Mumbai: Development Credit Bank Ltd (DCB) may be the first Indian bank to pay the price for aggressive retail lending over the past few years and is being closely monitored by the banking regulator, Reserve Bank of India (RBI), even as its quality of assets deteriorates and its profitability comes under strain.
The bank’s chairman Nasser Munjee admitted that bad loans were a problem, but denied that DCB was under RBI’s scanner.
DCB’s gross non-performing assets, or NPAs (bad loans), have risen more than threefold in the first three quarters of the current fiscal year—from 1.5% in April to 4.7% in December 2008.
As DCB needs to make provisions to take care of its growing NPAs, the bank’s profitability is being eroded. It recorded a net loss of Rs3.22 crore for the quarter ended December, compared with a net profit of Rs1 crore in the second quarter of the fiscal year and Rs5.44 crore net profit in the first quarter.
The reason behind rising NPAs, analysts say, is aggressive lending in the unsecured personal loans space.
Retail advances account for around 50% of DCB’s total loan book of Rs3,692 crore and some of these loans are turning bad as consumers have started defaulting.
In a bid to tide over the crisis, the bank has shrunk the unsecured retail loan book from Rs652 crore to Rs519 crore in the first three quarters of the current fiscal year, while its secured retail loans— backed by collaterals—have increased from Rs1,280 crore to Rs1,371 crore during this period.
Interestingly, DCB’s deposit base shrank by at least 17% in the three months ended December, from Rs6,006 crore to Rs4,979 crore.
Two rating agencies, Standard and Poor’s Indian arm Crisil Ltd and Fitch Ratings Ltd have recently downgraded the bank’s credit rating, citing its high exposure to “the vulnerable retail and small business segment” and increasing credit losses.
Fitch has also cut the outlook on DCB’s rating from stable to negative. According to the rating agency, a sustainable turnaround in performance “would be challenging, given an increasingly difficult operating environment and constraints in developing its franchise”.
This is not the first time that DCB, promoted by the Aga Khan Fund for Economic Development (Akfed), is in trouble. In September 2005, it appointed Gautam Vir as managing director and chief executive officer and gave him a mandate to clean up a pile of stressed assets and turn the bank around.
Vir also took the bank to the market in October 2006 through an initial public offering. He left in January this year.
On Wednesday, shares of DCB closed at Rs15.45 each, losing 1.28%.
Since January 2008, when they reached a lifetime high of Rs162, the shares have lost 90.46%. During this time, the Bankex, the Bombay Stock Exchange’s banking index, has lost 69%.