Dena prospectus says RBI has underscored its deficiencies

The Reserve Bank of India (RBI) has, in its annual inspection report of Dena Bank, identified operational irregularities and other deficiencies in the internal controls of the bank.

In its prospectus filed with the Securities and Exchange Board of India (Sebi) for its proposed second public issue for Rs 216 crore, Dena Bank said the RBI report is strictly confidential.

"The bank has informed the RBI about the actions already taken and measures that are under implementation in respect of the regulator's observations. The issues raised by the RBI in the report have been replied to by the bank," said the prospectus.

The RBI is empowered to inspect banks and financial institutions periodically under Section 35 of the Banking Regulation Act 1949.

On the detrimental impact of rising interest rates, the bank has stated, "With rising interest rates, the banking industry as a whole is exposed to the risk of high valuation loss and it is not restricted to Dena Bank."

But the bank seems more vulnerable than others since it does not have an investment fluctuation reserve (IFR) as on date due to the carried forward losses, said analysts.

Banks are required to create IFR to the extent of a minimum of five per cent of the total investment portfolio over a period of five years from 2001-02.

Dena Bank has obtained special permission from the RBI for not having created an IFR in view of its carried forward losses.

As on September 30, 2004, the balance of accumulated losses have been adjusted and written off against revenue reserve. The bank will start creating the IFR by March 31, 2005.

The revenue reserves represent the amount of profit left over at year-end after all costs have been paid and dividends to shareholders have been drawn down.

Dena Bank is yet to shift any securities from the 'available for sale' category to the 'held to maturity' category to shield itself from interest rate fluctuations.

Said the bank in its prospectus, "The bank is constantly watching market trends and is expecting some correction in the market. The board of directors of the bank has given authority to the chairman and managing director to shift securities at the appropriate time."

The bank may also face an asset liability mismatch if its short-term deposits "" which constitute over 56 per cent of the total term deposits"" are not rolled over.

Short-term deposits are deposits with a maturity of less than three years.