Indiabulls Housing Finance Ltd. plunged on Thursday, as the rebuff to its plan to merge with Lakshmi Vilas Bank Ltd. put a dent in hopes that shadow lenders could use such combinations to get better access to liquidity. The Reserve Bank of India rejected the merger plan, Chennai-based Lakshmi Vilas said in an exchange filing late Wednesday, without disclosing the reason for the central bank’s decision.
Shares of Indiabulls Housing fell as much as 13% in morning trade in Mumbai on Thursday, while the shadow lender’s dollar bonds also slumped. Lakshmi Vilas’ shares fell close to 5%.
Hurt by the spreading crisis among India’s non-bank financing companies, the two lenders had planned to combine in a bid to increase profitability and bolster capital. Indiabulls was looking to diversify its asset base and get access to low-cost funds, while Lakshmi Vilas Bank needed to raise capital and exit from the curbs placed on its lending.
"My sense is NBFCs will now be extra careful in approaching authorities with any kind of merger plan," said Gaurang Shah, senior vice president at Geojit Financial Services Ltd.
When the merger plan was first announced, it raised speculation that other Indian banks could become takeover targets as more shadow lenders sought combinations to overhaul their business models and resolve their liquidity problems.
For Lakshmi Vilas, the RBI’s rejection may push it into the arms of another bank or force it to find private equity investors to raise capital quickly.
Indiabulls dollar bond fell by a record after regulator rejected its merger proposal
Earlier this month, an Indian court and the police moved to begin separate investigations to examine allegations of fraud and misappropriation against Indiabulls and Lakshmi Vilas. Both companies have denied any wrongdoing.
The RBI cited high level of bad loans and insufficient capital to absorb risks as it brought Lakshmi Vilas under the so-called prompt corrective action last month. Lakshmi Vilas Bank’s losses swelled to 2.37 billion rupees ($33 million) in the quarter ended June. Bad loans accounted for 17.3% of total lending, almost double the industry average.
Other such mergers may go ahead if the RBI is happier with the two parties seeking to combine, some analysts suggested.
The plan “wouldn’t have created an organization that would be a value add for all stakeholders," Anil Singhvi, founder of proxy advisory firm IiAS told BloombergQuint. The RBI “would have seen it as a merger of two weak players rather than two strong players."
India has been rocked by a crisis among shadow banks, whose lending has been a lifeblood for everyone from small merchants to tycoons. The non-bank financing companies’ balance sheets have come under greater scrutiny after the collapse of Infrastructure Leasing & Financial Services Ltd. last year highlighted broader debt concerns.
That’s complicating the South Asian nation’s battle against a bad-loan problem that it needs to clear up to help promote investment and revive economic growth.
“This doesn’t mean the end of the road as far as our journey as a financial services player is concerned," Ajit Kumar Mittal, executive director at Mumbai-based Indiabulls Housing said in an interview broadcast on CNBC-TV18 late Wednesday.
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.