Regulatory laxity

Collapsing banks points to lack of proper supervision by RBI and oversight by Finance Ministry

AuthorPublished: 20th Nov 2020  12:00 amUpdated: 19th Nov 2020  8:56 pm

The collapse of Lakshmi Vilas Bank (LVB), a 94-year-old financial institution founded by a group of seven businessmen in the small town of Karur, Tamil Nadu, exposes laxity in regulatory mechanism. The latest failure follows a string of collapses of financial institutions in the last two years, and the common factor in all these cases has been the lack of proper supervision by the Reserve Bank of India and oversight by the Finance Ministry. Stringent supervision by the central bank would have checked the malpractices in banks, especially because many of these have not been one-off affairs but a reflection of systematic neglect of checks and balances. The RBI has now proposed to merge LVB with DBS Bank India Ltd (DBIL), the Indian subsidiary of Singapore’s largest lender, DBS Bank Ltd. When it materialises, it would be the first instance of an Indian lender being amalgamated with a subsidiary of a foreign bank. The RBI’s draft scheme envisages that the entire paid-up share capital and reserves of LVB will be written off. As a result, the bank’s shares would be delisted. For a period of two years, it would be known as LVB-DBS India, after which it will fade into history. The spectacular collapse of two leading non-banking finance companies (NBFCs) — IL&FS and Dewan Housing Finance Corporation Ltd (DHFL) — in quick succession in 2018 was followed by the fall of Punjab & Maharashtra Co-operative Bank a year ago, and then the dramatic collapse of one of India’s biggest private banks, YES Bank, earlier this year.

The significance of these failures can be gauged by the fact that these four institutions had assets worth Rs 5.5 lakh crore under their control when they collapsed. For years, Il&FS was known to have indulged in “rolling over” its loans, most of it in dubious infrastructure projects. Not only was the RBI negligent, but even several other public financial institutions, among them LIC and the SBI, which held a significant stake in IL&FS, failed to scrutinise the recklessness with which the company acquired projects in its portfolio. The case of DHFL represented an outright fraud while YES Bank’s collapse was triggered by massive concentration of dubious loans that were allowed to build, which ought to have been spotted much earlier by a more diligent regulator. A year after the collapse of PMC Bank, depositors are still not able to withdraw their savings and the bank’s entire net worth has been wiped out. The string of fiascos since the Nirav Modi affair has brought into focus the utter lack of supervision.

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