RBI junks LVB and Indiabulls merger plan

Reserve Bank of India (RBI) in New Delhi, India July 8, 2019. (Photo by Reuters)

The Reserve Bank of India (RBI) on Wednesday rejected the merger plans of two private-sector lenders -- Indiabulls Housing Finance and Lakshmi Vilas Bank.

The LVB informed the exchanges that the Reserve Bank, in its letter to the bank declined to grant permission for the merger. It, however, didn't elaborate on the grounds of rejection for the merger proposal.

"This is to inform that RBI vide their letter dated October 9, 2019, informed that the application for voluntary amalgamation of lndiabulls Housing Finance Limited and lndiabulls Commercial Credit Limited with The Lakshmi Vilas Bank Limited cannot be approved," the bank said in a filing.

However, sources suggested that the central bank didn't think it's prudent to combine two companies for India's banking system. "Combining two embattled entities would have caused a lot of problems in the banking industry," a source in the know said.

The lenders had sought the central bank's approval for the amalgamation on May 7, 2019.

Both lenders -- one in shadow banking space, while another in the normal banking space -- have been facing severe headwinds of late.

Last week, owing to lower capital adequacy, LVB attained a notorious distinction of being the first private sector lender in the country to be placed under the prompt corrective action (PCA) -- a course correction measure that curtails the lending capabilities of the bank. 

On the other hand, Indiabulls has seen its shares tank drastically over increased concerns over the liquidity issues. However, on Wednesday, its shares closed 2.34% higher at Rs 240.30 per share on BSE. Whereas shares of LVB tanked 4.93% at Rs 27 per share on BSE.

Prior to that, Economic Offences Wing of Delhi Police had registered a first information report (FIR) against LVB's directors. The FIR was registered against a complaint regarding offences of cheating, criminal breach of trust by banker, criminal misappropriation and criminal conspiracy under the Indian Penal Code 1860.

"The FIR is based on a complaint filed by Religare Finvest Ltd (RFL) pertaining to adjustment of their deposits to the dues of RHC Holding Pvt Ltd and Ranchem Pvt Ltd. The same was received at bank's end on September 25," LVB had said.

RFL had accused LVB of misappropriating Rs 790 crore it kept with the bank as a fixed deposit.

The market insiders expect the move to cause chaos in the banking stocks, which have seen headwinds in the past couple of weeks, over concerns of fresh stress in the loan books.

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