DBS-Lakshmi Vilas Bank Deal: RBI’s Positive Move Sends Many Correct Signals
Protecting depositors’ interest has to be the dharma of a banking regulator, because banking is built on the foundation of people entrusting their savings with banks. With this as the avowed objective, the Reserve Bank of India (RBI) seems to be doing better with each banking disaster under governor Shaktikanta Das’s watch, after the disastrous handling of Punjab and Maharashtra Cooperative Bank (PMC Bank).
 
On 17 November, Lakshmi Vilas Bank (LVB) was brought under a moratorium; the board of directors was superseded and an administrator appointed. Simultaneously, RBI announced a draft scheme for amalgamating LVB’s assets and liabilities with DBS Bank India Ltd (DBIL), the Indian subsidiary of DBS Bank of Singapore (DBSL), which allayed possible panic. The moratorium is brief—only up to 16th December—and the withdrawal limits fairly generous and flexible. 
 
So, yes, RBI did arrange a shotgun marriage without calling potential suitors to Lakshmi’s swayamwar, but only after it watched in silence at its dalliances, and after providing plenty of time for a suitable alliance which did not happen. But the positive signals sent out by this decision far outweigh the carping from various quarters. 
 
There is a general consensus that RBI has done well in rescuing LVB by bringing in a stable partner with deep pockets. Senior central bankers tell me that RBI has enormous powers to launch a rescue effort and it is usually always a quick negotiation with a public or private sector bank, without any elaborate exercise of calling for rival bids.  
 
This time around, RBI has conveyed an important signal by inviting a reputable foreign bank, registered in India, to acquire a large nationwide footprint through a bailout action. This provides the first real incentive for foreign banks to fall in line with RBI’s efforts to register in India and submit to greater oversight and supervision by our central bank. They can now look forward to the same growth opportunity that DBSL got, if there is a crisis in some other private bank (or a large finance company) the next time.
 
The objection to RBI’s action is mainly over one key issue—whether the equity capital of existing shareholders should have been wiped out, or should RBI have followed past precedent and provided some upside to existing investors by going for the merger route, even if it entailed a drastic write down of the value of existing shares. 
 
LVB had attracted some very powerful shareholders in the recent past. They have already announced plans to approach court over RBI’s decision to extinguish their shares entirely. The Bank has around 97,245 individual shareholders, who may be encouraged to lead the protests because their plight makes for better media headlines. Some of these investors have probably held on to their investment for decades; but many are speculators who hoped for a payoff when the Bank eventually changed hands; others are fronts for potential acquirers. 
 
On the other hand, discerning investors have had plenty of reasons to rush for the exit in the past few years. Writing in Moneylife, TR Bhat, a retired banker and thoughtful trade union leader, has pointed out that LVB has had five chief executive officers (CEOs) in the past decade and only one lasted his full term. Successive CEOs chased big borrowers with disastrous results and also faced constant interference in operations from a few shareholders with substantial shareholding, says Mr Bhat. (Read: Lakshmi Vilas Bank and Dhanlaxmi Bank: Self-Inflicted Existential Crisis?)
 
LVB made huge losses in 2019 and 2020 and, when its capital adequacy dived from 10.38% in 2017 to 1.12% in 2020, causing RBI to place the Bank under prompt corrective action (PAC) on 28 September 2019. It has also been investigated by the police for alleged misappropriation of funds by the management and was accused of hiding losses while making a rights issue in 2017 at a hefty premium. 
 
All this information has always been in the public domain. But investment by a clutch of finance companies vying to acquire the Bank was perhaps seen as a good speculative bet. Srei International, Capri Global (5%) and Indiabulls group (just under 5%) are significant shareholders of the Bank even after the latter’s merger proposal with two group companies was rejected by RBI in October 2019. 
 
Until two months ago, LVB’s management was negotiating a merger with Clix Capital, which is controlled by AION Capital Partners through an 85% stake. This move went for a toss when seven directors were thrown out at the annual general meeting on 25th September this year in a move orchestrated by a bunch of investors acting in concert. Those thrown out included LVB’s managing director, RBI-approved statutory auditor and a former chief general manager of RBI who was an independent director.
 
This audacious coup by a gang of powerful investors was deeply embarrassing for the regulator. It was doubly embarrassing that it happened when the LVB was under PAC which implies a period of close watch by the regulator. (Read: Coup at Lakshmi Vilas Bank: 7 Directors Ousted, in an Open Snub of RBI)
 
Some large investors in LVB also have seriously dubious antecedents, which had been brought to the attention of RBI governor. Those behind the coup had miscalculated badly by failing to realise that their action would have grave repercussions. Compared to the quality of suitors that LVB’s management was able to attract, RBI has done far better in choosing DBIL which has an impeccable parentage and deep pockets.
 
Now let us look at it from DBIL’s perspective. With only 27 branches in India so far, LVB’s 563 branches across 15 states give it a significant national presence almost overnight. It also adds Rs6,070 crore in current account/savings account (CASA) deposits and another Rs14,000 crore in term deposits. This is certainly a bonanza.
 
In return, it has been asked to bring in Rs2,500 crore (despite being well-capitalised), in order to ‘secure the amalgamated entity’. It would want the opportunity to start with a clean slate without having a bunch of powerful legacy investors seeking to trip up the management at every turn. RBI probably wanted this too. Putting the Bank under a brief moratorium also ensures that rumour mongering and fears orchestrated by vested interests do not cause a run on the Bank during the transition process. 
 
RBI’s rescue act for LVB is the third major bank resolution under governor Shaktikanta Das’s watch. The first, PMC Bank was a disaster, because the regulator treated it as yet another cooperative bank that went under. It also remains a festering sore, with over Rs205 crore invested by credit societies of RBI’s own officers and employees also stuck in the Bank, along with all others. 
 
The Yes Bank resolution did a lot better by eschewing the usual shortcut of a forced merger with a public sector bank (PSB) and nationalising private losses. But the public-private bailout by a group of banks still fell short, because a senior RBI official bumptiously refused to allow big-ticket foreign investors to participate and has forced State Bank of India (SBI) to take on disproportionate risk. 
 
It remains to be seen if Yes Bank is successfully turned around, or turns into another IDBI Bank, forever adding to bad loans and looking for capital infusion. Wiping out additional tier-1 (AT-1) bond-holders and inflicting losses on mutual funds and retail investors, who were victims of brazen mis-selling, will also remain a blot on the Yes Bank rescue. 
 
LVB is a big improvement on the previous two by allowing a foreign bank to provide a clean and credible rescue. PMC Bank, with its 125 branches in major metros and a core banking solution, could have been similarly rescued. Since governor Das has been promising to find a solution to PMC Bank, hopefully, the recent call for expression of interest and an expanded universe of potential investors, including foreign funds, will lead to a much-needed solution.
 

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    COMMENTS

    yerramr

    2 days ago

    If depositors' interest needed protection, did the RBI analyse how much of deposit portfolio sit in the band of less than Rs.5lakhs, the threshold of Deposit Insurance Guarantee? Second, are the banks as member institutions of Deposit Insurance and Credit Guarantee Corporation aware of the terms of such insurance? Third, if aware, when the guarantee amount would be released to such depositors' accounts? Why no action was initiated promptly on the fraudsters a priori by the RBI as regulator? How and Why DBS was chosen for the merger with disproportionate branches compared to the LVB? Has the RBI done full due diligence of the DBS or has the foreign hold proved more attractive? These and many more questions are begging an answer from the regulator.

    REPLY

    hari.krv

    In Reply to yerramr 2 days ago

    Very valid questions.

    sundarbtw

    In Reply to yerramr 2 days ago

    No one is telling that they can purchase assets and liabilities at a higher value than DBS bank.. that's why RBI has to take decision. CLIX and LVB were sitting on thus issue for many months even when CAR was reaching negative..

    Radhas1167

    4 days ago

    Will the government apply the same logic for PSU banks, write off the capital of shareholders and the buyer will invest only after due diligence and at the correct price. Why was LIC policyholders money used up to buy IDBI bank shares at a huge premium to its real value. Why are tax payers money used to recapitalize PSU banks at high valuation when their real balance sheet is full of holes

    Nahom

    5 days ago

    I was missold two useless products by DBS Bank. Be careful they are not so clean as they appear.

    cvkakatkar

    6 days ago

    DBS is more likely to make a mess of the sick Bank - and sell the same to some other PSU Bank (after a few years) at a profit.

    tillan2k

    6 days ago

    DBS will get ready made retail banking network no hassles for licenses, permits, approvals , certification and making rounds of baboodom . in addition lacs of ready made depositors .. agree hand over sick banks to Foreign banks This is foreign direct useful investment

    Saket Jain

    6 days ago

    why not give Air india, sate owned electricity companies and all loss making companies free of cost like LMB?

    Newme

    7 days ago

    Many unanswered questions.
    Why did the RBI rejected the very same DBS equity offer in 2018?
    Also if entire LVB equity is wiped out, why even allow the shares to be traded? It\'s hitting the LC daily. Who is buying it anyway?

    REPLY

    saioamshyd

    In Reply to Newme 6 days ago

    Those gullible investors, who want to make money by selling newly bought LVB shares with the hope of proportionate conversion into DBS shares.

    hari.krv

    In Reply to Newme 6 days ago

    All the issues raised are most relevant. The way this is handled reeks of arbitrariness and adhocism. It is sad that Moneylife appears to applaud such meddling in the name of depositor security. This merely reveals that nothing will change fundamentally in the banking industry. Those shouting loudest will continue to be pacified.

    Kamal Garg

    In Reply to Newme 6 days ago

    I agree that why the same DBS was rejected in 2018 when the going was much better and balance sheet of Lakshmi Vilas Bank was in much better shape.

    Second point is that how can you just hand over 563 branches in 15 states to another bank just for 'free'. What about the existing shareholders. RBI has done gross injustice to existing shareholders by just writing off the entire share capital to zero. Do you think that 563 branch network spread over 15 states has 'no monetary value' and of course the legacy built over the past 93 years.

    RBI has erred and failed in both the cases : Yes Bank (where it wrote off the entire AT-1 Bonds despite written and clear cut legal guideline to "first write-off the equity and then write-off the AT-1 Bonds) and now LVB (where it wrote off the entire share capital and preserved all Tier Bonds as it is).

    This further shows the dilly-dallying interpretation and approach of RBI in dealing with such cases as the RBI's approach in both the cases is just opposite to each other. How can you be 'legally right' in both the cases where your approach was just opposite and reverse of each case.

    Kamal Garg

    In Reply to Kamal Garg 6 days ago

    I think this issue needs more discussion among the investor fraternity to highlight the point and what is legally right and what are the implications of having different and opposite approach and view point in two similar cases by RBI.
    In fact, a great saviour magazine like MoneyLife should take up this matter very seriously at different levels in different forums so that contradictory and opposite approach and interpretation by RBI is properly addressed to have better investor security, trust and climate in the market and economy.

    hari.krv

    1 week ago

    Banking is the only business where when you mismanage and make a mess of it, others take losses while you are merged with a much more prosperous entity and your salary and perks shoot up. As long as we allow public to underwrite banking losses, banks will continue to be run to the ground and the managers will get huge pensions for life!

    saioamshyd

    1 week ago

    1. Hitherto RBI faild to regulate functioning of PSBs + private banks.Let the bygones be bygone.
    2. At least now, under the stewardship of the Karma Yogi PM with a revolutionary mindset, Shri Narendra Modi, the PMO is expected to take steps by stabilizing the RBI Inspections, Satutory auditors + internal inspections to nip the problem[s] at the budding level. We have a large posse of talented, genius young mindsets to man the bruised- the apex level infra structure & manpower.
    3.We do not have sufficient jail-space to imprison all the culprits. However, identify the kingpins in each failed Bank[s] & send them to jail. Handing over to the Singapore's DBS is right & timely step.
    4. In both PS/Private Banks the micro/macro-level functionaries are competent & honest to the core, by & large. GOI must ensure apex level functioning by visionaries of integrity. India possesses thousands & lacs with integrity; who must be identified & appointed/promoted.
    5. https://lnkd.in/f6eNdcv.
    3. SATYAMAEVA JAYATHE!!

    REPLY

    cvkakatkar

    In Reply to saioamshyd 6 days ago

    well Said - but dont agree with point no 3.
    The purpose of handing over to DBS seems to be, to put a curtain on all misdeeds of the past at RBI and LVB.

    tlrchandran49

    1 week ago

    RBI should have allowed the equity structure of LVB instead of extinguishing.

    RBI imposes penalty on Muthoot Finance, Manappuram Finance
    The Reserve Bank of India (RBI) on Thursday imposed penalties of Rs 10 lakh and Rs 5 lakh on Muthoot Finance and Manappuram Finance respectively for norm violations.
     
    The central bank has penalised Muthoot Finance Limited for non-compliance with directions issued by RBI on maintenance of loan-to-value ratio in gold loans and on obtaining copy of PAN card of the borrower while granting gold loans in excess of Rs 5 lakh, contravening RBI norms.
     
    An RBI statement said that a statutory inspection of Muthoot Finance with reference to its financial position as on March 31, 2018 and March 31, 2019, revealed non-compliance with the above-mentioned directions issued by RBI.
     
    Further, a notice was issued to the company advising it to show cause as to why penalty should not be imposed for failure to comply with the directions issued by RBI.
     
    "After considering the company's reply to the notice, oral submissions made during the personal hearings and examination of additional submissions made by it, RBI concluded that the aforesaid charges of non-compliance with RBI directions were substantiated and warranted imposition of monetary penalty," it said.
     
    Manappuram Finance has been fined for non-compliance with directions issued by RBI on verification of ownership of gold jewellery. An inspection of Manappuram Finance with reference to its financial position as on March 31, 2019, showed that it has not complied with the directions issued by RBI, said another statement in reference to Manappuram Finance.
     
    "This action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the company with its customers," RBI said in separate statements.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Newme

    7 days ago

    How can ownership be proved for inherited jewels.

    Harsh Vardhan Lodha Ousted from Directorship of 5 MP Birla Cos; Ministry Okays Admin Panel Move
    Harsh Vardhan Lodha has been ousted from the Boards of five investment companies of MP Birla group after an order by the Calcutta High Court restrained him from holding offices.
     
    The Union corporate affairs ministry had on Wednesday approved and accepted the cessation of directorship of Lodha as recorded by the Board of Directors of these companies headed by the judicial member of the court-appointed APL Committee.
     
    The decision to remove Lodha from the Boards of East India Investment, Gwalior Webbing, Baroda Agents and Trading Co, The Punjab Produce & Trading Co, and Punjab Produce Holdings, the oldest of which was founded in 1937, was based on the decision of the single bench of the Calcutta High Court dated 18 September 2020 which was approved by the division bench of the said high court on 1 October 2020. The ministry website, which lists directors of companies, no longer shows Lodha's name as Board member of these companies.
     
    On November 5, Lodha had chaired the Board meeting of Birla Corporation and thereafter other three cable companies on 9th and 10th November  as self-appointed Chairman, sidestepping the decisions of the High Court and the APL Committee, the panel overseeing the administration of the estate which holds majority stake and controlling interest in the group companies, which had barred him from acting as such following the High Court order.
     
    The extended Birla family, which is contesting a will of late Priyamvada Devi Birla produced by a former auditor of the group companies naming him as the sole inheritor of the Rs5,000 crore business empire (presently claimed to be valued at over Rs25,000 crore), said it will initiate contempt of court proceedings against Mr Lodha, the concerned companies and their Directors.
     
    "Lodha has continuously misinterpreted court orders and flouted the APL Committee decisions to cling on to the Boards of MP Birla Group companies wrongfully. We will move the court to restrain him from further action in contravention of the decisions of the court as well as the APL Committee," said a spokesperson for the Birlas.
     
    On September 18, 2020, Justice Sahidullah Munshi of Calcutta High Court had ordered Lodha be restrained from holding office in any of the MP Birla Group entities during the pendency of the suit involving the contested will of Priyamvada Birla. This judgement by the single judge was challenged by Lodhas before the division bench which not only declined to stay the ouster of Lodha from the entities of the MP Birla Group, but also held that the order of the single bench was neither a perverse decision nor it was not in the best interest of the estate.
     
    Sources said that Lodha's attorney deliberately interpreted the order to limit the purview of the court order only to alleged miniscule shareholding of the estate, ignoring the well-established corporate practice and commonly prevailing structure of control through holding of shares directly and indirectly by way of cross, chain and interlinked shareholding among the promoter group constituents.
     
    "Thus, the way paved for him to chair the Board meetings of the group companies is illegal and violative of the court orders. The profitability of the MP Birla Group companies has eroded steadily, and in no way is comparable to their peers," sources said.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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