Canara Bank is focusing on increasing the share of retail and agriculture loans and will go aggressive on them in the current financial year, managing director K Satyanarayana Raju said in an exclusive interview with Moneycontrol.
Having resolved much of the legacy bad asset issues, the public sector bank that counts Rekha Jhunjhunwala, the wife of late ace investor Rakesh Jhunjhunwala, among its shareholders, is confident that stress will remain under control and bad loans are well provided for.
“Most of our legacy issues are now over. The incremental stress is coming down, as you can see,” Raju said.
The bank’s gross bad loans dropped to 5.35 percent of its loan book in Q4 of FY23 from 7.51 percent a year ago. Fresh slippages were under control at Rs 2,857 crore. Its domestic loan book expanded 15.01 percent in FY23, driven by growth in retail and corporate borrowing.
Also Read: Canara Bank consolidated net profit jumps 74% to Rs 3,337 crore in March quarter
The bank’s retail, agriculture and small business loan portfolio grew by 13.23 percent in the fourth quarter and accounted for 51 percent of the total. The rest was corporate loans. Retail loans grew by 10.91 percent, agriculture credit expanded 21.24 percent while loans to micro, small and medium enterprises grew by 3.87 percent.
“In rural, we are looking at infrastructure, food processing, etc. We are going aggressive on rural infrastructure,” Raju said, adding that the bank is creating products that match the needs of rural borrowers.
Rural infrastructure
The central government has put a lot of thrust on upgrading rural infrastructure and public spending on warehousing, storage facilities, roads and other infrastructure in semi-urban and rural areas in recent years. Most banks are optimistic on business from this segment and Canara Bank too expects to gain from this.
The lender is targeting overall loan growth of 10.5 percent in FY24 but Raju is confident that 12-14 percent growth is a possibility.
Corporate loan growth was robust and Raju said there is strong demand for credit from companies. The bank is renegotiating loan rates with companies.
“When interest rates were low because of policy rate cuts during the pandemic, instead of keeping liquidity, it was better to lend to corporates. But now the interest rate regime is on the higher side and so lending has to generate equal returns. We don’t want to grow at the cost of the bottom line,” he added.
Canara Bank is playing it cautious on corporate loans and it is not alone. Most Indian lenders have expressed caution while lending to companies, having emerged out of a punishing bad loan cycle just before the pandemic. Further, the sharp turn in interest rates—downwards following the pandemic and then upwards on withdrawal—has led to difficulties in pricing of loans.
Risk management boost
Canara Bank has changed the way it underwrites risk and lends over the quarters. Raju said branches are only sourcing centres for loans and decisions to extend credit or refrain are taken at a centralised, regional level.
“Branches are our sourcing areas and entire sanctions are being done at processing centres. We have specialised ones for small and medium enterprise loans, retail loans and large corporate loans,” he said.
Since the bad loan cycle, public sector lenders have adopted the approach of centralising risk management. To be sure, large corporate loans need to get the nod from the headquarters of a lender to be disbursed. Further, large loan disbursements must follow a board-approved process.
These are measures taken to avoid a repeat of the previous bad loan cycle that decimated profits of public sector banks and eroded their capital immensely.
Deposit conundrum
One parameter where Canara Bank performed poorly was deposit growth. Domestic deposits grew 6.52 percent in FY23, much lower than the bank’s loan growth. Worryingly, low-cost current and savings account (CASA) deposits remained flat year-on-year. Raju said the bank has introduced new deposit products and is putting efforts to increase its CASA ratio.
“We want to increase the CASA to a comfortable level,” he said.
Raju explained that an increase in interest rates over the past year dragged down the CASA ratio. Typically, in a rising rate cycle, CASA deposits flow to term deposits as companies and households seek higher returns.
Canara Bank’s CASA ratio stood at 33.47 percent in the fourth quarter. The bank is targeting an overall deposit growth of at least 8.5 percent in FY24.
Deposit mobilisation has become a critical challenge for public sector banks in the past year. Most lenders have posted a deceleration and reports of bankers hawking deposits at special rallies have highlighted the intensity of competition.
While deposit growth is much lower than that of loans, Canara Bank does not need to raise capital over the next two years, Raju said. Internal accruals from profits and a comfortable capital adequacy ratio of 16 percent ensure this. The bank reported a 90 percent year-on-year jump in net profit to Rs 3,175 crore in the fourth quarter.
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