Lakshmi Vilas Bank Crisis:

Yet another bank is in trouble after PMC Bank and Yes Bank in the span of just two years. The question is what is common in these crises and how is the RBI responding? 

Lakshmi Vilas Bank was founded by seven businessmen of Karur in Tamil Nadu in 1926. Despite getting started in the South Indian region, it has reached milestones like having 566 branches and 918 ATMs spread across 19 states and Union Territories. With a history of 94 years, there seemed to be low chances of ending up into trouble, but ambition took over. 

The bank initially lended to Small and Medium Enterprises (SMEs), however towards in the last decade it started extending loans to big corporate houses in order to increase revenues and profitability. This actually happened, as between FY10 and FY17, LVB’s loan book grew by 4 times and revenues by 3 times. However, this could not last long because a few bad loans ruin everything. 

In 2016-17, Lakshmi Vilas Bank (LVB) had loaned Rs 720 crores against fixed deposits of Rs 794 crores to Malvinder Singh and Shivinder Singh, the former promoters of Ranbaxy and Fortis Healthcare. However, this became a bad loan. In 2018, the bank’s branch got sued by Religare Finvest, an arm of Religare Enterprises to recover the fixed deposits of Rs 800 crores that the bank invoked to recover its loan to the Singh brothers. Not only this, the bank had extended loans to companies in sectors like Textiles, Infrastructure and Metals, which struggled to make their interest payments. The bank has been making losses since long, and only made profits recently in FY2020. Lakshmi Vilas Bank’s capital adequacy ratio was 3.46% in December of which Tier-I capital was a mere 1.46%. The regulatory minimum for a healthy bank is 8% and 5% respectively. 

Source: Tijori Finance

Source: Finshots 

This is why the RBI put the bank under Prompt Corrective Action (PCA) which basically means that owing to its weak financials, it has been put under watch by the RBI. This restricts the operations of a bank and ability to issue fresh loans. Other banks under PCA include IDBI Bank, United Bank of India, UCO Bank etc.

Post this, LVB tried hard to merge with other financial institutions to get in the required amount of capital. The attempt started with India Bulls Housing Finance, which is a Non-Banking Financial Institution (NBFC). The NBFC was interested because it would have got advantage from the banking license that LVB had. However, the deal did not happen because the RBI called it off. The next attempt was with Clix Group Companies, which too did not materialize. 

Eventually, the capital starved bank was put under a moratorium on November 17, 2020 for a month, capping withdrawals at Rs 25,000 and Rs 5,00,000 in case of unforeseen circumstances. Simultaneously, the RBI announced a draft scheme of its merger with the Singaporean bank, DBS’s Indian subsidiary. 

The merger got approved on November 27, 2020 and DBIL will invest Rs 2500 crores, while the equity, reserves and surplus of LVB would be extinguished. As the shares of the bank get delisted the shareholders would suffer. Besides, LVB has to write off Rs 318-crore Tier-II Basel III bonds ahead of its merger, resulting in losses to the investors of these bonds. 

Why DBS? 

The RBI in a statement mentioned that DBIL had an advantage of a good parentage and would be able to bring in the required capital. The benefit DBS has is that it just had 20 branches in India. Through this merger, DBS would get access to the 566 branches and 918 ATMs of LVB, making it the largest foreign bank in terms of branches in India. Moreover, this is not the first time that DBS showed interest in LVB. Back in 2018, DBS had offered to buy 50% stake in LVB for Rs 100-150 per share, much higher than the current valuation. However, the deal got called off. 

The other private and Public Sector Banks (PSBs) were not an option of merger for the RBI because the private lenders are burdened with the pandemic blues. Whereas, the PSBs have just emerged from a ‘mega merger season’. 

How was Yes Bank’s case different? 

Surprisingly, the RBI did not put Yes Bank under PCA, rather directly took over its board. This meant that the RBI wanted to do a full inspection under an administrator. Prashant Kumar, former MD and CFO of State Bank of India was appointed as the administrator. Moreover, a Public Sector Bank (PSB) had to invest in Yes Bank to rescue it. The reason for the crisis kind of remains the same, which is the overzealous extension of loans to big corporates leading to Non-performing Assets (NPAs). The other difference between the two banks is in terms of scale. Yes Bank being a larger bank needed a much larger capital infusion from State Bank of India of Rs 7250 crores for a 45% stake. 

Analyzing RBI’s reaction:

RBI has received some criticism for this deal from various stakeholders. While the bank unions believe that ‘RBI has gifted the bank to DBS for free’. The All India Bank Employees Association also says that the merger is against the ‘Atmanirbhar’ policy proposed by the government. 

Although RBI timely rescued the bank, the fact that the failure of banks like PMC, Yes Bank and now LVB happened in quick succession raises a question on the structure of the banking industry. The kind of situation that the RBI is in can be said to be a stiff position because if it intervenes early, it is accused of micromanaging, whereas if it acts late it is held guilty. However, this does not provide assurance to the depositors and specifically shareholders who might find it difficult to not imagine another banking crisis. This is because usually in cases of mergers, the shareholders are offered the shares of the merged entity. However, LVB’s shareholders ended up with nothing. 

A lesson for the shareholders could be to recognise the red flags like the PCA, rising bad loans, failed mergers, etc. The relief here is that RBI has succeeded in protecting the depositors, although the amount of Rs 15000 crores deposits may not be as large. Another way to provide assurance could be the way RBI has been coping up with the crises. The governance has definitely improved, so has the prompt responsiveness. 

Ashu Jain is a second-year student at Ashoka University pursuing a major in Economics and Finance.