Now that lvb is out of harm’s way

Now that lvb is out of harm’s way

At the outset, let us be clear that a troubled Lakshmi Vilas Bank (LVB) merged with another bank strong enough to recapitalise it adequately is better for the banking and payments systems of India than a bank continuing to flounder.

That said, was the amalgamation with Singapore-based DBS (via an Indian subsidiary) wiping out the equity of existing shareholders the best option possible? Unless the Reserve Bank of India (RBI) clears the air, existing shareholders of the Karur, Tamil Nadu-based bank will continue to feel sadly let down. True, there were some sharp operators among the bank’s new crop of investors, who probably deserve what has come to them, but its traditional shareholders should have got a better deal.

It is possible that the government wanted to send multiple signals through the move: one, that India remains attractive to foreign direct investors; two, that a foreign bank that sets up an Indian subsidiary, instead of operating through a branch in India without a separate capital structure of its own, is welcome to buy out Indian banks, complete with their extended branch network; three, that the government is capable of solving a banking problem without putting taxpayer money at stake; and, four, India might have opted, at least for the time being, to stay outside the newly launched trading bloc, Regional Comprehensive Economic Partnership, but remains committed to deepening financial ties with Asia, particularly, the Association of Southeast Asian Nations, of which Singapore is a leading member.

LVB has some 560 branches. This is a valuable asset. It could hold enormous attraction to other foreign banks as well, apart from DBS. It would have been worthwhile for RBI to sound them out, besides potential Indian investors.

Why, for example, was Clix Capital deemed an unworthy suitor? RBI would do well to abandon its old-fashioned stance that, for a regulator, silence is golden. It should state its reasons for taking a drastic step such as the present one. Arbitrariness in a regulator is not good advertisement for a how investor-friendly a country is.