Pressure mounts on Clix Group and Lakshmi Vilas Bank to seal merger quickly. RBI concerned about the situation at LVB after the ouster of most directors from the Board by shareholders last week. The bank is currently run by a three-member committee of independent directors. If the Clix deal fails, the regulator may look at other options
The Reserve Bank of India (RBI) wants the Lakshmi Vilas Bank-Clix Group merger to happen at the earliest in the backdrop of events at the bank’s annual general meeting (AGM) last week.
On September 25, at the digitally convened AGM, seven directors were ousted by shareholders, including the managing director and CEO. The anguished shareholders, unhappy with the governance at the Chennai-based bank, also ousted the statutory auditors.
The bank is currently run by a three -member committee of independent directors.“The RBI hasn’t put a deadline as such. But the regulator wants both parties to come up with a merger plan at the earliest, say in the next 10-15 days, failing which the RBI will look at other options, including merging LVB with a bigger, stronger bank,” said a person in the know of latest developments.
The RBI, however, will give first preference to the Clix-LVB deal since this is already ongoing and due diligence is largely complete, the person said.
What is delaying the Clix deal?
The Clix deal is possibly being delayed by two factors. One, the likely higher capital requirement by the bank compared to what was initially estimated. LVB needed around Rs 1,500 crore urgently but this capital requirement might have gone up close to Rs 2,500 crore-Rs 3,000 crore due to fresh slippages, the Covid impact and the provisioning that will be required for a one-time loan recast.
According to the person quoted earlier, Clix may be reassessing the capital required up front if the deal goes through, hence the delay.
Second, the hunt is now on for a new, additional investor to come on board, said a second person familiar with the ongoing negotiations.“The reason being private equity firm Aeon Capital, which already holds a major chunk of around 80 per cent in Clix Capital Services, may end up holding a much bigger portion in the final merged entity, depending on the swap ratio, which the regulator may not be comfortable with,” the person said.
“To neutralise that, the hunt is on for a fresh investor meeting the RBI’s ‘fit and proper’ criteria and this may take some time,” the person added. Both individuals declined to be named citing the sensitivity of the matter.
Emails sent to the RBI, the Clix Group and LVB seeking the status of the merger process and reasons for delay remain unanswered.
What if the Clix deal falls through?
If the Clix deal comes to nothing, the RBI wants the bank to be merged with a larger bank. While Moneycontrol couldn’t confirm the names of banks that are being considered, a Business Standard report on Tuesday said that the RBI has spoken to Punjab National Bank (PNB) about a potential merger. The bank, however, has denied this report.
For PNB, a merger with LVB makes sense because it doesn’t have a strong presence in the South. The merger with Oriental Bank of Commerce and United Bank helped PNB gain strength in the East and North but it still lacks a strong presence in the South. In that sense, LVB with 566 branches, will be a good fit for PNB.
“The regulator won’t give PNB the first preference, however, since there is already an ongoing deal between LVB and Clix,” said a senior banker, who spoke on condition of anonymity.
On September 15, LVB had informed exchanges that the mutual due diligence process for merger with the Clix Group is substantially complete and both parties are in discussions on the next steps.
Prior to this, the bank was attempting a merger with Indiabulls last year but the RBI had rejected the proposal last October without citing a reason.
LVB’s financial position has deteriorated sharply and the developments at the recent AGM have added to the headache of the regulator. Going by the March quarter figures, LVB’s capital adequacy ratio (CAR) — a measure of the financial stability of a lender — was just 1.12 percent as on March 31, as against the RBI requirement of 8 percent. Similarly, the Tier I and II components of CAR stood at a negative 0.88 percent and 2 percent, respectively.
Gross non-performing assets (NPAs), or bad loans, as on March 31, stood at 25.39 percent compared with 23.27 percent a year ago. In the March quarter results notes, under the head ‘material uncertainty related to going concern’, the bank’s auditors had outlined its severe financial situation and indicated that any chances of survival depend on capital infusion.
In a release on Sunday, LVB, however, assured the public that it has enough liquidity and a fully functional board.
“Certain news items have appeared, expressing concerns about governance of the bank. Based on voting results of the 93rd Annual General Meeting, reappointment of seven directors was not approved. However, the bank continues to have a fully functional Board of Directors, including three independent directors,” LVB said.
The bank’s liquidity position as on date is comfortable, with liquidity coverage ratio (LCR) of around 262 percent against a minimum 100 percent required by the Reserve Bank of India (RBI), the lender said, adding that the management continues to enforce direct and indirect cost-reduction measures.
The provision coverage ratio (PCR) remains healthy at 72.6 percent, as against the minimum 70 percent prescribed under the RBI’s Prompt Corrective Action (PCA) framework.