The Reserve Bank of India’s (RBI) swift resolution of troubled Lakshmi Vilas Bank (LVB) will keep contagion at bay and help maintain stability in the banking system, rating agency S&P Global Ratings said in a note on Thursday. The decision to merge LVB with the Indian subsidiary of a foreign bank marks a shift in the Reserve Bank of India’s (RBI) stance with respect to the rescue of stressed banks, the note said.
“In our view, the RBI’s decision to consider a foreign bank, beyond just homegrown institutions, to bail out LVB demonstrates its willingness to put control of banking assets in foreign entities,” S&P Global said, pointing out that in the bailout of private lender Yes Bank earlier this year, the RBI had called upon government-controlled State Bank of India and other large Indian banks for capital support.
The rating agency believes the deal is positive for India’s banking sector and will bring much-needed relief to LVB, which has been struggling for many years. The RBI had put the private-sector lender under prompt corrective action (PCA) in September 2019, and the search for a white knight had been on since then. “We believe the RBI took into account DBIL’s (DBS India) healthy balance sheet and capitalisation when considering potential suitors for LVB,” the note said.
LVB, which has only a 0.2% market share, is the only private bank under PCA. Recently, the shareholders of LVB, at their annual meeting, ousted seven directors of the bank, including its managing director and CEO. The RBI had to step in and appoint a panel comprising three independent directors.
“We have always viewed the Indian government as highly supportive of the banking sector,” S&P Global said, adding that the government has consistently supported weak commercial banks by promoting the merger of distressed institutions with stronger lenders. It has historically not allowed commercial banks to fail and has swiftly stepped in to address trouble. In this case too, the RBI and the government stepped quickly to prevent any loss to the creditors, including depositors, and maintain system stability.
The acquisition of LVB will not materially affect the financial position of DBS, the rating agency said. LVB is small when compared to DBS, accounting for less than 1% of the group’s total assets. That said, LVB will significantly expand DBIL’s footprint in India.
As of September 30, 2020, LVB had 563 branches, compared with DBIL’s 27. “The merger could provide DBIL with a meaningful physical presence, which we believe is needed to complement the digital strategy the bank is already pursuing in India,” S&P Global said. LVB will also help DBS penetrate deeper into southern parts of India.