Lead Story

Why did Lakshmi walk away from LVB?

How promoter KR Pradeep pushed a community-owned bank on the road to ruin 

Within the chartered accountant community in Chennai, the buzz on Lakshmi Vilas Bank did not sound favourable. Amid official denial it was clear that the institution with a 90-year history had crossed the line and done the unthinkable. That was two years ago in 2018 and LVB, as it is known, was said to be facing a systemic breakdown – allegations of favoured lending and potential defaults not being flagged off in time, were rife.

A report on the bank’s internal systems and processes with adverse comments was downplayed. A well-known chartered accountant in the city says that was an indication that things were going downhill. “There were a few other banks that were also involved but LVB being in that group was a shocker since it was known for high level of diligence,” he describes with incredulity.

Pretty soon, the bank which was set up in 1926 would face a crisis which would lead to the promoter losing control and equity holders being wiped out. Its gross non-performing assets hitting 25% would push it beyond redemption as suitors played hard to get. The story of how LVB ended up where it has is one of misplaced ambition, unbridled power and mismanagement by its promoter.

Lining up dominoes
In 2016, when the credit review committee at LVB sat down to assess a proposal from Mumbai-based Talwalkars, whose core business is fitness clubs, there was high level of discomfort. Unconvinced about the business model, it rejected the Rs.1.2 billion loan application with a terse “not safe”. It was assumed that the story ended right there.

A month later, an enthusiastic KR Pradeep, a director on the bank’s board, brought it up again. Instead of sanctioning a loan of around Rs.1.2 billion, he suggested LVB subscribe to Talwalkars non-convertible debentures (NCDs). A former official present during the discussion says, “He knew it could be risky and decided to take the debenture route. For some reason, Pradeep was very keen on it though it seemed like a bad idea.” That apprehension was not without merit as Talwalkars eventually defaulted. In all, the total outstanding (counting unpaid interest) now stands at Rs.1.50 billion, with little hope of that money ever coming back.

Much of LVB’s aggression, transitioning from a bank that primarily catered to SMEs to one that went after large corporates was the brainchild of Pradeep. A chartered accountant, he got on LVB’s board in February 2009. The story goes that the break was facilitated by Kusuma Muniraju, a director on LVB’s board. Muniraju, an advocate, had shared office space with Pradeep in his earlier days. The friendship blossomed over time and culminated with him getting on to the board of the bank. No one was quite prepared for what was to follow. With a holding of around 5%, Pradeep would irretrievably alter the fortunes of LVB.

The process of bringing in a professional CEO was initiated in early 2010 and by August that year, it roped in PR Somasundaram from Standard Chartered. That was the beginning of a revolving saga where CEOs joined and departed abruptly. Over a decade, there were four occupants of the corner office. Once Somasundaram moved out in November 2012 after being around for less than two years, the board elevated KSR Anjaneyulu, then the bank’s ED and earlier with ING Vysya Bank, to the top job. In early 2014, Rakesh Sharma came aboard from SBI. Like his predecessors, his tenure was a short one and in September 2015, he put in his papers. Then came Parthasarathi Mukherjee from Axis Bank who stuck around for close to four years.

Editor's Note

The curious case of Lakshmi Vilas Bank’s merger with DBS

The RBI has displayed hitherto never-displayed alacrity in merging Lakshmi Vilas Bank with Singapore’s DBS, sidestepping a credible deal on the table

An apocryphal tale goes: When legendary bank robber Willie Sutton was asked why despite repeated sentencing, he continued to rob banks, he answered: ‘because that’s where the money is’. Sutton is not around in this post-truth world to confirm if he indeed said that, but the robbing of banks continues, albeit in a sophisticated manner.

Banking is as protected a business as you can get, in India. Given its protected status, a banking licence is literally a licence to print money. But, as in most businesses, in banking, longevity is not an indicator of success. And the collapse of 94-year old Lakshmi Vilas Bank (LVB) just confirms that. Dig beneath the surface and you will find a familiar story of ill-advised lending driven by cronyism and lack of adequate diligence.

When you mix out-of-bound ambition with tardy lending, you have a Molotov cocktail. What transpired at LVB wasn’t any different. Promoter KR Pradeep’s desire to grow saw it shifting focus to corporate clients from the original base of local traders.

There-on this desire to graduate to the big league saw it lend to real estate and infrastructure. Given how those sectors have been faring over the past few years, no prize for guessing how those loans eventually ended up. Ever since, depositors have bolted and many other borrowers have turned delinquent.

Such Molotov cocktails are routine where the management knows they won’t have to pay for all the wanton destruction they wreck on the balance sheet, or they are deluded by the notion that they can pull it off somehow. In the banking sector, the risk fom investors gets compounded because those wielding regulatory powers can be of the fair-weather kind. For instance, how else can one explain the RBI’s hands-on hands-off approach with respect to LVB and the unusual final hour urgency in merging it with Singapore’s DBS.

While DBS’ financial standing is not in question, why was the same urgency not shown when an even bigger Yes Bank was floundering. In fact, DBS was an interested bidder even then. Yes Bank necessitated a much-bigger bailout led by SBI at the taxpayers’ expense. The RBI was overseeing the state of affairs at LVB all this while. It could see LVB was splashed in red ink for more than two years now and the gross NPAs rising from 2.7% in FY17 to 25% in FY20.

What kind of regulatory example is being made here when you unilaterally decide to hand over a bank without calling for bids and write-off the entire equity capital? Clix Capital was in the final stage of negotiation with the LVB management and were hung out to dry at the last moment. At the other end, institutional shareholders of LVB who are now crying foul are equally to blame for going along with the tall promises made by the promoter. In September, the shareholders did vote out half the board, but it was a case of too little too late.

The LVB case brings to fore two key issues in our financial landscape: One, the absence of institutional activism, which can better governance standards, and two, the dire need for better regulation and transparency on part of the Central bank.