mid-October. “We have undertaken a lot of one-time settlements and recovered more than Rs 1,000 crore to make do for the run on the bank,” Sinha pointed out.
LVB’s name is likely to be retained for up to two years. The bank will be called LVB-DBS India during this period, said a person aware of the development. After this period, LVB’s name will cease to exist. Final operational contours will be presented to the RBI by DBS India, in a week.