(Bloomberg) -- Shares of an Indian shadow lender plunged on Thursday after the Reserve Bank of India rebuffed its plan to merge with a bank, blocking a path that may have helped other struggling non-bank financiers get better access to liquidity.
Indiabulls Housing Finance Ltd. plunged 19% to the lowest since March 5, 2014, in Mumbai on Thursday after the plan to combine with Lakshmi Vilas Bank Ltd. was rejected. The financier’s dollar bonds also slumped. Lakshmi Vilas, which fell by the daily limit of 5%, didn’t disclose the reason for the regulator’s decision in its filing on Wednesday.
Hurt by the spreading crisis among India’s non-bank financing companies, the two lenders had planned to combine in a bid to increase profitability and bolster capital. Indiabulls was looking to diversify its asset base and get access to low-cost funds, while Lakshmi Vilas Bank needed to raise capital and exit from the curbs placed on its lending.
“My sense is NBFCs will now be extra careful in approaching authorities with any kind of merger plan,” said Gaurang Shah, senior vice president at Geojit Financial Services Ltd.
When the merger plan was first announced, it raised speculation that other Indian banks could become takeover targets as more shadow lenders sought combinations to overhaul their business models and resolve their liquidity problems.
Read Andy Mukherjee on the implications of the quashed merger
Indiabulls will now focus on building its retail mortgage financing business and doesn’t plan to apply for a banking permit, Managing Director Gagan Banga said. It will fund credit growth by securitizing assets and co-originating loans and has no current plans to raise capital, he said in a phone interview.
For Lakshmi Vilas, the RBI’s rejection may push it into the arms of another bank or force it to find private equity investors to raise capital quickly.
Earlier this month, an Indian court and the police moved to begin separate investigations to examine allegations of fraud and misappropriation against Indiabulls and Lakshmi Vilas. Both companies have denied any wrongdoing.
The RBI cited high level of bad loans and insufficient capital to absorb risks as it brought Lakshmi Vilas under the so-called prompt corrective action last month. Lakshmi Vilas Bank’s losses swelled to 2.37 billion rupees ($33 million) in the quarter ended June. Bad loans accounted for 17.3% of total lending, almost double the industry average.
Read about the resignation of Lakshmi Vilas’s CEO
Other such mergers may go ahead if the RBI is happier with the two parties seeking to combine, some analysts suggested.
The plan “wouldn’t have created an organization that would be a value add for all stakeholders,” Anil Singhvi, founder of proxy advisory firm IiAS told BloombergQuint. The RBI “would have seen it as a merger of two weak players rather than two strong players.”
India has been rocked by a crisis among shadow banks, whose lending has been a lifeblood for everyone from small merchants to tycoons. The non-bank financing companies’ balance sheets have come under greater scrutiny after the collapse of Infrastructure Leasing & Financial Services Ltd. last year highlighted broader debt concerns.
That’s complicating the South Asian nation’s battle against a bad-loan problem that it needs to clear up to help promote investment and revive economic growth.
(Updates with closing share performance)
--With assistance from Rahul Satija.
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