Mumbai: Minutes after placing beleaguered Lakshmi Vilas Bank (LVB) undermoratorium and superseding its Board of Directors, the Reserve Bank ofIndia (RBI) on Tuesday announced a draft scheme to merge the ailing lender with DBS Bank India Ltd (DBIL).RBI has placed the Tamil Nadu-based LVB under moratorium for 30 days that would end on December 16, 2020, according to statements from the regulator and the government on Tuesday.

As part of the moratorium, the regulator has capped deposit withdrawals by customers to Rs 25,000.

Borrowers can withdraw above Rs 25,000 only for unforeseen expenses like medical treatment, education etc. This is the third such instance in the banking sector as the RBI had placed Yes Bank under moratorium for two weeks on March 5.

The bank was later rescued by SBI-led consortium.

PMC Bank was also placed under moratorium.Proposing the scheme of amalgamation, the central bank said that DBIL is well capitalised and will bring in additional capital of Rs 2500 crore upfront, to support the credit growth of the merged entity.Owing to comfortable level of capital, the combined balance sheet of DBIL would remain healthy after the proposed amalgamation, with capital to Risk weighted assets ratio (CRAR) at 12.51 per cent and Common Equity Tier 1 (CET-1) capital at 9.61 per cent, without taking into account the infusion of additional capital. DBIL is a wholly-owned subsidiary of DBS Bank Ltd, Singapore (DBS), which in turn is a subsidiary of Asia’s leading financial services group, DBS Group Holdings Limited and has the advantage of a strong parentage.

It had been issued a banking license on October 4, 2018.In a statement the central bank said, “LVB has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth.

In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue.

The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses.

Further, the bank is also experiencing continuous withdrawal of deposits and low levels of liquidity.

It has also experienced serious governance issues and practices in the recent years which have led to deterioration in its performance.” LVB was placed under the Prompt Corrective Action (PCA) framework in September 2019, considering the breach of PCA thresholds as on March 31, 2019.The RBI said that it had been continually engaging with the bank’s management to find ways to augment the capital funds to comply with the capital adequacy norms.The bank management had indicated to the Reserve Bank that it was in talks with certain investors.

However, it failed to submit any concrete proposal to Reserve Bank and the bank’s efforts to enhance its capital through amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end… In the meantime, the bank was facing regular outflow of liquidity. In October, non-bank lender Clix Capital had submitted a non-binding offer for LVB.

In an unprecedented move, shareholders at the last AGM voted against the appointment of the bank’s top brass.Meanwhile, the RBI said that it has superseded the Board of the troubled lender for a period of 30 days as any effort to revive the bank “will be in vain” with the present Board steering its affairs.

It appointed TN Manoharan, former non-executive chairman of Canara Bank, as LVB’s administrator.CH Venkatachalam, general secretary of the country’s largest bank union AIBEA said that the announcement has come as a shock to the bank customers and general public and would create panic and doubt in the minds of people about the stability and dependability of banks. “RBI which is responsible to maintain the stability of the banks and financial sector cannot escape its responsibility for not taking timely action.

RBI’s role should be thoroughly probed.

Moreover, some top management officials of LVB are responsible for the huge bad loans in the Bank and action should be taken on them,” said Venkatachalam.LVB has incurred a net loss of Rs 836 crore and Rs112 crore for the FY 2019-20 and quarter ending June 30, 2020 respectively.

The losses are expected to continue for other quarters of the FY 2020-21 also, as estimated by the Reserve Bank of India. As there is no likelihood of increase in fresh advances and slippages may continue, asset quality position is likely to deteriorate materially during FY 2020-21.

The CET1 of the bank was negative at -1.83 per cent and CRAR at 0.17 per cent as reported as on June 30, 2020 [CRAR has declined to -1.94 per cent as on September 30, 2020, as per unaudited position].As per assessment, the banking company faces deteriorating asset quality due to a large number of fresh slippages.

The banking company has so far failed to bring any firm proposal for infusion of fresh capital. Apart from this, the banking company has serious governance and management issues said the RBI.