LVB and its relation to PCA

The Lakshmi Vilas Bank was placed under PCA (Prompt Corrective Action) by RBI in
September 2019 after LVB breached PCA thresholds as on March 2019. This was done
due to high level of bad loans, the lack of sufficient capital to manage risks, a negative
return on assets for two consecutive years, and high leverage.

Under PCA framework, RBI has specified 3 parameters –

1. Capital to risk weighted assets ratio (CRAR)

2. Net non-performing Assets (NPA)
3. Return on Assets (ROA)

Although under PCA, the bank will not witness any adverse impact on its day-today
operations, including the acceptance and repayment of deposits as there are no
restrictions on operations by depositors. Moreover, the bank can also extend loans to all
segments, except corporates, stressed and high-risk sectors.

The PCA plan covers various suggestions or measures to recover non-performing

assets (NPAs), reduce costs, boost capital, downsize risk-weighted assets, and improve
profitability, among others. The LVB management is in the process of implementing all of
these.

Challenges faced by LVB –

 Domino Effect of Yes Bank Crisis: The LVB episode was highlighted after the
RBI and banks led by State Bank of India bailed out fraud-hit Yes Bank. On the
similar lines, Punjab and Maharashtra Cooperative Bank was hit by a loan scam
highlighting the riskiness of banks, especially cooperative banks.

 Weakening Financial Position: The financial position of the LVB was

continuously declining, with losses over the last three years eroding the bank’s
net worth. The bank reported a loss of Rs 894 crore in 2018-19, significantly
higher than the Rs 585-crore loss it posted the year ago. Almost 25% of the
bank’s advances have turned out to be bad assets

 Inadequacy to Raise Capital: LVB has not been able to raise adequate capital

to address the issues and was also experiencing the continuous withdrawal of
deposits and low levels of liquidity.

 Governance Issues: The performance of the bank had declined due to

serious governance issues in recent years.

 Lack of Promoters: The functioning of LVB has been under scrutiny as it does

not have strong promoters which also makes it a target for mergers.

The investors of LVB are going to face drastic losses because –

  The equity of the company will be completely written off which implies that
shareholders will lose all their investment unless there are buyers in the
secondary market.
 The investors who invested in AT-1 bonds will face huge losses on the
investment as AT-1 bonds contains principal loss absorption features which
signifies a full write down or conversion to equity.
 Share price of LVB would be significantly hit, there would be only sellers and no
buyers.

WAY FORWARD

These bank crisis because of mounting bad loans reflect underlying woes in the financial
sector. However, these crises also provide an opportunity to various stakeholders to
check and review their existing frameworks and to modify them accordingly with time.