Indian depositors, looking for a safe space to park their money, have been scudding from crisis-to-crisis in recent past, with PMC Bank, Yes Bank and now Lakshmi Vilas Bank going bust.
Although bank failures are nothing new or unique to India, the quick succession in which big lenders are going under is perturbing.
LVB is a small bank and its failure won't significantly impact the banking sector, but it's the loss of confidence and trust in banking system that has escalated with this crisis.
What is the crisis?
Lakshmi Vilas Bank has been put under moratorium by the RBI for 30 days, effective from 6:00 pm on November 17 till December 16. The action has been taken by the central bank on the basis of sub-section (2) of section 45 of the Banking Regulation Act, 1949. Under the moratorium, RBI has restricted withdrawals at Rs 25,000.
Depositors with more than one account will only be allowed to withdraw Rs 25,000 from all their accounts, while those with dues payable to the bank will receive the mandated amount after their dues are deducted.
Shortly after announcing the clampdown on Lakshmi Vilas Bank, the central bank also announced a draft scheme of amalgamation for merging the troubled lender with Singapore-based DBS Bank.
Why did Lakshmi Vilas Bank fail?
The troubled lender with 566 branches saw its capital adequacy ratio fall to 0.17 per cent in June 2020 as against the minimum 9 per cent. The bank had Rs 13,827 crore in outstanding loans and deposits worth Rs 21,443 crore at the end of the financial year 2019-20.
The private sector lender is in urgent need of capital because of the losses it has been incurring for the last three years which 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.
Besides, shareholders were also not too happy with the management of the 94-year-old private sector bank because of wealth destruction and losses on the books. They recently ousted the bank's seven directors, including RBI-appointed MD and CEO.
The old private sector lender has been under the RBI's prompt corrective action (PCA) framework since September last year and finally got a new acquirer in DBS Bank, on Tuesday, November 18, after two failed attempts at a merger.
Is depositor's money safe?
Between all the higgledy-piggledy, the RBI moved fast to announce that no depositor will lose money and that they will have access to it post the moratorium period that ends on December 16.
The fixed deposits (FDs) with Lakshmi Vilas Bank will be safe as well, however, the rates could change as DBS, the new owner, will take a call on this. It is noteworthy here that it is the shareholders who will have to bear losses as the bank's share values are slated to go down.