RBI has finally moved in the right direction of granting permission to the Singapore based DBS Bank to acquire the beleaguered Laxmi Vilas Bank. Importantly the depositors of the bank will be protected. LBV was drifting towards a chaotic end under RBI’s year long Prompt Corrective Action plan with two groups of shareholders jostling for control.
Surprisingly the bank was healthy when RBI flagged off the banking reforms and started the asset quality review of banks in the last quarter of 2015. Both its revenue and profitability was on the rise and the Gross NPR was less than 2% while the Capital Adequacy Ratio was well above that mandated by Basel III norms in the financial year 2015-16.
In 2016 LVB lent Rs 720 crores to Religare Finvest a company promoted by Malvinder Singh and Shivinder Singh the former owners of Ranbaxy against fixed deposits of Rs 750 crores. Several other loans were given to other industries that are now under scrutiny. In 2018 DBS Singapore along with several other foreign banks expressed in acquiring LVB. The DBS offer was for 50% stake holding at Rs 100 per share which was a fair deal as per the valuation at that point of time. The RBI did not accept the offer because it did not want foreign banks to enter the banking space without diluting controlling stakes.
The story in Hindi.
LVB meanwhile was loosing money by that time and started drifting. It was hard pressed for liquidity.
In 2019 LVB encashed a Rs 790 crore ( Rs 750 crore FD plus interest ) given by Religare in lieu of the loan. The borrower accused LVB Vice President and promoter K.R. Pradeep of fraud and registered a case of fraudulent misappropriation against him. It is alleged that one group of shareholders led by Board members and founders B K Manjunath and K.R. Pradeep started to siphon out money from the bank after Manjunath a member of the Institute of Chartered Accountants was permitted to be re-inducted in the bank board by RBI after 2016. The Lakshmi Vilas Bank with half a dozen other banks including public sector UCO Bank, Central Bank and IOB was put under RBI’s PCA watchlist in September 2019.
But there was no signs of correction, nor any new investor in sight who would meet the investment guidelines and also pump in adequate liquidity into the bank. There were two proposals mooted by the Pradeep group which was behind the merger proposal of LVB with Indiabulls Securities and Clix capital. Both were turned down by RBI. Last week another group of shareholders led by founding members
N. Ramamritham, N.T. Shah and S.B. Prabhakaran ousted the existing CEO and seven board members with the help of Institutional investors.
The infighting between the shareholder groups was the last straw on the camels back that prodded RBI into decision making. It belatedly made the right decision and allowed the merger of LVB with DBS protecting the depositor interest which is a right decision. The merger will require the entire equity capital to be wiped out which though unfortunate is the only option today. However had the RBI permitted this merger 2 years back the shareholders of the bank would not have to go empty handed.
This is one of the many cases of regulatory tardiness that is causing massive losses to the banking sector. The country lost Rs 1.82 lakh crore due to bank frauds in 2019-20 largely due to the fault of bank supervisors and regulators who need to act speedily and pro-actively. This was 160% higher than the bank frauds of the previous year and nearly 1.2% of the GDP. Regulatory reforms is necessary and urgent as pointed out in Chapter 9 of my book the Inside Story of Indian Banking published by Rupa in October 2020.
Connected links : Why is Bharat Not Atmanirbhar?
RBI needs to create a new route map for banking supervision.it has to carry other regulators like the SEBI and the CVC along with rating agencies like CRISIL and CARE and get its act together so that the massive frauds in the commercial banks, the NBFC and the co-operative banks are reduced to the minimum and the bank NPAs are brought down to safe limits quickly.
#RBI, #LVB, #DBS, #merger, #economy #banking #economicrevival #law , #investing
#SEBI , #CVC, #disinvestment
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