In a move that might put a question mark on the proposed merger of Indiabulls Housing Finance Ltd with Lakshmi Vilas Bank , the Reserve Bank of India has placed the private bank under its prompt corrective action (PCA) framework.

In regulatory filing on Saturday, the bank said that the central bank has taken this action 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.

For FY19, the bank’s net NPA stood at 7.49%, capital adequacy ratio was at 7.72% and its RoA was -2.32%.

Under PCA, banks are mandated to cut lending to corporates and focus on reducing concentration of loans to certain sectors. They are also restricted from opening new branches and paying dividends. Banks currently under PCA are United Bank of India, Indian Overseas Bank, Central Bank of India, IDBI Bank and UCO Bank.

“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 NP A, 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 regulator has also advised the bank on the restrictions put in place and the actions to be taken by the bank, with progress to be reported on a monthly basis to the RBI.

In August, the bank’s chief executive Parthasarathi Mukherjee quit citing personal reasons.

The RBI PCA framework was introduced in December 2002 as a structured early-intervention mechanism along the lines of the US Federal Deposit Insurance Corp.’s PCA framework. Subsequently, in 2017, the framework was reviewed based on the recommendations of the working group of the Financial Stability and Development Council on Resolution Regimes for Financial Institutions in India and the Financial Sector Legislative Reforms Commission.

Meanwhile, in April, the private sector lender had said that its board approved a merger with mortgage financier Indiabulls Housing Finance Ltd in an all stock deal. The merged entity, will be called Indiabulls Lakshmi Vilas Bank and will be among the top eight private banks in India by size and profitability, it had said.

On 23 September, the Economic Offences Wing (EOW), Delhi, registered a first information report (FIR) against directors of the bank for alleged cheating, criminal breach of trust, criminal misappropriation and criminal conspiracy. The FIR was 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.

Calling it a “desperate measure" the private lender, in a statement on Friday, said the mere registration of FIR against the bank does not mean anything at this stage. “The bank is committed to cooperate with the investigating agencies and regulatory authorities apparently in order to bring out the malicious attempts of RFL to mislead the public to cover up massive fraud indulged by their own promoters, employees, group companies."

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