"The RBI informed that the application for voluntary amalgamation of lndiabulls Housing Finance and lndiabulls Commercial Credit with Lakshmi Vilas Bank Ltd cannot be approved," said the Chennai-based bank in regulatory filings late on Wednesday.
The rejection comes after the RBI last month put LVB under the prompt corrective action (PCA) framework due to a high level of bad loans, lack of sufficient capital to manage risks and negative returns on assets for two consecutive years.
Under a corrective action, the RBI restricts banks from issuing big corporate loans to reduce the lender's concentration of risk and also limiting the opening of new branches.
The move came after Delhi Police's Economic Offences Wing registered a complaint against the board of LVB, alleging cheating and misappropriation of funds.
In April, Indiabulls Housing Finance and LVB first proposed the merger, saying the amalgamated entity will create a large, healthy and diverse asset portfolio, which will benefit from stable low-cost funding in the form of public deposits and a wide distribution franchise.
In a separate filing, Indiabulls Housing Finance said the company's board will consider a share buyback proposal on October 14.
Meanwhile, the Delhi High Court has sought a response from the Centre and the RBI on a plea seeking a special investigation team (SIT) probe into the alleged illegalities, siphoning off funds and violations committed by the promoters of Indiabulls Housing Finance.
Established in 1926, LVB is one of the oldest private sector banks based out of Tamil Nadu. As on March 31, its net advances stood at Rs 20,103 crore and deposits at Rs 29,279 crore.