Last 30 Months : Lakshmi Vilas Bank is the 5th Financial Firm To Collapse

The Reserve Bank of India declared a one month moratorium on Lakshmi Vilas Bank. The 94 year old bank plunged into crisis as it suffered continues losses resulting in steady erosion of its net worth. Its inability to raise fresh capital to bolster its balance sheet further complicated the matter warranting regulatory intervention.

This is not the first or will be the last example of such bank failures. Contrary to the claims of the protagonists of bank privatization, the private sector banks are turning bankrupt. The YES bank, PMC bank failures, and the crisis in ICICI bank illustrate the phenomenon. In fact, LVB is the fifth financial institution in the country that collapsed in the last 30 months. The other Indian financial institutions that failed over the last two years were IL&FS, DHFL, Yes Bank, and PMC Bank.

The root cause of all these failures is strangely similar. The corporates receive huge amounts of loans in collusion with corrupt bank board managements or officials. Exploiting loop holes in the law, the corporates turn their debt into non-performing assets for the banks, landing gullible depositors into trouble. This is why depositors have been advised not to have large monies deposited in savings account with one particular bank.

The Lakshmi Vilas Bank is only the latest example. The LVB continued as a traditional bank till 2017 providing credit mainly to small and medium enterprises. It shifted its focus to corporates since 2017. As a result, the gross ratio of non-performing assets to advances shot up to 25.4 % in March 2020. This happened primarily due to collusion of board of directors with the borrowers. The gross NPAs continued to rise despite RBI placing this bank under Prompt Corrective Action framework. This shows weakness in regulatory oversight.

Corporate NPAs in the Lakshmi Vilas Bank accounted for around 4000 crores, while the total bank loan portfolio stood at 16,000 crores.

The situation in the Indian banking sector may further worsen if regulatory measures are strictly not put in place. The COVID-19 induced economic crisis will result in further stress in financial sector. The IMF also cautions this possibility. The RBI in its Financial Stability Report in July pointed out that its stress tests indicated the gross NPA ratio of commercial banks could worsen to 14.7 percent by March 2021 from 8.5% a year earlier. The RBI and government of India should immediately act to protect the interest of depositors in particular and the Indian economy in general.

By Prof K Nageshwar

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