A CAMEL Model Analysis of Laxmi Vilas Bank: Causes of Failure and Lessons for the Indian Banking Sector

Abstract

The banking sector forms the backbone of the Indian financial system and plays a vital role in ensuring economic stability. However, in recent decades, the Indian banking industry has faced several crises, with institutions like IL&FS, DHFL, PMC Bank, Yes Bank and Laxmi Vilas Bank (LVB) collapsing due to mounting non-performing assets (NPAs), liquidity shortages and poor governance practices. This paper analyzes the downfall of LVB using the CAMEL model framework (Capital Adequacy, Asset Quality, Management Efficiency, Earnings, Liquidity). The study highlights that weak asset quality, liquidity crunch, erosion of net worth, governance failures and risky lending strategies to large corporates were the primary causes of the bank’s collapse. The findings emphasize the importance of sound governance, strict NPA monitoring and timely regulatory intervention in preventing bank failures. The merger of LVB with DBS Bank India in 2020 marked the first merger of an Indian private sector bank with a foreign bank, signaling a historic shift in India’s banking landscape.