Lakshmi Vilas Bank's Financial Crisis Sparks Panic Among Customers

Mythili Krishnamoorthi is distraught - her family faces a medical emergency and requires a large sum of money. But all her savings are now under a withdrawal moratorium imposed by the Reserve Bank of India (RBI) on Lakshmi Vilas Bank. The Chennai resident is desperate for the banking regulator to approve her plea for exemption to withdraw up to Rs 5 lakh.

"Rs 25,000 for a month is not enough when the house is going through a medical problem. I don't know what is going to happen. I hope the exemption announced works for me," a deeply worried Krishnamoorthi told NDTV.

Haima Ramakrishnan, a senior citizen and a customer of Lakshmi Vilas Bank for 43 years has just withdrawn Rs 25,000 permitted for a month. "I wanted to make use it (the withdrawal limit) and draw the money. For those completely dependent on this bank, it could be alarming," Ms Ramakrishnan said.

Thousands like her and Ms Krishnamoorthi went into panic after the central government on Tuesday placed the Tamil Nadu-based private sector lender under a moratorium, capping withdrawals. The Finance Ministry later said that depositors will be allowed, with RBI permission, to withdraw over Rs 5 lakh for medical, education, and wedding expenses.

Lakshmi Vilas Bank, which needed capital urgently due to its worsening asset quality, has been scrambling to find a buyer for the past one year.  

It had Rs 13,800 crore in outstanding loans, while losses had jumped to Rs 397 crore last quarter from Rs 347 crore a year ago. Bad loans shot up from 21.25% to 24.45% of its loan book.

The RBI has now proposed its merger with DBS Bank India, a subsidiary of Singapore-based DBS Bank. DBS Bank India is expected bring in Rs 2,500 crore as capital upfront.

"In the absence of any viable strategic plan, declining advances and mounting non-performing assets, the losses are expected to continue. The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses," the RBI has said, citing severe governance issues at Lakshmi Vilas Bank.

RBI has requested Lakshmi Vilas Bank and DBS Bank India to send in their suggestions and queries over the amalgamation by 5 pm on Friday. The central bank will take a final view on the situation after that.

The All India Bank Employees Association has, meanwhile, hit out saying that for three years it was known that the management had doled out a lot of "bad loans" to firms, some of which - Jet Airways, Nirav Modi group, Cox & Kings, and Religare - have now collapsed.

These developments have left the bank's customers worried about their money.

For instance, Sundar and his wife Raja Rajeshwari on Wednesday rushed to close their fixed deposits with a Chennai branch. "The bank did not even send customers an SMS alert. I want to play safe."  

In Mumbai, Ramesh Telang, a milk delivery entrepreneur, is worried about his entire working capital of Rs 2 lakh now stuck with the bank. "I don't know what to do now. There is no work in any case. I had started a small business, but now without money that will also stop. I used to survive on this. Earlier I was into tiffin services. That stopped too as schools are shut," said Mr Telang, one of the millions affected by the COVID-19 pandemic.

The crisis is now being highlighted as yet another example of people's trust eroding in the banking system.