The Reserve Bank of India imposed a 30-day moratorium Tuesday on struggling Lakshmi Vilas Bank Ltd (LVB), superseded its board of directors and announced a draft scheme for the amalgamation of the bank with DBS Bank India, a subsidiary of DBS of Singapore, in the wake of “serious deterioration in the financial position of the bank”.
The RBI also restricted withdrawals by depositors at Rs 25,000 from savings and current accounts, and expenditure on any item at Rs 50,000 per month. The central bank said the financial position of Chennai-based Lakshmi Vilas Bank, which has a network of 563 branches and deposits of Rs 20,973 crore, has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net worth.
“In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue,” the RBI said.
The central bank also appointed TN Manoharan, former non-executive chairman of Canara Bank, as administrator of LVB. DBS Bank will bring in additional capital of Rs 2,500 crore upfront, to support credit growth of the merged entity.
The RBI has been continually engaging with the bank’s management to find ways to augment the capital funds to comply with the capital adequacy norms. The bank management had indicated to the central bank that it was in talks with certain investors. “However, it failed to submit any concrete proposal to the RBI and the bank’s efforts to enhance its capital through amalgamation of a non-banking financial company (NBFC) with itself appears to have reached a dead end,” it said.
“The bank-led efforts through market mechanisms have not fructified,” it said.
As bank-led and market-led revival efforts are a preferred option over a regulatory resolution, the RBI had made all possible efforts to facilitate such a process, and gave enough opportunities to the bank’s management to draw up a credible revival plan, or an amalgamation scheme, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity, it said.
The LVB’s problems had been simmering for quite some time. It posted a net loss of Rs 397 crore in the September quarter of FY21, as against a loss of Rs 112 crore in the June quarter. Its EPS was -11.79 per cent. Almost one fourth of the bank’s advances have turned bad assets. Its gross non-performing assets (NPAs) stood 25.40 per cent of the advances as of June 2020, as against 17.30 per cent a year ago, and total deposits were pegged at Rs 21,161 crore.
The bank had not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, the bank was also experiencing continuous withdrawal of deposits and low levels of liquidity. “It has also experienced serious governance issues and practices in the recent years which have led to deterioration in its performance,” the RBI said.
The bank was placed under the prompt corrective action (PCA) framework in September 2019 considering the breach of PCA thresholds as on March 31, 2019. After taking into consideration these developments, the RBI has come to the conclusion that in the absence of a credible revival plan, with a view to protect depositors’ interest and in the interest of financial and banking stability, there is no alternative but to apply to the Central Government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949.
Accordingly, after considering the Reserve Bank’s request, the central government imposed a moratorium for 30 days effective Tuesday.
The Reserve Bank has assured the depositors of the bank that their interest will be fully protected and there is no need to panic. “With the approval of the Central Government, the Reserve Bank will endeavour to put the scheme in place well before the expiry of the moratorium and thereby ensure that the depositors are not put to undue hardship or inconvenience for a period of time longer than what is absolutely necessary,” it said.
According to RBI, owing to comfortable level of capital, the combined balance sheet of DBIL would remain healthy after the proposed amalgamation with Capital to Risk Weighted Assets Ratio (CRAR) at 12.51 per cent and Common Equity Tier-1 (CET-1) capital at 9.61 per cent, without taking into account the infusion of additional capital.
As on June 30, 2020, DBS Bank’s total regulatory capital was Rs 7,109 crore and its gross NPAs and net NPAs were low at 2.7 per cent and 0.5 per cent, respectively. CRAR was comfortable at 15.99 per cent (against requirement of 9 per cent) and CET-1 capital at 12.84 per cent was well above the requirement of 5.5 per cent.