Bad Loans Prompt India to Sanction Bank That’s Seeking Merger

(Bloomberg) -- India’s central bank placed lending restrictions on Lakshmi Vilas Bank Ltd., adding to the company’s troubles after its chief executive officer abruptly quit last month and police registered a case of alleged fraud.

Lakshmi Vilas Bank, which is seeking a merger with financier Indiabulls Housing Finance Ltd. to reduce its delinquent debt, was informed last week it would be brought under so-called prompt corrective action, it said in a filing Saturday. The Reserve Bank of India cited its high level of bad loans and insufficient capital to absorb risks, it said.

Banks sanctioned by the regulator are restricted from lending or expanding their network while they mend their balance sheets.

“The Prompt Corrective Action is aimed at improving the performance of the bank and will not have any adverse impact on the normal day-to-day operations of the bank,” according to the filing.

Lakshmi Vilas Bank’s losses swelled to 2.37 billion rupees ($33.6 million) in the quarter ended June. Bad loans accounted for 17.3% of total lending, almost double the industry average.

Chief Executive Officer Parthasarathi Mukherjee suddenly left in August for personal reasons, about seven months after his term was extended for two years. An Indian court and the police are poised to begin separate investigations into allegations of fraud and misappropriation against the bank and Indiabulls Housing Finance.

The lenders are awaiting approval for their merger from the RBI, which has stepped up scrutiny of the proposal. The plan, announced in April, aims to create a large and diverse retail asset book and an opportunity to foray into newer businesses, the private bank had said. Lakshmi Vilas Bank’s shares have plunged 61% since the announcement in April.

Lakshmi Vilas Bank is exploring various options to raise capital to shore up its risk-absorbing ability and is putting in place strategies to recover bad loans, it said in a separate statement.

The bank has received shareholders’ approval to raise as much as 10 billion rupees in equity and 5 billion rupees through bonds.

To contact the reporter on this story: Debjit Chakraborty in New Delhi at dchakrabor10@bloomberg.net

To contact the editors responsible for this story: Shamim Adam at sadam2@bloomberg.net, Stanley James

©2019 Bloomberg L.P.