The economic fallout of the coronavirus pandemic is expected to push up non-performing assets of the banking sector. To support the statement, I‘d like to point out that recently Reserve Bank of India (RBI) has stated that the estimated ratio of gross NPAs may rise to 12.5% by March, 2021, which might happen according to a baseline scenario. To explain is better, NPAs are non- performing assets which are a sort of loan or advance for which the principal or the interest on the same, is not paid and remains overdue for a period of 90 days. Usually, banks are required to classify NPAs further into substandard, doubtful and loss assets.
It’s known for a fact that India’s NPA ratio is one of the highest among comparable countries. After failure stories of IL&FS, Punjab & Maharashtra Cooperative Bank and DHFL, and the bailout of Yes Bank, the Reserve Bank of India has announced a decision to impose a 30-day moratorium on Lakshmi Vilas Bank Ltd. commonly known as LVB. Thus, the curious case of Lakshmi Vilas Bank is very important to look at. It is an Indian private sector bank established a century ago in Tamil Nadu. As of November 2020, the bank has 566 branches across 19 states and 1 union territory.
The RBI that LVB’s branches and deposits of Rs 20,973 crore, has undergone a steady decline with perennial losses over the last three years, ending up only eroding the bank’s net-worth. Almost 1/4th of the bank’s advances have turned out to be bad assets. It posted a net loss of Rs 397 crore in the September quarter of FY21, as against a loss of Rs 112 crore in the June quarter. Its gross non-performing assets stood 25.4% of its advances as of June 2020 (a year ago it was 17.3%). It had low levels of liquidity and with continuous withdrawal of deposits; the bank has not been able to raise adequate capital to address these issues. Serious governance issues in recent years have led to “deterioration in its performance”, as of a statement by RBI. Eventually a draft amalgamation scheme of Lakshmi Vilas Bank with DBS Bank India was passed by RBI. This merger would result in write-off of paid-up share capital and lastly delisting of Lakshmi Vilas Bank from all stock exchanges.
So what went wrong? Let’s have a flashback.
The problem initiated when all its focus shifted from SMEs to large businesses. One of the loans soon turned out to be a bad loan given to former promoters of pharma major Ranbaxy and Fortis Healthcare, of Rs. 720 crores.
A Delhi branch of LVB was sued to recover fixed deposits worth about Rs 800 crores that the bank invoked to recover loans to the Singh brothers.
RBI put LVB under Prompt Corrective Action (PCA) due to which it was not able to issue fresh loans or open a new branch anywhere. Soon the board members of Lakshmi Vilas Bank approved a merger of the bank with the country’s 2nd largest housing finance company i.e. the Indiabulls Housing Finance Ltd. The latter’s shareholders were to receive a 90.5% stake in the consolidated entity, which were to be called Indiabulls Lakshmi Vilas Bank, but all went in vain as the RBI objected to the merger proposal.
The dream catcher of every small depositor is the DICGC aka Deposit Insurance and Credit Guarantee Corporation, an RBI subsidiary. It gives insurance cover on up to Rs 5 lakh deposits in banks. This assures that the financial system is safe and sound but time and again the failures have wavered the confidence of depositors. However, are NPAs in the banking sector expected to accelerate? This is exactly where we started. The pandemic has affected the cash flows of people and of the companies. Absolutely, NPA’s will differ sector-wise with IT and pharma to lose less than tourism, aviation etc.
Together with a moratorium placed on Lakshmi Vilas Bank and maximum permissible limit for withdrawals at ₹25,000 per depositor, the bank is facing a 55% dip in share prices as of last week of November.