In today's Finshots brief, we will talk about:
- Lakshmi Vilas Bank
- Uber's tryst with London regulators and
- Why India is changing its pricing system for natural gas
The Lakshmi Vilas Bank Saga
Private lender Lakshmi Vilas Bank (LVB) has been struggling for a while now. Over the last three financial years, the bank’s bad loans have tripled. Its deposits have dropped 26% in the past year, while its buffers are running out quick. The bank has also been incurring steady losses over the past 10 quarters with losses reached a whopping Rs 836 crores last year.
So yeah, things have been pretty bad.
So in September last year, The Reserve Bank of India decided to do something about the bank’s high number of bad loans and the fact that its capital was insufficient to manage risks. It initiated a prompt corrective action against LVB. The idea here is to restrict the lender from issuing large new loans in order to reduce the risk of default, and thereby conserve the existing capital. But unfortunately, this didn’t really work.
LVB’s capital just kept on deteriorating. This was largely due to several loans going bad, forcing the bank to make additional provisions against them. LVB had only one chance at survival left - a fresh infusion of capital. But on that front, they weren’t having much luck.
Last October, LVB was ready to merge with housing finance company Indiabulls. But the RBI objected to the union. The regulator didn’t reveal its reasons, but some analysts estimated that the RBI didn’t want to grant an NBFC with real estate exposure easy entry into the banking system.
But then there was another ray of hope on the horizon. In July 2020, LVB revealed that they had made significant progress in a deal to merge with two companies from the Clix group stable - Clix Capital Service Pvt. Ltd. and Clix Finance India Pvt. Ltd. They were in the process of wrapping up all the due diligence on this front.
But recent events may have just put this union in jeopardy.
On Friday, LVB held an annual general meeting, in which shareholders rejected resolutions related to the appointment of 7 out of 10 directors including that of the interim Managing Director and CEO. This reveals that the bank’s owners don’t have a lot of confidence on the people running it. Anyway, the RBI quickly approved a 3 member board of independent directors to run the bank until things could be sorted out.
But this is pretty much the last straw. Analysts, investors, and depositors are calling for the RBI to intervene now to revive the bank before it turns into another PMC bank. As Amit Tandon, founder and Managing Director at Institutional Investor Advisory Services put it, “Everything that can possibly go wrong with a bank, has gone wrong with Lakshmi Vilas Bank. While no one is calling it insolvent, this is what the bank is.”
Uber gets its London license back
London is one of Uber’s biggest markets. The company has over 40,000 drivers in the city, and faces intense competition from other ride-hailing services. But last November, London regulators refused to renew the company’s license amid safety and security concerns. They had found that non-licensed drivers had been logging into the app using other people’s IDs and driving customers around. Some 14,000 trips had been served this way.
Uber immediately fixed the issue, but officials still refused to renew the license, arguing that there might have been more software issues. Uber appealed this decision and was allowed to keep its cabs on the road while the courts looked into the matter.
And finally, the court delivered its verdict yesterday. The company got its license back for another 18 months after the judges ruled that they were now “fit and proper” to hold it. Good for them!
Jamie Heywood, Uber’s regional general manager, said, “This decision is a recognition of Uber’s commitment to safety and we will continue to work constructively with TfL [Transport for London]. There is nothing more important than the safety of the people who use the Uber app as we work together to keep London moving.”
The Natural Gas price rejig
In India, Gas prices are regulated by the government, and they calculate it based on the average prices prevailing in international markets like the US, UK, Russia and Canada. These rates are revised just twice a year. But now, because of the coronavirus, the prices in these countries have been crashing, and in turn affecting prices in India as well. As it stands, the likes of ONGC are being forced to sell natural gas below cost. For instance, ONGC’s cost of production is $3.7 MMBTU (per million British Thermal Unit), whereas the selling price is $2.39 MMBTU.
These unfavourable price dynamics obviously make business unviable, and put a dampener on the government's plan to increase gas consumption. So now, they are planning to use the Japan-Korea Marker - a benchmark index used to determine the LNG tariff in North Asia and set the floor price based on this index. This should ideally see the floor price come up to $4 MMBTU! Meaning ONGC won't have to sell below this price.
Reacting to the news, ONGC shares rallied as much as 6% on Monday. However, on the flip side, this sudden increase in price might put a burden on consumers in the near future.
Make more in India
On Monday, India unveiled the new Defence Acquisition Procedure (DAP). According to it, domestically designed, developed and manufactured armaments and defence hardware must have at least 50% indigenous content, as opposed to 40% earlier. Know more.
On Saturday, Prime Minister Narendra Modi questioned the response of the United Nations in combating the Covid-19 pandemic- “Over the last 8 to 9 months, the whole world has been battling the pandemic of the coronavirus. Where is the United Nations in this joint fight against the pandemic? Where is its effective response?” Read more.