The merger of LVB-DBS May Set Precedent for the RBI

The merger of LVB-DBS May Set Precedent for the RBI

By: Ashwathy Nair

• The merger would serve as a template for the RBI to rescue other struggling banks.
• Rules by the RBI, limit foreign banks from dominating the Indian banking system.
• Unless the banks have a pan-India footprint, it cannot compete with the likes of ICICI Bank and HDFC Bank.

The merger that is being proposed of capital-starved (LVB) Lakshmi Vilas Bank with the DBS Bank, which is a local arm of Singapore could serve as an example for the (RBI) Reserve Bank of India in order to save other banks that are struggling.

Allowing the acquisition of a foreign bank and a weak local rival would not only open up more options for the banking regulator as it pursues well-capitalized entities with deep pockets but also the exclusively owned subsidiary structure of the Indian operations builds a barrier among the local entity from being affected by adverse progress at the parent organization.

In 2014, after foreign banks were allowed to set up a wholly-owned subsidiary by the central bank, the first foreign bank that received a banking licence was DBS. By allowing the banks to open branches anywhere in the country, the subsidiary structure brings the lender on par with local banks.

While foreign banks are being encouraged by the Reserve Bank of India to set up fully-owned subsidiaries in India, there is no compulsion for them to create one.

The managing director and chief executive officer of the State Bank of Mauritius, which is the second foreign bank to create a wholly-owned unit in India, Sidharth Rath stated that “The acquisition of an Indian bank is a smart strategy. For the regulator, clients and the acquiring bank, it’s a win-win scenario. We’re currently a start-up bank, looking to expand on the strength of our book. As of now, we are not looking at inorganic possibilities. However, we will look at it in the future”.

It was stated that the rules of the Reserve Bank of India limit foreign banks from dominating the Indian banking system as there is a threshold beyond which it cannot be operated by them.

As per the rules by World Trade Organization, licences might be denied to new foreign banks if their share of assets in India, both on and off the balance sheet, reaches 15 per cent of the total assets of the banking system.

The challenge that is being faced by foreign banks is the integration between the two business cultures after an acquisition.

The other obstacle faced by international banks is the integration between the two business cultures after an acquisition. Compared to Indian banks, which have a more conventional client-focused approach, foreign banks and employees are trained in digital skills and have good underwriting processes.