Lakshmi Vilas Bank , which is under the prompt corrective action (PCA) norms of the Reserve Bank of India, would have received a boost if the proposed merger with Indiabulls Housing Finance would have gone through.

However, with the RBI rejecting the proposal on Wednesday , the lender would have to rework its strategy for capital-raising.

Sharekhan by BNP Paribas in a tweet on Thursday morning said, “RBI rejects merger proposal of Indiabulls Housing and Lakshmi Vilas Bank; the bank will now have to independently explore options for raising capital while Indiabulls Housing is now looking for buyback of equity shares.”

The Indiabulls Housing Finance scrip was down 17.39 per cent on BSE in intra day trade on Thursday, while LVB shares lost 5 per cent to touch a 52-week low.

The Tamil Nadu-based lender is already planning to raise about Rs 1,000 crore this fiscal. This was cleared at the annual general meeting of the lender on September 27, which approved proposals for authorising the bank to raise further capital of up to Rs 1,000 crore through equity mode and Rs 500 crore by way of Tier I / Tier II bonds. The bank is exploring various avenues for raising capital to shore up its CRAR.

The bank is also working out strategies to recover non-performing assets.

As on June 30, 2019, LVB’s capital base was lower than the regulatory requirement. Its capital adequacy ratio and Tier I CAR stood at 6.46 per cent and 4.46 per cent as June 30, 2019 (7.72 per cent and 5.72 per cent as March 31, 2019) against the regulatory requirement of 10.875 per cent and 9 per cent.

“The merged entity will be substantially capitalised ...There was a handicap we were battling with, which gets removed by a large amount. The bank was looking to raise capital and bring in strategic partners,” LVB’s former Managing Director and CEO Parthasarathi Mukherjee had told reporters in April when the merger was proposed.

LVB has been reporting losses faced with rising bad loans. It reported a significant rise in net loss at ₹237 crore for the quarter ended June 30, 2019, against a net loss of ₹124 crore in the year-ago period. Its gross NPAs as a percentage of gross advances, increased to 17.30 per cent from 10.73 per cent in the year-ago quarter and 15.30 per cent in the preceding quarter.

It had reported a loss of Rs 894.10 crore in 2018-2019 and had a net loss of Rs 584.87 crore in 2017-18.

In a regulatory filing on Wednesday night, Indiabulls Housing Finance said, “Now that the merger will not happen with Lakshmi Vilas Bank, the uncertainty of the last five months on the business is lifted and the company will focus on the growth of its core business of housing finance.”

Indiabulls Housing Finance has been looking to step into the banking sector for some time. It had applied for a banking license in 2013 as well. It had also 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 the fit and proper” norm.