RBI Rejects Indiabulls-Lakshmi Vilas Bank Merger Plan
Does RBI’s decision to reject the merger plan suggest that it is against NBFCs using mergers to convert into banks? Views differ.
The proposed merger of private sector lender The Lakshmi Vilas Bank Ltd. with home financier Indiabulls Housing Finance Ltd. failed to receive approval from the Reserve Bank of India, the bank said on Wednesday in a statement to stock exchanges.
“...RBI vide their letter dated October 09, 2019, informed that the application for voluntary amalgamation of lndiabulls Housing Finance Limited and lndiabulls Commercial Credit Limited with The Lakshmi Vilas Bank Limited...cannot be approved.”
The Indiabulls Housing Finance and Lakshmi Vilas Bank first proposed the merger earlier in April this year, saying that the amalgamated entity would create a large, healthy and diverse asset portfolio, which will benefit from stable low-cost funding in the form of public deposits and a wide distribution franchise.
Subsequently, the two firms amended the structure of the merger deal which envisaged the amalgamation of Indiabulls Housing and Indiabulls Commercial Credit into the bank. The Indiabulls Group also continued to reduce its exposure to the real estate sector, in order to meet the RBI’s rules for new bank licences. These rules state that an entity is only be applicable to apply for a bank licence if the non-financial businesses contribute less than 40 percent to the group’s business.
Despite these adjustments, the RBI has rejected the proposed Indiabulls-Lakshmi Vilas Bank merger.
Bank Licences: Mergers vs On-Tap
Since August 2016, the RBI has put licensing of universal banks on tap. As part of these guidelines, the banking regulator permits NBFCs to apply for a banking licence, subject to certain conditions.
Indiabulls Housing Finance, however, chose not to apply for a banking licence using the on-tap licencing route and chose to merge with a weak bank. At the time, analysts said that the merger was largely a way to access a banking licence since Lakshmi Vilas Bank did not bring either a wide network or a large deposit franchise with it.
Does the RBI’s decision to reject the proposed merger suggest that it is against NBFCs using the merger route to convert into banks? Views differ.
Abizer Diwanji, head of financial services at EY, believes that is not case. RBI doesn’t seem to be against NBFC-bank mergers in concept, Diwanji said while adding that this may be a case-specific rejection.
I don’t think this rejection can be considered a secular trend across the board for any future mergers. A well managed and professionally run NBFC could still consider a merger with a bank and the RBI is unlikely to be against it. The only caveat is that the promoters will have to have a clean track record and a strong management experience.Abizer Diwanji, Head - Financial Services, EY
Stocks expert Ajay Srivastava of Dimensions Consulting, however, saw the rejection of the proposed deal as clear messaging that back-door entry into banking via mergers may not be encouraged.
Anil Singhvi, founder of proxy advisory firm IiAS, added that the RBI may have been guided by the fact that the merger may not have resulted in the creation of a robust financial institution.
I think this merger was not of strength and wouldn’t have resulted in giving much more confidence. It wouldn’t have created an organisation that would be a value add for all stakeholders. So I think the RBI would’ve looked at that. They would’ve seen it as a merger of two weak players rather than two strong players.Anil Singhvi, Founder, IiAS
What Next For Lakshmi Vilas Bank?
With the merger with Indiabulls Housing Finance rejected, Lakshmi Vilas Bank will now need to craft a fresh revival strategy.
On Sept. 29, RBI placed the private sector lender under its prompt corrective action framework. The restrictions were placed due to its high level of bad loans, weak capital levels, negative return on assets and high leverage, the lender said in a notification to the stock exchanges.
As of the quarter ended June 30, 2019, the bank reported a net loss of Rs 237 crore. Its gross non-performing assets ratio stood at 17.30 percent, while net NPAs stand at 8.3 percent. It's capital adequacy ratio stood at 6.46 percent.
The restrictions placed on the bank will mean reduced lending, particularly to riskier loan segments. Still, Lakshmi Vilas Bank will need to look for ways to raise capital to help provide for its bad loans while improving its capital adequacy ratio.
“As a result of the PCA restrictions, which in my view are mathematical in nature, the bank will have to work towards increased capital in some form or a potential merger with some other bank,” said Diwanji. The bank will also need to strengthen management as there is no chief executive officer right now, he added.
Parthasarathi Mukherjee resigned as CEO on August 29.
What Next For Indiabulls Housing Finance?
Indiabulls Housing Finance, too, will need to rethink its financing strategy as it will not get access to the deposit franchise that it would have via the acquisition with Lakshmi Vilas Bank.
The first reaction is of relief since it brings the recent uncertainty to an end, said Ajit Mittal, executive director at Indiabulls Housing Finance.
...we thought it was an opportunity for us because we have a robust balance sheet with a very solid amount of capital that could have helped revive this bank and, in the process, be long-term transformation for us. With that perspective, we had approached the regulator but we have always known that the regulators have their own thinking on this issue. At the end of it, it has not found favour with them. So, it’s fine. We are again going to focus on our existing business with more renewed vigour.Ajit Mittal, Executive Director, Indiabulls Housing Finance
Since the defaults by IL&FS group companies last year, NBFCs, including Indiabulls Housing Finance, have struggled to raise fresh funding to fuel growth. Instead, the non-bank lender has focused on conserving liquidity.
In an interview to BloombergQuint on Oct.1, Indiabulls Housing Finance 's Vice-Chairman and Managing Director Gagan Banga said the company will be cautious about raising funds in the face of challenges affecting India’s NBFC space. “There are macroeconomic challenges, both for the overall economy as well as the sector. It’s best to be very conservative (while raising money),” Banga told BloombergQuint.
On Wednesday, hours before the RBI rejection was intimated to the stock exchange, Indiabulls Housing Finance informed shareholders that its board would consider a share buyback at its meeting on Oct. 14.
Shares of the NBFC ended with close to 2 percent gains on Wednesday while Lakshmi Vilas Bank shares fell 5 percent.
Year to date, Indiabulls Housing Finance’s share price has declined 72 percent while Lakshmi Vilas Bank’s is down by almost 70 percent. In the same period, the Sensex gained 6 percent.
RBI rejects Indiabulls-Lakshmi Vilas Bank merger: Brokerages’ take
Macquarie
- This is a very negative development.
- The RBI’s rejection may further raise questions like:
- Was the RBI unhappy about the corporate governance of the group?
- Was the RBI unhappy about the quality of Indiabulls’ book?
- Was the RBI not comfortable about their ability to manage retail deposits?
- Rejection comes despite Indiabulls being a white knight for Lakshmi Vilas Bank.
- Unsure about the future of Indiabulls Housing Finance.
- This rejection further jeopardises the funding situation for Indiabulls Housing Finance.
- The RBI has done the right thing.
- Rating under review.
Morgan Stanley
- Approval would not have been easy.
- Conversion into a bank would have significantly hurt return ratios.
- Fundamentals of real estate lenders are challenging given higher bad loans and shrinking funding.
- Indiabulls’ on-balance sheet borrowing down 18 percent since September 2018.
- Stock to remain volatile.
- Underweight with target price at Rs 410 apiece.