The banking and financial services sector in India has been abuzz with reports of Indiabulls Housing Finance considering a probable merger with Lakshmi Vilas Bank. Boards across both financial entities are expected to hold meetings very soon in order to examine the possibilities of the merger of the housing finance entity with the private sector banking organization. Both financial players have been evaluating chances of a probable merger over a few months as per reports and may have already arrived at an understanding where the proposal for the merger can be formally approved prior to regulatory approvals being sought.
The merger is expected to be taken up by the board of Lakshmi Vilas Bank as per reports and the management of the banking institution had reservations previously regarding the share-swap ratio that was proposed. However, the revised ratio for share-swap from Indiabulls Housing Finance may be considerably improved as compared to the earlier ratio and hence this could well lead to a merger anytime soon prior to the regulatory approval aspects being taken up. As per reports, the merger price may be eventually touching anywhere around 10. There is a blueprint for merger of the banking entity with the housing finance company and an application may be made to the Reserve Bank of India (RBI) for transfer of banking licenses to the merged institution.
In case the current proposal is not approved, the two companies may once again approach the banking regulator and other authorities. Indiabulls Housing Finance is one of the biggest housing finance entities in the country and its size of assets is triple that of Lakshmi Vilas Bank which is a reputed private sector banking entity from Tamil Nadu founded back in the year 1926 by several Karur based businessmen for catering to financial requirements of local residents. Several NBFCs (Non-Banking Financial Companies) have been scouting for merger deals with banking institutions in the country owing to factors like a liquidity crisis, tougher market conditions, overall network and flexibility that comes with being part of a bank and higher borrowing costs. The Reserve Bank of India (RBI), however, has been extremely alert with regard to providing banking licenses for financial services companies.
According to latest reports, Lakshmi Vilas Bank has previously held discussions with three leading financial companies, two of which are reportedly based in Mumbai while one financial services company is from Kolkata with regard to chances of a merger. However, Indiabulls Housing Finance or the Indiabulls Group is now the preferred and predominant partner in this regard. RBI approval will be sought once the boards of both institutions approve the merger proposal. There are stringent provisioning based rules linked to sticky assets and in this current scenario, merging with a big finance entity like Indiabulls Housing Finance will enable the smaller Lakshmi Vilas Bank to scale up overall capital adequacy, thereby getting the breathing space to scale up advance levels. Additionally, over the last few years, several smaller banks have been tapping investors for enhancing capital levels as well.
The capital adequacy ratio for Lakshmi Vilas Bank stood at 7.5% by the end of last year and Indiabulls Housing Finance had a 21% ratio by this time. NPAs (non-performing assets) for Indiabulls Housing Finance were at around 0.6% in December 2018 while they were 7.6% in this period for Lakshmi Vilas Bank. Indiabulls Housing Finance possesses cash and equivalent volumes of approximately Rs. 21,000 crore as per reports. Lakshmi Vilas Bank has been raising capital over a period of 5 years via equity placements courtesy institutional investors and rights issue although this has not been deemed as sufficient according to reports.
On the other hand, merging with a private bank will be beneficial for Indiabulls Housing Finance as well. It will be able to reduce the overall pressure on account of higher costs of borrowing and also the mismatch between assets and liabilities. Indiabulls Housing Finance may be able to garner savings of a whopping Rs. 600 crore in case it is able to get access to the Rs. 31,000 crore deposit base at Lakshmi Vilas Bank. Lakshmi Vilas Bank already has a total of 569 branches as of the end of 2018 along with 6 extension counters according to reports. Nothing official has been stated by both entities although speculation is rife about the merger happening in the near future. Previously, NBFCs have merged with banks and the latest merger was witnessed between Bandhan Bank and GRUH Finance. In fact, Capital First and IDFC Bank have merged previously while IndusInd Bank also acquired Bharat Financial Inclusion.
This proposed merger is quite unique though; Indiabulls Housing Finance may be making a larger pitch for obtaining a banking license and foothold in the mainstream banking space through this deal. The NBFC majorly complies with the guidelines released by the RBI with regard to private sector bank licenses including the requirement that businesses of groups looking for bank licenses in the non-financial category should be a maximum of 40% of overall income/assets. Indiabulls Group majorly focuses on real estate with its other divisions not contributing anything more than 15-20% of overall income as per reports.
It remains to be seen whether the Reserve Bank of India finally approves this merger. Additionally, the additional director nominations to the Lakshmi Vilas Bank board by RBI does not equate to any merger approval. RBI will be scrutinizing the proposal once it is formally received from Indiabulls Housing Finance and Lakshmi Vilas Bank according to reports. Lakshmi Vilas Bank will benefit from increased relief from increasing NPAs and also regulatory capital shortages. The first 9 months of FY2018-19 saw the bank posting a Rs. 630 crore loss. It could only raise a sum of Rs. 460 crore some months earlier as per reports and it requires further capital to bypass the RBI’s PCA (Prompt Corrective Action) mechanism.
Indiabulls Housing Finance has previously tried to get a banking license and will now want to enter the sector by merging with the private sector bank. In case it wins approval, this merger will lead to one of the biggest private sector banks being created in India with more than 800 branches across the country and the loan book touching approximately Rs. 1,20,000 crore.