Bank mergers in India have got another push with a failed Lakshmi Vilas Bank getting an upscale acquirer DBS Bank of Singapore as partner. While the mega merger of public sector banks (PSBs) among themselves or the private sector merging with another private sector comes with lesser complication, the merger of an old private sector bank with a foreign bank will bring in new set of challenges.
The cultural conflict
Like they say a merger is not about combining the books of accounts and assets, it is more about cultural integration. The merger of old Lakshmi Vilas Bank with the Indian unit of Singapore-based DBS Bank is clearly a merger of two extreme entities. The 94-year old private sector Lakshmi Vilas Bank comes with an old legacy of people, processes, system and products. Whereas, DBS Bank comes with a foreign banking culture, which is more aggressive and focussed on productivity and return on investments.
DBS Bank 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.
In fact, DBS Bank was very proactive to register in India as a wholly-owned subsidiary way back in 2019. In India, most of the foreign banks operate as a branch of the parent. With the wholly-owned structure in India, the RBI also allows a level playing field as against the branch model. This is a big advantage for DBS Bank, which has already expanded its operations in India over the years.
A merger of strong and a weak bank
While the DBS Bank is well capitalised, the foreign bank will bring in additional capital of Rs 2,500 crore upfront, to support credit growth of the merged entity. This old private sector bank was in urgent need of capital because of the losses for the last three years. The bank's losses jumped from Rs 585 crore in 2017-18 to Rs 836 crore in 2019-20. The bank's gross NPAs have touched 25.39 per cent in the same period. The bank saw its capital adequacy ratio falling to 0.17 per cent in June 2020 as against the minimum 9 per cent. There could be more NPA surprises in future because of the COVID-19 stress as it managed to kick the NPA can down the road because of one-time restructuring of loan allowed by the RBI. The bank will need more capital to absorb the losses of the old private sector bank.
DBS Bank, which operates with 35 branches in 25 cities across India, is getting a chunk of branches at one go. Lakshmi Vilas Bank has some 566 branches with half a dozen commercial branches. In fact, DBS with a wholly-owned subsidiary structure has always enjoyed the incentives by way of near national treatment for opening branches across the country at par with national banks. While they are getting a huge network of branches in certain key geographies and locations, the RBI has also given more flexibility to DBS by giving the option of merging branches of Lakshmi Vilas Bank according to its convenience. "It may close down or shift the existing branches," says RBI.
Lakshmi Vilas Bank has staff strength of over 4,000. While the scheme of merger has no mention of employee rationalisation, it is likely that it will happen to some extent. DBS would need more trained staff for advisory and wealth management than branch banking as digital banking is already reducing the branch visits of customers and more and more transactions are taking place over mobile and internet banking. The entire digitisation drive, where DBS is quite aggressive, would need more expertise in data analytics, digital marketing, cyber security, wealth advisory, etc.