Now that the Reserve Bank of India has rejected the proposal for the voluntary amalgamation of Indiabulls Housing Finance Ltd and its 100 per cent subsidiary, Indiabulls Commercial Credit Ltd, with Lakshmi Vilas Bank (LVB), the moot question is whether the latter will be able to rise like a phoenix like Dhanlaxmi Bank did, or meet Global Trust Bank's fate.
By putting LVB, which is low on capital and high on bad loans, under prompt corrective action (PCA) late last month even as it was seized of the matter relating to the proposed amalgamation, the regulator probably hinted that it wants the bank to nurse itself back to health, and that the proposed amalgamation, which would have brought in precious capital to sustain the bank, would not pass muster.
The regulator will keenly watch how the PCA, entailing narrowing lending to relatively less risky segments, paring risk-weighted assets, stepping up recovery from bad loans, restricting branch expansion, among others, and a capital raising plan will pan out over the next couple of quarters before it makes the final call.
Given that Dhanlaxmi Bank has been given three years to repair its balance sheet and come out of PCA (in February 2019), the regulator, in the interest of fairness, could be expected to give LVB at least some time to do the same.
The RBI initiated PCA for LVB on September 27, 2019, on account of its high net non-performing assets (NPAs), insufficient Capital to Risk-weighted Assets Ratio (CRAR) and Common Equity Tier 1, negative Return on Assets (RoA) for two consecutive years and high leverage, based on the on-site inspection under the Risk-Based Supervision carried out for the year ended March 31, 2019. The RBI has two nominee directors on the board of the bank.
Read also: RBI puts Lakshmi Vilas Bank under PCA norms
As at June-end 2019, LVB's net NPAs stood at 8.30 per cent of net advances, against 5.96 per cent as at June-end 2018. Its CRAR at 6.46 per cent is below the regulatory minimum of 9 per cent, which banks have to maintain on an ongoing basis. The bank's RoA was negative in FY2019 and FY2018 at 2.32 per cent and 1.57 per cent, respectively.
The bank is in urgent need of capital to meet minimum regulatory requirements and make further provisions for loan losses. A bank insider said that when Dhanlaxmi Bank could raise Rs 120 crore on preferential allotment basis in FY2018 in tough market conditions, there is no reason why his bank could not do so now.
Industry players say Global Trust Bank's case was different as it blatantly breached norms relating to capital market exposure, its NPAs jumped to almost 28 per cent of loans and it totted up huge losses. The regulator had to step in to arrange its merger with Oriental Bank of Commerce in 2004, in the interest of the depositors.
So, the RBI is expected to give a breather to LVB for some time like it did in the case of Dhanlaxmi Bank. If the PCA does not work out as planned, then a merger with another bank would be the only option that is left.