LVB crisis: Same story, different characters

On Tuesday evening, the Reserve Bank of India (RBI) put Lakshmi Vilas Bank (LVB) under moratorium and also announced the proposed merger of the beleaguered old private bank with DBS Bank India.

While RBI has invited suggestions on the proposed scheme until Friday, November 20, T.N. Manoharan—the former non-executive chairman of Canara Bank and who has been appointed by the RBI as the administrator of LVB—in his 75-minutes maiden interaction with the press assured LVB’s 2 million depositors and 4,300-plus employees that they would be in the safe zone.

On Wednesday morning, the first day of the moratorium, Manoharan said that he had a call with regional heads of LVB where he told them that the pressure they would face would be reminding them of the initial days of demonetisation. But, particularly on the moratorium, the central bank took note of the fact that the financial position of LVB has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth.

In a separate press release, RBI said that in absence of any viable strategic plan, along with declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. “Further, the bank is also experiencing continuous withdrawal of deposits and low levels of liquidity,” RBI said, while imposing moratorium for thirty days effective from November 17 to December 16.

According to Manoharan, this is the shortest possible moratorium period in the banking history that he could recall. “We may not have to wait for the 30 days also and things may crystallise even before the moratorium ended,” Manoharan said. For the record, earlier this year on March 6, RBI had placed also YES Bank under a moratorium of 30 days. And, commenting on LVB’s current NPAs, Manoharan said that the bank was primarily retail-focussed until the focus shifted to corporates a few years ago.

LVP-DBS Bank India merger

On its part, on November 17 itself, the RBI separately placed its draft scheme of LVB-DBS Bank India merger. DBS Bank India is a banking company, which, although, was incorporated in India, but is the wholly-owned subsidiary of DBS Bank, Singapore, which in turn is a subsidiary of Asia’s leading financial services group, DBS Group Holdings, and has the advantage of a strong parentage.

According to Anand Dama and Neelam Bhatia, both analysts with Mumbai–based Emkay Global, given the small size of LVB, the RBI seems to have chosen the route of amalgamation with another foreign private bank instead of a unique restructuring scheme as in the case of YES Bank where investors, including banks, were called upon to infuse capital and, thus, revive it independently.

LVB held total deposits of ₹20,973 crore at the end of September 2020, which included current and saving deposits of ₹1,504 crore, and ₹4,566 crore respectively. On assets’ side, LVB had advances worth ₹16,622 crore while its gross and net NPAs stood at ₹4,063.27 crore and ₹946.72 crore respectively. At the end of September, LVB’s gross and net NPAs, as percentage of its assets, stood at 24.45% and 7.01% respectively.

In contrast, equipped with a banking license since October 4, 2018, DBS Bank India has a healthy balance sheet, with strong capital support. RBI highlighted that as on June 30, 2020, DBS Bank India’s total regulatory capital was ₹7,109 crore, while its gross and net NPA ratios as percentage of assets were significantly low at 2.7% and 0.5% respectively.

In RBI’s view, DBS Bank India’s capital to risk weighted assets ratio (CRAR) stood at a comfortable 15.99% as against the regulatory requirement of 9%, while its common equity tier-1 (CET-1) capital was well above the regulatory required 5.5% at 12.84%. “Although DBS Bank India is well capitalised, it will bring in additional capital of ₹2,500 crore upfront, to support credit growth of the merged entity,” RBI added.

Even without the capital infusion, in event of the merger going through successfully, the combined balance sheet of DBS Bank India would remain healthy with CRAR at 12.51% and CET-1 capital at 9.61%. “But the objective is not just survival, but to go to the next level,” Manoharan said.

Manoharan added that LVB’s depositors needed to be patient until the right steps are taken to safeguard their interests, and all the LVB employees’ interests are also taken care of as they will be absorbed in the proposed merged entity at the same costs and conditions as applied at LVB.

In the case of YES Bank, the RBI-proposed restructuring plan had assured the private bank’s employees continued service with the same remuneration and on the same terms and conditions of service as were applicable for at least for a period of one year from the appointed date of scheme notification. However, in case of LVB employees, RBI’s proposed scheme provides same remuneration for three years from the date on which the scheme is sanctioned.

According to a retired banker, the cultural integration will be the biggest challenge in this proposed amalgamation, as the average employee age of an old private bank and that of a foreign bank would have decadal differences. This is evident from the fact that during FY20, LVB introduced a voluntary retirement scheme for its employees and 69 employees opted for the same. With loss incurred through the last three fiscals, LVB has seen deterioration in its profit per employee ratio too.

While LVB’s depositors and employees seem to have a safety net, its shareholders are the most vulnerable if RBI’s proposed scheme gets a green signal. Because, the scheme says that on and from the appointed date, the entire amount of the paid-up share capital, reserves and surplus, including the balances in the share/securities premium account of LVB, shall stand written-off.

Further, on and from the appointed date, LVB shall cease to exist by operation of the scheme, and its shares or debentures listed in any stock exchange shall stand delisted without any further action from the DBS Bank India, LVB or order from any authority.

As per Emkay Global’s Dama and Bhatia, the merger of LVB (which has 563 branches) with DBS Bank India (with only 33 branches, and which is trying to expand its base in India), will be a long-term positive for the latter, while putting to rest concerns around a potential merger with a healthy large private bank as it has been the case in the past. For example, Bank of Rajasthan was merged with ICICI Bank with effect from August 13, 2010.

The bigger issue is that retail shareholders of LVB will face the maximum brunt if the RBI proposal goes through. With 46.73% of LVB’s total shareholding, at the end of September 2020, retail constitutes the largest part of the pie, followed by 20.38% held by non-institutional corporate bodies, and foreign portfolio investors (FPIs) ownership of 8.65%.

On a broader time scale, compared to 56.29% in September 2011, retail shareholding has reduced by 9.56% to 46.73% in September 2020. But, on a medium-term basis, while the shareholding of foreign portfolio investments has reduced by 7.91% from 16.56% in March 2019 to 8.65% in September 2020, retail shareholding has gone up by 10.69% in the same period from 36.04% to 46.73%.

Clearly, over the years, retail investors in the private banking space, have burnt their fingers with the likes of Global Trust Bank, and YES Bank. The same could also be said about their investment in LVP. This time too, only the characters have changed, but the story remains largely the same.