On Wednesday, Moody’s Investors Service said DBS Bank of Singapore would boost its business in India after merging with troubled Lakshmi Vilas Bank. A draft scheme to amalgamate the troubled Lakshmi Vilas Bank (LVB) into DBS Bank India, which is entirely owned by DBS Bank Ltd was announced by banking regulator RBI on Tuesday.
Moody’s stated that the merger would strengthen DBS’ business position in India by adding new retail and small and medium-sized customers. We estimate that DBS India’s customer deposits and net loans will increase by about 50% – 70% following the merger.
Also, LVB will connect about 500 branches to the 27 branches of DBS India. India is one of DBS’ priority markets, the global rating agency said, and LVB’s acquisition suits its growth strategy.
It also added that they expect that the merger will raise the net loans of DBS in India to approximately 1.5% of company loans, from 0.9% as of June 30, 2020. The net loan exposure of DBS in India will remain limited and will not change the credit profile of the group.
With its digital strategy in India, the acquisition will allow DBS to supplement traditional physical branch banking.
Moody’s also mentioned that DBS’s main international markets are India and Indonesia, where its digital banking services are actively developing, with more than 3 million digital bank customers in these two markets at the end of 2019.
LVB will connect retail and SME (small and medium-sized enterprises) clients to the top corporate and SME-focused loan book of DBS Bank India.
LVB is insolvent, and until December 16, the RBI has introduced a freeze on transfers to major depositors and creditors.
DBS will spend about USD 345 million in LVB’s funds as part of the draft amalgamation scheme.
Further, it added that for LVB depositors and senior creditors, the acquisition would be positive because the bank will benefit from parental funding from DBS, a powerful bank.
Moody’s said the rescue phase of LVB illustrates the shortcomings in the bank resolution system of India, as the moratorium restricts complete and prompt payments to depositors and creditors, resulting in the bank’s temporary default.
Although the Indian government recently granted the RBI the right to settle a bank without a moratorium being imposed.
Moody’s also added that the Financial Stability Board’s latest report describes India as one of the G20 countries’ outliers in terms of resolution capacities.