The Seven Minute Story of Lakshmi Vilas Bank

In the last three years, numerous financial firms have collapsed in a row. Remember the catchphrase which said, “PMC bank holders get a hell of a shock!”? Well while the lessons from PMC did help RBI save HDIL from near-bankruptcy, yet another corporate bank, YES bank collapsed owing to bad loan, lack of investment, overflow of liquidity and Modi government’s mishandling of the economy. Similarly, recall when PNB filed multiple criminal cases against Nirav Modi and associates? And just like that in 2019, the second-largest public sector bank had slumped. IDBI before LIC rescued it, IL&FS, DHIL, all indicate India’s bad bank problem and that, governance of banks is a serious issue now.

Recently, a Chennai based commercial bank has been up and down in the news. But this time, it is more than just the story of a failing Indian bank.

Lakshmi Vilas Bank: Explained.

The RBI imposed a 30-day moratorium on the 94-year-old private lender on November 17. But what made heads turn was RBI’s simultaneous proposal of a draft scheme for amalgamating LVB’s assets and liabilities with DBS Bank India Ltd (DBIL), the Indian subsidiary of DBS Bank of Singapore. While the general consensus holds in favour of RBI for its frantic effort in rescuing LVB by bringing in a stable and wise partner with deep pockets, the only objection hovers around the shareholders’ well-being. Even if RBI entailed a drastic change of the value of existing shares, suggestions on yet better handling by RBI remain. Like the equity capital of existing shareholders should have been wiped out, or RBI should have followed past precedent and provided some upside to existing investors by going for the merger route.

Principle of corporate governance was seldom practised in LVB.

Let’s look at other prime factors which led LVB to this standpoint.

Failures of LVB:

Its lending and investing policies: With several big corporate loans already wobbling away from 2015, LVB being a small lender still entangled with them eventually bringing in serious repercussions. Violating its own lending and investment policies, LVB went after big borrowers like Jet Airways, Religare, Nirav Modi, Reliance Housing Finance and Café Coffee Day.

Its deteriorating performance: Lakshmi Vilas saw its asset quality deteriorating rapidly over the past three years. It made considerable losses in 2019 and ’20. It was when its capital adequacy dived from 10.38% in 2017 to 1.12% in 2020, that RBI had to place the Bank under prompt corrective action (PAC) on 28 September 2019.

Its failed attempts at reviving their dilapidated condition: LVB has had five CEOs in the past decade with only one lasting his full term. “The master and servant relationship” restrained successive CEOs, the chase after big borrowers and constant interference from a few shareholders only led to catastrophic results.

Its incapability to read signals and act on time: The risk management system either failed to perceive the signs or the managers decided to shut their eyes in the fervour to grow until reports of fraudulent loans against bulk deposits brought LVB and its employees under the scanner of the economic offences wing (EOW) of the Delhi police.

But the miscarriages of different banks in a row for 30 months now, cannot only be put to the failing bank’s blame. Complaints about mismanagement and lack of governance standards were sent to the prime minister and RBI during 2019 with no tangible result.

Failures of RBI:

Its ignorance: What was the RBI doing when LVB was biting the dust? Not only RBI had the means to know the downslide but even had its own nominees on the boards apart from its annual inspection. RBI’s negligence was one reason to remain consistent from PMC to YES bank to LVB now.

But it seems to be doing better under Shantikanta Das’s watch these days. After the disastrous handling of PMC and YES bank, RBI pulled in a much better suitor for LVB than it could have managed to arrange in its wildest fantasies. In fact, LVB had to witness an embarrassing coup by a gang of influential investors while negotiating a potential merge deal. The merger move with Clix Capital, controlled by AION Capital Partners through an 85% stake, went for a toss when seven directors were thrown out at the annual general meeting on 25th September this year. Orchestrated by a bunch of investors acting in concert, the action was terribly miscalculated, failing to realise its grave repercussions. Under the close watch of the regulator, the bank saw the overthrow of LVB’s managing director, RBI-approved statutory auditor and a former chief general manager of RBI who was an independent director. The action was illegal and prohibited under articles 5A and 35B, which makes clear how RBI’s approval is necessary for both appointments and terminations and how shareholders’ resolutions cannot overturn such appointments.

What now?

RBI is being an Indian parent straight for 6 days by arranging a shotgun marriage without calling potential suitors to Lakshmi’s “swayamwar”. But it was only after watching its dalliances from a distance, and after providing plenty of time for a suitable merge. LVB is a substantial leap as compared to PMC and YES bank by having a foreign bank provide a clean and credible rescue.

From DBS’s point of view:

As per the proposed draft, “the entire amount of the paid-up share capital, reserves and surplus, including the balances in share/securities premium account of the transferor bank (LVB), shall stand written off. On and from the appointed date, the transferor bank 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 transferor bank, transferee bank (DBS Bank India) or order from any authority.”

LVB has more than 550, and 900-plus ATMs against over 30 branches of DBS in India, the deal will succour DBS spreading its roots across India. With a market value of about $47 billion, the proposed merger is likely to inject ₹2,500 crores into its Indian subsidiary. This is the first-ever when a foreign bank will be pulling an Indian one out of distress.

India’s banking union though has expressed reservations about the potential DBS deal. The All India Bank Employees’ Association (AIBEA), representing about half a million bank employees, protested against the proposed amalgamation and demanded a merger with a public sector lender instead. And that RBI should have had a bid on interested parties because about 15 large investors showed interest to invest in LVB.

RBI had asked DBS to dilute its stakes to 15% in 10 years initially to which it was not agreeable, looks like RBI managed to get under its skin somehow!

The 26th November Update:

NSE, BSE suspended the shares of Lakshmi Vilas Bank (LVB) from today i.e. November 26, as the verdict on amalgamation with DBS Bank is out. The stock is to be delisted from the exchange on 27th November as RBI writes off the entire equity share capital of LVB with DBS.

Interesting turn of events may occur if tier-2 bondholders of LVB decide to explore legal options against the government’s solicitous step. It’s now to wait and see if this stratagem manages to become a signature rescue for failing banks in the future.

Written by: Liza Anshul.