On Tuesday, the Reserve Bank of India decided to take control of Lakshmi Vilas Bank (LVB) and amalgamate it with DBS Bank India Limited. In less than a year, it's the third bank to be taken over by RBI. Prior to it the Punjab and Maharashtra Bank and Yes Bank were put under moratorium and a takeover plan for them was worked out.
Here is all you need to know about Lakshmi Vilas Bank:
What is Lakshmi Vilas Bank and when was it founded?
Lakshmi Vilas Bank was founded in 1926 by a group of seven progressive businessmen in Karur under the leadership of Shri V.S.N. Ramalinga Chettiar. The mission was to cater to the financial needs of the people in and around the textile city of Tamil Nadu, Karur involved in various trading businesses, industries and agriculture. The Bank was finally incorporated on November 3, 1926, under the Indian Companies Act, 1913, and obtained the certificate to commence business on November 10, 1926. Subsequent to the introduction of the Banking Regulations Act, 1949 and Reserve Bank of India as the regulator for the banking sector, the Bank obtained its banking license from RBI on June 19, 1958, and on August 11, 1958, it became a ‘scheduled commercial bank’ signifying capability to operate as a full-fledged commercial bank.
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What will happen now?
RBI-appointed administrator for Lakshmi Vilas Bank T.N. Manoharan says the bank has enough liquidity to pay back depositors and that he is confident of timely merger of Lakshmi Vilas Bank with DBS India. Manoharan says Lakshmi Vilas Bank has Rs 20,000 crore in deposits and Rs 17,000 crore in advances and his top priority is to assure Lakshmi Vilas Bank depositors that their money is safe.
How big is Lakshmi Vilas Bank?
Lakshmi Vilas Bank expanded its branch network considerably during the period 1961-65, when the Bank took over nine other banks. In 1974, the bank started expanding the branch network beyond Tamil Nadu to leverage opportunities in the pan-Indian market. Branches were set up in the neighbouring states of Andhra Pradesh, Karnataka and Kerala, important financial centres such as Mumbai, New Delhi and Kolkata as well as in other significant business centres in Maharashtra, Gujarat and Madhya Pradesh. Today the bank has a network of 563 branches (includes 7 Commercial Banking Branches, 1 Satellite branch) and 5 extension counters with PAN India presence, supervised by 7 Regional Offices.
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What is the bank's financial health?
According to the bank's website, it's Gross Advances as on 30th Sep 2020 was to the tune of Rs 16,622 crore, with Net Interest Income at Rs 79.52 crore. Total Deposits were pegged at Rs 20,973 crore. The bank has a total business mix of Rs 37,595 crore as on September 30, 2020.
Why did RBI impose the moratorium?
The Lakshmi Vilas Bank Ltd. (the bank) has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth. In the absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, the bank is also experiencing the continuous withdrawal of deposits and low levels of liquidity.
It has also experienced serious governance issues and practices in recent years which have led to the deterioration in its performance. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019 considering the breach of PCA thresholds as on March 31, 2019.
After taking into consideration these developments, the Reserve Bank of India has come to the conclusion that in the absence of a credible revival plan, with a view to protect depositors’ interest and in the interest of financial and banking stability, there is no alternative but to apply to the central government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949. Accordingly, after considering the Reserve Bank’s request, the central government has imposed moratorium for 30 days effective from November 17.
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What does moratorium mean?
The withdrawals from Lakshmi Vilas Bank have been limited to Rs 25,000 till the next 30 days.
What is next?
The RBI has put a merger plan for LVB with DBS Bank India. It has put a draft scheme of amalgamation in the public domain and has invited suggestions and objections, if any, from members, depositors and other creditors of transferor bank (LVB) and transferee bank (DBIL). The draft scheme has also been sent to transferor bank and transferee bank for their suggestions and objections. The suggestions and objections will be received by Reserve Bank up to 5 pm on November 20, 2020. The Reserve Bank will take a final view thereafter.
