The Reserve Bank of India (RBI), in consultation with the Central Government has placed Lakshmi Vilas Bank under moratorium for 30 days owing to a serious deterioration in the financial position of the bank. A cash withdrawal limit of ₹25,000 has been imposed on depositors.
— ET NOW (@ETNOWlive) November 17, 2020
What does this mean?
The struggling bank will not be allowed to make payments exceeding ₹25,000 to any of its creditors without prior approval from the RBI. The regulator has superseded the board of directors of LVB for a period of 30 days and TN Manoharan, former non-executive chairman of Canara Bank has been appointed as the administrator. Think of it like parents taking away your pocket money because you’ve not been responsible. You can only spend more money by seeking approval from mom.
RBI places Lakshmi Vilas Bank under moratorium for a month. pic.twitter.com/mHuIgtR5kd
— BloombergQuint (@BloombergQuint) November 17, 2020
How did it end up here?
LVB has seen a sharp rise in non-performing assets (NPAs), insufficient liquidity to manage risks, and negative returns on assets for two consecutive years. The bank’s business shrunk over the year from ₹47,115 crore at the end of September 2019 to ₹37,595 crore at the end of September 2020. Net loss after tax rose to ₹396.99 crore for the quarter ended September 30, 2020, as against net loss of ₹357.18 crore for the year-ago quarter.
Auditors also rang the alarm bells, stating that “a material uncertainty exists that may cast a significant doubt on the going concern of the bank.” To put it simply, business was doing badly and concerns of it going under were both grave and real.
— Economic Times (@EconomicTimes) November 17, 2020
What next for LVB?
The RBI on Tuesday seized control of the ailing bank and forced a merger with the local unit of Singapore’s largest lender DBS Bank. It will be the first time the central bank has tapped a bank with a foreign parent to backstop an Indian rival. The bank’s financial position made it difficult to find suitors.
While the RBI has stated that “appropriate steps will be taken to protect the interest of depositors,” the merger is bad news for LVB’s shareholders. The entire capital of the bank will be written off post the merger with DBS Bank India Ltd (DBIL).
Laxmi vilas bank is being amalgamated with DBS bank.
— 𝘽𝙖𝙣𝙠𝙚𝙧 𝙎𝙖𝙙𝙝𝙪 (@Banker_Sadhu) November 17, 2020
Is my money safe?
The money of depositors will be safe, however, they will only be able to withdraw ₹25,000 over the next 30 days. For those requiring money for an emergency like a hospital bill or to pay for a wedding event, this is bad news as they won’t have access to their money. For those owning shares of the bank, this is terrible news since the stock is now virtually worthless. Here’s a share market tip: Don’t buy LVB, at any price. Run away from it as fast as you can.
Former deputy governor R Gandhi believes that the long-standing expectation that only public sector banks should come to the rescue of ailing banks is gone, and that is a good thing. “Whether it is a public sector or a private sector or a foreign bank that should not be the criteria. The bank which will be able to take over the failing bank and which can bring in additional capital should be the primary consideration. That has been demonstrated and that is good for the future,” he said in an interview to the Economic Times.