While IBH’s past experience with RBI is a concern, there are chances that the deal will receive approval in the current scenario
The Reserve Bank of India (RBI) is likely to give it’s nod to the merger between the private sector lender — Lakshmi Vilas Bank (LVB) and the non-banking finance company (NBFC) Indiabulls Housing Finance (IBH), despite its earlier aversion to entities with linkages with the real estate sector.
While there are concerns on IBH’s previous experience with the regulator, there are chances that the regulator may hold a different opinion this time around.
“At that time, the RBI was very conservative in terms of allowing new entrants into the banking system. So, only two entities were found suitable as compared to other applicants for the licence,” said R Gandhi, former Deputy Governor, RBI. He added that as per the previous policy, exposure to sensitive sectors would have led to hesitation in granting licences. However, that is not a condition anymore.
The RBI laid out new guidelines for banking licences in April 2016, which are 'on tap', implying that applicants are free to approach the regulator at any point of time.
Gandhi said the RBI will look at the 'fit & proper' criteria of the new management and new shareholders. It will also look at the financials of the merging entities and factor in the feedback from other regulators as well. “The decision will not rely only on the basis of their exposure to real estate. The RBI will see its position as of today,” he said.
Is IBH rescuing LVB?
The Chennai-based LVB has breached all parameters — capital adequacy, asset quality, return on assets (RoA) — under the RBI’s Prompt Corrective Action (PCA) framework. It is likely to come under RBI directions anytime this fiscal and the first thing the regulator will ask promoters to do is to bring in more capital.
In March, LVB raised additional funds of Rs 459.59 crore via qualified institutional placement (QIP) and still was not able to push its capital adequacy above the required level.
The RBI has lifted directions from Allahabad Bank, Bank of India, Bank of Maharashtra, Corporation Bank and Oriental Bank of Commerce on grounds that they had obtained fresh capital infusion from the government to exit the PCA.
“If there are impending problems, the RBI can come to a conclusion that the bank needs help,” Gandhi said.
Paving the way for more mergers
In case the RBI approves the merger, it will open the floodgates for other NBFCs to follow a similar route.
“We expect larger NBFCs (as and when they fulfil all the criteria related to on tap banking licence) to adopt a similar route for a banking licence. This makes old-generation private sector banks (struggling with low profitability, lack of scale and capital constraints) attractive targets,” a Motilal Oswal report stated.
Markets see other private sector lenders like South Indian Bank, Karnataka Bank and Karur Vysya Bank as potential acquisition targets.
What are the risks?
Edelweiss said in a recent report that any slowdown in the real estate sector will adversely hit growth and earnings of the merged entity.
“It will also impact the default rates and recoverability in the event of a default. Adverse regulatory changes like increase in risk weights and cap on the interest spread under refinance schemes can impact IBH’s growth and profitability,” the report said.
For IBH, the challenge will be to clean up LVB’s books, thus taking a hit on its profits.
Meanwhile, employees of LVB have also expressed discomfort on the merger talks. In their view, LVB should be merged with a state-run bank rather than an NBFC.