LVB, Indiabulls will benefit significantly from merger, says Parthasarathi Mukherjee

Lakshmi Vilas Bank has been looking to raise capital for over a year. We have engaged with investment bankers and PE funds for some time now. So, while M&A may not have been the first choice, it was an offer that we had to consider seriously, and when such a proposal was made by Indiabulls, we looked at it. Since September last year, NBFCs have been facing multiple challenges. Our bank, too, has been facing headwinds and, hence, the merger proposal makes sense to both parties. I also wish to clarify that it’s not as if one party is the white knight here. Both parties stand to benefit significantly from this.

In the first place, I would not like to second guess the regulator’s thinking. Moreover, I would not phrase it as ‘challenges’. Clearly, there is a process. The process might even be considered complex. It’s our job to ensure that we have put in clear cogent replies to all the queries that they might have. We need to clearly show that we are conscious of the issues that might be there and that we have appropriate mitigants in mind.

We are making all efforts to ensure that it does not happen. LVB recently approved a proposal for allotment of shares on preferential basis to lndiabulls Housing Finance, comprising 5 per cent of the bank’s equity. This will result in fund infusion of about ₹190 crore. All efforts are on to ensure that we are adequately capitalised until the merger approval comes through. We are also trying to speed up the process of approval from both our ends.

In the first place, we recognise that the bank needs to run on its own till the merger process is completed. We will continue to look to raise capital as required, and also ensure that the capital that we have is more efficiently deployed. I am not contemplating a scenario where the transaction will not go through.

I believe the synergy kicks in from day one. Every additional rupee of cheaper funding will help the merged entity. Indiabulls already has good spreads (yield on loans, less cost of borrowings) and, hence, once we add our business, our low-cost funding base will immediately help the entity. Having said that, we will have to look at specific balance sheet items to understand the complications that may be there, and bring in appropriate mitigants.

LVB’s business is more of a well-rounded one while Indiabulls leans more towards real estate. So, initially, the exposure of the merged entity to real estate will be quite high. We will have to work at removing that imbalance quickly.

The business of the merged entity over the medium term would be retail-focussed, similar to the strategy and vision of LVB.

LVB is a very old private sector bank that has done well for most part of its history. Over the past 10 years, the bank has grown substantially faster than in the past. And this was achieved by funding chunky corporate assets. While the going was good, these businesses delivered well, but when the tide turned, we got hit. Over the past year, we have taken it on the chin, but the good part is that much of the stress has played out in the bank’s book. So, incremental stress will be much lower. In this process, we have strengthened our operations and ushered in governance in lending operations.

Currently, corporate loans constitute about 37 per cent. Retail is low at 10-11 per cent, the balance is SME. Going ahead, the ideal mix by 2026 (our centenary year) will be 30 per cent SME, 30 per cent retail, and the balance corporate and agri.

With the merger, there will be a spike in retail (real estate) loans initially. But eventually, we would want to lean towards the ideal mix.