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Perspective Into Laxmi Vilas Bank Merger

The mergers of such banks certainly testify that banking activity can be carried out by promoters with ability to raise capital and having a robust risk management system.

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The recent decision of putting Laxmi Vilas bank under moratorium and subsequent merger with DBS is a proactive measure taken by Government of India and Reserve bank of India. LVB has been under stress for the past 10 quarters thus RBI had put it under prompt corrective action. During the last year, banks gross NPA was around 25% and the net NPA about 10% amounting to Rs.1388 crores. The capital and the tier one capital was completely eroded as on March 2020. The operating profit was negative in March 2020 though there was marginal profit in June this year. This bank has an exposure of approximately 35% in the state of Tamil Nadu, which certainly exhibits geographical concentration risk.

This bank has been under public glare ever since 7 out of 11 members including the MD and CEO were voted out by the shareholders with reasons regarding corporate governance. Bank couldn't come forth with any tangible plan of restructuring which could have instilled the confidence of the regulators. The share price of the bank was around Rs.180 in 2017 and slipped to Rs.10 as on March 2020. In current era of banking, focus is on retail and MSME lending, but LVB had only 25% of the total advance in this category. The bank has gross advances to the tune of Rs.16300 crores. The bank had advances to Jet, Religare, cafe day etc. which as per reports the chances of recovery is bleak.

Decision by Government and Reserve bank was taken primarily to protect deposits and depositors amounting to approximately Rs.21,000 crores and to ensure that there are no systematic issues. The recent crisis of PMC bank and yes bank where prompt corrective action were taken is a clear indication that regulator and Government will step in and ensure that depositor's confidence is not eroded. There were reports of LVB being taken over by Indiabulls which was not approved by Reserve bank of India. There were many NBFC's interested in taking stake, however the Reserve bank in its wisdom, considering the financial health did not venture with them as the industry is in process of stabilising after the DHFL crisis. Reserve bank could have explored the possibility of a PSU bank but as we recently witnessed a mega merger of PSU banks it would be prudent to let the merged Entities stabilise.

There are also various reports which talk about shareholders but it is important to understand that in the present context the shareholder funds have been totally eroded. Moreover, the tier 1 capital was declining at fast pace and bank was on a very slippery slope. The minimum capital requirement would be to the extent of
Rs.1500 crores to comply with Basel III requirements. In addition to this the bank would require more capital for growth and also to make up for under stated wage revision provision. As per some estimates additional Rs.400 crores would be required for additional provision including IT infrastructure. To summarize at least Rs.2500 crores to Rs.3000 crores would be required to make the bank viable and compliant to the norms of Basel III.

In the present situation the tier 1 capital and tier 2 capital has been wiped out thus forcing RBI to write off tier 2 bonds. The decision to suspend trading of share was very vital so as to eradicate uncertainties and stock dumping.

Selection of DBS by RBI certainly would be because of the deep pockets, sound financial health and Finance infusion which the bank can provide. DBS has also taken a calculated risk of merging the with LVB's considering the present state of affairs.

DBS would have to restructure, change the business model and infuse capital in order to make sure that the bank becomes profitable and also caters to the needs of the existing clients. Moreover, DBS would have to be aggressive in its recovery strategy and brace up towards legal challenges that come their way.

There have been instances of such mergers in the past where similar steps were taken. In case of global trust bank which was taken over by Oriental Bank of commerce is a classic example. The financial sector has over the years witnessed the merger of many private sector bank  like  Bank  of  Punjab,  Centurian  bank, Global trust bank, lord Krishna bank , United western bank etc. The mergers of such banks certainly testify that banking activity can be carried out by promoters with ability to raise capital and having a robust risk management system. The  measures  taken by GOI & RBI in  case of LVB  is a signal to  such banks to pull up their socks and put their house in order.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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S Ravi

The author is a practising chartered accountant and an independent director on many large public companies whose views and ideas have been instrumental in framing policy

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