What Lakshmi Vilas Bank account customers should do post imposition of moratorium?

The Reserve Bank of India (RBI) has placed Lakshmi Vilas Bank (LVB) under a one-month moratorium till December 16, 2020. During the moratorium period, withdrawals for depositors have been capped at Rs 25,000. The central bank has further said that LVB is proposed to be acquired by Singapore-based DBS Bank India as per the drafted amalgamation scheme.

To quell fears of LVB's customers, RBI, in its press statement issued on November 17, 2020, has clarified that depositors need not panic and their interests will be fully protected. Added to this, TN Manoharan, the RBI-appointed administrator of Lakshmi Vilas Bank, on Wednesday said that depositors' money is safe and expressed confidence of completing the lender's merger with DBS Bank India within the deadline set by the regulator.

Now, if you are customer of LVB, you would be understandably worried about the future of the bank and more importantly, your own money in the bank. Obviously, you have seen in the recent past what happened to depositors at PMC Bank in September last year and YES Bank in March this year.

So, let us look at what are the restrictions placed under the one-month moratorium for LVB depositors, what accountholders should do and what they can expect once the merger with DBS India is completed.

• Restrictions under moratorium

RBI said that the decision to place the bank under moratorium was taken because: "The financial position of The Lakshmi Vilas Bank has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth. Further, the bank is also experiencing continuous withdrawal of deposits and low levels of liquidity. It has also experienced serious governance issues and practices in the recent years which have led to deterioration in its performance. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019 considering the breach of PCA thresholds as on March 31, 2019."

Under the moratorium period (till December 16, 2020), withdrawals for depositors have been capped at Rs 25,000. The withdrawal limit for all types of accounts held by a depositor cannot exceed Rs 25,000. Thus, the withdrawal cap is per depositor and not per account.

However, higher withdrawals are allowed to meet unforeseen expenses such as medical treatment of the depositor or any person dependent on the depositor, cost of higher education of the depositor or any other person dependent on the depositor in India or outside India, for marriage of the depositor or his children or any other person dependent on the depositor or in connection with any other unavoidable emergency. The withdrawal amount in the exception cases cannot exceed Rs 5 lakh, stated RBI.

Here's what a savings account holder needs to do.

• Stop all auto-credits into your LVB savings account

If your salary or any other income such as dividends on shares etc was being auto-credited into your LVB savings account then immediately inform the payer to route the credits to an alternative savings account of yours. If you don't have another savings account then you need to open one with a well-established, large, financially stable bank.

You need to inform the payer of these incomes in writing that you want the payments credited into a different bank savings account i.e. change the earlier bank mandate given to the payer. Once LVB-DBS merger is complete, you can then evaluate whether you want to continue your existing LVB savings account (post its merger with DBS) and restart the credits into the account.

• Regarding auto-debit from LVB accounts during the moratorium period

If you have given mandates for auto-debit of mutual fund SIPs, loan EMIs, insurance premium payments etc., from your LVB account then these payments will be debited from your LVB account provided the total amount of debits does not exceed Rs 25,000 during the moratorium period. If the total amount exceeds Rs 25,000, then you may face issues. Therefore, request the financial institution which is receiving the auto-debit money to accept alternative payment mechanism. Ask if the auto-debit during the LVB moratorium can be avoided.

Further, the RBI has clarified that if a depositor has taken a loan from LVB whose EMI due date falls during the moratorium period, then such EMIs will be debited from the depositor's account. Remaining balance in account, if any, will be available for withdrawal purposes. For instance, assume you have taken a loan from LVB whose EMI is Rs 13,000 and EMI debit date is 25 of every month. This means that from your LVB account, you will be eligible to withdraw Rs 12,000 only (Rs 25,000 - Rs 13,000) during the moratorium period.

• Post the merger with DBS India

Deposits: Going by previous mergers, it is likely that there will be changes in the interest rates and even the terms and conditions offered on various types of deposits. Thus, once the merger between LVB and DBS India is completed, depositors who wish to continue their accounts with the merged entity should keep a track of the interest rates offered on their savings account, fixed deposits, recurring deposits etc.

IFSC code: Another thing to keep in mind is that post the merger, the IFSC codes will also change. This means that customers who wish to continue their accounts with the merged entity, will have to register new bank mandates wherever they have used the IFSC code for auto-debit purposes; this could be with mutual fund houses, insurance companies, NPS deposits etc.

Loans: The RBI notification has clarified that if LVB has received the full payments against the any due amounts from the borrowers, then the bank can release the securities that have been pledged, hypothecated, or mortgaged during the moratorium period.

However, once the merger is completed, the borrower should keep track of the interest rate offered to them on their on-going loan by DBS India. If the interest rate ends up being higher, then you will have to take a call on whether you want to continue servicing the loan with the merged entity or transfer your loan to another bank.

• Deposits are insured for up to Rs 5 lakh

Depositors need to remember that their deposits are insured for up to Rs 5 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, this is usually applicable if the bank is liquidated. After announcing the one-month moratorium on withdrawals, the RBI has put out the draft amalgamation scheme to merge the LVB with the DBS Bank.