One hundred and twelve years ago, a man with rare courage ventured on the first steps to start a bank in Mangalore. Realising that smaller borrowers—small traders and peasants—were at the mercy of moneylenders who were charging interest in excess of 50 per cent, Ammembal Subba Rao Pai, a lawyer by profession, started the Canara Hindu Permanent Fund Limited in July 1906. Moreover, he realised that traditional channels for savings were not entirely risk-free and that a larger institutional structure would not only protect and reward savings but also provide a profitable avenue for credit that would challenge the stranglehold of the moneylenders in the rural economy.
Subba Rao Pai modelled this venture on the successful example set by the Madurai Hindu Permanent Fund Limited, which, incidentally, was promoted by a group of lawyers with some help from local merchants in Tamil Nadu. Four years later, the Canara Hindu Permanent Fund blossomed into Canara Bank Limited. More than a century later, Canara Bank continues its journey as a premier bank in India, one that pairs traditional prudential values so essential for a systemically important institution with the daring of embracing modernity.
Subba Rao Pai’s commitment to the long haul is vindicated by the fact that the Articles of Association of the Permanent Fund stipulated a cap of 10 per cent on the interest rate even though the prevailing interest rates were much higher. That this was not a gimmick is also borne out by the fact that the very first balance sheet of the venture showed a profit, indicating that Subba Rao Pai was successful in undercutting the moneylenders without sacrificing the viability of the fledgling venture. The venture, established with 2,000 shares of Rs.50 each, was one of the first joint stock companies to be floated in South Canara. It was not just the moneylenders who were its competitors. The area was already serviced by Bank of Madras which enjoyed a significant presence in southern coastal Karnataka at that time. It is evident that Subba Rao Pai did not see the incumbent bank as a threat because he realised that Bank of Madras catered almost exclusively to the larger merchants and landlords and was not accessible to those lower down the social and economic scale. This was apart from the fact that Bank of Madras charged high interest rates from borrowers.
It is interesting that the South Canara region was the base for several banks in the early years of the last century. Most analysts of banking attribute this to the high levels of literacy and to the commercialisation of agriculture in the area. As early as 1929, there were at least 10 banks thriving in the region, but even at this stage it was evident that Canara Bank was the leader of the pack. It had the highest paid-up capital among the 10 banks. A rash of bank collapses in India in the 1920s and 1930s, most notably that of the Travancore National and Quilon Bank in 1938, resulted in a loss of confidence, but Canara Bank remained unscathed. In fact, as a measure of instilling confidence among the public, the bank voluntarily offered its books to be examined by the Reserve Bank of India (RBI), which enhanced its prestige among existing and prospective customers. This also explains why unlike many of the other smaller banks, Canara Bank was not swallowed up by larger ones during the period of bank consolidation in the 1930s and 1940s (many smaller banks also perished during this period). By 1939, Canara Bank had 38 branches, of which 12 were in South Canara district. None of the 20-odd comparable entities operating in the region had a bigger network of branches. Clearly, Canara Bank was the leader of the pack and destined for the long haul. It is evident that Canara Bank had emerged unscathed from the period of intense uncertainty in Indian banking when smaller banks were struggling to remain on their feet in conditions that were aggravated first by the Great Depression and then by the gathering war clouds. Independence and the new-found zeal for self-reliance and the emphasis on industrial development provided new opportunities for the bank. By 1956, when Canara bank celebrated its golden jubilee, the bank that started with merely four employees in 1906 had more than a thousand employees.
The question of assuming “social control” of banks was already on the radar of the country’s political leadership after Independence. The nationalisation of the larger Indian banks was delayed by political divisions within the Congress party. Significantly, unlike many of the other banks that were nationalised, Canara Bank was not promoted by an industrial group or conglomerate. Eventually, in July 1969, Canara Bank was nationalised along with 13 other banks. On the day it was nationalised, Canara Bank had a network of 360 branches, 307 more than the number of branches it had in 1956. It had deposits to the tune of Rs.185 crore, a 12-fold increase since 1956; during the same period, its advances had increased nearly 16-fold. It also had a staff strength of more than 7,000 employees.
The government-led thrust on heavy industry in particular and on industrial development in general, the advent of the Green Revolution and the related growth of trade, all provided an ideal environment for Canara Bank to grow. The Green Revolution, by laying the basis for the commercialisation of agriculture, opened up possibilities for the expansion of agricultural credit; this expansion could not have happened without nationalisation. Canara Bank, with its locus of operations still mainly in South Canara, was ideally suited to exploit the new possibilities because the region witnessed rapid commercialisation of agriculture. Lending to agriculture was not restricted to crop loans; instead, animal husbandry, dairying and fisheries all came to be viewed in a holistic manner by institutions such as Canara Bank. Moreover, the ties of people in the area to the rapidly growing metropolis of Bombay (now Mumbai) and the migration of people to the Gulf countries in later years provided an ideal environment for the bank’s rapid growth.
In recent years, the bank has focussed more attention on the micro, small and medium enterprises (MSMEs) segment. The proportion of advances to this segment of borrowers has increased from about 15 per cent in 2013 to about 22 per cent of overall lending by the bank in 2018. Conversely, the share of credit to corporate borrowers of the bank has fallen sharply, from about 58 per cent in 2013 to about 36 per cent in 2018. Clearly, the bank has been rebalancing its loan portfolio at a time when overall credit offtake in the Indian banking industry has been tardy.
Canara Bank has always paid attention to the quality of its workforce. This is highlighted by the fact that it developed a code of ethics for employees well before many of its peers did. The bank’s Chairman, T.N. Manoharan, told Frontline that in a service industry like banking, human resource talent is critical in “securing customer delight”. Over a prolonged period, mainly because of the government stipulation, most Indian public sector banks, including Canara Bank, had been barred from recruiting employees. In 2001, the bank announced a voluntary retirement scheme for employees, following which “substantial talent left the industry”, according to Manoharan. Recruitment restarted only in 2010, which meant that those who retired in this period were not replaced. In 2010, the average age of a Canara Bank employee was 51 years; five years later, the average age dropped to 40.5 years; now the average age is about 39 years. “A few years from. now, you will not see any old persons in the bank,” a young officer remarked.
Manoharan said the bank had recruited about 35,000 employees in the last six years and has a total strength of about 60,000 employees. “Modernisation is meant to make processes more efficient and may result in fewer employees doing the same thing, but growth also requires us to employ more people,” said Manoharan. Modernisation is the means of drawing more business, he pointed out. Although the entry of talent has made the organisation more youthful, Manoharan said youth also need the experience and wisdom of the older employees. This, he said, is the reason why older employees are encouraged to mentor junior employees. “Senior employees ought to see this not as an unnecessary expenditure of time but as an investment,” said Manoharan.
Canara Bank also has International presence with branches at key financial centers such as London, New York, Hong Kong and Dubai. About 7 per cent of total business is contributed by overseas branches.
In expansion mode
Canara Bank has been in expansion mode in recent years. About half of the bank’s branch network consists of branches that have been opened in the last five to six years, said Manoharan. He added that while most other banks have been “guarded” about expanding their branch network, “we felt we have to reach out.” This may seem out of place in an industry that has been going through a rough patch in the last few years, mainly because of the burden of bad loans.
What explains Manoharan’s sanguinity about the prospects for Canara Bank in the years ahead? Perhaps the fact that Canara Bank did not venture headlong into infrastructure lending as most other public sector banks did in the last few years. Barring a few power projects, the bank does not have much of an exposure to infrastructure projects that have become unviable or lack adequate equity support from promoters of the projects. Remarkably, for a bank that is based in Bengaluru, it did not lend to the now-defunct and scandal-hit Kingfisher Airlines. Part of this is explained by the bank’s “conservative” lending philosophy, as Manoharan explains in the accompanying interview. But this is not the only reason why Manoharan appears optimistic about the future.
Clearly, there are other reasons for being hopeful in a time of stress for most banks. In order to deal with the stress in the Indian banking sector, the RBI now has a Prompt Corrective Action (PCA) framework that identifies ailing banks at the earliest. The PCA is triggered when banks breach regulatory requirements pertaining to three key parameters: minimum capital adequacy, rate of return on assets and a threshold for the proportion of non-performing assets in a bank’s books. Of the 21 public sector banks, 11 are under the PCA framework, which restricts their operations. It is possible that Manoharan’s confidence arises from the fact that Canara Bank is not under the PCA framework. Crucially, this implies that the bank is in a position to benefit from opportunities for credit growth because several of its competitors would be unable to participate in lending activity. Although Canara Bank’s net NPAs are currently higher than the prescribed norm, the bank is confident of reining them in soon. Naturally, the portion of the business that may have gone to other banks may come to Canara Bank.