Reserve Bank Of India Blocks Merger Of Lakshmi Vilas Bank With Indiabulls Housing Finance Ltd Citing Bad Loans

The Chennai-based Lakshmi Vilas Bank Ltd (LVB) has announced that the Reserve Bank of India (RBI) has rejected its proposed merger with Indiabulls Housing Finance Ltd.

The Reserve Bank of India (RBI) rejected the merger plan, the bank stated in a statement filed with stock exchanges, without disclosing the reason for the central bank’s decision.

The RBI cited high level of bad loans and insufficient capital to absorb risks as it brought Lakshmi Vilas under the so-called prompt corrective action recently.

Lakshmi Vilas Bank’s losses swelled to 2.37 billion rupees (USD 33 million) in the quarter ended June. Bad loans accounted for 17.3% of total lending, which is almost double the industry average.

The latest setback for the bank has come only days after the RBI initiated a so-called “prompt corrective action” on the lender due to high level of bad loans, lack of sufficient capital to manage risks and a negative return on assets for two consecutive years.

It may be recalled that Indiabulls Managing Director Gagan Banga had tried to assuage investors, saying the RBI action against Lakshmi Vilas Bank would not shut the door on the merger.

Under a corrective action, the RBI restricts lenders from issuing big corporate loans to reduce the lender’s concentration of risk, while also limiting the opening of new branches, among other steps.

Incidentally, the Lakshmi Vilas Bank is also being investigated by the police for alleged misappropriation of funds by its directors.