AION Capital-backed Clix Capital Services Pvt. is looking at merging its lending operations with Lakshmi Vilas Bank Ltd., following which, it will invest Rs 2,000-2,500 crore into the bank, two people with direct knowledge of the matter said.
In an exchange notification on Monday, Lakshmi Vilas Bank said it had received a non-binding letter of intent from Clix Capital Services and Clix Finance India Pvt., for an investment in the bank, which could lead to an amalgamation with Clix Group.
According to the first person cited earlier, Clix Capital is valued at around Rs 3,000 crore, which would imply that after the merger, Clix Group would hold nearly 65% of the bank. Lakshmi Vilas Bank has a market value of Rs 540 crore, as on June 16.
Once this merger is complete, the bank would raise funds to shore up its capital base. Clix Group could look at investing Rs 2,000-2,500 crore in the bank to maintain its stake in it, the first person cited earlier said.
To be sure, this is still a non-binding proposal which is subject to a due diligence exercise which is currently underway. The notification said that the investor has 45 days to conduct its due diligence, after which it will decide on a final offer.
Clix Capital didn’t respond to queries sent on email. Lakshmi Vilas Bank declined to comment on the story.
Lakshmi Vilas Bank is currently under the Reserve Bank of India’s prompt corrective action framework, under which it’s not allowed to add large loan exposures or expand its presence.
As on Dec. 31, 2019, the bank’s capital adequacy ratio stood at 3.46%, of which, 1.46% represented the bank’s Tier-1 capital base. As per RBI norms, banks are expected to have minimum Tier-1 capital of 7% and a minimum capital adequacy ratio of 9% by March 31, 2019.
Given the bank’s low level of capital, an infusion is now urgent.
The proposed capital infusion into Lakshmi Vilas Bank will help it meet the regulatory minimum capital requirements, which are essential to exit the prompt corrective action framework, the second person cited earlier said.
While the bank will get capital, the merger will give Clix Capital’s businesses access to cheaper funding. India’s non-banking finance sector has faced a tough funding environment since October 2018 after the collapse of Infrastructure Leasing & Financial Services group.
As on Dec. 31, 2019, Lakshmi Vilas Bank’s outstanding deposit base stood at Rs 23,565 crore compared with over Rs 30,000 crore a year ago. The bank is in the process of getting rid of expensive bulk deposits which make up 7% of total deposits, the second person cited earlier said.
On the lending side, the two sides see complementarity. Clix Capital has a loan book worth Rs 5,000 crore, which is spread across housing loans, two-wheeler loans, business loans and unsecured personal loans. The loan categories which Clix Capital operates in are similar to categories Lakshmi Vilas Bank is looking to expand its business in, the people cited earlier said.
As on Dec. 31, the bank’s outstanding advances stood at Rs 17,535 crore as compared with Rs 24,123 crore a year ago.
Cleaning up the bank’s existing loan book, however, will be challenging.
At the end of the third quarter, Lakshmi Vilas Bank’s gross non-performing asset ratio stood at 23.37% as compared with 21.25% as on Sept. 30, 2019. Net NPAs as a ratio of total advances stood at 9.81% as on Dec. 31, as compared with 10.47% in the preceding quarter.
Lakshmi Vilas Bank has been trying to conserve capital by reducing its risk-weighted assets.
While an earlier proposal of amalgamation between Lakshmi Vilas Bank and Indiabulls Housing Finance wasn’t cleared by the RBI, the fresh proposal could be viewed more favourably.
“A private equity investor can bring in the necessary patient capital for the bank, which can be locked in for seven or eight years. And there’s precedent in Fairfax’s investment in Catholic Syrian Bank. Moreover, it can also attract necessary talent to lead Lakshmi Vilas Bank, which has been without a head for some time now,” said Srinath Sridharan, an industry expert. “The regulator could see these points as a positive when considering an investment proposal.”
AION Capital, which owns a majority stake in Clix Capital, is a private equity firm funded by ICICI Ventures and Apollo Capital Management. This isn’t the first time that Apollo Capital is looking to invest in a distressed bank. In 2014, the global fund had invested in Germany’s KCB Bank, which it has since turned around.
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