Lakshmi Vilas Bank has been placed on moratorium for a month effective from 6 pm on 17 November to 16 December. The moratorium has been imposed on the basis of an application submitted by the RBI under Sec 45 of Banking Regulation Act, 1949. The commencement has been stayed or continuance of all actions and proceedings against that banking company during the period of a moratorium, subject to the condition that such stay shall not in any manner prejudice the exercise by the Central Government of its powers under Section 35(b)(4) of the Banking Regulation Act, 1949.
Withdrawals by account holders and creditors have also been capped at Rs 25,000/- during the moratorium period. Thus, the Bank shall not, without the permission in writing of the Reserve Bank of India, make, in the aggregate, payment to a depositor of a sum exceeding Rs 25,000/- from any of his savings, current or any other deposit accounts. Further, the bank cannot make payments to any creditor exceeding Rs 25,000/- if not otherwise provided by the RBI in its order.
As per sources, after superseding the Board of Directors of Lakshmi Vilas Bank (LVB), the Reserve Bank announced a Draft Amalgamation Scheme to merge the Tamil Nadu-based ailing lender with DBS Bank India Ltd. While proposing the scheme of amalgamation, the central bank said that DBIL is well capitalized and will bring in additional capital of Rs 2500 crore upfront, to support the credit growth of the merged entity.
Owing to a comfortable level of capital, the combined balance sheet of DBIL would remain healthy after the proposed amalgamation, with capital to Risk-weighted assets ratio (CRAR) at 12.51 percent and Common Equity Tier 1 (CET-1) capital at 9.61 percent, without taking into account the infusion of additional capital.
‚ÄúDBIL has a healthy balance sheet, with strong capital support. As of June 30, 2020, its total Regulatory Capital was Rs 7,109 crore (against the capital of Rs 7,023 crore as of March 31, 2020). As of June 30, 2020, its GNPAs and NNPAs was low at 2.7 percent and 0.5 percent respectively; Capital to Risk Weighted Assets Ratio (CRAR) was comfortable at 15.99 percent (against the requirement of 9 percent); and Common Equity Tier-1 (CET-1) capital at 12.84 percent was well above the requirement of 5.5 percent,‚ÄĚ read the RBI statement.
DBIL is a wholly-owned subsidiary of DBS Bank Ltd, Singapore (DBS), which in turn is a subsidiary of Asia‚Äôs leading financial services group, DBS Group Holdings Limited and has the advantage of a strong parentage. It had been issued a banking license on 4 October 2018.
‚ÄúLVB 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. The bank 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 the continuous withdrawal of deposits and low levels of liquidity. It has also experienced serious governance issues and practices in recent years which have led to a deterioration in its performance,‚ÄĚ the Central Bank said.
Earlier Moratoriums by the RBI
This is the third such instance in the banking sector, as the RBI had earlier placed ‚ÄėYes Bank‚Äô under a moratorium for two weeks on March 5. The bank was later rescued by the SBI-led consortium. Punjab and Maharashtra Co-operative Bank was also placed under moratorium.
The current Lakshmi Vilas Bank was placed under the Prompt Corrective Action (PCA) framework in September 2019, considering the breach of Prompt Corrective Action (PCA) thresholds as of 31st March 2019.
The central bank mentioned that it had been continually engaging with the bank‚Äôs management to find ways to augment the capital funds to comply with the capital adequacy norms.
Meanwhile, the bank management had indicated to the Reserve Bank that it was in talks with certain investors. However, it failed to submit any concrete proposal to Reserve Bank and the bank‚Äôs efforts to enhance its capital through the amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end. In the meantime, the bank was facing a regular outflow of liquidity.