Dhanlaxmi Bank taking aggressive steps to get back into black

Many old-generation private sector banks seem to be gradually disappearing from the Indian banking landscape. In the last decade, seven such banks, three from Maharashtra, two from Kerala, and one each from Tamil Nadu and Rajasthan, have got merged with bigger and stronger banks. Weak financials and promoter meddling often made the merger inevitable.

ICICI Bank acquired three banks — Bank of Madura (2001), Sangli Bank (2007), and Bank of Rajasthan (2010); Punjab National Bank assimilated Nedungadi Bank in 2003; IDBI Bank and Federal Bank took over United Western Bank and The Ganesh Bank of Kurundwad, respectively in 2006; and Lord Krishna merged with the erstwhile Centurion Bank of Punjab in 2007

Cut to 2012. The Kerala-based Dhanlaxmi Bank is in the news. It has seen a shakeout at the top, middle and lower rungs in the last few months.

After nearly 40 months at the helm, Mr Amitabh Chaturvedi resigned from the MD and CEO's position in February, in the backdrop of the bank totting up losses of around Rs 37 crore in the October-December 2011 period.

New team, new structure

Mr Chaturvedi and his team had tried to set a scorching growth path for the bank. In the last three years, the bank made big investments in fixed assets, technology and a re-branding exercise (the name was changed from Dhanalakshmi Bank to Dhanlaxmi Bank in August 2010). To attract talent, the bank matched the salaries paid by top private sector banks.

To streamline operations, the organisation structure was rearranged into over a dozen verticals including retail liabilities, retail assets, corporate, SME, treasury, etc. The business mix was gradually changed, with more emphasis on wholesale assets and liabilities.

Accountability

When all these changes were being wrought, the old guard at the bank, especially the officers affiliated to the unions, felt neglected and unwanted. They wanted the new guard out. The new leadership wanted growth that was three to four times the industry average. However, the increase in business in the short term was not enough to meet the burgeoning expenditure, resulting in strain on profitability. The business, no doubt, grew 3.5 times from Rs 6,000 crore in December 2008 to Rs 21,000 crore in December 2011.

In the process, employee costs rose sharply. In the October-December 2011 period, its employee cost was Rs 73 crore on a total business of around Rs 21,000 crore. In sharp contrast, the wmployee cost at a slightly larger sized bank, City Union Bank, was just Rs 28 crore, on a total business of around Rs 26,000 crore.

The Dhanalakshmi Bank Officers' Organisation wants the affairs of the bank to be investigated and accountability fixed. In a circular to its members, the Association has sought answers to three questions.

How come the top management in banks enjoy immunity for all their grave misdeeds;

How could the banking regulator ignore the early warning signals; and

Why this sudden reversal of fortunes: how come the bank that was making profits till the September quarter, reported a dismal performance in December quarter, all of a sudden?

Changing focus

The new MD & CEO-in-charge, Mr P.G. Jayakumar, has his task cut out. To revive the fortunes of the bank he has embarked on an aggressive cost-cutting exercise — trimming excess flab, surrendering excess space in possession of branches/ offices, reducing salaries of those hired on a cost-to-company basis, and divesting its 13 per cent stake in Destimoney Securities Pvt Ltd. Besides, the bank has dismantled the vertical structure and reverted to the traditional branch-centric banking model. Prior to his elevation, Mr Jayakumar was Executive Director of the bank.

On the business front, the bank wants to focus more on high-yielding retail, especially loans against gold, and SME loans. The bank sees lending against gold as a big opportunity as the RBI has reduced the flexibility that gold loan companies earlier enjoyed vis-à-vis banks. It will not renew low-yielding corporate advances.

These measures could help the bank get back to profitability. Mr Jayakumar acknowledged that under the previous leadership team, the bank's capital funds doubled to Rs 1,000 crore.

The banking regulator is closely watching the bank. A senior RBI official is on the bank's board, as an observer.

While a couple of broking firms have put out research reports that Dhanlaxmi Bank is a potential candidate for acquisition, Mr Jayakumar has pooh-poohed them. He has dismissed all such talk as market speculation. The bank is here to stay, he added.

The jury is still out on whether Dhanlaxmi Bank will hold its own or go the way its country cousins — Nedungadi Bank and Lord Krishna Bank — have gone.

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