The role of two central bank nominees to the board of Lakshmi Vilas BankNSE -0.96 % would be in focus on Friday when the highest policy-making group at the lender meets to possibly consider a merger with a non-banking finance company (NBFC).
An approval from the two nominees – Suvendu Pati and Rajnish Kumar – could set the precedent for the regulatory stance on the subject, as the central bank is unlikely to go against the recommendation of its own representatives at bank board meetings.
Smaller banks, with low-cost liabilities, are attractive bets for bigger para banks, and a successful deal involving Lakshmi Vilas could act as the template for Indian financiers.
“We have already sounded out the central bank and it seems to be positive about this idea, should the merger tick all the boxes,” a person familiar with the matter said. “We are actively evaluating the possibility of the merger with Indiabulls Housing Finance. The board would discuss the issue, and this will be the first firm step toward the merger.”
Indiabulls Housing’s cost of borrowing is around 10.2-10.5% while that for Lakshmi Vilas is 6.7%.
Lakshmi Vilas Chief Executive Officer Parthasarathi Mukherjee said the possibility of a merger is “market speculation, at this point.”
Given the challenges NBFCs face by way of access to low-cost financing in a tight liquidity market, the merger with a bank would bring synergy. This would also address capital concerns at smaller banks if they were merged with NBFCs that have asset books in excess of Rs 20,000 crore.
Lakshmi Vilas is also in discussion with two more NBFCs in the Rs 20,000-crore assets club, sources said.
“The bank continues to be in discussion with a number of prospective investors and has been examining various routes for raising capital,” Lakshmi Vilas said Thursday in a regulatory filing to stock exchanges.
The bank is looking to raise Rs 2,000 crore of capital to augment its depleting capital ratio, which was at 7.57% at the end of December last year, falling from 9.67% three months ago.
It is also making losses in successive quarters due to rising bad loans. If the bank doesn’t raise capital before March 31, it risks slipping into the ambit of the central bank’s Prompt Corrective Action framework that imposes operational curbs.
