RBI’s handling of the Lakshmi Vilas bank crisis: wiser after previous crises

Banking sector news has rarely been good in recent years: Ballooning non-performing assets, strained balance sheets, stories of unscrupulous lending and poor corporate governance have all clouded the Indian banking sector. Despite credit guarantee schemes, credit growth has also been subdued: according to data released by the Reserve Bank of India (RBI), the growth rate of personal loans was only 10.6% on a sliding scale. annual in August 2020, compared to 15% in March 2020.

The confidence of depositors has been repeatedly shaken by recent crises in the sector. In the past 15 months, a large private sector bank, YES Bank, and the Punjab and Maharashtra Cooperative (PMC) have gone bankrupt. And earlier this week, 94-year-old lender Lakshmi Vilas Bank (LVB) fell under a similar cloud, but what stands out is the Reserve Bank of India’s handling of the situation.

Lakshmi Vilas Bank’s problems started when she began to focus on large loans. The bank, which began promoting commerce in western Tamil Nadu, began investing in companies in which it had no expertise. was a loan of 720 crore rupees to the investment arm of Malvinder and Shivinder Singh, the former promoters of Ranbaxy. Experts lament that aggressive growth moves killed the bank – it bled for several quarters and couldn’t raise capital to fund its operations. Several investors expressed their interest but the discussions were unsuccessful; the RBI rejected an offer from Indiabulls, while another from Clix Capital was stuck in valuation issues.

The central bank imposed a moratorium on LVB and placed a ceiling of Rs 25,000 on withdrawals from account holders and creditors. (However, account holders can withdraw over Rs 25,000 for unforeseen expenses including medical treatment, education, etc.) Bank Ltd, Singapore — a move that would be welcomed by depositors and the investment community in his outfit. DBIL has a healthy balance sheet, with strong capital backing. As of June 30, 2020, its total regulatory capital was Rs 7,109 crore (compared to Rs 7,023 crore as of March 31, 2020). As of June 30, 2020, its gross and net non-performing assets were low, at 2.7% and 0.5% respectively. Its risk-weighted capital / risk ratio was comfortable at 15.99% (versus a 9% requirement) and Tier 1 Common Equity, at 12.84%, was well above the 5.5 requirement. %, said the RBI. (The risk-weighted capital-to-asset ratio is a measure of a bank’s available capital as a percentage of a bank’s risk-weighted credit exposures. It is used to protect depositors and promote stability and investment. efficiency of financial systems Common Equity Tier 1 is a component of Tier 1 capital that corresponds to a bank’s obvious capital (cash, stocks, etc.)

“The rapidly deteriorating financial situation of Lakshmi Vilas Bank with regard to liquidity, capital and other critical parameters, and the absence of any credible capital injection plan have forced the Reserve Bank of India to take immediate action in the public interest and in particular in the interest of depositors, ”the RBI said. The main customers of the bank are in Tamil Nadu and Pondicherry; According to the company’s website, it has more than 2 million customers and deposits of Rs 29,279 crore in fiscal year 19. Meanwhile, DBS said in a statement, “the proposed merger will deliver stability and better prospects for depositors, clients and clients of Lakshmi Vilas Bank. employees after a period of uncertainty. At the same time, the proposed merger will allow DBIL to expand its customer base and network, particularly in South India, which has a close and long-standing business relationship with Singapore. ‘

What stood out was the swift action of the government and the RBI towards a resolution. Former finance secretary Subhash Chandra Garg observes that the way the RBI has come up with solutions is the best way forward. “The bank had time to find a suitor, but it didn’t quite work out. In such circumstances, there are only two options: either close the bank, which would have been an impractical option, or merge it. [with another]. The bank merger is the best solution, and the terms of the takeover will be agreed by the end of the month, ”he said.

Additionally, the decision to tap into a world bank, away from Indian public sector banks, opens a window for other global banks that may have interests in India but that could have been deterred by the rule that 25% of new branches within a year are expected to be in rural unbanked areas. It also shows that the regulator is thinking beyond nationalist considerations, giving hope to other global banks in India hoping to expand their footprint here.

Banking expert N Srinivasan says the RBI needs to be careful not to set a precedent here because what it does with one bank can become a role model for others. He adds that there are also worrying signals coming from Dhanlaxmi Bank and that a foreigner taking control is needed for the change, especially among small private banks.

The RBI replaced the board of directors of LVB for 30 days and appointed the former non-executive chairman of Canara Bank, TN Manoharan as a director and initiated the merger. This speed of thought and action is a far cry from its handling of the PMC banking crisis, which came to light in September 2019. PMC Bank has been the subject of investigations and regulatory measures, and the direction of enforcement filed a money laundering complaint against the promoters. of Housing Development and Infrastructure Limited (HDIL) – PMC loans to HDIL are the focus of the investigation. The RBI had capped withdrawals for account holders last year after the crisis erupted. The withdrawal limit was then revised from the original Rs 1,000 after an outcry from customers who had their savings in the bank and gradually increased to Rs 50,000. The decision to cap withdrawals came as a surprise as the The bank’s finances were not in dire straits – it had made a net profit of Rs 99.69 crore in 2018-19. Eleven of the bank’s clients are believed to have died because they were unable to access funds for treatments. Almost a year later, PMC’s depositors are still subject to restrictions under RBI orders.

The government acted too late in the case of YES Bank, which ran into problems following the RBI’s asset quality reviews in 2017 and 2018. The governance issues became evident when independent director Uttam Prakash Agarwal stopped citing the deterioration of corporate governance standards in January 2020. It was in March 2020 that RBI took over management of YES Bank, and subsequently announced a draft “reconstruction plan” which requires SBI to invest capital to acquire a 49% stake in the restructured private lender. The bailout has been criticized for being messy and the resolution will have to wait until March 2022, if not longer.

The RBI appears to have learned lessons from its past handling of similar crises. The good news for depositors is that the crisis does not present a systemic risk for the banking sector, it is not a crisis that will spread. In addition, past experience shows that depositors’ money in regular commercial banks would not be lost.

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