A Long Winding Road Towards the End of Lakshmi Vilas Bank

The Reserve Bank of India on Tuesday proposed the amalgamation of LVB with DBS Bank India Ltd (DBIL), a wholly-owned subsidiary of DBS Bank Ltd Singapore (DBS).

After dilly-dallying for some time, the Reserve Bank of India (RBI) finally woke to the ugly reality surrounding trouble-ridden Lakshmi Vilas Bank and recommended the Centre to impose a moratorium.

Simultaneously, the banking regulator has proposed the amalgamation of LVB with DBS Bank India Ltd (DBIL).

DBIL is a wholly-owned subsidiary of DBS Bank Ltd Singapore (DBS), which, in turn, is a subsidiary of Asia’s leading financial services group, DBS Group Holdings Limited. DBIL was issued a banking licence on October 4, 2018.

The RBI has already hosted a draft amalgamation scheme in its website and sought the views from various stakeholders on the draft scheme.

The apex bank has said suggestions and objections will be received by up to 5 pm on November 20. The Reserve Bank will take a final view thereafter.

The RBI, in the meanwhile, has superseded the board of LVB and appointed T.N. Manoharan, former non-executive chairman of Canara Bank, has the administrator of LVB.

A depositor is allowed to withdraw a maximum of Rs 25,000 during the moratorium period.

The move to merge LVB with DBS has, however, elicited a strong reaction from All-India Bank Employees’ Association (AIBEA).

“This is not a solution. Merging it with a public sector bank is the proper solution,” said C.H. Venkatachalam, general-secretary, AIBEA. He was quite vocal in his criticism of the banking regulator. “The RBI knew this would happen. A doctor should give timely medicine when an ailment is diagnosed. Here in this instance, the RBI waited for long. Now, it has declared that the patient has died,’’ he said.

Also read: Centre Places Lakshmi Vilas Bank Under Moratorium, Cash Withdrawals Capped at Rs 25,000

“Why is DBS interested in this sick bank? There must be some reason. RBI should now hurry up to agree,” he said.

However, the RBI has a different take. “Although the DBIL is well capitalised, it will bring in additional capital of Rs 2,500 crore upfront to support credit growth of the merged entity,” the banking regulator said in a release.

As at the end of June 30, 2020, the total regulatory capital of DBS was at Rs 7,109 crore (against a capital of Rs 7,023 crore as on March 31, 2020). As on June 30, 2020, its GNPAs (gross non-performing assets) and NNPAs (net non-performing assets) were low at 2.7% and 0.5% respectively; Capital to risk weighted assets ratio (CRAR) was comfortable at 15.99% (against a requirement of 9%); and common equity Tier-1 (CET-1) capital, at 12.84%, was above the requirement of 5.5%.

“Owing to a comfortable level of capital, the combined balance sheet of DBIL would remain healthy after the proposed amalgamation, with CRAR at 12.51% and CET-1 capital at 9.61%, without taking into account the infusion of additional capital,” the RBI said.

A man checks his phone outside the Reserve Bank of India (RBI) headquarters in Mumbai, India, April 5, 2018. Photo: Reuters/Francis Mascarenhas/Files

“For the past three years and more, the Tamil-Nadu based LVB has not been in good health, Rather, it was suffering from bad health and continuous loss. The reason is well known to all, including the RBI,” the AIBEA general-secretary said in a statement.

“The-then management of the bank had indulged in a lot of bad loans of more than Rs 2000 crore to borrowers like Religare, Jet Airways, Cox and Kings, Nirav Modi group, Coffee Day, Reliance Housing Finance, etc. All these undesirable loans were known to RBI as it had its nominee as director on the board of the bank,” he said.

Though the bank was put under Prompt Corrective Action (PCA) norms, he felt that the regulator had given the bank a long rope. AIBEA had been demanding for long its merger with a public sector bank. “RBI, which is responsible to maintain the stability of the banks and financial sector, cannot escape its responsibility for not taking timely action. RBI’s role should be thoroughly probed,” Mr. Venkatachalam said. He also demanded a thorough investigation into the conduct of top officials of the bank in creating huge NPAs.

According to the draft amalgamation scheme proposed by the RBI, the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of LVB, shall stand written off on the appointed date of amalgamation. Also, on the appointed date of amalgamation, LVB shall cease to exist and its shares or debentures listed in any stock exchange shall stand delisted.

The draft scheme has also envisaged the closure of books of LVB forthwith. It has further envisaged preparation of LVB balance sheet as at the close of business on November 17, 2020 and thereafter as at the close of business on the date immediately preceding the appointed date. The balance sheet will then be audited and certified by a chartered accountant or a firm of chartered accountants approved or nominated by the Reserve Bank of India. The balance sheet will then be filed with the Registrar of Companies by DBS. Once this process is over, the transferor bank (DBS) is not required to “prepare balance sheet or profit and loss accounts, or to lay the same before its members or file copies thereof with the Registrar of Companies or to hold any board meeting or annual general meeting for the purpose of considering the balance sheet and accounts or for any other purpose or to comply with the provisions of the Companies Act, 2013 and it shall not thereafter be necessary for the Board of Directors of the transferor bank to meet for any purpose”.

Also read: Clouds Continue to Gather Around Lakshmi Vilas Bank as Shareholders Vote Out the CEO

The financial position of LVB (the bank) has been on a downhill trip for quite some time now. “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 the recent years which have led to a deterioration in its performance,” the RBI said.

The bank was placed under PCA framework in September 2019.

LVB hit national headlines not long ago when shareholders voted out resolutions related to the appointment of seven directors, including that of interim CEO S. Sundar. At the annual general body meeting of the shareholders held on September 25, they cleared resolutions related to only three directors.

The seven rejected names are: S. Sundar; N. Saiprasad (non-executive, non-independent director); Gorinka Jaganmohan Rao (non-executive, independent director); K.R. Pradeep (non-executive, non-independent director); B.K. Manjunath (non-executive, independent director); and Y.V. Lakshminarayana Murthy (non-executive, independent director).

The appointment of only three directors was cleared. They are: Shakti Sinha, Satish Kumar Kalra and Meeta Makhan.

It was a stunning blow. It was a reflection of the complete lack of confidence in people who were running the functioning of LVB.

For the year ended March 2020, Lakshmi Vilas Bank reported a loss of over Rs 825 crore.

The bank’s total Capital Adequacy Ratio (CAR), as per Basel Ill guidelines, was at 0.17 % as of June 30, 2020 as against 1.12 % as of March 31, 2020. Net NPA stood at 9.64% as of June 30, 2020, as against the net NPA of 8.30%, as of June 30, 2019. Net NPA was 10.04% as of March 31, 2020.

In July last, the bank insisted in a release that “despite logistical challenges arising due to COVID-19 situation, we have made significant progress with Clix group for the proposed amalgamation of Clix Capital Service Pvt. Ltd. and Clix Finance India Pvt. Ltd. into the bank”.

It went on to add: “However, there may be a slight delay in the mutual due diligence and preparation of documents for regulatory requirements due to Covid situation and travel restrictions. Hence, both the parties mutually agreed to extend the exclusivity period till September 15 2020.”

But the shareholder action in throwing out resolutions relating to the appointment of a majority of the directors put a question mark over the discussions with the Clix group.

Last October, the RBI put paid to the private lender’s efforts to merge the bank with Indiabulls Housing Finance. It was widely believed that the banking regulator was not amused by the clear manoeuvring of Indiabulls to get a back-door entry into the banking space through the merger of LVB with itself. Also, Indiabulls was in the limelight at that point in time for a number of not-so-positive reasons.

Also read: The Takeaways From RBI’s Refusal to Bless the Indiabulls-Lakshmi Vilas Bank Merger

A few months before the rejection of the merger plan by the RBI, LVB saw its managing director and CEO Pasrthasarathi Mukherjee resign citing, of all things, personal reasons. At one point, Srei Capital, too, was reportedly eying this bank.

Indeed, LVB saw shareholders close ranks to throw out the non-performing management. The shareholder activism of the kind that one saw in LVB was unparalleled in the annals of the Indian banking industry.

The RBI has finally woken up. Perhaps, this has come a bit late.

While the regulator’s proposal to quickly merge LVB with DBS is welcome, the unions are likely to kick up a controversy. DBS of Singapore has, it may be recalled, earlier had a tie up with the Chennai-based Murugappa group. Cholamandalam Investment and Finance Company, the finance arm of the Murugappa group, inducted the DBS group as an equity partner in Chola in early 2006.

The objective was to help Chola to enter the personal finance business. Chola was originally set up to offer hire purchase and leasing services. In the early 90s, it got into vehicle finance. In January 2006, it entered into a tie up with DBS to make a foray into the personal finance field. In fact, Chola was renamed as Cholamandalam DBS Finance Ltd. Unfortunately, the personal finance business pushed the company to the brink of disaster in 2008. And, the company ended with massive delinquent debt. Chola DBS exited the personal finance field in September 2008. That sort of forced DBS to quit the joint venture. After intense negotiations, the divorce finally came about sometime in 2010.

From hindsight, it could be argued that DBS was in a way responsible for pushing the Murugappa group to return Chola to the route of caution.

Well, the Reserve Bank of India is now seeking to amalgamate Lakshmi Vilas Bank, which is under a moratorium, with DBS. And, the move has already drawn the ire of the bank unions. Given this backdrop, the LVB merger is bound to be interesting.

Also, the draft merger plan envisages equity write off. This is perhaps an unprecedented move.

Indeed, one can see lots of fireworks in the coming days even though though Diwali has slowly slipped behind us.

K.T. Jagannathan is a senior business journalist.