The curious case of Lakshmi Vilas Bank’s merger with DBS

An apocryphal tale goes: When legendary bank robber Willie Sutton was asked why despite repeated sentencing, he continued to rob banks, he answered: ‘because that’s where the money is’. Sutton is not around in this post-truth world to confirm if he indeed said that, but the robbing of banks continues, albeit in a sophisticated manner.

Banking is as protected a business as you can get, in India. Given its protected status, a banking licence is literally a licence to print money. But, as in most businesses, in banking, longevity is not an indicator of success. And the collapse of 94-year old Lakshmi Vilas Bank (LVB) just confirms that. Dig beneath the surface and you will find a familiar story of ill-advised lending driven by cronyism and lack of adequate diligence.

When you mix out-of-bound ambition with tardy lending, you have a Molotov cocktail. What transpired at LVB wasn’t any different. Promoter KR Pradeep’s desire to grow saw it shifting focus to corporate clients from the original base of local traders.

There-on this desire to graduate to the big league saw it lend to real estate and infrastructure. Given how those sectors have been faring over the past few years, no prize for guessing how those loans eventually ended up. Ever since, depositors have bolted and many other borrowers have turned delinquent.

Such Molotov cocktails are routine where the management knows they won’t have to pay for all the wanton destruction they wreck on the balance sheet, or they are deluded by the notion that they can pull it off somehow. In the banking sector, the risk fom investors gets compounded because those wielding regulatory powers can be of the fair-weather kind. For instance, how else can one explain the RBI’s hands-on hands-off approach with respect to LVB and the unusual final hour urgency in merging it with Singapore’s DBS.

While DBS’ financial standing is not in question, why was the same urgency not shown when an even bigger Yes Bank was floundering. In fact, DBS was an interested bidder even then. Yes Bank necessitated a much-bigger bailout led by SBI at the taxpayers’ expense. The RBI was overseeing the state of affairs at LVB all this while. It could see LVB was splashed in red ink for more than two years now and the gross NPAs rising from 2.7% in FY17 to 25% in FY20.

What kind of regulatory example is being made here when you unilaterally decide to hand over a bank without calling for bids and write-off the entire equity capital? Clix Capital was in the final stage of negotiation with the LVB management and were hung out to dry at the last moment. At the other end, institutional shareholders of LVB who are now crying foul are equally to blame for going along with the tall promises made by the promoter. In September, the shareholders did vote out half the board, but it was a case of too little too late.

The LVB case brings to fore two key issues in our financial landscape: One, the absence of institutional activism, which can better governance standards, and two, the dire need for better regulation and transparency on part of the Central bank.