Mumbai: The Aga Khan Fund for Economic Development (Akfed) has sought approval from the Reserve Bank of India (RBI) and the Union government to hold more than 10% stake in the private sector Development Credit Bank Ltd, or DCB, a top executive said.
Akfed has for long held at least 25.10% interest in DCB. But RBI in February 2005 capped any holding by a single entity in a private bank at 10% its paid-up capital. Earlier this year, the regulator stopped issuing fresh branch licences to DCB as promoter holding in the bank was above this limit.
DCB needs the approvals to be able to have the continued support of Akfed, especially when the bank is fighting bad debt and turning in losses.
“We have sought (the) Reserve Bank of India and government approval to let Aga Khan Fund for Economic Development to maintain its holding in the bank,” said Murali M. Natrajan, managing director and chief executive, DCB. “We have said that the Aga Khan Fund is not just an investor in the banking sector; they run a series of cultural programmes and are involved in many social initiatives in the country.”
He added that the bank has about 80 branches spread across 28 cities. “We have enough capacity to generate retail deposits. As we improve our performance we will get more branches.”
That will be a tough task. DCB’s gross non-performing assets (NPAs, or bad debt), increased threefold in the first three quarters of fiscal 2009, from 1.5% of total loans in April 2008 to 4.7% in December.
The provisions made for these bad loans have gradually eaten into the bank’s earnings. It posted a net loss of Rs3.22 crore for the quarter ended 31 December, compared with profits of Rs1 crore in the preceding three-month period, and Rs5.44 crore in the first quarter.
In February, Crisil Ltd, the Indian arm of rating agency Standard and Poor’s, downgraded DCB’s Rs1,500 crore certificates of deposit programme to P1, from P1+, citing deterioration in the bank’s asset quality in the previous three quarters, and on expectations of continued pressure over the medium term.
Some days later, Fitch Ratings downgraded DCB’s national long-term rating to BBB from A-, citing the bank’s high exposure to “the vulnerable retail and small business segment” and increasing credit losses.
The agency also lowered its outlook on the bank’s rating to negative from stable, saying that a “sustainable turnaround in performance would be challenging given an increasingly difficult operating environment and constraints in developing its franchise.”
Natrajan, formerly with Standard Chartered Bank as global head of small and medium enterprise (SME) banking, was named DCB’s managing director and CEO on 6 May.
Akfed and DCB’s board have given Natrajan three years to return the bank to sustainability. Currently, he is revamping the bank’s business plan—restructuring loans given to retail customers, cutting costs and rationalizing branches.
However, he says it will be at least six months before any improvement can be reflected in the bank’s books.