The functioning of old generation private banks has come under the spotlight with shareholders of two private sector banks, Lakshmi Vilas Bank (LVB) and Dhanlaxmi Bank firing their chief executive officers in the span of a week and the Reserve Bank of India (RBI) taking a close scrutiny of their operations. While there are no strong promoters for these banks, a clutch of powerful investors are calling the shots with the stage set for a takeover or merger of these banks, sources said.
On Wednesday, shareholders of Kerala-based Dhanlaxmi Bank voted against the appointment of Sunil Gurbaxani as managing director and CEO, though the RBI had approved his appointment for a period of three years from the date of taking charge. Last week, shareholders of the struggling LVB voted against the appointment of seven directors to its board, including that of S Sundar as the MD and CEO, and the promoters KR Pradeep and N Saiprasad.
Although these banks have been in existence for several decades, they have no promoter groups who can take these banks forward. Two other South-based banks — South Indian Bank and Federal Bank — have been operating as board-driven banks without a promoter. In Karur Vysya Bank, the promoter stake is 2.11 per cent and there’s no promoter in Karnataka Bank. All these banks are prime takeover targets if the RBI agrees, as takeover or merger of a bank is not possible without the approval of the central bank.
The firing of CEOs in two banks has raised concern among depositors as the collapse of Punjab and Maharashtra (PMC) Co-operative Bank last year was followed by the near-death experience of Yes Bank. However, the RBI made timely intervention and salvaged Yes Bank, preventing a systemic fallout. Even before PMC Bank and Yes Bank, the collapse of IL&FS in 2018 had sent the entire financial sector into a turmoil.
Lakshmi Vilas Bank
Problems in Chennai-based LVB were simmering for quite some time. “The RBI has let the situation linger at Lakshmi Vilas Bank linger for too long. It cannot afford another accident in the financial sector after IL&FS, PMC and Yes Bank,” said Institutional Investor Advisory Services India Limited (IiAS), an advisory firm, that advised shareholders to vote against the re-election of directors.
Everything that can possibly go wrong with a bank, has gone wrong with LVB. And while no one is calling the bank insolvent, this is what it truly is. The RBI hopefully has a contingency plan ready, although it is not obvious what it will take for the regulator to set it in motion, IiAS said. LVB posted a net loss of Rs 112.28 crore in the June quarter of FY21, as against a loss of Rs 237.25 crore in the same period last year. Its EPS was -3.33 per cent. Almost one fourth of the bank’s advances have turned bad assets. Its gross non-performing assets (NPAs) stood 25.40 per cent of the advances as of June 2020, as against 17.30 per cent a year ago, and total deposits were pegged at Rs 21,161 crore.
LVB’s Tier-1 capital ratio had turned negative at 0.88 per cent and 1.83 per cent as of March 2020 and June 2020 respectively as compared to the minimum requirement of 8.875 per cent.
What’s the way forward? “The RBI has approved that day-to-day affairs of the bank will be run by a committee of directors (CoD) composed of three independent directors. This CoD will exercise discretionary powers of MD and CEO in the ad-interim,” said Shakti Sinha, independent director.
While Meeta Makhan is the chairperson of the CoD, Shakti Sinha and Satish Kumar Kalra are the other members. With liquidity coverage ratio (LCR) of about 262 per cent as on September 27, 2020, against minimum 100 per cent required by the RBI, the deposit-holders, bond-holders, account-holders and creditors are well safe guarded, Sinha said.
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The most recent merger proposal has come from AION-backed Clix Capital and discussions with them are reportedly on. The bank was earlier wooed by SREI Capital. It almost tied up with Indiabulls Housing Finance, but the RBI objected to the merger proposal. “The RBI is likely to come out with a merger or takeover plan for LVB. Who will be the suitor? It’s likely to be a PSU bank. The RBI can’t afford to keep the steady stream of bad news emanating from the financial sector,” said a banking source.
Dhanlaxmi Bank
Thrissur-based Dhanlaxmi Bank has been witnessing a different battle, with some high networth investors opposing changes being brought about by the board led by Gurbaxani, who incidentally was appointed by the RBI.
MA Yusuff Ali — the promoter of Lulu Mall group of Kochi and Dubai — who holds nearly 5 per cent stake, Gopinathan CK with 9.79 per cent and DHFL group’s Kapil Wadhawan (4.99 per cent stake) are the top shareholders of the bank. Yusuff Ali also holds significant stakes in South Indian Bank and Federal Bank.
In a letter to the RBI Governor, the All India Bank Employees Association (AIBEA) had said, “In the beginning of this year, the top management has changed and in recent months we are concerned to observe that perhaps the bank is once again heading in the wrong direction. Instead of consolidating the gains and further strengthening the bank, we observe that efforts are on to change the business profile which are bound to land the Bank into difficulties.”
AIBEA said several branches were earlier opened in north Indian states and the bank got into problems due to inadequate control and supervision. Hence, the situation arose, including in the view of the RBI, and these decisions had to be reviewed and the bank has already closed many of those branches. “But we learn that attempts are again being made to open more branches in northern states while the bank has inadequate infrastructure to manage the business in those areas. Similarly, the cost to income ratio in this bank is already high, and it goes without saying that there is imperative need and necessity to improve the ratio substantially,” AIBEA Secretary General CH Venkatachalam said.
If the central bank does not effectively intervene in the affairs of this bank now, once again it will run into problems. “Slowly, the people and customers of the bank have regained their confidence about the bank and any reversal of the same would be suicidal for the bank,” Venkatachalam said.
Total deposits of Dhanlaxmi Bank stood at Rs 10,904.07 crore as of March 2020. It made a net profit of Rs 6.09 crore and a revenue of Rs 236.65 crore for the quarter ended June 2020. The capital adequacy ratio (CRAR) as per Basel III and Core CRAR as of March 2020 was 14.41 per cent and 10.69 per cent, respectively. Gross NPAs fell from Rs 495.84 crore as on March 31, 2019 to Rs 401.22 crore as on March 31, 2020
According to bank unions, the RBI’s role in the board of directors of Dhanlaxmi Bank should be reviewed, as otherwise the central bank would become answerable if things go bad. “(RBI) cannot afford to view it merely as a small bank based on the size of its deposits. It needs to prepare for the systemic shock that the collapse of this lender can cause among the old generation private sector banks – most of whom need capital,” IiAS said.
With the Covid-19 pandemic still raging, the RBI has more than enough on its hands. That said, according to banking sources, the central bank should not be in a reactive mode, but on the front-foot, tackling the problem head-on.
According to bank unions, the RBI’s role in the board of directors of Dhanlaxmi Bank should be reviewed, as otherwise the central bank would become answerable if things go bad. 
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