In recent months, Development Credit Bank (DCB) has made news for all the wrong reasons, including the distinction of being the only bank to report losses in 2008-09. In a wide-ranging interview, the bank’s Chairman, Nasser Munjee, tells Sidhartha that the worst is over and DCB will be profitable in the second half of this year. Besides, he reveals that DCB, in which the Aga Khan Foundation holds 25.1 per cent, is looking to divest stake to a strategic investor. Excerpts from the interview:
You are the only bank to have reported a loss during the last financial year…
Let me put it in perspective. The bank had a portfolio of unsecured lending, which we wanted to run off and increase the share of secured lending. We needed a couple of good years. The first half was fine but post-October, the commercial vehicle market and the construction equipment & logistics business completely collapsed. The third quarter was bad for everyone. That’s where our unsecured personal loan portfolio was hit because of cash flow problems for many borrowers. Fortunately, we had stopped retail lending in May-June 2008. A large part of the provisioning of Rs 125-130 crore was for retail. Last year, we also adopted a very stringent provisioning policy. We provide 50 per cent on (loans that are outstanding for) 90 days and 100 per cent on 180 days. We have excess provisioning and anything we recover goes to the bottom line. It’s a timing issue. We have an operating profit.
We have also contracted the balance sheet because we saw the problem with wholesale money. We repaid some of the high-cost deposits and concentrated on current and savings accounts (Casa). The share of Casa has increased from 26 per cent to 31 per cent. The balance sheet is now around Rs 5,900 crore as against Rs 7,500 crore in the previous year. The good news is that retail deposits are over Rs 2,000 crore and have increase by Rs 500 crore in the last six months. The trends are very healthy. Our income has been affected because we stopped retail lending and are very slow on corporate financing. Also, our capital adequacy is very healthy. We will raise Tier-II capital.
But won’t the rating downgrade affect you?
We have our well-wishers. It is expensive to raise Tier-II capital but we will raise Rs 50 crore. If the conditions are good, we may think of a rights issue later in the year. We are not desperate but when times are tough, it’s best to have excess capital. One thing is clear: we cannot contract the balance sheet further.
Have you reworked your strategy, something that you were planning to do?
We will have to find a business model that will include totally secured lending such as mortgages and home equity. Our SME (small and medium enterprise) business has done very well and we want to focus on mid-corporates. We would like to be a neighbourhood bank and focus on Gujarat, Goa and Maharashtra.
We want to use our 80 branches more efficiently. Cost-control is part of the strategy. Since our business has shrunk, our staff strength has come down from around 2,200 at the end of March 2008 to 1,570 now. The economy will be extremely robust in 2010. You will still find some pain this year but by the end of the year, things will really change. We expect a return to profitability in the second half of the year.
What does RBI have to say in terms of operations?
Last year was very challenging as we had downgrades, which occurred due to two reasons. One was because Akfed (Aga Khan Fund for Economic Development) was asked to dilute stake, and that would have lowered the comfort level. Two, there was no CEO. Now, we are getting to grips with the situation.
But how are you addressing RBI’s concerns on stake dilution?
It has been handled informally as stake dilution was supposed to have been done by March. In difficult times, you need strong promoters. You can always get a private equity player, but will you be comfortable with it? I have been arguing the case and RBI appreciates it.
What are the options before you?
One option is to go it alone, raise capital and clean up the books. It will take a year to be on top of the situation and I am very bullish on 2010. The second option is to get a strategic partner. But the bank is neither for sale, nor is it being merged. The maximum we can consider is a strategic partner and that’s something that makes sense. I have some very good names but I cannot take that decision. I will take the options to the promoters.
By when will you decide?
We should do it this calendar year. We need a partner with a philosophical fit with Akfed.
How much stake can you offer, given RBI guidelines?
These details are yet to be worked out. Obviously, a small amount does not make sense. It has to be a meaningful shareholding.