Lakshmi Vilas Bank: A Stitch in time

The RBI has let the situation linger at Lakshmi Vilas Bank linger for too long. It cannot afford another accident in the financial sector after IL&FS, PMC and Yes Bank.

Last week marked the first anniversary of the Punjab and Maharashtra Cooperative Bank debacle. Even as stories of its depositors struggling to repay loans or depending on their friends for charity continued to hog headlines, a solution to the bank’s insolvency remains elusive. Policy makers may take comfort in the passage of the Banking Regulation (Amendment) Bill 2020, which brings cooperative banks directly under the ambit of the Reserve Bank, but depositors are still waiting for their money.

PMC Bank’s collapse last year was followed by the near-death experience of Yes Bank Ltd. The contagion-risk from the impending collapse of the lender adversely impacted depositor confidence across other banks and prompted regulatory intervention. An RBI led bail-out was announced for Yes Bank, to stem the systemic fallout.

Even before PMC Bank and Yes Bank, there was the collapse of IL&FS in 2018.

Given the steady stream of bad news emanating from the financial sector, the RBI has gone out on a limb to reassure deposit holders. Importantly, it has promised swift and proactive action to eliminate systemic shocks. It now needs to back this with decisive action and intervene before it is engulfed in another crisis – one which can be potentially brought on by Lakshmi Vilas Bank.

Everything that can possibly go wrong with a bank, has gone wrong with Lakshmi Vilas Bank. And while no one is calling the bank insolvent, this is what the bank truly is. RBI hopefully has a contingency plan ready, although it is not obvious what it will take for the regulator to set it in motion.

Read the full blog here.