Lakshmi Vilas Bank (LVB) is caught in a vicious cycle. The private lender’s previous exposures to large corporates have turned bad. As a result, the bank is required to make more provisions for bad debts. This, in turn, has ripped off the bank’s profitability besides eroding its capital. Without adequate capital, the bank is unable to make any lending, thus leading back to lower profitability.
“Profitability, capital adequacy and provisions (for non-performing assets) have made a vicious circle in the last couple of years. We now have plans to cut this cycle,” S Sundar, interim MD and CEO of LVB told
The small lender, which is under the Reserve Bank of India’s prompt corrective action (PCA) since September, has chalked out a three-pronged strategy to reverse the cycle. This includes reducing provisions (by arresting fresh slippages and intensifying recovery), increasing profitability (through zero or low-risk lending) and raising capital (via preferential issue, qualified institutional placement (QIP) or even stake-sale.)
“In the third quarter, we have made an attempt to control our NPAs and it has given positive result. So, we are reinforcing our efforts for the fourth quarter as well,” Sundar said.
LVB’s gross NPA in absolute terms grew by 21 per cent to ₹4,081 crore in the third quarter this year from ₹3,364 crore in Q3FY19. In the September quarter, the bank’s GNPA stood at ₹4,091 crore. The GNPA ratio also rose to 23.27 per cent from 13.95 per cent on a year-on-year basis in December. However, net NPA in absolute terms fell to ₹1,464 crore (₹1,716 crore) during the period.
“Going by our past recovery record, in large advances we were able to recover an average of 35-40 per cent and in small accounts, about 85 per cent,” Sundar said, adding that even by a conservative estimate, the bank expects to recover at least ₹1,800 crore from its existing NPA accounts.
“I am expecting GNPA to come down quarter after quarter. Once this comes down, the provision requirement also comes down and to that extent our profitability is also protected,” he added.
LVB made a recovery of ₹850 crore in FY19 and ₹747 crore in FY18. In the first three quarters of the current fiscal, the bank made a recovery of about ₹520 crore and expects to recover around ₹800 crore in the fourth quarter. “We should be able to show a total recovery of about ₹1,100 crore for the full year,” Sundar said.
Due to capital inadequacy, the bank is unable to make any fresh lending. So LVB is now focussing on capital-efficient lending products like gold loans. Besides being capital-efficient, these loans are risk-free due to the collateral and also offer a decent margin of 2-3 per cent to the lender.
“Our credit department has selected 175 branches to deal exclusively with gold loans. They have been given all the infrastructure support like quick account opening facilities, adequate gold appraisers, etc,” Sundar said. “We expect around ₹1,200 crore to come from gold loans this year,” the LVB CEO said.
LVB has also planned to increase its focus on micro, small and medium enterprises (MSMEs). The bank has set a revenue target of ₹2,400 crore from MSME loans. It has identified 101 branches for MSME lending and has set a target of ₹2 crore per branch per month.
The bank’s capital adequacy ratio under Basel-III stood at a low 3.46 per cent during the December quarter. This is way below the prescribed limit of 8 per cent. The bank is looking to raise around ₹2,000 crore capital through preferential issue, QIP and stake-sale.
“If we start showing profit quarter-after-quarter next year, perhaps, in the second quarter of 2021-22, we will approach the RBI to lift the PCA,” he added.