Global rating agencies are upbeat on the proposed merger of cash-starved Lakshmi Vilas Bank with the Indian arm of Singapore’s DBS Bank, saying it demonstrates the Reserve Bank of India’s (RBI’s) willingness to give control of banking assets to foreign entities.
Previously, the emphasis 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.
Standard and Poor’s (S&P) on Thursday said the swift resolution of LVB will keep contagion at bay and maintain stability in the banking system.
Another rating agency, Fitch, said the proposed takeover is not sufficiently large to immediately affect DBS’s credit ratings. However, what it signifies about the bank’s growth strategy could shape its earnings and capitalisation risks over the medium term and potentially alter its credit profile.
The RBI has proposed merging LVB with DBS Bank India Ltd (DBIL). As part of the proposal, DBIL will inject Rs 2,500 crore into the merged entity to support its financial position.
Earlier, rating agency Moody’s had said the step will strengthen DBS’ business position by adding new retail and small and medium-sized customers.
DBS Bank India’s loan book is mostly focused on the corporate and SME sectors. The acquisition will help DBS complement traditional physical branch banking with its digital strategy in India.
The acquisition of LVB will not materially affect the financial position of DBS. However, LVB will help DBIL expand its footprint in India.
S&P said in a statement that this deal is positive for India’s banking sector and will bring much-needed relief to LVB, which has been struggling for many years.
Fitch said India’s banking system is under significant stress and “we have a negative outlook on the operating environment”, whose factor midpoint of 'bb' is eight notches lower than Singapore's 'aa-'.
The net loans of DBIL made up less than 1 per cent of the group’s loan portfolio at end-June, but should this proportion increase materially in the next few years, it could weigh on the bank’s blended operating environment factor score, on which we already have a negative outlook,