Global rating agency Standard and Poor's ( S&P) today said Reserve Bank of India's move to consider Singapore-based DBS Bank to bail out Lakshmi Vilas Bank demonstrates its willingness to put control of banking assets in foreign entities.
Previously, empahsis had been to look at homegrown institutions. In the bailout of private sector YES Bank earlier this year, the RBI called upon government-controlled State Bank of India and other large Indian banks for capital support.
The swift resolution of troubled Lakshmi Vilas Bank (LVB) will keep contagion at bay and help maintain stability in the banking system.
Reserve Bank of India has proposed merging LVB with DBS Bank India Ltd ( DBIL). As part of the proposal, DBIL, the wholly owned subsidiary of Singapore-based DBS Bank will inject Indian rupee Rs 2,500 crore into the merged entity to support its financial position.
The acquisition of LVB will not materially affect the financial position of DBS. LVB is small when compared to DBS, accounting for less than 1 per cent of the group's total assets. That said, LVB will significantly expand DBIL's footprint in India.
This deal is positive for India's banking sector and will bring much-needed relief to LVB, which has been struggling for many years, S&P said in a statement.
The RBI had put the private-sector lender under prompt corrective action (PCA, or under watch by the central bank) in September 2019, and the search for a white knight had been on since then.
"We believe the RBI took into account DBIL's healthy balance sheet and capitalization when considering potential suitors for LVB," rating agency said.
The Indian bank, which has only a 0.2 per cent market share, is the only non-government-owned bank under PCA. Recently, the shareholders of LVB at their annual meeting ousted seven directors of the bank, including its managing director and CEO. The RBI had to step in and appoint a panel comprising three independent directors.
The Indian government is highly supportive of the banking sector. The government has consistently supported weak commercial banks by promoting the merger of distressed institutions with stronger lenders. It has historically not allowed commercial banks to fail and has swiftly stepped in to address trouble, it added.