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For south-based private sector lender Lakshmi Vilas Bank (LVB), raising capital has been a critical issue, particularly after the RBI rejected the merger plan with Indiabulls Housing Finance last year. The bank announced that it has signed a preliminary, non-binding letter of intent with the Clix Group for a proposed amalgamation, has raised hopes for the capital-starved bank. The stock has rallied 5 per cent post the announcement.
But the proposal has to pass muster with the RBI that had turned down Indiabulls Housing’s merger with LVB last year. If this capital raising effort fails yet again, the troubles of the loss-hit bank could only worsen going ahead.
Weak finances
For LVB, a very old private sector bank, troubles began with its fast-paced growth in loans, led by chunky corporate assets. From 2.7 per cent in March 2017, gross NPAs as a per cent of loans are 23 per cent as of December 2019. About 37 per cent of the bank’s loan book pertains to the corporate segment, while MSME is another 19 per cent; retail is just about 11 per cent of overall loans.
In the December quarter, the bank saw a 27 per cent decline in advances and 23 per cent fall in deposits. In the nine months ended December 2019, the bank reported a loss of Rs 929 crore. As a result, the bank’s Tier 1 capital stood at a very low 1.46 per cent as of December 2019 (against mandated 8.875 per cent) and total capital adequacy at 3.46 per cent (mandated level of 10.875 per cent).
The RBI had put the bank under Prompt Corrective Action (PCA) last September on account of high net non-performing assets (NPAs), insufficient capital, negative return on assets (RoA) for two consecutive years and high leverage. The proposed merger with Indiabulls Housing Finance was expected to resolve the bank’s capital issue, and hence the RBI’s rejection of the merger plan came as a huge setback for the private sector bank.
The proposed amalgamation with the Clix Group, if comes through, could offer respite on the capital front. But the weak finances of the bank remain a key concern, and could deteriorate sharply as the impact of Covid plays out in the coming quarters.
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