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What is the Lakshmi Vilas bank crisis? and how will it impact the depositors?

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On Tuesday, The Reserve Bank of India imposed a 30-day moratorium on Lakshmi Vilas Bank Ltd (LVB) which was striving for survival all this time. The RBI superseded LVB’s board of directors. Moreover, the central bank also announced a draft scheme for the amalgamation of the struggling bank with DBS Bank India. The DBS Bank India is a subsidiary of DBS of Singapore. All these decisions have been taken as a response to deal with the serious and devastating financial position of the bank.

The Reserve Bank of India also capped the withdrawals by depositors at Rs 25,000 from savings and current accounts. Expenditure on any item has also been restricted at Rs 50,000 per month.

In just a tenure of last two years India has witnessed a string of banking collapses beginning with IL&FS in 2018, PMC in late 2018, Yes Bank in March 2020 and now the Lakshmi Vilas Bank. With each banking failure, the confidence of depositors in the financial system gets defeated. With every restriction on withdrawal, the once slapped customer hesitates to step back in the system.

What is the central bank’s position?

The RBI has said that the financial position of the Chennai-based Bank, having a network of 563 branches and deposits of Rs 20,973 crore, has seen a steep plunge. The bank has incurred losses back to back over the last three years leading to a fall in its net worth.

As per the RBI, the losses are expected to continue on account of the declining advances, absence of any viable strategic plan, and mounting non-performing assets or NPAs.

TN Manoharan, former non-executive chairman of Canara Bank, has been appointed as the administrator of Lakshmi Vilas Bank by the Reserve Bank of India with the DBS Bank bringing in additional capital amounting to Rs 2,500 crore upfront. This amount shall be used by the to support credit growth of the merged entity.

The central bank has continuously engaged with the Lakshmi Vilas’ management to find ways to augment the capital funds so that it could comply with the capital adequacy norms. The management of Lakshmi Vilas Bank had hinted to the central bank that it was in talks with certain investors but it, however, failed to submit any concrete proposal to the RBI and the efforts of the bank to supplement its capital through amalgamation of an NBFC, non-banking financial company, with itself may have concluded at a dead end. The efforts by the bank to help itself through market mechanisms have not gone well

The Reserve Bank had made all possible efforts to facilitate such a process, and gave enough opportunities and chances to the bank’s management to devise a credible revival plan, or an amalgamation scheme because bank-led and market-led revival efforts are an option which is preferred over a regulatory resolution. The opportunities provided, however, could not be materialised. And during all this time, the bank was witnessing an outflow of liquidity on a regular basis.

The problems of Lakshmi Vilas Bank had been escalating for quite some time with the bank posting a net loss of Rs 397 crore in the September quarter of Financial Year 2021 in comparison to a loss of Rs 112 crore in the June quarter. Its Earning Per Share or EPS stood at -11.79 per cent with the bank’s almost twenty-five per cent or one-fourth of the bank’s advances have turned into bad assets and its gross non-performing assets (NPAs) standing at 25.40 per cent of the advances as of June 2020. This comes against 17.30 per cent recorded a year ago while the total deposits were held at Rs 21,161 crore.

The bank had not been able to manage to raise the necessary capital to deal with the issues around its continuously falling negative net-worth and incessant losses. To add another problem to the list, the bank was experiencing regular withdrawals of deposits along with low levels of liquidity apart from the serious governance issues and practices in the recent years which have led to supreme deterioration in its performance.

In September 2019, the bank was put under the prompt corrective action or PCA framework due to the breach of PCA thresholds as on March 31, 2019. The RBI, after taking into consideration these developments, has concluded that because the bank still does not have a credible revival plan, there is no alternative but to apply to the Central Government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949, with the aim of protecting depositors’ interest and in the interest of financial and banking stability. And after analysing the request of the Reserve Bank, the central government has imposed a moratorium for 30 days effective Tuesday.

What will be the fate of depositors?

The RBI has assured the bank’s depositors that their interest will be completely safeguarded and there is no need to panic. It said that the Reserve Bank will endeavour to put the scheme in place, with the approval of the Government, well before the expiry of the moratorium to ensure that the depositors of the bank are not put to undue inconvenience or hardship for a period of time longer than what is absolutely necessary.

The combined balance sheet of DBIL would remain healthy after the proposed amalgamation owing to comfortable level of capital. The Capital to Risk Weighted Assets Ratio or CRAR is at 12.51 per cent and the Common Equity Tier-1 or CET-1 capital at 9.61 per cent. All this data is calculated without taking into account the infusion of additional capital. As of June 30, 2020, the total regulatory capital of DBS Bank was at Rs 7,109 crore while its net NPAs and gross NPAs were low at 0.5 per cent and 2.7 per cent, respectively. Against requirement of 9 per cent, CRAR was comfortable at 15.99 per cent and CET-1 capital at 12.84 per cent as against the requirement of 5.5 per cent.

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