Shares of an Indian shadow lender plunged 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 after the plan to combine with Lakshmi Vilas Bank was rejected. The financier’s dollar bonds also slumped. Lakshmi Vilas didn’t disclose the reason for the regulator’s decision in its filing.
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.
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 securitising assets and co-originating loans and has no current plans to raise capital, he said. 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.
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.