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IDFC is all set to meet the requirements of RBI guidelines for new banking license, the most important step being creation of non-operating holding finance company.
IDFC , the infrastructure finance company, which on Tuesday decided to apply for new banking license is all prepared to meet Reserve Bank of India's norms relating to new banking licenses, the most important step being the creation of a non-operating holding finance company (NOHFC), says Vikram Limaye, MD & CEO of IDFC.
IDFC will also be required to bring all its financial services operations under NOHFC as per the RBI guidelines. The company offers financial services including investment banking, broking, asset management and infrastructure funds and private equity funds.
IDFC's current business, which is mainly infrastructure lending does not qualify under RBI's key requirement of priority sector lending. "We have very little in terms of priority sector loans that would qualify under RBI norms today. But obviously, we will grow the priority sector book if we get a banking license and will comply with RBI's guidelines on PSL norms," Limaye stressed.
On being asked about an option of acquisition in the banking space, Limaye said that it would be too premature to talk about as the company would first focus on meeting RBI's guidelines.
Below is the verbatim transcript of Limaye's interview
Q: In all your previous interactions with us, you have indicated that IDFC is not interested in a banking license, so what brought about the turnaround?
A: It has been sometime that we have been saying including on our quarterly earnings calls that we would be applying for a banking license. So from that standpoint, we have already made our intentions quite clear for the last several months that we would be applying for a banking license.
Q: Have you all thought through how you will structure it, which will be the non-operative holding company and which will be the one that will operate the license, I would assume IDFC the listed entity will operate the license, so it becomes IDFC Bank so to speak?
A: I think the guidelines are quite clear that any promoter of a bank will have to establish non-operating financial holding company. So we will have to be compliant with the RBI guidelines for bank licenses and we will need to establish a non-operating holding finance company with IDFC being the promoter.
Q: The bank will obviously be an unlisted entity which IDFC, the parent company, will own through the non-operative holding company?
A: That is correct. That is the structure that RBI has specified in its guidelines.
Q: Will there be any businesses of IDFC which IDFC cannot operate because the rules also stipulate that the group should not offer any service which the bank ought to offer, so will there be some kind of a demerger of some of your businesses into the bank?
A: Today, we operate several businesses including a large lending business. We have an investment banking and broking business and asset management business and an alternatives business, which is focused on infrastructure funds and private equity funds etc. So, all these businesses are financial services businesses, which would be under the non-operating holding financial company (NOHFC) structure and obviously would be separated from the bank, which would largely hold the lending business.
Q: So you first demerge all these businesses into an entity and then the holding company owns it two levels lower below the non-operative holding company?
A: Basically the non-operating holding company is supposed to own all the financial services businesses of the promoter. So we will obviously have to get the NOHFC to hold all the businesses that we are in.
Q: Currently what portion of your lending can be constituted as priority sector lending (PSL) and how is the company planning to meet the mandated requirements?
A: Right now we are an infrastructure financial company (IFC). So we have to comply with all the regulations surrounding IFCs including, the volume of assets that need to be in infrastructure which is 75 percent. So largely all our lending is to infrastructure, but infrastructure does not qualify as a priority sector today. So we have very little in terms of priority sector loans that would qualify under RBI’s norms today. But obviously, we will grow the priority sector book if we get a banking license and will comply with RBI’s guidelines on PSL norms.
Q: Suppose you got the license in January or February, you get 18 months to implement it and from thereabout 18 months to comply for priority sector for I would assume cash reserve ratio (CRR) and statutory liquidity ratio (SLR) also you get 36 months?
A: No, CRR, SLR you have to comply on the date when the bank becomes operational. PSL you get incremental time.
Q: So would it mean therefore that in that second year of operation, your entity will face a drain in terms of margins and in terms of profits because your current book will have to comply with SLR and CRR?
A: It is quite clear that if you think about banking you have to think about it from a longer-term perspective. We fundamentally believe in the longer-term growth story of India. If you believe in that you have to believe that banking is an attractive and the right place to be in. So if there is a temporary dip in profits or in returns I think that would be more than compensated by the longer-term prospects of being in banking.
So when we comply with all the CRR, SLR and priority sector norms, there will certainly be a temporary dip in profits and returns but I do not think that is the way we are thinking about it because we have always thought about any business that we get into from a long-term perspective. So, we are quite confident that from a long-term perspective this is the right decision for the organization.
Q: I will just read out what one of the analysts had to say, “IDFC will face the biggest challenges as it will involve rolling out a new vertical deep into rural areas at an early stage. Hence we do not rule out they are looking at acquisitions to jumpstart the process”, is that something which perhaps will be under consideration?
A: I think it is too premature to talk about all of that. We have to first apply for the banking license, which is end of this month and then depending on how things evolve we will have to try and figure out what our strategy would be in terms of growing the bank and being compliant with all of RBI’s regulations. It is too premature to talk about acquisitions of what we would do in order to grow our business.
Q: Certainly, you are not going to buy a microfinance institution (MFI) or non-banking financial company (NBFC) till you get your license in hand but it would be worthwhile asking you whether after you get the license in hand, this would be an option to buy NBFCs with big branches or buy MFIs with branches?
A: The point is after you become a bank for three years, the RBI regulations are quite clear that you are not permitted to get into any kind of merger or acquisition etc. So I think from that standpoint we will have to be complaint with whatever RBI’s guidelines are.
Q: After you set up the bank, isn’t it? After you get the license and set up the bank, you have 18 months?
A: It is premature to talk about what our strategy would be 18 months from now and what we would do in order to build the bank etc. So I do not want to get into that at this point in time because it is too early for us to outline what that would be.
Q: What is the public shareholding in IDFC?
A: We are a diversified company in terms of shareholding. Other than the government of India which owns about 17 percent, rest is all owned by various foreign direct investment/foreign institutional investors (FDI/FII).
IDFC stock price
On April 21, 2014, at 10:11 hrs IDFC was quoting at Rs 119.25, up Rs 0.95, or 0.80 percent. The 52-week high of the share was Rs 165.45 and the 52-week low was Rs 76.25.
The company's trailing 12-month (TTM) EPS was at Rs 12.79 per share as per the quarter ended December 2013. The stock's price-to-earnings (P/E) ratio was 9.32. The latest book value of the company is Rs 88.76 per share. At current value, the price-to-book value of the company is 1.34.
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