In an interview with Indianbankingnews.com Editor Manju AB, Canara Bank managing director and CEO LV Prabhakar talks about why banks are posting record quarterly profits, the balance sheet gains from the merger of Syndicate Bank and the probability of the cycle of higher interest rates starting again as the Reserve Bank of India (RBI) sucks out excess liquidity. He also speaks about the bank's recovery from bad loans being higher than its non-performing assets (NPAs), a trend which is likely to continue.
Here are the edited excerpts from the conversation.
Most of the banks have been recently reporting record quarterly profits but isn’t it a worry that this is not coming from their core interest income? Are banks depending on fee-based revenue and loading customers with high service charges?
All the banks are doing well only because the economy is picking up. If you look at bank credit in the fiscal second quarter, Canara Bank’s retail segment has seen over 10% year-on-year growth. Within this, home loans have grown over 14% while agriculture credit rose over 15%. The volumes are beginning to inch up and we have increased our customer base. So even though you collect small amounts as fees and processing, cumulatively the income earned will increase.
The bank’s non-interest income is growing because the revenue from treasury operations has shot up sharply and we have developed expertise in predicting the market very well.
What makes you so optimistic about the economic revival when the appetite for corporate credit is still so low?
There are loan proposals on the table and we are looking at an over 7% growth in corporate credit by the end of this fiscal. We have already underwritten Rs 20,000 crore of loans and have a pipeline of another Rs 15000-20,000 crore. All this is waiting for disbursal. On the retail front, which constitutes 57% of our total loan book, we are looking at a 14% growth. Credit offtake from corporates can touch higher if the demand pick up in the economy continues.
Corporate credit demand is coming from which sectors?
We are getting good demand from infrastructure under the hybrid annuity model (HAM) for various road projects. Steel, healthcare and cement are the other sectors where demand is picking up. There is demand from some others sectors but it is not very significant. We have good loan demand from MSME (micro, small and medium enterprises), retail and agriculture segments.
Are you open to funding commercial real estate projects at this juncture?
We are open to funding commercial real estate which is into residential projects. After financing the commercial project, the units will be converted into home loans. So we are exploring these projects. That is why I keep saying that our loan book will be growing at 7.5% in the current quarter. Every quarter we are showing a stable growth.
Isn’t the other income segment doing fairly well?
Yes, we have made good gains and are aggressive on this. We have good scope of selling our priority sector loans. Last fiscal, we sold Rs 48,000 crore worth of priority sector lending certificates (PSLCs) and booked a profit of Rs 690 crore. This financial year though we sold only Rs 40,000 crore in the first two quarters, the coupon fetched more and we earned Rs 910 crore.
Our subsidiaries are also doing well, which is giving us good earnings. Besides, we are doing well in government business. So we are not fleecing the customers through higher service charges as you seem to suggest, but have a gamut of income earning channels which we are utilising well. We have already reduced our MCLR (marginal cost-based lending rate) by 10 basis points and the overnight and the one-month rate by 15 bps. In the last one month, we have also waived the processing fees for home loans.
What made you say that you are expecting the bank’s recoveries to outpace its fresh bad loan additions?
We have already established that in the last quarter and expect this trend to continue. In the quarter ended September, cash recovery stood at Rs 3,717 crore while upgrades were at Rs 2,671 crore (after borrowers repaid their dues) and we wrote off Rs 1,585 crore worth of loans. This took the total reduction to Rs 7,285 crore during the quarter while the fresh NPA additions stood at Rs 6,896 crore.
But wasn’t this mainly due to a one-off gain from DHFL (Dewan Housing Finance Corporation Ltd) resolution?
The total recovery from the DHFL account was Rs 1,700 crore, of which Rs 900 crore is in the form of bonds and Rs 700 crore came in as cash recovery. On the bonds, we have already made a MTM (mark-to-market) provision of Rs 191 crore. We have not used this for profits but for enhancing our provision coverage ratio to 82.44%, from 81.18 % in the June quarter. Going forward, this ratio will be crossing 83% and may even touch 84%.
Isn’t the bank’s exposure to Srei infrastructure proving to be a new headache?
Our total exposure to the group is Rs 3,200 crore and we have provided a 50% provisioning coverage for it. We have a promoter guarantee for Rs 1,990 crore and will continue to pursue it. As a banker, I will try to get back every penny the bank has lent to it. But it is a consortium loan and we will have to fight it out together. I am hopeful.
Canara Bank also has an exposure to Air India. What happens to this?
It is a very small exposure in the three-digit range. We are not worried about it. The debt will be held by a government-owned entity.
So you have bettered your guidance on NPAs?
We had guided for a slippage of Rs 14,000-Rs 15,000 crore in the current financial year. Now six months have passed and we have performed better than our initial expectations.In the fiscal first quarter, there was a slippage of Rs 4,254 crore, out of which Rs 1,770 crore are either upgraded or recovered. So only Rs 2,500 crore is left from the first quarter. In the second quarter ended September, the slippage stood at Rs 6,500 crore. So together slippage stood at Rs 9,000 crore during the first half of the fiscal, out of which we are likely to recover up to Rs 2,000 crore.
As per our guidance, there is Rs 6,000 crore which can still slip. So we will be at below our Rs 15,000 crore slippage guidance. Our recoveries will outpace the fresh bad loan additions. In the September quarter, as stated earlier the deduction is Rs 7,250 crore whereas we have added only Rs 6,896 crore of bad loans. Going forward, the bank’s net NPA will be somewhere around 2.8% and gross NPAs we are trying to bring down to 7.5%, though we have given a guidance for 7.8%. Internally, we are confident that it will be below 7.5%.
Canara Bank is one of the few banks which is aggressively pushing for education loans. Any specific reason for this?
Traditionally, Canara Bank has had a special emphasis on education. If one wants education, they should not be denied an opportunity that is our belief. For education loans we set up 242 fast processing centres all over the country. In these retail asset hubs (RAH), the turnaround time is very short; we sanction the loans within 48 hours and at very competitive rates. So the bank approaches institutions and gives a demonstration to students on how education loans can help lower income tax once they are employed. We immediately provide loan sanctions to those students who are interested. We have seen 7% to 8% growth in this segment despite the Covid impact. As the bank is headquartered in Bengaluru, we want to fund many students who want to pursue higher education.
Are the NPAs in education loans rising?
The NPAs under this segment are under control. If you see, our NPAs under retail is just 1.37%. In case of education loans also, it is less than 2%. The NPA of less than 2% of advances is acceptable.
Even on Canara Bank’s vehicle loans, the NPA is below 2% and for home loans, the NPA is just 0.97%. Transparency is essential for good governance. We explain in details the contours of the loan.
How has the merger of Syndicate Bank with Canara Bank helped?
Considering that both the banks were from the same region, there were a lot of synergies that could be captured. After the amalgamation in June 2020, our profits have been rising every quarter (from Rs 406 crore to Rs 444 crore, then to Rs 696 crore, Rs 1,010 crore and to Rs 1,177 crore in the June quarter). For the quarter ended September 2021, the net profit rose 200% year-on-year to Rs 1,333 crore.
The amalgamation has helped us in strengthening our balance sheet and making use of the synergies.
Even capital if you see, both the banks have had CRAR (capital to risk-weighted assets ratio) of 14.37% for the first time in the last decade. Even the Common Equity Tier 1 (CET 1) ratio at 10.09% is the highest for either bank. The provision coverage ratio of 82.44% also is the highest in the last decade.
Since both the banks came from the same region, was there any strategic need to merge them?
We have relocated, amalgamated or closed down 685 branches. However, we haven’t retrenched anybody. We are, in fact, recruiting more people.
With the RBI sucking out liquidity, do you expect interest rates to rise?
As demand for credit picks up and the excess liquidity evaporates, there is a probability of interest rates hardening. By December 3, the RBI will be sucking out Rs 6 lakh crore of liquidity. So going forward there is a good probability that liquidity will be sucked out.
So will deposit rates rise?
As the demand rises, we will need deposits. The cycle of higher deposit rates will start again. When the lending rates inch up, it is but natural that the deposit rates will also move upwards.
How much of bad loans will Canara Bank be transferring to the National Asset Reconstruction Company Ltd (NARCL) and what role will it play as the lead sponsor?
We will be shifting Rs 4,000 crore of loans to the bad bank. We will have 12% stake and have the status of being a promoter of the NARCL. The government has provisioned Rs 30,600 crore guarantee to back security receipts issued by the NARCL.
