Dhar sees a silver lining on Baroda’s dark cloud

He adds that this industry is vulnerable to a number of outside factors that can affect its stability and profitability, including market fluctuations, regulatory changes, and economic cycles.

Astute business leaders typically recognise unique selling propositions or USPs that differentiate their companies from rivals by offering superior and cutting-edge services or specialising in a particular market. Others improve quality, efficiency, talent or ultimately go on a marketing spree.

I have met Mr Dhar a couple of times: the first time being in June of last year when his company was awarding bonus shares to its shareholders, and the second time when the taxman ranked the bank he manages among the best compliant taxpayers in the country.

Each shareholder of the bank cheered after the bank distributed 12.5 billion units of ordinary shares of Shs10 to them. The bank was increasing its paid-up share capital by this, from Shs25 billion to Shs150 billion in order to comply with the regulator’s requirements.

Calculated risk
Behind his black framed glasses, he looks adorned with enthusiasm and vigour. Mr Dhar sounds like a bank CEO. He has a humour one would adore to hold in such a position.

Since he took over as manager of this institution in February of last year, the bank, which is listed on the local stock exchange, has generated ‘good’ returns for its shareholders that have made it one of the most traded counters on the Ugandan bourse.

In 2023, its dividends payable increased from Shs919 million to Shs1.042 billion. But the bank’s executives are holding a lot of them because a big chunk of its old shareholders haven’t materialised their shares, something that deters them from receiving their dividends directly to their bank accounts along with other shareholders. 

The bank generates currently ‘good’ cash, its executives believe. Last year, its total income surged from Shs261.74 billion to Shs295.46 billion, its financial statements show. These financial documents also show the performance of the group as well as the bank, but when you look closely, you notice that the figure after evaluation remains the same, indicating that the bank is the only member of the group that produces cash.

It turns out that the bank eliminated Equity Stock Brokers Uganda Limited and Baroda Capital Markets Limited, its stock brokerage operations, from its cash flows. This was during the previous fiscal year. Following a process review and a request to take action to guarantee an orderly transfer of client assets, the Capital Markets Authority board authorised Baroda Capital Markets Limited and Equity Stock Brokers Uganda Limited to close their stock brokerage business last year, the regulator’s files show.

According to reports, it was forced out of business due to certain operational requirements it found hard to implement. Now, the market is left with five equity brokers in the market: Old Mutual Investment Group Uganda Limited, Chipper Technologies Uganda Limited, Dyer and Blair Uganda Limited, and Crested Stocks and Securities Limited.

Currently, the bank invests a larger portion of its assets in loans and advances rather than the securities that most banks do. According to Mr Dhar, this is a calculated move that shows the bank’s emphasis on lending as its main source of income.

“We extend loans to entrepreneurs who leverage the strengths of the country in various sectors, to enable them to manufacture and produce for the consumption of citizens and also exports,” he says.

This, he adds, is how the bank contributes its bit “for a significant increase in the GDP of the country and the progress, the prosperity of the people of Uganda.. [something that] positions the bank for long-term success in the dynamic banking industry”, adding that this enhances customer relationships.

Silver lining
If you looked most bank executives in the eye, they would most likely say that, but I think Mr Dhar sidestepped the real issue, which is that banks typically turn to securities because they offer safe and reasonably stable returns, something that every business operator in banking knows.

The government securities have a high scale of over Shs15 trillion that surpasses advances and at the moment they have the highest returns when compared to loans and advances.

Last year, Bank of Baroda’s loan book strengthened. Its non-performing loans and other assets dropped from Shs14.9 billion to Shs415 million. What happened?

I ask. Mr Dhar responds coolly that the bank has strong recovery plans in place, including proactive steps to interact with noncompliant borrowers and retrieve unpaid balances.

“The bank successfully implemented a restructuring of loans and rescheduling of payments for distressed borrowers, allowing them to regain financial stability and resume repayments,” he says.

Also, improving economic conditions, such as increased business activity and higher employment rates, leads to improved borrower repayment capacity,” he adds.

Bank of Baroda Uganda sees ‘gold’ in loans and advances because it has accumulated some ‘big’ clients that it never used to in the past.

Bad debts
But a number of them, including the renowned businessman Mukesh ‘Shumuk’ Shukla, have defaulted on advances of loans, totalling billions of shillings, endangering his thirty-year-old company and real estate holdings. Bank of Baroda Uganda’s 2023 financials show that these bad debts went on a frenzy from Shs7.98 million to Shs18.41 billion.

Overall, bad debts written off by banks are often a reflection of underlying economic, financial, and operational challenges. While macroeconomic factors play a significant role, other internal and external factors also contribute to the accumulation of bad debts within banks’ loan portfolios.  

The Bank wrote off bad debts of Shs18 billion during the last financial year. These turned into non-performing assets mostly due to the stress caused by the macroeconomic situation, mainly the aftereffects of the Covid-19 situation. Bank of Baroda was not an outlier.

A number of corporations, especially in sectors like real estate, hospitality, and commodities, were knocked sideways by the pandemic.

“The bank is applying effective risk management and prudent lending practices to minimise the impact of bad debts on the bank’s financial health,” Mr Shashi says.

He explains that the bank has “strengthened [its] risk management and asset review processes to identify and address potential non-performing loans early, preventing them from escalating into non-performing status. The bank also adheres to stringent lending practices, including thorough credit assessments and due diligence, to mitigate the risk of loan default.”

Several Certified Financial Analysts I talked to before engaging Mr Dhar told me these bad debts are ultimately one of the primary reasons the bank’s profits dipped. Reason? Writing them off involves removing the uncollectible loan amount from the bank’s books. This process typically involves recording an expense in the bank’s financial statements to reflect the loss.

When a bank writes off bad debts, it records the amount as an expense on its income statement. This expense is often categorised under “provision for bad debts” or “loan loss provisions.” Bank of Baroda Uganda’s loan provisions in 2023 were Shs9.55 billion, a decrease from the Shs11.07 it allocated in 2022.

“But as a bank, we are focusing on reducing operating expenses, improving asset quality, optimising loan pricing, and managing funding costs effectively so the banks can position themselves for sustainable growth and profitability despite challenging market conditions,” he concludes.