Lakshmi Vilas Bank and Dhanlaxmi Bank: Self-Inflicted Existential Crisis? -Part 2
Lakshmi Vilas Bank (LVB)’s Leadership Crisis-A Similar Story 
 
LVB’s experience in its efforts to transform itself was no different from its Kerala counterpart. In 10 years, between 2010 and 2020, it saw a succession of five chief executive officers (CEOs), namely, PR Somasundaram, KSR Anjaneyulu, Rakesh Sharma, Parthasarathy Mukherjee and S Sundar. None of them lasted his full term except Mr Mukherjee (like Amitabh Chaturvedi of Dhanlaxmi Bank-DLB). But he also resigned during his second term. Mr Sundar was ousted at the September shareholders’ meeting. Each of them claimed that he would take LVB on a path of sustained growth. That did not happen.  
 
Three leading questions emerge for consideration. One, why did successive CEOs leave much before their agreed tenure? Two, why were the directors thrown out by the shareholders in this year’s meeting?  And three, wasn’t Reserve Bank of India (RBI) aware of the goings-on particularly when it had its own nominees on the board?
 
Each CEO adduced personal reasons for putting in his papers midway. It was Parthasarathy Mukherjee who candidly admitted that his efforts had failed to deliver the promised result as evidenced by the decline in the asset quality, huge provisioning and consequent erosion of capital.  He wished a new hand might help to run it better, says an August 2019 report in Business Standard.
 
Leap into Unfamiliar Turf
 
The transformation strategy laid emphasis on going after big business. LVB did not have the wherewithal to identify, evaluate and decide on large credit proposals.  While the existing officers were familiar with the conventional business model, training them to meet the new challenge was impractical when speed of decision-making became the priority. 
 
Those who were inducted on a contractual basis through lateral recruitment, holding new designations like vice-president, president and senior president, had little knowledge of the organisational culture and were often driven by the animal spirit of going big. The checks & balances on specially-created positions were hardly in place. 
 
The time-tested system of regular dialogue with the unions was replaced by increasing unilateralism in the matter of business strategy. Directors too would interfere regularly, in violation of the principles of corporate governance.
 
Violating its lending and investment policies, LVB under Parthasarathy Mukherjee went after big borrowers. The advances to some of big names like Jet Airways, Religare, Nirav Modi, Reliance Housing Finance and Café Coffee Day got stuck. 
 
When several big corporate loans had already started wobbling from 2015, for a small lender like LVB entangling with them was fraught with serious risk. The risk management system either did not perceive these signals or the managers sought to shut their eyes in the zeal to grow. There were also reports of fraudulent loans against bulk deposits which brought the Bank and some of its employees under the scanner of the economic offences wing (EOW) of the Delhi police.
 
In the meantime, during the third quarter of 2017, LVB went for a rights issue. It did not disclose its actual financial position and the fact of a pending litigation against it, initiated by a large corporate depositor who had disputed the appropriation of its deposit of Rs750 crore. The rights issue had a hefty premium of Rs112 against a face value of Rs10 allowing the Bank to raise about Rs786 crore. Within two weeks thereafter, the third quarter results disclosed a huge loss of Rs39 crore and a surge in its non-performing assets (NPAs); the share prices nosedived to Rs12.
 
The Figures Speak
 
By the time Mr Mukherjee quit, the Bank’s downfall had already begun. In 2020, it reached an alarming low as indicated in the table below. With mounting NPAs which required huge provisioning, the Bank recorded successive losses in 2019 and 2020. The capital adequacy ratio tanked from 10.38% in 2017 to 1.12% in 2020. In September 2019 the RBI put LVB under prompt corrective action (PAC).
 
LVB Performance 2017-20
 
 
Last year, LVB was negotiating with prospective investors for a possible bailout in the form of additional capital, eventually paving the way for a merger. A proposal to merge with India Bulls Housing Finance initiated in 2019 fell through. In June-July this year, CLIX Capital evinced interest in taking over LVB. 
 
The Failures
 
What emerges from available inputs is that the principle of corporate governance was seldom practised in LVB. A few directors with substantial shareholding interfered in the day-to-day operations of the Bank. As stakeholders it is legitimate to have certain expectations but a greater responsibility on them is to give autonomy to the CEO and top management team to work within the policy framework formulated by them in the board. The CEOs selected by the said directors could not possibly rise above the master and servant relationship. 
 
When the Bank was impacted by huge NPAs, provisioning and consequential loss, its decision to go in for a rights issue with a high premium was not something even ordinary shareholders could digest. 
 
A complaint was sent to the Securities and Exchange Board of India (SEBI) about the non-disclosure of material facts in the prospectus. Complaints about mismanagement and lack of governance standards were sent to the prime minister and RBI during 2019 with no tangible result. 
 
When the proposal to merge with India Bulls fell through, the chances of turning around looked bleaker still. One way to address this uncertainty was to act in concert and throw the directors and their nominee out even if such extreme measure created a vacuum at the top.
 
In short, as in case of Dhanalaxmi Bank, LVB floundered in the attempt to transform, by moving into a new trajectory on three scores:
 
1. Violation of its lending and investment policies;
2. Making short shrift of corporate governance standards and checks & balances
3. Failure to read the signals and act on time.
 
Not Shareholders’ Activism
 
The outcome of the shareholders’ meeting was stunning in both DLB and LVB. It could hardly be attributed to shareholder activism. On the contrary, a group of influential shareholders and directors, without knowledge of running a bank, acted in concert and rejected the board-sponsored resolutions on the appointment of CEOs.  
 
DLB’s Mr Gurbaxani and LVB’s Mr Sundar were targets of concerted group action. Both were selected by the boards following the prescribed procedure and the decisions were confirmed by RBI. (Interestingly, a new advertisement from DLB for the post of CEO spells out the same traits, which were found in the ousted appointee!) 
 
Without giving them a chance to prove their worth, overturning board decisions taken only this year was unfair and is hardly a barometer of shareholder activism. Unseen hands were at play to influence the shareholders.  
 
In his reaction to the shareholders’ decision, Mr Gurbaxani had hinted that his efforts to bring in better governance standards were behind the development and stressed the urgency for a surgery.  In the meantime, LVB is looking for a buyer and DLB has started the process to recruit a new CEO.
 
RBI’s Role and the Banking Regulation Act
 
On RBI’s role two pertinent questions crop up. One, what did RBI do when all these developments happened in the two banks? It had the means to know the downslide; it had its own nominees on the boards apart from its annual inspection. Beyond the now recurring ‘prompt corrective action’, it allowed the drift to prolong.
 
Two, can shareholders remove the managing director whose appointment was made with RBI’s prior approval in terms of Section 35 B (1) (b) of Banking Regulation Act, 1949? The relevant extracts from the Section are interesting:
Section 35 B (1) (b):  ‘…no appointment or re-appointment or termination of appointment of a chairman, a managing or whole-time Director, manager or chief executive officer by whatever name called, shall have effect unless such appointment, re-appointment or termination of appointment is made with the previous approval of the Reserve Bank.’
 
The Act has overriding power on the memorandum and articles of association of the banking company as per Section 5A which reads:
Section 5A (a): the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a banking company, …..or in any resolution passed by the banking company in general meeting or by its board of directors, ……and 
 
(b) any provision contained in the memorandum, articles, ….or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become …void,…
 
A simple reading of these Sections makes it clear that both, appointment and termination, need RBI’s prior approval. The shareholders’ resolutions cannot overturn such appointments.
 
Fearing a crisis, RBI took two quick actions in DLB, it appointed DK Kashyap as an alternate director representing RBI and asked a committee of directors to oversee the day-to-day affairs; and, two, it directed the termination of the services of P Manikandan with immediate effect. These actions vindicated the charges of director K Jayakumar and AIBOC. In case of LVB, a committee of three directors was asked to look after the day-to-day affairs of the Bank. But the interventions came too late in the day.
 
The big question is: How will the banks be salvaged?
 
What Next for LVB and DLB? 
 
LVB and DLB are cases of poor board oversight and undue interference in violation of the basic principles of governance. In both the cases, there was a failure to take the stakeholders on board when drastic organisational and cultural reorientation was mandated, resulting in alienation of a large section of long serving employees.
 
What are the options available? Given the track record of the two banks, band-aid from the regulator won’t help. Private investors interested in taking control will need a lot of time and resources to turnaround these banks. For growth and expansion, both banks need professional management, which will only succeed if basic issues are addressed. 
 
(This is concluding part of a two-part series.)
 
Read first part here
 
 
(TR Bhat, who was the president of the All India Private Sector Banks’ Officers’ Federation (1995-2010) acknowledges the inputs provided by two former CEOs and his former associates in both these banks; the inferences are his own)
 
  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    saioamshyd

    1 month ago

    https://www.moneylife.in/article/lakshmi-vilas-bank-and-dhanlaxmi-bank-self-inflicted-existential-crisis-part-2/61930.html
    1. PSB & Pivate banks compete with each other in scams involving deposit moneys of the gullible & enterprising citizenry.
    2. To loot the Indian wealth in Trillions & shift it across the borders was a way of life during Congess regime. Congress leadership, allegedly, looted INR.17 quadrillion[1 quadrillion=1000 trillion; 1 trillion=1 lac crore], which is 45 times more than Modiji's humble plan of mobilizing US$.5 trillion by selling India's Sovereign Bonds. There is a nexus between members of CVC, IBA & CORNERED & BRIBED-UFBU AFFILIATES LED BY CHV , PSB boards/CEOs/CMDs + Duds of UFM, ruling politicians & fugitives, etc. Unless & until the nexus is broken & culprits are booked & punished- though opening a Pandora's box- no future for India.
    3. When POs mobilized huge sums of deposits and such sums were utilized by GOI through annual budgets, why can't the deposit moneys [excess liquidity after genuine advances/loans] be mobilized by PSBs & be utilized by GOI routed through annual budgets. BJP led NDA has sufficient majority in Parliament to realize the KaraYogi PM's dreams by amending Indian Constitution suitably.
    4. With a single stroke of his pen the PM can do so, in consultation with the accidental PM, DR.Manmohan Singh, A TRUE PATRIOT TOTHE CORE, X RBI GUV. Once the PSB employees'/retirees' issues are brought under the purview PAY COMMISSION, the entire PSB employees/retirees are benefitted.
    5. RBI must be more equipped to regulate functioning of entire banking indstry. Infrastructure & manpower is aplenty in India; which require further augmentation.

    6. https://www.youtube.com/watch?v=4Si8U02s8cQ.
    7. SATYAMAEVA JAYATHE!!!


    cvkakatkar

    1 month ago

    RBI Nominee Directors, Statutory Auditors, RBI Inspection teams - all preferred to be fooled by the Bank !
    Why the Directors are not being investigated by EOW or other Agencies?

    rajoluramam

    1 month ago

    To some extent, R B I is also responsible for many ills in the Indian Banking industry. The main cause is the inordinate delay in taking decisions. The banks which are in the worst postion now are not suddenly came down to such a precarious financial position. At least, minimum it takes nearly 5 years duration to come down to the worst irreparable condion. As it is rightly said, RBI representative is there on the Boards of the bank.
    After attending the board meetings it appears there is no practice of submitting a confidential note about the wrong doings of the bank by the RBI director. Explanation has to be called from them for their failure to do the job in an efficient way.
    VERY SORRY STATE OF AFFAIRS.

    REPLY

    cvkakatkar

    In Reply to rajoluramam 1 month ago

    What will happen to the depositors ?

    UK court again rejects Nirav Modi's bail in PNB fraud case
    In a major setback to fugitive diamantaire Nirav Modi, a UK court on Monday again rejected his bail plea.
     
    This is the seventh time that the UK court has rejected Nirav Modi's bail plea.
     
    Nirav Modi, who is wanted in India by Central Bureau of Investigation and the Enforcement Directorate (ED) in Rs 13,500 crore Punjab National Bank (PNB) fraud case and has been at London's Wandsworth Prison since his arrest in March 2019, will appear before a court next month, via video-link, for the second phase of his extradition trial.
     
    Last month, the UK court has extended the remand of the diamantaire till the next scheduled hearing in his ongoing extradition trial on November 3.
     
    The CBI and ED, seeking Nirav Modi's extradition to India, are being represented by the Crown Prosecution Service in the UK. The fugitive businessman has applied for political asylum in UK after he was denied bail five times.
     
    In July this year, the ED confiscated the fugitive diamantaire's properties worth Rs 329.66 crore in Mumbai, Rajasthan, the United Arab Emirates (UAE) and the UK. The movable and immovable assets were seized under the Fugitive Economic Offenders Act, 2018.
     
    The assets included four flats at Samudra Mahal, the iconic building in south Mumbai's Worli, a seaside farm house and land in Alibaug, a wind mill in Jaisalmer, a flat in London, some flats in the UAE, shares and bank deposits. On December 5, 2019, the court declared him a fugitive economic offender.
     
    Modi and his uncle Mehul Choksi of the Geetanjali Group are being investigated by the two agencies after the PNB alleged that they cheated it of Rs 13,500 crore with the involvement of some bank employees.
     
    The ED has filed a charge sheet against Choksi in a Prevention of Money Laundering Act Court in Mumbai.
     
    India is currently making efforts to extradite Nirav Modi from the UK and his uncle Choksi from Antigua and Barbuda where he is now a citizen.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  • User 

    Over 40% of System Credit and 75% of Borrowers To Benefit from Interest-on-interest Concession: CRISIL
    Ex-gratia payment of interest-on-interest by banks and non-banking finance companies (NBFCs) for the moratorium period between 1st March and 31 August 2020 would aggregate about  Rs7,500 crore benefit for eligible borrowers—with the tab being picked up by the government, says a research note.
     
    An analysis by rating agency CRISIL shows the benefit to be extended to borrowers with outstanding loans (standard as on 29 February 2020) of less than Rs2 crore under select categories, irrespective of whether the moratorium was availed or not. Such loans account for more than 40% of systemic credit and 75% of borrowers, it added. 
     
    "The cost to exchequer would have halved if waiver was allowed only where moratorium was availed of. Also, to ensure effective and timely implementation, the government has asked lenders to credit the amount to eligible borrowers latest by 5 November 2020," the ratings agency says.
     
    Last week, the department of financial services (DFS) in the ministry of finance (FinMin) issued a notification. It gives a relief to borrowers in the form of a grant of ex-gratia payment of the difference between compound interest and simple interest for six months from 1st March to 30 August 2020.
     
    This means, during this period, borrowers will pay only simple interest on the loan and would receive refund for the excess compound interest payment made, if any, during the six months.   
     
    This will be the difference between compound interest and simple interest over the six months from 1st March to 31 August 2020. While lenders have to apply for reimbursement by 15 December 2020, the timelines for receipt of funds from the government are yet to be notified.
     
    Krishnan Sitaraman, senior director of CRISIL Ratings, says, “Our analysis shows that a complete interest waiver, including interest on interest, for eligible loans up to Rs2 crore would have meant a staggering Rs1.5 lakh crore impact. This could have posed significant challenges for the government as well as the financial sector. Waiver of only interest-on-interest will have a much milder and manageable impact.”
     
    With the Indian government expected to bear the cost of waiver on small-borrower loans, the potential burden on lenders—already facing profitability pressure and asset-quality challenges because of the Covid-19 pandemic and challenging macroeconomic environment – has eased.
     
    From a borrower’s perspective, CRISIL says, the benefit would be relatively higher for those who had availed higher-yielding loans. Consequently, borrowers of unsecured, micro and gold loans will benefit more than those who had taken home loans.
     
    Malvika Bhotika, associate director of CRISIL Ratings, says, “Extending the benefit to all eligible borrowers irrespective of whether they have availed of moratorium or not, will assuage concerns over unfair treatment that borrowers not availing of moratorium could have otherwise harboured.”
     
    "While the waiver will offer a modicum of relief in terms of cash flows, repayment discipline among borrowers after the moratorium ended – and thus medium-term delinquencies at banks and NBFCs – will bear watching," the ratings agency added.
     
  • Like this story? Get our top stories by email.

    User 

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 4 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)
    FREE: Your Complete Family Record Book
    Keep all the Personal and Financial Details of You & Your Family. In One Place So That`s Its Easy for Anyone to Find Anytime
    We promise not to share your email id with anyone