In a sudden twist in the ongoing race for cash strapped Lakshmi Vilas Bank, the central government has decided to place the ailing Chennai-based private sector lender under moratorium till December 16, 2020, based on an application made by the Reserve Bank of India. The move was announced through an order issued by the Ministry of Finance.
The bank will not be allowed to make payments exceeding Rs 25,000 to any creditors without prior approval from the RBI.
The Reserve Bank of India, in consultation with the Central government, has superseded the board of directors of LVB for a period of 30 days owing to a serious deterioration in the financial position of the bank. TN Manoharan, former non-executive chairman of Canara Bank has been appointed as the administrator.
“Appropriate steps will be taken to protect the interest of depositors,” said an RBI official on condition of anonymity adding that the central bank is watching the situation closely and will ensure that all steps will be taken for the revival of the bank. On March 5, 2020, a similar moratorium had been imposed on Yes Bank which was later rescued by an SBI-led consortium. Another example of the government stepping in, transpired in 2004 when the RBI had announced that crisis-ridden Global Trust Bank would be merged with the financially-strong public sector Oriental Bank of Commerce.
Moneycontrol has reviewed the Finance Ministry order which says -
In exercise of the powers conferred by sub-section (2) of section 45 of the Banking Regulation Act, 1949 (10 of 1949), the Central Government, after considering an application made by the Reserve Bank of India under the sub-section (1) of that section, hereby makes this Order of moratorium in respect of the Lakshmi Vilas Bank Limited, Karur, Tamil Nadu for the period with effect from 18:00 hrs on the 17th day of November 2020 up to and inclusive of 16th day of December 2020 and hereby stays the commencement or continuance of all actions and proceedings against that banking company during the period of moratorium, subject to the condition that such stay shall not in any manner prejudice the exercise by the Central Government of its powers under clause (b) of sub-section (4) of section 35 of the said Act or the exercise by the Reserve Bank of India of its powers under section 38 of the said Act.
Under section 45 of the Banking Regulation Act, if the RBI is satisfied that in the public interest or in the interest of depositors or in order to secure the proper management of the banking company or in the interests of the banking system of the country as a whole, the RBI may prepare a scheme for a) reconstruction of the banking company or b) for the amalgamation of the banking company with any other banking institution.
The sudden step by the government comes amidst reports suggesting Aion Capital-backed NBFC Clix Capital could walk away from the proposed merger with the southern bank if deal discussions drag on without a concrete timeline to conclude the transaction. The decision to impose a moratorium on LVB also comes on the back of a steady deterioration in the financials of LVB as well as a shock revolt by shareholders at the lender’s last AGM who voted against the appointment of the top brass.
A preliminary non-binding letter of intent was signed between LVB and Clix Capital back in June. On November 7, LVB said, "There was minor incremental due diligence requested by Clix Group, which was completed this week. Now, the respective sides are in the process of a workable and mutually acceptable framework.”
On February 6, 2020, Moneycontrol had named DBS Bank India, Kotak Mahindra Bank & Brookfield and Everstone Capital-backed Indo Star Capital Finance as potential white knights in the fray for the crisis-hit LVB.
LVB: A PROBLEM CHILD FOR THE REGULATOR
LVB has been controversy’s favourite child ever since it was put under the Prompt Corrective Action (PCA) framework due to a sharp rise in non-performing assets (NPAs), insufficient liquidity to manage risks and negative returns on assets for two consecutive years. The PCA is meant to improve the performance of weak banks and not impact their day to day operations.
In October 2019,LVB’s proposed merger with India Bulls Housing Finance was blocked by the RBI. On 25 September, 2020, in a shock development, the shareholders of the private sector lender voted against the appointment of seven directors, including S. Sundar as the managing director and chief executive at the AGM. The search is still on for a head honcho.
The bank, which has dangerously high NPA levels and a negative capital adequacy ratio had a forgettable Q2 with net loss pegged at Rs 396.99 crores. To make matters worse, the auditor rang the alarm bells as well.
"In the opinion of the bank, this bank will be able to realise its assets and discharge its liabilities in its normal course of business and hence the financial results have been prepared on a going concern basis. The said assumption of going concern is dependent upon the bank's ability to achieve improvements in liquidity, asset quality and solvency ratios, augment its capital base and mitigate the impact of Covid-19 and thus a material uncertainty exists that may cast a significant doubt on the going concern of the bank,” the auditor said recently.
A CLOSER LOOK AT LVB AND ITS Q2 REPORTCARD
The m-cap of Lakshmi Vilas Bank at the end of day’s trade on November 16th stood at Rs 526 crore. The promoters hold 6.8 percent stake. Indiabulls Housing Finance (4.99 percent), PE fund Jupiter Capital Private Ltd (1.08 percent), Srei Infra Finance (3.34 percent), Capri Global Holdings Pvt Ltd (3.82 percent) and LIC (1.62 percent) are some of the shareholders in the public category.
Lakshmi Vilas Bank operates in the retail, mid-market and corporate space. As of June 30, 2019, the operations were spread over a network of 569 branches (including seven commercial banking branches and one satellite branch) and 5 extension counters, supervised by 7 regional offices. While the bank has a significant presence in Tamil Nadu, it is also present in 16 states and 3 union territories. It has 32 “B” Category Branches and 1047 ATMs according to its website.
Gross non-performing assets (GNPAs) continue to be too high at 24.45 per cent, even the net NPAs stay too high at 7.01 per cent. The bank’s capital levels are at precarious levels. Going by the auditors’ note, the bank's Tier 1 Capital ratio has turned negative; the overall Capital Adequacy Ratio (CAR) as per Basel Ill guidelines was at negative 2.85 per cent as of September 30 indicating the need for urgent capital infusion.The bank’s business has shrunk over the year. Total business of the bank was Rs 37,595 crore the end of September 2020, as against Rs 47,115 crore at the end of September last year. Net Loss after tax is Rs 396.99 crore for the quarter ended September 30, 2020, as against net loss of Rs 357.18 crore for the year-ago quarter.