Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The news here is not that a foreign bank is investing in India. The issue is the value of the option that was just wasted. The fact is this transaction removes a major contingent investor from the rescue pool, and it signals the unwillingness of large, high quality, foreign banks to make significant investments in the financial system.We have more questions than answers at this point in time; however, the prognosis for the banking system is not great. This is bad news for other struggling financial institutions in India, including the non-bank sector.

The news here is not that a foreign bank is investing in India. The issue is the value of the option that was just wasted. The fact is this transaction removes a major contingent investor from the rescue pool, and it signals the unwillingness of large, high quality, foreign banks to make significant investments in the financial system.We have more questions than answers at this point in time; however, the prognosis for the banking system is not great. This is bad news for other struggling financial institutions in India, including the non-bank sector.

Lakshmi Vilas Bank: DBS Rescue Is a Wasted Option

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/dbs-group-holdings-ltd" target="_blank" data-smartkarma-citation="entities:22:1" rel="noopener">DBS Group Holdings (DBS SP)</a> will take over a failing bank in India. DBS Bank India may inject capital into <a href="https://www.smartkarma.com/entities/lakshmi-vilas-bank-ltd" target="_blank" data-smartkarma-citation="entities:17552:1" rel="noopener">Lakshmi Vilas Bank (LVB IN)</a>, before merging the latter into the former. There is no talk about what DBS will gain in return for this service, but we imagine it will be substantial and that there will be seem back-stop on credit deterioration. We do not view this recapitalization as onerous for DBS, where that is the typical knee-jerk reaction. In fact, this can be incredibly positive for DBS in terms of growth longer term.

DBS Group Holdings (DBS SP) will take over a failing bank in India. DBS Bank India may inject capital into Lakshmi Vilas Bank (LVB IN), before merging the latter into the former. There is no talk about what DBS will gain in return for this service, but we imagine it will be substantial and that there will be seem back-stop on credit deterioration. We do not view this recapitalization as onerous for DBS, where that is the typical knee-jerk reaction. In fact, this can be incredibly positive for DBS in terms of growth longer term. 

India Financials

Saumya Agarwal

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Corrigenda: There is an error in this Insight. Please note the change.
Correction: LVB’s paid-up share capital, reserves and surplus will be written off and the shares and debentures shall stand de-listed. Therefore, the pro-forma net worth will be Rs 85 Bn instead of the Rs 92 Bn mentioned in the Insight.
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In what appears to be a remarkable life-saving move for the distressed Lakshmi Vilas Bank, the RBI announced a draft scheme for the merger of Lakshmi Vilas Bank (LVB) with DBS India. RBI also placed the troubled bank under Moratorium effective immediately, for one month, till Dec 16,2020.
LVB had been desperately scouting for a buyer, to raise capital, after posting losses for 3 consecutive years which saw its net worth erode markedly. However, LVB’s earlier proposal to merge with India bulls Housing Finance was rejected by the RBI in 2019 and its recent talks with Clix Capital turned out to be inconclusive.


Corrigenda: There is an error in this Insight. Please note the change.
Correction: LVB’s paid-up share capital, reserves and surplus will be written off and the shares and debentures shall stand de-listed. Therefore, the pro-forma net worth will be Rs 85 Bn instead of the Rs 92 Bn mentioned in the Insight.


In what appears to be a remarkable life-saving move for the distressed Lakshmi Vilas Bank, the RBI announced a draft scheme for the merger of Lakshmi Vilas Bank (LVB) with DBS India. RBI also placed the troubled bank under Moratorium effective immediately, for one month, till Dec 16,2020.
LVB had been desperately scouting for a buyer, to raise capital, after posting losses for 3 consecutive years which saw its net worth erode markedly. However, LVB’s earlier proposal to merge with India bulls Housing Finance was rejected by the RBI in 2019 and its recent talks with Clix Capital turned out to be inconclusive.

Lakshmi Vilas Bank Gets a Mighty Savior- To Be Merged with DBS Bank India

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has <a href="https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1101" target="_blank" rel="noopener">proposed</a>, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (<a href="https://hemindrahazari.com/2019/01/31/ilfs-collapse-what-happens-when-infrastructure-development-is-privatised-hemindra-hazari/" target="_blank" rel="noopener">here</a>) and <a href="https://www.smartkarma.com/entities/dewan-housing-finance-corp" target="_blank" data-smartkarma-citation="entities:8142:1" rel="noopener">Dewan Housing Finance (DEWH IN)</a> (<a href="https://hemindrahazari.com/2019/01/29/panel-discussion-on-cobrapost-expose-of-dhfl/" target="_blank" rel="noopener">here</a>) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has proposed, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (here) and Dewan Housing Finance (DEWH IN) (here) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Credit quality is the over-riding risk for India’s banks. Low capital is a compounding risk. As the situation worsens, deposit flight is a very real risk that would only deepen India’s banking crisis. Following the IL&amp;FS debacle, depositor and wholesale lenders, will have more concerns. This is especially the case as the currency continues to weaken. Where they take out their money from a bank or from a non-banking financial company (NBFC), this can create stresses on liquidity. This is because not all banks or NBFC’s can easily liquidate assets on the left side of the balance sheet to pay back depositors, or wholesale lenders. Even government owned <a href="https://www.smartkarma.com/entities/545" target="_blank" data-smartkarma-citation="entities:545:1">Bank Of Baroda (BOB IN)</a> saw a major deposit contraction in the latest quarter. <a href="https://www.smartkarma.com/entities/17552" target="_blank" data-smartkarma-citation="entities:17552:1">Lakshmi Vilas Bank (LVB IN)</a>, <a href="https://www.smartkarma.com/entities/1557" target="_blank" data-smartkarma-citation="entities:1557:1">DCB Bank Ltd (DCBB IN)</a> and <a href="https://www.smartkarma.com/entities/2619" target="_blank" data-smartkarma-citation="entities:2619:1">Dhanlaxmi Bank (DHLBK IN)</a> all saw deposit contraction in the quarter.  And private bank, <a href="https://www.smartkarma.com/entities/547" target="_blank" data-smartkarma-citation="entities:547:1">ICICI Bank Ltd (ICICIBC IN)</a>, saw deposits down.

Credit quality is the over-riding risk for India’s banks. Low capital is a compounding risk. As the situation worsens, deposit flight is a very real risk that would only deepen India’s banking crisis. Following the IL&amp;FS debacle, depositor and wholesale lenders, will have more concerns. This is especially the case as the currency continues to weaken. Where they take out their money from a bank or from a non-banking financial company (NBFC), this can create stresses on liquidity. This is because not all banks or NBFC’s can easily liquidate assets on the left side of the balance sheet to pay back depositors, or wholesale lenders. Even government owned Bank Of Baroda (BOB IN) saw a major deposit contraction in the latest quarter. Lakshmi Vilas Bank (LVB IN), DCB Bank Ltd (DCBB IN) and Dhanlaxmi Bank (DHLBK IN) all saw deposit contraction in the quarter.  And private bank, ICICI Bank Ltd (ICICIBC IN), saw deposits down.

India

Lakshmi Vilas Bank Limited owns and operates commercial banks in India. The Group's banks provide a variety of services, including corporate banking, commercial & personal banking, retail banking, NRI services, insurance and development banking through a network of branches.

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Lakshmi Vilas Bank (LVB IN)

Lakshmi Vilas Bank: DBS Rescue Is a Wasted Option

The rescue of Lakshmi Vilas Bank raises more questions for bank creditors as it sets new lows in India’s bank resolution framework.

Hank Calenti, CFA

DBS – Fast Track Entry To India

DBS Bank India may inject capital into Lakshmi Vilas Bank, before merging it into its own business. DBS Group will gain substantial branches, fast...

Daniel Tabbush

Lakshmi Vilas Bank Gets a Mighty Savior- To Be Merged with DBS Bank India

In a remarkable move, the RBI announced a draft scheme for the merger of Lakshmi Vilas Bank with DBS India. It also placed the troubled bank under...

Saumya Agarwal

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Instead of forcible conversion to banks the RBI should ensure that it improves the regulation of important NBFCs so as to ensure that these...

Hemindra Hazari

India – Deposit Flight?

Credit quality is the over-riding risk for India’s banks. Low capital is a compounding risk. As the situation worsens, deposit flight is a very...

Daniel Tabbush

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