The Union Cabinet today has approved the RBI’s Proposal of merging LVB with DBS Bank India. As part of the amalgamation plan, DBS India will infuse fresh capital of ₹ 2,500 crore into LVB and the entire share capital and reserves and surplus will be written off.
On 17th November, the Central Bank has Lakshmi Vilas Bank under one-month moratorium, superseded its board and capped withdrawals at ₹25,000 per depositor. “With the merger, there will no further restrictions on the depositors regarding the withdrawal of their deposit,” Union minister Prakash Javadekar said.
Analysts and global credit rating agencies have applauded RBI’s move and said that it will benefit both parties. “The quick action taken by the RBI in the Laxmi Vilas Bank matter affirms the faith of the depositors in the banking system,” Ajay Shaw, Partner, DSK Legal.
DBS was the first foreign bank to receive a banking licence after the central bank allowed foreign banks to set up a wholly owned subsidiary in 2014. “With DBS likely to use digital capabilities to enhance its physical footprint in India, the proposed deal could lead to a 30-40% increase in Indian assets of DBS,” said JPMorgan analysts Harsh Wardhan Modi and Saurabh Kumar.
The RBI has resorted to forced mergers in the past. The central bank had announced a scheme of amalgamation for IDBI-United Western merger in September 2006 and the merger of Global Trust Bank with Oriental Bank of Commerce in the year 2004. This is, however, the first time the central bank has tasked a bank with a foreign parent to revive an ailing private lender.
Lakshmi Vilas Bank, struggling with bad loans and governance issues, has been scrambling to find a buyer for the past one year. Lakshmi Vilas Bank failed to get approval from the Reserve Bank of India late last year to merge with shadow lender Indiabulls Housing Finance. Its subsequent discussions with Clix Capital, part of a company owned by Mumbai-based private equity firm AION Capital, also did not come through.
LVB’s capital adequacy ratio stood at 3.46 percent at the end of December and the percentage of gross bad loans to total assets had inched up to 23.27 percent, the bank had said in its quarterly results released in February.