Lakshmi Vilas Bank: Investors oppose RBI’s merger proposal

Source: Economic Times

by Dhruva Prasad

The bank’s failure comes at a time when the health of the country’s financial institutions is the need of the hour

Lakshmi Vilas Bank investors decided to oppose the RBI’s decision to merge the bank with Singapore-based DBS Bank on Thursday. In a press release on Tuesday, the RBI had issued a draft amalgamation scheme of LVB’s merger with DBS Bank, which included a complete write-off of paid-up share capital and delisting from the Bombay Stock Exchange.

“Any move that hinders the process of natural justice should be avoided,” an institutional investor told The Print. He added that since depositors are also shareholders in many old generation private banks, the move would adversely impact small retail investors too.

The RBI-appointed administrator of LVB, TN Manoharan, has assured depositors that their money is safe, but the question over the bankers’ burden of accountability looms large.

LVB’s travails began with its Rs. 720-crore bad loan to promoters of pharma giants Ranbaxy and Fortis Healthcare, following which Religare Enterprises Limited sued the bank’s Delhi branch.  The bank’s Gross NPAs ballooned from 10 percent in 2018 to 25.4 percent in 2020. This was at a time when the bank was ranked second lowest by market capitalization amongst the 21 scheduled commercial banks in the country.

Post-pandemic implications

The health of the Indian economy in the post-pandemic era will hinge on the robustness of the banking sector. With multiple tranches of fiscal relief largely relying on loan restructuring and collateral-free borrowing, and 72 percent of banking loan to industry under stress, the banks will have to rise to the occasion and lead the country’s economic recovery.

Moreover, by putting investors and depositors in the dock, the RBI is inhibiting investment in the banking sector, which is critical for keeping liquidity in the system buoyant.

Fifth crisis in the last 30 months

The collapse of LVB comes in the wake of the Yes Bank and Punjab and Maharashtra Co-operative Bank (PMC Bank) crises, and it is the fifth financial institution to be crippled in the last 30 months.

While in the case of Yes Bank, bondholders had borne the brunt of RBI’s decision to write-off 8400 crores, the depositors of PMC Bank are still waiting for a crisis-resolution formula.

In 2018, Infrastructure Leasing and Financial Services (IL&FS) and Dewan Housing Finance Corporation Limited (DHFL) had defaulted on loans worth more than 130 000 crore rupees.

(by Dhruva Prasad)