Banks are seen under pressure due to falling yields, low credit demand and prospects of rising pressure on net interest margins in coming months. In an interview, Canara Bank Chairman & Managing Director A C Mahajan tells Sidhartha that the bank is insulated and also discusses the consolidation plan. Excerpts:
Is your bank’s net interest margin (NIM) showing signs of improvement and is there a worry as rates may go up?
Our NIM is in the region of 2.75-2.80 per cent. So, there is nothing to worry about. If yield has decreased, the cost of deposits has also decreased. We derive a lot of strengthen from current account, savings account (Casa), which is around 29-30 per cent of total deposits.
But the bigger banks are targeting 3 per cent NIM.
We have a very diversified portfolio. Unless we go for very high yielding credit, we cannot raise NIM to the 3 per cent level. But I cannot sacrifice priority sector lending in return for lending to a real estate developer.
The share of Casa has come down a little. Why is that so?
A year ago, Casa was at 31 per cent. Now, it is 29.7 per cent. There is a perceptible change in individual savings behaviour. Earlier, people did not mind leaving money in their savings accounts, but now they shift funds to fixed deposits. Technology has also made this possible. Nearly 90 per cent of Canara Bank branches are on core banking platform, which allows customers to automatically shift money from their savings accounts to fixed deposits.
Some banks have raised deposit rates. What is your experience with deposit growth and do you feel the need to raise rates?
It is not a concern for us at the moment. An increase of 10-20 basis points in deposit rates can get us tonnes of money. At the moment, the question is where to deploy funds. Deposit growth has been around 16-17 per cent till December-end.
How much credit growth have you witnessed and what is your expectation?
We are seeing a good demand from housing, agriculture, infrastructure and small and medium enterprises. Till December, the growth was 12-13 per cent and we may end the year with 16-17 per cent growth. We should also bear in mind that credit growth was very high in the last few years. So, there is also a base effect at work. But overall, exports are yet to pick up. Though we say that India is not totally globalised and the impact of the meltdown on India has been limited, exports have been hit significantly. A pick up in exports will result in a rise in domestic production too, which will help credit growth.
RBI is looking at a system of base rate to replace the benchmark prime lending rate (BPLR). How will that impact you?
In a sense the report that has been submitted is our report, since members from the banking industry were part of the committee. For us, a system of base rate will be fine. In fact, it is a silver lining since powerful conglomerates demand rates that suit them and banks have little bargaining power.
So, it is these people who should worry since banks can stop lending below BPLR. The committee has suggested only 15 per cent of the lending can be sub-BPLR, and a majority will go to the public sector. In terms of the rate, our base rate will be around 8.5-8.75 per cent.
Treasury income will be under pressure since yields have gone up significantly. Is it a big worry?
Well, overall profits are not going to decrease since we earn profits from a bouquet of products, including treasury. The share of treasury income in the total income is very small.
But in the last quarter, you got a decent amount of money, Rs 500-crore or so…
It depends on the market and what call we take.
Will including technical write-offs in calculating the provision coverage ratio help you meet the 70 per cent requirement?
According to RBI norms, our provision coverage ratio is now close to 76 per cent.
There are talks of consolidation again. Have you started working on it?
We have not taken any steps so far, as there is nothing on paper. At the moment, consolidation is a solo act since there are no partners available. The reasons for consolidation can be distress, commercial reasons, regulatory factors or the majority shareholder. At the moment, all public sector banks are doing well, so there is no distress.
All public sector banks are doing a similar job, so banks will have to look at synergy for consolidation. Geographical synergy is going to be the most important factor since geographical expansion takes time. You need branch authorisation, you need to look for premises and then look for people. Moreover, it does not eliminate small competitors. From Canara Bank’s point of view, it has less presence in Chhattisgarh, Jharkhand, Maharashtra, Gujarat and Madhya Pradesh.
Dena Bank is very strong in Gujarat and Maharashtra.
We cannot discuss individual banks. But even if we strengthen our presence in some states by acquiring one bank, there will be other areas where we will still need to strengthen our operations. So, even if consolidation takes place, this will only be the first round. A second round will follow soon
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Reserve Bank of India is likely to hike the cash reserve ratio (CRR) – the portion of deposits banks have to keep with the central bank – by 25-50 basis points without waiting for the scheduled review of the monetary policy in January 2010. The CRR remains unchanged since January 17, 2009 when it was cut 50 basis points to 5 per cent.
