Higher cost of deposits, which has led to a slight moderation in net interest margin (NIM) across lenders including Canara Bank, will continue being a pain point for lenders in near term as the deposit market remains competitive, Canara Bank MD, CEO K. Satyanarayana Raju tells businessline in an interaction.
Despite stable deposit cost and higher yield on advances, why has NII grown at a slow pace of 5 per cent in Q2?
Even though our cost of deposit remained stable at 5.70 per cent in H1FY25, we could show 11 basis points (bps) growth in yield on advances from 8.66 per cent in Q1 to 8.77 per cent in Q2.
But even after 11 bps growth in yield of advances, actual increase in net interest income (NII) sequentially is only ₹149 crore.The reason is, from April 1 onwards, whatever penal charges we are applying are being accounted under other charges.
It is not being considered under interest income. So to that extent, there is a dent on NII. If you do not consider the change, NII would be much higher.
NIM too moderated 2 bps sequentially in Q2...
The net interest margin (NIM) is slightly lower due to pressure on cost of deposit. In the March quarter, the interest rates had risen to as high as 8.10 per cent.
Even now I have seen that, some banks are holding interest rate at 7.93-7.94 per cent.
So, when incremental deposit garnering is being done at interest rate of 7.7-7.9 per cent, it will have impact on cost of deposit during the tenure of the deposit.
You cannot re-price deposits even if you have surplus funds, you have to bear that expenditure. Presently, we don’t see any ease in deposit market rate. None of the public sector banks have any challenge on deposit mobilisation, but at what rate, that is the major concern.
Due to this fact, almost all banks have seen 7-13 bps moderation in NIM this quarter, but our NIM fell by only 2 bps sequentially to 2.88 per cent, which shows our effective management on cost of deposit and yield on advances.
Going ahead, our NIM could be at 2.85 per cent. I don’t see much improvement in cost of deposit. Since the central bank has changed its policy stance to neutral, if there is reduction in repo rate, external benchmark linked advances will get revised immediately whereas deposits will take time to re-price.
SMA-1 and SMA-2 stressed book has grown to 1.15 per cent in Q2 from 0.51 per cent last quarter. Where is the stress emanating from?
SMA-0 and SMA-1 (special mention account) has come down in absolute terms sequentially.
Only SMA-2 has seen steep increase, which is due to two accounts. One account is of a central government backed public sector unit in steel industry, where our exposure is around ₹3,800 crore. And other account involves a state government guaranteed irrigation project, which is also moving across SMA buckets.
But both these accounts I do not see serious concern at this moment. Already a resolution is being worked on in steel industry. Second case is only about delay in repayment, there is no concern on repayment. As on September end that account was in SMA-2 bucket, but as on date it is only SMA-1. If we exclude these two accounts, our SMA-2 book has also reduced from ₹4,500 crore to ₹4,000 crore.
Why did the RBI reject bank’s proposal to set up a credit card subsidiary?
We had applied for NBFC license for credit card business, which the regulator is not in favour of. So immediately, we have carved out that section and created a separate section within the bank.
The same official in charge for the proposed subsidiary, is now leading the newly formed credit card vertical in the bank. The wing has started its functioning and business activity is being conducted as scheduled.
What is the update on listing of Canara Robeco AMC?
We are prepared for Canara Robeco listing in Q4. We are yet to get the approval from DFS, which we are expecting in another 15 days. Once we get the approval, if market sentiment is positive, we will list in Q4 or Q1 FY26. We are also preparing for the IPO of Canara HSBC Life Insurance in FY26.
Loans to NBFC fell 11 per cent on-year. Is it due to higher risk weights?
In our bank, 99 per cent exposure to NBFCs is towards ‘A’ and above rated entities. So we don’t have too much concern, but we are little conservative in approaching NBFCs. We are selectively lending, so you will see sequential growth in segment, though on-year the growth is slower.
We are very cautious in lending to NBFC-MFIs. We have created a guardrail in the bank that we will not take over Rs 40 crore exposure towards a single MFI. We noticed stress in the MFI sector a year back and put these guardrails into place. We will continue being conservative in lending to NBFC-MFI.