The Hindu Business Line : Andhra Bank `well insulated' against investment swings

BY shifting Rs 4,663 crore of securities from `available-for-sale' and `held-for-trading' categories to `held-to-maturity', Andhra Bank has strengthened its balance sheet, the bank's Chairman and Managing Director, Mr T.S. Narayanasami, told Business Line.

The move resulted in the bank having to provide Rs 153 crore towards depreciation of assets and, therefore, ate into the second quarter profits. But in future, any fall in the market value of the securities (consequent upon any rise in interest rates) will not affect the bank, Mr Narayanasami said.

Andhra Bank was one of the few banks that actually made a profit out of treasury operations in the second quarter — many banks took a hit under that head. The bank's operating profit was Rs 340.22 crore compared with Rs 270.89 crore in the same quarter last year.

Then came the provisions. `Provisions and contingencies' amounted to Rs 195 crore, against Rs 72 crore previously. Most of it (Rs 153 crore) was due to the depreciation on securities shifted to the `HTM' (held-to-maturity) category.

Banks are allowed to transfer securities from AFS (available-for-sale) and HFT (held-for-trading) heads to HTM only at the beginning of the year. However, considering that most banks would be affected by rising interest rates (and therefore, falling bond prices), the RBI brought in two changes in its guidelines. First, it raised the limit for securities under HTM head from `25 per cent of investments' to `25 per cent of net demand and time liabilities'. Second, it allowed banks to effect the shift one more time this year.

Mr Narayasami said that Andhra Bank took full advantage of this and transferred Rs 4,663 crore to HTM category. One advantage — if the market value of these securities fell, the bank would not have to provide for the depreciation.

Second, as a fall-out of the move, the bank's `investment fluctuation reserve' now works out to 14 per cent, against the RBI's stipulation of 5 per cent. Thus, the move has effectively insulated the bank against any vagaries in interest rates, Mr Narayanasami noted.

Besides, the bank sold some securities from the HTM category and booked a profit of Rs 113 crore. A bank may sell its HTM securities, but the profits will have to be taken to the `capital reserve'.

While on the one hand, various reserves have thus been strengthened the bank has also gone aggressive on provisions for non-performing assets (NPAs), Mr Narayanasami said. He pointed out that provisions cover over 95 per cent of NPAs. The bank's net NPA level stands at 0.2 per cent of its risk weighted assets.

During the first half of the year, gross NPAs came down to Rs 490 crore from Rs 615 crore. About Rs 40 crore of this was on account of agricultural loans becoming `standard', consequent to the RBI's guidelines for rescheduling of agricultural credit.

Mr Narayanasami also noted that the bank's net interest margin of 4.39 per cent was the highest in the industry. This gives the bank room to raise deposit rates without having to prices its loans higher. Consequently, it expects more credit offtake to happen. In the current quarter, Andhra Bank expects to give fresh loans of Rs 1,000 crore.

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