LVB Fiasco highlights missing governance

The recent near-collapse of Lakshmi Vilas Banks (LVB) is the clear sign of continuing indifference of banks in implementing corporate governance (CG) practices. It is now gasping for survival with worried depositors. Such successive debacles in financial sector expose the fragile governance even when it functions under the regulatory surveillance. Despite constant regulatory and supervisory reforms and heightened oversight, such blatant indifference towards governance of financial entities is escaping the scrutiny causing devastation with huge collateral damage. The worst sufferers in the imbroglio are minority shareholders and customers. The strained interpersonal relations and anxiety of stakeholder over the fast deterioration of bank caused the insurmountable situation exposing the organization to a great risk. 

• Point of debate: 

The pent up anger of stakeholders led to rejection of appointment of seven directors including its interim CEO and MD Mr. Sundar in its Annual General Meeting (AGM). With RBI had to put up a committee of Directors to lead the day today operations. While such shareholder activism could be a wake up call to the banks and regulators, it can also be a lingering threat to the continuity of professional management of banks that could be self-defeating. 

This trend could open up precedence to the vested interest groups to muster support of large shareholders to vote out management causing instability to the financial entities. The amendment of related laws may be needed to ensure that management is well protected, once it has the approval of the regulator. Directors elected by the shareholders should be enough to protect the shareholder interest. Though depositors have the biggest stake, there is no direct representation in the management except through some voluntary forums and regulatory protection. 

• Steep deterioration of LVB: 

The noticeable deterioration of performance of LVB since March 2016 is startling. During FY 2015-16, the bank was on relatively better footing with a business mix of Rs.453 billion – Deposits Rs.255 billion and advances of Rs.198 billion. The asset size was at Rs.287 billion recording a net profit of Rs 180 million with return on assets (ROA) working out to 0.72 percent. Gross Non –Performing Assets (GNPA) was at two percent and net NPAs were at 1.2 percent that compares well with best practices. Capital adequacy ratio (CAR) was reasonable at 10.67 percent against the minimum needed at that time at 9 percent. 

But in next four years, the bank went down into a tailspin and RBI had to impose prompt corrective action (PCA) in September 2019 to stem the deterioration but it went down further. The deposits have gone down to Rs.214 billion, advances to Rs.138 billion. The GNPAs surprisingly climbed to 25.39 percent partly contributed by fall in the base of advances. Bank posted a massive loss of Rs.8.36 billion. The loss excludes provision of Rs. 5.94 billion ought to be made against the adjustment of a loan of Rs.7.94 billion against fixed deposits disputed by the depositor. Its tier-I capital turned negative crashing to -0.88 percent as against the minimum regulatory requirement of 8.875 percent. The overall CAR is in dilapidated state at 3.46 percent against minimum need of 10.875 percent. The bank’s performance levels went down to such low despite board management and regulatory supervision. It calls for resetting the parameters for imposing PCA that could apprehend the emerging weaknesses to prevent collapse of institutions. 

• Way forward: 

LVB, once a good private sector bank has reached a brink of disaster with its capital fast receding, soaring GNPAs and mounting other liabilities. More importantly, the shattered confidence of the management may not have the required enthusiasm to resurrect the bank. The near term challenge of RBI is to ensure that the bank is able to identify a broadly acceptable CEO to lead the bank in this crisis. The bank should be able to woo the investors including, Clix Capital to shore up its CAR to a level where lending activity can be rejuvenated. Without starting fresh credit within the limits of PCA, earnings cannot be stepped up. With comfortable liquidity, it can lend to activities that carry zero risk weight. 

In the medium to long term, the regulators have to introspect into the monitoring system of corporate governance practices in regulated entities that needs an overhaul. It is clear that the early signs of riskiness in business growth escape the attention of subcommittees of the board as well as the regulator. The risk sensitivity of the boards is not sufficient to intervene and guide the banks to prevent such near collapse of viability of business growth. 

A tectonic reform in corporate governance management is needed and effectiveness of its monitoring and surveillance can only protect the financial entities that are critical to finance growth. The collateral damage caused by such failures of institutions in the financial markets douse the risk appetite of both lenders and consumers. If institutions follow sustainable business models under the effective regulatory lens, the shareholder activism will be supportive to growth.  The fiasco of LVB should be taken as a cue to bring about necessary changes to shield financial entities.