Maintaining existing net interest margins will be the biggest challenge for banks as they shift to a high-interest regime, according to Mr S. Raman
Maintaining existing net interest margins will be the biggest challenge for banks as they shift to a high-interest regime, according to Mr S. Raman, Chairman and Managing Director, Canara Bank. In a conversation with Business Line, he said banks would be fine as long as they could pass on the hikes in interest rates to customers. Excerpts:
What were your priorities when you took over as Chairman and Managing Director of the bank, and what has been the progress?
One of the priorities when I took over was to maintain steady growth. And the bank's main USP was its customer service, and that had to be further pushed ahead. We also wanted to do some amount of expansion and focus on the ATM network. We have opened about 150 branches and 150 ATMs so far. Profits have been maintained.
On the technology front, we had problems but have made a reasonable amount of headway and stabilised. We are also on to new products such as ASBA (application supported by blocked amount), prepaid gift card, and so on. And we are also going to come out with mobile banking soon.
One of my other priorities for a bank of our size is that we should have a bit more of international banking than what we have now. So, from 3.5 per cent, we have come somewhere near 4 per cent and hopefully we will touch 5 per cent.
What are the challenges in sustaining the growth momentum seen in the recent quarters?
Going forward, net interest margin (NIM) will be a challenge because after a long period of low-interest regime we are shifting to a relatively elevated interest rate regime. Essentially, NIM is a function of two things — cost of money and return on deployments. So long as we are able to pass it on, we are fine.
NIM is also reflective of the types of economies. In developing countries, NIMs are bound to be higher, and in forward economies, it will be lower. Economy is also slated to grow by 8.5-9 per cent. When this happens, there will be demand for money. The price could be slightly higher, in which case, of course, there is no problem for the banking industry.
Three-four successive years of liquidity overhang did lead to a lot of distortions in terms of interest rates; depositors have not been compensated reasonably, from whom there is a backlash, and deposit growth has now slackened.
But now with this liquidity tightening, we are introducing some healthier elements with the depositors being given good returns and borrowers also being forced to pay a reasonable price. So, better balance always exists when there is tightness in the liquidity rather than otherwise which introduces a lot of unhealthy elements, and also irresponsible borrowing.
How is the liquidity situation now?
Now it is slightly tighter than what is ideally required. I think liquidity tightness of about Rs 20,000 crore to Rs 30,000 crore is good for the economy, because it introduces a balanced picture. But Rs 1 lakh crore is too tight for everybody. Liquidity is slightly improving. Earlier it had reached Rs 1.5 lakh crore, it's around Rs 70,000 crore now. There has been improvement, which is good.
The RBI governor had recently suggested that banks should lower their NIMs. Is it possible in the current scenario?
My own take is that 3 per cent NIM is nothing unreasonable, because where is the fee income? Public sector banks are predominantly in the business of lending money — pure vanilla business. We understand and appreciate what the RBI is saying, but the point is at 9-10 per cent interest rates, 3 per cent is not an unreasonable margin, especially in the light of the fact that we do not have any hidden charges. Thanks to the efforts of the RBI, the customer is treated well. Where will you find deposits at 9 per cent and housing loans still available at 8.5 per cent?
What is the kind of pressure you expect on interest and deposit rates, going forward?
At this point of time, there is an elevated bias; banks are forced to increase the interest rates. It's not as if banks don't want to pay more, banks have increased the rate of interest by more than two percentage points in the last two months. And if you look at advances, base rate has gone up by about only 1 per cent.
You've had an above-industry credit off-take, what will be your outlook in terms of credit growth? The RBI Governor has also said that banks should look at curtailing credit and increasing deposits.
What the governor says is also right, you cannot be having continuously incremental CD ratio in excess of 100 per cent. That has not been the case with Canara Bank; we grew our credit by 29 per cent and deposits by 25 per cent; but at this point of time our CD ratio is still a very comfortable 72 per cent. We respect what the Governor says, and it is always healthy to have a good deposit growth.
For deposit growth, as mentioned earlier, one of the main constraints is that there was a backlash from depositors. If I were a depositor, why would I give money at 5.5 and 6 per cent? That was the rate for much of the last 3-4 years.
How ready are Indian banks for Basel III?
Indian banks have always been very well capitalised in relation to banks outside India. As far as Canara Bank is concerned, if we take the profits for Q3 into account, our capital adequacy is almost 14.5 per cent. With tier-II of about 4.8 per cent, there's almost 10 per cent tier-I capital that we have, if we notionally add the profits of the three quarters. So, capital-wise, most Indian banks are very much in line with Basel III.
The second thing about Basel III is that it is still work in progress. When the guidelines come out, Indian banks will not have too much of a problem; the problems will be of technology, risk management models, and such.
There has always been enough prudence in India. Merely having models doesn't help, we also have to exercise prudence at the ground level, which was always done in India. So Basel III is no great issue on which Indian banks will spend sleepless nights. Technology, CASA (current and savings account), are the issues because we have a long history and so legacy issues; so data availability, data mining are the challenges we face, and not having adequate capital itself or not being able to handle the other issues which Basel III tries to address.
What will be the kind of technological investments you will be making, going forward?
I have given a free mandate here. We will improve the technology; spending is not a constraint. Canara Bank can easily spend a decent amount on technology.
We have not yet invested too much in management information systems, which is again an important requirement from the Basel III perspective, or data mining.
We have invested in core banking, which is just a starting point. We also want to continuously improve customers' experience at the counter.
We are constantly making assessments of what is required. We have also recruited 200 technology professionals. Within a month-and-a-half, we will also be coming out with our mobile banking service.
