By Chandini Monnappa and Nupur Anand
BENGALURU/MUMBAI (Reuters) - Indian lender Lakshmi Vilas Bank Ltd (LVB) said on Wednesday the central bank had not approved its merger with Indiabulls Housing Finance Ltd, making it the latest bank to face struggles in an already troubled sector.
The country's banking industry, which is going through a tumultuous time, plagued by issues including high levels of bad loans, took a big hit last year after a major infrastructure conglomerate collapsed, straining liquidity in the sector.
"RBI vide their letter dated October 09, 2019, informed the application for voluntary amalgamation of Indiabulls Housing Finance Limited and Indiabulls Commercial Credit Limited with The Lakshmi Vilas Bank Limited cannot be approved," LVB said in a statement to exchanges on Wednesday.
The news could pressure the shares of LVB and Indiabulls, both of which have fallen to multi-year lows after being hit by allegations of misconduct.
The latest setback for LVB comes days after the Reserve Bank of India initiated a so-called "prompt corrective action" on the lender due to high level of bad loans, lack of sufficient capital to manage risks and a negative return on assets for two consecutive years.
Indiabulls Managing Director Gagan Banga last week tried to assuage investors, saying the Reserve Bank of India's action on Lakshmi Vilas Bank "does not shut the door on the merger".
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 also being investigated by Indian police for alleged misappropriation of funds by its directors.
LVB's shares closed about 5% lower at 26.95 Indian rupees ($0.3791) on Wednesday, while Indiabulls Housing Finance Ltd closed 5.5% up at 1,308.65 rupees.
($1 = 71.0860 Indian rupees)
(Writing by Sudarshan Varadhan; Editing by Shailesh Kuber and David Evans)