Mumbai: A day or two before the Reserve Bank of India (RBI) Governor Shaktikanta Das took to Twitter to inform he tested positive for Covid-19 on 25 October, the civil servant turned central banker met an RBI officer, who is in-charge of private banks in the Department of Banking Regulation. The meeting lasted several hours.
Less than a month prior to that, Lakshmi Vilas Bank (LVB) shareholders had voted out seven board members including the managing director in the bank’s annual general meeting, prompting the RBI to appoint a three-member committee of directors to run LVB’s daily affairs.
The RBI governor holding a long meeting with a mid-level official is not usual, central banking sources said, referring to Das’s move last month.
When such interactions happen with an officer of the regulation department, it is understood that some significant development is in the offing, probably related to licencing — one of most important functions of the banking regulator in a country where entry costs are prohibitively high.
“Probably that was the time a decision was taken on LVB’s future,” said a source.
“First it is the supervisory department which sends its report on the viability of a (private) bank. If it is felt that there is need for the central bank’s intervention, then the regulation department is involved to outline the contours for a resolution,” the source added while alluding to the process that the central bank follows for forced mergers.
On Tuesday, within an hour of placing the old generation private sector bank under moratorium, the RBI announced the ‘draft scheme of amalgamation’ with DBS Bank India Ltd (DBIL) — the subsidiary of Singapore’s DBS Bank.
The speed at which a resolution was announced after putting a lender under moratorium is unprecedented.
“This was to ensure there is no panic. In this case, after making up its mind on a suitor, RBI announced the moratorium,” the source said. In the past, after announcing a moratorium for a troubled lender, the RBI generally took days to announce the suitor.
Why RBI took quick action
The private sector lender was under RBI’s close watch for a while now. Its financial position deteriorated due to continuous losses over the last three years, which eroded its net worth. The bank was unable to raise capital.
The RBI observed that Lakshmi Vilas Bank was experiencing continuous withdrawal of deposits and with low levels of liquidity. There were governance issues too with the Tamil Nadu based lender. LVB was under the RBI’s Prompt Corrective Action (PCA) framework since September 2019.
On the other end of the spectrum, DBS was one of the early foreign lenders to go for a wholly-owned subsidiary (WoS) route — by converting its branches into an Indian subsidiary, DBIL, in March 2019.
The top three foreign banks in India — Citibank, Standard Chartered and HSBC — have not taken the subsidiary route, yet.
As a policy initiated by former governor Raghuram Rajan, the RBI has been prodding the foreign lenders for local incorporation for the last five years. Local incorporation enables effective control by the RBI. Subsidiary route also means the foreign lender is committed in the country with its lending business rather than restricting itself to high value merchant banking and margin accretive credit card business.
The central bank has been liberal with branch authorisation policies with foreign lenders who adopted the WoS route — the hallmark of its stick and carrot policy on foreign lenders. The regulator hardly granted any additional branch licence to foreign banks that are yet to go for local incorporation.
The DBS advantage
Observing DBIL has the advantage of ‘strong parentage’, the RBI said in a statement Tuesday that the bank has a healthy balance sheet, with strong capital support.
DBIL will bring Rs 2,500 crore capital “upfront” to support the credit growth of the merged entity. It has a capital adequacy ratio (CAR) of 15.99 per cent as against the regulatory requirement of 9 per cent, and the CAR of the merged entity will be 12.51 per cent without taking into account the additional capital infusion.
As a result of the WoS adoption, DBS is in the “good books” of RBI, central bank sources said.
Apart from the “strong parentage”, a healthy capital position made it a suitable candidate to take over capital-starved Lakshmi Vilas Bank. And it has an impeccable record as far as governance is concerned.
DBS was set up by the government of Singapore, and it is controlled through Temasek Holdings — Singapore’s second-largest sovereign wealth fund.
The PJ Nayak Committee, which was set up by Rajan, to review governance of bank boards in India, had observed that the DBS board is fully empowered, and neither the Singapore government nor Temasek has a role in the appointment of the chief executive officer.
Why LVB works for DBIL
Lakshmi Vilas Bank also fits perfectly in DBIL’s scheme of things mainly due to its reach among micro, small and medium enterprises (MSME) customers, especially in one of the most industrialist states in the country — Tamil Nadu, a second central banking source said.
“With the government policy for the growth of the MSME sector, many private banks have expanded their portfolios to this segment,” the source said. This would have encouraged DBIL as it has been expanding in India with presence in 24 cities across 13 states.
“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 to scale its customer base and network, particularly in South India, which has longstanding and close business ties with Singapore,” DBS said in a statement late Tuesday.
DBS will gain 563 branches of LVB after the merger.
Sources said DBS had been doing due diligence on LVB for a while. The foreign lender realised that LVB’s human resources down the line — apart from the top management — is efficient.
One of the key challenges for the merger is going to be the integration of human resources.
Lakshmi Vilas is an old generation private bank while DBIL is a tech savvy lender with young attire. “In any merger, integration of human resources is a key,” said a senior banker from a public sector bank which was among the merger of 10 such banks into 4, earlier this year.
NBFC suitors that didn’t work out
LVB was a target for a number of non-banking finance companies (NBFCs), those who have an ambition to become a universal bank.
Indiabulls Housing Finance was one such shadow lender but the RBI was not in favour of such a proposal, mainly due to the feedback from investigative agencies that had kept a close tab on the mortgage lender, said sources.
CLIX Capital — a shadow bank co-founded by former Genpact CEO Pramod Bhasin — was in talks in LVB for a merger. But, according to the RBI sources, the regulator is more comfortable with a bank merging with another bank rather than an NBFC.
“NBFCs have a different culture than mainstream banks. Mainly because of differential regulatory architecture,” said another source referring to the lenient regulatory framework that shadow banks are subjected to as compared to banks.
No wonder the central bank decided to choose DBS to shower its blessings this Diwali for Lakshmi Vilas.