What is the Lakshmi Vilas Bank (LVB) crisis?

In the past two years, India has seen some major disruptions in the banking sector. After the PMC Bank debacle and YES Bank crisis, Lakshmi Vilas Bank's future also seems to be in jeopardy. Founded in 1926 by a group of businessmen under the leadership of VSN Ramalinga Chettiar to aid small businesses, LVB later turned its focus from SMEs to large businesses. And that led to its downfall.

What is happening at Lakshmi Vilas Bank currently?

The Reserve Bank of India on October 17, 2020, seized control of a struggling Lakshmi Vilas Bank and forced its merger with the local unit of Singapore’s largest lender DBS Bank. In November, RBI capped deposit withdrawals from the bank at Rs 25,000 a day for a month (till December 17, 2020). The regulator's intervention came after watching the bank struggling to find a suitor to help it meet minimum capital buffers. According to the rescue plan, the entire paid-up share capital, and reserves and surpluses of LVB would be written off.

What will happen to LVB customers?

While LVB will cease to exist, only its deposits will appear on the books of the India unit of DBS Group Holdings Ltd. The interests of depositors and employees will be protected.

What went wrong for LVB?

The bank was established to cater to the financial needs of small businesses. However, LVB shifted its focus from SMEs to large businesses. It provided a loan worth Rs 794 crore to former promoters of pharma major Ranbaxy and Fortis Healthcare — Malvinder Singh and Shivinder Singh — against fixed deposits of Rs 794 crore. This proved to be a major misstep for the lender. In 2018, Religare Finvest, an arm of Religare Enterprises Limited, sued a Delhi branch of LVB to redeem fixed deposits worth about Rs 800 crore that the bank invoked to recover loans to the Singh brothers. After the case was filed, RBI put LVB under prompt corrective action (PCA) in September 2019 due to which the bank was not able to issue fresh loans or open a new branch anywhere. The PCA has not been revoked to date. Currently, the case is sub judice and two employees of the bank have been arrested.

Removal of directors

On September 25, 2020, in an unprecedented move, shareholders of Lakshmi Vilas Bank ousted seven directors from the company, including the interim MD and CEO S Sundar, all in one go. According to reports, the shareholders were unhappy with a rise in the bank's bad loans, value erosion and its bleak future.

The RBI then appointed three members — Meeta Makhan, Shakti Sinha and Satish Kumar Kalra — to look after the daily affairs of the bank along with the remaining four senior officials of the bank.

How the cash-starved Lakshmi Vilas Bank failed to find a suitor?

LVB began talks with India Bulls Housing Finance. But just one month after it had been put under the PCA framework, the bank was denied RBI permission for the merger. The bank had no alternative other than to find another investor for funding.

LVB then announced that it was in talks with Clix Capital. However, according to media reports, Clix Capital said that turmoil at LVB had put the deal in jeopardy.

LVB and DBS Bank merger

On October 17, 2020, RBI forced a merger of LVB with the local unit of Singapore’s largest lender DBS Bank.

Lakshmi Vilas Bank's financial position

LVB’s Tier-I capital adequacy ratio turned negative 0.88 per cent as on June 30, 2020, against the minimum requirement of 8.875 per cent. It has been posting losses for the past 10 quarters, even as its loss in the June quarter shrank to Rs 112.28 crore from Rs 237.25 crore a year earlier. Its deposit portfolio has been declining and a little over a fourth of its loan assets have turned bad. In March 2017, its bad loans were just 2.7 per cent. Its gross NPA, at 10 per cent in 2018, increased to 15.3 per cent in 2019 and 25.4 per cent in 2020.

In the past five years, after rising to Rs 185 in 2017, the bank's share price slipped to just Rs 12.45 on October 18, 2020.

About Lakshmi Vilas Bank (LVB)

The company was established way back in 1926 by seven people from Tamil Nadu to cater to the financial needs of small businesses in their city. In 1958, they received a banking licence and by 1970 the company already had a pan-Indian presence. The bank has a total of 566 branches all over the country and 918 ATMs in 19 states and a Union Territory.