Laxmi Vilas bank

The government recently announced that the Lakshmi Vilas Bank has been put under moratorium  (temporary suspension of activity).

 The financial position of The Lakshmi Vilas Bank Ltd. has been deteriorating, as the bank has been incurring continuous losses over the last three years. The bank’s gross non-performing assets (NPAs) are at 25.4% of its advances (loans) as of June 2020, compared to 17.3% a year ago. Further, the bank is also experiencing the continuous withdrawal of deposits and low levels of liquidity.  It has also experienced serious governance issues and practices in recent years which have led to deterioration in its performance. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019.  Prompt Corrective Action (PCA) is a framework under which financially weak and mismanaged banks are monitored by the RBI. Moreover, the bank has not been able to raise adequate capital to address these issues. Due to these developments, the RBI applied to the Central Government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949.

Measures Announced By RBI for LVB

Under the moratorium, the RBI has restricted withdrawals by depositors at Rs 25,000 from savings and current accounts, and expenditure on any item at Rs 50,000 per month. The RBI has also superseded the Board of Directors of LVB, for a period of 30 days, in order to protect the depositors’ interest. The central bank also appointed TN Manoharan, former non-executive chairman of Canara Bank, as the administrator of LVB.

   The collapse of Infrastructure Leasing & Financial Services (IL&FS) in 2018 led to liquidity issues and loan defaults in the overall financial system. Punjab & Maharashtra Co-op Bank was hit by a loan scam involving Housing Development and Infrastructure Ltd (HDIL) and the bank is yet to be bailed out.  After a while, the collapse of Yes Bank in March 2020 had a significant impact on the financial system.

Future Outlook

  The various steps taken by the RBI in the recent past show that the regulator is keen to proactively step in to deal with risks to wider financial sector stability. However, irrespective of the health of steps taken by the RBI the health of the overall finance sector remains a significant concern, as the wide-ranging damage due to the COVID-19 pandemic has put significant stress on the financial system

Hence, the RBI has its task cut out in ensuring it keeps the crucial engine of credit ticking over as the economy strives to revive, along with maintaining a heightened vigil over-scheduled commercial banks as well non-banking financial companies, due to the threat of a systemic downfall from a failure.