RBI’s Swift Resolution Of Lakshmi Vilas Bank To Maintain Sector Stability: S&P
A branch of The Lakshmi Vilas Bank in Mumbai, India. (Photographer: Mahima Kapoor/BloombergQuint)

RBI’s Swift Resolution Of Lakshmi Vilas Bank To Maintain Sector Stability: S&P

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The Reserve Bank of India’s swift resolution of The Lakshmi Vilas Bank Ltd. will keep contagion at bay and help maintain stability in the banking system, S&P has said.

The banking regulator has placed Lakshmi Vilas Bank under a moratorium, capping withdrawals at Rs 25,000, and proposed a merger with DBS Bank India Ltd. The Indian subsidiary of the Singapore-based bank will infuse Rs 2,500 crore into the merged entity to support its financial position.

The development came a little over a year after the RBI placed the 93-year-old lender under its prompt corrective action framework.

"The RBI’s swift resolution of the troubled Lakshmi Vilas Bank will keep contagion at bay and help maintain stability in the banking system,” S&P Global Ratings said. “We believe RBI took into account DBS Bank India Ltd.’s healthy balance sheet and capitalisation when considering potential suitors...,”

Lakshmi Vilas Bank, which has only a 0.2% market share, is the only non-government lender under RBI’s PCA framework. Its shareholders recently ousted seven directors, including the managing director and chief executive officer. The central bank had to then step in and appoint a panel comprising three independent directors.

According to S&P, the Indian government has always been highly supportive of the country’s banking sector as it has consistently supported weak commercial banks by promoting their merger with stronger lenders. It has not allowed commercial banks to fail and has swiftly stepped in to address trouble.

In this case too, the RBI and the government stepped quickly to prevent any loss to the creditors, including depositors, and maintain system stability, the U.S.-based ratings agency said. "In our view, the RBI’s decision to consider a foreign bank, beyond just homegrown institutions, to bail out Lakshmi Vilas Bank demonstrates willingness to put control of banking assets in foreign entities.”

Also Read: From Yes Bank To Lakshmi Vilas Bank, Lessons From Bank Failures

Impact On DBS Bank India

The acquisition of Lakshmi Vilas bank will not materially affect the financial position of DBS Bank India, S&P said. When compared to DBS Group, Lakshmi Vilas Bank is small, accounting for less than 1% of the Singapore-based group’s total assets.

That said, Lakshmi Vilas Bank will significantly expand DBS Bank’s footprint in India. As on Sept. 30, 2020, it had 563 branches in the country, compared with DBS Bank’s 27.

Also Read: Lakshmi Vilas Bank Paves The Way For DBS Bank’s India Ambitions

"The merger could provide DBS Bank India with meaningful physical presence, which we believe is needed to complement the digital strategy the bank is already pursuing in India,” S&P said. “Lakshmi Vilas Bank will also help DBS Bank India penetrate deeper into southern parts of India.”

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