The government on Wednesday approved the merger of crisis-ridden Lakshmi Vilas Bank (LVB) with DBS Bank India Ltd (DBIL) and removed restrictions on withdrawal of deposits by depositors.

The Union Cabinet has approved the merger of the LVB with DBS Bank India Limited, Union Minister Prakash Javadekar told reporters, adding the decision will provide comfort to 20 lakh depositors and protect the services of 4,000 employees.

"Cabinet approves Scheme of Amalgamation of Lakshmi Vilas Bank with DBS Bank India Limited; with this there will no further restrictions on the depositors regarding the withdrawal of their deposits," the official spokesperson said in a tweet.

The minister said that those responsible for deteriorating financial health of the LVB would be penalised.

The government had earlier on November 17 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 the public domain a draft scheme of amalgamation of LVB with DBIL, a banking company incorporated in India under Companies Act, 2013, and having its Registered Office at New Delhi.

The Reserve Bank had also superseded the board of the LVB and appointed T N Manoharan, former non-executive chairman of Canara Bank, as an administrator of the bank for 30 days.

LVB is the second private sector bank after Yes Bank which has run into rough weather during this year. In March, capital-starved Yes Bank was placed under a moratorium. 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.