DCB grows loans fast in times of liquidity crunch

DCB grows loans fast in times of liquidity crunch

After getting burned in 2009, Development Credit Bank (DCB) had exited unsecured lending. That ought to give some comfort to investors when they see the sudden spurt in its loan book over the past three months.

DCBs advances at the end of March stood at Rs5,284 crore, an increase of 22.7% over the Rs4,306 crore loans outstanding at the end of December. To be sure, the banks loan book had been steadily shrinking in the three quarters till September, so year-on-year growth at 23% is not remarkable for its size. The bank had also raised some Rs190 crore of capital during the quarter, thus giving it sufficient muscle to ramp up loans.

While a growth in the loan book is welcome during these troubled times, questions arise as to how DCB has funded these advances and at what cost? DCBs credit-to-deposit ratio looks a scary 83.41% at the end of March compared with 69.65% three months ago.

What had led to trouble for the bank in the previous three years was a rash of advances funded by wholesale deposits. In the current context, however, things have changed though deposits grew only 2.33% over the three months. Retail deposits accounted for 84.42% of total deposits at the end of March showing a slight improvement.

However, low-cost current and savings accounts (Casa) deposits dipped to 32.12% of total deposits in the March quarter. Thats a slip of almost one percentage point from a quarter ago. At the same time, borrowings increased 7.4%.

The result is that cost of funds shot up 41 basis points (bps) to 7.57%. One basis point is one-hundredth of a percentage point.

That, combined with a marginal dip in yields, has eaten into margins. Net interest margin in the three months ended March slipped to 3.12%, down 25 bps from a quarter ago. That takes the sheen off a 52% year-on-year increase in net profit to Rs17.3 crore.

Anyhow, operating profit grew only a tepid 9% year-on-year and a cut in provisions was what added heft to profits. It cannot continue for long and, thus, the loan growth comes at a good time for DCB. However, unless it spruces up its deposits act, that growth will come at a cost.

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