With four financial institutions collapsing in over two years under their watch, the RBI and the government may not merit applause, but the central bank deserves a round. Moments after the government imposed a one-month moratorium on capital-starved Lakshmi Vilas Bank (LVB), the RBI deployed the draft scheme of amalgamation with the Indian unit of the Singapore government-controlled DBS Bank with surgical accuracy.
Such a swift resolution protects the interests of depositors and employees, helps maintain financial stability and prevents chaos. While LVB shareholders will stand to lose, the DBS’s cash injection of `2,500 crore into the merged entity ensures that normalcy of banking operations is restored faster. For the DBS, the acquisition won’t materially affect its financials, but significantly expands its footprint adding meaningful physical presence.
Though the rescue reveals the regulator’s proactive hand, the criticism, however, is that the RBI waited too long to step in. The LVB has been struggling for some time and had a negative return on assets for two consecutive years. It lacked sufficient capital to manage risks and failed spectacularly to raise funds. Interestingly, it’s the only non-government-owned lender to be placed under the Prompt Corrective Action in September 2019. Effectively, a rescue plan involving a white knight began since then, but it took one full year for the RBI to bail out the bank.
Like other economies, India rarely allows its banks to fail. Historically, the government merged distressed or scam-hit lenders with stronger PSBs, with taxpayers picking up the bill. Bucking the trend this time, the RBI chose a foreign entity without roping in state-run lenders, perhaps as they are busy themselves undergoing the mega bank merger process announced last year. It also reinforces the RBI’s willingness to encourage foreign entities to scout potential merger candidates given several banks have weak financials but sound businesses.
Lastly, the LVB-DBS merger is an important reminder to the government to empower the RBI. Just consider PMC Bank. Last year, the RBI imposed restrictions when crisis struck, but couldn’t mount a rescue as it was powerless to supersede the PMC board as it did with the LVB or Yes Bank.