Development Credit Bank

The year 2008-09 will go down in history as one in which the world
 economy received an unprecedented shock owing to the melt down of the
 financial system in the USA and in Europe. The collapse of the housing
 market triggered a major crisis in the US financial system; the largest
 home lender in the US, Fannie Mae and Freddie Mac buckled, Investment
 Banks as we knew them disappeared in a fortnight of upheaval, banks
 began to fold up in a domino effect as a result of which US households
 lost some  trillion of wealth. The impact of all this was soon felt
 in the real sector of economies around the world. Almost every major
 economy is witnessing negative GDP growth; World Trade will decline by
 nearly 10% this year; and World GDP will be negative. These are
 unprecedented times and it will require unprecedented effort,
 co-operation and time to recover. Capitalism as we know it will need to
 be redefined with new rules of the game for the future development of
 financial systems around the world.
 
 India, fortunately, escaped the worst impacts of this crisis. Since our
 banks were tightly controlled by the RBI, they were less prone to be
 caught by prevailing orthodoxy in the financial systems of the world.
 Indian banks remain well capitalized and the Indian economy remains one
 of the few that is growing steadily at 6.2% per annum. Nevertheless,
 India just like the rest of the world, has been severely affected by
 the destruction of demand caused by the extraordinary financial crises
 that began in early 2008 and was at its full force around the third
 quarter of 2008. Reflecting the contagion effect of the global
 recession, growth impulses remained subdued in India. At a global
 level, in recent months, there are a few positive signals. However,
 these signals are not strong enough to indicate a firm turnaround. In
 India too there are some signs of recovery and upturn. Nonetheless, it
 may be a while before the economy picks up the desired momentum.
 
 Last year, in the Chairmans Statement I was bullish about the
 prospects for DCB for this year. I suggested that the turnaround of DCB
 had been consolidated and that we could look forward to a period of
 stability, performance and growth with DCB putting its business model
 to work. The underlying assumption was that we would continue to be
 operating in a benign environment. Alas that was not to be.
 
 DCB faced two major problems this year. The first had to do with a
 deteriorating retail portfolio especially unsecured personal loans that
 existed before and was grown further in 2007 and the second had to do
 with the severe credit crunch faced by banks in September and October
 2008.
 
 In the first quarter itself we had seen that things might slow down
 precipitously and we had anticipated that our existing unsecured
 personal loans portfolio would face stress. We acted quickly and cut
 off lending in this segment altogether by August 2008. Lucky we did.
 Our anticipation began to be felt gradually in November 2008 when the
 portfolio, which was diminishing month by month, began to feel major
 stress in some geographies. As economic conditions began to worsen,
 fortunately our SME and Corporate portfolio held up with one serious
 exception -Subhiksha a victim of the collapse of the capital market. As
 of March 2009, our net unsecured personal loans advances was down to
 Rs. 329.64 crores from Rs. 698.65 crores in March 2008. Last year, we
 had adopted a stringent provisioning norm once our Gross NPAs had
 fallen from Rs. 314.92 crores in March 2006 to Rs. 63.43 crores in
 March 2008. This was to ensure discipline of our credit process. All
 unsecured personal loans over 90 days past due would be provided at 50%
 and unsecured personal loans over 180 days past due at 100%. Using
 these provisioning norms we provided Rs. 101.61 crores in this
 financial year to cover our unsecured personal loans. This level of
 provisioning gives us a coverage ratio of 76.4% for unsecured personal
 loans at a capital adequacy of 13.4%. Regrettably, this high level of
 provisioning has resulted in a Rs. 88.10 crores loss this year.
 Nevertheless, we felt we should address the problems being faced in an
 appropriate and aggressive manner. This we have done.
 
 Given the tighter monetary conditions imposed by RBI in the summer of
 2008, we decided to restructure DCBs balance sheet by substantially
 de-risking it rather than growing it. High cost deposits - both
 corporate and treasury - were repaid and the focus of attention shifted
 dramatically to grow current and savings accounts (CASA). Total
 Deposits; as a result fell by 24% to Rs. 4,647 crores with Corporate
 and Treasury Deposits falling to Rs. 1,396 crores. Future asset growth
 will be predicated on the growth of low cost deposits ensuring better
 spreads. The Balance Sheet contracted from Rs. 7,582 crores to Rs.
 5,943 crores, indicating this restructuring. Owing to this strategy,
 DCB was spared the impact of rapidly tightening monetary conditions
 that were witnessed from September to November 2008. High levels of
 liquidity sustained DCB through this turbulent period.
 
 The good news is that our CASA ratio is presently at 31% up from 24% in
 March 2008. The Balance Sheet is thus beginning to grow again on the
 basis of low cost deposits rather than expensive and lumpy wholesale
 funding. Our bancassurance is growing rapidly with Birla Sunlife (we
 are a fast growing partner). Our secured asset growth will pick up
 traction during the forthcoming year predicated on low cost
 liabilities. Provisions have peaked and will decline steadily as asset
 growth picks up and the unsecured retail portfolio runs off during the
 next financial year.
 
 DCBs new MD & GEO, Murali M Natrajan, was appointed at the end of
 April 2009. He brings with him maturity and skills perfectly suited to
 the Bank and I am sure that under his leadership the Bank will overcome
 our present difficulties in a short space of time and that next year
 will witness the stabilization I spoke about last year, followed by
 growth and returns for investors. We are all committed to this outcome
 and I am certain that with the support of our Promoters - AKFED - and
 our other major investors we will emerge as a highly profitable niche
 community bank in the private sector serving communities in the
 vicinity of our branches in the principal states in which we function.
 
                                                    Nasser Munjee
 
                                                       Chairman
 
 Date: 19 June 2009