Countdown begins for Dhanlaxmi’s 1:2 rights issue

Countdown begins for Dhanlaxmi’s 1:2 rights issue

By CL Jose

June 12 EGM to discuss run-away expenditure, low CAR

KOCHI/May24-2022: The Trissur-based Dhanlaxmi Bank, which has been on a proverbial roller coaster ride for about a decade now, is understood to have finalised plans for a 1:2 rights issue.

Though the officials talked to shied away from any confirmation on this regard, informed sources stated that the issue will hit the market sooner than later.

The rights issue is expected to mend the poor capital adequacy position of the bank and thus help grow its lending portfolio further.

EGM on June 12

In another serious development, bank has convened an extraordinary general meeting (EGM) of its shareholders on June 12 on a requisition made by 11 shareholders including B Ravindran Pillai (Ravi Pillai), who alone holds 9.99 per cent, the largest single stake in the bank.

The requisition has stated that “The Bank is passing through a financial crisis as is evident from the results for the quarter ended December 31, 2021, and the Cost-to-Income (C2I) Ratio has risen to alarming proportion.”

It also added that the bank is not having any effective control over expenditure, especially Legal and Administrative, whereas the lender is going to start new branches and recruit fresh personnel even though the capital adequacy ratio (CAR) of the bank has been adversely commented by the Reserve Bank of India (RBI).

“A detailed discussion on the financial position of the bank, especially the abnormal increase under expenditure, has to be initiated by the bank,” the requisition letter has explained.

Dhanlaxmi Bank, unlike the other private sector banks in Kerala such as South Indian Bank (SIB) and Federal Bank (CSB Bank case is exceptional), has more large individual shareholders, such as CK Gopinath (around 7.5 per cent stake), MA Yusuffali (5 per cent) and Kapil Kumar Wadhawa (5 per cent).

C2I ratio, CAR at precarious levels

Talking to BBN, a former top official of Dhanlaxmi Bank, acknowledged the untenable cost-to-income ratio as well as CAR the bank enjoys as of March 31, 2022.

“Though the bank has indeed made remarkable progress on several parameters such as advances, deposits, provision coverage ratio (PCR), curtailing of NPAs, etc, it’s high time the bank took meaningful steps to curb expenditure and thus bring down the cost-to-income ratio to a sustainable level,” the former bank official stated.

As of end-FY22, while the cost- to-income ratio was at 74.72, the CAR of Dhanlaxmi Bank was 10.32 per cent. While the banks in general have been able to clamp down C2I ratio below 60 per cent, many banks even target a ratio below 50 per cent.

There is no denying that Dhanlaxmi has a long way to go on curbing this key ratio, which predominantly defines profitability of an organisation.

Referring to the CAR at 10.31 per cent, he said that the bank certainly needs to build up its capital base in order to grow further from here.

Rights issue to shore up CAR

The soon-to-hit 1:2 rights issue means an increase of about Rs126.5 crore in its paid-up capital from the current Rs253 crore to about Rs380 crore.

Given the current net worth of Rs900 crore (reserves at Rs647 crore), the imminent capital increase could ramp up the CAR to around 11.75 per cent and thus create an additional headroom for asset growth.

Pricing ‘rights’ a challenge

With the current market price of Dhanlaxmi Bank share hovering around Rs12.85, the bank would find it challenging to price the rights share above the face value of Rs10, according to market experts, who stated that the pricing needs to account for the dilution of capital resulting from a 1:2 rights issue.

Dhanlaxmi Bank, which managed to wriggle out of a more than three-year-long prompt corrective action (PCA) regime imposed by RBI in early 2019, had to face an unsavoury scenario, when its chief executive officer was voted out at its AGM in 2020.

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