Lakshmi Vilas Bank Paves The Way For DBS Bank’s India Ambitions
The Lakshmi Vilas Bank Ltd.’s merger with the Indian subsidiary of Singapore’s DBS Bank Ltd. has opened up new possibilities for foreign lenders operating in the country.
While the announcement was part of the Reserve Bank of India’s draft amalgamation scheme, it will need the government’s nod to be completed within 30 days. If the merger were to go through, it would help DBS Bank India to rapidly expand its presence in the country, which it has not been able to achieve so far.
The lending businesses for both banks are complementary. DBS Bank India, similar to Lakshmi Vilas Bank, has a prominent presence in small and medium enterprises lending. DBS Bank India, however, brings with it strong underwriting skills and a completely digital banking network.
The merged entity is expected to have capital adequacy ratio of 12.51% and common equity tier-1 capital of 9.61%, the RBI said in a statement. In comparison, DBS Bank India reported a capital adequacy ratio of 15.99% as on June 30, with common equity tier-1 capital at 12.84%, indicating a strong capital base.
After the banking regulator’s announcement, DBS Bank India in a statement said its parent would bring in Rs 2,500 crore worth of additional capital once the merger was approved. These funds would be raised fully from DBS Bank’s existing resources. This equity infusion, according to the RBI, will aid the credit growth needs of the merged entity.
“One would expect that they (DBS Bank) would be able to begin from a relatively clean slate. DBS Bank as a lender has been in the MSME sector globally, so they would be able to bring in those international underwriting standards to the Indian market. The problems in Lakshmi Vilas Bank look like something they can absorb and move on,” said Amit Tandon, founder and managing director at IiAS Advisory.
The merged bank would have more than 600 branches spread across India. Under the draft amalgamation scheme, DBS Bank India would have the right to merge, shut down or transfer any of the branches of Lakshmi Vilas Bank. As such, after the merger, Lakshmi Vilas Bank would cease to exist as an independent entity.
A New Start?
After operating as a local branch since 1995, DBS Bank India converted into a wholly owned subsidiary of the Singapore-based parent in March last year. While guidelines for the wholly owned subsidiary model were introduced in November 2013, only two lenders have such entities. The other is State Bank of Mauritius, whose Indian subsidiary was granted a licence by the RBI in January 2019.
The model was aimed as a mode for foreign banks to receive near national treatment in the Indian banking industry, which would allow them to freely open branches in the country.
According to the RBI guidelines, wholly owned subsidiaries may be permitted to enter into mergers and acquisitions with any private bank in India, subject to an overall foreign investment limit of 74%.
But under a different set of guidelines, which govern ownership in private banks, the regulator has broad discretion in permitting investment in stressed lenders.
“Higher stake / strategic investment by promoters / non-promoters through capital infusion by domestic or foreign entities / institution shall be permitted on a case to case basis under circumstances such as relinquishment by existing promoters, rehabilitation / restructuring of problem / weak banks / entrenchment of existing promoters or in the interest of the bank or in the interest of consolidation in the banking sector, etc,” the ‘Ownership in Private Sector Banks, Directions, 2016’ state.
According to Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, the RBI’s decisions in the Lakshmi Vilas Bank rescue plan indicate that the regulator might be taking a more liberal view toward foreign banks looking to expand in India.
“The regulator is now prepared to explore the possibility of having foreign banks acquire an Indian bank. This is of course under moratorium, but in the normal course of business also, we would be expecting the RBI to come up with something interesting in this area,” said Parekh.
One area where DBS Bank India might face difficulty is the cultural difference between a foreign and an old-generation private bank. But if DBS Bank India continues to focus on strong corporate governance and risk management frameworks and even considers a good salary structure for employees, the merger could end up working in its favour, Parekh said.
The merger, according to DBS Bank India’s statement, will help the lender grow its relationship with customers from southern states that have long-term business ties with Singapore.
This is the third such instance where the RBI had to step in and rescue a lender in recent months. After Punjab & Maharashtra Cooperative Bank was placed under strict restrictions in September 2019, Yes Bank was placed under moratorium in March this year. While the State Bank of India-led rescue plan has helped services normalise at Yes Bank, PMC Bank is still awaiting investor interest.