New Delhi: Lakshmi Vilas Bank (LVB) has been placed under moratorium for a month, with depositors restricted from withdrawing more than Rs 25,000 from their accounts, as India’s financial authorities look to coordinate a rescue act for the struggling private sector bank.

Account holders will only be able to withdraw more than Rs 25,000 (up to Rs 5 lakh after getting special permission) for education needs or medical emergencies.The Reserve Bank of India (RBI), in consultation with the Centre, has thus superseded the bank’s board of directors owing to “serious deterioration in the financial position of the bank”.According to a RBI statement, N. Manoharan, former non-executive chairman of Canara Bank has been appointed as LVB’s administrator.

“The financial position of the Lakshmi Vilas Bank Ltd. (the bank) has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth. In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses,” the central bank’s statement noted.

“The Reserve Bank had been continually engaging with the bank’s management to find ways to augment the capital funds to comply with the capital adequacy norms. The bank management had indicated to the Reserve Bank that it was in talks with certain investors. However, it failed to submit any concrete proposal to Reserve Bank and the bank’s efforts to enhance its capital through amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end. As such, the bank- led efforts through market mechanisms have not fructified. ”In its statement, the RBI notes that though it gave the bank’s management ample time to “draw up a credible revival plan”, that outcome did not materialise.

Thus, the RBI came to the conclusion that it had “no alternative” but to apply to the central government for imposing a moratorium under Section 45 of the Banking Regulation Act, 1949.

This is the same method that was used last year in the case of PMC (Punjab and Maharashtra Co-Operative) Bank and Yes Bank in March 2020. The idea is to prevent panic and a run on the bank while authorities sort out the situation.

Over the last year, LVB’s financial situation and corporate governance has taken a hit, as The Wire has reported. Two months ago, a long series of developments culminated in the bank’s shareholders voting out the interim CEO.

Amalgamation on the cards

The central bank plans to use the next month to finalise a scheme that will merge LVB with another banking company.“The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic. In terms of the provisions of the Banking Regulation Act, the Reserve Bank has drawn up a scheme for the bank’s amalgamation with another banking company.

With the approval of the Central government, the Reserve Bank will endeavour to put the Scheme in place well before the expiry of the moratorium and thereby ensure that the depositors are not put to undue hardship or inconvenience for a period of time longer than what is absolutely necessary,” the regulator said in a statement.

According to the draft scheme of amalgamation, LVB will merge with DBS Bank India Ltd, a banking company that is part of the DBS Group Holdings Limited.

The RBI has placed the draft scheme in the public domain and has invited feedback from the public and other stakeholders until November 20.

Under the proposed terms, the “entire amount of the paid-up share capital and reserves and surplus… shall stand written off” and the bank will be delisted.