Lakshmi Vilas fell 5% in Mumbai on Wednesday, while Indiabulls rose 2.4%.
Lakshmi Vilas Bank Ltd. said India's central bank rejected its proposal to combine with a shadow lender, a move that may delay its plan to raise capital.
Reserve Bank of India rebuffed Lakshmi Vilas's plan to merge with Indiabulls Housing Finance Ltd., the Chennai-based Lakshmi Vilas said in an exchange filing on Wednesday. The statement didn't disclose a reason for the rejection. The regulator, last month, placed lending restrictions on the commercial bank seeking to reduce its delinquent debt.
The two companies, hit by a crisis in India's non-bank finance sector, planned to combine in a bid to increase profitability and bolster capital. Indiabulls was looking to diversify its asset base and raise low cost funds, while Lakshmi Vilas Bank needed to raise capital and come out of the lending curbs.
"The core issue for Lakshmi Vilas Bank now will be to raise capital,"said Siddharth Purohit, an analyst at SMC Global Securities Ltd. "They have to either look for private equity funding or the RBI might have to do a forced merger given that no scheduled commercial bank has been allowed to go bust in India."
Earlier this month, an Indian court and the police moved to begin separate investigations to examine allegations of fraud and misappropriation against Indiabulls and Lakshmi Vilas. Both companies have denied any wrongdoing.
Lakshmi Vilas fell 5% in Mumbai on Wednesday, while Indiabulls rose 2.4%. The announcement came after market.
The RBI cited high level of bad loans and insufficient capital to absorb risks as it brought Lakshmi Vilas under the so-called prompt corrective action last month. Lakshmi Vilas Bank's losses swelled to 2.37 billion rupees ($33.6 million) in the quarter ended June. Bad loans accounted for 17.3% of total lending, almost double the industry average.
The merger "wouldn't have created an organization that would be a value add for all stakeholders," Anil Singhvi, founder of proxy advisory firm IiAS told BloombergQuint. The RBI "would have seen it as a merger of two weak players rather than two strong players."
India has been rocked by a crisis among shadow banks, whose lending has been a lifeblood for everyone from small merchants to tycoons. The non-bank financing companies' balance sheets have come under greater scrutiny after the collapse of Infrastructure Leasing & Financial Services Ltd. last year highlighted broader debt concerns. That's complicating the South Asian nation's battle against a bad-loan problem that it needs to clear up to help promote investment and revive economic growth.
"This doesn't mean the end of the road as far as our journey as a financial services player is concerned," Ajit Kumar Mittal, executive director at Mumbai-based Indiabulls Housing said in an interview broadcast on CNBC-TV18.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)