Lakshmi Vilas Bank placed under moratorium until Dec 16; RBI proposes amalgamation scheme

In a big development on Tuesday, the Lakshmi Vilas Bank Ltd. was placed under moratorium by the Reserve Bank of India until December 16 as per Section 35A of the Banking Regulation Act, 1949. A scheduled commercial bank with a pan-India network of 563 branches, it was founded by 7 businessmen in 1926. In the last few months, RBI has initiated such action against the Punjab and Maharashtra Co-operative Bank and Yes Bank.

In the moratorium period, the customer of this bank shall not be able to withdraw more than Rs.25,000 from all accounts combined. However, the RBI may allow withdrawals up to Rs.5 lakh in case of medical treatment, higher education, marriage, or any unavoidable emergency. Apart from this, the bank has been permitted to spend money only to meet obligations such as salaries of employees, rent, taxes, stationery, printing, postage, telegrams, legal expenses not exceeding Rs.50,000, etc.

Moreover, the RBI has superseded the bank's Board of Directors for a period of 30 days to protect the interest of the depositors and to ensure proper management. Consequent upon the supersession of the Board of Directors, India's central bank appointed TN Manoharan, the former non-executive Chairman of the Canara Bank as the Administrator of the Lakshmi Vilas Bank Ltd. He will discharge the duties and functions of the Board of Directors. 

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RBI flags governance issues

In its order, the RBI made it clear that the Lakshmi Vilas Bank Ltd. has serious governance and management issues. It highlighted that the bank had incurred a net loss of Rs.836 crore and Rs.112 crore for the fiscal year 2019-20 and the quarter ending June 30, 2020, respectively. It added, "As there is no likelihood of an increase in fresh advances and slippages may continue, asset quality position is likely to deteriorate materially during FY 2020-21". 

According to the RBI, the bank has undergone a steady decline in the last three years besides the lack of any viable strategic plan, declining advances and mounting non-performing assets. Revealing that the Lakshmi Vilas Bank Ltd. had not been able to raise adequate capital to address issues around its negative net-worth, the country's central bank stated that it was experiencing the "continuous withdrawal of deposits" and "low levels of liquidity". In September 2019, the bank was placed under the Prompt Corrective Action framework. 

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Draft scheme of amalgamation

Cautioning the customers not to panic, the RBI has proposed the amalgamation of the Lakshmi Vilas Bank Ltd. with the DBS Bank India Ltd. It noted, "DBIL is a wholly owned subsidiary of DBS Bank Ltd, Singapore (“DBS”), which in turn is a subsidiary of Asia’s leading financial services group, DBS Group Holdings Limited". With strong capital support, the combined balance sheet of the DBIL is expected to remain healthy after the proposed amalgamation. 

Suggestions and objections on the draft scheme of amalgamation have been invited from members, depositors and other creditors of the Lakshmi Vilas Bank Ltd. and DBIL till 5 pm on November 20. This scheme has also been sent to the aforesaid banks for their views. The RBI has resolved to put the scheme in place well before the expiry of the moratorium period to ensure that the depositors do not face undue hardship. 

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