Photo: Yichuan Cao/NurPhoto via Getty Images It took just nine days for shareholders, depositors and customers of cash-strapped Lakshmi Vilas Bank (LVB) to realise the seriousness of the Reserve Bank of India (RBI) and the government in protecting the interests of depositors, and ensuring financial and banking stability. There cannot be a clearer message to banks that are poorly capitalised or making losses for years. “The LVB case sends out a message to old private sector banks. They need to manage things better, improve governance and stay well capitalised… or face the consequences,” says a former chief executive of a private bank, declining to be named. “They have to take this extremely seriously; the message has gone out to everyone.” The government has approved the amalgamation of LVB with DBS Bank India Ltd (DBIL), the Indian arm of Singapore-based parent DBS. The moratorium imposed by the RBI on November 17 will be lifted on Friday, November 27, and all of LVB’s 563 branches will function as DBIL branches. DBIL has 33 standalone branches. Technically, LVB ceases to exist now, but until the operational businesses are not merged—which involves integrating the technology platforms, human resources (HR) and legal systems apart from people integration—the branches of LVB are expected to continue to function independently. The withdrawal of limits imposed on depositors of LVB will be lifted from Friday. DBS India declined to comment on the merger or its strategy. Investors had expressed concerns. After the moratorium, the LVB stock fell by 50.6 percent, closing at Rs7.65 at the BSE on Wednesday. The exchanges said trading in LVB has been suspended with effect from November 26, after the gazette notification announced by the ministry of finance. LVB has reported a wretched set of financials in recent months. It posted a loss of Rs396.9 crore, its net interest income fell by 12.3 percent from the previous quarter to Rs79.52 crore in the September-ended quarter and its deposits plummeted by Rs470 crore to Rs20,973 crore from its FY20 level of Rs21,443 crore. Provisioning for bad loans soared 248 percent to Rs391.33 crore from its June level of Rs112.37 crore. Deposits for LVB have fallen to Rs20,050 crore as of November 18 from Rs20,973 crore in the September-ended quarter. The bank’s capital adequacy CET 1 ratio is -4.85 percent, well below the mandated levels. All these factors—and the inability to find a new suitor quickly—led to the RBI introducing the moratorium and pushing for the merger with DBIL. The LVB’s board of directors had already been superseded and an administrator, TN Manoharan, appointed in November. Enough Time To Get Act Together The swift decisions from the regulator RBI and the government have caused concern, but they don’t come as a surprise. In 2004, the RBI had announced an amalgamation scheme of Global Trust Bank (GTB) with Oriental Bank of Commerce, within 46 hours of placing GTB under moratorium. In that case too, the net worth of the new-age GTB, led by Ramesh Gelli, had turned negative and was poorly governed. Experts believe that speed is of essence when formulating a merger. “In situations such as these, speed is more important. The more you drag on a decision, you create employee uncertainty, depositor uncertainty and customer uncertainty,” says the financial head of a foreign investment bank, who has been involved in merger deals. LVB was granted enough time to sort out its problems. Proposed merger talks with non-banking financial company (NBFC) Indiabulls Housing Finance had started in March 2019, which failed as the regulator was unhappy with the real-estate exposure which the non-bank had. In 2020, talks commenced with another NBFC, Clix Capital, but they also did not materialise because of due diligence and valuation concerns. “One cannot say the merger is being announced too swiftly. LVB was given enough time to find a solution. In any stressed situation [such as this merger], there is a bit of madness. But there is method in this madness. The RBI has thought things through and only stepped in when LVB could not find a solution,” says the investment banker. The immediate fallout of this LVB-DBS issue will be how shareholders react to the merger. The amalgamation scheme states that the LVB’s equity, including the shareholding of the promoter group (6.8 percent), Indiabulls Housing Finance (4.99 percent), Srei Infrastructure Finance (3.34 percent) and Capri Global (3.82 percent), will be extinguished. Some of these shareholders might move court. But the bank’s shareholders had missed opportunities. According to LVB insiders, there were several times in the past when shareholders could have raised capital, but did not succeed due to the “unrealistic valuation expectations” of some of their shareholders. Shriram Subramanian, MD of InGovern, a proxy advisory and research firm that assists institutional investors on corporate governance issues, says: “Why did the shareholders wait for the equity value to turn zero? They could have come together and explored options to raise capital, possibly through a rights issue earlier.” Bank insiders have now questioned the timing of the moratorium. Shakti Sinha, LVB’s former director before the board was superseded, says: “The bank was starting to show signs of improvement after the AGM in September when the bank’s shareholders decided, publicly, to vote against the appointment of seven board members. There were no liquidity concerns at LVB.” LVB may now face a fresh concern of run-on deposits. “DBIL has lower interest rates on deposits than LVB… these are on an average 1 to 2 percent lower. LVB depositors might start to withdraw amounts when they see lower DBIL rates and try and park these in other banks. Withdrawals do happen when a merger with a more solid bank, which gives lower interest rates, takes place. Maybe, at this point, a moratorium was more important,” Sinha tells Forbes India. But the RBI’s decision for the moratorium was overwhelmingly to safeguard the interest of depositors at the earliest. As in the case of Yes Bank earlier, and even in the case of Aadhar Housing Finance which was acquired by Blackstone in mid-2019, the regulator National Housing Bank was keen to protect the interests of deposits at Aadhar Housing. Real Merger Issues DBS Bank, which is bringing in Rs2,500 crore of additional capital, is not paying out anything to LVB’s shareholders. The burden of making this merger work now rests on DBS India, and not the RBI. One of the real concerns will be integrating the technological platforms. According to sources, DBS India’s core banking system is Finacle UBS from Infosys while LVB’s technology platform is Flexcube system from Oracle, which it had upgraded last year. The new parent, with its strong parentage and digital focus, will have to decide on the more suitable platform to operate with. Sinha says the merger will not be easy. “Besides factors like differential interest rates, there will be concerns of integrating different technology platforms and managing cultural differences, besides HR and legal processes.” A banking story which started 94 years ago as a community-focussed bank servicing small-businesses has now ended in an abrupt manner. LVB suffered in the early part of the decade when it had no option but to write off large loans towards infrastructure projects lent to questionable corporate houses. Second, the inability to raise capital at the right time and the rapid move to expand its branch network crippled its balance sheet in the following years. But all is not lost for both partners. “DBIL will acquire LVB’s strong customer and employee loyalty, besides a strong retail presence across South India,” says Parthasarathi Mukherjee, former managing director and CEO of LVB between 2016 and 2019. LVB, in turn, gets the much-needed capital. The new chapters of LVB’s life will now be written by DBIL. But it will have to be patient.