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The rescue act

LVB's bailout plan could have come earlier

Topics
Lakshmi Vilas Bank | DBS Bank | Lakshmi Vilas Bank crisis

Business Standard Editorial Comment  |  New Delhi 

Yet another financial institution has failed and is being rescued. The (RBI) on Tuesday proposed to merge (LVB) with the Indian subsidiary of Singapore-based . LVB was also placed under a moratorium by the government for a month and depositors would be allowed to withdraw only Rs 25,000 during this period. According to the plan, the entire paid-up share capital, and reserves and surplus of LVB will be written off. However, the interests of depositors and employees will be protected. In the end, this might look like a smooth process, where the interests of depositors and employees are protected, and a troubled entity is merged with a strong financial institution looking for growth opportunities. has a healthy balance sheet with sufficient regulatory capital. It is also willing to put additional capital in the merged entity to support credit growth. Both the government and the regulator have done well to initiate the process in a synchronised manner — the RBI announced the amalgamation scheme within minutes of the government putting the bank under moratorium. This contained the damage to a large extent. Further, writing off the existing equity sends a strong signal to shareholders in banks that they could be the biggest loser in the case of mismanagement. The RBI has also done well by sending a strong signal that it wants control of banks in strong hands. That explains its decision to allow the Indian subsidiary of a foreign bank to take control of LVB.

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First Published: Thu, November 19 2020. 00:40 IST
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