Moody's Investors Service said that Singapore's DBS Bank will strengthen its India business after the merger with beleaguered Lakshmi Vilas Bank.
The Reserve Bank of India (RBI) had announced a draft scheme to amalgamate the troubled Lakshmi Vilas Bank (LVB) into DBS Bank India, which is fully owned by DBS Bank Ltd.
Lakshmi Vilas Bank brought under moratorium; RBI proposes merger with DBS Bank India
“The merger will strengthen DBS’s 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 percent-70 percent following the merger,” Moody’s said in a note.
LVB will also add around 500 branches to DBS India's 27 branches. India is one of DBS’s priority markets, and the acquisition of LVB fits DBS’s expansion strategy.
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The global rating agency estimates that the merger will increase DBS’s net loans in India to around 1.5 percent of group loans, from 0.9 percent as of 30 June 20201. DBS’s net loan exposure in India will remain small and will not alter the group’s credit profile, it said.
Moody's is of the view that the acquisition will help DBS complement traditional physical branch banking with its digital strategy in India. India and Indonesia are DBS' core foreign markets where it is actively growing its digital banking services, and had more than 3 million digital bank customers in these two markets at the end of 2019.
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Further, LVB will add retail and SME (small and medium enterprises) customers to DBS Bank India's mostly corporate and SME-focused loan book.
LVB is insolvent and the RBI has introduced a moratorium on payments to large depositors and creditors until December 16. As part of the draft amalgamation scheme, DBS will invest around $345 million in LVB's capital.
“The acquisition will be positive for depositors and senior creditors of LVB because the bank will benefit from parental support from DBS, a very strong bank,” Moody’s said.
It added that LVB's rescue process highlights the deficiencies in India's bank resolution mechanism as the moratorium restricts full and timely payments to depositors and creditors, thereby leading to a temporary default by the bank. This is despite the fact that the Indian government recently gave powers to the RBI to resolve a bank without imposing a moratorium.
“The recent report by the Financial Stability Board identifies India as one of outliers among the G20 countries in terms of resolution powers,” Moody’s noted.