When a bank fails the loss falls on depositors mostly but in case of this take over, the depositors accounts simply move over to the DBS Bank. This is a striking new avenue for rehabilitation of weak Indian banks. The question is: will this remedy be more widely available.

Unlike in this case, the law provides that when a bank fails the depositors would get just small fraction of their deposits kept for no fault of theirs. Late finance minister, Arun Jaitley, had moved a bill for raising the amount refundable to the depositors but surely not in full.

Why this is important is that for the functioning of the financial sector, confidence and trust are the foundation stone. If people feel nervous about the future of their money in banks, their trust in banks will vanish and the ordinary saver will not know where to go for safe-keeping.

Bank failures do not happen every other day and for the public sector ones, it is the latent faith that since the government is the owner, people’s money is guaranteed. Few know that by legislation the reality is otherwise.

In this sense the DBS take over is a landmark. It could thus serve as a model for rehabilitation of weak Indian banks.

Many banks in India are currently facing existential threat and consequently those who have kept money in the banks often face total loss of their life-time savings. So for their depositors this model could be a life line.

Unlike what happened to the depositors of the Punjab and Maharashtra Co-operative Bank, whose funds were frozen after RBI intervention, the Lakshmi Vilas Bank depositors would be able to access their funds right away.

DBS Bank, which is headquartered n Singapore, has possibly taken the Tamil Nadu based Lakshmi Vilas mainly on account of the large Tamil population in that city-state. It should be possible for DBS Bank to capture the substantial volume of transactions between the Singapore based Tamils and their dear ones and families back home.

The model for DBS takeover of Lakshmi Vilas as a subsidiary bank, will enable DBS to get the same treatment as any Indian bank registered in India. It will have no restrictions on opening branches, as applies to all foreign banks operating in India.

Many weak banks have so far been taken over or merged but this is the first time that a foreign banks has come in as the rescuer. Global Trust Bank, BCCI, and more recently Yes Bank have been bailed out when they had run aground. But in all these cases either Indian public sector banks or in one case, a private bank has been the white knights.

State Bank of India, which is the biggest in terms of deposits and branch networks, has been the most frequently used one which had to step in for rescuing smaller weak and failing banks. Country’s second biggest bank, Punjab National Bank, had also taken over a number of smaller banks to bail them out. In the latest round of bank consolidation, PNB has taken over United Bank of India, which was one of the bigger PSBs.

In fact, given their current position, many more banks would be facing the same position in the post-covid period.

Many banks have been asked to give support to their lenders when the lock-down was declared. The banks had to fund their operations of their beleaguered borrowers for the time being. But once the situation normalises, not all of them would be in a position to pay back their loans. Thus many of these banks would need to be rescued.

The government might also not be in a position to intervene and support these weaker banks as the fiscal deficits have mounted in the period since lock-down. This will be a major issue for financial sector in India and therefore some viable options would be needed for rescuing the weak banks in near future.

Large public sector banks have huge accumulated losses and bad debts already which have eaten away their own funds, that is, the bank’s own capital in the form of paid-up equity. In view of the seriousness of the problem of bad debts, both RBI and the union government have to take up programmes for restructuring these banks.

Their restructuring might call for some fundamental reforms and restructuring of public sector banking so as to make them attractive for take over by large and established foreign banks.

The first such hindrance is the restriction on private holding in public sector banks. It might be time to let private sector investors, including overseas entities, controlling shares in them. This will mean amending the banking nationalisation act.

There are also restrictions on opening fresh branches. Currently, a quarter of all new branches will have to be compulsorily in unbanked and rural areas. Such practices might not be cost-effective. A taken over bank might need just a few critical branches for relaunching their operations.

In the context of the interest showed by the DBS Bank in acquiring Indian assets, the policy makers must also now consider how other foreign banks could be attracted to invest in Indian banks. Given the size of the growing Indian markets, Indian banks might seem to be lucrative purchases for some of the biggest banking corporations world over. (IPA Service)