Lakshmi Vilas Bank Merger: Factual and Informational Details

It looks like the Government of India is now playing smart rather than being a ‘Daanveer’ (over merciful donator). Just in case you are not aware of ‘Daanveer’, we’ll tell you. This name (or rather title) was conferred to a person in a community or village who always donated whenever someone went to him and pleaded for money or help.

Basically, whoever went to ‘Daanveer’ never returned empty-handed. This is because that person considered this as his moral responsibility to donate money and help anyone who approached him. But, this also resulted in many people taking undue advantage of his mercy.

But why are we telling you all this? The news is that, under the vigilance of the government and RBI, Lakshmi Vilas Bank is being merged with DBS. Besides this, a 30-day moratorium has been imposed, and the fund withdrawal limit has been capped at Rs. 25000. Now you may be thinking, what’s the connection between ‘Daanveer’ and the central government? And, what does this connection have to do with the ailing Lakshmi Vilas Bank? We will tell you in detail. Read on.

The Government’s Onus

Remember the Yes Bank saga? After much hue and cry by the shareholders and depositors, the government stepped in and roped in SBI to rescue the failing bank. The fact of the matter is, whenever a bank is failing, the government steps in and appoints a PSU to rescue the failing institution.

But, in the process, the government loses resources that could otherwise have been utilised for a better purpose somewhere else (because PSUs are managed by the government).

Now, it looks as if the government is trying to play smart by preferring an ‘out and out’ rescue over getting involved directly. So, this time the government has ‘outsourced’ the rescue operation to DBS Bank India (the subsidiary of Singapore based DBS Bank).

Is the government learning from the evolving judicial system that now prefers more ‘out of court’ settlements overhearing cases and deciding? However, it is, if the government is actually preferring ‘smart work over hard work’, it’s appreciable.

Intricacies of the Deal

Now that we have praised the government’s perspective of the deal let’s look at the intricacies of the deal and the parties involved. Lakshmi Vilas Bank has been facing a severe crunch since last few years. On the other hand, DBS (parent company of DBS Bank India) is an extremely well-managed entity that shall have no problems whatsoever in absorbing the ailing #LakshmiVilasBank.

First, have a look at the financials of these two banks and their financial comparison:

It may now be clear why DBS Bank might be a perfect buyer for Lakshmi Vilas Bank. On the one hand, where LVB has had a tough and testing time financially, especially in the last few years, DBS, on the other hand, has enjoyed financial soundness and stability.

It is important to mention here that trouble started mounting for LVB when they provided huge amounts of unsecured debt to the promoters of Ranbaxy (pharma major) and Fortis Hospitals. After that, in the last fiscal year, LVB suffered a huge revenue loss.

DBS Bank India does not have numerous branches in India and hence, buying out LVB might prove to be useful for them as they’ll get a sort of ‘ready-made’ structure to expand with. DBS India will absorb the entire staff along with bailing out the ailing LVB. In fact, DBS India will infuse additional capital of Rs. 2500 crores to purchase the stake.

From the Customers’ Perspective

A moratorium has been imposed by the central government (on RBI’s request) on Lakshmi Vilas Bank customers. The moratorium is effective till December 16, 2020. During the moratorium period, depositors will be able to withdraw a maximum amount of Rs. 25000. Those who hold multiple accounts with the bank, they will be able to withdraw Rs. 25000 all accounts combined.

However, the limit is more for those who may face unforeseen circumstances like a medical emergency or if they are getting married. For them, the limit is Rs. 5 lakhs or the total deposit in their account, whichever is less.

During this moratorium period itself, the merger with DBS Bank India shall be completed. The government has clearly stated that the depositors at LVB do not need to worry at all as their deposits will remain safe. However, shareholders are not that confident at the moment.

From the intricacies known about the deal, it can also be stipulated that shareholder’s interests are probably being ignored. But, when the deal goes through, this might just be a sort of collateral damage (if shareholders lose money in the process).

The Bottom Line

After two rejected merger deals, finally, LVB is getting merged with DBS Bank India. From the LVB’s point of view, it is going to be a life-saver. Also, it is getting an extremely capable mentor in the form of DBS. It is genuinely understandable about the problems of the depositors and the shareholders till the deal is executed. But, that is how it is, and all we can do is wait for the end result.

The government’s experiment with an international prima facie looks impressive, but the exact result of it is what we have to wait for. For now, we can just hope that LVB is properly rescued and the depositors get their hard-earned money back.