Laxmi Vilas Bank financial crisis? What it means for stakeholders and depositors

Finance: After the failures of IL&FS, Punjab & Maharashtra Cooperative Bank and DHFL, and the bailout of Yes Bank, the Reserve Bank of India decision to impose a 30-day moratorium on Lakshmi Vilas Bank Ltd (LVB) and put in place a draft scheme for its amalgamation with DBS Bank India, a subsidiary of DBS of Singapore, has raised concerns about the safety of the financial system.

Lakshmi Vilas Bank, which needed capital urgently due to its worsening asset quality, has been scrambling to find a buyer for the past one year.  

It had ₹ 13,800 crore in outstanding loans, while losses had jumped to ₹ 397 crore last quarter from ₹ 347 crore a year ago. Bad loans shot up from 21.25% to 24.45% of its loan book.

The RBI has now proposed its merger with DBS Bank India, a subsidiary of Singapore-based DBS Bank. DBS Bank India is expected bring in ₹ 2,500 crore as capital upfront.

“In the absence of any viable strategic plan, declining advances and mounting non-performing assets, 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,” the RBI has said, citing severe governance issues at Lakshmi Vilas Bank.

Thousands of the stakeholders went into panic after the central government on Tuesday placed the Tamil Nadu-based private sector lender under a moratorium, capping withdrawals. The Finance Ministry later said that depositors will be allowed, with RBI permission, to withdraw over ₹ 5 lakh for medical, education, and wedding expenses.

Public shareholders of Lakshmi Vilas Bank (LVB) will lose their money as the entire amount of the paid-up share capital will be written off as per the scheme of amalgamation of LVB with DBS India proposed by the Reserve Bank of India (RBI).

However, depositors need not worry as their deposits will be transferred to DBS and would be fully secured. Around 4000 employees of LVB also can heave a sigh of relief as they will be moved to DBS at the same remuneration as in LVB for the next three years.

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