CHENNAI: Mortgage lender Indiabulls Housing Finance‘s plans to turn into a bank by merging with Chennai-based Lakshmi Vilas Bank received a setback on Wednesday, with the banking regulator rejecting the proposal.
The rejection is a particularly hard blow to LVB, as the merger would have brought in capital and helped the bank get out of lending restrictions imposed by Reserve Bank of India following a bad loan pile-up.
LVB had applied for RBI’s approval for a voluntary merger of Indiabulls Housing and Indiabulls Commercial Credit with the bank last April.
The proposal was approved by fairplay watchdog Competition Commission of India last June, but was rejected by RBI on Wednesday.
“This is to inform that RBI vide their letter dated October 9 informed that the application for voluntary amalgamation of lndiabulls Housing Finance and lndiabulls Commercial Credit Limited with Lakshmi Vilas Bank cannot be approved,” the bank informed the stock exchanges after market hours. Earlier in the day, the stock slumped nearly 5% to close at 27. Indiabulls’ stock was up 2.5% to close at 240.3 apiece.
Indiabulls’ realty links may have been a deterrent
“It is too soon to comment on future plans of the bank and we are yet to set a date for the board meet. However, the board of directors will soon meet to plan the way forward for the bank since the merger plan is no longer on the table,” LVB chairman BK Manjunath told TOI over phone.
Reacting to the RBI decision, Sameer Gehlaut-promoted IndiaBulls said, “Now that the merger will not happen with Lakshmi Vilas Bank, the uncertainty of the past five months on the business is lifted and the company will focus on growth of its core business of housing finance.” It also said that its board would meet on October 14 to consider a share buy-back proposal.
While there is speculation on the reasons for RBI’s rejection, sources said several regulatory inquiries on Indiabulls coupled with litigations against LVB could have weighed against the merger.
Also the Indiabulls group’s links with real estate could have been a deterrent. RBI’s rejection comes close on the heels of the Punjab and Maharashtra Cooperative Bank fraud which was triggered by its exposure to real estate firm HDIL.
LVB, started by the entrepreneurial Vysya community in Karur in western Tamil Nadu, slipped into reporting losses when it expanded its scope of business from lending to small businesses to larger entities. It suffered losses of Rs 585 crore for the year ended March 2018, which extended to a loss of Rs 894 crore in March 2019.
These elevated levels of losses along with ballooning bad loans, insufficient capital adequacy and negative return of assets for two consecutive years, forced the RBI to impose restrictions on the bank and its activities by placing it under Prompt Corrective Action (PCA) on September 28. The bank’s bad loans stand at 17.3% of its advances while it is 7.53% for market leader SBI as of June 30, 2019.