Lakshmi Vilas Bank (LVB) is now, for all practical purposes, a headless institution. After its CEO was ousted by shareholders at the bank's AGM last week, three directors are in charge of daily operations following an RBI directive. The market chatter is that the Reserve Bank may step in to put its representatives on LVB board or to push for an immediate merger.
On September 25, shareholders of the Chennai-Headquartered bank witnessed some high drama-filled, unprecedented developments at its annual general meeting (AGM).
The appointment or re-appointment of all seven directors, including the Managing Director and CEO, S Sundar, was rejected by anguished shareholders along with that of the statutory auditors.
The outcome of the AGM (first reported by Moneycontrol ) was unprecedented in many ways. It is rare that shareholders oust an RBI-approved CEO in a bank, along with more than half the directors on the board, and the auditors as well for good measure.
One of the institutional investors Moneycontrol spoke to raised concerns about promoters indulging in the bank’s operations and failure to adhere to good corporate governance norms. “What we see in smaller, community-driven, private banks is promoters dominating the show. That isn’t desirable for a banking institution handling public money,” said an investor requesting anonymity.
As news of the management's ouster hit the headlines, Lakshmi Vilas swung into damage control. It sought the central bank’s approval to form a committee of directors (CoD) to take charge. The approval came on Sunday.
Two institutional investors in the bank, who spoke to Moneycontrol on Monday, said the Lakshmi Vilas Bank will be in serious trouble until at least Rs1,500 crore of immediate capital comes in, either from potential acquirer Clix or someone else.
“There is no money. Only if Rs 1,500 crore comes soon, the bank can resume its normal business operations and return to normalcy,” said one of the investors.
A second investor said they expect the RBI to step in at the earliest — either by pushing for a merger or to put its people on the bank’s board. “A three-people committee can only be a temporary arrangement. The CEO’s position is vacant. Majority of the board members are ousted. Such a bank, if left that way, will be a permanent headache. That warrants urgent RBI action to calm down the investors and depositors including us,” said the investor.
What are the possibilities ahead?
One, the central bank can speed up the Clix-LV deal. In the past, RBI has forced mergers of weak banking institutions with stronger candidates. ICICI Bank-Bank of Rajasthan is an example.
“RBI shouldn’t have much problems in approving the LVB-Clix Capital deal,” said Anand Dama, analyst at Emkay Global. “The situation of LVB is similar to that of Yes Bank, although less severe in terms of systemic impact. The number one option for the RBI is to get the LVB-Clix capital deal done at the earliest. If that doesn’t work out, it can think of approaching other banks,” said Dama.
On 15 September, LVB told exchanges that the two companies have substantially completed the mutual due diligence for a merger. Both companies are now on to the next stage of discussions. There needs to be a formal application made to the RBI for the merger.
Investors are hopeful because the deal has progressed past the due diligence.
Clix Capital, founded by Pramod Bhasin, who previously headed BPO company Genpact, has deep pockets and boasts a track record in financial services that is sufficient enough to impress the regulator.
Clix Capital offers various types of loans. Bhasin acquired the business in 2016 from GE Capital. Private equity firm AION Capital Partners is a significant shareholder in the company.
Two, the central bank can temporarily put its representatives on the LVB Board to oversee the day-to-day functions till a solution emerges. The news of the AGM vote-out has raised eyebrows of investors, and shareholders. The question of whether the LVB-Clix deal will go through in the backdrop of the latest developments dominates the minds of investors.
The bank had earlier tried to merge with Indiabulls, which didn’t get the RBI’s nod. There were also informal talks with another NBFC. That, too, fell flat.
“There is huge uncertainty with respect to the future of the bank. Since there is already a merger deal being discussed with Clix, in the interest of shareholders and depositors, the RBI should first give them a definite time-frame to complete the deal, say a binding agreement of note more than 15 days,” said J N Gupta, former Sebi ED and founder of SES, a proxy advisory firm. “If this fails, RBI should take a decision on what to do next,” Gupta said.
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.
The distressed finances require the bank to take effective steps to augment its capital base in 2020-21. “We were informed that the bank routinely evaluates its capital raising options,” the auditors said.
According to the March quarter figures, LVB has a capital adequacy ratio (CAR) — a measure of the financial stability of a lender — of 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 the severe financial situation the company is going through and indicated that any chances of survival depend on capital infusion.
Bank assures liquidity
The bank has, however, assured the public that it has enough liquidity. Its liquidity position continues to remain strong and it has a fully functional board, the bank said in a release on Sunday.
“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.
Provision coverage ratio (PCR) remains healthy at 72.6 percent as against the minimum 70 percent prescribed under RBI's Prompt Corrective Action (PCA) framework.
But these numbers are of little help to ease the concerns of investors and depositors after what happened in the last AGM, and given the financial track record of the bank.
A merger with a strong entity is the only workable option for LVB at this stage, analysts said. “Unlike Indiabulls, Clix doesn’t have much exposure into risky assets. The regulator should be fine with this merger,” said Dama of Emkay Global.