In less than a year, the Reserve Bank of India (RBI) has been pushed to impose a moratorium on the second bank as the sequel of financial institution's struggle in mitigating the crisis in regulating its liquidity and banking transactions, which had signaled the state of a plunge in the banking sector. 

Earlier this year, RBI had restricted YES Bank in carrying out its banking operations and seized the control of a bank after the fast-growing private bank had plummeted due to rising Non-Performing Assets and debts. Now, on Tuesday, the RBI had carried out a similar strike against Lakshmi Vilas Bank and seized its operations, pushing the Tamil Nadu based bank to face a fresh ordeal. 

The Central government has on Tuesday, based on the recommendation from the RBI, imposed a one-month moratorium on Lakshmi Vilas Bank (LVB) with effect from 6 pm on November 17 until December 16, and during the tenure of the moratorium, the customers of LVB are limited in withdrawing their cash from the bank. The development has come when LVB struggled to find a regulator to fix the crisis and to meet minimum capital requirements as per the standards of RBI. 

According to reports, LVB has been struggling for capital and in the September quarter, the bank witnessed that the capital adequacy ratio failed to cop up to the regulatory norms and turned negative. The bank has been ailing to revive and its loss had widened to Rs 397 crore in the September quarter from Rs 357 crore in the year earlier. 

In its statement, RBI said that the financial position of Lakshmi Vilas Bank had undergone a sharp decline with the bank incurring continuous losses over the last three years, eroding its net-worth. In the absence of any viable strategic plan, declining advances, and mounting non-performing assets (NPAs), the losses are expected to continue. The Reserve Bank further stated that LVB has been experiencing a continuous withdrawal of deposits and low levels of liquidity. 

The Tamil Nadu based bank had also witnessed issues over its governance and practices in recent years, which pushed the financial institution to see its performance getting deteriorated. LVB has been under RBI's Prompt Corrective Action (PCA), which is a framework under which banks with weak financial metrics are put under watch by the RBI, since September 2019. In the September quarter of the current year, the Capital Adequacy Ratio (CAR) plunged to -2.85% as on September 30, against a regulatory minimum of 10.875%.

According to reports, the latest available numbers show that LVB had deposits of Rs 20,973 crore and a loan book of Rs 13,505 crore.  As of March 31, 2020, the 20 largest depositors of the bank had Rs 1,580 crore in the bank, which comprised 7.37% of the bank's deposits. As the sequel getting away from the tracks of maintaining a steady run with meeting the regulatory norms, the RBI has now seized its control and imposed a one-month moratorium and LVB would likely witness a bankruptcy like YES Bank. 

After placing LVB under the moratorium, the RBI had appointed TN Manoharan, a former non-executive chairman of Canara Bank, as the administrator of LVB. Along with LVB and YES Bank, the RBI had recently seized control of Punjab and Maharashtra Co-operative Bank after it faced a similar crisis. With taking over the control of LVB, the RBI had rolled out the proposal of merging LVB with the Delhi-based DBS Bank India Limited. 

DBS Bank India is an Indian arm and wholly-owned subsidiary of DBS Bank Ltd, Singapore, and this Singapore based bank is a subsidiary of Asia's leading financial services group, DBS Group Holdings Limited. In its notice, RBI said that DBS Bank India has a healthy balance sheet with strong capital support. As on June 30, 2020, its total regulatory capital was Rs 7,109 crore with its gross non-performing assets at 2.7% during the same period. 

RBI had asserted that DBS Bank will pour in additional capital of Rs 2,500 crore upfront to support the credit growth of the merged entity. The move of recommending a drive of merger for LVB from RBI has come when LVB had been in talks with Clix Capital for a merger. It has been a prolonged talk with witnessing no possible deal between the entities. The reports say that its the first time that the RBI had recommended an Indian based bank to get merged with the Non-Indian based bank in its bid to save the former. 

The DBS Bank said that the proposed merger will allow it to scale its customer base and network, particularly in South India, which has close ties with Singapore. On the other hand, what will happen to the depositors of LVB? The RBI has said that the depositors can only be able to withdraw Rs 25,000 from the bank account till December 16 even if they have more than one account with LVB. 

The account holders have been given exceptions in withdrawal to meet emergency situations. The depositors can withdraw more than Rs 25,000 by taking special permission from the RBI. They will be allowed to withdraw the money to meet sudden expenses like medical treatment of the account holder or any person dependent on them or for payments for education in or outside India and if the account holder has to meet unavoidable emergencies like marriages or other ceremonies. However, the account holder can withdraw a maximum of Rs 5 lakh under these situations during the moratorium period.