Mumbai: The Aga Khan Fund for Economic Development (Akfed) will reduce its stake in Development Credit Bank Ltd (DCB) to 10% from 24.86% in the next three-four years to comply with the nation’s rules as the lender seeks to wipe out losses and turn profitable. The Reserve Bank of India (RBI) has not issued branch licences to DCB in the past one-and-a-half years because Akfed hasn’t lowered its holding in the bank to the prescribed 10% limit.
“We are moving in the right direction and in the next three-four years, the promoter holding will be brought down to 10%,” said Murali Natrajan, managing director and CEO of DCB. “We raised Rs81 crore recently through a qualified institutional placement. This bought down the promoter holding in the bank to 24.86% from 26%.”
Akfed is seeking to conform to RBI rules after the central bank rejected its application for an exemption. DCB, weighed down by a high level of stressed assets, operates through 80 branches. “Our aim is to attract about five-seven long-term investors along with our core investor, Akfed, who will continue to supervise the working of the bank,” said Natrajan, eight months old in the job.
Some of the key investors are Al Bateen Investment Co. Ltd of the United Arab Emirates, Tata Capital Ltd, DCB Investments Ltd, a special purpose vehicle floated by UK-based asset management company Schroders Plc, Motilal Oswal Securities Ltd and Housing Development Finance Corp. Ltd. DCB narrowed losses to Rs16.9 crore as of 30 September from Rs35.3 crore on 30 June and has exited the unsecured loans business that led to much of the damage to its balance sheet, but the quality of its assets is still poor.
The ratio of its gross non-performing assets (NPAs) to advances stood at 11.24% and net NPAs to advances at 4.67% at the end of September. In comparison, IndusInd Bank Ltd’s gross NPA ratio as at end September was 1.50% and net NPA ratio, 0.98%. Its other rival in the same league, Dhanalakshmi Bank Ltd, had a gross NPA ratio of 1.73% and net NPA of 0.86% as at end September.
“We are giving emphasis on collection and recovery of bad loans. Incremental, non-performing (loans) are reducing. In six-nine months, the non-performing loans will stabilize and we should record profits on a month-on-month basis,” Natrajan said. He refused to say how much debt the bank has recovered, but said DCB’s provisions and contingencies have dipped to Rs32.09 crore as on 30 September from Rs40.08 crore on 30 June.
“We have run down the unsecured loan book from its peak of around Rs700 crore to around Rs200 crore in September,” said Praveen Kutty, executive vice-president and head, consumer banking group, DCB. The bank is now focusing on growing its secured assets in retail, micro, small and medium enterprises and the mid-sized corporate business segments.
Crisil Ltd, India’s largest credit rating agency, had assigned a “stable” outlook on DCB in July, when the bank raised capital by issuing bonds. Crisil said DCB’s capitalization would allow it to absorb the losses, while maintaining tier I capital above 10.5%. As at end-September, DCB’s capital adequacy ratio (CAR) stood at 15.90%, its tier I at 12.5% and tier II at 3.4%.
Banks need to set aside a portion of their capital in proportion to their risk exposure so depositors and lenders are protected. Tier I capital is the money set aside so it can absorb losses without having to cease trading, and tier II capital ensures the bank can absorb losses in the event of a winding-up, and so provides a lesser degree of protection to depositors. According to RBI norms, banks have to maintain a minimum CAR of 9%.
“We have made step-by-step progress in tackling provisions and NPAs, especially in the unsecured personal loans segment. We have also been able to reduce the overall costs of the bank,” Natrajan said.
DCB’s cost-cutting measures have led to savings of Rs35-40 crore. “The bank has rationalized its workforce, reorganized the organizational structure, renegotiated with vendors and consolidated extra premises,” added Natrajan. Over the past six-eight months the bank has also cut its workforce from 2,200 to 1,550 people.
Expanding its business, DCB has tied up with Icra Online, a wholly owned subsidiary of Icra Ltd (an associate of Moody’s Investors Service Inc.) to offer wealth management services. “We have trained over 100 relationship managers for this new business line,” Kutty said. “We will offer this service to all bank customers irrespective of the deposit amount maintained by the customer.” As an entry strategy, the bank has decided not to charge any fee for its wealth management services.