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On 17 November, Lakshmi Vilas Bank (LVB) was brought under a moratorium; the board of directors was superseded and an administrator appointed.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.
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.