The Reserve Bank of India (RBI) issued a regulatory action on Lakshmi Vilas Bank, the lender said in a statement on Saturday, at the same time that police have started probing the bank’s directors for alleged misappropriation of funds.
The RBI had initiated a so-called “prompt corrective action” due to the high level of bad loans on Lakshmi Vilas’ books, the lack of sufficient capital to manage risks and a negative return on assets for two consecutive years, the bank said.
The RBI’s action was aimed at improving the bank’s performance and will not adversely impact its day-to-day operations, the statement added.
Under a corrective action, the RBI restricts lenders from issuing big corporate loans to reduce the lender’s concentration of risk, while also limiting the opening of new branches, among other steps.
Lakshmi Vilas Bank is the latest lender in the country to face struggles in an already troubled banking sector plagued with bad loans.
Reuters reported on Friday that Indian financial services company Religare Finvest (RFL) has accused Lakshmi Vilas of misappropriating funds to the tune of ₹790 crores it kept with the bank as a fixed deposit, according to a copy of a complaint filed with the Economic Offences Wing of the New Delhi police.
The private lender said in a statement on Friday that the registration of the police complaint against does not mean anything at this stage and that the bank will cooperate with the investigating agency and regulatory authorities.
The RBI’s action could be a set back to Lakshmi Vilas plans to merge operations with housing finance firm Indiabulls Housing Finance Ltd (IBHF) in a share-swap deal.
Other banks such as IDBI Bank, Central Bank of India and United Bank of India are also under RBI prompt corrective actions.