Money & Banking

‘Interest rates cannot be reduced as cost of funds is high’

Anil Urs N.S. Vageesh | Updated on June 30, 2013

R.K. Dubey

We will focus more on getting low-cost deposits: Canara Bank CMD





It is about six months since R.K. Dubey, 59, took over as the Chairman and Managing Director of Canara Bank.

Prior to this, he was Executive Director of Central Bank between 2010 and January 2013 and was General Manager at Punjab National Bank between 2008 and 2010 after rising through the ranks over the preceding three decades.

He has set some ambitious targets for the bank — opening 1,300 new branches, reaching Rs 10-lakh crore worth of business, achieving Rs 10,000 crore of annual profits — all this in the next two years. He admits these are stretch targets, and that even two years can sometimes be long enough to throw the best plans out of gear. He is equally conscious that these benchmarks will help the bank improve its financial parameters and place it among the top four banks in the country. For instance, Canara Bank’s low-cost deposits are much lower than those of comparable large banks. In an interview to Business Line on the sidelines of a branch inauguration function at Mysore, Dubey explains how he plans to achieve the targets. Excerpts:

Why aren’t interest rates coming down?

That question should be asked to the RBI Governor.

They have brought down the repo rate thrice in the last one year, but banks are not cutting rates?

Liquidity is a problem. I am not getting deposits from the market. If I do not get deposits, how will I have money to lend? With liquidity already choked, at these rates I am not getting inflows. I am not in a position to reduce rates because cost of funds is high. My margins are not there. Non-performing assets (NPAs) are increasing because of the slowing economy, and there is also regulatory tightening on provisioning. Provisions are required on a continuing basis and bad debts have not been decreasing for the last one-and-half years. Profits of all banks are going down. It’s not that we don’t want profits but the situation is like that. In some cases, to tell you the truth, interest paid on deposits is more than the interest earned on advances!

Is that because you take too much bulk deposits (deposits above Rs 1 crore from high networth individuals, corporates, trusts etc)?

No. Bulk deposits were 44 per cent of deposits just a little over a year ago in March 2012. We brought it down to 19.5 per cent in March 2013 and now it is around 14.6 per cent. How much more can I do? If I keep on doing that my balance sheet will shrink. I have shed more than Rs 1 lakh crore worth of business (high-cost deposits) that I did not renew. Some of it, of course was renewed at our prevailing lower rates. We were taking bulk deposits earlier at 10-11 per cent. My base rate (for lending) is 10.25 per cent. Where is my margin? So how can I reduce my deposit rate? If all others reduce rates, I will also do so. But if I alone do it, you’ll agree that I am a fool. We are in a Catch-22 situation.

How are you planning to improve your net interest margin?

We have an issue here. Our CASA (current account and savings account) ratio is low at 25 per cent of deposits. Those banks whose CASA is 30-40 per cent or even more, their net interest margin is not less than 3 per cent.

Our NIM is at 2.3 to 2.4 per cent. We are aiming to take it to between 2.5 and 2.75 per cent this year. Then next year we will take it up to 3 per cent and stabilise there. Our aim is to reach this through opening more branches pan-India and especially in rural and semi-urban pockets. These branches help us get more CASA deposits. If I can get Rs 4 crore to 5 crore of low-cost deposits per branch and also able to lend some loans to priority sector — some agriculture loans, artisan loans etc., then the branch can be viable in two years time.

How many people do you plan to recruit for these plans?

We recruited 7,500 people last year and will be recruiting another 7,000 this year. This is a two-year plan. This 14,500 is a big number. This will also cover our needs for a 5,000 branch presence that we hope to reach in two years. Our present staff strength is around 44,000. So in a two-year period, I am replacing practically one-third of my staff. Every year, around 4,000 to 5,000 people are retiring. The 70s generation is going en masse. For 18 years, there was no recruitment in the name of productivity and computerisation. So there is no next line. The next line is in their forties. There is a maturity gap.

How do you address that?

We can’t address that. We used to get promotions once in seven or eight years. Now they get in two-three years. To become a manager, it took a minimum of five years in scale II. Now they do it in two years. We became GMs at the age of 55 to 60.

They will reach there between 40 and 45. We don’t have people. If I want to promote, there are no people. So I relax my criteria from seven years to four years to three years. I have to run the bank. I can’t stop that.

So that is how we are addressing the gap, but the maturity gap remains. Experienced people are going and less experienced people are taking senior positions. That may be good or bad. It cuts both ways and is open to interpretation. Some times they may be better. Sometimes they may be reckless.

Published on June 30, 2013

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