Lakshmi Vilas Bank Ltd said on Wednesday the central bank has not approved its merger with Indiabulls Housing Finance Ltd.

Ending months of uncertainty around the proposed merger, the Lakshmi Vilas Bank (LVB) on Wednesday said in a stock exchange filing, "This is to inform that RBI vide their letter dated October 09, 2019, informed that the application for voluntary amalgamation of lndiabulls Housing Finance Ltd and lndiabulls Commercial Credit Ltd with Lakshmi Vilas Bank Ltd cannot be approved."

In April, private sector lender Lakshmi Vilas Bank Ltd had informed exchanges that its board has approved a merger with mortgage financier Indiabulls Housing Finance Ltd in an all stock deal.

Both Indiabulls and its target Lakshmi Vilas Bank Ltd. were seeking to increase profitability and bolster capital as the crisis in the shadow banking sector drags on.

The bank had sought approval from the Reserve Bank of India (RBI) on 7 May, 2019.

The merger is crucial for the lenders - Indiabulls is looking to diversify its asset base while Lakshmi Vilas Bank needs to raise capital to come out of the lending curbs. Indiabulls’ dollar bonds and shares plunged after the Delhi High Court admitted a petition against the shadow lender and the Reserve Bank of India placed restrictions on the Lakshmi Vilas Bank, Bloomberg reported on 1 October.

The central bank has placed it under prompt corrective action (PCA) owing to high level of bad loans, insufficient capital adequacy ratio, negative return on assets (RoA) for two consecutive years and high leverage. This action, the bank said, was based on the central bank’s risk-based supervision for FY19.

The news could pressure the shares of LVB and Indiabulls, both of which have fallen to multi-year lows after being hit by allegations of misconduct.

Indiabulls Managing Director Gagan Banga last week tried to assuage investors, saying the Reserve Bank of India's action on Lakshmi Vilas Bank "does not shut the door on the merger".

Under a corrective action, the RBI restricts lenders from issuing big corporate loans to reduce the lender's concentration of risk, while also limiting the opening of new branches, among other steps.

Lakshmi Vilas Bank is also being investigated by the police for alleged misappropriation of funds by its directors.

LVB's shares closed about 5% lower at ₹26.95) on Wednesday, while Indiabulls Housing Finance Ltd closed 5.5% up at ₹1,308.65.

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