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Current Affairs

Lakshmi Vilas Bank moratorium case

Date: 20 November 2020 Tags: miscellaneous

Issue

The Reserve Bank of India has decided to impose a 30-day moratorium on Lakshmi Vilas Bank Ltd (LVB) and put in place a draft scheme for its amalgamation with DBS Bank India, a subsidiary of DBS of Singapore.

 

Background

After the failures of IL&FS, Punjab & Maharashtra Cooperative Bank, and DHFL, and the bailout of Yes Bank, concern about financial system of our country has arisen.

 

Details

  • The financial position of the LVB has undergone a steady decline, with continuous losses over the last three years eroding the bank’s net-worth.

  • The bank has not been able to raise adequate capital to address these issues. It was also experiencing continuous withdrawal of deposits and low levels of liquidity.

  • Almost one fourth of the bank’s advances have turned bad assets. Its gross non-performing assets (NPAs) stood 25.4% of its advances as of June 2020, as against 17.3% a year ago.

  • The bank management had indicated to the RBI that it was in talks with certain investors, but failed to submit any concrete proposal.

  • The combined balance sheet of DBS India and LVB would remain healthy after the proposed amalgamation, with Capital to Risk Weighted Assets Ratio (CRAR) at 12.51% and Common Equity Tier-1 (CET-1) capital at 9.61%, without taking into account the infusion of additional capital.

  • In the case of LVB, equity capital is being fully written off. This means existing shareholders face a total loss on their investments unless there are buyers in the secondary market who may ascribe some value to these.

  • NPAs in the banking sector are expected to increase as the pandemic affects cash flows of people and companies. 

  • NPA accretion in cash-rich sectors like IT, pharmaceuticals, FMCG, chemicals, automobiles is expected to be smaller when compared to areas like hospitality, tourism, aviation, and other services.

 

Moratorium

  • A moratorium is a temporary suspension of an activity or law until future considerations. A moratorium may be imposed by a government, by regulators, or by a business.

  • Most of the time, moratoriums are intended to alleviate short-term financial hardship or provide time to resolve related issues.

  • Moratoriums are often imposed in response to temporary financial hardships. For example, a business that has exceeded its budget might place a moratorium on new hiring until the start of its next fiscal year.