Canara Bank managing director and CEO Satyanarayana Raju has had to play a bit of a juggler’s role in pushing yield on loans up to protect margins at nearly 3% in the current fiscal in an environment where interest rates on deposits have remained elevated. 

Raju has withdrawn the bank’s sanctions to corporates of nearly Rs 40,000 crore of low-yielding advances and is getting them deployed at higher rates. The state-owned lender had a total of around Rs 60,000 crore of low-yielding advances. “We have already shed low-yielding advances worth between Rs 35,000-40,000 crore. The remaining is well within our appetite,” said Raju.

The yield on advances has thus improved to 8.77% in the September quarter, from 8.66% three months ago. In the corporate sector, the yield has increased to 8.48%, from 7.12% just three quarters back. This has helped Canara Bank to shed its net interest margin (NIM) by just 2 basis points quarter-on-quarter to 2.88% in Q2 of FY25 at a time when many banks have seen their NIMs lose between 7 bps to 13 bps. 

Raju has ruled out the possibility of NIM traveling beyond 3% at this moment because the bank’s CASA (current account savings account) ratio is just 31% while the cost of deposit is stabilised at a high of 5.7%. “When your CASA ratio is at 31%, your cost of deposit compared to other peer banks will be a little on the higher side. And when your cost of deposit is that much, you have to increase the yield on advances,” Raju said.

As credit in the banking sector has outpaced deposit growth for several quarters now, lenders have been raising interest rates to lure depositors. In the process, lending margins have come under stress. 

“Under the present conditions when controlling the cost of deposits is a little tough for the bankers, expecting the NIM to cross NIM 3% in the near quarters, in one to two quarters, it may not be possible,” Raju told analysts.

For keeping the cost of funds under control, Canara Bank has been tapping alternative resources like infrastructure bonds or raising the window available with the Reserve Bank of India (RBI) by pledging its excess statutory liquidity ratio (SLR). The lender’s main focus, though, has been to garner more CASA deposits, for which it has launched over 10 target-focused products for the last 20 months to attract various sections of the society. For the first time in the last three quarters, CASA has seen sequential growth as it moved up from constituting 30.98% of total deposits to 31.27% as of 30 September 2024. 

Will shedding low-yielding advances impact the bank’s credit growth this fiscal? In the first quarter ended June, credit growth was sluggish due to this strategy but Raju is confident that the remaining quarters will be good. He expects credit growth to reach 11% in the current financial year, with the retail-agriculture-MSME loans pacing at 12% and corporate at around 10%. 

As of 30 September 2024, the Bengaluru-headquartered bank has a loan pipeline of Rs 20,000 crore which are sanctioned but pending disbursement. 

Canara Bank, which for the first time posted a quarterly net profit crossing the Rs 4,000-crore mark, stopped gold loans for agriculture purpose in metropolitan cities this year due to complexities over proof of land records. Instead, it introduced in metropolitan branches gold loans only for commercial use with a ‘little higher rate of interest’ and moved it from agriculture to the retail category. This product has grown to Rs 28,000 crore as of 30 September, out of the bank’s total gold loan portfolio of Rs 1.65 lakh crore. The gold loans for agriculture purpose are confined to the rural, semi-urban and urban areas where it is easier to obtain proof of holding the land.

For the last six months, 50% of Canara Bank's recovery is coming from small-ticket loans, typically below Rs 100 crore each.  

The bank has tied up with around 10 non-banking financial companies (NBFCs) to co-lend but is particular about expanding this platform to those who follow the bank’s underwriting norms. “They (NBFCs) expect us to dilute from our credit policy and match with their sanctioning norms, but we are not keen to do so. If any NBFC comes forward and refers to any portfolio which matches with our existing credit policy underwriting standards, we don't mind to do that. Otherwise, we want to confine ourselves to our policy. We don't want to deviate from that,” said Raju.