The speculation around the fate of the Reserve Bank of India's problem child Lakshmi Vilas Bank (LVB) seems to have finally ended today with the regulator releasing a draft scheme of amalgamation of the cash-strapped private sector lender and DBS Bank India. The proposed scheme of amalgamation is under the special powers of the Government of India and the RBI under Section 45 of the Banking Regulation Act, 1949.
The central bank said it would receive suggestions and objections on the proposed scheme up to November 20, 2020, and would then take a final view.
But the road to today’s crucial decision by the government authorities has seen a lot of uncertainty, a miffed suitor and dramatic events at the target entity.
On February 6, 2020, Moneycontrol had named DBS Bank India and Brookfield and Everstone Capital-backed Indo Star Capital Finance as potential white knights in the fray for the crisis-hit LVB which is based out of Chennai. Later, Moneycontrol reported that top private sector lender Kotak Mahindra Bank had also put its hat in the ring.
That’s not all. Private equity firm Aion Capital-backed CLIX Capital had been engaged in discussions with LVB and these talks had dragged on for months since a non-binding letter of intent was signed between both parties in June 2020.
So with so many potential suitors in the race, what seems to have worked in favour of DBS Bank India, a wholly owned subsidiary of the parent lender based in Singapore? Why was it the chosen one?
Let us take a quick look at some possible factors.
Clearly, a strong balance sheet (total regulatory capital of Rs 7,109 crore), low level of bad loans and healthy levels of tier-1 capital (a core measure of a bank’s financial strength from the central bank’s point of view) were some of the aspects which seem to have given adequate comfort to the RBI.
And, it definitely does not hurt when the chosen suitor is backed by a global investment powerhouse which has a net portfolio value of a whopping $306 billion, as of March 31!
The Singapore government’s investment arm Temasek is a key shareholder in DBS Bank. In the Indian financial services segment, Temasek has invested in heavyweights like ICICI Bank and HDFC Bank in the past. Currently, it has investments in AU Small Finance Bank and NBFC Fullerton India Credit Company .
Upfront moolah matters in rescue acts of struggling entities and as part of the draft scheme of amalgamation, DBS Bank India will also infuse upfront capital of Rs 2500 crore to aid the credit growth of the merged entity. This will be fully funded from DBS’ existing resources.
“LVB has a lot of NRI customers and it will be easier for DBS to service them with its Asian presence. After converting its domestic operations to a wholly owned subsidiary, it has been looking to expand,” said an individual familiar with the central government’s rescue plan.
“If required, DBS is willing to pump in more capital at a later stage beyond the immediate fund infusion,” he added.
“DBS has the strength to support deposit holders of LVB. This deal will help them get a geographic footprint, expand and build a branch network down south,” a second person told Moneycontrol. Lakshmi Vilas Bank has a 94-year history in India, with an established retail and SME customer base, and a strong presence in South India.
In an official statement, DBS said, “the proposed amalgamation will provide stability and better prospects to Lakshmi Vilas Bank’s depositors, customers and employees following a time of uncertainty. At the same time, the proposed amalgamation will allow DBIL (DBS Bank India Ltd) to scale its customer base and network, particularly in South India, which has longstanding and close business ties with Singapore.”
“DBS will await final decision on the proposed scheme from the RBI and the Government of India, and will announce further details at a later stage,” the lender added.
DBS Bank is no stranger to India and has been present in the country for 26 years. In March 2019, to expand the franchise and build greater scale, DBS converted its India operations to a wholly owned subsidiary, DBS Bank India Ltd. It is now present in 24 cities including Delhi, Mumbai, Bengaluru, Chennai, Pune, Kolkata, Surat and Salem across 13 states.
This will not be the first brush of DBS Bank with an Indian financial services entity. Back in 2006, it had picked up a 37.5 percent stake in NBFC Choolamandalam Investment Finance, a joint venture with the Murgappa Group. Four years later it sold its stake to the Muruguppa group and exited the venture.
The Asian lender is also regarded as a digital leader and a few years earlier, had launched Digibank in India – an entirely mobile-centric banking service, with no branches whatsoever. This digital prowess can only help usher the amalgamated entity into the next era of technology-led banking and compete better with its peers.
Recently, DBS Chief Executive Office Piyush Gupta spoke about improvement in business momentum with wealth management and a pickup in credit card spending among the bright spots. He expects a “strong economic rebound in Asia” to fuel loan growth and fee income.
WHY DID THE CLIX CAPITAL DEAL NOT ’CLICK’?
As indicated earlier, deal discussions between LVB and Clix Capital had dragged on for several months and failed to conclude. The RBI believed that bank-led efforts through market mechanisms had not fructified.
In a press release issued on November 17, the banking regulator hinting at the ongoing talks with Clix Capital and said, “The Reserve Bank had been continually engaging with the bank’s management to find ways to augment the capital funds to comply with the capital adequacy norms. The bank management had indicated to the Reserve Bank that it was in talks with certain investors. However, it failed to submit any concrete proposal to Reserve Bank and the bank’s efforts to enhance its capital through amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end.”
Clearly, the RBI had lost patience and decided to step in finally. A similar rationale was adopted earlier by the regulator when a moratorium was imposed on Yes Bank which failed to raise funds within stipulated timelines.
Interestingly, it was not just the RBI which lost patience. Recent reports had suggested that Aion Capital-backed NBFC Clix Capital could walk away from the proposed merger with the southern bank if deal discussions dragged on without a concrete timeline to conclude the transaction.
Pramod Bhasin, the founder of Clix Capital told the Economic Times: "We have to decide this urgently. We are happy to walk away from the deal and get on with our lives. This cannot go on forever.”
Another aspect to be kept in mind is that the RBI had blocked LVB’s proposed merger with India Bulls Housing Finance last year. Though an official reason was not announced by both firms, it was widely speculated that the regulator was not entirely comfortable with NBFC-bank mergers.
WHY WAS LVB A PROBLEM CHILD FOR THE BANKING REGULATOR?
LVB has been controversy’s favourite child ever since it was put under the Prompt Corrective Action (PCA) framework due to a sharp rise in non-performing assets (NPAs), insufficient liquidity to manage risks and negative returns on assets for two consecutive years. The PCA is meant to improve the performance of weak banks and not impact their day to day operations.
In October 2019, LVB’s proposed merger with India Bulls Housing Finance was blocked by the RBI. On September 25, 2020, in a shock development, the shareholders of the private sector lender voted against the appointment of seven directors, including S. Sundar as the managing director and chief executive at the AGM. The search is still on for a head honcho.
The bank, which has dangerously high NPA levels and a negative capital adequacy ratio, had a forgettable Q2 with net loss pegged at Rs 396.99 crore. To make matters worse, the auditor rang the alarm bells as well.
"In the opinion of the bank, this bank will be able to realise its assets and discharge its liabilities in its normal course of business and hence the financial results have been prepared on a going concern basis. The said assumption of going concern is dependent upon the bank's ability to achieve improvements in liquidity, asset quality and solvency ratios, augment its capital base and mitigate the impact of COVID-19 and thus a material uncertainty exists that may cast a significant doubt on the going concern of the bank,” the auditor said recently.
The m-cap of Lakshmi Vilas Bank at the end of the day’s trade on November 17 stood at Rs 521.91 crore. The promoters hold 6.8 percent stake. Indiabulls Housing Finance (4.99 percent), PE fund Jupiter Capital Private Ltd (1.08 percent), Srei Infra Finance (3.34 percent), Capri Global Holdings Pvt Ltd (3.82 percent) and LIC (1.62 percent) are some of the shareholders in the public category.
Lakshmi Vilas Bank operates in the retail, mid-market and corporate space. As of June 30, 2019, the operations were spread over a network of 569 branches (including seven commercial banking branches and one satellite branch) and 5 extension counters, supervised by 7 regional offices. While the bank has a significant presence in Tamil Nadu, it is also present in 16 states and 3 union territories. It has 32 “B” Category Branches and 1047 ATMs according to its website.