The LVB mess — a failure of regulation?

S Kalyanasundaram | Updated on November 23, 2020

Times of stress   -  BusinessLine

RBI appears to have missed early signs of stress in the bank. Needed is a system to study lapses of central bank and its officials

One more banking wicket is down with the fall of Lakshmi Vilas Bank Ltd, which existed for 94 long years. We also saw the collapse of YES Bank Ltd in recent times. But in the case of YES Bank, with the help of the government capital infusion, the bank was allowed to survive.

But LVB will be merged with another bank. The bank was placed under moratorium on November 17, which will be effective up to December 16, 2020. The Reserve Bank of India on November 17, 2020 placed in public domain a draft scheme of amalgamation of the bank with DBS Bank India Ltd (DBIL).

The RBI has invited suggestions and objections, if any, from members, depositors and other creditors of transferor bank (LVB) and transferee bank (DBIL) on the draft scheme and the RBI has informed that the suggestions and objections would be received up to 5 p.m. on November 20, 2020. The RBI may take a final view thereafter.

Inadequate time

LVB was stressed for the past many years and the RBI did not act in time to save the bank or its stakeholders. However, it is strange that the RBI has given just three days’ time to stakeholders to offer suggestions and objections. Even to understand the scheme of amalgamation, needs more time.

The RBI has all the powers to conduct inspection of banks and to monitor their financial health. It has enormous powers to take corrective action. It can even supersede the board of the banks and stop further lending by banks.

There were multiple occasions during which RBI could have taken corrective action on LVB. Deterioration of a bank does not happen overnight. The following situations could have forced RBI to act, but it seems that the regulator has failed miserably.

**The Lakshmi Vilas Bank Ltd had a Capital Adequacy Ratio of 11 per cent in the year 2016, which fell in subsequent years to the level of 10, 10, 7 and finally to 1 per cent as on March 2020.

**The Gross NPA was just two per cent in 2016 and deteriorated to the level of 25 per cent in 2020. The Net NPA, which was just one per cent in 2016, deteriorated to 10.04 per cent in 2020.

**When the bank’s borrowing was ₹1,773 crore in 2017, the next year it jumped to ₹4,012 crore, which shows that the bank was not able to generate deposits to meet its credit requirement and this is similar to overtrading by any trader.

**The bank had a deposit base of ₹33,309 crore in 2018 which has fallen to ₹29,279 crore in 2019.

The RBI owes an explanation to the government and the general public on why it did not act on time.

LVB is a domestic institution with nine decades of standing. As on September 30, the bank has 563 branches and 974 ATMs. The bank had deployed PoS machines at various merchant establishments. The acquirer will have readily available structure to do banking business with trained manpower (who can be trained for reskilling easily) and long standing customers. The bank is being given away to a foreign entity on a platter. Why should LVB be merged with a foreign bank?

Why were no bids invited from other interested parties? Without open bidding, how can we say that this is the best option for all the stake holders, more so for the shareholders?

RBI and ccountability

There have been several instances of ‘strained’ government banks being rescued by recapitalisation through taxpayers’ money. Whenever any private bank fails, it is merged with some other bank and the depositors are saved. In the process, the shareholders of failed banks see erosion of their investment. There seems to be inadequate supervision by the RBI and the action taken is always with inordinate delay, which results in the erosion of shareholder value.

But there seems to be no action on fixing the accountability of the central bank. There should be a system to study the lapses of the central bank and their officials and to fix accountability for any laxity. This will help in avoiding bank failures in future.

The writer is a retired banker

Published on November 23, 2020

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