Implications of Lakshmi Vilas Bank and DBS India merger

Though RBI has put LVB under moratorium, the path looks clear now, as RBI has also found DBS India to acquire LVB. Prima Facie the deal looks suitable for both parties but why is DBS, Asia's digital bank, interested in India's traditional LVB? What will be the implications of the merger? Here is my view.

Amol Dethe
  • Updated On Nov 18, 2020 at 01:39 PM IST
Read by: 100 Industry Professionals
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While the expectation was that Clix Capital would acquire Lakshmi Vilas Bank, RBI surprised at the last minute by bringing another company on board. Reserve Bank of India (RBI) released two circulars on Tuesday. In the first notification, RBI put LVB under a moratorium for the period of 30 days. In the second one, RBI announced the proposed amalgamation of DBS India, a subsidiary of an Asian Bank listed in Singapore, with Lakshmi Vilas Bank. With these two decisions, LVB’s year-old struggle of finding an investor is over and DBS India got a big opportunity to expand in India within a short time frame.

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Why is DBS interested in LVB?
DBS Bank has been present in India since 1994. DBS is one of the first among large foreign banks that started operating as a wholly-owned subsidiary of a leading global bank. In 2016, DBS Launched India’s first mobile-only bank – DigiBank. It now has 2.5 million customers. DBS is a strong bank with a significant focus on innovation. In Singapore the bank has been very aggressive in digital innovation and closely working with hundreds of FinTechs.

In my view, the big benefit of DBS India is that it will get the readymade infrastructure of the bank -- not only customers but its branches and the whole network. Generally, all banks wish to expand rapidly but taking regulatory approvals for opening a branch, spotting a real estate asset, and setting up a branch takes a long time. DBS India is now present in 24 cities across 13 states. Now they will get access to LVB's 570 branches with a presence in 16 states and 3 Union Territories. To set up such infrastructure on its own, DBS may have had to spend a decade.

In the statement DBS India has stated, “Bank has been trying to expand its presence all over India,” and this is a golden opportunity.

Under the deal, DBS will have to infuse Rs 2500 crore as an upfront capital and buy the 51% shares of the bank. Currently Retail Shareholder have 23.98%, FPI holds 8.65%, Insurance companies 6.40%, and HNI holds 22.75%.

Also, Indiabulls Housing Finance holds 4.99%, Srei Infrastructure Finance holds 3.34% and Prolific Finvest Pvt. holds 3.36% in the bank.

DBS may follow the Fairfax route
Though RBI has approved the amalgamation of DBS India and Lakshmi Vilas Bank, RBI may ask DBS India to reduce its stake to 15% over the next few years just like Fairfax. Two years back Fairfax bought a 51% stake in the CSB Bank (erstwhile Catholic Syrian Bank). RBI shared with them a proper schedule of diluting the stake in phases. The first phase was to cut its stake to 40% within five years and 10% in the subsequent five years. Within a total of 15 years, Fairfax had to reduce its stake to 15% to meet the regulatory guidelines. Fairfax is a Canada-based finance company and is founded by Prem Watsa.

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Impact on LVB customers and shareholders
LVB went through major turbulence in the last two years. The amalgamation of the bank looks positive for both the entities. But customers' interests need to be handled carefully. A moratorium may not affect customers much as the withdrawal limit is descent and the duration is only for 30 days. Also, emergency withdrawal is allowed. But LVB customers who have deposits and loans may suffer as DBS India will have its own interest rates. If DBS is offering a lower interest rate on the fixed deposits then the LVB customers will have to lose some interest. And they may have to pay higher interest rates on the loans compared to LVB.

Whether the merger will be beneficial for the shareholders remains a question. Because according to the draft scheme most likely the paid-up share capital will be written off. The share prices of the LVB are already down significantly.

The Moratorium Saga
After Yes Bank, LVB is the second private bank that went under the moratorium within a span of one year. Both Yes Bank and LVB were struggling to raise funds. In the last two years, LVB went through tough times. When RBI disapproved the LVB merger with Indiabulls then the lender sealed a deal with Clix Capital. But that, too, didn't materialize. In the first time of the banking history, shareholders of LVB voted against seven out of a total of 11 members from the senior management including the interim MD & CEO.

Today, Yes Bank is operational and RBI has also laid a path for LVB, but there is something wrong with the banking sector. Bad loan fiasco is the major reason for both the banks to go through such phases. If this ends here, with only these two banks, it's fine. And RBI must ensure there are no other banks in line.

Read more on Lakshmi Vilas Bank here

  • Published On Nov 18, 2020 at 09:30 AM IST
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