The Reserve Bank of India, the country’s central bank, has proposed that Lakshmi Vilas Bank, a troubled local lender, be amalgamated into DBS India.

The proposed scheme of amalgamation is wielded under the special powers of the Government of India and RBI under Section 45 of the Banking Regulation Act, 1949.

In a statement on Nov 17, RBI notes “the rapidly deteriorating financial position” of Lakshmi Vilas Bank in terms of liquidity and capital. The bank, which has been losing money for the past three years, has been placed under a moratorium and customers are not allowed to withdraw more than INR25,000. 

On the other hand, RBI notes that DBS Bank India has a healthy balance sheet with its Common Equity Tier-1 capital at 12.84%, well above the requirement of 5.5%, for example. As at June 30, DBS Bank India’s total regulatory capital was INR 7,109 crore, up slightly from INR 7,023 crore as at March 31, 2020. 

See: Recalling perverse incentives in the finance sector as new private equity bond is launched

And, given “absence of any credible plan for infusion of capital”, therefore, the amalgamation with DBS Bank India is necessary in the name of “public interest and particularly in the interest of the depositors”.

According to DBS, it will inject INR 2,500 crore ($463 million) into DBS Bank India if the scheme goes through. This will be fully funded from DBS’ existing resources.

“The proposed amalgamation will provide stability and better prospects to Lakshmi Vilas Bank’s depositors, customers and employees following a time of uncertainty,” says DBS.

“At the same time, the proposed amalgamation will allow DBIL to scale its customer base and network, particularly in South India, which has longstanding and close business ties with Singapore,” the bank adds.

DBS says it will await the final decision on the proposed scheme from RBI and the Government of India, and will announce further details at a later stage.

Lakshmi Vilas Bank has a 94-year history in India, serving retail and SME customers in south India. As of Sept 30, it has 563 branches.

DBS has been in India since 1994 and has grown to cover 24 cities across 13 states.

DBS shares closed at $24.65 on Nov 17, up 1.78%.