The Reserve Bank of India headquarters in Mumbai. Photo: AFP / Indranil Mukherjee

The Indian subsidiary of Singapore-based DBS Group Holdings will now take over the troubled Lakshmi Vilas Bank after the government approved the amalgamation of the two banks.

The Reserve Bank of India, which had taken over Lakshmi Vilas Bank on November 15 after the deterioration of its finances, has said the freeze on withdrawals will be lifted on November 27 and the branches of the Chennai-based lender will operate as DBS Bank India. The central bank added that DBS Bank is making the necessary arrangements to ensure smooth service for Lakshmi Vilas Bank customers.

Earlier, as per the central bank’s advice, the government had imposed a 30-day moratorium on the crisis-ridden bank and restricted monthly cash withdrawal per depositor to 25,000 rupees. The Reserve Bank had superseded the bank board and appointed its own administrator for 30 days. The moratorium had sparked panic among the customers, who queued up in large numbers to withdraw money.

While making the announcement regarding the amalgamation, Union Minister Prakash Javadekar said, “The government has asked the Reserve Bank to take action against the people in the management who drive banks to the brink of collapse – liability has to be fixed.” He said the amalgamation was in the interest of Lakshmi Vilas employees, customers and investors.

As part of the amalgamation plan, DBS India will infuse fresh capital of 25 billion rupees (US$339 million) into Lakshmi Vilas Bank and the entire share capital and reserves and surplus will be written off. This amalgamation will increase Singaporean bank’s footprint as it will be operating the Indian lender’s 550 branches and 900-plus ATMs. However, turning around the ailing lender will be a challenge.

Lakshmi Vilas Bank was founded in 1926 by a group of businessmen in Karur in Tamil Nadu state. The bank rose to prominence by lending to small businesses, but in the last few years its asset quality deteriorated after it resorted to aggressive corporate lending.

In September 2019, the Reserve Bank placed the privately-owned lender under prompt corrective action framework due to a high level of bad loans, lack of sufficient capital to manage risks and negative turn on assets for two consecutive years. The board members of Lakshmi Vilas Bank also came under scrutiny following allegations of cheating and misappropriation of funds. The troubled lender has been scouting for a partner since last year.

This is the first time the government has allowed a foreign bank to help rescue a troubled bank. In the last one year Lakshmi Vilas Bank is the third bank to invite governmental intervention following collapse. The other two are Yes Bank and Punjab and Maharashtra Cooperative bank. Shadow banker Infrastructure Leasing & Financial Services and mortgage lender Dewan Housing Finance Corporation suffered a similar fate.