A customer exits a Dena Bank branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Inside Dena Bank: The Lender That Doesn’t Lend

Public sector lender Dena Bank will not be able to give any fresh loans till at least December 2018, the Reserve Bank of India has told the bank’s management, according to a senior official at the bank.

The RBI had asked the bank to stop all fresh lending in May.

In July, the bank’s management approached the regulator, requesting it to ease some of the lending restrictions, RS Singh, executive director at Dena Bank told BloombergQuint in a conversation.

In its reply, the banking regulator told Dena Bank that these restrictions would continue for at least two more quarters, Singh said.

The RBI did not respond to a query sent by BloombergQuint on Tuesday.

Dena Bank is one of the 11 state-owned banks which have been placed under the RBI’s Prompt Corrective Action (PCA) framework because of their poor asset quality and weak capital base. Under the framework, the RBI typically puts restrictions on the kind of loan exposures that weak banks can take.

However, the restrictions placed on Dena Bank are the strictest among all banks.

The strictures followed a surge in the bank’s bad loans. At the end of June, the bank’s bad loans accounted for over 22 percent of its total book. The bank has reported a net loss for six consecutive quarters. Its loss for the June-ended quarter stood at Rs 722 crore, as compared with a loss of Rs 1,225.4 crore in the March quarter.

No Lending. So, What Does A Bank Do?

Given that Dena Bank can’t lend, its loan book is shrinking.

At the end of the first quarter, Dena Bank had outstanding loans of Rs 69,700 crore, down from Rs 74,239 crore as on March 31. According to Singh, in the absence of any fresh lending, the bank has been focusing largely on resolution and recovery.

But the progress has been slow.

During the quarter, Dena Bank was also able to recover about Rs 400 crore worth of stressed loans, apart from the Rs 430 crore that the bank received, due to resolution in two large cases which were under insolvency.

The lender is also trying to reduce the level of high risk corporate loans from its books. This is part of the bank’s strategy to come out of the PCA framework. According to RBI’s definition of corporate loans, which is loans above Rs 5 crore, the bank’s corporate loan book stood at over Rs 34,000 crore.

Singh says Dena Bank has asked its BB rated customers, whose accounts are at a higher risk of turning bad, to either pay higher interest rates or move to another bank.

Low rated high risk loans require us to allocate higher capital. Considering that we are not in a position to waste our capital on maintaining relationships, we have given this option to our customers. About Rs 400 crore worth loans have moved out of the bank’s loan book during this quarter after this option was made available.
RK Singh, Executive Director, Dena Bank

Releasing Capital

The bank is also working on releasing capital to shore up its capital adequacy ratio which was at 10.6 percent at the end of the June quarter.

As part of this, the lender is planning on selling Rs 200 crore worth of equity it holds across various non-core assets like National Securities Depositories Ltd. NSDL e-governance and SIDBI, Singh said.

Cost cutting plans have been put in place and more will follow.

Dena Bank has already shut down 14 branches and 39 automated teller machines (ATMs), which were not seeing many visits. The bank is reviewing more branches and ATMs for similar action.

It is also in the process of selling some offices it owns and plans move its branches to rented locations to save cost, Singh said.

We have floated tenders to sell some of our office premises. Once interested buyers come, the process can get completed soon. These cost cutting measures should get us at least Rs 250-300 crore.
RK Singh, Executive Director, Dena Bank

Ignoring The Red Flags

Former officials of the bank, who spoke to BloombergQuint on condition of anonymity, said that the current situation could have been avoided if the lender had heeded red flags earlier.

According to atleast three former officials, in the mid-2000s, the bank decided that it wanted to shed its image of being a trader’s bank and enter the big league.

In the ten years between 2006 and 2016, the bank saw its loan book expand rapidly. It’s advances rose from only Rs 14,748 crore at end of March 2006, to over Rs 85,000 crore at the end of March 2016.

A lot of the growth came from lending to the infrastructure sector as part of consortium lending agreements.

According to the first of the three officials quoted above, the banking regulator has been issuing warnings about the bank’s exposure to the power sector since 2013. According to this official, the warnings came as part of the annual inspection that the RBI conducts.

The bank suspended any further loans to stressed sectors like power, iron and steel and roads after this. But the damage was done. Loans has started to turn sour and Dena Bank, by virtue of being a marginal lender in banking consortia, had limited say in restructuring decisions.

Then the bank compounded its mistake. To offset the effects of large infrastructure lending, the bank increased retail and MSME lending. This led to a further burgeoning of the book.

Matters came to a head when the RBI conducted its asset quality review in 2015-16. The result of the review has been seen in the bad loans and losses reported by the lender.

How Easy Is A Recovery?

While the lender is now focused on recovery, how easy will it be since it can’t lend afresh?

A consultant, who has previously tried to implement turnaround plans at Dena Bank, pointed out that without the ability to lend, the bank is trying everything to simply exist in the current environment. However, a scenario where a bank only pays interest on deposits and does not earn any income on fresh loans would be difficult to sustain, this consultant said.

The bank’s retail deposits shrank marginally from Rs 24,307 crore at the end of the March quarter to Rs 21,642 crore at the end of the June quarter.

Singh remains hopeful.

The bank has held on to its deposit base and will re-start lending as soon as it is permitted to, he told BloombergQuint.

Also read: What Happens When A Bank Stops Lending?