Rationale

The rating factors in Dhanlaxmi Bank Limited long-standing track record of over 97 years in the banking sector and its established presence in South India, especially in Kerala. While the bank has reported low capital cushions in the past due to weak internal accruals, it raised Rs. 297.5 crore in February 2025 via a rights issue, which has helped improve its capitalisation and solvency profile. ICRA expects the growth prospects to improve due to the fresh capital raise. Dhanlaxmi’s profitability has remained weak over the past several years due to the relatively low net interest margin (NIM) and high operating expenses, which kept its capital buffers low, impacting its ability to grow its loan book. Loan book growth picked up at a healthy pace for a year or two after the bank exited the prompt corrective action (PCA) framework in February 2019. However, the overall growth has been moderate since then. Hence, the scale of operation remains small. The bank’s net advances declined to Rs. 6,289 crore as on March 31, 2019 from Rs. 9,065 crore as on March 31, 2011 due to advisory/restrictions under the Monitorable Action Plan (MAP) and the PCA, resulting in a decline in its market share. Net advances reached Rs. 11,069 crore as on December 31, 2024, increasing at a compound annual growth rate (CAGR) of 10.0% during March 2019-December 2024. While the bank’s fresh non-performing advances (NPA) generation rate has moderated and the headline asset quality metrics have improved over the years, the same remains monitorable, especially given the increasing stress in the retail segment. Dhanlaxmi’s ability to absorb credit costs due to asset quality shocks remains constrained by its weak operating profitability. Additionally, the bank’s top 20 exposures remain concentrated in relation to its capital while the liability base also continues to be concentrated with the top 20 depositors forming 22.3% of total deposits as on March 31, 2024. ICRA, however, notes that a sizeable share of the deposits from the top depositor is non-callable, reducing the liquidity risk to an extent. ICRA also takes note of the presence of two Reserve Bank of India (RBI) appointed directors on Dhanlaxmi’s board.