Summary of the week: the Dhanlaxmi bank fiasco


Before we get to today’s story, a quick recap of everything we’ve covered this week. Monday we took the day off. On Tuesday we discussed the CCI issue with MakeMyTrip and OYO. On Wednesday we talked about India’s battle with affordable housing. On Thursday we discussed why Google was fined by the TCC and finally we talked about the ants.

With the recap out of the way, let’s get to today’s big story, shall we?

The story

Running a bank is simple, isn’t it? You collect deposits. You raise funds. You lend the money and you keep the interest. And as long as you keep handing out money to creditworthy people who pay you back on time, you’ll be good as gold.

You just need to keep repeating this simple maxim. Sounds pretty easy, right?

Well, tell that to the shareholders of Dhanlaxmi Bank, a 95-year-old bank based in Kerala. The bank’s share price has crashed 93% since 2010. It’s almost a penny stock now (below ₹10). This means that if you invested ₹1 lakh in 2010, you would be left with a paltry sum of ₹7,000 now.

And last week, shareholders had had enough.

They think the CEO is spending money willy-nilly while the bank is already in dire straits. So they revolted. They now want to restrict its purchasing power. So if he wants to open new branches, it will not be possible. If he wants to upgrade the computer systems, this is also prohibited. He can only pay staff salaries and he can’t do much else.

It’s hard !

Now here’s the thing… this isn’t the first time shareholders have rioted at Dhanlaxmi Bank. And it probably won’t be the last. But to understand what’s going on, we need to understand the history of the legacy bank.

Since its establishment in the 1920s, Dhanlaxmi Bank has followed the basic principles of banking. Increase deposits. Lend money. Pocket the interest. And it worked pretty well. He focused on building relationships with small businesses. He built his retail portfolio slowly and steadily. He stuck to his area of ​​expertise and didn’t experiment that much.

But times are changing and the bank did not want to be left behind. He wanted to change his image – from a sleepy old bank to an agile gazelle. He wanted to be tech savvy. He wanted a pan-Indian presence.

And in 2008, Amitabh Chaturvedi came on board to usher in a new era for the regional bank. He was someone who had risen through the ranks at ICICI Bank and then at Reliance Capital. Everyone thought he could bring the private sector aggression to Dhanlaxmi.

It worked.

In just 3 years, the bank’s loan portfolio grew from ₹2,500 crore to ₹10,100 crore. His deposits increased from ₹3,400 crore to ₹13,800 crore. It opened 66 new branches across the country. And its numbers have tripled.

Chaturvedi has also done so by staying on the syndicate’s good books. He raised salary levels, gave work to employees’ children and he even offered to relocate Keralites working in other metros. Things were looking up.

Oh, he actually changed the name of the bank – from Dhanalakshmi to Dhanlaxmi. Don’t ask why!

But all of this came at a cost. And the cracks started to appear soon after. The expenses exceeded the limits. Revenues began to lag. The old guard began to retire and new employees were not allowed to join the employee union.

3 years after the start of his term, tensions have erupted again. In October 2011, the employees’ union said senior management was making makeup on the accounts. That they were finding new ways to show benefits. That they recognized income that they had not received at the start, while staggering the expenses over a given period.

The RBI got involved and launched an investigation. After all, the capital adequacy ratio – a number that tells you what kind of money is available to cushion future losses – fell from 14.44% in 2011 to 10.81% in 2009. The bank continued its expansion goals too quickly by spreading itself too thin.

The Bank’s board has stopped supporting Chaturvedi. They wanted him to stop free expansion and reduce loans. And he did. Soon, revenues dried up, while costs remained high.

Chaturvedi really had no choice but to leave the bank.

And in August 2012, his auditor Walker Chandiok and Co. threw up his hands and also quit. Something to do with financial irregularities.

Things were so bad that in 2015 the RBI stepped in. The regulator has placed the bank under what is called the Rapid Corrective Action (PCA) framework.

Being put on this list is usually bad news. Of course, the objective is to ensure that the bank protects its capital and does not go bankrupt. But it also means restrictions on lending money. You know, the very things that fill coffers.

And it took almost 4 years for the bank to set up its financial act and become a free bird again. Well, sort of.

Because financial matters are one thing. But what if there is another problem? The Elephant in the Room — Culture.

For a legacy bank in Kerala trying to find its feet in the new world, the biggest hurdle was preserving the ‘culture’ built so painstakingly over the years.

You see, between 2003 and 2020, the Bank had 7 CEOs. And 5 of them did not fulfill their full mandate. Even seasoned board members jumped ship citing issues with management and a toothless board.

And when in 2020 the RBI appointed Sunil Gurbaxani as CEO, shareholders waited only 6 months before ousting him. Apparently he was making the same mistakes as his predecessors, ignoring the bank’s South Indian roots in its quest for growth.

At that time, the Secretary General of the All India Bank Clerks Association wrote to the Governor of RBI. His request was simple: “Please find someone who understands the history of the bank. His legacy. its customers and shareholders.

Or, as one expert told Forbes: “Essentially, the problem is that Dhanlaxmi is a Kerala-based bank, and as management you really have to understand the local sentiments. You have to behave and act like a local to win over the shareholders who have been missing for many years.

Managing a bank is not so simple after all. Being overly aggressive is one thing, but it also seems like you have to respond to “feelings.” Especially if you’re a foreigner who’s been brought in to run the show. You are beholden to shareholders and their whims and fancies.

So you could say that the shareholders should then select the top brass?

And they kind of did. Next up was Kerala-based banking veteran JK Shivan. In fact, the RBI actually asked the bank’s board to get shareholder support before appointing him. What they did. 99.81% of shareholders gave the green light.

But barely a year and a half later, it is the same JK Shivan who faces the ire of shareholders. It’s his powers they want to reduce now.

So now the question is – if an RBI appointee is not good enough; if someone the shareholders have chosen is also not good enough; What is the next step for the bank that clings to its “DNA”?

Also, how responsible is the RBI for this mess – You see, the RBI also has candidates for the board of the bank and they are accused of sleeping behind the wheel.

How will Dhanlaxmi Bank get out of this mess?

The simple answer is that she urgently needs to raise capital to get her house in order.

But it must also settle the constant battle between shareholders, the board and management. If that doesn’t happen, it won’t be the last you hear about trouble at 95-year-old Dhanlaxmi Bank.

Until there…

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