What are the reason of RBI to put LVB under moratorium and amalgamated with DBS Bank?
The RBI has now decided to impose a 30-day moratorium on Lakshmi Vilas Bank Ltd (LVB) due to the following reasons-
- Continuous Losses: The RBI said the financial position was declining steadily, with continuous losses over the last three years eroding the bank’s net-worth.
- Rising NPAs: Serious governance issues in recent years have led to deterioration in its performance. Almost one fourth of the bank’s advances have turned bad assets. Its gross non-performing assets (NPAs) stood 25.4% of its advances as of June 2020, as against 17.3% a year ago.
- The Tier 1 Capital ratio turned a negative 0.88% at the end of March 2020.
- Low Liquidity: It was also experiencing continuous withdrawal of deposits and low levels of liquidity.
- Unable to raise Capital: The bank has not been able to raise adequate capital to address these issues. The bank management had indicated to the RBI that it was in talks with certain investors, but failed to submit any concrete proposal.
- The capital ratio subsequently worsened to -4.85% by the end of September, tipping the central bank’s hand.
What happen to depositors and shareholders?
- Depositors- The RBI, which put a cap of Rs 25,000 on withdrawals, has assured depositors of the bank that their interest will be protected
- Deposit Insurance and Credit Guarantee Corporation (DICGC) gives insurance cover on up to Rs. 5 lakh deposits in banks.
- Shareholders of LVB– Equity capital is being fully written off. This means existing shareholders face a total loss on their investments unless there are buyers in the secondary market who may ascribe some value to these.
How has the pandemic affected the banking system?
- Worsen NPA -NPAs in the banking sector are expected to increase as the pandemic affects cash flows of people.
- RBI’s Financial Stability Report pointed out in its stress test indicated that the gross NPA ratio of commercial banks could worsen to as high as 14.7% by end of current financial year.
- The COVID-19 pandemic has stress on corporate balance sheets and governments burdened with large debt.
- Lurking around the corner is also the major risk– stress intensifying among households and corporations that has been delayed but not mitigated, and could spill over into the financial sector
Banks now need to adopt a ‘React, Adapt and Lead’ strategy to emerge stronger on the other side of the COVID-19 pandemic. After all, stronger banks and a sound financial services ecosystem will play a key role in the recovery of Indian economy.