Lakshmi Vilas Bank Fiasco: Will Depositors Get Their Money Back?

Close on the heels of PMC Bank and Yes Bank, Lakshmi Vilas Bank has now been placed under moratorium. The Indian government on Tuesday imposed a one-month moratorium on Lakshmi Vilas Bank and capped the cash withdrawal limit at Rs 25,000 for depositors. The withdrawal cap will remain in place until Dec 16, 2020.

"The financial position of The Lakshmi Vilas Bank has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth. In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue," the RBI has stated.

What led to chaos at Lakshmi Vilas Bank?

When the economy was booming between 2004 and 2015, every bank wanted to enter into corporate lending. However, things were not hunky-dory and businesses started seeing a serious downturn particularly those in power, airlines and telecom.

In the last few years, non performing assets started imploding, putting lenders like Yes Bank and Lakshmi Vilas Bank at risk. Big and medium sized corporates started defaulting, pushing non performing assets higher. Lakshmi Vilas Bank had exposure to some big corporates like Reliance Home, Cox and Kings and Jet Airways Group.

While bigger banks also lent to corporate houses where defaults occurred, they were able to raise capital quickly. Apart from this, big banks have a solid liability franchise, which tends to make them relatively safer as they can raise deposits quickly.

Another problem in the banking sector today is that the slightest hint of trouble means depositors start withdrawing. When deposits start falling it compounds the problem and pushes the bank into a virtual collapse. This is exactly what has happened at Lakshmi Vilas Bank. In short, in ability to raise capital, mounting losses and flight of deposits is what led to the gradual downfall of the bank.

The Reserve Bank had also declined a merger of the Bank with IndiaBulls Housing in October last year. Who knows an approved merger may have salvaged the situation.

Will depositors in Lakshmi Vilas Bank get their money back?

The answer to that question is that depositors money looks safe at the moment. The Reserve Bank of India may approve an amalgamation of Lakshmi Vilas Bank with DBS Bank India Ltd. (DBIL).

DBIL is a wholly owned subsidiary of DBS Bank Ltd, Singapore, which in turn is a subsidiary of Asia's leading financial services group, DBS Group Holdings Limited and has the advantage of a strong parentage.

DBIL has a healthy balance sheet, with strong capital support. As on June 30, 2020, its total Capital was Rs 7,109 crore (against Capital of ₹7,023 crore as on March 31, 2020). As on June 30, 2020, its GNPAs and NNPAs were low at 2.7% and 0.5% respectively; Capital to Risk Weighted Assets Ratio (CRAR) was comfortable at 15.99% (against requirement of 9%); and Common Equity Tier-1 (CET-1) capital at 12.84% was well above the requirement of 5.5%.

Although the DBIL is well capitalised, it will bring in additional capital of Rs 2500 crore upfront, to support credit growth of the merged entity. Owing to 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.

It remains to be seen if the amalgamation goes through. Remember, in the case of Yes Bank it was SBI, which bought in fresh capital into the bank and salvaged the situation. It's unlikely that the government will allow the bank to collapse and a merger is highly possible. Also, in the past there has never been a private sector bank or public sector bank that has collapsed, though smaller cooperative banks have. This means investors and deposit holders have every reason to be optimistic.