‘We have a very aggressive approach to tackle NPAs'

Mr S. Raman, Chairman and Managing Director, 

Source :BL:ANJANA CHANDRAMOULY:29 sep.2011

Canara Bank, which moved to system-based NPA (non-performing asset) recognition fully on July 30, expects to clean up its asset book by this quarter. The bank would achieve this “without making a great dent in profitability”, Mr S. Raman, Chairman and Managing Director, Canara Bank, told Business Line in an interview.

Excerpts:

What is the impact of rising interest rates on asset quality?

Some portions of the portfolio may be under strain, but in my opinion interest rate hike has happened in a graduated way. As GDP growth continues to be around 8 per cent, the impact of 0.5 or 1 per cent more interest will not cause much strain.

Some housing loans, where people have borrowed quite aggressively, might get impacted. Else, I do not think there will be too much of an impact; it is manageable. SMEs (small and medium enterprises) may be under strain. But it all depends on GDP growth. If it happens, the SME segment might also sail through.

How much has the system-based recognition of NPAs added to your NPAs? What about recoveries?

In Canara Bank, we have a very aggressive approach to tackle NPAs in accordance with the guidelines. Where it was required to cover only loans of up to Rs 1 crore, we decided to lower the threshold to Rs 10 lakh on March 31, 2011. That did have a little spike in NPAs, but we have made tremendous amount of recoveries since then.

Similarly, in the first quarter of this fiscal, we lowered the threshold in stages to Rs 2 lakh. As on July 30, we have taken a decision that every single account in the bank would be system-recognised.

When we did it in April and May, we gave ourselves two months and a month, respectively, to recover from NPAs. We had huge recovery drives, lok adalatswere able to recover Rs 750 crore in the first quarter. Of this, over Rs 500 crore pertained to NPAs in the previous year.

A 28 per cent drop in net profits in one quarter is all we have encountered to make a clean-up of this magnitude. Because of the shifting to system-recognition, we had a reversal of income of Rs 210 crore. This quarter, too, we are making similar efforts. We would have cleaned up the entire lot this quarter without creating a great dent in our profitability.

Canara Bank's asset quality is good. Our exposure to MFIs (micro-finance institutions) is virtually zero in Andhra Pradesh, and other States also, it is a miniscule amount. Our exposure to commercial real estate, in relation to peer banks, is very small.

Last year we raised almost Rs 2,000 crore through QIP (Qualified Institutional Placement), and so capital-wise we are strong. After clean-up, our provision-coverage ratio is close to 70 per cent. We will be able to increase our provision size this quarter.

Average repo window borrowing continues to be high even as credit growth has moderated and deposit inflows continue to be high… Why?

The RBI has been saying that one per cent of total deposits is a comfort level. I don't understand why liquidity-wise there is any great issue.

Deposit inflows continue to be high because of higher rates of interest, and credit growth is moderate. Investments in liquid mutual funds by banks, including us, is higher than the spread that the RBI prescribes, and unwinding of which the RBI has given us time till January 2012.

Because of the comfortable liquidity, we have not unwound our extra mutual fund exposure positions; of course, unless and until the rate hardens and the demand for credit spikes suddenly, we will continue with those positions.

Overall, if you look at the liquidity or near-liquid assets, our position is actually pretty comfortable. That's one reason why NIMs (net interest margins) of banks were under pressure last quarter whereas they had to give higher rates of interest to deposits. There was almost a rate war in November-December last year.

Will CASA be affected by high fixed deposit rates? What has been your experience? What measures have you taken to shore up CASA?

We have introduced a lot of competition internally for improvement of CASA (Current Account, Savings Account), and have been able to open huge number of accounts. But it has become difficult to shore up CASA. It will take at least six months.

Your NIM has reduced in Q1, and you have projected NIM of 2.9 per cent for this fiscal? How do you plan to achieve this?

Our NIM in Q1 has been 2.5 per cent, despite interest reversal of about Rs 200 crore. Taking that into consideration, NIM would have been 2.7 per cent and not too far from what we have projected. We are confident of reaching 2.9 per cent this fiscal.

In Q2, we would be migrating to NPAs of up to Rs 2 lakh as part of system-recognition of NPAs, and would result in little bit of spike in NPAs and interest reversal.

But we would definitely improve on the present level, and in Q3 and Q4 we would have no problems at all. We would be able to come very close to 2.9 per cent tor the entire year