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Is Merger A Solution For Downfall Of Indian Banks: Analysis In Light Of Merger Of LVB And DBS India

In the Banking Sector of the Indian Economy, it has become a trend for many years that the ‘Bad Banks’ or banking institutions giving minimum profit or maximum losses to the government had been given a privilege and are put under PCA (prompt corrective action) by the RBI under which the banks which are financially weak and mismanaged are put under the watch of RBI.

To cover-up such past losses and for the purpose of rein station of the lending ability of such banks, the government has pledged to provide them with a huge sum of Rs 70,000 crore for Capital injection in low performing banks and for promoting the bank mergers in the economy. The Finance Minister has expressed to the country, even in her 2021 budget speech, that the government is willing to merge the Bad Banks with the ones which have better management and output, to improve management quality in such Banks and improve risk-taking skills by better management and human labour.

The RBI had placed a 94 years old private lender by the name of Lakshmi Vilas Bank under a 30-days moratorium on 17th November 2020 supporting this action, RBI stated that “serious deterioration in the bank's financial position” is the reason for such a step as LVB had submitted a reported in which it showed a net loss of ₹397 crore in the second quarter due to rise in the number of bad loans and provisions which lead to the creation of the negative net worth of the bank. Soon after this, the RBI announced its decision of amalgamation of the LVB with DBS India, in a draft scheme with respect to the special powers exercised by the Government and RBI which is provided to them in accordance with Section 45 of the Banking Regulation Act, 1949.

The Amalgamation Of Lakshmi Vilas Bank (LVB)?

The amalgamation was initiated just after the moratorium of 17th November, implemented by the RBI on cash strapped LVB as it showed continuous losses of huge amounts as it showed a loss of ₹397 crore in the second quarter even after the huge amount of funds like ₹70,000 provided by the government for survival and putting such banks under PCA, this bank has not shown any significant improvement which eventually led to the shareholders to vote against the management committee of LVB due to an increase in erosion value.

Bad Loans started to get accumulated in 2017 when the LVB started shifting its focus from SMEs to major big companies in the market and shelled out loans of huge amounts to big companies. As a result, it was important to introduce an amalgamation for LVB. The merger of LVB with DBS India has come as an important statement with the intent of the determining authority, as this gives a proposal to the internal working individuals and various institutions of the RBI to open up the banking space for corporates. The actions of the RBI in this instance were unavoidable.

This amalgamation will prove out to be very beneficial for various business houses and especially for LVB and DBS India as By this acquisition the DBS Bank India will be benefited in ways such as that it will be acquiring many readymade infrastructures and facilities of the bank and will be getting not only the customers of that branch of the bank but the complete branches and the whole network which was being controlled or was being operated by that branch of the bank.

In General, all banks aim for a quick and easy expansion but face various challenges like taking regulatory bodies approvals for such expansion and for opening a branch, spotting a real estate asset that will yield more profit to the bank, and setting up a branch at the desired place for attracting target consumers are considered to be tasks which takes a long time.

Impact Of This Acquisition On The Market

As LVB went through a lot of major challenges in the past few years as it was a low performing bank so it was put under PCA by the RBI according to which, it is allowed to collect deposits by the market but can only do very little commercial lending. The merger of these banks and all other such low performing banks which are considered as Bad Banks looks like it is a win-win solution for both entities.

But the interests of the customer and shareholders of such banks in the market is often ignored but it really needs to be handled carefully by the big business personalities and regulatory bodies administering activities in the market.

A moratorium might not be that much effective to a customer as the withdrawal limit in such scenarios is acceptable and reasonable and the duration is for 30 days where all the emergency withdrawals are allowed. But the customers of such Bad Banks who have large amounts of deposits and loans in the banks may suffer as the new acquiring bank will definitely have its own interest rates which might be low or higher depending upon the bank.

If the new acquiring bank offers a lower interest rate on the fixed deposits of the customers of the ‘Bad Banks’ which they have acquired then the customers will have to lose some interest as compared to what they could have received also the customers might be asked to pay higher interest rates on the loans which will now be handled by the rules and regulations of the new acquiring bank.

Government’s Supervision On Merger Of Banks

In August 2020, the government exercised its powers according to Section 45 of the Banking Regulation Act, 1949 which grants the RBI the power to apply to the Government for suspension of any kind of business for any banking institution and prepare a draft for restructuring or amalgamation of the concerned entity as the government announced its plans for amalgamation for Bad Banks in the market.

According to Section 2(1)(b) of the Income Tax Act, 1961, amalgamation is defined as a process that mandates at least ¾ shareholders of the transferor company to become the shareholders of the transferee company. And with respect to Section 45(5)(g) of the Banking Act, the RBI will not be obligated to comply with any kind of construct as the RBI is provided with the liberty to include all of the items provided under Section 5 to be included in a draft scheme.

In the case of the LVB merger with DBS Bank India, the Union Cabinet had approved the merger of capital-starved private lender LVB on 25th November 2020 as part of the amalgamation scheme introduced by the RBI. According to which DBIL is required to infuse a fresh capital of ₹2,500 crore into LVB and buy 51% shares of the bank.

Analysis Of Amalgamation Of LVB

The amalgamation of LVB with DBS India will prove out to be a win-win situation for every party involved in the contract as it will eventually lead to foreign banks to operate in India through any channel, because of this amalgamation now the DBIL can still continue to exist as the subsidiary branch of the parent bank.

Also, in the case of acquisition of shares of private sector bank at any given point of time, a minimum of 25% of the paid capital of the bank is to be held and in the context of the Indian Economy, this amalgamation will turn out to be a major a turning point as it will invite private investors to invest in banking institutions of India, as the government has noticed that even after huge amounts of capital injections, the development is not significant enough so private sector needs to be involved to overcome challenges faced in any government institution and bring benefits of private.

Conclusion
According to the facts stated by the government officials, it seems that the merger will work out to be a solution for the falling of Indian Banks. The government is planning to the merger only the low performing or Bad Banks which is a good solution to this problem as such banks are already not performing well, by the mergers they will get appropriate financial and managerial support from the acquiring and well-established institution.

This will definitely turn out to be a win-win situation for both the entities to the merger, as one would get proper support for covering its losses and developing over by good management eventually bring change in the banking system of the Bad Banks and the acquiring banks will receive well-established infrastructure and expand its reach in the country and develop more customer base leading to providing good banking services in the country eventually resulting in the development of the banking sector in the Indian economy.

Written By:
  1. Aayush Akar, National Law University Odisha
  2. Gaurav Gupta, Amity Law School, Noida

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