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
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
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
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
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
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
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.
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.
- Aayush Akar, National Law University Odisha
- Gaurav Gupta, Amity Law School, Noida