RBI Pushes for Merger of PNB and Lakshmi Vilas: How Did We Get Here?

Last week, the RBI appointed a Committee of Directors to oversee the day-to-day affairs of Laxmi Vilas Bank (LVB) after things took a turn for the dramatic at the bank’s Annual General Meeting (AGM).

The shareholders were unanimous in their rejection of all seven Directors who were poised to be re-elected. This came as a surprise to many in the industry that has witnessed an episodic encounter of the Bank with multiple events over the course of the last two years.

A Bit of Context

LVB is a Chennai-based “widely-held” private sector bank (around 93% shares are non-promoter held) that ran into trouble when it extended loans worth ₹794cr ($107.67m) to RHC Holding and Ranchem, owned by siblings Malvinder Singh and Shivinder Singh. The Singh brothers were arrested last year on charges of fraud and siphoning of funds, allegedly causing losses worth ₹2,397cr ($325.04mn) to Religare Enterprises.

LVB consequently came under investigation by the Economic Offences Wing (EoW) of Delhi Police for being party to misappropriation of fixed deposit receipts of Religare against which the loans to Singh brothers were sanctioned.

The troubles of LVB continued to mount when the Enforcement Directorate (ED) registered a case under the Prevention of Money Laundering Act (PMLA) against the bank. Soon thereafter, the Serious Fraud Investigation Office (SFIO) and SEBI slapped the bank with their investigative diktats, making the bank a public focus of serious economic offences.

Reality Check for LVB

Market realities for LVB have taken major dives one after another once it came under increased regulatory scrutiny. Deposits have shrunk by over a quarter as of March 2020 and operating losses have scaled to approximately ₹15.46cr ($2.09mn) in FY20. The net losses for 2019–20 amounted to ₹836cr ($113.3mn), thus adding to the bank’s ignominy.

This pattern of concurrent losses, distressed financials and endangered public funds invested in the bank is what forced RBI’s hand to seek Prompt Corrective Action (PCA) for the bank in September last year.

RBI Corrective Measures at Work So Far

PCA is essentially a preventive strategy employed by RBI to shore-up the financial health of banks that are facing deteriorating capital levels and before any further deterioration begs the need for a cure such as bankruptcy. It involves wide-ranging changes like restructuring the capital structure, corporate management and infusion of liquidity.

One of the ways to achieve the above-stated objectives is to call for a merger leading to improved capital position of the amalgamated entity. However, the seeming hurdle with this remedy is that no diligent acquirer wishes to get their hands on a bank with ailing financials and a history of malpractice.

Nevertheless, the RBI has helped LVB court a number of candidates over the last one year. Indiabulls Housing Finance, already a 5% shareholder, proposed a merger which was eventually rejected by the Central Bank. Another contender, Clix Capital, was close to a deal, the talks for which went astray after approvals from existing shareholders hit a roadblock.

PNB in the Fray

Punjab National Bank (PNB) has now been propped up by the RBI to take over as the white knight to rescue LVB. Reports suggest that PNB, along with another public sector bank, were ‘invited’ (perhaps "forced" is more accurate) to assess LVB’s financials.

To add a positive spin, a merger with LVB may position PNB well in the Southern Indian market, considering its prior buyout of Nedungudi Bank of Kerala in 2003.

What Lies Ahead?

The banking landscape in India has stood testimony to some dismal events in recent years with crises looming around instances like Yes Bank, Bank of Baroda, PMC Bank etc. Even PNB, the prospective suitor for LVB, isn’t without controversy since fraudulent transactions were uncovered in its own domain.

This puts things in perspective for the depositors and markets at large which bear witness to a culture of a greater number of banks falling under regulatory scrutiny owing to mismanagement, fraud and other such implications.

Although the RBI’s hand-holding has helped fix the regulatory annals in many of these instances, it remains to be seen how many more surprises follow from the prevailing laissez-faire attitude cultivated by the banks in India.

The regulator’s recent zeal however when it comes to fixing the banking sector cannot let us forget the system’s historical ignorance which led to these wild west norms cropping up in the first place. But we digress.

(Originally published October 1st 2020 in transfin.in)