Thursday, September 29, 2022

Lakshmi Vilas Bank becomes 1st private bank to enter RBI’s PCA club

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New Delhi: Lakshmi Vilas Bank became the first private sector bank on Saturday to be placed under Prompt Corrective Action (PCA) framework by the Reserve Bank of India (RBI). In a regulatory filing on Saturday, Lakshmi Vilas Bank said that the RBI has taken this action because of high level of bad loans, insufficient capital adequacy ratio, negative return on assets (RoA) for two consecutive years and high leverage.

The financials of Lakshmi Vilas Bank looked grim

“The Reserve Bank of India, vide their letter dated 27 September, 2019 has initiated prompt corrective action for Lakshmi Vilas Bank Ltd on account of high net NPA, insufficient capital to risk-weighted assets ratio (CRAR) and common equity tier-1 (CET 1), negative RoA for two consecutive years and high leverage, based on the on-site inspection under the Risk Based Supervision carried out for the year ended 31 March, 2019,” it said.

The bank also said that the decision was based on the RBI’s risk-based supervision for FY19. For financial year 2018-19, the private bank’s net NPA stood at 7.49 percent, capital adequacy ratio was at 7.72 percent and its RoA was -2.32 percent.

What happens when a bank is placed under PCA?
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When placed under PCA, banks are required to cut lending to corporates and focus on reducing concentration of loans to certain sectors. They are also not allowed to open new branches and pay dividends.

The banks that are currently placed under the RBI’s PCA framework include United Bank of India, Indian Overseas Bank, Central Bank of India, IDBI Bank and UCO Bank.

Bank’s merger with Indiabulls under cloud

The move has now put the proposed merger of Indiabulls Housing Finance Ltd with the private sector bank under cloud. The RBI has informed Lakshmi Vilas about the restrictions that have been placed and the actions that need to be taken. It has also asked the lender to submit a report every month.

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