Auditors qualify Lakshmi Vilas Bank financials yet again

Inadequate provisioning against a large loan key reason

MUMBAI: The auditors of the capital-starved Lakshmi Vilas Bank (LVB) has yet again qualified the bank’s financials for failing to make full provisions against a Rs794 crore disputed loan extended to two companies a few years ago.

The bank has signed a non-binding agreement with Clix Capital Group for a merger proposal towards which a mutual due diligence process is on.

The bank that has posted net profit of Rs93 crore for the March(FY20) quarter after several quarters of net losses, currently sits on a precarious and unsustainable capital adequacy ratio (CAR) of 1.12 per cent.

The chief executive S Sundar believes the merger with the capital-heavy Clix Capital can possibly address the capital deficit of LVB and at the same time will complement Clix Capital that is yet to have a strong physical presence.

This is the third financial year in a row for LVB that the audit opinion has been ‘qualified’ on account of the same disputed loan.

More reasons to qualify accounts

Further, the failure of the bank to make provisions against the reversal of Rs48.70 crore held towards revision of wages due to the bank’s employees has also prompted the auditors to qualify the accounts of FY20.

The auditors have also not taken kindly to the bank’s act of recognising the deferred tax asset (DTA) to the tune of Rs I,185.57 crore as on March 31, 2020.

An auditor’s report is qualified when there is either a limitation of scope in the auditor’s work, or when there is a disagreement with management regarding application, acceptability or adequacy of accounting policies, and the action is viewed seriously by the investors.

However, “a qualified audit report does not mean that the said business is suffering, nor does it mean that its financial statement isn’t transparent. It merely reflects the auditor’s inability to give a clean report.


Sticky issue

The disputed loan issue pertains to a deal during the financial year 2017-18 when the bank adjusted loans aggregating to Rs794 crore extended to RHC Holding and Ranchem Pvt Ltd against deposits of Religare Finvest Ltd with the bank.

The said adjustment has been contested by Religare Finvest and a suit has been filed against the bank in May 2018; the matter still remains sub judice.

LVB maintained that the appropriation of the said amount as lawful and tenable and hence not made any specific provision on this score except Rs200 crore contingency provision despite an RBI advice for full a provision of Rs794 crore.

As regards the reversal of Rs48.70 crore held towards the revision of wages due to the bank’s employees, LVB has cited the withdrawal of mandate given to the Indian Banks’ Association (IBA) to negotiate revision of salary on its behalf as the basis for reversing the provision.

However, the auditors contend that there is no evidence to suggest that there will not be any liability for the wage revision with effect from November 2017.

“While the quantum of wage revision cannot be determined as on date, it is likely that the provision required would at least be Rs.48.70 crore,” the auditors noted as part of the ‘basis for qualified opinion.’


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