Context: The Union Cabinet, chaired by the Prime Minister has given its approval to the Scheme of Amalgamation of Lakshmi Vilas Bank Limited (LVB) with DBS Bank India Limited (DBIL).
Benefits of amalgamation:
- There will be no further restrictions on the depositors regarding withdrawal of their deposits.
- It is in line with the Government's commitment to a clean banking system while protecting the interests of depositors and the public as well as the financial system.
- The government had earlier on the advice of the RBI imposed a 30-day moratorium on the crisis-ridden LVB restricting cash withdrawal at Rs 25,000 per depositor.
- The RBI simultaneously placed in public domain a draft scheme of amalgamation of LVB with DBIL, a banking company incorporated in India under Companies Act, 2013.
- The Reserve Bank had also superseded the board of the LVB and appointed an administrator of the bank for 30 days.
- It was done to protect depositors' interest and the interest of financial and banking stability.
- LVB is the second private sector bank after Yes Bank which has been troubled this year.
- The government rescued Yes Bank by asking state-run State Bank of India to infuse Rs 7,250 crore and take 45 per cent stake in the bank.
Prompt Corrective Action(PCA)
- It is a framework under which banks with weak financial metrics are put under watch by the RBI.
- Applicable: The PCA framework is applicable only to commercial banks and not to co-operative banks and non-banking financial companies (NBFCs).
- It may be noted that of the 21 state-run banks, 11 are under the PCA framework.
- It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.
- Essentially PCA helps RBI monitor key performance indicators of banks, and taking corrective measures, to restore the financial health of a bank.
- The PCA framework deems banks as risky if they slip some trigger points - capital to risk weighted assets ratio (CRAR), net NPA, Return on Assets (RoA) and Tier 1 Leverage ratio.
- It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios.
Measures under PCA
- Depending on the threshold levels, the RBI can place restrictions on dividend distribution, branch expansion, and management compensation.
- Only in an extreme situation, breach of the third threshold, would identify a bank as a likely candidate for resolution through amalgamation, reconstruction or winding up.
What is amalgamation?
- An amalgamation is a combination of two or more companies into a new entity.
- Amalgamation is distinct from a merger because neither company involved survives as a legal entity.
- Instead, a completely new entity is formed to house the combined assets and liabilities of both companies.
- Types of amalgamation
- An amalgamation can be in the nature of purchase or merger.
- Amalgamation in the nature of purchase is when one company acquires another where the transferor’s business is discontinued.
- This means the shareholders of the transferor entity no longer have a proportionate share in the combined equity of the parties to the amalgamation.
- Amalgamation in the nature of merger, on the other hand, combines the assets and liabilities, including the interest of the shareholders as well as the business of the parties to the amalgamation.
- The merger is a process wherein two or more companies/entities are combined to form either a new company or an existing company absorbing the other target companies.
- Basically, it’s a process to consolidate multiple businesses into one business entity.
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