An end to LVB: A future for banking amalgamations

An end to Lakshmi Vilas Bank: A future for banking amalgamations

People walk past a Lakshmi Vilas Bank branch in Mumbai. Credit: Reuters.

On September 25, 2020, at the Lakshmi Vilas Bank (LVB) annual general meeting when shareholders voted against the appointment of most directors, including the Managing Director, they set in motion events that eventually ended up destroying their own investment.

On November 17, 2020, the Reserve Bank of India (RBI) acted quickly and decisively to secure a future for the bank. RBI announced its decision to amalgamate LVB with the DBS Bank India. As per the draft amalgamation scheme, the entire amount of the equity share capital and reserves, and the surplus will be written off. Effectively, LVB will get delisted from the stock exchanges and the name will cease to exist. The operations, employees and branch network will all be amalgamated with DBS Bank India, the subsidiary of DBS Bank of Singapore.

In September 2019, the RBI had put LVB under Prompt Corrective Action (PCA) due to a high level of bad loans, lack of sufficient capital to manage risks, and a negative return on assets for two consecutive years. RBI puts banks under PCA when deviations are observed from the regulatory framework, and the bank is required to take certain steps to correct those regulatory deviations. LVB was also under the shadow of fraud and misappropriation of funds.

LVB seems to have been reckless in its lending practices. LVB also wrote off oversized loans given to questionable borrowers thus crippling the bank.

LVB was in urgent need of capital. In the past year, Indiabulls Housing Finance as a suitor for LVB did not find favour with the RBI. The discussions with another investor Clix Capital did not make any headway. The Covid shock meant that all lenders – banks and NBFCs included – were raising fresh capital. In this heightened competition for capital, finding an investor to fund a zombie bank was well-nigh impossible.

A splintered bunch of shareholders, many of them opportunists, used the bank to further their own ends and did not see the need for urgent action. A new investor, fresh funds, and a strong board would have enabled the bank to change its lending practices and work culture and given it a fresh start.

The amalgamation of LVB with DBS shows that the RBI has deftly handled a weak bank by placing the interests of the depositors, employees, and the future of the bank in mind when it brought in a credible bank in DBS for the amalgamation. The aspirations of DBS and the current assets of LVB are in sync. For a promise of infusing Rs.2500 crores fresh capital, and the challenge of integrating a slack work culture, DBS gets over 500 branches, a deposit base, and a reach. The risks for DBS are the negative surprises on the loan books.

Shareholders of LVB may feel aggrieved that their value has been reduced to zero. In a bankruptcy scenario, equity shareholders are the first to lose. Unless the current equity shareholders of LVB were ready to bring in fresh funds in the form of the rights issue, LVB was hard-pressed for funds and this is the best solution for LVB.

For banking in India, such a shotgun amalgamation could be a blueprint for the future as many private sector aspirants, including NBFCs and payment banks, seek out wider reach and ready branch networks.

The future of weak banks may well be forced amalgamations with stronger banks, at the expense of shareholders of the weak banks. The RBI may also have to rethink whether the small shareholdings of promoters in banks is good for the financial health of banks.

(Ther writer is Founder and MD of InGovern Research Services, a corporate governance advisory firm)