Earlier this year, when the Yes Bank crisis was at its peak just ahead of a bailout, there were strong speculations among banking analysts about an impending crisis at Lakshmi Vilas Bank (LVB). Analysts’ concerns were valid. They cited that the critical financial parameters of the banks, mainly capital adequacy ratios and non-performing assets (NPAs), were at alarming levels.
The bank needed capital to survive.
The uncertainty continued till June 12 when LVB informed bourses that it has received preliminary, non-binding letter of intent (LoI) from Clix Capital Services and Clix Finance India. This deal, however, was subject to due diligence and regulatory approvals, the bank said.
Cilix deal sealed?
On September 15, LVB gave the first confirmation to its investors that the bank may be past the worst phase and this time a deal may happen. The lender informed the stock exchanges that it and Clix Group have substantially completed the mutual due diligence for a merger. And both companies are now on to the next stage of discussions. The news enthralled the investors who rushed to buy the share of the bank on September 16 morning.
At the time of writing this copy, LVB shares were trading 9.8 per cent up at Rs 22.40 per share. Given that due diligence is complete between the two entities, the merger is likely to take place provided the Reserve Bank of India (RBI) gives final clearance to the deal, analysts interpreted.
“The fact that due diligence is over shows that merger is a strong possibility now. The bank needs capital desperately to continue as a going concern. In this context, this deal is significant,” said Siddharth Purohit, analyst at SMC Global Securities.
This is the second time LVB is in news for a potential merger. Last year, speculations were rife about LVB merger with Indiabulls. However the RBI had rejected the merger in October last year without citing a reason.
"This is to inform that the RBI vide their letter dated October 9, 2019, informed that the application for voluntary amalgamation of lndiabulls Housing Finance and lndiabulls Commercial Credit with LVB cannot be approved," the bank had said then.
But, this time the deal has progressed past the due diligence and investors are hopeful.
Pramod Bhasin’s Clix Capital is coming with deep pockets, has a track record in financial services sufficient enough to impress the regulator. Clix Capital is into financial services offering various types of loans. Bhasin had acquired the business in 2016 from GE Capital. Private equity firm AION Capital Partners is a significant shareholder in the company.
Worsening financials
LVB didn’t really have any option but to agree for a merger to secure the much needed capital. The bank’s financials were in a precarious state requiring an urgent merger.
According to the March quarter figures, LVB has a capital adequacy ratio (CAR) as on 31 March 2020 as per BASEL III at just 1.12 per cent as against the RBI requirement of 8 per cent. Similarly, the Tier-I and Tier-II components of CAR stood at (-) 0.88 percent and 2 per cent, respectively.
Bad loans too are high compared with peers. Gross NPAs of the bank, as on March 31, stood at 25.39 per cent, compared with 23.27 per cent in the year-ago period.
“In the absence of an immediate capital infusion, there is no way the bank could have survived,” said a senior banker with a private bank. He didn’t want to be named.
Auditors’ caution
In the March quarter results notes, under the head 'Material uncertainty related to going concern', the bank’s auditors had outlined the severe financial situation the company is going through and indicated that any chances of survival depend on capital infusion.
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 per cent.
There has been a steady decline in the bank's deposit base since September 2019 and increase in the NPA ratios. The bank's Tier l Capital ratio has turned negative, at -0.88 per cent, 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 were informed that the bank routinely evaluates capital raising options,” the auditors said.
In the opinion of the bank, based on their internal assessment and the likely capital infusion, it will be able to realise its assets and discharge its liabilities, the auditors noted. “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 the COVID-19 pandemic and thus a material uncertainty exists that may cast a significant doubt on the bank's ability to continue as a going concern,” auditors said.
In October last year, rating agency CARE had downgraded LVB's bond programme of Rs 318 crore to BB+ with negative outlook from BBB-. LVB was put under the PCA framework by the RBI after high level of bad loans, insufficient CAR, negative return on assets (RoA) for two consecutive years and high leverage. The RBI took the decision after assessing the deterioration in FY19 numbers.
With the merger nearing, the bank may have got another chance to stay in competition. LVB needs to wait till the regulator’s final nod though.
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