Increased competition and a decline in commercial banking has prompted India's second-largest bank to diversify, according to one of its top officials.

Panemangalore Shenoy, executive director of Bombay-based Bank of Baroda, said the company is hoping to expand into insurance and mutual funds.

"Investment funds and management fees are the future of the financial sector," he said in an interview. "We have to gear ourselves to the market."

Baroda, which has $10 billion of assets, needs to keep pace with a shift among retail customers out of deposits and into other investments, Mr. Shenoy said.

Currently, Indian banks can offer mutual funds, but insurance is still government regulated.

The bank is investing $50 million this year to computerize 850 of its branches in metropolitan areas. These branches generate about 70% of the bank's revenues.

Baroda, founded 90 years ago, has 2,500 branches, including 39 overseas. It focuses mainly on retail and commercial banking. Most of its earnings still depend on net interest income.

"There is increasing competition from foreign banks in metropolitan regions, and the share held by nationalized, or government-owned Indian banks, is declining," Mr. Shenoy said.

Though Chase Manhattan Corp. recently took a minority stake in an Indian bank to expand corporate banking on the subcontinent, Mr. Shenoy said it was unlikely his own institution would strike a similar alliance with a foreign bank.

To boost returns, Bank of Baroda has hired Deloitte & Touche to conduct a study of its U.S. operations. Most activities at the New York branch revolve around remittances, cash management, correspondent banking, and trade finance.

"We're looking at both the business mix in different markets and how we should realign ourselves as an international bank," Mr. Shenoy said.

Bank of Baroda earned $81.5 million for the nine months that ended Dec. 31, yielding a 0.95% return on assets. For the full fiscal year that ended March 31, 1998, the bank reported net income of $109 million, which yielded a 1.1% ROA and a nearly 20% return on equity.

To increase capital and expand worldwide operations, the bank plans to issue between $118 million and $140 million worth of subordinated debt.

Bank of Baroda would have preferred to issue fresh equity that would have reduced the Indian government's 66% stake to around 51%, but a three- year slump in Indian stock prices made that option unattractive, Mr. Shenoy said.

According to Thomson Bankwatch, an affiliate of American Banker, Bank of Baroda faces "intensifying competition and hardening banking conditions."

The rating agency noted that the Indian bank will also "be challenged to maintain its current profits and improve its asset quality in the near future."

BankWatch said that like other state-owned banks in India, Bank of Baroda carries a relatively high level of nonperforming loans.

But the rating agency said that "given its economic importance and majority government shareholding, the bank can fall back on government support in the event of any adversity."

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