Bank of America has ventured into the high-risk-high-gain route for its operations in India. The bank's unsecured loans nearly doubled from Rs 881 crore in 1995-96 to Rs 1,579 crore in 1996-97.
The bank earned a distinction of sorts when its unsecured loans overshot the level of secured loans which stood at Rs 1,472 crore at the end of March.
There was a slight increase in advances secured against tangible assets, from Rs 1,221 crore in March 1996 to Rs 1,472 for the current fiscal.
This is what explains the 79 per cent increase in its net profit which stood at Rs 94.4 crore in March end. This includes interest income which went up by 47 per cent largely because of the unsecured loans.
As a general rule, banks keep their exposure to unsecured advances at an extremely low level. One reason why Bank of America was forced to opt for unsecured loans which earn high interest in order to meet the high cost of its borrowings, sources said.
High cost term deposits of the bank rose 68 per cent to reach Rs 2,448 crore in March end. Term deposits constituted as much as 78 per cent of its total deposits which is higher than some of the newly launched private banks.
The annual accounts of the bank's Indian branches which was released recently, shows that the bank managed a sharp increase of 51 per cent in its demand deposits and a 54 per cent increase in saving bank deposit in 1996-97.
But these increases had limited impact in bringing down the overall cost of funds for the bank because demand and saving bank deposits contributed only Rs 709 crore which was 22 per cent of its total deposits of Rs 3,158 crore on March 31,1997. At the same time, the bank's total deposits rose by 64 per cent over last year's level of Rs 1,927 crore.
The accounts also indicates an actual drop in the quantum of loans covered by guarantees from the government and other banks which was Rs 69.6 crore to Rs 23.8 crore.
The rise in high-income unsecured advances and high-cost term deposits resulted in a sharp increase in both interest earned and interest expended.
Interest income shot up by 47 per cent to reach Rs 575 crore by the end of 1996-97 while the interest payout showed an increase of 33 per cent at Rs 343 crore.
The bank, however, tried to counter-balance the high risks it was taking by more than quadrupling its investments in bonds and debentures from Rs 52 crore in 1995-96 to Rs 281 crore in 1996-97.
