Reserve Bank of India (RBI) has imposed a moratorium on Lakshmi Vilas Bank for a period of 1 month, effective 6 pm, November 17th until December 16th, 2020. Moreover, the RBI also announced the amalgamation of Lakshmi Vilas Bank and DBS within minutes of putting LVB under moratorium.
During this moratorium period of 1 month, withdrawals by account holders and creditors will be capped at Rs 25,000. This means if you are a customer of LVB, then you cannot withdraw more than Rs 25,000 until December 16, 2020. This includes savings, current and other deposit accounts and fixed deposits as well. However, as per an official statement, withdrawals above Rs 25,000 can only be made in the case of unforeseen expenses including medical treatment, education etc (up to Rs 5 lakh). The central bank has assured that the depositor’s money is safe and has asked depositors not to panic.
What is a Moratorium and How Does it Work?
A moratorium is a temporary suspension of an activity or a waiting period set by a legal authority intended to ease the short-term financial hardship or provide some time to resolve related issues. A moratorium remains until issues that led to moratorium have been resolved.
Most often, though not always, it is the solution to a short-term crisis that disrupts the normal routine of a business. For instance, if a company is experiencing a financial crunch, it can place a moratorium on certain activities to lower the costs.
About the LVB – DBS Merger
The RBI has already issued a draft scheme of amalgamation involving a merger of Lakshmi Vilas Bank with DBS Bank India. DBIL (DBS Bank India Ltd) is a fully-owned subsidiary of DBS Bank Ltd., Singapore, which is, again, a subsidiary of Asia’s top financial services group, DBS Group Holdings Limited. DBIL was issued with a banking license on 4th Oct 2018.
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The proposal of Lakshmi Vilas Bank – DBS Bank India Ltd (DBIL) merger by RBI came after the steady decline in LVB’s financials with it incurring losses spanning over the last three years, according to the RBI. RBI was closely watching the private sector lender for a while. Owing to the deterioration in its financial position due to continuous losses over the last three years, its net worth dropped drastically and the bank was unable to raise capital.
What Made RBI Take Such a Step?
Some key highlights that would describe the reason behind this action are listed below:
- While the lender was under RBI’s watch before even the Lakshmi Vilas Bank news came, it experienced the continuous withdrawal of deposits and had low levels of liquidity. Furthermore, there were governance issues as well. LVB was under the RBI’s Prompt Corrective Action (PCA) framework since September 2019, under which banks with weak financials are put under watch by the RBI. These banks are watched closely based on three parameters – capital ratios, asset quality and profitability.
- RBI also mentioned that LVB was unable to come up with a counter plan to its negative net-worth and continuing losses. As per RBI’s statement, losses would have continued in the absence of any feasible strategic plan, declining advances and scaling non-performing assets (NPAs).
- The Chennai-headquartered Lakshmi Vilas Bank’s problem escalated after RBI rejected its proposal to merge with Indiabulls Housing Finance Ltd in October last year. Subsequently, a proposed merger with Clix Capital Ltd also went off the table. Clix had submitted a non-binding offer for LVB in the month of June but RBI on Tuesday said that the cash-strapped bank had failed to submit any foolproof proposal, due to which it had to appoint an administrator and supersede the bank’s board.
- Coming to the financials, LVB had reported a net loss of Rs. 396 crores in July to September quarter as compared to a net loss of Rs. 357 crores in the same quarter of the last financial year. Its gross NPA has been consistently over 20% and net NPA over 7% since the last 6 quarters.
- DBIL (DBS Bank India Ltd) has the advantage of ‘strong parentage’, the RBI said in a statement on Tuesday that the bank has a good balance sheet, with strong capital support. If the merger scheme gets a green signal, DBS will inject Rs 2,500 crore capital into DBIL, to support the credit growth of the merged entity. This capital will be fully funded from DBS’ existing resources. The bank will wait for the conclusion on the proposed scheme from RBI and the Indian government and announce further details later.
- The DBS Bank has only 20 branches across India; with the help of this merger, it will be able to expand its footprint with the plan proposed by RBI as Lakshmi Vilas Bank has a huge network of more than 550 branches and 900-plus ATMs across India. This merger will make DBS Bank India the largest foreign bank in terms of branches and the small and medium enterprises loan portfolio of Lakshmi Vilas Bank complements that of DBS Bank India’s focus.
Lakshmi Vilas Bank Merger – What Should the Investors Do?
If you have LVB bank as the primary account for your investments, owing to the withdrawal cap, your SIPs might get impacted. This means, your monthly SIP amount might not get debited in case you have already exhausted the withdrawal limit of Rs. 25,000.
If you want uninterrupted SIPs, you have a couple of options. You can either make a lumpsum investment in your existing mutual fund for the SIP amount or start a new SIP by adding another bank as your primary bank. To continue with the SIP payments, You would again have to add a mandate for this new bank.
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Just because the RBI has capped the withdrawals from LVB, there is no need to panic. The moratorium has been imposed for only a month. The DBS Bank merger step was also announced immediately as a proactive measure by the RBI.
The Reserve Bank of India has also assured that the Lakshmi Vilas Bank and DBS Bank India Limited merger will indeed provide stability and better outcomes to Lakshmi Vilas Bank’s depositors, account holders and employees. DBS India is willing to pay depositors of Lakshmi Vilas Bank fully if they do not wish to continue to remain with the lender post-merger.