The Lakshmi Vilas Bank (LVB) will have to explore other ways to raise capital to shake off regulatory restrictions after the Reserve Bank of India (RBI) pulled the plug on its merger move with Gurugram-based Indiabulls Housing Finance, reports say.
The Chennai-based lender was placed under prompt corrective action (PCA) last month over burgeoning bad loans, failure to meet the capital adequacy ratio, and a negative return on assets (RoA) for two successive years, apart from unsustainable levels of leverage.
The bank's net non-performing assets (NPA) touched 7.49 percent by the end of the last financial year and the capital adequacy ratio declined to 7.72 percent. The RoA was a negative 2.32 percent.
LVB said in a regulatory filing to the bourses on Wednesday: "This is to inform that RBI vides their letter dated October 09, 2019, informed that the application for voluntary amalgamation of Indiabulls Housing Finance Ltd and Indiabulls Commercial Credit Ltd with The Lakshmi Vilas Bank Ltd cannot be approved."
The stocks of LVB and Indiabulls have been battered by the uncertainty over the RBI's approval has for the merger move. Shares of Indiabulls Housing lost 73.45 percent and LVB 71 percent since the report of the all-stock merger move appeared in April.
On Thursday, LVB was trading at Rs 25 by noon after shedding 4.82 percent on the National Stock Exchange (NSE). It closed on July 5 at Rs 70.95. Indiabulls Housing Finance lost 16 percent from Wednesday's closing to trade at Rs 200 by noon on Thursday on the NSE, reports show. At close on July 5, the share was worth Rs 727.95.
LVB has been forced by the RBI to cut lending to companies and focus on reducing the concentration of loans to certain sectors. It has also been restricted from opening new branches and paying dividends.
The bank requires prior approvals for entering into transactions other than in the usual course of business. It's annual general meeting on September 27 approved raising further capital up to Rs 1,000 crore by selling shares and Rs 500 crore by way of bonds, according to a LiveMint report.
The RBI had expressed concerns over control of the merged entity and Indiabulls' links to the real estate sector, a major cause of stress in the country's banking and shadow banking sectors. Indiabulls Housing executive director Ajit Kumar Mittal said the company welcomed the removal of uncertainty.
"For us, it's back to business as usual. We have surplus liquidity of Rs 20,000 crore and we'd like to now deploy it in several ways like buyback of shares, etc. We have not applied our mind to applying for a small finance bank license as it doesn't fit in well with our business," said Mittal.