Lakshmi Vilas Bank share price hits 20% lower circuit after RBI puts bank under moratorium

RBI has put Lakshmi Vilas Bank (LVB) under moratorium, with effect from November 17, 6 pm till December 16, 2020. On Tuesday, Lakshmi Vilas Bank was added to the list of recent financial sector failures. The 93-year-old lender was placed under moratorium and is to be merged with DBS Bank India, after many quarters of weakening financials. This was in contrast to what happened with Punjab and Maharashtra Co-operative (PMC) Bank where depositors’ pain still continues. 

While bank failures are neither new nor unique to India, the quick succession in which we have seen lenders of material size fall is worrying. There were pending sell orders of 30,945,341 shares, with no buyers available at the time of market opening. Bank will not be able to make payment worth more than Rs 25000 to its depositors without written permission from the Reserve Bank of India (RBI).  

As per the draft scheme of amalgamation of the Lakshmi Vilas Bank with DBS Bank India, the entire amount of the paid-up share capital will be written off. “On and from the appointed date, the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the transferor bank, shall stand written off,” according to the draft scheme published on the RBI website. 

Over the last two years or so, Investors have seen failure of IL&FS, DHFL, Yes Bank, PMC Bank, and now Lakshmi Vilas Bank. IDBI Bank, which was thought to be on the brink, was saved via an infusion of capital by LIC, which took over the majority stake in the lender from the government. If you exclude IDBI, lenders with a cumulative asset size of about Rs 5.5 lakh crore have gone under since 2018. Of course, that’s a small fraction of the size of India’s financial sector but these cases, together and separately, throw up some important lessons for the Reserve Bank of India and the country’s financial sector. 

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TN Manoharan, former non-executive chairman of Canara Bank, has been appointed as the administrator by the Reserve Bank of India (RBI) under Section 36ACA(2) of the Banking Regulation Act, 1949 with effect from November 17.