Time's running out for Dhanlaxmi Bank. It has to shore up its capital fast to avert a looming action from the Reserve Bank of India (RBI).
The Thrissur-based lender has been making headlines for the last few years for all the wrong reasons, ranging from meltdown in top level to sword fight in board room. In September 2020, it had its CEO thrown out by shareholders with over 90 percent voting against Sunil Gurbaxani at an annual general meeting.
Last year in September, independent director S Kalyanasundaram called it quits, citing multiple issues in the bank's operations and internal battle within the board. In mid-2022, a section of the shareholders wrote to the board, seeking an urgent meet, citing falling capital adequacy. Several top executives and board members have quit the bank showing personal reasons, though majority of the exits are attributed to power battles in the board room.
On the positive side, the bank has recently seen an improvement in its asset quality, and some stability at the top management with CEO Shivan JK completing his term in office. But the elephant in the room at this point is the bank’s weak capital ratios, which has led to discomfiture for the Mint Street.
Race against time?
Clock is ticking for Dhanlaxmi Bank to raise its survival capital. The Reserve Bank has given the ultimatum to raise the capital urgently as its capital
position appears inadequate. The Capital Adequacy Ratio (CAR) of the bank stood at 12.37 percent as of end-March 2023. While this is above the regulatory minimum of 11.5 percent, it may not be sufficient for the lender to pass the stress tests periodically conducted by the regulator. To put it simply, a stress test assesses what happens to a bank in adverse scenarios. The RBI has asked Dhanlaxmi Bank to have a clarity on the capital raise at the earliest.
Unless the capital comes, the bank cannot grow its balance sheet. It will have to rework its loan mix to focus more on low-risk weighted loan assets to keep the capital consumption low. Any unexpected shocker in the form a large default can deepen the pain. The RBI has two additional directors on the bank’s board watching the situation.
Warning signals
According to a senior board member, the regulator has given the bank an ultimatum. “If the bank fails to raise the capital either through a rights issue or other means, it could lead to strict actions from the RBI in the form of superseding the board and even pushing merger with a stronger candidate,” said the member, refusing to be named.
Both the RBI and Dhanlaxmi Bank chose to stay silent on the matter while responding to mails for this column.
The efforts to raise funds have been on for a long time. But, the key reason why the plan hasn’t taken off is the difference on opinion on the board. In fact, the bank had approved a rights issue way back in March 2022. At least two board members this writer spoke to said the plan is derailed due to a lack of consensus and "ego battle" on the board.
Yet, the last-minute efforts are on. The bank’s board is likely to meet soon to generate a consensus on the rights issue, said one of the sources. “I’m optimistic that this will happen. We should have clarity soon.” Out of the eight members on the board, which include two additional directors and the CEO, at least two haven’t agreed to the rights issue, said the second person. Both the sources requested anonymity.
Falling bottomline
In the December quarter, the bank posted a multi-fold decline in its net profit to Rs 3 crore as against Rs 22 crore a year ago. Its total income rose to Rs 343 crore during the third quarter of this fiscal from Rs 312 crore last year.
Within this, the bank's interest income rose to Rs 308 crore from Rs 276 crore and gross non-performing assets (NPAs) declined to 4.81 percent of the gross loans by the end of December 2023 from 5.83 a year ago.
The bank has seen improvement in the category of SMA-2 loans (less than 2 percent of the book) and restructured loan book. “As far as asset quality is concerned, there is no issue. The only concern is with the capital,” said the second person.
Change in guard
Dhanlaxmi Bank will soon have a new leader as Shivan JK's term as the chief executive got over in end-January. The bank has got permission from the RBI to retain Shivan at the post till a new CEO comes on board.
Earlier, Moneycontrol had reported that a total of five names have been shortlisted for the Dhanlaxmi Bank corner office and the options are under the scrutiny of the RBI. Among the shortlisted candidates are Ajith Kumar K K, who is working as a senior executive at Federal Bank, and Madhav Nair, who is serving as the country head and chief executive of Bank of Bahrain and Kuwait (BBK).
Amid all this, what is even more puzzling is the recent spike in the bank’s share price. The stock has nearly doubled in a month touching a 52-week high of Rs 59 apiece and is trading around Rs 46. The board knows now is a good time for the bank to close its rights issue but for that the warring board needs to converge.
Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.
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