Canara Bank, led by Managing Director and CEO K. Satyanarayana Raju, has recently made significant adjustments to its lending practices to balance growth with risk management. With a growing gold loan portfolio and improvements in asset quality, the bank is taking a measured approach to maintain sustainable expansion while securing its financial health.
Strategic Shift in Gold Loan Portfolio
Over the past three years, Canara Bank’s gold loan portfolio has consistently grown at a rate of 25%-31% annually. As this portfolio surpassed ₹1.5 lakh crore, the bank decided to adopt a more cautious stance to control risk and manage asset quality effectively.
Raju explained, “We have taken several steps where we have discontinued certain offerings. For instance, in metropolitan cities, we have stopped lending gold loans for agricultural purposes and have withdrawn interest subvention for such loans across all branches.”
Launch of Retail Gold Loan Product
To ensure stable growth in metropolitan areas, Canara Bank introduced a specialized retail gold loan product. This product features higher pricing and a lower loan-to-value (LTV) ratio, aimed at creating a more controlled lending environment. The bank’s average LTV ratio for its gold loan portfolio is now approximately 66.73%, which is significantly below the regulatory guideline of 75%-80%, even for loans tied to agricultural purposes.
This shift in lending practices has moderated the bank’s gold loan growth rate, which has slowed from 30% to 17% per year. Despite the decrease, Raju is optimistic that this 15% growth will remain sustainable, highlighting a strategic focus on quality over quantity. “Our growth may have moderated, but this measured approach is critical to ensure the quality and longevity of our portfolio,” he remarked.
Improved Asset Quality and Reduced NPAs
Canara Bank’s cautious lending strategy has yielded positive outcomes in asset quality. In the latest quarter, the bank achieved a slippage rate of only 1%, with slippages totaling ₹2,300 crore. This figure was offset by recoveries and upgrades, which amounted to over ₹3,500 crore, helping to improve the bank’s asset quality ratios.
As a result, Canara Bank’s gross Non-Performing Asset (NPA) ratio dropped from 4.14% to 3.73%, while the net NPA ratio was reduced from 1.24% to 0.99%. This improvement was largely driven by a proactive approach to monitoring and managing asset quality.
Increased Provision Coverage Ratio
The bank’s provision coverage ratio, a key measure of its financial strength, also rose from 89% to approximately 91%. Raju attributed this improvement to the bank’s enhanced underwriting standards and proactive decision-making over the past two years.
“Our provision coverage ratio has increased, reflecting our commitment to secure the bank’s portfolio. The underwriting standards we adopted two years ago are now yielding tangible benefits in terms of asset quality,” Raju stated.
Financial Performance in Q2FY25
In Q2FY25, Canara Bank posted a net profit of ₹4,014 crore, marking an 11.3% year-on-year increase from ₹3,605 crore in Q2FY24. This growth is attributed to improved asset quality and reduced NPAs. According to a regulatory filing, the bank’s gross NPA ratio decreased from 4.76% in the previous year to 3.73% in Q2FY25, and its net NPA ratio reduced by 42 basis points to 0.99%.
Detailed Insights from Raju’s Interview
In an interview, Raju elaborated on the rationale behind these strategic shifts and provided insights into the future direction of Canara Bank’s portfolio and asset quality management.
Gold Loan Growth and Future Projections
When asked about the gold loan portfolio’s growth, Raju shared that the bank had taken precautionary measures to manage its portfolio after crossing ₹1.5 lakh crore. “We realized that as the industry leader in India’s gold loan market, we needed to carefully control our expansion,” he said. Canara Bank’s decisions to halt agricultural gold loans in metropolitan areas and withdraw interest subvention have been part of this risk management approach.
To compensate for the reduction in gold loans for agriculture, the bank has introduced a retail gold loan product at higher rates and with a lower LTV in metropolitan cities. Raju expressed confidence that, despite a slower growth rate of around 17%, Canara Bank can maintain a sustainable 15% growth rate in the gold loan portfolio.
Guidance on Asset Quality
Raju also addressed the bank’s asset quality, stating, “We managed to control slippages significantly this quarter, achieving only a 1% slippage rate.” With total slippages at ₹2,300 crore, the bank’s recoveries and upgrades exceeded this figure, reaching over ₹3,500 crore. This accomplishment has strengthened the bank’s asset quality ratios.
The gross NPA ratio was reduced from 4.14% to 3.73%, and net NPA declined from 1.24% to 0.99%. Canara Bank’s provision coverage ratio rose from 89% to almost 91%, reflecting robust financial health. Raju emphasized the positive impact of improved underwriting standards and a disciplined approach to lending decisions on Canara Bank’s asset quality.
Special Mention Accounts (SMA) Monitoring
Canara Bank has also closely monitored Special Mention Accounts (SMAs) – loans that may be at risk of becoming non-performing. Raju reported that the bank’s SMA-0, SMA-1, and SMA-2 categories were significantly lower than in the previous quarter. However, two accounts – one with a central PSU steel industry and another related to a state government irrigation project – remain in SMA-2 and SMA-1 categories. Together, these accounts total ₹6,000 crore.
Despite their presence in SMA-2, Raju expressed confidence that these accounts do not pose significant risks, as the bank has provided a 15% provision for them. The state government irrigation project is backed by a state guarantee, which further minimizes the risk of slippage.
Outlook for Canara Bank’s Future
Moving forward, Canara Bank remains committed to its risk-controlled growth strategy, particularly within its gold loan portfolio. Raju reiterated that the bank’s moderation in growth is a deliberate choice aimed at preserving quality over quantity. With enhanced asset quality, a sustainable growth rate, and robust financial metrics, Canara Bank is well-positioned for continued stability.
In summary, Canara Bank’s recent steps underscore a commitment to responsible lending, improved asset quality, and sustainable growth, with a particular focus on its gold loan portfolio and prudent risk management practices.
Major portion of lending is under Gold Loan portfolio with risk of LTV. It seems this banks gold loan portfolio should be verified by third party agency for correct picture since in many banks facing spurious gold issue.