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)
4 years ago
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.


4 years 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?
4 years 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.
Replied to rajoluramam comment 4 years ago
What will happen to the depositors ?
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