How aggressive lending and rising NPAs caused the LVB to collapse
The 94-year-old Lakshmi Vilas Bank (LVB) may have been in the news for over a year now, as it was subjected to rapid corrective action (PCA) by the Reserve Bank of the India in September 2019, but the lender had been struggling with bad debts for longer.
Its problems seem to have started sometime in 2016-17, after deciding to switch to business lending from its earlier focus on lending to SMEs and individuals. This was also the time when he made a loan of around ₹ 720 crore to former Ranbaxy and Fortis Healthcare promoters, Malvinder Singh and Shivinder Singh, who subsequently went underperforming.
In poor health
“For three years and more, the private sector LVB based in Tamil Nadu has not been healthy. Rather, he suffered from poor health and continued loss. The reason is well known to everyone, including the RBI, ”the Indian Bank Employees Association (AIBEA) said in a recent statement.
He added that the bank had made bad loans of over ₹ 2,000 crore to borrowers such as Religare, Jet Airways, Cox and Kings, Nirav Modi Group, Coffee Day and Reliance Housing Finance.
Data from its annual reports shows the bank appears to have decided to engage in aggressive lending. Its total net advances increased 8.59% to ₹ 25,768.20 as of March 31, 2018, from ₹ 23,728.91 crore a year earlier.
However, gross non-performing assets (APN) which reached 9.98% of gross advances at March 31, 2018, against 2.67% a year earlier, coupled with a lack of adequate capital, forced the bank to moderate its loans in 2018-2019. and focus on “optimization and conservation of capital”. As a result, the total net advances decreased by 21.98% to ₹ 20,103.26 crore as of March 31, 2019.
With its capital position deteriorating further, net advances fell 31.22% to ₹ 13,827.89 crore as of March 31, 2020, which LVB’s annual report attributed to ‘constraints stemming from declining CRAR “.
As of September 30, 2020, advances fell further to ₹ 13,505.16 crore even as gross NPA rose to 24.45% of gross advances and the capital adequacy ratio fell to (-) 2.85% .
Around 37% of LVB’s loan portfolio comes from the corporate segment, according to its 2019-20 annual report.
A sector break in NPAs shows bad loans in the infrastructure sector to be highest, at ₹ 718.97 crore, followed by base metals and metal products, at ₹ 341.86 crore.
“In FY20, asset quality deteriorated in the banking industry in general and in your bank; many accounts have slipped to NPA from different segments including business, MSMEs and retail.
“Despite the good performance during the recovery, the huge slippage in NPA accounts has eclipsed the recovery performance,” the annual report notes, adding that it recovered ₹ 761.38 crore from the NPA accounts.
However, a former investor points out that it’s not as if the bank is the only one making these loans. “Many loans have been granted within the framework of a consortium. The economic situation has also changed during this period, ”he noted.
The bank’s efforts to find an investor and raise capital are well documented, but the long wait seems to have finally involved the RBI, organizing a “rescue” of LVB by DBS Bank.