Lakshmi Vilas Bank: A Stitch In Time

Everything that can possibly go wrong with a bank, has gone wrong with Lakshmi Vilas Bank, writes Amit Tandon.

A branch of The Lakshmi Vilas Bank in Mumbai, India. (Photographer: Mahima Kapoor/BloombergQuint)
A branch of The Lakshmi Vilas Bank in Mumbai, India. (Photographer: Mahima Kapoor/BloombergQuint)

Last week marked the first anniversary of the Punjab and Maharashtra Cooperative Bank debacle. Even as stories of its depositors struggling to repay loans or depending on their friends for charity continued to hog headlines, a solution to the bank’s insolvency remains elusive. Policy makers may take comfort in the passage of the Banking Regulation (Amendment) Bill 2020, which brings cooperative banks directly under the ambit of the Reserve Bank, but depositors are still waiting for their money.

PMC Bank’s collapse last year was followed by the near-death experience of Yes Bank Ltd. The contagion-risk from the impending collapse of the lender adversely impacted depositor confidence across other banks and prompted regulatory intervention. An RBI led bail-out was announced for Yes Bank, in order to stem the systemic fallout.

Even before PMC Bank and Yes Bank, there was the collapse of IL&FS in 2018.

Given the steady stream of bad news emanating from the financial sector, the RBI has gone out on a limb to reassure deposit holders. Importantly, it has promised swift and proactive action to eliminate systemic shocks.

It now needs to back this with decisive action and intervene before it is engulfed in another crisis – one which can be potentially brought on by Lakshmi Vilas Bank.

For those unfamiliar with the lender’s situation, it has now been struggling with losses and low levels of capital for some time now. A search for a suitor for the bank to merge with drags on.

A statement made by the auditors of Laxmi Vilas Bank as part of its June 30, 2020 results sums up the situation:

The Bank had incurred a loss of Rs 836.04 crore during the year ended 31st March 2020. The Bank has been incurring losses for the past 10 quarters and has incurred loss of Rs 12.28 crore for the period under review. The Reserve Bank of India has initiated Prompt Corrective Action 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%. There has been a steady decline in the Bank's deposit base since September 2019 and increase in the NPA ratios. The Bank's Tier 1 Capital ratio has turned negative, at (0.88)% and (1.83)% as at 31st March 2020 and 30th June 2020 respectively, as compared to the minimum requirement of 8.875%.

Tier-1 capital ratio negative. Losses for last 10 quarters. Eroding deposit base. High NPAs. Low provision coverage. It rarely gets this ugly. Yet Lakshmi Vilas Bank powers on, backed only by the promise to inject capital.

The bank, in the past, has been wooed by SREI Capital. It even (almost) walked down the aisle with Indiabulls Housing Finance, till RBI objected. The most recent merger proposal has come from AION-backed Clix Capital and discussions on that continue.

With each new announcement, and rumour, depositors and investors hold on to hope.

But its unclear that the bank is doing all it needs to do to give a new investor confidence.

For instance, the forthcoming shareholder meeting would have been an ideal opportunity to address issues at the board level. A strong board would have enabled the bank to break from the past and give confidence to the buyers that they are free to address legacy issues. It would have attracted serious investors who, with ownership issues addressed, could have re-written the destiny of the bank. This chance has been muffed.

Instead, the bank is proposing to re-appoint some old hands back to its board, at its AGM on Sept. 25. These include:

  • N Saiprasad, 56, as a non-executive non-independent director. He served on the board from March 1990 to 1998 and from March 2006 to 2014. He was brought back to the board in March 2019.
  • Raghuraj Gujjar, 65, who is proposed to be re-appointed non-executive non-independent director, is a Chartered Accountant. He served as Non-Executive Chairperson from April 2013 to April 2015. Lakshmi Vilas Bank proposes to appoint him as non-executive non-independent director from Dec. 2, 2019.
  • KR Pradeep, 59, is proposed to be appointed as a non-executive non-independent director. He was appointed on the board in January 2020. In the past he has served on the bank’s board from February 2009 to 2017.
  • B Manjunath has been an independent director on the board from August 2008 to January 2015. After a cooling off period, he was appointed as independent director and part-time chairperson of the bank from June 7, 2017, to June 5, 2020. He was appointed as additional director on June 10, 2020.

While some may argue that it is the independent directors and two RBI nominees that will set the agenda, if the past is a guide, it is a tall ask.

Meanwhile, even as the depositors of PMC Bank are bounced door-to-door, Lakshmi Vilas Bank continues to raise fresh deposits. This is to say nothing of existing public depositors, who have entrusted the lender with more than Rs 15,000 crore – on a wing and a prayer.

Everything that can possibly go wrong with a bank, has gone wrong with Lakshmi Vilas Bank. While no one is calling it insolvent, this is what the bank is.

The regulator, hopefully, has a contingency plan ready, although it is not obvious what it will take for the regulator to set it in motion.

RBI needs to be ‘proactive’. It cannot afford to view Lakshmi Vilas Bank merely as a small bank based on the size of its deposits. It needs to prepare for the systemic shock that the collapse of this lender can cause among the old generation private sector banks – most of whom are in need of capital.

With the Covid-19 pandemic, RBI has more than enough on its hands. It does not need a potential accident with Lakshmi Vilas Bank to distract it. If it is reading the writing on the wall, it should not be in reactive mode, but on the front-foot setting the agenda.

Amit Tandon is founder and Managing Director at Institutional Investor Advisory Services.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its Editorial team.