Reserve Bank of India Archives

Highlights Of The Speech

The RBI announced a Rs 50,000 crore Term Liquidity Facility to Ease Access to Emergency Health Services. To put it up in simple words, the RBI will lend Rs 50,000 crore to banks who would intern have to lend it to Emergency Health Care services working to mitigate the COVID-19 pandemic. These services include vaccine makers, COVID-19 drug makers, testing labs, oxygen plants, healthcare services, hospitals, etc. The banks can borrow from the RBI at the repo rate and for a maximum period of three years with some special benefits as well. They will also have to maintain a COVID loan book in order to avail benefits from the RBI.

On April 15, 2021, the RBI induced Rs 25,000 crore of liquidity into the market by buying G-Sec or Government securities. This programme was called Government Securities Acquisition Programme 1.0 or G-SAP 1.0. Similarly, the RBI announced a G-SAP 2.0, where the RBI will induce liquidity of Rs 35,000 crore into the market by procuring G-Secs.

Small Finance Banks or SFBs play an important role when it comes to giving credit to rural areas, small businesses and individuals. The RBI, therefore, has announced a three-year Special Long Term Repo Operation(SLTRO) of Rs 10,000 crores at repo rate. SFBs will thereby gain liquidity effectively which will help stimulate Micro, Small, and Medium Enterprises(MSMEs) and the rural economy. To know more about how a Long Term Repo Operation works, check out the article at marketfeed over here.

Banks had to fulfil a target set by RBI for Priority Sector Lending. A Priority Sector includes Agriculture, Micro Enterprises, Marginal Farmers, Weaker Sections. These sectors promote credit growth in underdeveloped and rural areas. So far, Small Finance Banks lending to Microfinance Institutions(MFIs) were not counted as Priority Sector Lending. They will now be counted in as Priority Sector Lending till March 31, 2022.

Banks need to keep liquid cash as a precautionary measure with the RBI known as Cash Reserve Ratio or CRR. The CRR is a percentage share of net demand and time liabilities (NDTL). We need not go into detail about it. The RBI has announced that any lending made to MSMEs(up to Rs 25 lakh) need not be counted into their NDTL. This means that banks will have to keep less liquid cash with the RBI as a reserve. This shall boost lending to MSMEs.

During the first wave of the COVID-19 pandemic in India, the RBI had announced restructuring schemes and a moratorium for stressed assets or bad loans under Resolution Framework 1.0. To know how a loan is restructured, click here. With Resolution Framework 2.0, a one-restructuring is permitted for those businesses or individuals with loans less than ₹25 crores who had not availed for the first scheme. Additionally, banks have been allowed to modify and extend the moratorium period for loans under Resolution Framework 1.0 for up to two years.

When the economy is running well, banks are required to set aside ‘countercyclical/floating provisions’ above the mandatory provision requirements. These provisions are used only in contingencies or emergencies, which is a pandemic in this case. Banks are now allowed to use these countercyclical provisions for making provisions for bad loans. This means that Banks need not necessarily draw money from profits to make provisions.

The RBI has given a relaxation in the Overdraft (OD) facility for state governments. State governments can borrow money from the RBI using what is called the Overdraft (OD) facility. They need to pay the RBI back with interest(at repo rate) under a limited time period called the Overdraft. The RBI has permitted states to be in Overdraft for a maximum of 50 days( from the earlier limit of 36 days) and 21 days consecutively( from the earlier limit of 14 days).

The Impact

The announcement had a positive impact on the stock markets. SENSEX was up 424 pts where NIFTY 50 was up 121 pts. NIFTY PHARMA, the benchmark index for pharmaceutical companies, climbed 3% yesterday after the RBI decided to give it a liquidity facility of Rs 50,000 crore. The top gainers for yesterday were pharma companies like Dr. Reddy, Sun Pharma, and Banks like IndusInd Bank, Axis Bank, and Kotak Mahindra Bank. NIFTY Bank Index was up 2% led by mostly Small Finance Banks after RBI announced a support system for them.

The RBI’s announcement has relieved certain distressed sections of the society. It has not only created a support system for businesses that have shut shop, but also for healthcare services. The announcement can ensure that the Banks’ Bad Loans remain under check. One can expect a boost in oxygen production, drug and vaccine production. Meanwhile, businesses and individuals could stand strong till the time India gets back up on its feet again, with a better healthcare system and vaccination drive this time. Until then, Stay Home, Stay Safe.

The Lakshmi Vilas Bank(LVB) has been a troubled-child for the Reserve Bank of India(RBI) since last year. The bank currently faces a liquidity crunch. It’s poor performance, constant losses, rising bad debts, and bad liquidity have brought it close to the edge of a cliff. Eventually, the RBI had to come to its rescue.

You can read more on what went wrong with Lakshmi Vilas Bank in the first place here.

The RBI has decided to pursue the following action to prevent LVB from going bust:

The RBI has decided to place LVB under a moratorium till 16th December. Customers of the bank cannot withdraw more than Rs 25,000 from the bank till 16th December unless under emergency.

The board of the bank has been dissolved and the RBI has appointed former non-executive chairman of Canara Bank T.N. Manoharan as the administrator of the bank

RBI has also drafted a merger plan for Lakshmi Vilas Bank and its suitor DBS India Limited. DBS India Limited(DBIL) is the Indian arm of Singapore-based DBS Bank. The RBI decided to do so after LVB’s plans to merge with financial-services company Clix Capital failed.

After the announcement, the shares of Lakshmi Vilas Bank fell 20% and hit the lower circuit.

About The Merger

Low on liquidity, LVB was in merger talks with financial-services company Clix Capital for a long time. In fact, the two had made sufficient progress and reached a credible stage. The RBI had given the two a deadline to finalize the merger. The RBI was persistent on it since LVB had problems with liquidity and couldn’t have gone without the necessary cash for long. LVB’s merger with Clix Capital would have brought in the capital of up to Rs 1,900 crores and assets worth Rs 4,600 crores from Clix Capital. The two however failed to go ahead with the deal. Therefore, the RBI started looking for suitors for Lakshmi Vilas Bank.

Kotak Mahindra Bank, DBS Bank, Brookfield Asset Management, Everstone Capital-backed Indo Star Capital Finance showed interest in acquiring LVB. The RBI decided to favor DBS Bank for its strong financials, strong balance sheet, low bad loans, and its interest in expanding in India.

According to the Draft Proposal by RBI, DBS would infuse upfront capital of Rs 2,500 crore in Lakshmi Vilas Bank. This deal is beneficial for DBS since this will add a large number of customers and up to 500 branches under DBS’s umbrella. DBS wishes to expand its footprint in India. The merger will increase DBS’s Net Loans from 0.9% to 1.5% in India, this is a small number and therefore won’t affect the bank’s credit profile. LVB also plans to raise an additional Rs 500 crores through a rights issue.

Why is the Market Bitter About the News?

According to the draft plan, the reserve & surplus and paid-up capital – the money that the company receives from shareholders in exchange for shares– will be written off. Its value will become zero. To put up in simple words– shareholders could lose all their money.

Additionally, Lakshmi Vilas Bank as a separate entity will cease to exist and will be delisted from all exchanges in India. DBS India Limited on the other hand is an unlisted company in India. This serves as a huge blow since Lakshmi Vilas Bank’s 77% stake is owned by the ‘public’ with only 6% owned by the promoters. The rest is owned by Mutual Funds and Institutional Investors. Shareholders are currently blown by the news, while some are even planning legal action in case the merger goes through.

Why LVB Needs A Merger, If Any.

LVB’s gross non-performing assets (GNPAs) are too high at 24.45%, even the net NPAs are high at 7.01%. This means too much bad debt. The bank’s Tier 1 Capital ratio has turned negative, It is a key measure of a bank’s financial strength. The Capital Adequacy Ratio (CAR) as per Basel Ill guidelines is at negative 2.85%, the requirement is a minimum of 3%. The CAR shows whether the banks have enough capital on reserve to handle a certain amount of losses. Clearly, LVB doesn’t have it.

The Reserve Bank of India (RBI) had placed the bank on PCA(Prompt Corrective Action) framework in September 2019, citing rising debts and inadequate capital. Under PCA, a bank’s lending is restricted, the bank is required to arrange a certain capital and meet certain conditions placed by the RBI.

The current management of the bank has failed miserably at securing investment and mergers. The bank was unsuccessful at its merger with India Bulls Housing Finance last year and now with Clix Capital. It is clear that top-level management is inefficient and in the middle of a crisis.

Lakshmi Vilas Bank has Rs 20,000 crore in deposits and Rs 17,000 crore in advance. The banks have the hard-earned money of many individuals and small-time businesses at stake. It’s a sticky situation since, on one hand, we have the money of depositors at stake and on the other hand, we have the interest of shareholders at stake. RBI and Lakshmi Vilas Bank need to keep both their interests in mind and take the best possible action. A merger, not necessarily with DBS, is crucial for LVB to survive.