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RBI bails out Lakshmi Vilas Bank, Know what a failed bank is?

Know what went wrong with Lakshmi Vilas Bank and other similar incidents


The RBI imposed a 30-day moratorium on Lakshmi Vilas Bank and put a draft scheme in place for its amalgamation with DBS Bank India, a subsidiary of DBS of Singapore. The Reserve Bank of India’s action has raised safety concern on the financial system.

What went wrong with Lakshmi Vilas Bank?

The Reserve Bank of India said that the financial position of the Lakshmi Vilas Bank has undergone a steady decline because of continuous losses in the last three years. Lakshmi Vilas Bank is a Chennai based private sector bank which has a network of 563 branches and deposits of Rs 20,973 crore. The bank has not been able to raise adequate capital to address these issues. It was also experiencing continuous withdrawal from its customers putting it in a liquidity problem. Lakshmi Vilas Bank showed a net loss of Rs 397 crore in the September quarter of this financial year. It had shown a loss of Rs 112 crore in the June quarter earlier. Almost 25 per cent of the bank’s advances have turned bad assets. The gross NPA stood at 25.4 per cent of its advances, which was 17.3 per cent last year.

The RBI put a cap of withdrawal limit of Rs 25,000 for the customers of the bank. However, the central bank has ensured that the interest rates  of the depositors will be protected. The combined balance sheet of the Lakshmi Vilas Bank and DBS India will remain healthy after the proposed amalgamation.


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Other Recent cases of Bank failures

The IL&FS defaulted in payment obligations of bank loans (including interest) and triggered a liquidity crisis in the financial services market. IL&FS and its subsidiaries owed Rs 99,354 crore. The collapse of IL&FS set off a chain reaction in the financial sector and led to liquidity issues. PMC Bank (Punjab and Maharashtra Co-operative Bank) was hit by a loan scam involving HDIL promoters and the bank hasn’t been bailed out yet. Yes Bank lost out on capital from both depositors and debtors early this year as it had loaned too much money to the firms. And when the bank faltered on NPA, depositors lost faith and started withdrawing their money which created a huge financial problem for the bank. RBI had to step in and bail-out both the PMC and the Yes Bank as it capped the withdrawal limit. State Bank of India bought Yes Bank’s shares worth Rs 7,250 crore at Rs 10 per share.


Why do banks fail?

Banks have failed in India mainly because they have lent too much of loan to firms, who are then not in a position to pay it back. This becomes non-performing assets for banks and once the bank falters on NPA, depositors lose faith in the bank. They start withdrawing the money so that they don’t lose their hard-earned money which creates a liquidity problem for the bank.

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