On November 17, the Reserve Bank of India (RBI) imposed a month-long moratorium on cash strapped Lakshmi Vilas Bank (LVB), a small private sector bank. If you are a customer of LVB, then you cannot withdraw more than Rs 25,000 until December 16, 2020. This includes your savings, current and other deposit accounts, including your fixed deposits. If you have more than one deposit account with the bank, then the moratorium will apply cumulatively on all your accounts. There’s a small relief in cases of emergencies. The RBI has said that you could withdraw up to Rs 5 lakh for medical emergencies, payment towards higher education or for marriage.
“For LVB, the negative noise was there for quite some time. The moratorium comes in the wake of deteriorating financials of the bank, failed merger attempts in the past with Indiabulls Housing Finance and Clix Capital,” says Joydeep Sen, corporate trainer and author. Also, the shareholders of the bank had voted against the appointment of seven directors at the annual general meeting in September 2020.
The RBI has assured that the depositor’s money is safe and that there is no reason to panic with the announcement of a month-long moratorium on withdrawals. Shortly after announcing one-month moratorium for LVB, the central bank unveiled a move to merge LVB with DBS Bank India Ltd (DBIL). “Merging the bank with a stronger bank benefits the depositors of the weaker bank. The depositor’s money is safe in the amalgamation announced,” says Sen.
“Given the small size of LVB, the RBI seems to have chosen the route of amalgamation with another foreign private bank instead of a unique restructuring scheme as in the case of Yes Bank, where investors, including banks were called upon to infuse capital and thus revive it independently,” says Anand Dama, senior research analyst at Emkay Global Financial Services.
Are my deposits safe with LVB?
All the depositors of LVB will have access to their principal and accrued interest, just as before, once the amalgamation is done. Your money is protected. “But after the moratorium, the high interest rates paid by LVB on deposits will be lowered to what DBS Bank pays to depositors,” tweets Kirtan Shah, Chief Financial Planner at SRE. For instance, if you have a one-year fixed deposit (FD) with LVB, the present interest rate is 6 per cent, but it will be reduced to the interest rate offered by DBS Bank, which is 4.05 per cent for a one-year FD.
However, as a depositor, you can continue with the deposits or withdraw your money after the merger.
Your SIP, EMI payments will stop, albeit temporarily
Some LVB customers might have enrolled for systematic investment plans (SIP) or may be paying equated monthly installments (EMIs) on their loans. The moratorium imposed on your LVB account includes the auto payments (or withdrawals in other words) that go towards your EMI and SIP commitments.
But your EMIs won’t stop even in such cases if they are less than Rs 25,000. Talk to your lender and ask for a temporary leeway. Typically, your lender can extend your deadline by a couple of months. If nothing else works and much of your life’s savings are stuck in your LVB accounts, you might have to withdraw from your investments to tide over the crisis temporarily. Harshvardhan Roongta, Principal Financial Planner at Roongta Securities says, “During the moratorium period, your LVB account will not be debited. So, immediately register fresh ECS mandates with a different bank account for such payments to be cleared.”
SIP and ECS payments are also covered in the Rs 25,000 withdrawal limit imposed. In simple words, SIPs of less than Rs 25,000 will continue as usual. Meanwhile, dividend and redemption inflows would continue into your LVB account. Just that your money (beyond Rs 25,000) is stuck till December 16.
However, you would need to review your bank mandate once your account goes over to DBS. Your mutual fund allows you to register up to five bank accounts. You can either register your new DBS account in your SIP mandate or a new bank account. You might, however, need to brace yourselves for dealing with a different bank branch once the amalgamation is complete, depending on call that DBS takes.
Inform your employer and get your salary account changed to another bank to ensure that you get your salary on time. Talk to your employer if your salary account is with LVB.
But what if I have a loan with LVB itself?
In case you have a loan repayment to be made to LVB itself – from your salary account with LVB – then the bank will debit your bank account first towards the EMI liabilities. The remaining amount will then be available to you for withdrawals, subject to the overall cap imposed. However, if the amount in your LVB account is insufficient, then you are liable to pay the balance to the bank. You cannot default on LVB loans as DBS can recover the amount from you.
Will my deposit be insured?
The deposits with all banks are guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), to the tune of Rs 5 lakh, only if your bank is liquidated. This is not the case with LVB, as the RBI has initiated an amalgamation process with DBS Bank after announcing the one-month moratorium on withdrawals.
Kalpesh Ashar, founder, Full Circle Financial Planners and Advisors says, “These measures by the Reserve Bank of India are precautionary actions to safeguard customers’ savings with the bank.”
Also, the timing of the announcement appears to be well-thought-out, as Diwali shopping is done and most EMIs and SIP payments happen in the first half of a month.
Don’t panic
Just because the RBI has imposed restrictions on withdrawals from LVB, there is no need to panic. The moratorium has been imposed for a month. The plan to merge with DBS Bank is also announced immediately as proactive measure by the RBI.
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