How Lakshmi Vilas Bank eroded its wealth amid controversy and losses

It has been a year since the Reserve Bank of India (RBI) initiated prompt corrective action (PCA), an exercise that puts weak banks under central bank scrutiny, against the 94-year-old Lakshmi Vilas Bank (LVB). But last week, this low-profile Chennai-headquartered bank found itself attracting some unwonted publicity when 60 per cent of its shareholders voted against a proposal to re-appoint seven directors, including one of the promoters, K R Pradeep (who holds around 2 per cent), and the company’s Managing Director & Chief Executive Officer S Sundar.

On Sunday, the Reserve Bank of India (RBI) approved an interim arrangement under which the bank would be run by a Committee of Directors (CoD), comprising three independent directors vested with the discretionary powers of MD & CEO. This topped off a fortnight of controversy after two former LVB employees were arrested by the Delhi Police for misappropriating fixed deposits worth Rs 729 crore from the equally troubled Religare Finvest. This follows a First Information Report registered by the Economic Offences Wing a year ago against LVB’s directors involving a complaint from the same financial company — charges the company has strongly refuted.  

Meanwhile, a minority LVB shareholder has approached the Madras High Court with a plea to direct the RBI and the Securities and Exchange Board of India (Sebi) to initiate appropriate legal action against the bank by appointing an administrator and to suspend the board to safeguard the savings and investments of the public and stakeholders. The court admitted the case and gave the ministry of finance, RBI, Sebi and the bank eight weeks to respond.

How did a profitable bank founded to serve small businesses in 1926 by a group of businessmen from the Vysya community — a trader caste based in southern and central India — come to this pass? Why are shareholders so upset with the bank? Till about 10 years ago, LVB was a stock market favourite among retail investors. In 2017, its share price touched the Rs 187-mark. Since then, the price has steadily fallen — it is now in the Rs 19-22 range.

One of the major shareholders said they have been unhappy for at least two years about the way the bank was being run. In August last year, a month before the RBI put LVB under the PCA, CEO Parthasarathi Mukherjee resigned despite being given a two-year extension. Shareholders said that operations are largely controlled by people from the community and that the bank is yet to sort out the legacy issues of poor lending decisions and so on.

Indeed, LVB has incurred huge losses for the past three consecutive years — in FY18 losses stood at Rs 580 crore, rising to Rs 890 crore in FY19 and Rs 840 crore in FY20. In the same period, net non-performing assets (NPAs) have ballooned from 5.7 per cent in FY18 to 7.50 per cent in FY19 and 10 per cent in FY20.

This has raised questions about the quality of RBI oversight. “The RBI has let the situation linger at LVB for too long. It cannot afford another accident in the financial sector after IL&FS, PMC and Yes Bank,” said a note from proxy advisory firm Institutional Investor Advisory Services (IiAS).

Insiders said the problems began in 2008-09, when the bank decided to focus on faster growth and participated in many loan syndications. This worked till 2015-16 when many of the loans turned bad, and the RBI’s Asset Quality Review forced banks to reveal the true stress on their books. As with many other banks, the exposure to real estate and infrastructure dented LVB’s interest income even as the insolvency courts put a moratorium on many delinquent borrowers’ accounts. Business dwindled thereafter, as  advances declined from Rs 19,251 crore in September 2019 to Rs 16,310 crore in June 2020.

Meanwhile, the bank's Tier 1 capital turned a negative 1.83 per cent as of June 30, 2020, against the minimum requirement of 8.875 per cent under Basel III norms, meaning LVB’s equity capital had been eroded.

Serious efforts to find suitors for bank gathered steam after LVB came under PCA regime. Kolkata-based SREI Infrastructure, which own 3.34 per cent, was one contender. Then, the bank almost walked down the aisle with India Bulls Housing Finance, which owns 4.99 per cent, till the RBI objected for reasons that were not made public. The most recent merger proposal has come from Clix Capital, majority-owned by Mumbai-based PE firm AION Capital,  and discussions with them continue.

The question is whether the bank is safe now. The CoD says the bank’s Liquidity Coverage Ratio (LCR), or the proportion of highly liquid assets to meet short-term obligations, exceeds 250 per cent against the minimum 100 per cent required by RBI, and its provision coverage ratio, the percentage of profit the bank needs to cover bad loans, remains healthy at 72.6 per cent against the RBI-prescribed 70 per cent. The CoD also said the bank no longer had an asset-liability mismatch and was fulfilling commitments to depositors, bond-holders, creditors and so on and was enforcing cost reduction measures both of direct and indirect costs.

But the bank needs capital. Shareholders approved the proposal to increase LVB's share capital from Rs 650 crore to Rs 1,000 crore via a follow-on public offer, rights issue, qualified institutional placement or other available routes. At the same time, the CoD is evaluating the offer from Clix.  Latest reports suggest that Clix is seeking indemnity from LVB’s dues ahead of a deal.

Officials said a capital infusion of about Rs 1,200 crore could see operating profit of about Rs 100 crore in three years. A top-up of capital would certainly help to meet regulatory norms, but able leadership to bring stability to the bank is another ask altogether.