Andhra Bank to defer tier-II float on high rates

The rise in interest rates has made the Hyderabad-based Andhra Bank to put on hold its proposal to raise over Rs 400 crore tier-II capital by December 2007.

"We are trying to defer the proposal as far as possible. We may not raise tier-II capital this year," Chairman and Managing Director, K Ramakrishnan, told Business Standard.

The going interest rate on tier II bonds, according to Ramakrishnan, is 10.25 per cent. "If the capital is raised at this rate, we have to charge a much higher rate of interest on advances. The higher the rate of interest on advances, the greater the risks," he said. 

TESTING TIMES
(Rs crore)	2005-06	2006-07
Deposits	33,922	41,454
Advances	22,100	27,889
Total assets	40,669	47,541
Borrowings	758	734
Total income	3,067	3,762
Net profit	485	538
Net NPA to net Adv (%)	0.24	0.17
CAR (%)	14.00	11.33

Ramakrishnan said though Andhra Bank had a comfortable capital adequacy ratio of 11.9 per cent, it had proposed to raise tier II capital envisaging that there could be a mismatch between the rate of growth of its deposits and advances. Though there has been a marginal decline in the growth of credit offtake at present, he was hopeful that it would accelerate in the second half of the current financial year. The bank was looking at 25 per cent and 23 per cent increase in credit and deposits respectively this year.

With regard to the bank's foray into life insurance, he said discussions were in an advanced stage with Bank of Baroda and Legal & General of UK, the strategic partners in the proposed joint venture. "We want to get going as early as possible," he said indicating that a memorandum of understanding between the three partners was likely to be signed within a couple of months or even earlier. Andhra Bank would be holding a 30 per cent stake in the joint venture, while Bank of Baroda and L&G would hold 44 per cent and 26 per cent. The joint venture involves an initial capital investment of about Rs 200 crore.

Explaining the reasons for planning to enter insurance, Ramakrishnan said the initiative was aimed at improving the bank's profitability, particularly at a time when profit margins were thin.

The net interest margin of Andhra Bank had declined from 3.7 per cent in 2004 to 3.2 per cent at present. There's also a lot of synergies in banking and insurance operations making it an "ideal foray". Besides, he said, the insurance market in India was very huge as it is yet to penetrate the rural areas. And, as far as rural areas are concerned, Andhra Bank has an edge in its home state. The bank has a total of 918 branches in Andhra, of which 776 are in rural and semi-urban areas.

Ramakrishnan will be visiting US in the third week of this month to obtain approvals for its second overseas office in New Jersey. Currently, the bank has one foreign office in Dubai, and is looking at a presence in Malaysia in alliance with Bank of Baroda and Punjab National Bank. He said the bank was well on course to achieve its target of reaching the Rs 1-lakh crore mark in business by September 2009. Apart from opening 200 ATMs this year, the bank would be setting up 100 branches every year.

Its current business is at around Rs 70,000 crore. In 2006-07, it posted an income of Rs 3,762 crore and a net profit of Rs 537.9 crore.