Lakshmi Vilas Bank: The Unravelling Of A 93-Year-Old Lender

This small bank from Tamil Nadu is now on the brink. What took it there and what solution will emerge?

Lakshmi Vilas Bank Mulund branch. (Source: BloombergQuint)
Lakshmi Vilas Bank Mulund branch. (Source: BloombergQuint)

It’s not an everyday occurrence in India to have shareholders vote out directors from a board. Certainly not seven at one shot. It’s even rarer to see this happen at a banking entity, closely monitored by the Reserve Bank of India.

Yet, that’s what happened on Sept. 25. Shareholders voted out seven directors of Lakshmi Vilas Bank up for nomination, including Chief Executive Officer S Sundar.

Details of the shareholder vote, now available on the exchange websites, shows that 99.7% of institutional shareholders voted against the appointment or reappointment of the seven directors. Among public shareholders, 62% voted against and among promoter shareholders, 19% voted against the matter.

At least two large institutional investors voted against the resolutions. These included Srei Infrastructure Finance Ltd. and Capri Global Holdings Pvt, according to three people with direct knowledge of the development. Another large shareholder, Indiabulls Housing Finance Ltd., abstained from the vote, the housing finance company confirmed over email.

An official at one of these firms, speaking on the condition of anonymity, said they had been unhappy with the bank’s performance for at least the last two years. A failed attempt to merge with Indiabulls Housing Finance, a high level of bad loans and losses led them to vote against these directors continuing on the bank’s board, this person said. A second official at another investor that voted against the resolutions shared a similar view. He, too, spoke on condition of anonymity.

Both officials also cited governance concerns at the bank, saying that the promoters continue to influence the bank’s affairs via board appointments. Concerns about reappointments to the board had also been raised by proxy advisory firm IiAS in the run up to the vote on Sept. 25.

Srei Infrastructure and DHFL Pramerica Life Insurance did not respond to queries sent on Sept. 29. Rajesh Sharma, managing director at Capri Global, wasn’t available for comment.

Lakshmi Vilas Bank declined to comment on queries sent.

In a statement on Monday, the bank had said that day-to-day affairs would be run by a three-member committee of the board, approved by the RBI. The bank said it was holding liquidity well in excess of the regulatory requirement, in an attempt to address any depositor concerns.

The Build-Up...

The voting of directors took the 93-year old lender closer to a crisis that has been building for years. But it wasn’t always seen as a weak bank.

Lakshmi Vilas Bank was once a small, local bank started by a community of businessmen in Tamil Nadu. It went on to acquire other local lenders to serve small traders and businessmen in southern India. For most of its history it has been closely held by promoters who were businessmen first and bank owners later.

Over the years though, promoter groups kept selling their shares, leaving the bank with over 92% public shareholding.

In 2010, like many other lenders at the time, Lakshmi Vilas Bank expanded its ambitions.

In an attempt to shed the image of an old private sector bank, former foreign banker PR Somasundaram was hired as chief executive.

From thereon the lender started to build its corporate loan portfolio by taking small shares in large consortium loans, which was the norm in those days, said one of three people quoted above. The lender built a corporate loan book with exposure to sectors like infrastructure, textiles and metal sectors.

Somasundaram exited within a short two years. Between 2012 and 2015, the bank saw two more changes in leadership. KSR Anjaneyulu, an executive director at the bank, was appointed interim CEO between 2012 and 2014. In 2014, Rakesh Sharma took over only to leave a year later.

In December 2015, former Axis Bank official Parthasarthi Mukherjee was appointed as CEO. He stayed till August 2019.

Through these years, the bank continued to grow its loan book, led first by corporate advances and then by retail advances under Mukherjee.

Outstanding loans, which stood at Rs 6,277 crore as of March 2010 rose to a peak of Rs 27,005 crore as of March 2018.

Historically these old generation private banks have existed to serve the communities which built them, said independent banking analyst Hemindra Hazari. As long as they want to continue doing that, these banks will thrive, he said.

Once they [old private sector banks] step out to expand their presence and their businesses, the old generation private banks are met with limitations in management bandwidth. To cover this gap, they often hire senior managers from other banks, but the decisions have not panned out the way they wanted. Either the inherent culture of the organisation did not match with the new manager, or the hiring decisions themselves were flawed.
Hemindra Hazari, Independent Banking Analyst

...And The Unravelling

While the bank was chugging along between 2010 and 2018, capital had remained a nagging issue. Like in other old private lenders, promoter shareholding was dispersed. The largest chunk of shareholding of about 3.5% rests with KR Pradeep. The total shareholding of the promoter group was under 7%.

Without a prominent promoter group, and up against newer private lenders, raising capital was never easy.

Under Mukherjee, in January 2017, Lakshmi Vilas Bank opened a qualified institutional placement for the first time in its history, where it managed to raise Rs 165 crore from a clutch of investors, said an official who worked at the bank at the time. He spoke on condition of anonymity. Again, in March 2019, the bank raised another Rs 459 crore through a QIP.

Mukherjee was trying to clean-up the loan book alongside by selling chunky loan exposures and cutting back on limits to weaker customers. He also tried to shed the bank’s costly bulk deposits.

In January 2017, new trouble struck. Religare Financial Services alleged that the bank had misappropriated fixed deposits worth Rs 791 crore. Recently, news agency PTI reported that two former employees of the bank have been arrested in the case.

Alongside, the bank continued to look for capital and investors. In April, it received a merger proposal from Indiabulls Housing Finance. Despite two attempted deal structures, the merger proposal was turned down by the RBI in October 2019.

Even before that decision came through, Mukherjee left in August 2019.

The Way Out

The bank now stands a cross-road.

With capital wiped out and most board members, including the new chief executive S Sundar, voted out, chugging along is no longer an option.

One possible solution is a proposed merger with non-bank lender Clix Capital, which expressed an interest in the bank on June 15.

The merger, if concluded, is expected to bring in about Rs 2,500 crore in capital to Lakshmi Vilas Bank, said a person directly familiar with the deal. While Clix Capital has concluded a fair amount of due diligence, some concerns remain. For one, the Pramod Bhasin-promoted entity is seeking more clarity from regulators on the liabilities it will need to take on after such a merger, the person cited earlier said. Once it receives clarity, Clix Capital will submit an offer to the board and the promoters, after which it will need to approach the regulator.

Clix Capital has declined to comment on BloombergQuint's emailed queries sent on Sept. 29.

But the clock is ticking for the bank and for the regulator.

With tier-1 capital negative, how long can the bank go on even if the deposit base holds steady? Equally, how patient will the RBI be? The regulator, after the events that have unfolded at Punjab & Maharashtra Cooperative Bank and Yes Bank Ltd., may be keen to avoid another accident in the financial sector.

“Investors, through their vote, have sent a strong signal to the regulators. With even the CEO getting voted out, the investors have served the bank to RBI on a platter,” said Amit Tandon, MD at proxy advisory firm IiAS. “They cannot not act.”

Lakshmi Vilas Bank: A Stitch In Time

Note: This story has been corrected after DHFL Pramerica Life Insurance clarified that they did not vote against the resolution to appoint the seven directors to the Lakshmi Vilas board. The error is regretted.