Bank failures carry systemic risks. Recall in 2008, the failure of Lehman Brothers setting off a chain reaction that resulted in the Global Financial Crisis. The problem with banks is that if even a hint of trouble materialises, there could be a run on deposits. Governments can prevent a failure turning into a systemic risk, and the Government of India appears to have done just.
Under an archaic law, a scheme of amalgamation using the special powers of the Government of India and the Reserve Bank of India from Section 45 of the Banking Regulation Act 1949, amalgamated Lakshmi Vilas Bank (LVB) with DBS India (DBI), a subsidiary of DBS Group Holdings, on Nov 27, 2020.
With it, shareholders and bondholders are - for want of a better word- wiped out by law. The Act empowers RBI “to prepare a scheme for the amalgamation of the banking company with any other banking institution”. The Indian press has reported various challenges that are now being referred to the Delhi High Court. However, prime minister Narendra Modi has a super majority in parliament, and is able to enact and implement various laws, including passing three seemingly unpopular farm bills that have triggered protests from farmers.
