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Failed Bank

Failed Bank

Context:

RBI decided to impose a 30-day moratorium on Lakshmi Vilas Bank Ltd (LVB) and put in place a draft scheme for its amalgamation with DBS Bank India.

Background:

  • As per the RBI, the financial position of the Chennai-based LVB has undergone a steady decline with continuous losses over the last three years eroding the bank’s net worth.
  • The bank has not been able to raise adequate capital to address these issues as it was also experiencing the continuous withdrawal of deposits and low levels of liquidity.

Failed Bank:

  • The closing of an insolvent bank by the regulator is known as a bank failure.
  • The bank deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) which is a subsidiary of the Reserve Bank of India (RBI).
  • The account holders who have accounts in the failed bank will not experience any change using the bank with new ownership as they will still have access to their cash and should be able to use their debit cards and cheques.

Safety of Depositors and Financial System during the moratorium:

  • The RBI, which put a cap of Rs 25,000 on withdrawals, has assured depositors of the bank that their interest will be protected.
  • The combined balance sheet of DBS India and LVB would remain healthy after the proposed amalgamation.
  • The Capital to Risk-Weighted Assets Ratio (CRAR) reached at 12.51% and Common Equity Tier-1 (CET-1) capital at 9.61%, without taking into account the infusion of additional capital.

Regulatory measures against Bank Failures:

  • In 2004, the RBI announced a moratorium on private sector lender Global Trust Bank, which was then reeling under huge losses and bad loans.
  • The bank was merged with the public sector Oriental Bank of Commerce within 48 hours under an RBI-led rescue plan.
  • In 2020, the RBI has followed a somewhat similar approach on resuscitation of the troubled lenders of Yes Bank and now LVB.
  • The moratorium announcement was followed by a reconstruction plan for Yes Bank and capital infusion by banks and financial institutions, with State Bank of India, ICICI Bank, Kotak Mahindra Bank, HDFC, Axis Bank, and others putting in equity capital in the reconstructed entity.

Impact of COVID-19:

  • The Non-Performing Assets (NPAs) in the banking sector are expected to increase as the pandemic affects the cash flows of people and companies.
  • The impact will differ depending upon the sector, as segments like pharmaceuticals and IT seem to have benefited in terms of revenues.
  • NPA accretion in cash-rich sectors like IT, pharmaceuticals, FMCG, chemicals, automobiles are expected to be smaller when compared to areas like hospitality, tourism, aviation, and other services.
  • The expert committee headed by K V Kamath recently came out with recommendations on the financial parameters required for a one-time loan restructuring window for corporate borrowers under stress due to the pandemic.

Source: Indian Express