DCB defaults on priority sector loans

Development Credit Bank (DCB), a Mumbai-based private sector bank, was not in compliance with the priority sector advances norms stipulated by the Reserve Bank of India (RBI) as on March 31, 2006.

RBI requires every bank to extend at least 40 per cent of its net bank credit to priority sectors which include agriculture and home loans. DCB's priority sector advances portfolio constituted 32.73 per cent of its total advances. It is also not in compliance with the requirement to lend to the agriculture sector, DCB said in its revised draft red herring prospectus filed with the Securities and Exchange Board of India.

The bank has to make up the shortfall by investing in RBI stipulated instruments, which provide a lesser yield than normal advances. Continuing failure to adhere to RBI stipulations could result in penalties and/or strictures from the RBI, DCB said in the prospectus.

DCB had earlier filed a prospectus but would not go ahead with its IPO plans earlier in 2006 because of unfavourable market conditions. The bank, which is 58.43 per cent owned by The Aga Khan Fund for Economic Development (AKFED), plans to raise around Rs 325 crore through the IPO.

AKFED is a part of the Aga Khan Development Network and is a for-profit international development fund engaged in promoting entrepreneurship and building economically viable enterprises in developing countries.

The RBI guidelines on ownership in private sector banks require any individual, entity or group of related entities holding or controlling in excess of 10 per cent of the total paid-up share capital to reduce the shareholding to 10 per cent or below.

The RBI approval for the IPO has set a condition that AKFED needs to bring down its stake in the bank to 10 per cent by March 31, 2007.

The bank also has a concentration of loans to certain customers and to certain groups of customers and credit losses from these customers or groups could adversely affect its business and financial condition.

As at March 31, 2006, the bank's total exposure was Rs 2,896 crore, which includes outstanding funded exposure and non-funded exposure. DCB's exposure to its 10 largest borrowers in the aggregate accounted for approximately 10.07 per cent of its total exposure as at March 31, 2006.

Its exposure to its largest single borrower as at March 31, 2006 accounted for approximately 1.69 per cent of its total exposure and 19.17 per cent of the capital funds (comprising Tier I and Tier II capital).

DCB's exposure to its largest borrower group (excluding food credit) as at March 31, 2006 accounted for approximately 2.96 per cent of the total exposure and 38.54 per cent of its capital funds. Credit losses on these large borrowers and group exposures could adversely affect the bank's business and financial condition.