Tag: LVB

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Editorial

Lakshmi Vilas Bank Is Sinking. RBI Comes To Its Rescue

The Lakshmi Vilas Bank(LVB) has been a troubled-child for the Reserve Bank of India(RBI) since last year. The bank currently faces a liquidity crunch. It’s poor performance, constant losses, rising bad debts, and bad liquidity have brought it close to the edge of a cliff. Eventually, the RBI had to come to its rescue.

You can read more on what went wrong with Lakshmi Vilas Bank in the first place here.

The RBI has decided to pursue the following action to prevent LVB from going bust:

  • The RBI has decided to place LVB under a moratorium till 16th December. Customers of the bank cannot withdraw more than Rs 25,000 from the bank till 16th December unless under emergency. 
  • The board of the bank has been dissolved and the RBI has appointed former non-executive chairman of Canara Bank T.N. Manoharan as the administrator of the bank
  • RBI has also drafted a merger plan for Lakshmi Vilas Bank and its suitor DBS India Limited. DBS India Limited(DBIL) is the Indian arm of Singapore-based DBS Bank. The RBI decided to do so after LVB’s plans to merge with financial-services company Clix Capital failed. 

After the announcement, the shares of Lakshmi Vilas Bank fell 20% and hit the lower circuit.

About The Merger

Low on liquidity, LVB was in merger talks with financial-services company Clix Capital for a long time. In fact, the two had made sufficient progress and reached a credible stage. The RBI had given the two a deadline to finalize the merger. The RBI was persistent on it since LVB had problems with liquidity and couldn’t have gone without the necessary cash for long. LVB’s merger with Clix Capital would have brought in the capital of up to Rs 1,900 crores and assets worth Rs 4,600 crores from Clix Capital. The two however failed to go ahead with the deal. Therefore, the RBI started looking for suitors for Lakshmi Vilas Bank. 

Kotak Mahindra Bank, DBS Bank, Brookfield Asset Management, Everstone Capital-backed Indo Star Capital Finance showed interest in acquiring LVB. The RBI decided to favor DBS Bank for its strong financials, strong balance sheet, low bad loans, and its interest in expanding in India. 


According to the Draft Proposal by RBI, DBS would infuse upfront capital of Rs 2,500 crore in Lakshmi Vilas Bank. This deal is beneficial for DBS since this will add a large number of customers and up to 500 branches under DBS’s umbrella. DBS wishes to expand its footprint in India. The merger will increase DBS’s Net Loans from 0.9% to 1.5% in India, this is a small number and therefore won’t affect the bank’s credit profile. LVB also plans to raise an additional Rs 500 crores through a rights issue. 

Why is the Market Bitter About the News?

According to the draft plan, the reserve & surplus and paid-up capital – the money that the company receives from shareholders in exchange for shares– will be written off. Its value will become zero. To put up in simple words– shareholders could lose all their money.

Additionally, Lakshmi Vilas Bank as a separate entity will cease to exist and will be delisted from all exchanges in India. DBS India Limited on the other hand is an unlisted company in India. This serves as a huge blow since Lakshmi Vilas Bank’s 77% stake is owned by the ‘public’ with only 6% owned by the promoters. The rest is owned by Mutual Funds and Institutional Investors. Shareholders are currently blown by the news, while some are even planning legal action in case the merger goes through.

Why LVB Needs A Merger, If Any.

LVB’s gross non-performing assets (GNPAs) are too high at 24.45%, even the net NPAs are high at 7.01%. This means too much bad debt. The bank’s Tier 1 Capital ratio has turned negative, It is a key measure of a bank’s financial strength. The Capital Adequacy Ratio (CAR) as per Basel Ill guidelines is at negative 2.85%, the requirement is a minimum of 3%. The CAR shows whether the banks have enough capital on reserve to handle a certain amount of losses. Clearly, LVB doesn’t have it. 

The Reserve Bank of India (RBI) had placed the bank on PCA(Prompt Corrective Action) framework in September 2019, citing rising debts and inadequate capital. Under PCA, a bank’s lending is restricted, the bank is required to arrange a certain capital and meet certain conditions placed by the RBI.

The current management of the bank has failed miserably at securing investment and mergers. The bank was unsuccessful at its merger with India Bulls Housing Finance last year and now with Clix Capital. It is clear that top-level management is inefficient and in the middle of a crisis.

Lakshmi Vilas Bank has Rs 20,000 crore in deposits and Rs 17,000 crore in advance. The banks have the hard-earned money of many individuals and small-time businesses at stake. It’s a sticky situation since, on one hand, we have the money of depositors at stake and on the other hand, we have the interest of shareholders at stake. RBI and Lakshmi Vilas Bank need to keep both their interests in mind and take the best possible action. A merger, not necessarily with DBS, is crucial for LVB to survive.

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Editorial

Mayhem at Lakshmi Vilas Bank

Lakshmi Vilas Bank (LVB) has been in headlines lately. The shareholders in the Annual General Meeting ousted 7 of their senior management including CEO and MD S. Sundar. The shareholder even voted against the re-appointment of its statutory auditors. Yes, even the auditors! Previously, Lakshmi Vilas Bank had been facing a series of resignations from top officials, failed investment prospectives, rising Bad Debt, and poor financial performance. Is Lakshmi Vilas Bank headed for real trouble now? Or can Lakshmi Vilas Bank get out of this mess, like Yes Bank?

Poor Financials

  • LVB has been posting a loss for the last 10 quarters. Subsequently, the loss for the quarter ending June stood at a whopping Rs 112.3 crores.
  • The company’s Gross Non-Performing Assets (NPA) has risen from 10.7% in June 2018 to a very high of 25.4% in June 2019. Gross NPA is the sum of all loans given out by the bank, which have not been paid back duly or, in simple terms, sum of all loans that have gone bad. Having a 25.4% Gross NPA means that 25.4% of all the loans the bank has given have gone bad.
  • The Reserve Bank of India (RBI) had placed the bank on PCA(Prompt Corrective Action) framework in September 2019, citing rising debts and inadequate capital. Under PCA, a bank’s lending is restricted, the bank is required to arrange a certain capital and meet certain conditions placed by the RBI.
  • The Capital Adequacy Ratio(CAR) of the bank as of June 2020 stands at 0.17% as opposed to the minimum 9% limit set by the RBI. CAR is the amount of capital a bank retains as compared to its risks. It tells us whether to not the company will be able to absorb losses in wake of an uncertain event. Essentially it tells us about the financial health of the company, and in the case of Lakshmi Vilas Bank, it is not looking good.

Too Many Resignations? Internal Conflict? Poor Management?

  • There is a noticeable pattern in voting out of the senior officials in the AGM. In the ousting of the senior officials, 80% of the promoter group was IN FAVOR of retaining them, while only 20% were AGAINST retaining them. It was because of the vote of the retail and institutional shareholders that they were ousted from the bank. This could be because of internal politics in the board of the bank.
  • The company’s then-CEO and MD Parthasarathi Mukherjee resigned in August 2019. In September 2019, the company was placed under Prompt Corrective Action by the RBI. This was around the time LVB and Indiabulls Housing Finance Limited were planning a merger which was struck down by the RBI in October 2019.
  • The Then-CFO S.Sundar along with three senior officials had resigned due to ‘administrative reasons’. The next day, he was appointed as interim CEO and MD. In September 2017, he was ousted along with 6 other officials in the Annual General Meeting.
  • Vice President and Chief Risk Officer D Krishnakumar resigned in April 2020. The reason for his resignation was not stated.
  • In 2019, Religare Finvest, a financial services company accused LVB and two of its promoters of siphoning off funds up to Rs 793 crores. Economic Offences Wing of the Delhi Police arrested two of its ex-employees in connection with the case. LVB denied all claims and stated that RFL made the accusation to cover-up their own instance of fraud.

Recent Developments

The point is, LVB is having a capital crunch. The shareholders voted in favor of raising the foreign shareholding limit to 74 percent and also voted in favor of a rights issue to meet capital needs. The RBI has also set up a 3-Member Committee to look after the functioning of the bank temporarily.

LVB is in talks with Clix Capital, a Non-Banking Financial Company (NBFC), for a merger. Both have signed informal agreements for the merger and also completed the due diligence for the same. The merger may bring up capital of up to Rs 1,900 crores and assets worth Rs 4,600 crores from Clix Capital. There is still an uncertainty after the board room scuffle during the AGM. RBI wants this deal to go ahead as soon as possible. If the deal doesn’t click, the RBI may push for a merger with a larger bank.

Clix Capital has given a non-binding offer letter to LVB, offering to take close to 90% stake in LVB. Clix Capital has also sought an exemption from the mandatory three-year lock in period for sale of shares. This gives a hint about the deal going through.

There is definitely some internal problems within the senior management. However, the depositor’s money is safe, but only to a point. The liquidity coverage ratio of the bank is 262% against the RBI norm of 100%, this means it can easily meet its short term obligations easily. Investors and Bank Account holders need to watch out how LVB raises capital, gets a new, faster, and more efficient CEO, and steps taken by the bank to reduce NPAs and allot capital efficiently.