Should RBI's regulatory action on Lakshmi Vilas Bank worry erring lenders?

It is time for private-sector lenders with a record of lax fiscal discipline to worry since the Reserve Bank of India (RBI) has begun cracking the whip under prompt corrective action framework, the latest being the Chennai-based Lakshmi Vilas Bank, following Mumbai-based Punjab and Maharashtra Cooperative (PMC) Bank.

The banking regulator introduced the prompt action framework after the dangerous rise in non-performing assets dragging down many lenders.

The regulatory action will cloud the proposed merger of Indiabulls Housing Finance Ltd with Lakshmi Vilas Bank. In a regulatory filing on Saturday, the bank said that the central bank has taken this action owing to a high level of bad loans, insufficient capital adequacy ratio, negative return on assets (RoA) for two consecutive years and high leverage, according to a Livemint report. This action, the bank said, was based on the central bank's risk-based supervision for FY19.

The bank's net NPA stood at 7.49 percent in the last financial year, the capital adequacy ratio at 7.72 percent and its RoA was 2.32 percent, the report said. Under PCA, banks have to cut lending to corporates and reduce the concentration of loans in certain sectors. They are also restricted from opening new branches and paying dividends.

The major lenders currently under PCA are United Bank of India, Indian Overseas Bank, Central Bank of India, IDBI Bank and UCO Bank. The RBI last week placed the PMC Bank under PCA by restricting withdrawal by customers and banning advances and their renewal by the bank after major irregularities on its books were reported. The bank failed to declare the Rs 2,500-crore loan to the troubled real estate firm Housing Development and Infrastructure Ltd a non-performing asset. 

"The Reserve bank of India, vide their letter dated 27 September, 2019, has initiated prompt corrective action for Lakshmi Vilas Bank Ltd on account of high net NPA, insufficient capital to risk-weighted assets ratio (CRAR) and common equity tier-1 (CET 1), negative RoA for two consecutive years and high leverage, based on the on-site inspection under the Risk-Based Supervision carried out for the year ended 31 March, 2019," a notification said.

The regulator has also advised the bank on the restrictions put in place and the actions to be taken by the bank, with progress to be reported on a monthly basis to the RBI, according to the report. The bank's chief executive Parthasarathi Mukherjee quit citing personal reasons last month.

The Lakshmi Vilas Bank said in April that its board approved a merger with mortgage financier Indiabulls Housing Finance Ltd in an all-stock deal. The merged entity to be called Indiabulls Lakshmi Vilas Bank was expected to become the eighth largest private lender in India by size and profitability.

The lender is also under investigation of the Economic Offences Wing (EOW) for alleged cheating, criminal breach of trust, criminal misappropriation and criminal conspiracy on a complaint by Religare Finvest Ltd (RFL) pertaining to adjustment of their deposits to the dues of RHC Holding Pvt Ltd and Ranchem Pvt Ltd.