Mumbai: Baring Private Equity Asia is in talks with Lakshmi Vilas Bank to buy at least a 26% stake in the Chennai-based private lender, said two people close to the development. Lakshmi Vilas Bank is keen to sell as much as 51% if permitted by the Reserve Bank of India (RBI) but bad loans may cloud a potential deal as Baring wants to value the lender at about $400 million, a far cry from Lakshmi Vilas Bank’s expectation of $1 billion, said the two people, who did not want to be named.

“The bank has been in talks with both BPE Asia and another strategic firm. The bank is hoping to seal the deal in the next six months," said the first person.

The person said the vast disparity in Lakshmi Vilas Bank’s valuation is because “non-performing assets of the bank have risen considerably in the last one year and there will be a requirement to make additional provisions in future as well." The person did not provide details of the strategic firm which is also separately in talks with Lakshmi Vilas Bank.

Lakshmi Vilas Bank’s gross non-performing assets (NPAs) widened sharply to 10.73% as of June 2018, from 3.78% as of end-June 2017.

For the first quarter of fiscal year 2018, the bank swung to a loss of 124 crore from a profit of 66 crore a year earlier. Gross advances stood at 26,127 crore last quarter.

A spokesperson for Baring PE Asia declined to comment.

“It may be indicated that the bank is in discussions with prospective investors. All details have been reported to the stock exchanges," Lakshmi Vilas Bank’s MD and CEO P. Mukherjee said in response to an emailed query.

Lakshmi Vilas Bank plans to use the fresh funds to boost its capital adequacy which has been falling, said the first person. As on 30 June, its capital adequacy stood at 9.45% as against 9.81% a quarter ago.

“Lakshmi Vilas Bank is keen on selling up to 51% stake, if allowed by the Reserve Bank of India. It is seeking a valuation of around $1 billion but this is too high considering the financials and market capitalization," said the second person cited above.

If the central bank permits Lakshmi Vilas Bank to sell 51% to a foreign investor, it will be the second such instance in recent times where a foreign non-banking entity will be allowed to take over a domestic bank.

In February 2018, Kerala-based Catholic Syrian Bank announced that Prem Watsa-owned Fairfax Holdings Ltd will be picking 51% stake in the bank.

On Tuesday, The Economic Times reported that several investors including Aion Capital Partners, Blackstone Group, Carlyle and True North were engaging with Lakshmi Vilas for a stake purchase.