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RBI rejects proposed Indiabulls-Lakshmi Vilas Bank amalgamation

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Chennai-based private sector lender Lakshmi Vilas Bank (LVB) on Wednesday said that Reserve Bank of India (RBI) has denied approval for amalgamation of Indiabulls Housing Finance (IHF) and Indiabulls Commercial Credit Limited.

Chennai-based private sector lender Lakshmi Vilas Bank (LVB) on Wednesday said that Reserve Bank of India (RBI) has denied approval for amalgamation of Indiabulls Housing Finance (IHF) and Indiabulls Commercial Credit Limited.
The press release by LVB states, "RBI vide their letter dated October 09, 2019, informed that the application for voluntary amalgamation of Indiabulls Housing Finance Limited and Indiabulls Commercial Credit Limited with The Lakshmi Vilas Bank Limited ("LVB" or "Transferee Company") cannot be approved."
It is noteworthy that Indiabulls Housing Finance has called a board meeting on October 14 to consider buy-back of equity shares.
Indiabulls said, "Now that the merger will not happen with Lakshmi Vilas bank, the uncertainty of last 5 months on the business is lifted and the company will focus on its growth of the core business of housing finance. The company has also announced a board meeting on October 14th, 2019, Monday for considering buyback of its shares, subject to the board approval, the Company upon buyback of securities will have a ratio of aggregate of secured and unsecured debts to the paid-up capital and free reserves of not more than 6:1 on standalone and consolidated basis. We thank all our shareholders for their patience during this period of uncertainty since April 2019."
The merger, announced on April 2018, has received all necessary approvals, but the all-important nod from the RBI.
Last year, the board of Lakshmi Vilas Bank had approved the merger with Indiabulls Housing Finance in which shareholders of the bank will get 14 shares of Indiabulls Housing Finance for every 100 shares they hold.
The combined entity, with employee strength of 14,302, will have a loan book size of Rs 1.23 lakh crore for the first nine-month period of 2018-19.
In September, the RBI had initiated Prompt Corrective Action (PCA) against Lakshmi Vilas Bank due to high level of bad loans, lack of sufficient capital to manage risks and a negative return on assets for two consecutive years.
PCA was initiated after an on-site inspection, under the risk-based supervision, was carried out for the year ended March 31, 2019.
For FY19, the bank's net NPA stood at 7.49 per cent, capital adequacy ratio was at 7.72 per cent and its return on assets was (-) 2.32 per cent. It had reported a net loss of Rs 894.10 crore for 2018-19.
PCA is aimed at improving the performance of the bank and will not have any adverse impact on the day-to-day operations, including acceptance/repayment of deposits in the normal course, LVB said.
Under PCA, banks are mandated to cut lending to corporates and focus on reducing the concentration of loans to certain sectors. They are also restricted from opening new branches and paying dividends.
Dipan Mehta, Member of BSE & NSE, said that he is not surprised by the rejection by RBI as it would have created bad precedence.
"Clearly, it is a back door way of getting a banking license and could have even created a sort of way for many of the other NBFCs to look for banking licence without going through the entire rigmarole of getting a banking license and the associated risk," Mehta said.
Further, he said, "I think both companies have their own set of problems which are quite challenging at this point of time in terms of liquidity and growth."
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