Development Credit Bank (DCB) returned to profitability in 2010-11 after losses in the previous two financial years. The private sector lender has stopped offering personal loans, after the deterioration of asset quality and eroded profitability in 2008-09 and 2009-10. Managing Director and Chief Executive Officer Murali M Natrajan says it has no plan to re-enter this segment. Instead, he tells Somasroy Chakraborty & Parnika Sokhi, the focus will be on the retail and small & medium enterprises (SME) segments in the coming years. Edited excerpts:
DCB has been consolidating its businesses since 2009 to return to profitability. Is it now ready to embark on a growth trajectory?
Actually, we did both the jobs simultaneously. We had a problem of high delinquency rate in our personal loan portfolio. While we were addressing that problem, we were also working on growing our other businesses. Since a part of the balance sheet was declining, the growth was not really visible. We no longer offer personal loans and credit cards. The people who worked in these businesses had either left the bank or were absorbed in other, growing businesses. We have also made 100 per cent provisioning on the personal loans still in our books and classified these as non-performing assets. The bank is also focusing on recovery of these loans.
Will you re-enter the unsecured retail loan business?
It is not part of our new strategy. Our focus is retail mortgages, SME and micro enterprises. In liabilities, we plan to grow our Casa (current account, savings account) and retail term deposits. Maybe, three or four years later, we will review the personal loan business. For now, only if any of our existing customers ask for a personal loan will we offer this product. Given our size and capital base, re-entering this business may impact our earnings again.
In an uncertain economic environment, even the SME sector comes under stress. Are you comfortable with the credit quality of your SME loans?
In the current environment, there is a risk that SMEs will be under pressure, as the payment cycle is getting extended. However, we have not seen any significant deterioration in the quality of our SME loans. We have experienced people handling this business, which fits well with our strategy. Almost half of our branches are in SME-centric areas. Historically, the bank has been serving traders and small businessmen. We have nearly trebled our SME loan portfolio since 2009.
Why are you not focusing on large companies?
It is because our operating profit is small. If a large account becomes non-performing, it puts a lot of pressure on a bank of our size. Also, the margins in this business are not as good as in the SME segment.
In 2011-12, DCBs deposit growth was muted. How do you plan to improve this?
Our retail deposits grew well. The growth appeared slow since we consciously shed some of the large deposits, where the rates were high. We are confident of growing our deposits by 18-20 per cent this year.
Our focus will be Casa deposits. We expect the share of these deposits to remain above 30 per cent. This will be supported by our branch network. We aim to have 150 branches in the next three years.
Won’t the branch expansion deteriorate your cost-to-income ratio further?
Our cost-to-income ratio is at 72.5 per cent. It is not that our absolute cost is high. The cost-to-income ratio appears high because we don’t have sufficient balance sheet size. We have systems, processes and infrastructure. So, now as we grow our balance sheet, the cost will not increase at the same pace. As our income grows, this issue (of high cost-to-income ratio) will be addressed. If it continues to remain high, we will slow down our branch expansion. Our aim is to bring down the cost-to-income ratio to 60 per cent in the next 24-30 months.