Context: Lakshmi Vilas Bank (LVB) merger with DBS bank is justified
Why RBI decided for merger of Lakshmi Vilas Bank (LVB) amalgamation with DBS bank?
- Erosion of trust in financial institutions: India, over the past two years has seen the collapse of four financial firms: IL&FS, Dewan Housing Finance, Punjab and Maharashtra Cooperative Bank and Yes Bank.
- Rise in NPA’s: LVB’s bad loans have mounted to about a quarter of its gross advances, while deposits have shrunk by nearly Rs 6,900 crore in the last one year.
- Failure of bank’s management: They were unable to come up with a credible capital-raising and revival plan, forcing the RBI to seek its merger with another bank.
Why Investors in Lakshmi Vilas Bank (LVB) are unhappy over its amalgamation with Singapore’s DBS Bank?
- The Reserve Bank of India’s (RBI) proposed to write off LVB’s entire paid-up equity capital and reserves, resulting in a zero value of its shares.
- The situation is similar to that of Yes Bank’s AT-1 (additional tier-1) bond investors, who suffered a total write-down of their Rs 8,415 crore holdings as part of a rescue plan.
- The LVB’s shareholders, like Yes Bank’s AT-1 bondholders, are demanding compensation for the forced extinguishing of their investments.
The question of who is more important an Investor or a depositor?
- The RBI’s concern as a banking sector regulator is to first secure the interest of depositors because Banks, unlike regular companies, make money not from owning plants, machinery and property instead, it is derived from deploying other people’s money primarily deposits.
- No bank, however well-capitalised, can survive if depositors decide to pull out money.
Why the choice of amalgamating with DBS is right?
- Unlike public sector banks that are burdened with stressed loans and requirement of fund infusion, DBS has committed to bring in additional capital of Rs 2,500 crore upfront.
- Also, despite being a foreign bank, it has chosen to operate in India through a wholly-owned subsidiary, as opposed to just having branches.
- Has submitted itself to the RBI’s more stringent regulatory requirements, and DBS will be able to add 550-plus branches to its existing 33. This will send a strong signal to other foreign banks to pursue greater growth opportunities
- With Indian banks want for more capital, a foreign bank as desi is most welcome.