India's central bank has proposed a scheme to merge the ailing Lakshmi Vilas Bank (LVB) with DBS Bank.
The move would involve DBS, South-east Asia's biggest bank, injecting 25 billion rupees (S$452 million) of fresh capital into its wholly owned India subsidiary DBS Bank India.
Chennai-based LVB has been struggling with financial decline and red ink for the past three years.
It incurred a loss of around $150 million in the 12 months to March 31. Its net worth has also shrunk while unpaid loans have increased.
LVB is the fourth Indian bank to have had a near-death experience in the past two years, forcing the central bank to bail them out.
"LVB, like many private sector banks, is full of anachronisms. Based in small towns, it couldn't attract enough good talent," said Mr Amit Tandon, founder of Institutional Investor Advisory Services.
"It didn't modernise fast enough... its old hands didn't step down as directors to infuse fresh capital and ideas even as the bank deteriorated."
India's central bank advised LVB in September last year to reduce bad assets and bring in new capital. A string of investors showed interest, including SREI Capital, Indiabulls Housing and, most recently, Clix Capital.
"Discussions dragged on for months, especially with Clix. LVB's inability to get its arms around any of the investors was a telling sign that things weren't okay. That's why the central bank stepped in," said Mr Tandon.
The central bank imposed a one-month moratorium on LVB on Tuesday, capped deposit withdrawals at 25,000 rupees and unveiled the proposed merger with DBS soon after.
LVB's share price has crashed with its eroded net worth and shareholders will be written off without a stake in the new entity, but the central bank has repeatedly assured depositors that their interests will be protected.
The merger might be broadly positive for DBS, banking analysts said.
It has been in India since 1994 and converted its operations into a wholly owned subsidiary DBS India that was incorporated in March last year.
"DBS has since wanted to build its portfolio of low-cost liabilities and lend to small and medium enterprises. These two drivers will benefit if DBS acquires LVB," said a banker who did not want to be named.
Despite the size of LVB's non-performing assets, a merger would give DBS a valuable customer base and a sizeable branch network in India.
DBS has only around 30 branches in India, but could gain LVB's over 560 branches and 970 ATMs across the country, especially in Tamil Nadu.
LVB has over 210 billion rupees in deposits as at September.
DBS Singapore said the proposed amalgamation would provide "stability and better prospects" to LVB's customers and employees following a time of uncertainty. It would also allow DBS India "to scale its customer base and network, particularly in South India, which has longstanding and close business ties with Singapore".
It is awaiting confirmation from the Indian central bank.
DBS has a history of moving into other territories like Hong Kong and Taiwan through similar acquisitions of large banks.
"How it will work in India, only time will tell. The key challenge will be integration of the two banks, especially given LVB's large unionised staff and other systemic issues," said the banker.