Despite an inflationary environment, Canara Bank hopes to increase its business by 25 per cent to Rs 6,25,000 crore in the current financial year. In an interview with Debasis Mohapatra, Chairman and Managing Director S Raman talks about the company’s strategy for the future. Edited excerpts:
The Reserve Bank of India (RBI) recently raised the interest rate on savings bank deposits and the repo rate by 50 basis points (bps). How would this hit your net interest margin in the current financial year?
A rise of 50 bps in the savings rate, along with the rise in the repo rate, would have an impact on the net interest margin (NIM) in the current financial year. However, the NIM would also depend on our yield on advances, which would offset some of the rise. We have already raised our base rate by 50 bps, effective from Thursday. We may see a dip in the margin in the first quarter of the current financial year. However, we should be able to maintain NIM at three per cent for the whole year.
What is your outlook on the cost of funds, the treasury income and fee-based income in the current financial year?
The cost of funds would depend on the efficiency of our fund management. Logically, this should go up in an inflationary environment. However, we have managed to reduce the cost of funds in 2010-11 from that in 2009-10. Treasury income would remain muted in the first half of the current financial year due to hardening of rates. This may, in turn, affect the non-interest income. Fee-based income should be sound in the current financial year.
What is your estimate of the aggregate business growth in the current financial year? Please share the numbers for both deposits and credit growth.
We expect an aggregate business growth of 25 per cent and hope to reach a level of Rs 625,000 crore by end of the current financial year. If you see our business growth in the last few years, this is quite achievable for us. In 2010-11, our credit and deposits saw sound growth and we are hopeful of maintaining the momentum in the current financial year. The bank plans to touch total deposits of Rs 355,000 crore, a 20.74 per cent rise over 2009-10. Our advances are expected to rise 27.35 per cent to Rs 270,000 crore in the current financial year.
What is your current exposure to debt-oriented liquid mutual funds? Is the present cap a matter of concern?
It varies on a day-to-day basis. Investment in debt-oriented liquid mutual funds is one of the avenues for banks to deploy surplus funds. It usually yields more than other instruments. However, RBI has now come up with a regulation saying total exposure can’t be more than 10 per cent of the bank’s net worth. According to this norm, Canara Bank can park around Rs 2,000 crore in these funds. However, this depends on the liquidity situation.
When will your insurance business break even? Is it exerting pressure on the bank’s balance sheet?
According to industry standards, insurance business takes around seven years to break even. Operationally, we are only two years old. However, there are other ways at looking at an insurance business than its profit-and-loss account during the initial years, namely enterprise value, market share, growth rate and public perception. As far as the balance sheet is concerned, there is not much pressure on it due to the insurance business, since the total equity requirement for this business is around Rs 1,000 crore, spread over eight years. So, around Rs 125 crore is the maximum capital required on an annual basis. However, on many occasions, it is not required. So, there is no pressure on the balance sheet.
