After beleaguered Lakshmi Vilas Bank’s long-drawn attempts to raise capital fell through, the RBI stepped in to safeguard the interest of depositors. By proposing a scheme of amalgamation with DBS Bank India,the central bank has ensured a clean transfer of assets and liabilities and ended the uncertainty for depositors.

While depositors’ money is safe, there are other questions that arise, which could impact depositors post merger with DBS Bank.

Critical issues

One, the draft scheme states that every savings bank account or current account or any other deposit account, including a fixed deposit with the transferor bank (LVB), shall be opened at DBS Bank post merger date. The nature of accounts will remain the same and respective holders’ name will be retained. Smooth transition for depositors will be critical. Industry experts, however, believe that this will not be an issue, given DBS Bank’s strong digital and technological capabilities.

“DBS Bank’s strong digital capability, process-orientation, and its parent entity’s experience in working with new-age digital ecosystem and digital fintech players, will come handy now. After the amalgamation, it can quickly ramp up India operations with Phygital model and serve clients across retail / MSME / SME / corporate / agri backgrounds well,” said Srinath Sridharan, independent markets commentator.

While depositors are unlikely to face much operational challenges transitioning to DBS Bank, they may have to contend with lower interest rates.

According to the proposed scheme, DBS will pay interest on deposits at the existing LVB rate until the merger date. After that, interest on savings and fixed deposits (and other interest bearing accounts) will be paid as per the prevailing rates at DBS Bank for the similar accounts.

DBS Bank offers relatively lower interest rate on deposits. For instance, LVB currently offers 6 per cent on fixed deposits of 1-3 years, while DBS Bank offers 4.05-4.3 per cent on similar deposits. For 3-5 year deposits, LVB offers 6 per cent interest and DBS Bank offers a lower 5.5 per cent.

Final call on rates

Hence, fixed deposit holders may see a reduction in interest on their deposits post merger. However, the final decision on rates will be awaited post merger. The management may decide to grandfather existing LVB deposits (at existing rates) to retain customers.

“The resolution plan that the RBI appointed administrator would place before it by mid-December should clarify the questions around its outlook to grandfather existing LVB fixed deposits till they are redeemed,” said Sridharan.

How far existing depositors of LVB will be offered a like-to-like product at DBS Bank post merger will also need to be seen. For instance, while LVB offers a fixed deposit of 367 days to less than three years, DBS has a 376 days to two-year bucket for fixed deposits. Similarly, while LVB offers a special 366 day deposit at a higher 7 per cent rate, there is no such deposit under DBS currently. How such differences in products are dealt with will also need to be seen.

“All these decisions with respect to specific products will be dealt with post the amalgamation, keeping in mind the best interest of the customers,” said TN Manoharan, the RBI-appointed administrator of LVB.

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