Lakshmi Vilas Bank Crisis: What went wrong?

In the past 30 months India has seen failure of 5 big financial firms. PMC, IL&FS, DHL, Yes Bank & Now Lakshmi Vilas Bank. Lakshmi Vilas Bank was established in 1926 by 7 Businessmen of karur under the administration of Shri V.S.N Ramalinga Chettiar. Recently this bank has gained a lot of attention during its annual general meeting which was held on September 25th 2020. In this meeting shareholders voted against the reappointment of seven director including the RBI appointed managing director and CEO S Sundar. This events in the history of Indian Business and Banking are very rare which led to the bank getting a lot of limelight.

The Tamil-Nadu based bank has a network of 563 branches and a deposit of 20,973 Crores Rs. & was established to cater the needs of small business with an objective of financially supporting to the needs of the people in karur engaged in Trading business, Industry and Agriculture. Initially it was going good as bank started delivering profits from the year 1998. However, in the year 2009, in order to grow big, the banks started to build a corporate loan portfolio for which it started taking share of consortium loan. (In consortium loan, two or more lender join together to finance a single borrower). Being a part of consortium loan, the bank ended up having exposure to most large NPA’S. Provisions made for this loan resulted in losses for the bank and resulted in decrease of its capital. In march 2018 bank posted a loss of 585 Crores Rs. In order to overcome this loan, they needed to raise an adequate amount of capital which the management failed to do so. On the top of that in 2019 RBI put the bank into PMC (Prompt Corrective Action) after a case was filed against the Delhi branch of the bank for misappropriation of funds. Due to this bank was unable to issue fresh loans and open new branches. After which the bank was in talks with India Bulls Housing Finance for merger but was denied by RBI. Having no option left but to find another investor, the bank then moved to Clix capital for merger, but due to the problems going on with the bank, Clix Capital backed out of the deal.

The Bank’s Financial position has weakened in the past few years, as losses continue to mount. In the current year itself it posted a loss of 112 crore Rs. in the June quarter which grew and became 397 crores Rs. in the September quarter. Alongside this there was continuous withdrawal from the customers resulting in banks left with less capital. The NPA of bank came around 25% of the total advances given by bank.

Finally, RBI decided to take the matters in hand as the bank was experiencing downfall and put it into moratorium on October 17th. In November bank put restriction on withdrawals from bank at 25000 Rs. a day. In order to revive the bank RBI forced its merger with the local unit of Singapore based DBS bank. From 27th November onwards the Lakshmi Vilas Bank is successfully amalgamated with DBS Bank.

What will happen to the customers of Lakshmi Vilas Bank?

All the customer records and accounts will have to be transferred in the DBS bank database, nature of account and names of the person holding those account will be the same. Interest rate on deposits will be the same for now to retain the customers. RBI said that all the employees of Lakshmi Vilas Bank will work as the employees of DBS Bank. Talking about the shares & the shareholders of Lakshmi Vilas Bank, the shares are suspended from trading on BSE & NSE from 26th November. As per the amalgamation scheme of RBI, whole amount of paid up capital will be written off, which means the Public shareholder of the Laxmi Vilas Bank will incur losses & get nothing.

Thank you.

Regards,

Raj Gudhka,

Kautilya,

IBS Mumbai.