RBI’s decision in the LVB-Indiabulls merger case is prudent

| Updated on October 13, 2019 Published on October 13, 2019

But the regulator owes markets an explanation

After pondering over the merger proposal between Indiabulls Housing Finance and Lakshmi Vilas Bank for a good six months, the RBI has finally decided not to give it the go-ahead this week. This could well be in the best interests of depositors and the Indian banking system. While both Lakshmi Vilas Bank (LVB) and Indiabulls Housing have sought to put a positive spin on this rejection, they may now have to work harder on alternative means to address their business challenges.

The RBI’s decision to nix this merger appears prudent on two counts. When the merger was first proposed in April, it was seen a coming together of two troubled entities. Hit by the freeze in institutional lending to realty-focussed non-banks after the IL&FS/DHFL crises, Indiabulls Housing Finance was essentially hoping to piggyback on LVB’s branch network to garner a low-cost retail deposit base that could resurrect its loan growth. LVB on its part, which was saddled with gross NPAs of over 13 per cent and a precarious capital adequacy of 7.5 per cent, was hoping to lean on Indiabulls’ large loan book and fee income to prop up its profitability and capital base. Allowing two such entities to operate a bank may have undermined the interests of public depositors and investors. That LVB’s financial position has since worsened enough for it to be swept into RBI’s Prompt Corrective Action framework and the Indiabulls group has been the subject of a public interest litigation alleging financial irregularities, further muddy these waters. Letting a non-bank entity merge with a bank to secure a banking licence would also have set an undesirable precedent for future contenders to the RBI’s hard-to-get universal banking licences. Now that the RBI has put these licences on tap and has defined the eligibility criteria, it would be best if NBFCs or housing finance companies seeking to convert into banks are required apply directly to the RBI for conversion into universal banks, without taking recourse to back-door routes.

While the RBI’s decision is unexceptionable, the investors in the two listed entities who have been subjected to a roller-coaster ride in the last six months, have reason to be aggrieved at the opaqueness of this decision-making process. With the RBI refraining from conveying any reasons for its refusal, rumour mills in the stock and bond markets are now working overtime making it an uphill task for both LVB and Indiabulls Housing to chart a recovery from this setback. The merged entity, as per the amalgamation plan, was expected to be fully compliant with RBI’s capital and prudential lending norms, apart from meeting all its conditions for a universal banking licence, making it all the more imperative for the RBI to disclose the reasons for its rejection. This will serve as a guidepost not only to investors and the markets at large, but also to all other entities who hope to apply for on-tap licences in future.

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Published on October 13, 2019
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