The Hindu Business Line : IOB to ginger up derivatives desk

Chennai, June 16 When Mr S.A. Bhat took over as Chairman and Managing Director of Indian Overseas Bank about a year ago, he announced that the setting up of a ‘syndication desk’ in the bank, which would book large loans and downsell them to other banks.

Many in the banking industry were sceptic about the initiative, for IOB was thought not big enough for loan syndication. A bank that wants to syndicate loans should have muscle enough to keep a big chunk of the loan for itself and sell the rest to other banks.

But in the very first year of operations, IOB earned a commission income of Rs 12 crore from this business — which means the bank syndicated around Rs 2,500 crore. Comparatively, Bank of India — a much bigger bank — earned around Rs 8 crore last year from loan syndication. In the current year, IOB expects to earn Rs 20 crore from this business — a big help at a time when profits from treasury operations are drying up.

Having pulled it off in syndication, IOB now wants to try its hand at derivatives. A ‘derivatives desk’ has been set up. It did two transactions last year, with no significant income.

Mr Bhat wants to ginger up the ‘derivatives desk’ so as to offer derivatives products to more clients. These offerings will be fully hedged by the bank with back-to-back contracts, so that there will be no loss to the bank.

But the idea is to gain experience and eventually take up proprietary positions in the derivatives market, Mr Bhat told Business Line. “That is where money is.”

Essentials

Mr V. Krishnaswamy, General Manager (Treasury), IOB, notes that the derivatives business requires two essentials — experience and software. The bank has just brought back one senior executive from its Bangkok branch to head the treasury operations. It is also shopping for the right software.

Mr Bhat said that Indian Overseas Bank (like all other banks) would strive to earn more fee-based income. Towards this, it has picked up 11.83 per cent stake in an asset reconstruction company, J.M. Financial, with an option to buy up to 15 per cent. Trading in bad loans is seen as another source of profits.

Also, last year, the bank earned a commission income of Rs 12 crore by selling insurance and mutual funds through its branches.

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