LVB FAILURE

Subject: Economy

Context:  Reserve Bank of India decision 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 has raised concerns about the safety of the financial system.

 Concept:

• The RBI said the financial position of the Chennai-based LVB, which has a network of 563 branches and deposits of Rs 20,973 crore, has undergone a steady decline, with continuous losses over the last three years eroding the bank’s net-worth.
• The RBI, which put a cap of Rs 25,000 on withdrawals, has assured depositors of the bank that their interest will be protected.
• 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.
• The RBI had earlier this year bailed out Yes Bank through a scheme backed by State Bank of India and other banks.
• One safety net for small depositors is the Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, which gives insurance cover on up to Rs 5 lakh deposits in banks.
• The RBI and the government have often assured that the financial system is safe and sound, but a spate of failures have the potential to affect the confidence of depositors.