Will the Reserve Bank of India (RBI) rely on the mergers & acquisition (M&A) experience of private sector banks such as ICICI Bank and Kotak Mahindra Bank (KMB) to mount a rescue plan for the troubled Lakshmi Vilas Bank (LVB)?

Financial market experts feel that if the proposed amalgamation of the ‘Clix Group’ with LVB, which could lead to surplus capital of about ₹1,500 crore from Clix Capital becoming available to the bank on merger, does not materialise then the latter’s merger with either ICICI Bank or Kotak Mahindra Bank may be the best option.

They feel the regulator could possibly offer some regulatory dispensation to the acquiring banks to encourage a takeover.

ICICI Bank has vast M&A experience, having acquired Bank of Madura (2000), Sangli Bank (2007) and Bank of Rajasthan (2013). KMB had acquired ING Vysya Bank in 2015.

Moreover, ICICI Bank and KMB have raised capital in the last few months. ICICI Bank mopped up ₹15,000 crore via allotment to eligible qualified institutional buyers in August 2020. KMB raised ₹7,442.50 crore via a Qualified Institutional Placement (QIP) of equity shares in May 2020.

The resources raised by these two banks could come in handy if they make up their mind on acquiring LVB.

Experts also point out that the RBI had addressed problems at YES Bank in the interest of depositors and financial sector stability and the case of LVB also calls for similar intervention.

The plan to merge LVB with ICICI Bank or KMB is likely to be considered only if the proposed transaction with Clix doesn't go through, they said. However, efforts are on to ensure that normalcy is restored at the lender at the earliest.

Clix Group, LVB merger proposal

LVB had signed a preliminary, non-binding letter of intent (LoI) with Clix Capital Services Pvt Ltd and Clix Finance India Pvt Ltd (collectively, the ‘Clix Group’) as on June 15, 2020 in relation to the proposed amalgamation.

The proposed amalgamation was subject to completion of mutual due-diligence in the exclusive window of 45 days.

On July 30, 2020, LVB, in a regulatory filing, said “the parties hereto have started the due diligence review...however, on account of the current pandemic and the travel restrictions, the due diligence process and inter-party discussions have suffered unexpected delays.”

So, the exclusivity was extended till September 15, 2020 to include other post due diligence and preparation for regulatory filing requirement.

On September 15, 2020, LVB said: “We wish to inform that the mutual due diligence is substantially complete, and the parties are in discussions on the next steps.”

Precarious state

The 94-year old LVB is in a precarious state when it comes to its capital and bad loans position. The bank incurred a loss of ₹836.04 crore during the year ended March 31, 2020. It has been incurring losses for the past 10 quarters and has incurred loss of ₹112.28 crore in the first quarter of FY21.

As per the “Limited Review Report on the unaudited quarterly financial results (ending June 2020)”, the bank’s auditor observed that there has been a steady decline in the Bank's deposit base since September 2019 and increase in the NPA (non-performing asset) ratios.

“The Bank's Tier 1 Capital ratio has turned negative, at (0.88) per cent and (1.83) per cent as at March 31, 2020 and June 30, 2020 respectively, as compared to the minimum requirement of 8.875 per cent.

“This requires the Bank to take effective steps to augment its capital base in the year 2020- 21. We are informed that the Bank routinely evaluates capital raising options,” the auditor said.

Cost to income ratio for the quarter ended June 2020 was at 99.95 per cent as against 114.45 per cent in the year ago quarter.

The Reserve Bank of India initiated Prompt Corrective Action (PCA) for LVB in September 2019. Under PCA, the bank is required to bring in additional capital, restrict further lending to corporates, reduce NPAs and improve the Provision Coverage Ratio to 70 per cent.