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Sunday, December 06, 2020

Rescuing the bank

The DBS-LVB deal ensures protection of depositors’ interest, which is supreme in banks.

By: Editorial | Updated: November 21, 2020 5:44:53 am
Financial skulduggery is a reality.

Investors in Lakshmi Vilas Bank (LVB), especially minority shareholders, have valid reasons to be unhappy over its amalgamation with the wholly-owned Indian subsidiary of Singapore’s DBS Bank. Their grouse is specifically over the Reserve Bank of India’s (RBI) proposal to write off LVB’s entire paid-up equity capital and reserves, resulting in a zero value of its shares. The situation is similar to that of Yes Bank’s AT-1 (additional tier-1) bond investors, who suffered a total write-down of their Rs 8,415 crore holdings as part of a rescue plan for yet another private sector lender in March. The LVB’s shareholders, like Yes Bank’s AT-1 bondholders, are demanding compensation for the forced extinguishing of their investments. While the reconstructed Yes Bank has new major shareholders, in LVB’s case, the bank itself would cease to exist. The RBI’s scheme envisages all its assets and liabilities — from 563 branches, 974 ATMS and Rs 20,973 crore deposits (as on September 2020), to land and buildings — to be transferred to DBS Bank India from the date of amalgamation.

While the disquiet of equity and quasi-debt investors is understandable, the RBI’s concern as a banking sector regulator is to first secure the interest of depositors. Banks, unlike regular companies, make money not from owning plants, machinery and property. Their business, instead, is derived from deploying other people’s money — primarily deposits. No bank, however well-capitalised, can survive if depositors decide to pull out money. The regulator, then, has to intervene to ensure no bank fails or at least not allow it to trigger runs in other banks. India, over the past two years or so, has seen the collapse of four financial firms: IL&FS, Dewan Housing Finance, Punjab and Maharashtra Cooperative Bank and Yes Bank. LVB’s bad loans have mounted to about a quarter of its gross advances, while deposits have shrunk by nearly Rs 6,900 crore in the last one year. The bank’s management failed to come up with a credible capital-raising and revival plan, forcing the RBI to seek its merger with another bank.

The choice of DBS cannot be faulted. Unlike public sector banks, saddled with stressed loans and requiring fund infusion themselves, it has committed to bringing in additional capital of Rs 2,500 crore upfront. Also, despite being a foreign bank, it has chosen to operate in India through a wholly-owned subsidiary, as opposed to just having branches. By submitting itself to the RBI’s more stringent regulatory requirements, DBS will, nevertheless, now be able to add 550-plus branches to its existing 33. That should send a strong signal to other foreign banks to pursue greater growth opportunities by becoming desi in the manner of a Hindustan Unilever or Nestle India. Indian banks need more capital — and foreign as desi is most welcome.

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