RBI places Lakshmi Vilas Bank under moratorium: Are your deposits safe?

Events over the past year have rattled depositors. After the Punjab and Maharashtra Bank (PMC) episode last September, when the RBI placed the bank under directions and capped deposit withdrawals, the once-fancied private sector bank, YES Bank ran into trouble in March this year. The RBI had placed restrictions on the withdrawal of the bank’s deposits for about two weeks.

Now, the RBI has placed Lakshmi Vilas Bank (LVB) under moratorium capping deposit withdrawals. The RBI has also proposed the amalgamation of the bank with DBS Bank India.

What does this mean for depositors of LVB? Should they worry about the safety of their deposits? What will the merger with DBS Bank imply?

Here’s what you need to know.

Why did the RBI cap withdrawal on deposits of LVB?

The financial position of LVB has been deteriorating sharply over the past two to three years. The bank has been making losses over the last three years, owing to a sharp rise in bad loans and provisions. This has led to steep erosion in profit and capital. Since March quarter this year, the bank’s Tier I capital has slipped into negative. This has been a big cause for concern as banks must carry sufficient capital to absorb losses, without having to cease operations.

While the bank has been trying to raise capital over the past year---first by merging with Indiabulls Housing Finance and then through an investment deal from Clix Group—the efforts did not fructify. Also, the bank has seen a steady outflow of deposits, leading to low levels of liquidity according to the RBI. To ensure that the bank does not go belly up, the RBI has stepped in and superseded the board.

Additionally, to ensure that depositors’ interests are protected, the RBI has laid down some directives on the disbursement of payments. This includes capping of deposit withdrawal at Rs 25,000 per depositor.

But how long will restrictions apply? PMC Bank depositors continue to face hardships with cap on deposit withdrawal at just Rs 1 lakh for the past year….Can LVB depositors face a similar plight?

The cap on deposit withdrawal is for thirty day period (up to December 16, 2020). Post which depositors will be able to withdraw any amount (unless the RBI modifies the directives). Even in the case of YES Bank the RBI had imposed restrictions on deposit withdrawal on March 5, but lifted it on March 18, after a clutch of lenders led by SBI pumped in Rs 10,000 crore into the bank to bail it out.

In the case of LVB, the RBI has already put forth a proposed resolution plan---amalgamation with DBS Bank—which reduces uncertainty for depositors. After the final decision on the merger scheme is out, the cap on deposit withdrawals will be lifted.

In case of PMC Bank, one must remember that the lack of resolution yet, is owing to the lacunae in the regulations of cooperative banks, until recently. The dual regulation by the RBI and by the Registrar of Co-operative Societies has led to huge regulatory gaps in cooperative banks. But the recent Banking Regulation (Amendment) Bill 2020 has brought certain cooperative banks under the RBI supervision process applicable to commercial banks. This should help protect the depositors of such cooperative banks in future.

As for LVB, remember that no commercial bank has failed in India, as the RBI has always stepped in to safeguard depositor’s interest.

So what happens after LVB merges with DBS Bank?

Depositors of LVB will ideally become customers of DBS Bank. Every savings bank account or current account or any other deposit account including a fixed deposit, with LVB will be opened at DBS Bank on the date the merger comes into force. The nature of the accounts and name of the respective holder(s) will remain the same.

But what about the interest on the deposits? Will I get the same interest as I was receiving on my LVB deposits?

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

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

Hence fixed deposit holders may see a reduction in interest on their deposits post the merger.