Oriental Bank of Commerce – a growing bank

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Oriental Bank of Commeerce

Oriental Bank of Commerce logo
Oriental Bank of Commerce logo

Oriental Bank of Commerce

Foraying into credit card segment

Oriental Bank of Commerce has entered into the credit card segment through a tie-up with SBI Cards. It will be a co-branded credit card. It will be based on both magnetic stripe and chip-based. The bank will be coming out with its cards during Diwali festival. The bank is a late entrant to the credit card business. Almost all the other banks have already forayed into the credit card business much before. But there is one advantage in the bank entering into credit card business with this much delay. It can straightaway reap the benefits of latest card technology without the botheration of costly updating and revamping its existing set up. It can enjoy the chip security technology now. Nagesh Pydah is the Chairman & Managing Director of the bank. The embedded chip will prevent fraudulent cloning of the card by fraudsters.

Recruitment drive and branch expansion

What is the bank’s strategy in these tough times of high interest rates and declining industrial production? Oriental Bank of Commerce wants to focus on mid-cooperatives and small and medium enterprises. The bank’s syndication vertical is progressing well. The bank has in hand about six assignments involving Rs.3000 crore credit in this vertical. The bank is confident of maintaining its credit growth of 18-20 per cent in line with projection made by Reserve Bank of India. The bank says that demand for credit in areas like logistics, manufacturing and infrastructure is picking up. The bank says that it has no immediate plans to increase its lending rates. The bank is in the process of recruiting around 2750 clerks and officers for its branches and administrative offices throughout India. It plans to add 173 new branches in 2011-12. At present, Oriental Bank of Commerce has 1644 branches. As on June 30 2011, the total business of the bank stood at Rs.242770 crore.

Monetary policies alone cannot cure inflationary ills

The CMD is of the personal opinion that RBI may pause hiking of interest rates. He is also of the opinion that interest rates will soften after September as the rates have already peaked. But September has passed and we are in the month of October. Interest rates have only increased. Can we say that the CMD’s opinion has gone wrong? Whether this opinion will prevail or not depends on inflation scenario. RBI Governor is very keen to attack inflation through the monetary policies. The intention is good. But monetary policies alone will not bring a respite to the high inflation prevailing in India, which is eroding the returns of the depositors. Fiscal policies will have to be tuned with monetary policies in order to bring an effective cure. This is what the US Fed Chief Bernanke also stated recently. But the fiscal policies are not in the hands of the RBI. It can only take one sided action. But at the same time, RBI is also aware that its repeated hikes in interest rates are blunting the growth of many sectors. Car loan and home loan borrowers are steeply affected through periodic rate hikes.

No further raising of capital till 2014

The CMD has based on his above opinion and predicted that the cost of funds may soften when deposits go in for re-pricing later during the year. The deposit rates have already peaked uncomfortably for the bankers. But for the retired people, it is a boon as they can enjoy higher returns with safety. During the current year 2011-12, Oriental Bank of Commerce expects deposit growth at 19% and credit growth at 20%. Oriental Bank of Commerce has ruled out any further raising of capital till 2014. The bank is expecting a net profit growth of 20% in 2011-12. The bank says that this net profit growth of 20% will be after providing for the transitional pension liability of Rs.170 crore in the current fiscal year. The bank does not want to focus on topline. Instead, its strategy is to focus on the bottomline. For this, it is imperative that its net margin should rise above 3%. But at the same time, the bank should see that the non-performing assets (NPAs) do not rise.

Capital infusion

In March this year, Oriental Bank of Commerce received a capital infusion from the Central government amounting to Rs.1740 crore. The bank has now, after this capital infusion, surplus liquidity of Rs.6000 crore. Statutory Liquidity Ratio (SLR) is at 27.3%. The bank can also raise Rs.6800 crore capital through Tier-II capital. The bank also wants to change its strategy of sanctioning more working capital loans instead of term loans. When the present CMD assumed office, the composition of the loan book of the bank was 60% term loan and 40% working capital loan. The CMD wants to change this composition to 55% term loan and 45% working capital loan. He has succeeded to a great extent in this goal as the current composition of the loan book of the bank shows that term loans account for 57% and working capital loans 43%. What is the advantage in having more working capital loan as compared to term loans? Higher working capital loan means higher fee-based income for the bank. Its profit and profitability will increase.

First overseas branch

Oriental Bank of Commerce wants to focus on key thrust areas like logistics including warehousing and pharma industry. The bank has applied for RBI permission to convert its representative office Dubai International Financial Centre (DIFC) to a full-fledged branch. For this, permission of regulatory authorities in UAE is also required, which is not difficult to get, considering the status of the bank. That will be the first full-fledged international branch for the bank and it will be a milestone for Oriental Bank of Commerce in its chequered history. The bank has the advantage of parking its assets in its overseas branch. Once the bank gets the status of a foreign branch, it can start doing external commercial borrowing lending to big corporate entities both in India and abroad. At present the bank is handicapped in not having any foreign branch. At the most, it can give guarantees for such ECBs, for which it gets a fee income. But direct ECB lending will bring more profits for the bank. Oriental Bank of Commerce has already opened 60 branches in India during the current fiscal year 2011-12. A foreign branch will be a feather in its cap if it materialises during the current fiscal year itself.

Net interest margin comes down

In 2010-11, the bank’s revenue was at Rs.12087 crore and its net profit at Rs.1502 crore. In July, Oriental Bank of Commerce hiked its base rate by 25 basis points to 10.25% from 10%. Oriental Bank of Commerce also increased its benchmark prime lending rate (BPLR) by 25 basis points to 14.50% from 14.25%. Base rate is defined as the minimum lending rate at which a bank offers loans. As at the end of March 2011, the bank recorded a net interest margin of 3.18%. But this healthy rate has subsequently come down due to provisions and expenses. In March 2010, the net interest margin of the bank was at 2.56%. In the same month of July 2011, the bank revised its foreign currency denominated deposit rates and NRE Term Deposits.

Automatic NPA identifier

Oriental Bank of Commerce plans to recover Rs.1200 crore this fiscal year. Last year, the bank declared NPAs amounting to Rs.1200 crore and made hefty provisioning. The bank’s gross NPA as on 31.03.11 stood at Rs.1920 crore which was nearly 2% of its total advances. The bank has put all the loan accounts upto Rs.10 lakh on an intensive scanner. The intensive scanner is a system driven NPA identifier. It will identify NPAs automatically and report. It reported an accretion of Rs.275 crore to Rs.300 crore because of this adaptation. This confers an advantage to the bank. Earlier the bank identifies an NPA, earlier the recovery can be made. The bank has already a provision coverage ratio of 77%. It is planning to increase it to 80% this year. The bank is adequately capitalised to take care of its credit requirements for the next two years at the projected growth rate of 20% p.a. The bank has a Tier-I capital of 11.21% now.

Government stake

The government of India has a 58% stake in the bank. Because of the rise in the interest rate of savings bank account from 3.5% to 4% effected by the RBI, the cost of funds for Oriental Bank of Commerce has risen by 10-12 basis points. Earlier, the bank was negotiating with Punjab National Bank for issue of co-branded credit cards. Now it has signed agreement, as pointed out earlier, with SBI Cards.

Tie-up with Experian

Oriental Bank of Commerce has tied up with Experian Credit Information Company of India (Experian India) for availing credit information services. This tie-up will enable Oriental Bank of Commerce to get an additional platform for verification of the credit history of customers and take decisions based on true facts. Its credit risk management will be toned up because of this. Already Oriental Bank of Commerce is availing credit information service from two companies namely Equifax and CIBIL. To start with, the bank will use the service of Experian for obtaining credit report about retail customers. Experian is headquartered in Dublin and is world’s largest credit bureau operator with offices in 40 countries.

Focus on SME

Oriental Bank of Commerce is targeting to grow its small and medium enterprises (SME) portfolio to grow by 30% during the current fiscal. The bank advanced 40% of its total credit to this segment in 2009-10. The bank’s overall loan exposure to this segment stands at Rs.17000 crore now. It is very difficult to get true information about the SME sector and here the bank’s tie up with credit information agencies will come in handy. The bank paid a dividend of Rs.10.40 per share for 2010-11. It paid a dividend of Rs.9.10 per share in 2009-10. The bank facilitated its customers to pay income tax through its ATMs.

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