Lakshmi Vilas Bank Ltd which in troubled waters, has now 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 predicted 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.
Future course of Action:
- Only possibility of the bank’s survival now is that an investor should invest a chunk amount as capital.
- However, the hurdle of this plan seems to be regulatory approval. 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 suspicion of non-bank lenders with real estate exposure.
- Investors are hoping that the RBI would be kinder this time. They quote the example of Fairfax’s success with Catholic Syrian Bank. If nothing else works, this is the only route to take forward is the saying.
- Options of merger with another bank may not work out as most private lenders are preoccupied with dealing with the fallout of the Corona Pandemic and absorbing a sick bank at this juncture is seen to be the least of priorities.
- Public sector banks on the other hand have just emerged from a mega merger season.
Note:
- In the past one week the share of Lakshmi Vilas Bank have surged 21% over the previous week.
- On release of this news, the stock was up 5% for the consequent second day.
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