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The proposed merger of Lakshmi Vilas Bank with Indiabulls Housing Finance will create a much stronger entity but the question is whether the Reserve Bank of India will give its blessings to the proposal.
Once the application is submitted, the RBI could take at least a month to decide on the proposed merger.
In a statement, LVB said there was no prior notification to the RBI. “While the Board has unanimously approved the resolution, the RBI Nominee Directors, as is the practice at the bank, did not have to participate in the voting or express any views,” it said, adding that the process of applying to the RBI is now on hand.
An analyst, who did not wish to be named, said: “Typically, the RBI has not been very keen on allowing real estate players in the banking sector. But given the financial situation of Lakshmi Vilas Bank, this could be a way out., The analyst also pointed out that Indiabulls Housing had unsuccessfully applied for a banking licence in 2013.
But since then, Indiabulls Housing Finance bought 40 per cent stake in British lender OakNorth Bank in 2015 with two nominees on its Board “after intense PRA [Bank of England] scrutiny on fit and proper”.
IBH has also made a case for its eligibility for a banking licence from the RBI in the investor presentation released on Friday when the deal was announced, pointing out that it has a successful track record of over 20 years.
LVB raises capital
Meanwhile, Tamil Nadu-based LVB had been scouting for possible partners for quite some time and had also raised ₹459.59 crore in March through a QIP to bolster its capital adequacy and try and avoid the Prompt Corrective Action framework of the RBI.
The private sector bank reported net losses for five straight quarters and had a net loss of ₹584.87 crore in 2017-18 with gross NPAs at 9.98 per cent.
Its financial situation has been in turmoil. The bank posted a net loss of ₹629.66 crore for the third quarter ended December 31, 2018 with gross non-performing assets at 13.95 per cent of gross advances. Its Tier-I capital is currently at 5.6 per cent and a capital adequacy ratio of 7.7 per cent.
RBI clarifies
A day after the LVB board approved the merger of the private sector lender with Indiabulls Housing Finance (IBH) through a share swap deal, the Reserve Bank of India clarified that the presence of its two nominee directors on the bank’s board does not imply approval of the proposal. The central bank, in a late evening statement on Saturday, said: “It is clarified that the merger announcement does not have any approval of the RBI at this stage. It is also clarified that presence of additional directors nominated by the RBI on the board of LVB does not imply any approval of the RBI of the merger proposal.”
Moreover, the additional directors have clearly mentioned at the meeting that they have no view on the proposal, it added. The proposals, as and when received from these entities, will be examined in RBI as per extant regulatory guidelines/ directions.
The share swap ratio of 0.14:1, or 14 shares of IBH for every 100 shares of LVB, has been agreed upon by the respective boards of directors, LVB said in a regulatory filing, adding that the deal is subject to regulatory approvals, including that from the RBI.
The two are hopeful of obtaining approvals, going by precedents — the merger of GRUH Finance with Bandhan Bank, Capital First with IDFC Bank and Bharat Financial Inclusion with IndusInd Bank.
The amalgamation comes at a time when housing finance companies are facing liquidity issues and a slowdown in loan disbursements after the IL&FS debacle.
The merged entity will have a net worth ₹19,472 crore and a loan book ₹l,23,393 crore for the nine months of FY19. Its employee strength will stand at over 14,300.
The shareholders of IBH will own 90.5 per cent of the amalgamated entity, while those of LVB will hold the balance 9.5 per cent. Indiabulls founder and Chairman, Sameer Gehlaut’s stake will come down from 21.5 per cent to 19.5 per cent. He will further bring his holding down to below 15 per cent before the merger is effective.
As a first step towards the proposed merger, IBH’s board has constituted a reorganisation committee headed by independent director and former RBI Deputy Governor SS Mundra.
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