DBS Bank, which became the first major global bank to voluntarily form a subsidiary to tap the Indian market, will gain access to borrowers and small businesses through LVB’s 560 branches with the “scheme of amalgamation.” As part of the bailout, depositors and bond holders in general will get their money back. Equity shareholders face a total loss of investment, signalling to investors that this may become the playbook for future rescues of troubled banks.
“The proposed amalgamation will allow DBIL to scale its customer base and network, particularly in south India, which has longstanding and close business ties with Singapore,” DBS said.
Just before announcing the merger plan, the RBI had imposed a one-month moratorium on the lender with a cap on deposit withdrawal at Rs 25,000 per account. It also superseded the board and named TN Manoharan, a former non-executive chairman of Canara Bank, as administrator. ET had highlighted DBS Bank’s interest in LVB in its edition on February 7.
LVB under stress for the last three years
For DBS chief executive Piyush Gupta, who has been seeking to grow in India, the acquisition of LVB could become a springboard for reaching thousands of customers in one go in multiple geographies. Gupta had said on several occasions in the past that DBS wants to increase its presence in India.
LVB became the third major lender to face such a moratorium in less than two years after Yes Bank and Punjab and Maharashtra Co-operative Bank.
“Reserve Bank will endeavour to put the scheme in place well before the expiry of the moratorium and thereby ensure that the depositors are not put to undue hardship or inconvenience for a period of time longer than what is absolutely necessary,” the central bank said.
The Karur, Tamil Nadu-based lender has been under financial strain for the last three years with losses, mounting bad debt and a steady erosion of capital. It raised funds through rights share issues and bond sales over the years but without any impact on the nonperforming loans. Indiabulls Housing Finance, which was refused RBI permission to acquire LVB last year, holds a 4.99% stake in the bank, while Srei Infrastructure Finance holds 3.34% and Capri Group holds 3.8%. The promoter holding is about 6.8%.
“It’s not looking good for us,” said one of the investors who didn’t want to be named.
The bank faced management issues with dominant shareholder KR Pradeep intervening in the running of the bank. RBI had rejected his plan to become chairman once and shareholders recently defeated his bid to get re-elected as a director.
RBI said LVB failed to come up with any viable strategic plan despite its talks with Clix Capital for a proposed merger and that, with declining advances and mounting non-performing assets (NPAs), its losses were expected to continue.
The bank had not been able to raise adequate capital to address its negative net worth and continuing losses, RBI said, explaining the moratorium.
ET reported November 9 that Clix Capital was ready to call off merger talks as they were not progressing.
LVB’s capital adequacy ratio turned negative (-2.85%) at the end of September while its tier 1 capital (-4.85%) has been in the negative zone since March. The old-generation private lender reported a net loss of Rs 397 crore for the September quarter, compared with a Rs 357 crore net loss in the year-ago period while a quarter of its loans are nonperforming.
Gross advances shrank to Rs 16,622 crore at the end of September from Rs 19,251 crore a year back as it had no capital to lend. The bank had restricted its business to gold ornaments and MSMEs under government guarantees, which don’t require capital.
The additional Tier-1 or AT1 bonds, which are considered a quasi equity instrument and designed to be used to bail out banks when their capital is eroded, will get written off in full. The RBI had followed such a method in the case of Yes Bank as well – barring a minor portion, investors lost their money.