Curtain falls on 94-year-old LVB: Rise, fall and a painful end

LVB was founded in 1926 by a group of businessmen in Karur in Tamil Nadu. The bank rose to prominence lending to small businesses. But the fall came quick. Before it could complete a century of existence, DBS got knocked out by its own doing—an aggressive shift from retail to wholesale loans.

According to the website of the bank, it was seven businessmen who came together to form the bank. One of its founders, who spoke to Moneycontrol on condition of anonymity after the final scheme was released on Wednesday, recalled the hard initial days. The tone was filled with an unmistakable tinge of nostalgia.

“You see, some of our ancestors struggled to mop up the initial capital to build this bank. They approached many different people for support. This is a sad day,” the person said.

LVB’s mission was to cater to the financial needs of the people in and around the textile city of Tamil Nadu, Karur. The customers were mainly small and medium merchants involved in various trading businesses, industries and agriculture. The Bank was finally incorporated on November 3, 1926, under the Indian Companies Act, 1913, and obtained the certificate to commence business on November 10, 1926.

Subsequent to introduction of the Banking Regulations Act, 1949, and the Reserve Bank of India as the regulator for the banking sector, the Bank obtained its banking licence from the RBI on June 19, 1958, and on August 11, 1958, it became a ‘scheduled commercial bank’ signifying capability to operate as a full-fledged commercial bank.

The fall

Over the years, when the growth tilted from retail to corporate book, things began to change. Around four to five years ago, LVB took an aggressive shift from retail and MSME, SME loans to high-ticket corporate loans. Bulky corporate loans helped the bank grow its book in no time, but dragged it down when the wind turned against it. The expected recovery in the economy wasn’t happening. Every industry segment, except a few top companies in each, was struggling to show results. Many of LVB’s corporate bets proved wrong. It has around Rs 3000-Rs 4000 crore problematic corporate loans, analysts estimate.

Simultaneously, the NPAs (non-performing assets) were zooming without control. In September 2019, the RBI put the bank under the Prompt Corrective Action (PCA) framework. PCA is a category where the regulator groups weak banks in for closer monitoring and business restrictions. At that time, LVB’s gross NPAs were already over 17 percent. The losses had mounted to Rs 894 crore in 2018-19. Add to this, negative return on assets for two years and insufficient capital, the bank had qualified in all ways for the RBI to crack the whip.

From this point, LVB never recovered. LVB has been incurring losses for the past 10 quarters and the RBI initiated Prompt Corrective Action (PCA) in September 2019, which inter alia prescribes the bank to bring in additional capital, restrict further lending to corporates, reduce NPAs, and improve the Provision Coverage Ratio to 70 percent. In the second quarter, LVB’s GNPAs stood at 24.45 percent, while net NPAs stood at 7.01 percent. The bank’s Tier 1 Capital ratio has turned negative; the overall Capital Adequacy Ratio (CAR), as per Basel Ill guidelines, was at a negative 2.85 percent as of September 30.

The bank’s business has shrunk over the year. Total business stood at Rs 37,595 crore at the end of September 2020, as against Rs 47,115 crore at the end of September 2019. The net loss after tax amounted to Rs 396.99 crore for the quarter ended September 30, as against a net loss of Rs 357.18 crore in the year-ago quarter.

Search for a rescuer

LVB saw the writing on the wall. With depleting capital levels and skyrocketing NPAs, there was nothing the bank could do but to look at a rescuer. In other words, the bank was willing for a merger to avoid a crash landing. It started negotiating with two NBFCs including Indiabulls Finance. The Indiabulls proposal progressed to some stage but the regulator turned down the idea. In October 2019, the RBI formally rejected the Indiabulls merger with LVB without citing any specific reasons.

Then came the Clix Group. LVB initiated discussions with the Pramod Bhasin-backed NBFC for a possible merger. In October 2020, LVB informed exchanges that it has received an indicative non-binding offer from Clix Group for the proposed merger. Prior to that on September 15, LVB had said the mutual due diligence process for merger with Clix Group is substantially complete and both parties are in discussions on the next steps. The bank had signed a non-binding letter of intent (LOI) with Clix Capital Services Private Limited and Clix Finance India Private Limited as on June 15, 2020.

These developments gave hope to LVB’s investors—only to disappoint in the final stage. LVB couldn’t clinch the Clix deal.

The end

Just like the fading hopes, the shares of LVB was falling steeply. Consider this: The share price of the LVB lost 58 percent so far this year as against an 8 percent jump in the benchmark equity index, Sensex. At the end of Wednesday’s session, LVB shares were trading at Rs7.3 apiece.

On November 18, the government put LVB under a one-month moratorium and capped withdrawals at Rs25000. The RBI, in consultation with the Central government, superseded its Board. In less than an hour, the RBI announced a draft scheme of amalgamation between the DBS India and LVB.

The big shocker for investors came when the draft scheme said all equity-capital of the bank will be written off as part of the amalgamation. Worried institutional investors of the bank said they will explore all options including the legal options to seek justice. What added to the frustration of shareholders was the fact that the same DBS had approached the bank for a 50 percent stake buy in 2018 for at least Rs 100 per share. Now, DBS was practically getting the bank free of cost!

What lies ahead for LVB investors? Some of the shareholders may move courts for a final attempt. But it is unlikely that the regulator will go back from its stance. A least that’s what the past experience shows.