a machine on the side of a building: RBI-India-Lakshmi Vilas Bank

© Provided by Quartz
RBI-India-Lakshmi Vilas Bank

The unravelling of a 93-year-old small private bank is now threatening to destabilise India’s Rs97 lakh crore ($1,3 trillion) banking system.

On Sept. 25, shareholders of Chennai-based Lakshmi Vilas Bank’s (LVB) ousted managing director and chief executive officer S Sundar along with seven directors on allegations of mismanagement and poor governance. Sundar had been appointed to the bank in January this year.

Even though LVB is a fairly small player in India’s financial sector, analysts believe that the timing of this incident could have an outsized impact on the industry. India’s banking system, which is reeling under a spate of corporate defaults, is facing a fresh wave of bad loans triggered by the Covid-19 slump. Besides, the collapse of Punjab Maharashtra Co-operative (PMC) bank, Yes Bank, and IL&FS had riled the financial system over the last two years.


Load Error

“The Reserve Bank of India has let the situation at Lakshmi Vilas Bank linger for too long. It cannot afford another accident in the financial sector after IL&FS, PMC, and Yes Bank,” said Institutional Investor Advisory Services (IiAS).

The big banking mistake

The implosion at LVB did not happen overnight. In fact, the decay had been setting in for a long time.

The bank was founded in 1926 by a group of businessmen in the southern Indian state of Tamil Nadu with an aim to finance small businesses in the region. With this principle at its core, the bank continued to grow its loan book gradually, posting decent profits and paying a good dividend to its shareholders.

But between 2008 and 2017, it decided to change its unique strategy and copy what large banks were doing.

At the time, India’s leading private lenders such as ICICI Bank and Axis Bank were focusing on