What is ailing Chennai’s Lakshmi Vilas Bank and should depositors be worried?
The News Minute|September 30, 2020
For the last 10 quarters, Lakshmi Vilas Bank has been incurring losses, and was put under Prompt Corrective Action (PCA) by RBI in September 2019.
Lakshmi Vilas Bank branch in Mysore
Image source: Christopher J Fynn via Wikimedia Commons (CC BY-SA 4.0)
For the first time in the history of any bank in India, shareholders of Chennai-based Lakshmi Vilas Bank ousted seven directors and auditors at the bank’s Annual General Meeting (AGM) on September 25. This also included the recently appointed RBI-approved MD and CEO S Sundar, leaving the 94-year-old bank headless. This is being touted as an unprecedented revolt by shareholders, never seen before in India’s banking history. Certain reports also quote the incident as a ‘dramatic shareholder coup’, that has now left the bank without a promoter or a CEO. A section of shareholders, mainly institutional shareholders, were extremely unhappy with the mismanagement and lack of governance at the bank that has been grappling with losses and deteriorating deposits and hence rejected resolutions seeking appointment of the seven directors. This was N Saiprasad, non-executive & non independent director; Raghuraj Gujjar, non-executive & non-independent director; Gorinka Jaganmohan Rao, non-executive & non-independent director; KR Pradeep, non-executive & non-independent director; BK Manjunath, non-executive & independent director; YN Lakshminarayana Murthy, non-executive & independent director. The remaining directors of the bank then held an emergency meeting on Sunday to figure out a way forward, not only to find the next MD and CEO, but also to discuss raising funds, something the bank is in dire need of. Left leaderless, the Reserve Bank of India then approved that day-to-day affairs of the bank be run by a Committee of Directors (CoD) composed of three independent directors, who will exercise the discretionary powers of MD and CEO in the ad interim. But why are the shareholders unhappy? What led to the drama at the company’s 93rd AGM and what is the way forward for the bank? Here’s a lowdown. A cash-strapped bank For the last 10 quarters, LVB has been incurring losses, having reported a loss of Rs 836.04 crore for the financial year of FY20. Owing to weak financials, in September 2019, RBI initiated Prompt Corrective Action (PCA) against the bank over high non-performing assets (NPAs) or bad loans, lack of adequate capital, and a negative return on assets for the past two years. A PCA is usually put in place to improve a bank’s performance and under it, banks have to reduce bad loans, cut down lending to corporates, restrict opening of new branches, paying dividends and look to bring in further capital. The RBI’s move came as the Delhi Police's Economic Offences Wing registered a complaint against the board of LVB over alleged cheating and misappropriation of funds. The bank’s deposit base has been declining since September 2019 and the bank’s Tier l Capital ratio has turned negative, at -0.88%, as compared to the minimum requirement of 8.875%. Tier 1 Capital is the financial muscle of a bank and is seen as a primary indicator to measure a bank's financial health from RBI’s point of view. Making matters worse, R Subramanian, a former employee of the bank has filed a public interest litigation (PIL) in the Madras High Court seeking suspension of the board of Lakshmi Vilas Bank, and the appointment of an administrator, Hindu BusinessLine reported. He has alleged in the PIL that the bank has been publishing misleading information to shareholders and the public. He has also alleged that the bank gave advances to the tune of Rs 2000 crore to Religare, Jet Airways Group, Cox and Kings, Nirav Modi Group, Coffee Day and Reliance Housing Finance. The loss to the bank is due to bad advances extended, the PIL further alleged. LVB has been looking for an investor for over a year. Last year, the bank nearly went ahead with a merger with Indiabulls Housing Finance, but the deal was opposed by the RBI. Post this, the bank has been in talks to merge with non-banking lender Clix Capital. LVB had informed the stock exchanges that both companies substantially completed due diligence for a merger, moving onto appointing a valuer for the merged entity. The AGM drama and way forward However, this doesn’t seem to have allayed shareholder or investor concerns. On Friday, shareholders rejected nine resolutions put forth by the company with regard to appointment and re-appointment of directors, auditors, etc. However, they did approve increasing the bank’s authorised share capital to Rs 1000 crore, raising capital, and increasing investment limit of NRIs, among others. Investors and shareholders who spoke to the media said that the bank needs capital infusion on an urgent basis and needs at least Rs 1,500 crore to stay afloat and run normal operations. They want a good management in place that will not only run the bank professionally, but also identify potential investors. Shareholders are also of the opinion that RBI needs to step in at the earliest to either put in a strong management in place or push for a merger of the bank so that investors and depositors are not worried. “A three-people committee can only be a temporary arrangement. The CEO’s position is vacant. Majority of the board members are ousted. Such a bank, if left that way, will be a permanent headache. That warrants urgent RBI action to calm down the investors and depositors including us,” an investor told Moneycontrol. Should depositors be worried? Depositors are bound to be worried about their bank’s financial health after the Punjab & Maharashtra Co-operative Bank Limited fiasco last year and RBI’s action on Yes Bank earlier this year. However, analysts are of the view that while LVB is in dire need of capital, the situation isn’t as severe as Yes Bank’s in terms of impact. The bank is also in advanced talks for a merger with Clix, and if RBI steps in, this is likely to push for faster completion. RBI has the power to push for a merger of an ailing bank. And with the potential deal also completing due diligence, investors are hopeful of its fructifying. "The most important aspect is that the depositor's money is safe. My association with the LVB is for the past 12/13 years. But the bank is 93-years old. Never in its history has the bank defaulted on its deposits," Pradeep, one of the directors who was voted out, told IANS. The bank too, put out a statement after the AGM in a bid to allay fears of depositors. It said that its liquidity position as on date is comfortable and that it continues to enforce cost reduction measures. LVB also said that its provision coverage ratio remains healthy at 72.6%, against the minimum of 70.0%. PCR ratio is usually seen as the ability of a bank to service debt and meet financial obligations and anything above 70% would mean that the bank isn’t vulnerable. Besides existing business, LVB said that it will continue its focus on capital-light loans. All the existing employees of the bank will continue to be in full service as usual. “Till a new managing director is appointed, the existing senior management team along with the Board of Directors will discharge the day-to-day affairs of the Bank as usual. We will be making further announcements on the Interim Management at the soonest,” the bank said in a statement.