DBS's Ratings Not Immediately Affected by Takeover of Lakshmi Vilas Bank: Fitch
The proposed takeover by Singapore-based DBS Group Holdings Ltd of India's The Lakshmi Vilas Bank Limited (LVB) is not sufficiently large to immediately affect DBS's credit ratings, says Fitch Ratings. However, the ratings agency says, it signifies about the bank's growth strategy that could shape its earnings and capitalisation risks over the medium term and potentially alter its credit profile.
 
DBS established 21 new branches in India in 2019 for a total of 33, but the proposed transaction will add as many as 563 branches, a greater number than that of all other foreign banks in India put together. LVB's network is focused in south India, with three-quarters of its branches located in three states - Tamil Nadu, Andhra Pradesh and Karnataka. 
 
Fitch says, "We regard LVB's branches as one of its most coveted residual assets for a foreign buyer and believe the ready-made platform that will enable deeper market penetration is the key draw for DBS."
 
According to the ratings agency, DBS pivoted to a hybrid physical-digital approach after incorporating a local subsidiary in 2019 and aims to build out more than 100 physical touchpoints across India by the end of the year, having previously emphasised a digital banking model. 
 
"The proposed acquisition dovetails with the bank's stated strategy and could significantly accelerate its ambitions in India upon successful integration to help it reap growth opportunities in the medium term. LVB's balance sheets amount to less than 1% of DBS's risk-weighted assets (RWA), assets and equity, meaning it will not immediately affect the group's asset quality, profitability or capitalisation and, consequently, its credit ratings," Fitch added.
 
India's banking system is under significant stress and Fitch says it has a negative outlook on the operating environment, whose factor midpoint of 'bb' is eight notches lower than Singapore's 'aa-'. The net loans of DBS Bank India Ltd, DBS's onshore subsidiary, made up less than 1% of the group's loan portfolio at end-June, but should this proportion increase materially in the next few years, it could weigh on the bank's blended operating environment factor score, on which Fitch already have a negative outlook.
 
According to the ratings agency, a weaker assessment of DBS's operating environment into the 'a' category would have significant ramifications for its financial profile and would almost certainly lead to a downgrade of its standalone credit ratings. 
 
"We do not envision its Indian business expanding at such a pace, but we are watchful if the proposed LVB acquisition is a harbinger of aggressive balance sheet expansion - whether organically or inorganically," Fitch added.
 
  • Like this story? Get our top stories by email.

    User 

    The Time Value of Money
    Human misery cannot be quantified by an inanimate number, such as, “Gross domestic product (GDP) is expected to contract by x% over the next one year.” Human misery is real – it affects every aspect of human existence; social, emotional, economic and mental. 
     
    The ramifications of the COVID pandemic and the all-round deep misery it has caused, and is causing, is being felt by one and all. But is the way relief provided by the government of India by waiving part of the interest payable on loans to a section of borrowers, in any way justifiable – both in terms of what has been done and the way it has been done?
     
    A rupee today is more valuable than a rupee say one year from now, or for that matter a rupee tomorrow – this is what is known as the time value of money.
     
    A rupee in hand today may either be used for consumption or be saved. If used for consumption, it would yield one rupee of satisfaction. If it is saved and invested in an earning asset, the rupee, after one year, would be more valuable than its value today. 
     
    Moreover, the future is always uncertain. If the rupee is not consumed immediately, there is the risk that it might be stolen, borrowed and not returned, lost, or simply lose value due to inflation. Therefore, there are multiple logical reasons why a rupee today is more valuable than the same rupee after the passage of any period of time.
     
    The mechanism used to keep track of the time value of money is by way of interest and discount rates. A practical matter, which has to be kept in mind while calculating interest, is the period for which the interest is to be calculated. Once interest is applied, it becomes part of the dues of the borrower and indistinguishable from the principal dues. 
     
    By convention and tradition, interest calculated at yearly intervals is known as simple interest but when it is calculated at shorter intervals, say monthly or quarterly, it is known as compound interest. It is interesting and pertinent to observe that even simple interest gets compounded at yearly intervals. 
     
    Periodic calculation and payment of interest by borrowers reassures banks and gives an objective basis for evaluating the quality of the loan as well as the quality of the bank’s health. If interest is not being serviced in a timely manner, it is a clear indication that the borrower is either into financial troubles or his inclination to repay his dues has reduced.
     
    Loan contracts are commercial agreements between the borrower and the lender and it is assumed that both are not only competent to enter into the contract but are also doing it without any kind of extraneous pressures. Legal recourse in interpretation or enforcement of commercial agreements is taken only if there is disagreement between the borrower and the lender on the terms of the contract or some of the clauses are considered legally untenable. 
     
    Either party to an agreement may take recourse to legal measures for getting an impartial appraisal and decision on the terms of the agreement or the legality of the contract. Other than that, courts, as a policy, should not, and do not, interfere in the working of legally binding valid agreements. 
     
    For giving relief to a class of people having difficulty in servicing their borrowings, it is understandable, but not necessarily justified, for the government to step in as a result of political pressures. No one would disagree that the cohort availing loans are not only economically and politically powerful but also very vocal. 
     
    However, for the honourable courts to push for waiver leaves one with a sense of disquiet. First, there seems to be no conflict between the borrowers and lenders. If borrowers have difficulty in repayment, they need to approach the lenders for relief who, in turn, have to evaluate the validity of such demands on merits. 
     
    Second, the small sub-set of people, who are able to avail loans in the first place, are in general better placed in life than the rest of the population. They become even better off by having larger capital at their disposal through the borrowing arrangement. If part of the legitimate dues are then waived off, they become still better off. The bigger the loan, the bigger the waiver which, in turn, leads to higher increase in income and wealth inequalities in society – at the cost of all those who have not availed borrowed capital!
     
    Third, it sets a (very dangerous) legal precedent of seeking legal recourse to avoid paying legitimate dues. 
     
    Fourth, the benefit to individual borrowers from waiver of the quarterly compounding effect over two quarters would be marginal compared to the size of the borrowing, but its effect in derailing the maintenance of discipline for efficient and effective operation of financial markets is massive and, ultimately, adversely affects each and every aspect of the real economy.
     
    The time value of money is one of the fundamental truths of life and keeping this in mind is essential for the smooth functioning of our economy and society. It is as fundamental as, say, the law of gravity. Without gravity, none of the planets would be able to maintain their orbits, there would be no regular seasons, evolution as we know it, would not happen. Life without gravity is inconceivable. Similarly, not accounting for the time value of money can lead the entire social and economic superstructure to collapse.
     
    The decision of waiving compounding of interest was something that our esteemed democratically elected government and honourable courts should have given more thought to, before pushing the banks to implement it.
     
    (The author worked with various banks - public, private, and foreign both in India and abroad - for nearly 30 years and is currently on a self-imposed sabbatical to try and understand as to what ails Indian banking and what, if anything, can be done to improve its functioning.)
  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    Ramesh Popat

    6 days ago

    all categories of borrowers got a big chunk.
    but the middle class who suffered a lot in the year
    are untouched so far. too low deposits rates added
    fuel in the fire. real inflation is much more now.
    will anyone wake up for them?!

    Kamal Garg

    6 days ago

    In the first place, courts should not have intervened in the matter at all. All borrowings are a commercial contract between borrower and lender. If a Government of the day wants to give some relief to its populace based upon some consideration, let the government give such relief and courts have no role to play here. And rightly also, GoI has already announced some relief in the matter based upon their understanding of the issue and the broader social and economic objective in mind, why the courts are still intervening in the matter is not understandable.

    ramaninv1953

    1 week ago

    A Very lucidly written Article.

    sachin_pu

    1 week ago

    This is one of the best articulated piece I have read in recent times. Thank you!

    s5rwav

    1 week ago

    Due to Consistently High Level of Retail Inflation, Purchasing Power of Rupee has Eroded over a Period of Time. Further, Return on Saved Money and Invested is Not Lucrative. As a Result, Commoners Suffer Irrevocably. I am Babubhai Vaghela from Ahmedabad. Thanks.

    Lakshmi Vilas Bank: AIBEA Wants Officials of RBI Also Probed; Demands Merger of LVB with a PSB
    While seeking merger of Lakshmi Vilas Bank (LVB) with a public sector bank (PSB), the All India Bank Employees' Association (AIBEA) has demanded a probe into all those who were on watch, including nominees of Reserve Bank of India (RBI) on the board of LVB and others, for the huge bad loans of about Rs2,000 crore, which took down the Bank.
     
    In a statement, CH Venkatachalam, general secretary of AIBEA, says, "RBI, which is responsible to maintain the stability of the banks and financial sector cannot escape its responsibility for not taking timely action. RBI’s role should be thoroughly probed. Moreover, some top management officials of LVB are responsible for the huge bad loans in the Bank and action should be taken on them."
     
    Speaking with IANS, Mr Venkatachalam alleged, that the decision of RBI to palm off 94-year-old bank to DBS Bank India Ltd, a wholly-owned subsidiary of Singapore-based DBS Bank Ltd, smacks of arbitrariness and lack of transparency. "There would have been several groups interested in LVB with its extensive branch network and deposit base. The RBI did not make any open bid for LVB. From where DBS Bank India came in and how RBI zeroed in on that bank is not known," he says.
     
    He charged RBI of handing over LVB to DBS Bank India overnight in an arbitrary manner. "The fundamental question is why only DBS Bank India and why not others? Why no bids were issued? It is agreed that RBI may have powers, but those powers should be exercised in a transparent manner and not arbitrarily," Mr Venkatachalam said.
     
    AIBEA says, the then management of LVB had indulged in a lot of bad loans of more than Rs2,000 crore to borrowers like Religare, Jet Airways, Cox and Kings, Nirav Modi group, Coffee Day, and Reliance Housing Finance. "All these undesirable loans were known to RBI as it had its nominee as director on the Board of the Bank. The Bank was put of prompt corrective action (PCA) norms indicating that the Bank needs correction. But unfortunately, a very long rope has been given to the Bank and today, the RBI has announced moratorium," it added.
     
    On Tuesday, RBI said the financial position of the LVB has undergone a steady decline with the Bank incurring continuous losses over the last three years, eroding its net worth.
     
    In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. RBI says, "LVB has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, the bank is also experiencing continuous withdrawal of deposits and low levels of liquidity."
     
    "It has also experienced serious governance issues and practices in the recent years which have led to deterioration in its performance. The bank was placed under the PCA framework in September 2019 considering the breach of PCA thresholds as on 31 March 2019," RBI said.
     
    According to RBI, it had been continually engaging with the management of LVB to find ways to augment the capital funds to comply with the capital adequacy norms.
     
    The LVB management had indicated to RBI that it was in talks with certain investors but failed to submit any concrete proposal.
     
    Further, LVB's efforts to enhance its capital through amalgamation of a non-banking financial company (NBFC) with itself appears to have reached a dead end, RBI said.
     
    According to RBI, it has come to the conclusion that in the absence of a credible revival plan, with a view to protect depositors' interest and in the interest of financial and banking stability, there is no alternative but to apply to the Central government for imposing a moratorium under Section 45 of the Banking Regulation Act, 1949.
     
    Accordingly, after considering RBI's request, the Central government has imposed moratorium for 30 days effective from 17 November 2020.
     
    As per the draft amalgamation scheme, RBI has said on and from the appointed date, the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the transferor bank (LVB), shall stand written off.
     
    On and from the appointed date, the transferor bank shall cease to exist by operation of the scheme, and its shares or debentures listed in any stock exchange shall stand delisted without any further action from the transferor bank, transferee bank (DBS Bank India) or order from any authority.
     
    As regards LVB employees, they will continue in service and be deemed to have been appointed in the DBS Bank India at the same remuneration and on the same terms and conditions of service, as were applicable to such employees immediately before the close of business on 17 November 2020.
     
    However, the RBI scheme also provides for DBS Bank India to discontinue the services of key managerial personnel of LVB after following the due procedure at any time, after the appointed date, as it deems necessary and providing them compensation as per the terms of their employment.
     
    Similarly, DBS Bank India shall have the option of merging LVB branches according to its convenience and may close down or shift the existing branches as per the extant instructions issued by the RBI.
     
    LVB has a network of 563 branches while DBS Bank India has only 33. The amalgamation will give a jump-start for DBS Bank India with a readymade branch network.
     
  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    tillan2k

    1 week ago

    The state of affairs would not reached if LVB did not have friends and patrons in RBI and Fin MIN . At material time Fin min overtly was friendly with south based banks

    ssbh.dceo

    1 week ago

    WHEN THIS COOKING WAS GOING ON, WHERE WAS UNIONLOOKING AT? WHY IT WAITED TILL RBI ACTION?.
    THERE IS NO POINT IN ARGUING IN THE POSTMORTEM SECENREO.

    saioamshyd

    1 week ago

    https://www.moneylife.in/article/lakshmi-vilas-bank-aibea-wants-officials-of-rbi-also-probed-demands-merger-of-lvb-with-a-psb/62123.html
    1. PSBs are, already, in doldrums. It is as good as opening a pandora's box.
    2. To loot the Indian wealth in Trillions & shift it across the borders was a way of life during Congress regime. Congress leadership, allegedly, looted INR.17 quadrillion[1 quadrillion=1000 trillion; 1 trillion=1 lac crore], which is 45 times more than Modiji's humble plan of mobilizing US$.5 trillion by selling India's Sovereign Bonds. There is a nexus between members of CVC, IBA & CORNERED & BRIBED-UFBU AFFILIATES LED BY CHV , PSB boards/CEOs/CMDs + Duds of DOFS/UFM, ruling politicians & fugitives, etc. Unless & until the nexus is broken & culprits are booked & punished- though opening a Pandora's box- no future for India.
    3. RBI/GOI efforts to andover LVB to DBS Bank is a last resort.
    4. https://www.youtube.com/watch?v=4Si8U02s8cQ.
    5. SATYAMAEVA JAYATHE!!!

    cvkakatkar

    1 week ago

    RBI was supposed to submit its reply to Chennai High Court on 18th Nov,2020, in a case filed by an Ex-Employee of LVB.
    RBI had to inform the action it has taken on various complaints against the Bank and action taken by the regulator. They preferred to close the issue by Moratorium and merger, just a day before the hearing.

    Ramesh Popat

    1 week ago

    why DBS only? There must be clear rationale for the same in the public.
    It would be better if new development takes place in this regards before
    20th Nov. Can there be other better existing permissible Indian suitors?

    REPLY

    tillan2k

    In Reply to Ramesh Popat 1 week ago

    this is Foreign direct investment

    Shivram_R

    In Reply to Ramesh Popat 1 week ago

    I believe DBS is a good choice because the practice of merging with PSBs and continuing to evergreen bad loans and hiding losses and net worth erosion for a later date should stop. This is a step in the right direction.

    saioamshyd

    In Reply to Shivram_R 1 week ago

    GM! I agree with you Shivram Ji! DBS Bank may take over entire Private Banks. LVB take over just with well-established infrastructure + manpower for Rs.2500 crore is the cheapest investment. If it is successful, DBS may take over all failed/failing private banks.

    Nahom

    1 week ago

    RBI is a key player in wealth loot from depositors to Cronies. It is universal : where the tiniest top of the wealth pyramid paupers the bottom base. This will not change. AIBEA has also vested interest in this food chain since they get the crumbs from the cronies. Only option for the oppressed is " suicide".

    REPLY

    cvkakatkar

    In Reply to Nahom 1 week ago

    LVB is not a part of AIBEA - so, there cannot be any hidden agenda behind this demand.

    sundarbtw

    In Reply to cvkakatkar 1 week ago

    They are part of AIBEA... except new age private banks all old bank employees are unionised

    Newme

    1 week ago

    DBS being a foreign bank their pay scale would be bigger than LVB. In a way, LVB are rewarded for the bank failures.

    rajoluramam

    1 week ago

    It is not clear about the position of perpetual bonds( debentures) of LVB takdn for the purpose of BASEL III COMP NCB SRX. CAN ANY BODY CLARIFY THE POSITION.

    sundarbtw

    1 week ago

    All the listed loans were given may be 5 years ago. That was the time every bank had given. The issue is other banks were minimum 10 times the size of LVB. LVB should have closed long back

    REPLY

    cvkakatkar

    In Reply to sundarbtw 1 week ago

    Correct that is the reason - the role of RBI Nominees and the then Board needs to be investigated.

    sundarbtw

    In Reply to cvkakatkar 1 week ago

    It is for the new owner to decide and not the government. It is a private bank. No tax payers money is put. Am sure new owner will go after corrupt employees

    sushilprasadassociates

    In Reply to sundarbtw 1 week ago

    It is next to impossible to close a bank - even the smallest - in any country or by any government. The repercussions for closing down banks are widespread and severe.

    sundarbtw

    In Reply to sushilprasadassociates 1 week ago

    Closure i mean extinguishing the equity value and looking for buyer. Many of the loans and deposits are linked to insiders and bank employees in these banks.. these banks were running like chit funds with limited clients. .

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 4 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)
    FREE: Your Complete Family Record Book
    Keep all the Personal and Financial Details of You & Your Family. In One Place So That`s Its Easy for Anyone to Find Anytime
    We promise not to share your email id with anyone