LVB: Grim reminder of governance problems

T. N. Manoharan, the former non-executive chairman of Canara Bank who has now been appointed by the Reserve Bank of India (RBI) as the administrator for Lakshmi Vilas Bank (LVB) with all powers of the board of directors of the bank, is not new to managing crisis and finding a way out.

After the collapse of Satyam Computer Services in January 2009, the astute chartered accountant was nominated by the government-constituted board to take over the operations of the beleaguered company till it found a buyer. Speaking to Fortune India, he, however, confined himself to saying that his immediate priority as LVB administrator is “to protect the interests and of customers in general and that of the depositors of Lakshmi Vilas Bank in particular.” He also allayed any fears that depositors may have on availability of cash.

In developments that followed in quick succession on Tuesday, November 17, RBI got the central government to place LVB under a moratorium till December 16, 2020. Under this, RBI has restricted total withdrawals to a maximum of ₹25,000 by a depositor but a depositor would be allowed to withdraw more in case of medical emergency or for education or to pay for any obligatory expenses like a marriage or any other ceremony.

Also, RBI has placed in public domain a draft scheme of amalgamation of LVB with DBS Bank India (DBIL), the Indian arm of the Singapore-based DBS Bank.

Later in the day, at a press conference, Manoharan pointed out that DBIL has a healthy balance sheet, with strong capital support. As on June 30, 2020, its total regulatory capital was ₹7,109 crore (against capital of ₹7,023 crore as on March 31, 2020). As on June 30, 2020, its gross NPAs and net NPAs were low at 2.7% and 0.5%, respectively; the capital to risk weighted assets ratio (CRAR) was comfortable at 15.99% (against requirement of 9%); and common equity Tier-1 (CET-1) capital at 12.84% was well above the requirement of 5.5%.

DBIL, which is well capitalised, is to bring in additional capital of ₹2500 crore upfront, to support credit growth of the merged entity.

Most seem to see the developments as a timely move by the RBI. Veteran Indian banker Narayanan Vaghul says, “Going by what has been appearing in the news about LVB, it has been a badly managed bank and the RBI has been pointing it out. I think the RBI has taken timely action because if the bank can be taken over, it means the bank is not insolvent and a moratorium is the first step before initiating any amalgamation.”

What does he think about the merger of a 94-year-old private sector bank with a foreign bank? What can be the positives and the challenges? “The age of a bank does not matter. If a bank is weak it has to [undergo change] as that is the only way forward. DBS has an India presence, so it's not quite a foreign bank. After all, banking has transformed now,” Vaghul says.

In this, Vaghul also sees a message for the other 11-odd old private sector banks: “Unless they transform they will have to go.”

He says, “I hear that Federal Bank is transforming itself into digital banking. While I do not know the actual status there, if you do not take measures to transform and keep pace with the changes in the banking industry you end up losing your relevance in the market today.”

Agrees Duvvuri Subbarao, the former RBI governor, with a caveat that he has not studied the LVB developments closely, “Banking is a competitive industry and if the old private sector banks have to survive and compete they will have to adopt to new practices, new culture and new technologies. Otherwise, they will only end up depending on niche banking which can erode their competitiveness.”

Many see merit in the RBI intervention and what seems a clear attempt to rescue a failing bank. Given the earlier two failed attempts – one by Indiabulls and the other by the Clix Group – to acquire LVB, banking analysts say the RBI may have done the due diligence required to conclude that DBS will be the most suited.

It is still not clear is whether the LVB-DBS deal will be treated as a slump sale or whether DBS also gets the branch licences to significantly build its footprint, given that the original entity will cease to exist.

But some see a pattern of sorts emerging. “Not one bank in the history of Indian mid-sized private banks has ever been able to save itself. Every single private sector bank that failed had to be either rescued by a white knight or taken over by somebody else with the exception of DCB, which is the only bank which managed to turn itself around,” says Gopal Srinivasan, chairman and managing director of TVS Capital Funds. He, however, sees merit in the steps taken by the RBI.

Srinivasan also points out that this time there is a player with an existing banking licence that would take over LVB, which was not the case in earlier attempts to acquire the bank.

Amol Agrawal, assistant professor at the Ahmedabad University, who has studied the Indian banking scene closely, says, “It is unfortunate that after the crisis at YES Bank, there is one more.” He adds that though LVB has been a story of a failing bank, of all the private sector banks -- prior to those given licences after 1994 -- that are today defined by the RBI as old private sector banks, there were initially close to 25 of them, but the number is now down to 11 after the collapse of LVB. The common factor running across most bank failures in India, he says, is problems of loan books exploding, governance problems and the overarching role of promoter-directors.

A well-known banker, speaking on condition of anonymity, feels the move by the RBI was the only option left “as LVB is a sick bank and the RBI had to find a buyer or all the bank’s depositors would have lost their money.”

What is, however, worrying is that some who have looked at LVB closely say the takeover by DBS may not be the end of the story as the bank did have some serious flaws in its internal affairs and there is a good chance that there may be some serious problems that may emerge from the whole mess.

The question then is, why is India -- despite having a solid banking regulator and strict regulations -- having to deal with banks failing at regular intervals. Perhaps, as professor Agrawal points out, in the light of the spate of bank failures, the RBI may want to consider a review of its own supervision practices and regularly publish the findings and the changes it is bringing about in them.