Kerala-based Dhanlaxmi Bank Ltd has approached the Reserve Bank of India (RBI) to appoint new auditors after Walker Chandiok and Co. and audit consultancy Grant Thornton Advisory Pvt. Ltd walked out in early August, a month before the completion of their three-year tenure, following major differences with the management of the old generation private lender.

Dhanlaxmi has submitted a list of three firms, seeking approval from RBI. These are PB Vijayaraghavan and Co., RGNPrice and Co. and CNGSN and Associates. After RBI approval, the lender needs shareholders’ nod to finalize the appointment.

The board approved the appointment of new auditors at its meeting on 4 August, according to two people familiar with the development, who spoke on condition of anonymity. At the same meeting, the current auditors submitted their resignation. Typically, banks appoint statutory auditors for three years and renew their term.

At the heart of the matter, according to the two bank executives quoted above, is the disagreement between the auditor and the bank’s management on its explanation of a sudden surge in the interest earning and margin in the June quarter. There were other issues as well, but they could not be immediately ascertained. The bank’s annual general meeting is slated in September. Under the prevalent norms norms, auditors can be appointed or removed only with shareholders’ nod.

P.G. Jayakumar, managing director and chief executive officer of the bank, declined comment on the appointment of new auditors. He said there is no basis in allegations that the bank flouted norms to gain interest earnings.

Walker Chandiok and Grant Thornton declined to comment citing client confidentiality.

On 13 August, The Economic Times reported about the resignation of the auditors.

“We reduced our reliance on low-yielding corporate loans, cut operational costs and shed expensive bulk deposits in the quarter. There is no artificiality in the increase in yield on advances and net interest margin (NIM),” Jayakumar said.

After he took over in February, Jayakumar had said that the “flawed” business strategies of the previous chief and high compensation offered by him to senior executives led to problems in the bank. “While the strategy was in itself flawed, the execution turned out to be expensive, thereby leaving the bank with a host of issues to manage,” he had said.

In the June quarter, the bank cut its corporate loan book by about Rs.400 crore and focused more on retail advances and loans against gold. As at end June, corporate loans constituted 23% of its total loan book of Rs.8,600 crore, while retail was 45%. The proportion of bulk deposits has also been brought down by about 10%, or about Rs.1,000 crore, Jayakumar said.

“The bank has cut the number of employees to 3,000 from 4,600 in February and rationalized the high salary of most senior staff. The improvement in profit was the result of these combined actions,” Jayakumar said.

The yield on advances rose to 13.27% in the June quarter from 11.35% while NIM improved to 2.5% from 1.53% in March.

For the quarter ended June, Dhanlaxmi Bank posted a net loss of Rs.11.86 crore, against a loss of Rs.86 crore in the quarter ended March and a profit ofRs.3.4 crore in the corresponding quarter last year.

Its gross non performing assets rose to 1.39% in the June quarter from 1.18% in the March quarter and 0.63% in the same quarter last year.

“Such a sharp rise in yield on advances in one quarter is surprising even though they have adopted various measures to increase interest earnings and cut bulk deposits,” said Hatim Broachwala, senior research analyst, Karvy Stock Broking Ltd. “One would tend to believe more on the auditors than the management in the normal course of operations.”

The bank has been in the news since late last year when RBI started an inspection of its books in November on concerns about its financial health. RBI later issued a “monitorable action plan” asking it to focus on direct advances instead of buying loan portfolios and improve its earnings and cost-income ratios. (LiveMint)