Over the last year, the 90-year old private sector Lakshmi Vilas Bank (LVB) was desperate to raise capital from the market. The bank had met many investors including private equity players, but nothing worked. In fact, there were quite a few M&A proposals but didn't progress to any logical conclusion. The Indiabulls Housing proposal was the only one where things really moved very fast. But, this proposal was rejected by the RBI. The bank is back to square one. Worse, the RBI has put LVB under prompt corrective action (PCA) framework from September this year. So what is the road ahead for the bank?
Boosting Capital Base
The bank is running on very low capital. It's capital adequacy ratio has fallen below RBI's regulatory requirement of 9 per cent to 7.72 per cent levels. The bank has a market cap of just Rs 900 crore, which doesn't offer any scope to mobilise capital. There is likely to be more equity dilution, which would impact financials. The bank has to start the search for a strategic or financial investor to restart normal lending business.
Containing Rising NPAs
Its gross NPA has jumped from 2.67 per cent three years ago to 15.30 per cent. Such high levels increases provisioning pressure and absorbs capital. If one takes gross NPA plus restructured stressed advances, the ratio goes up to 19.29 per cent of advances. So, close to a fifth of its advances are in troubled companies. The bank has large exposure in infrastructure, iron & steel and EPC. The immediate priority should be on recovery of loans as slowdown in the economy and lending would increase NPA levels.
Crazy Cost Structure
The bank has to put a check on its cost as the cost to income ratio, a key barometer of cost efficiency is too high at 101.48 per cent. Most banks operate in the 40-50 per cent bandwidth. The bank has to correct its cost structure to support profitability. It has to focus on digitization and new asset light models like using fintech for lead generation.
In a fast changing banking landscape, the bank has to rethink its business model. There are already small finance banks (SFBs), which are serving niche segments. The government has also consolidated PSBs with 10 large banks where some would be focusing on specific geographies. Similarly, fintechs are also reaching out to underserved and unbanked areas with innovative financing schemes.