Even as depositors expressed a negative sentiment as they were barred from withdrawing more than Rs 25,000 from LVB, Finance minister Nirmala Sitharaman lauded the move. She told Bloomberg TV that the LVB-DBS merger had opened up the banking sector and sent the “right message” to the world.
The BJP-led government seems to recklessly continue with its path of privatising state-run banks. Sitharaman hinted that more banks would be privatised to put in place a “healthy banking system”.
The RBI almost never arranges a bailout of a bank. But after the pandemic-induced melting down of banking assets and the crisis of 2018, the RBI’s hand has been forced -- both in case of Yes Bank in March and now the LVB.
On November 27, LVB and DBS were amalgamated. Later, it became clear that Lakshmi Vilas Bank would be able to retain its identity even as its logo was tweaked and its name boards altered. RBI has also announced that the new bank is financially sound.
Batting legend Sachin Tendulkar has been roped in by DBS Bank to convey the following message: “A better tomorrow begins with a safer today. Lakshmi Vilas Bank is now part of DBS, Asia’s safest bank.” The maestro is the brand ambassador of DBS for the last five years.
In a notification on Lakshmi Vilas Bank’s website, customers have been informed that they can continue to use their existing bank accounts, debit cards and cheque books seamlessly for transactions pan-India as earlier.
Meanwhile, shareholders of LVB have tasted success, with the Madras High Court refusing to stay the merger, but made a cautionary note. “Even if the authorities have the power to reduce the share value during an amalgamation under section 45 of the Banking Regulation Act, reducing it to zero prima facie cannot be done without very, very compelling reasons,” a division bench of the HC consisting of Justice Vineeth Kothari and Justice MS Ramesh said.
Before the merger, as of November 2020, LVB had 556 branches in 19 states and one union territory. The bank also has deposits worth over 20,000 crore.
After Tier-2 bonds were written down by the LVB as part of the merger, borrowers have approached the Supreme Court of India. However, as advised by the RBI, LVB has written down bonds worth Rs 318 crore.
“Lakshmi Vilas Bank was a lender for small businesses. Now it has become part of a large corporation. It was caught in quicksand and the RBI had to act in a responsible manner. It’s all a question of raising capital and continuing with the process of onward lending. The deals with India Bulls and Clix Capital fell through. Now, DBS has come out with an effective package worth Rs 2,500 crore,” said one business analyst.
Stimulus also spoke to an array of journalists covering the issue. “For a while Lakshmi Vilas Bank has been reporting losses. For nearly 10 quarters, the bank was incurring losses,” a journalist told Stimulus on condition of anonymity. “In September 2019, LVB was put under prompt corrective action (PCA). This is a measure put in by the RBI to improve a bank’s performance,” the journalist said.
After the RBI tightened the screws on Lakshmi Vilas Bank, it was mandated that the bank reduce their non-performing assets or bad loans. There were restrictions imposed on the bank, preventing it from opening new branches or giving dividends. The bank is also required to bring in new inflows. “It was at this time that Clix Capital, which is a non-banking finance company,” the journalist said.
Meanwhile, TN Manoharan, a former non-executive chairman of Canara Bank has been brought in as administrator. “The bank will soon start to operate seamlessly,” he told media persons on November 18.
The crisis in the banking sector can be traced back to at least late in 2018 when the shadow banking issue began. In March this year, Yes Bank had to be bailed out by a consortium of banks including HDFC and SBI. “The government is desperately trying to consolidate the private banking sector and is trying to boost investor sentiment,” another analyst told me.
“2018 was a bad year for the banking sector. Even since then, the government has been trying to make the smaller banks healthier,” the journalist told Stimulus.
Reason why LVB is placed under moratorium
Based on the recommendation of the Reserve Bank of India (RBI), which regulates the functioning of all Banks in the country, the Centre initiated the move to place the Lakshmi Vilas Bank (LVB), a leading private bank-cum-money lender, under moratorium. RBI’s decision was aided in no small measure by the tangible decline in the Bank’s financial status as indicated by the balance sheet for more than the past three financial years.
Losses are likely to continue for some more time as the LVB doesn’t appear to have chalked out any alternative strategy to arrest the declining advances or to check the increasing non-performing assets (NPAs). Also, LVB’s inability to raise the desired capital so as to resolve issues regarding its negative net-worth and non-stop losses is also cited as a reason provoking the RBI to act in the way it did. Moreover, mismanagement on the part of the Bank’s high-level administration has only compounded the issue of continual withdrawal of deposits and low liquidity levels. As a result of these collective factors, the RBM moved in during September, 2019 and placed LVB under the Prompt Corrective Action (PCA) framework.
Cornerstone of LVB’s financial mess lay in going off target and focussing mainly on lending loan to SMEs. Moreover, LVB’s fortunes nose-dived when it lent a whopping loan of Rs.720 crore to Ranbaxy (Malvinder Singh) & Fortis Healthcare’s (Shivinder Singh) against FDs valued at Rs.794 crores. In May, 2019, LVB requested RBI’s consent to merge with the Indiabulls Housing Finance and the Indiabulls Commercial Credit to meet its desired capital requirements. However, the deal fell through because of RBI’s reluctance to allow realty-focused companies into the field of commercial banking.
In an attempt to merge with Clix Group, LVB signed a preliminary (non-binding) letter of intent in June, 2020 after suffering a loss of Rs.836 crores in the financial year ending March, 2020. Downward financial trend continued as LVB recorded a loss of Rs.397 crores in the second quarter of 2020-21, which was actually 11.4% more than the loss of Rs.357 crores in the corresponding quarter during the last financial year. Bad loans stood at 7.01% as of September, 2020.
What the future holds for LVB?
In all likelihood, LVB is likely to be merged with DBS Bank (India) Ltd., which is a wholly-owned subsidiary of the Singapore-based DBS Bank Ltd.
On Tuesday, the RBI came up with a draft proposal to merge LVB, a private sector money-lender, with DBIL [DBS Bank (India) Ltd.] The RBI’s merger proposal of LVB and DBIL was conceived by invoking the special powers vested with it under Section 45 of the Banking Regulation Act, 1949.
In RBI’s interpretation, the merger was aimed to provide stability and to bolster the financial prospects of LVB’s employees, customers and depositors after they faced a tough period of uncertainty. “Subsequently, merger would enable DBIL to enhance its operations in South India and strengthen its customer base,” RBI said further.
Tapping its existing resources, the DBS will provide Rs.2500 crores (equivalent to SGD 463 million) to DBIL if the proposed merger comes through. However, for the time being, though, the DBS will have to wait for the Govt. of India and the RBI’s final decision in this regard before revealing its further course of action.
What’s brewing at LVB at present?
On 25.9.2020, the 93rd AGM (annual general meeting) of LVB voted against 7 members (including the interim MD-CEO Sundar) out of 11 members as the shareholders were obviously disappointed with the increasing bad loans and the overall erosion of the Bank’s reputation. They also expressed their fears as to what the future held for the LVB.
A 3-member committee comprising Satish Kumar Kalra, Shakti Sinha and Meeta Makhan was appointed by the RBI to run the LVB with the cooperatin of the remaining four Board members. A chief administrator would also be appointed soon by the RBI, it is learnt.
Origin of LVB’s troubles
Looking back, it is now apparent that LVB’s conscious decision to move away from SMEs to large business during 2016-17 started its downslide. The Bank’s decision to lend a whopping loan of Rs.720 crore to Ranbaxy (Malvinder Singh) & Fortis Healthcare’s (Shivinder Singh) against FDs valued at Rs.794 crores backfired as it turned out to be a bad debt.
As if adding fuel to the fire, one of LVB’s Delhi branches was sued by Religare Finvest (part of Religare Enterprises) in 2018 for recovery of FDs worth Rs.800 crores which the Branch had to invoke in order to recover loans taken by the Singh brothers. Once a case was registered, the RBI notified the LVB under PCA (prompt corrective action) in September, 2019 thus making it impossible for the Bank to issue fresh loans or open new branches. Till date, the PCA remains in force; the case, in which a couple of LVB employees have been arrested, is still sub-judice.
Merger of LVB and Indiabulls Housing Finance didn’t occur
Pushed to the brink and experiencing shortage of capital, LVB commenced talks was and began talks with Indiabulls Housing Finance, a NBFC company, for a possible merger. However, to LVB’s horror, RBI came up with yet another verdict within a month after placing it in the PCA framework: RBI denied permission to LVB’s merger plans with the Indiabulls Housing Finance, without assigning any reason. Financial experts are of the view that the very idea of an NBFC company acquiring a Bank wasn’t worth considering. LVB was thus forced to look for another investor for funding in the absence of any other option.
Merger of LVB and Clix Capital
After its merger deal with Indiabulls Housing Finance fell through, the LVB initiated merger talks with Clix Capital. In stark contrast to an LVB official’s claim that merger talks were going on smoothly, a Clix Capital official said that LVB’s financial mess had derailed the deal. Amid the confusion out of these conflicting claims, LVB’s shareholders approved the Bank’s merger with Clix; however, necessary regulatory approval wasn’t forthcoming.
LVB’s financial status
With a market cap of Rs.680 crores, LVB is placed at the second spot among the 21 listed Banks in the country. Bad debts had dealt a severe blow to the bank’s overall financial status. In 2018, LVB’s gross NPA stood at 10%, increased to 15.4% in 2019 and reached 25% in 2020. Promoters too have pledged their shares; notably enough, investments in LVB via FII/DII investments have gone up quite considerably during the past four years.
What the future has in store for LVB?
To begin with, LVB has to wait for a few more months to emerge out of the PCA tag, even as it has started focussing on tapping the capital. A Bank official lets the cat out of the bag by revealing that no significant change has gone into the Bank’s working style and the way depositors view it. LVB sees no gloom in the near future though it is going through an arduous journey.
It is rumoured in the banking industry that the RBI would push LVB hard for an imminent merger. As the merger would be a systematic risk, the matter is said to be under active consideration of the Union Ministry of Finance. RBI is said to be expvloring the possibility of asking the public sector Punjab National Bank (PNB) to acquire LVB.
Many unconfirmed and contrasting reports are emerging in the media about the future of the LVB. As of now, there has been no official word from RBI or any other authority about what the future holds for the Bank. It is certain that LVB could redeem itself to a great extent if its proposed merger with Clix is realized.
LVB’s shares dip from Rs.185 to Rs 10
LVB was founded in 1926 by a 7-member group of entrepreneurs headed by V.S.N. Ramalinga Chettiar hailing from Karur District in Tamil Nadu. In its 94 years of existence, LVB has expanded with 566 branches and 918 ATMs operating across 19 States and one Union Territory in the country.
LVB’s market cap is more than Rs.600 crores while its gross NPA for the financial year 2019-20 stands at 25.4%. LVB has completed 62 successful years as a scheduled commercial bank and a year under the PCA framework. LVB has almost 40% of its total branches in Tamil Nadu. During the past five years, LVB’s share prices had varied from Rs.185 (in 2017) to Rs.10 (in March, 2020).