Sources say that the apex bank, acting on the memorandum sent by the bank officers’ union, has issued a 15-point Monitorable Action Plan after conducting an investigation into the bank, to strengthen its weak financials. RBI has come down strictly on the bank’s capital adequacy ratio and share of top depositors 

The Reserve Bank of India (RBI) had conducted an inspection and issued a 15-point Monitorable Action Plan (MAP) to Dhanlaxmi Bank. This was followed by the furore caused due to a memorandum sent by the All India Bank Officers’ Confederation to the RBI stating the weak financials and certain wrongdoings by the bank. (The stink coming from Dhanlaxmi Bank: AIBOC raises serious allegations).
 
Moneylife has accessed and reviewed some parts of this action plan. While the bank was in a denial mode about the issue, sources say the RBI has taken the union seriously even if it is just a matter of “abundant caution.”

As per the MAP, Dhanlaxmi Bank should moderate its loan growth, year-on-year, to 25% for 2011-12, should not be dependent on portfolio buyouts and should focus on increasing its direct advances. It has asked the bank to improve its earning ratio and cash-income (efficiency) ratio to 70% by March 2012 from its current 83.73% during 2010-11.

According to sources, the RBI has been especially tough on Dhanlaxmi Bank because it thinks that the bank has grown really rapidly and they want to ensure it’s not on a reckless growth path. RBI has put in place strict conditions for monitoring its operation, but it is willing to give the bank adequate time to ensure that it remains safe and steady without rocking the boat.

Sources from the banking industry told Moneylife that RBI was concerned about a few issues with Dhanlaxmi Bank. It includes the decision by the bank to capitalise salaries and offer bonuses when it was not in a position to pay the same. And because of these actions, the RBI has been extraordinarily strict on its CRiR (Credit Risk Rating). However, the RBI believes that given the time and stringent monitoring, the bank would not face any difficulty.

As a further measure, sources say RBI has put one of its general managers on the board of duty of Dhanlaxmi Bank so that every major action taken by the bank and whether it is adhering to the guidelines of RBI or not can be monitored almost on a continuous basis.

Interestingly, the RBI, in its action plan, has also asked the Dhanlaxmi Bank to improve its capital adequacy ratio to 12% by March 2012. It is stricter for Dhanlaxmi Bank than other banks where the capital adequacy ratio is only 9%. Sources say that this is one area where RBI is extra strict with the bank, but it is in the interest of both the bank and its depositors.

The RBI has also been cautious about top depositors of the bank. RBI, through MAP, has asked the bank to bring down the share of the top 20 depositors in total deposits below 20% by March 2012. Sources say that this is another measure where the apex bank is strict with the bank so that it ensures that there are stable deposits that the bank builds and not institutional deposits which would fly out any time.

RBI has also asked Dhanlaxmi Bank to strengthen its liquidity risk management and reduce dependence on high cost borrowing/deposits by March 2012, put a limit of 20% of total book for portfolio buyouts and submit a monthly report on performance of loan portfolio to its regional office in Thiruvananthapuram, Kerala, strictly adhere to directions issued under Section 35 (A) of the Banking Regulations Act and improve its accounting policies and implement good practices particularly in reference to booking of interest on bills discounted, accounting of intangible assets etc.

In MAP, the apex bank has asked Dhanlaxmi to maintain its SLR (statutory liquidity ratio) cushion of 1% of its NDTL (net demand and time liabilities) till its liquidity profile improves. Considering the weak financial position of the bank, the RBI has asked the bank’s board that it “may put a suitable cap on interest rates carried by the bank.”

Further, by December 2011, the apex bank has asked Dhanlaxmi Bank that it should put in place a comprehensive BCP (business continuity planning) system, improve its KYC/ALM (Know Your Customer/Anti-Money Laundering) norms, put a system driven NPA (non-performing assets) classification in place and ensure that all MIS (management information system) data flows are system-driven.