Why has Lakshmi Vilas Bank fallen by more than 50 per cent over the past year?

BL Research Bureau

For south-based private sector lender, Lakshmi Vilas Bank, funding chunky corporate assets has led to sharp rise in bad loans and provisioning over the past two years, eating into its earnings and capital. The RBI recently put the bank under Prompt Corrective Action (PCA) on account of high net non-performing assets (NPAs), insufficient capital, negative return on assets (RoA) for two consecutive years and high leverage. This was based on the RBI’s Risk-Based Supervision carried out for the year ended March 31, 2019.

For Lakshmi Vilas Bank that is awaiting regulatory approvals for the proposed merger with Indiabulls Housing Finance (which was expected to resolve the bank’s capital issue), multiple headwinds have led to its stock price halving over the past year. While the RBI placing it under PCA does not imply restrictions on operations by depositors, it puts restrictions on its lending to corporates and other stressed sectors. With the bank’s weak capital already limiting its lending — the loan book has shrunk in FY19 and in the June 2019 quarter — and sharp rise in bad loans leading to the bank reporting notable losses, the RBI’s latest move only suggests more pain ahead for the bank.

Deteriorating finances

For LVB, a very old private sector bank, troubles began with its fast-paced growth in loans in the recent past, mainly on account of funding chunky corporate assets. From 2.7 per cent in March 2017, gross NPAs as a per cent of loans shot up to 17.3 per cent in the latest June 2019 quarter. About 35 per cent of the bank’s loan book pertains to the corporate segment, while MSME is another 20 per cent; retail is just about 10 per cent of overall loans.

In terms of sectors, infrastructure is about 38 per cent of loans, textile 27 per cent and metals another 20 per cent. Exposure to high-risk sectors have impacted the bank’s performance.

The bank had announced a watchlist of ₹2,500 crore in March 2017. Slippages from this book over the past two years have led to sharp rise in provisioning, impacting earnings. In the March 2018 quarter, owing to accelerated NPA recognition (post RBI’s earlier February 2018 circular on stressed assets), the bank reported a huge ₹1,600 crore of slippages, leading to a loss of ₹584 crore in FY18.

Interestingly, while the bank’s watchlist fell to nil by the third quarter of last fiscal, slippages continued, impacting performance in FY19 as well, when the bank reported a higher loss of ₹894 crore.

As a result, the bank’s Tier 1 capital was abysmally low at 5.7 per cent as of March 2019, which further fell to 4.46 per cent as of the June 2019 quarter (below the RBI requirement of 7 per cent; 8.875 per cent including capital conservation buffer). The bank raised about ₹188 crore in July this year, by way of preferential share allotment to Indiabulls Housing Finance, which increases its Tier 1 capital to 5.56 per cent, but it is still below the mandated requirement.

More pain ahead

After growing by about 19 per cent CAGR between FY14 and FY18, the loan book has shrunk by about 15 per cent in FY19. In the June 2019 quarter, loans declined by 21 per cent YoY and 6.3 per cent QoQ. The corporate loan book shrunk by a sharp 36 per cent YoY. The bank’s deposits also fell by about 11 per cent in the June quarter. Significant rise in bad loan provisioning led to the bank continuing to incur loss during the April-June quarter.

There appears to be more pain for the bank in the coming quarters. For one, the chunk (68-70 percent) of the bank’s GNPAs pertain to the corporate sector, where the persisting stress is likely to keep slippages elevated in the coming quarters. The bank’s exposure to lower-rated corporate book is also notable. About 28.5 per cent of the loans is below BBB rated. This could continue to lead to notable slippages. The bank’s SMA1 (where payments are overdue by 31-60 days) and SMA2 (overdue by 61-90 days) books are about 59 per cent of the portfolio.

Given the persisting stress in the book and the RBI’s PCA placing restrictions on lending, the bank’s earnings will continue to be under pressure. The biggest issue for the bank is its weak capital base. Lakshmi Vilas Bank has been looking to raise capital for over a year. The merger with Indiabulls Housing was expected to address the issue. It needs to be seen, if despite the RBI’s PCA and other challenges, the deal is able to pass muster with the regulator. If not, then the capital issue would remain a key challenge for the bank.

Other issues

Recently, the Economic Offences Wing had registered an FIR under complaint for offences of cheating, criminal breach of trust by the banker, criminal misappropriation and criminal conspiracy against the board of directorsof LVB. The FIR was based on a complaint filed by Religare Finvest pertaining to adjustment of their deposits against the dues of RHC Holding Pvt Ltd and Ranchem Pvt Ltd.

In response to those allegations, the bank in a statement, had said that it was committed to cooperating with the investigating agencies and regulatory authorities to bring out the malicious attempts of Religare Finvest to mislead the public to cover up massive fraud indulged by their promoters/ employees/ group companies.