RBI’s swift resolution of Lakshmi Vilas Bank to help maintain stability in banking system: S&P

S&P Global Ratings has said that the Reserve Bank of India's (RBI) swift resolution of distressed Lakshmi Vilas Bank (LVB) will keep contagion at bay and help maintain stability in the banking system. The central bank has proposed merging Lakshmi Vilas Bank with DBS Bank India (DBIL). As part of the proposal, DBIL will bring in additional capital of Rs 2,500 crore upfront, to support credit growth of the merged entity.

S&P has believed that this deal is positive for India's banking sector and will bring much-needed relief to LVB, which has been struggling for many years. It also said the RBI had put the private-sector lender under prompt corrective action (PCA, or under watch by the central bank) in September 2019, and the search for a white knight had been on since then.

The US-based rating agency further said it has always viewed the Indian government as highly supportive of the banking sector as it has consistently supported weak commercial banks by promoting the merger of distressed institutions with stronger lenders. It has historically not allowed commercial banks to fail and has swiftly stepped in to address trouble. In this case also, the RBI and the government stepped quickly to prevent any loss to the creditors, including depositors, and maintain system stability.