Home / Markets / Mark To Market /  A quick RBI prescription needed for comatose Lakshmi Vilas Bank

The festering troubles at Lakshmi Vilas Bank are a reminder that proactive regulatory interference is the best course of action to safeguard depositor interest. The Reserve Bank of India (RBI) has both a success and a failure this year as a lesson in rescuing ailing banks. Punjab and Maharashtra Co-operative (PMC) Bank has been an unfortunate disaster, with its depositors at risk of losing money. On the other hand, Yes Bank’s rescue was certainly swifter and better orchestrated. Both cases involved governance issues, something that bothers Lakshmi Vilas Bank shareholders as well.

In this bank’s case, shareholders have taken the first step of voting out the directors they feel responsible for the mess.

On Friday, shareholders voted against the reappointment of seven directors, including the managing director, at the annual general meeting.

Deep rot
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Deep rot

The central bank needs to pick up the ball quickly and put in place a plan to revive the bank. Clearly, its prompt corrective action (PCA) hasn’t worked. In fact, this regulatory quarantine that restricts the bank from lending has only made the situation worse.

“This is an issue where the best date has already gone by," said Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services (IiAS). The advisory firm had warned shareholders on the governance of the bank ahead of the AGM on Friday.

As pointed earlier, RBI hasn’t covered itself with glory after the disastrous outcome of PMC Bank. But it could escape blame since cooperative banks’ operations are also overseen by state governments. However, any tardiness shown with Lakshmi Vilas Bank would reflect poorly on the regulator.

Lakshmi Vilas Bank has seen its gross bad loans triple, its advances shrink by 30% and its capital wither away in the past three financial years. The bank has also seen three managing directors and futile attempts to get investors over this period.

But the biggest trouble for the bank is its inability to bring in capital. Lakshmi Vilas Bank, in all respects, is insolvent since it has negative equity capital. The ousting of the directors has rendered the current negotiations with Clix Capital for stake sale uncertain. “The bank’s case is rather complicated. Its performance doesn’t attract good investors. And the investors the bank wanted to get money from did not make the cut with the regulator. Only the regulator can fix this," said a consultant requesting anonymity.

Analysts believe that the best course of action is, unfortunately, a shotgun marriage for the bank. Meanwhile, its depositors are not sitting for a solution. The bank’s deposits have dropped 26% in the past year. That shows depositors have woken up to the troubles.

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