The lessons Lakshmi Vilas Bank debacle holds for retail investors

The curb on withdrawals from accounts held with Lakshmi Vilas Bank affected its account holder but it also led to a fall in the share prices of LVB. The depositors may be relieved by the news of the bank merging with DBS and they know this process may take some time. The RBI-appointed administrator has assured that Lakshmi Vilas Bank has enough liquidity to repay depositors money. Despite the assurance, the account holders are going through the same experience as that of Yes Bank & PMC Bank depositors but they at least know that their money is safe.

But, the same cannot be said for shareholders. According to the draft terms of the merger, the bank's paid-up share capital, reserves and surplus will be written off. The bank will no longer exist, hence the shares of the banks will be delisted. This means that shareholders of the bank will get nothing and lose the entire value of their shares.

This situation is not a sudden development. The Lakshmi Vilas Bank crisis has been long time in making as the bank's non-performing assets (NPAs) kept surging along with the losses. The Prompt Corrective Action (PCA) initiated by the RBI last year clearly indicated things were not going well for the private lender.

It always works for retail investors to track the fundamentals of stocks on a regular basis. In case of Lakshmi Vilas Bank, there were sufficient red flags raised at regular intervals that prompted investors to exit long time ago. Some investors often get attracted by the low-price point of the stock, which is not related to its valuation or quality.