| Photo Credit: BIJOY GHOSH

The first bank that will see a change in top leadership in 2024 is Dhanlaxmi Bank. On January 29, the current MD & CEO, JK Shivan, will conclude his three-year tenure. Given that his predecessors gave up on the role in less than a year, it’s quite appreciable that Shivan would have served his full term. Who will replace him isn’t known yet and, more importantly, what next for the bank once he’s gone is a question with no convincing answers. 

Apparently, five names have been shared with the Reserve Bank of India to be considered for the CEO’s role, but the regulator is yet to revert. Meanwhile, with the ₹130-crore rights issue, which ought to have been rolled out by July last year, is still in limbo. Capital adequacy of the bank hovers just a few decimals above 12 per cent, and has been at a precarious level for almost two years. Highly placed sources say the regulator is very much aware of the wobbly situation at the bank.

What’s gone wrong?

Faced with a typical ‘old private sector banks’ issue, Dhanlaxmi Bank is yet another case of influential individuals holding sizeable chunks of shares and wanting things done their way, including having their people in the bank. Resident individuals hold 53 per cent stake in the bank and non-resident Indians 19 per cent stake. The unceremonious exit of Sunil Gurbaxani, Shivan’s predecessor, reflected on the poor corporate governance standards at the bank.

“Coming from a PSU background Shivan was nuanced in balancing the influential shareholders and the bank’s business,” said a former senior executive of Dhanlaxmi Bank. This was good to sustain the bank through the pandemic and keep its wheels moving. His test came in early 2022. In FY22, the bank’s capital adequacy plunged to 12.98 per cent (down 149 basis points year-on-year), and was left with little option other than bring in capital.

All that’s asked is ₹130 crore to shore up the bank’s capital base. Despite over 24 months of struggle, the bank is far from getting the internal approvals for its rights issue; a reasonably easy fundraising option largely involving the existing shareholders. Initially, it was the legal battle against the bank instituted by a section of its shareholders which caused the delay.

Now, it is disharmony among the bank’s directors stretching the process. On September 17, 2023, when an independent director, Sridhar Kalyanasundaram, stepped down from his position, it caused another stir within the bank. But ironically, a few days later, despite the RBI approving the appointment of KN Madhusoodanan as a part-time chairman, there is little progress on the rights issue. Meanwhile, the bank’s stock price has more than doubled to now touch ₹30 apiece amid fundraising woes.

Effects of stalemate

Weak financials and stretched capital position have been synonymous to Dhanlaxmi Bank for almost a decade. Hinging largely on gold loans (25 per cent of total loans) and bulk deposits (19 per cent of total deposits), the bank is managing to keep its head above the water. Nearly ₹336 crore of loans form part of the restructured book. Therefore, while optically, the gross and net non-performing assets seem to have reduced to 5.36 per cent and 1.29 per cent, respectively, in the September FY23 quarter, down 60-100 basis points each year-on-year, the threat to asset quality has far from receded. “If the bank were to run a stress test on its books, the picture could very different,” said a person closely aware of the matter. Skirting on thin ice, will the regulator continue handing out a long rope to the bank?

Tough call

The banking system has just recovered from three back-to-back shocks, and there is no room to afford another bank failure, especially when the fight for deposits is getting difficult and expensive. Perhaps that’s the regulator’s concern, too. That said, the RBI hasn’t shied away from taking bold and unconventional solutions to solve the bank failures in 2019 and 2020 and even in the case of North East Small Finance Bank. With rights issue getting delayed for operational reasons, is the regulator taking the time to work out another unconventional solution for Dhanlaxmi Bank? The present leadership is believed to have been a bridge between the regulator and the investor groups, shielding the bank from untoward actions.

Will things change when Shivan steps down or will he stay longer to see through the capital raise? The coming weeks will reveal the answers.