Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Dhanlaxmi Bank says it expects Rs120 crore equity infusion this week

Existing Dhanlaxmi Bank investors Kapil Kumar Wadhawan, Ravindran Pillai and C.K. Gopinathan and group to put in funds to bolster the bank's weak capital position

Thrissur, Kerala-headquartered Dhanlaxmi Bank Ltd is expecting 120 crore in equity infusion from its existing shareholders this week to help bolster its weak capital position, said two people in the know.

The funds are in exchange for a preferential allotment of shares in favour of Kapil Kumar Wadhawan, Ravindran Pillai and C.K. Gopinathan and group, said one of the people quoted above.

While Wadhawan will increase his shareholding from 3.49% to 5%, the other two will increase their shareholding to 10% each from the 4.99% that they hold, this person added.

“The procedure will be completed on Friday, when the bank holds its shareholders’ meeting and they approve it with a vote," said the person, a senior official of the bank who spoke on condition of anonymity as he is not authorized to speak to the press.

Foreign portfolio investors, or FPIs, own more than 20% of the bank’s shares while foreign or non-resident individuals own 15.16%, according to the shareholding pattern as on 30 June.

According to Reserve Bank of India (RBI) guidelines on ownership of private sector banks, the regulatory limit of equity ownership for individual persons is capped at 10%. In case someone wants to increase their shareholding to 5% or more, an RBI approval is mandatory.

With the upcoming investment, Dhanlaxmi Bank will be able to tide over its current capital crunch, the second person said, also speaking on condition of anonymity.

On Friday, domestic ratings agency Credit Analysis and Research Ltd (CARE) said that it had assigned a default rating to Dhanlaxmi Bank’s upper tier II bonds, as the bank’s capital adequacy ratio (CAR) dropped below the regulatory requirement on 31 March.

At the end of March, Dhanlaxmi Bank had a CAR of 7.51%, which is below the regulatory requirement of 9.625%. As per regulatory norms, the bank was required to have capital funds worth 645 crore but had capital worth about 504 crore as on 31 March, it said in disclosures on its website.

Due to the deterioration in the bank’s finances, RBI asked it to defer payments on some of its bonds.

“Dhanlaxmi Bank Ltd has informed BSE that the Reserve Bank of India has advised the bank to make the payment of interest on the Upper Tier II Series I bonds, due for payment on July 30, 2016 in later years, as per the terms of the issue, subject to the bank complying with the regulatory requirement of CAR, with prior approval of Reserve Bank of India," the bank had said in a notification to the stock exchanges on 29 July.

An e-mail sent to RBI on Monday seeking comment on the proposed capital infusion plans remained unanswered.

The Kerala-based private sector lender had reported a loss of 209 crore on a total income of 1,281 crore for the year ended 31 March, owing to higher provision towards bad loans and pension benefits. Its gross bad loans constituted 6.36% of advances at the end of March. Dhanlaxmi Bank is yet to report its June-quarter earnings.

“It is always more serious when a private sector bank has been downgraded as there is no sovereign backing. It is also a lesson for others that aggressive growth strategies have to be met with equally sound risk management strategies, otherwise, it will turn into a messy situation," said Hemindra Hazari, an independent banking expert.

Dhanlaxmi Bank’s troubles began in November 2011 when RBI started an investigation into the bank’s books for not following certain accounting norms.

In February 2012, Amitabh Chaturvedi, the bank’s managing director and chief executive officer at that time, suddenly quit, owing to differences with the board regarding expansion strategies. Chaturvedi had planned an aggressive growth drive for the lender, but the bank’s board did not see the pay-off on large investments made by him.

Following this, the bank was embroiled in a fixed deposit scam in 2014. The Economic Offences Wing (EOW) of the Central Bureau of Investigation arrested some former employees and a former director of the bank in this connection. And, in November 2015, RBI imposed a 1 crore penalty on the bank.