The Reserve Bank of India has merged capital-starved Lakshmi Vilas Bank (LVB) with the Indian subsidiary of Singapore’s DBS Bank. The central bank had to go ahead with the merger plan as there was no credible revival plan to revive the bank and protect depositors’ interest. After the scheme of amalgamation came into effect on November 27, DBS Bank India Limited (DBIL) has received capital infusion of Rs 2,500 crore fully funded from DBS’ existing resources. The amalgamation will provide stability and better prospects to LVB’s depositors, customers and employees after a long period of uncertainty.
This is the first time the RBI has allowed a foreign bank to rescue a struggling Indian bank. In fact, DBIL became lucky in the second attempt after in 2018 it had approached LVB to acquire about 50% of the stake for a much higher valuation of Rs 100-Rs 150 per share. According to the resolution plan, DBS India will invest $335 million in the equity of the LVB for a 51% stake even as the existing reserves and surplus of the bank will be extinguished. The merger is a very prudent step in order to save the depositors and to mitigate the systematic disruption associated with it. To be sure, the merger will be a template for the central bank to rescue other struggling banks in the future. In fact, the central bank had in October last year rejected a proposal for LVB to merge with Indiabulls Housing Finance Ltd.
Once the integration is complete, customers of LVB can access a wider range of products and services, including access to the full suite of DBS digital banking services. Moreover, DBIL is well-capitalised, and its capital adequacy ratio remains above regulatory requirements after the amalgamation. The bank’s Capital to Risk Weighted Assets Ratio (CRAR) was at 15.99%, against the regulatory requirement of 9%, and Common Equity Tier-1 (CET-1) capital at 12.84% was well above the requirement of 5.5%. The central bank had underlined that LVB’s losses would have continued in the absence of any feasible strategic plan, declining advances and scaling non-performing assets (NPAs).
Read: RBI rejects proposed Lakshmi Vilas Bank-Indiabulls Housing Finance merger
As part of the amalgamation, RBI had placed 94-year old LVB under one-month moratorium, superseded its board and capped withdrawals at Rs 25,000 per depositor. The RBI had put the bank under Prompt Corrective Action in September 2019. The central bank had placed Punjab and Maharashtra Co-operative Bank under its control and had placed Yes Bank under a moratorium before preparing a scheme led by State Bank of India and involving several other lenders to rescue the private-sector bank.
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