Will Lakshmi Vilas Bank get a rescuer this time?
- Lakshmi Vilas Bank's capital adequacy ratio was a pitiful 3.46% in December of which tier-I capital was a mere 1.46%. The regulatory minimum for a healthy bank is 8% and 5% respectively
Troubled Lakshmi Vilas Bank has got a second shot at survival through a non-binding agreement with a private equity investor.
Pramod Bhasin-promoted Clix Capital Services Pvt. Ltd and Clix Finance India Pvt. Ltd want to buy stake in the bank. Both these firms are held by a private equity firm AION Capital. Media reports have pegged the eventual stake anywhere between 45% and 65% through a merger of Clix Capital Services and the bank. The bank will get a capital infusion of ₹2,300-2,500 crore.
The south-based private sector lender has been in talks with various institutional investors for capital for long now. These talks resumed after the Reserve Bank of India (RBI) refused to approve a merger with Indiabulls Housing Finance Ltd last year.
Lakshmi Vilas Bank's capital adequacy ratio was a pitiful 3.46% in December of which Tier-I capital was a mere 1.46%. The regulatory minimum for a healthy bank is 8% and 5% respectively.
What is worrisome for the bank is that despite being in the prompt corrective action (PCA) scheme of the RBI, its capital has seen steady erosion. PCA is like an intensive care for a weak bank wherein its lending activities are restricted so that it conserves capital.
In the case of Lakshmi Vilas Bank, the decay in its loan book has been fast, leading to accelerated provisioning and hence capital erosion. The bank was placed under the PCA in September 2019, when its capital adequacy ratio was at 5.5%.
Since it cannot grow its loan book under PCA, bad loan ratios look even more daunting now.
The lender’s only shot at survival is an investor putting in a chunk of capital. But the biggest hurdle of this plan seems to be regulatory approval. The RBI did not give reasons for denying permission to the proposed merger of Lakshmi Vilas Bank with Indiabulls Housing Finance but most analysts attributed it to the regulator’s wariness of non-bank lenders with real estate exposure.
Investors are hoping that the RBI would be kinder this time around. “There is the example of Fairfax’s success with Catholic Syrian Bank. If nothing else works, this is the route to take,” said an analyst requesting anonymity.
Options of merger with another bank may not work out as most private lenders are preoccupied with dealing with the fallout of the pandemic. Absorbing a sick bank will be the least of priorities. Public sector banks on the other hand have just emerged from a mega merger season.
Share of Lakshmi Vilas Bank have surged 21% over the last one week. The stock was up 5% for the second day today in response to the news of investment.
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