For the last 10 quarters, Lakshmi Vilas Bank has been incurring losses and the RBI subjected it to Rapid Corrective Action (PCA) in September 2019.
For the first time in the history of any bank in India, the shareholders of Chennai-based Lakshmi Vilas Bank removed seven directors and auditors at the bank’s Annual General Meeting (AGM) on September 25. This also included MD and CEO S Sundar, rendering the 94-year-old bank headless.
This is being touted as an unprecedented revolt by shareholders, never seen before in Indian banking history. Some reports also cite the incident as a “dramatic shareholder blow,” which has now left the bank without a promoter or CEO.
A section of shareholders, mainly institutional shareholders, were extremely unhappy with the mismanagement and lack of governance at the bank which has been dealing with losses and deteriorating deposits and therefore rejected the resolutions seeking the appointment of the seven directors. This was N Saiprasad, a non-executive and non-independent director; Raghuraj Gujjar, Non-Executive and Non-Independent Director; Gorinka Jaganmohan Rao, non-executive and non-independent director; KR Pradeep, non-executive and non-independent director; BK Manjunath, non-executive and independent director; YN Lakshminarayana Murthy, Non-Executive Independent Director.
The bank’s remaining directors then held an emergency meeting Sunday to find a way forward, not only to find the next CEO and chief executive officer, but also to discuss fundraising, something the bank urgently needs.
Without a leader, the Reserve Bank of India then approved that the bank’s day-to-day affairs be managed by a Committee of Directors (CoD) made up of three independent directors, who will exercise the discretionary powers of MD and CEO in the interim. .
But why are shareholders unhappy? What led to the drama at the company’s 93rd AGM, and what is the way forward for the bank? Here is a truth.
A bank with liquidity problems
For the past 10 quarters, LVB has been incurring losses, having reported a loss of Rs 836.04 crore for the FY20 financial year. Due to financial weakness, in September 2019, the RBI initiated Rapid Corrective Action (PCA) against the bank for high non-performing assets (NPA) or bad loans, lack of adequate capital, and negative return on assets during the last two years.
A PCA is generally implemented to improve a bank’s performance, and under it, banks have to reduce bad loans, cut business loans, restrict the opening of new branches, pay dividends, and seek to attract more capital.
The RBI move came when the Delhi Police Economic Crimes Wing filed a complaint against the LVB board for alleged cheating and embezzlement.
The bank’s deposit base has been declining since September 2019 and the bank’s Tier I capital ratio has turned negative, at -0.88%, compared to the minimum requirement of 8.875%. Tier 1 capital is the financial muscle of a bank and is considered a primary indicator for measuring the financial health of a bank from an RBI point of view.
To make matters worse, R Subramanian, a former bank employee, has filed a public interest litigation (PIL) in Madras High Court seeking the suspension of the Lakshmi Vilas Bank board and the appointment of a trustee, reported Hindu BusinessLine. It has alleged in the PIL that the bank has been publishing misleading information to shareholders and the public.
It has also alleged that the bank made advances in the amount of Rs 2000 crore to Religare, Jet Airways Group, Cox and Kings, Nirav Modi Group, Coffee Day and Reliance Housing Finance. The loss for the bank is due to bad advances extended, the PIL 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 RBI opposed the deal.
Post this, the bank has been in talks to merge with non-bank lender Clix Capital. LVB had informed the stock exchanges that both companies substantially completed due diligence for a merger, going on to appoint an appraiser for the merged entity.
The AGM drama and the way forward
However, this does not appear to have allayed the concerns of shareholders or investors. On Friday, shareholders rejected nine company resolutions regarding the appointment and re-election of directors, auditors, etc.
However, they approved to increase the bank’s authorized share capital to Rs 1000 crore, raise capital and increase the investment limit of NRIs, among others.
Investors and shareholders who spoke to the media said the bank urgently needs a capital injection and needs at least Rs 1.5 billion to stay afloat and conduct normal operations. They want good management that not only runs the bank professionally, but also identifies potential investors.
Shareholders are also of the view that the RBI should intervene as soon as possible to establish sound management or push for a bank merger so investors and depositors are not concerned.
“A committee of three can only be a temporary arrangement. The CEO position is vacant. Most of the board members are removed. Such a bench, if left like this, will be a permanent headache. That justifies an urgent action by the RBI to calm investors and depositors, including us, “one investor told Moneycontrol.
Should Depositors Care?
Depositors will surely be concerned about the financial health of their bank after the Punjab & Maharashtra Co-operative Bank Limited fiasco last year and the RBI’s action on Yes Bank earlier this year.
However, analysts are of the opinion that while LVB is in dire need of capital, the situation is not as dire as Yes Bank 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 drive a faster completion. RBI has the power to drive the merger of a troubled bank. And with the potential deal also completing due diligence, investors are hopeful it will come to fruition.
Business Standard reported Wednesday that RBI told the Punjab National Bank to be ready to take over LVB if the Clix deal doesn’t go through. Another public sector bank has also been asked to consult LVB’s books.
“The most important aspect is that the depositor’s money is safe. My association with LVB is for the last 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 in, told IANS.
The bank also issued a statement after the AGM in an attempt to allay depositors’ fears. He said that his liquidity position to date is comfortable and that he continues to apply cost reduction measures.
LVB also said that its provision coverage ratio remains healthy at 72.6%, compared to a low of 70.0%. The CRP ratio is generally considered the ability of a bank to pay off debt and meet financial obligations and anything above 70% would mean that the bank is not vulnerable.
In addition to the existing business, LVB said it will continue to focus on low-capital loans. All existing bank employees will continue in full service as usual.
“Until a new managing director is appointed, the existing senior management team together with the Board of Directors will handle the day-to-day business of the Bank as usual. We will make further announcements on interim management as soon as possible, ”the bank said in a statement.
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