Is time running out for Dhanlaxmi Bank?

Jayakumar, who took charge in 2012, blames the previous management's unbridled expansion programmes for the lender's present crisis

The warning signs of an imminent crisis at Dhanlaxmi Bank were first noticed in October 2011 when a section of its employees' union accused the top management of window dressing the financial accounts to show inflated profits. Amitabh Chaturvedi, who was then the managing director and chief executive officer, dismissed the allegation, but resigned four months later over disagreement with board members on issues relating to business strategy.

The Thrissur-based bank has been struggling since then. While it made a small profit in 2012-13, it logged a loss of Rs 252 crore in 2013-14. The gross non-performing asset ratio and net bad loan ratio deteriorated to 6 per cent and 3.8 per cent, respectively, while the cost-to-income ratio increased to a whopping 98.3 per cent. At the same time, the share of low-cost current account savings account (CASA) deposits declined to 22 per cent. The capital adequacy ratio, as per Basel III norms, remained low at 8.67 per cent at the end of March 2014

Incumbent managing director and CEO, P G Jayakumar, who took charge in 2012, blames the previous management's unbridled expansion programmes for the lender's present situation. "We have high levels of non-performing assets because of the old loan sanctions," he says. "We have been making provisions for the last two years, and this has affected our profitability."

The bank grew at break-neck speed between March 2008 and September 2011, it recruited 3,300 people, opened 95 branches, reported a fivefold rise in advances to Rs 10,130 crore and quadrupling of deposits to Rs 13,815 crore. But the growth came at a big cost - the wage bill went up, the cost-to-income ratio deteriorated and the asset quality worsened. The bank also faced a liquidity crisis when a few of its bulk depositors withdrew.

At the peak of the crisis, the Reserve Bank of India (RBI) was apparently in favour of merging Dhanlaxmi Bank with another financially strong bank. "Former RBI governor D Subbarao was in favour of the merger," says a person familiar with the developments at the bank. "But the state government of Kerala opposed the merger on the ground that Dhanlaxmi was the only home-grown Hindu bank from Kerala."

Dhanlaxmi, being one of those old-generation private banks, was given a chance to reinvent itself under a new management and Jayakumar was given charge in May 2012. While other lenders in a similar position, like Federal Bank and Ratnakar Bank, are on a strong footing now after a leadership change, the Thrissur-based lender has remained trapped in a web of increasing cost and high slippages (in non-performing assets), from which it is still yet to recover.

Jayakumar was initially given a one-year term. RBI extended his term by one more year in May 2013 and then by six months in May this year. The central bank has always backed a longer fixed tenure for bank heads, a practice suggested by the P J Nayak Committee formed to look into the governance issues in Indian banks.

However, a merger remains the likely option if the old-generation private bank fails to improve its finances soon. "The bank is walking on thin ice," says the person quoted above. "It has missed some of the targets it had set for itself. If the situation does not improve, RBI may reconsider the merger."

The bank's top management, however, remains confident of a turnaround. "We have now shifted our focus to the retail and the small and medium enterprises segments," says Jayakumar. "We are lending carefully, mostly against collateral, and monitoring our asset quality closely. We are trying to improve operating efficiencies, cut costs and grow our low-cost deposit base. I believe the worst is almost over and we can expect improvement (in earnings performance) in the coming quarters."

Dhanlaxmi is taking other austerity steps. It is relocating its branches from high cost premises and renegotiating with its vendors. It is also focusing on cross-selling insurance products and treasury operations to grow its non-interest income. Sources said that the bank is planning to raise Rs 200 crore in next few months to improve its capital adequacy ratio to 11-12 per cent.

Dhanlaxmi's CEO seems confident of a turnaround, but unless the finances see a smart recovery soon, it is likely to end up in the list of old-generation private banks that have been taken over by a financially stronger rival.