The curious case of loan evergreening at Lakshmi Vilas Bank

Skeletons have started tumbling out of the 94-old Lakshmi Vilas Bank's closet after the Reserve Bank of India imposed a moratorium on the South-headquartered bank and also initiated a merger proposal with the Singapore-headquartered DBS Bank in India.

Sources reveal the private bank has an exposure of Rs 90 crore in one of the loan accounts of Pune-based loss-making firm Bilcare Ltd. This loan was converted into a zero coupon non-convertible debenture (NCD) by the bank with no repayments scheduled for the first five years.

They cite it as a case of evergreening by the 94-year old bank in order to avoid the hassles of NPA classification in this pharmaceutical packaging solution company.

In banking, evergreening is a practice of offering more loans to a troubled company to repay the earlier loan.

Bilcare has been making losses for many years. In 2019-20, the company earned revenues of Rs 1,923 crore with losses of Rs 99 crore. A year before, the revenues were at Rs 3,057 crore and losses at Rs 453 crore.

The story goes something like this: The bank extended a loan facility of Rs 25 crore to Bilcare under the tenure of MD & CEO R R Somasundaram in 2011. This company promoted by a first-generation entrepreneur Mohan Bhandari was doing quite well with international operations. It had revenues of Rs 2,200 crore and profits of Rs 149 crore in 2010-11. But the company soon faced rough weather. Its revenues plunged by 13 per cent to Rs 3,076 crore with net losses of Rs 113 crore during 2013-14. Bilcare approached many of its existing banks for loan restructuring.

Sources reveal Lakshmi Vilas Bank was generous enough to sign another cheque of Rs 65 crore. This loan was, however, not given directly to the company but to one of its subsidiaries based in Mauritius. The company had three subsidiaries in Mauritius -- Bilcare Mauritius Ltd , Bilcare International and Bilcare Packaging Ltd. The bank then was manned by K S R Anjaneyulu, when this overseas loan was granted to Bilcare subsidiary. Anjaneyulu, an executive director, earlier acted as an interim MD & CEO in 2010 when V S Reddy resigned in January 2010.

It is not known whether this money was used by Bilcare to avoid a lone default at another bank or for some other purposes. A forensic audit would reveal the exact nature of the utilisation of funds.

By the end of 2017, the Bilcare loan facility of Rs 90 crore-plus started creating issues for the Lakshmi Vilas Bank. There was also a new MD & CEO Parthasarathi Mukherjee, a former Axis Bank official, who took charge in January 2016. The loan facility soon fell under the watchlist of the bank for possible NPAs. In fact, the Bilcare loan facility slipped to NPAs by the fourth quarter of 2017-18. The bank was already neck deep in NPAs when new accounts like Bilcare slipped.

That was when the Bilcare management requested the bank for a conversion of loan into NCDs. Surprisingly, the bank agreed to convert the entire loan facility of Rs 90 crore-plus into zero coupon NCDs.

Did the bank set aside any provisions for this loan conversion? How could the bank agree for a zero-coupon NCD with no change in loan outstanding amount? The five-year repayment holiday is also questionable.

Lakshmi Vilas Bank refused to comment on the loan conversion as the bank is under administrator's charge. "We won't be able to comment," says the bank. Queries sent to Bilcare didn't elicit any response till the time of filing the story.

Bilcare's balance sheet of 2019-20 reflects the zero coupon NCDs. It had listed an amount of Rs 50 crore-plus. The balance sheet states that the amount is to be repaid in three annual instalments from March 2024. It also adds that the directors have issued personal guarantees for these loans.

Clearly, the skeletons have started tumbling out of Lakshmi Vilas Bank's closet. There could be many more such loan accounts having been evergreened by the bank.

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