Shotgun Marriage Between DBS-Lakshmi Vilas Bank Still In Adjustment Phase

Nearly a year after the Reserve Bank of India stitched together a merger between DBS Bank India and Lakshmi Vilas Bank Ltd. to save the latter, the two lenders are still adjusting to each other. While progress has been made, much remains to be done in terms of integrating technology, products and cleaning up bad loans. These pains, which accompany most bank mergers, have proven to be a bit more acute given the cultural differences and legacy problems faced by Lakshmi Vilas Bank.

When the RBI announced the merger, DBS Bank India didn't really have any time for due diligence beyond information available in public domain, according to Prashant Joshi, managing director and head-national distribution. Joshi is heading the integration process.

"I came to Chennai on Nov. 26 last year and as they say, the bank was handed over. Literally. There's a photograph where they are handing me something on the day we came," Joshi told BloombergQuint in an interview. The first task was to send out the message that the intention was not to rock the boat. "It wasn't as if someone who knew better had come in to run the bank."

In an increasingly technology-driven sector, the integration of tech platforms is the first challenge faced in any bank merger. The DBS-LVB consolidation has been no different, with the integration still work-in-progress a year after the deal was stitched together.

Lakshmi Vilas Bank used Flexcube, a core banking system by Oracle. DBS Bank India, like its parent, is on the Finacle platform, developed by Infosys Ltd.

Eventually, DBS Bank India came to the conclusion that this migration had to be done, since all of its reporting to domestic and international regulators, products and services were on Finacle. A disruption on that front had to be avoided.

The integration, by DBS' own estimates, could take till September 2022.

In the interim, the foreign bank subsidiary has started implementing the Finacle platform, alongside Flexcube, at the top 100 branches of Lakshmi Vilas Bank. This would also help in training a large chunk of the private bank's staff, Joshi said.

A bank official familiar with the matter, who spoke on the condition of anonymity, said that the expense could have been avoided, had the DBS Bank India team come up with an alternative other than a complete change in systems. The Lakshmi Vilas Bank staff had been introduced to the Flexcube platform only about a decade ago and now for them to go through an entirely new technology platform is a cumbersome process.

It isn't clear if the over 3,000 staff at Lakshmi Vilas Bank will be fully trained in the new systems before the internal deadline ends, this person said.

The merger didn't face just a technology mismatch. It faced a culture mismatch, too, as a foreign bank subsidiary tried to merge with a regional lender.

The biggest surprise for the DBS Bank India team was the lack of depth in management at Lakshmi Vilas Bank.

"We had estimated that about 40% of the middle management at the bank would be good managers. When we came in, we realised that this layer didn't exist at all. That layer had left after the crisis started and we were not aware of it actually," said Joshi, adding that fresh hiring had to then be prioritised. "We went out and hired close to 30 people only for Lakshmi Vilas Bank's needs."

Reporting structures were troublesome, too. Branch heads at Lakshmi Vilas Bank wielded a lot of power. This had to be replaced with a more vertical management structure where branch heads did not lose their importance, but lending decisions were driven by centralised goals.

According to a second former Lakshmi Vilas Bank employee, now part of DBS Bank India, the changes introduced by the foreign bank subsidiary are now stabilising. As soon as the employees realised that the changes being brought in did not impact their employment status, most accepted the roles they were given.

The scheme of amalgamation by the RBI states that all employees of Lakshmi Vilas Bank would become employees of DBS Bank India, at the same remuneration and on the same terms and conditions of service, as was applicable before the merger.

According to VG Kannan, former managing director, State Bank of India, who oversaw the merger of the five associate banks with SBI, any reluctance or resistance to change among employees typically lasts for about two years. After that initial period is done, most people adhere to the new normal.

"The real challenge will arise when this bank goes into the expansion phase and people will need to be transferred outside their home locations," Kannan said. "Then the HR issues will pop up as people wouldn't want to leave their posts. How soon the problem will be resolved will depend on how the management deals with it."

Where the merger has helped DBS Bank India is in pivoting its 'Digibank' offering into something backed by LVB's physical network.

Before DBS Bank India was handed the Lakshmi Vilas franchise, the former was largely known for its 'Digibank' offering, a mobile application through which customers could open a bank account and use services without ever having to visit the branches. Its physical presence was restricted to 40 branches.

While Digibank has always been successful on the customer acquisition front, retention was still a problem since customers weren't using services to the full potential, Joshi said.

Currently, about 40% of the incremental deposits being collected through the Lakshmi Vilas Bank franchise comes from the Digibank platform, he added.

DBS Bank India had to also train its own staff on how to sell retail products to customers, since this was never their strong suit. For this, multiple training sessions were conducted, where employees from Lakshmi Vilas Bank were invited to share their knowledge.

"We realised that a bank does not run for 94 years without there being something which has worked for them," Joshi said.

That the merger is still work-in-progress is visible in the numbers too.

The merged bank had a gross non-performing assets ratio of 11.59% but a net NPA ratio of 2.4%. This suggests that while legacy bad loans still need to be dealt with, they have been provisioned for to a large extent.

Between March 2020 and March 2021, the merged bank made additional provisions worth Rs 3,579.7 crore against NPAs. Most of this was toward assets from the Lakshmi Vilas Bank loan book.

However, the provisions did weigh on capital.

At the time of the merger announcement, DBS Bank, the Singapore-headquartered parent of DBS Bank India, infused Rs 2,500 crore worth of capital.

As of June 30, the merged bank had a capital adequacy ratio of 14.61% and Tier-1 capital of 11.87%. In a separate email response, DBS Bank India said that its capital adequacy ratio as of August stood at 15.51%. "We will seek capital as we come closer to regulatory minimum," the bank said.

Advances and deposits data signal divergent trends.

Deposits of the merged entity have grown a modest 6.4% between December 2020 and June 2021. Deposits stood at Rs 52,703 crore as of June 30, 2021.

Apart from the outflow of deposits witnessed in the first two months of the merger, the base of current account-savings account or CASA deposits by have risen by 15%, Joshi said.

Funded advances have seen stronger growth of over 23%. As of June 2021, funded advances stood at Rs 50,455.6 crore and non-funded advances at Rs 22,162.7 crore.

But DBS Bank India thinks it's now ready to focus on growing the merged franchise.

This is being achieved through businesses such as gold loan, which was a strong suit for Lakshmi Vilas Bank ahead of the merger.

"As a foreign bank we would have never thought about building it. But we realised that gold loans was a very good business which the staff here was very well trained for," Joshi said. "They then trained our staff and even me in the business."

Independent banking analyst Hemindra Hazari sees the push on gold loan as a risky bet to grow the bank's balancesheet.

"Loans against gold jewellery is normally a safe and highly profitable strategy for banks as it the lowest hanging fruit available; however, banks must adopt adequate safeguards in the appraisal of gold jewellery as this is the weak link in the process," he said.

Another area which DBS Bank India is pushing for growth is small-business loans through its analytics based lending platform. The product allows for a quick assessment and disbursal of small business loans. DBS Bank India has identified the top Lakshmi Vilas Bank branches where this business would do well and trained the staff there.

The foreign bank subsidiary is also tapping the wealthy client base of Lakshmi Vilas Bank to grow its wealth management services.