While there is disquiet among LVB shareholders, banking circles are agog over the prospect of the proposed merger of capital-starved LVB with the local arm of Singapore’s DBS Bank serving as a template for the RBI to rescue other struggling banks.
LVB shareholders are upset with the RBI draft scheme and are awaiting the central bank’s final amalgamation plan this week before deciding on taking legal recourse. On the other hand, bank unions have questioned the way the RBI selected DBS Bank for the merger.
The RBI sought feedback of the LVB shareholders earlier last week after it came out with the draft amalgamation plan where it decided to write off the equity shares of the bank to zero.
Bankers and industry insiders are also questioning the different approach adopted by the RBI for Yes Bank and LVB. In the case of Yes Bank, while RBI protected the interest of shareholders, it decided to write down the equity of LVB to zero.
There are some who also raised questions on the way RBI came out with its resolution plan for LVB. CH Venkatachalam, general secretary, All India Bank Employees Association (AIBEA), said there was no transparency in the selection of DBS Bank for the takeover. “RBI knew about the problems in LVB for the last three years. When we have many Indian banks with financial capacity, why was a foreign bank selected? How were they selected? It’s unfair to the Indian public. They are getting LVB for peanuts,” he said.
“If they had decided to write down the equity value of LVB to zero, there would have been many banks that would have been interested in acquiring a bank like LVB that has over 500 branches. They could have called for bids from other banks giving them few days to do their due diligence,” said a banker who did not wish to be named.
“This announcement has come as a shock to the bank customers and general public. This will create panic and doubt in the minds of people about the stability and dependability of banks because people keep their hard-earned savings in the banks,” he said.
As things stand, shareholders of the bank will get zero compensation as the draft scheme announced by the RBI has proposed total write-off of shares and debentures of LVB. The RBI, which was to announce the final scheme last week, is expected to announce the final amalgamation plan this week.
The bank’s market capitalisation, which was nearly Rs 500 crore last Tuesday, fell 40 per cent to Rs 303 crore in two days.
“LVB has been given virtually free to DBS Bank. The draft scheme of the RBI indicates nothing is in store for shareholders,” said a shareholder who reportedly wrote to the RBI. The central bank had rejected a proposal by DBS Bank for acquiring 50 per cent stake in LVB in 2018. RBI was then against giving a foreign bank higher stake in a bank. LVB promoters hold only around 6.80 per cent stake in LVB.
Depositors of LVB have also turned cautious. While LVB is offering 6 per cent interest on one-year term deposits, DBS Bank’s Digibank offers 4.05 per cent.
DBS established 21 new branches in India in 2019 for a total of 33, but the proposed transaction will add as many as 563 branches, a greater number than that of all other foreign banks in India put together.
What’s the excitement about?
A section of banking experts says allowing a foreign bank to acquire a weak local rival not only opens up more options for the banking regulator as it seeks well-capitalised entities with deep pockets, but the wholly owned subsidiary structure of the Indian operations also ring-fences the local entity from being affected by an adverse development at the parent organisation.
DBS was the first foreign bank to receive a banking licence after the central bank allowed foreign banks to set up a wholly owned subsidiary in 2014. The subsidiary structure brings the lender on a par with local banks, allowing them to open branches anywhere in the country.
RBI has not made it compulsory for foreign banks to have wholly owned subsidiaries to operate in India.
“It’s a brilliant strategy to acquire an Indian bank. It’s a win-win situation for the regulator, customers and the acquiring bank. We are right now a startup bank looking to grow on the strength of our book. We are not looking at inorganic opportunities as of now. However, we may look at it in the future,” said Sidharth Rath, managing director and chief executive officer, State Bank of Mauritius, the second foreign bank to set up a wholly owned unit in India.
However, RBI’s rules limit foreign banks from dominating the Indian banking system as there is a threshold beyond which they cannot operate.
According to World Trade Organization rules, licences to new foreign banks may be denied when their share of assets, both on and off-balance sheet, in India exceeds 15% of the total assets of the banking system.
“Existing foreign banks with branch mode of presence have not been enthusiastic about converting into a wholly owned subsidiary (WOS) because they don’t gain in a business sense. Their business ambitions may not be to become a pan-India bank. If a foreign bank wants to become a WOS with a larger ambition of expansion in India, this will be heartening,” said Anand Sinha, a former RBI deputy governor.
The large foreign banks in the country are primarily wholesale banks with niche retail presence. These banks are aware that unless they have a pan-India footprint, they cannot compete with the likes of HDFC Bank and ICICI Bank.
For DBS, the deal with LVB makes economic sense as its growth in Singapore is now saturated, and it has to look at markets like India to expand. Following the setting up of DBS Bank India Ltd (DBIL) last year, it was also looking to establish over 100 customer touch-points across 25 cities. Currently, DBIL has just about 30 branches in India.
The other challenge that foreign banks face is in aligning the two business cultures post an acquisition. Foreign bank staffs are trained in digital skills and have strong underwriting processes, compared to Indian banks, which have a more traditional client-focused approach.