The existential crisis at Lakshmi Vilas Bank has been warded off. Unlike YES Bank, the resolution plan is not a half-hearted attempt to bail out the bank, which is welcome. The RBI’s proposal to amalgamate LVB with DBS Bank India (DBIL), a wholly-owned subsidiary of DBS Bank Singapore, is a clear and clean way of putting the long drawn uncertainty of the bank’s misfortunes to rest. What’s more, it now stretches the line of “white knights” that the RBI can call upon to bail out other stressed banks.
Over the past few months, the market has been rife with speculation over the likes of Punjab National Bank and Kotak Mahindra Bank coming to the aid of the beleaguered LVB. But the RBI surprised the market and picked a foreign bank for the rescue act.
The move is welcome on two counts. One, rather than an already weak and capital-starved domestic bank being saddled with LVB, the RBI has picked a bank with strong balance sheet and deep pockets. Two, the RBI has possibly nudged other foreign banks to consider similar opportunities to expand their footprint in the Indian market.
In India, instances of commercial banks going kaput have been rare. While a number of banks failed prior to 1960, after the RBI was granted powers for consolidation, compulsory amalgamation and liquidation of small banks, no commercial bank has failed, as the RBI has always stepped in to safeguard depositors’ interest, through forced mergers.
Recently, such shotgun weddings were brokered to fulfil the long lost idea of consolidation of public sector banks too. The Centre proposed four sets of big bank mergers last year — folding ten PSBs into four. But the major pitfall of these mergers was the marrying of weak banks that only led to fresh set of issues. While forced mergers to bail out weak banks is an idea that in itself requires a re-look, the entire exercise becomes more futile when the anchor bank has a weak balance-sheet.
Currently, most PSBs have weak finances and continue to depend on the Centre for their capital requirements. With the Centre’s own finances under stress, meeting the capital needs of 12 PSBs will increasingly become challenging. Hence, finding investors to infuse capital into some of the stressed PSBs will be critical in the next one to two years. With large lenders such as SBI, BoB and PNB already burdened by botched-up mergers and rescue efforts, the Centre’s idea to trigger the next round of consolidation hinges on roping in investors with deep pockets or banks with strong balance sheets.
There are a few private banks that fit the bill. But they are likely to conserve capital for growth and to absorb bad loan losses. Against this backdrop, the RBI’s move to call upon DBS Bank to rescue LVB opens up a fresh line of suitors. Foreign banks with deep pockets, strong balance sheets, and desirous of expanding presence in the Indian market, may now follow DBS’ suit.
After all, DBS Bank did manage to take over (if the scheme is finalised) LVB’s assets and liabilities at negligible cost. The foreign player would get access to LVB’s 560-odd branches and about 970 ATMs across the country and will be able to expand its presence in the South. DBS Bank will now have access to LVB’s ₹20,000-crore deposit base, of which, ₹6,000 crore is low- cost CASA deposits.
DBS has been in India since 1994. In March 2019, it converted its India operations to a wholly-owned subsidiary, DBIL. But it still has limited presence with about 35 branches. However, the bank’s strength lies in its digital capabilities which has helped build a strong customer base. As of June, DBS Bank had a sizeable customer deposit base of ₹24,700 crore, of which ₹5,700 crore is low-cost deposits. LVB acquisition will only deepen its presence in the Indian market.
Following suit
In November 2013, the RBI had released a framework for the setting up of wholly-owned subsidiaries (WOS) by foreign banks in India. Foreign banks can operate in India either through the branch mode or WOS model. The latter implies more stringent regulatory requirements and hence most foreign banks, barring DBS Bank and State Bank of Mauritius, operate through the branch mode.
While the WOS model is not mandatory, the RBI expects foreign banks to eventually adopt it, to ensure better regulation and to mitigate the risk of spill-over of crisis at the parent bank to the foreign banks’ Indian operations.
The merger with LVB, which will imply greater scale and wider presence for DBS Bank in India, may nudge other foreign banks to now consider the WOS model. Being locally incorporated, the WOSs are given near national treatment. Also, operating through WOS will allow the foreign bank to acquire private banks subject to the overall investment limit of 74 per cent.
Foreign banks such as Citibank (42 functioning offices), Deutsche (20), Standard Chartered (104), and HSBC (30) may look to expand their footprint in the Indian market after the DBS Bank move. These banks have strong capital ratios and sizeable business in India.
But what will nudge these foreign banks to go the full hog? Draconian maybe, but the RBI may have to tighten the norms for foreign banks operating via the branch mode — cap branch expansion/salaries or bring in higher supervision. After all, local incorporation (WOS) will ensure better regulatory control, clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent and ring fence capital and assets within the host country.
But will the DBS-LVB deal itself nudge a few larger foreign banks to take the plunge, without all the regulatory hustle? Time will tell.