he government on Tuesday imposed a month-long moratorium on Lakshmi Vilas Bank (LVB), restricting cash withdrawals at Rs 25,000 per depositor, and simultaneously announcing a scheme to merge the cash-strapped lender with DBS India. This has been done on advice of the Reserve Bank of India (RBI) in view of the private sector bank's deteriorating financial health.

The RBI also superseded the LVB board and appointed TN Manoharan, former non-executive chairman of Canara Bank, as its administrator for 30 days. The RBI placed in the public domain a draft scheme of amalgamation of LVB with DBS Bank India Ltd (DBIL).

In a statement, DBS Bank India said the proposed amalgamation will provide stability and better prospects to LVB depositors, customers and employees. “To support the amalgamation, DBS will inject Rs 2,500 crore into DBIL if the scheme is approved. This will be fully funded from DBS's existing resources,” it said.

LVB is the second private sector bank after Yes Bank to have run into rough weather this year. In March, capital-starved Yes Bank was placed under a moratorium and the government rescued it by asking SBI to infuse Rs 7,250 crore and take a 45% stake in the bank.

The Department of Financial Services in a gazette notification said LVB “shall not, without the permission in writing of the Reserve Bank of India, make, in the aggregate, payment to a depositor of a sum exceeding Rs 25,000 lying to his credit, in any savings, current or any other deposit account” during the moratorium period up to December 16, 2020. However, the bank can make payments in excess of Rs 25,000 to meet unforeseen expenses in connection with medical treatment of a depositor or any dependent person, or towards the cost of higher education of the person/dependants.

Besides, the RBI can permit the bank to disburse more than Rs 25,000 for payment towards obligatory expenses in connection with marriage or other ceremonies or any other unavoidable emergency. The amount disbursed during the emergency situation shall not exceed the sum of Rs 5 lakh or the actual balance lying to the credit of the account of such depositor, whichever is less, the notification said.

Also, if a depositor maintains more than one account in the same capacity and in the same right, the total amount payable from all the accounts together cannot exceed Rs 25,000.

The RBI said LVB’s financial position has undergone a steady decline, with the bank incurring continuous losses over the last three years. In the absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue, it said, adding the bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses.

The bank is experiencing continuous withdrawal of deposits and low levels of liquidity as well as serious governance issues in recent times. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019 amid soaring NPAs. LVB shareholders in September had ousted seven directors, including its MD and CEO, and auditors at the bank's AGM. The truncated board sought to assuage investors stating that the bank's liquidity situation was comfortable and assured the depositors that their monies were safe.

The bank's troubles started after it shifted its focus to lend to large businesses from SMEs. Its loans of nearly Rs 720 crore to the investment arms of Malvinder Singh and Shivinder Singh, former promoters of pharma major Ranbaxy and Fortis Healthcare, against fixed deposits (FDs) of Rs 794 crore made with the bank in late 2016 and early 2017, also turned it turtle.

LVB had sought the RBI's nod to amalgamate itself with Indiabulls Housing Finance and Indiabulls Commercial Credit in May 2019 to meet its capital requirements. However, the deal could not get regulatory approval because of the RBI's aversion to let realty-focused entities into commercial banking. On June 15, 2020, the bank had signed a preliminary, non-binding letter of intent with Clix Group for a possible merger.

LVB posted a net loss of Rs 836.04 crore in the year to March 2020. The bank had recorded a net loss of Rs 396.99 crore during the second quarter ended September of this fiscal, up from Rs 357.17 crore in the same quarter a year ago. Net NPAs or bad loans stood at 7.01% of the net loans at end of September 2020, as against 10.24% as on March 31, 2020 and 10.47% by September 2019.

Started by a group of seven progressive businessmen of Karur under the leadership of VSN Ramalinga Chettiar in 1926, the bank had expanded with 566 branches and 918 ATMs in 19 states and one union territory.