Lakshmi Vilas Bank to merge with Indiabulls Housing Finance
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Private-sector lender Lakshmi Vilas Bank’s board on Friday approved a merger with mortgage lender Indiabulls Housing Finance Ltd in the latest incidence of a bank combining with a non-banking finance company.

Shareholders of Lakshmi Vilas will get 14 shares of Indiabulls Housing for every 100 bank shares they hold, the two lenders said in a stock-exchange filing.

"The advantage is capital and a boost to the asset book," Parthasarthi Mukherjee, chief executive officer and managing director of Lakshmi Vilas Bank, said in a conference call. "We become a profitable and strong business franchise."

Indiabulls trumped several private equity players which were reportedly in the fray to acquire a stake in the bank.

Indiabulls founder and chairman Sameer Gehlaut will be the vice chairman of the merged lender while its managing director Gagan Banga and the bank’s MD Parthasarathi Mukherjee will become joint managing directors.

The board of Indiabulls Housing has constituted a reorganisation committee headed by SS Mundra, a former deputy governor of the Reserve Bank of India, to make necessary decisions related to the proposed merger. Mukherjee said that the merger was a unanimous decision and that the RBI will take its own view despite it having nominees on the bank's board.

For Indiabulls, the move will end its quest to enter the banking sector in India. The non-bank lender had attempted to enter the sector about six years ago when the RBI had sought applications for a banking licence. Eventually, in April 2014, the RBI granted banking licences only to Bandhan Financial Services Pvt. Ltd and IDFC Ltd.

After failing to get a banking licence in India, Indiabulls acquired a 40% stake in the UK-based OakNorth Bank in late 2015. This was the first major share purchase in a UK bank by an Indian mortgage lender. Indiabulls has partially exited the bank since then.

"We do not see any demerit in Indiabulls not getting a banking licence when they applied previously," said Mukherjee. "Till the approval is completed, our bank will ensure that it functions as a going concern and that it stays away from the PCA [Prompt Corrective Action] norms."

The latest transaction adds to the growing list of mergers between banks and non-bank lenders. Other similar deals over the past year include Bandhan Bank’s proposed acquisition of Gruh Finance, the merger of IDFC Bank and Warburg-backed Capital First and IndusInd Bank's acquisition of Bharat Financial Inclusion Ltd.

Shares of Indiabulls Housing gained 0.53% to close at Rs 903.15 while the bank’s share climbed about 5% to end at Rs 92.75 in a positive Mumbai market on Friday. 

Financial metrics and rationale

Indiabulls Housing has a larger presence in northern and western regions while the bank is mostly present in southern India.

"We can say that we are bank which is aspiring to branch out much beyond its normal area of operations," said Mukherjee, adding that the merged entity will be substantially capitalised.

The acquisition would provide low-cost funding in the form of public deposits to Indiabulls, which has a loan book more than three times bigger than the bank’s. 

The merged entity would have a loan book of Rs 1,23,393 crore, based on financials for the nine-month period ended December 2018. It would be among the top eight private-sector banks in India by size and profitability, according to an investor presentation.

The bank is in need of additional capital. In October 2018, CARE Rating downgraded the bonds issued by the bank by a notch owing to significant losses during the April-June quarter, resulting in deterioration in capital adequacy levels. 

The bank had a capital adequacy ratio of 7.7% as on December 31, 2018, against the prescribed level of 10.875%. Indiabulls Housing’s capital adequacy ratio was 23.1%. The ratio for the merged entity would be 20.6%.

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