IDFC Bank will be offering 9.50 percent base rate to its customers, says Rajiv Lall, executive vice-chairman and MD of IDFC Bank. He also says the bank is on track to deliver at least a Rs 1,000 crore in profits this year.
IDFC Bank kickstarted its lending operations today, a little over a year after recieving its banking licencing from the Reserve Bank of India.
IDFC Bank will be offering 9.50 percent base rate to its customers, says Rajiv Lall, executive vice-chairman and MD of IDFC Bank.
Lall is confident that the bank will deliver atleast Rs 1,000 crore profits in the current year. “We are confident that year-on-year (Y-o-Y), we will grow our profits after tax (PAT) at least 10-15 percent every year,” he said.
Below is the transcript of Rajiv Lall's interview with Ritu Singh on CNBC-TV18
Q: Let me first start by asking you about the tagline of the bank 'Banking Hatke'. It begs the question. What are you doing so differently from the rest of the players that already exist in the system?
A: Many things which will unveil themselves in the fullness of time. But the most important message both internally to all employees within IDFC Bank and to the market that we are trying to address is that it is an attitudinal change, it is an attempt and a goal and an ambition to set new benchmarks for how service is delivered by any bank.
The biggest feedback we got in preparing for the bank from the general customer community was that nobody likes bankers - not entirely surprising. How can you be in a service industry, which is what banking is and not be liked by your customers?
So, 'Banking Hatke' is just to remind ourselves and to signal to everybody else that we intend to be like no other bank can deliver a service standard like no other bank.
Q: If you could tell us how will you ensure profitability? You are starting a bank, you are transitioning from an infrastructure lender into a banking that has high cost of operations. You have to build your deposit franchise from scratch. There is a high cost of funds. How will you ensure good profitability?
A: Last year, IDFC had over Rs 1,700 crore in profits. So, as per the requirements of the RBI our entire balance sheet pretty much has moved from IDFC Limited to IDFC Bank, so that business is something that the bank inherits, that is already generating profits.
Our only question is what share of those profits - do we want to invest in building of the bank and at what pace do you want to invest in building of the bank.
We are on track to deliver at least a Rs 1,000 crore of profits this year, which means if we are investing Rs 600-700 crore in building out the bank, starting with that base of profitability, we are confident that year-on-year (Y-o-Y), we will grow our profits after tax (PAT) at least 10-15 percent every year.
Q: Tell me about the loan book structure, how will that be divided — you said you will start with about Rs 70,000-80,000 crore of loan book, in that how much will be wholesale, Bharat and personal business which you are launching in January and what will be the profitability mix also?
A: To start with everything is wholesale in commercial by definition.
Q: But you have 15 branches in Hoshangabad in Madhya Pradesh (MP).
A: The average ticket size in those branches is Rs 20,000 per customer. In terms of actual value volume and contribution to our overall balance sheet, that will take time.
If India's growth rate trajectory remains pretty much as it is, we are expecting our balance sheet size should be anywhere between one and a half lakh crore to two lakh crore in five years. Of that, two-third will be commercial and wholesale. One-third will be retail and Bharat - that is quite a lot
Q: What will your loan book look like in the first year itself and what will be the contribution to profits, that 10-15 percent that you are talking about?
A: 100 percent wholesale bank.
Q: 100 percent wholesale?
A: Yes, the rest is all investment.
Q: Let me take one segment at a time – wholesale - that has been your forte. 80 percent of the book has been infrastructure but that also has the most problems, that also has the maximum non-performing assets (NPAs).
A: No, wholesale - the only segment in the economy that has serious problems is infrastructure. Our goal from day one is to diversify revenues.
Q: How are you approaching the wholesale sector as a whole, I mean that segment, how will you ensure there is low NPAs and good profitability given the bulk of your exposure so far has been in infrastructure?
A: We have provided for our NPAs, we have cleaned up our balance sheet. So, it is not as if it is weighing us down in the future. We have talked to over 300 clients and I can tell you that there is a real opportunity for us to capitalise on the relationships we have and the relationships we are developing to build business.
If 60 percent of the economy is services then that reflects in what happens to the growth of balance sheet of the bank. So, whether it is housing, whether it is real estate, whether it is telecom, whether it is FMCG, whether it is automotives or whether it is pharmaceutical, all of this comprises the landscape that we will be tackling.
Q: If I could dwell on the infrastructure part a little more since your experts in that area, you have been lending to them, the power sector specifically has shown a lot of signs of distress, a lot of banks are suffering because of high NPAs in that region, how much more time do you think before we see a revival there, a pickup and that is also crucial to your business?
A: It is very difficult to project a timeframe on that. It depends on the types of actions that are taken to restore confidence in that sector.
There has been a lot of damage done to corporate balance sheets and bank balance sheets on account of difficulties in the power sector. These problems are quite complex, there is no one root cause; it is a combination of many things.
The resolution of which is partly a judicial matter because it is about contractual disputes that need to be solved and that takes a long time given the way our court system operates and it is a political matter because it is also about the distribution of pain, who bears the losses.
Q: You have conversation with the regulators, with the government officials and with players in the industry, what is on the table as far as revival is concerned?
A: There is no concrete plan that says okay by this date certain these problems will be resolved.
Q: That is a red flag?
A: It is a red flag which is why I am not all that particularly optimistic about an early resolution of these problems which is why we have provisioned so aggressively.
We don’t believe that so many of these things that are beyond our control to bring about resolution will be resolved. Therefore, we have to develop the capital cushion to protect ourselves in the worst case.
Q: On the other part of your business Bharat banking, that is completely new for you. Tell us about your plans there, what growth you envisage?
A: That is very exciting. 15 of the 23 branches will be in rural Madhya Pradesh, in three districts of Madhya Pradesh. We call it Bharat banking. What it means is it is really rural banking.
Now the technology exists in a very cost effective manner for us to - again - completely raise the bar on service and our commitment is that we will take banking to the community. We don't expect these people to come to the bank branch.
So, we have designed a hub and spoke system for delivering services in this manner from a hub that is the receptacle or is the holding place for our ambulatory sales force that are supported with many cash in-cash out points that are manned and operated by partners using IDFC Bank technology.
The payback period for a branch is less than three years. Once you have paid back for the not very substantial capital that is required to create this architecture on a per bank basis the Return on Equity (RoE) for each ecosystem on a branch is between 15-20 percent.
Q: So, you will be profitable from day one in rural banking?
A: No, you cannot be profitable from day one. You will be profitable from third year which is the payback period and then it depends on how fast we grow our branch infrastructure. But each branch, that is the way to look at it, will be profitable within 36 months.
Q: Tell me about your priority sector lending (PSL) targets. Now that you have become a bank and you have to comply with 40 percent PSL how difficult will that be?
A: It will be very difficult, because we are starting with a very large balance sheet. So, if you start with Rs 55,000 crore loan book and that is growing at whatever, 10 odd percent a year, every year the challenge for meeting our PSL requirement grows. A lot of our incremental lending will happen in PSL space. So, everything we do in Bharat banking is all PSL.
Q: But will you have to buy maybe some of these loans too?
A: Yes, we will do that as well. We will partner with others who are doing PSL lending. We have made some investments in microfinance companies in which we have taken equity.
Q: For instance?
A: I would rather not mention names in public just yet, but there are these kinds of relationships in which we have got a small equity stake. It creates a much stronger relationship. It allows us to have an influence of their underwriting standards and how we operate etc. So, that is another form of partnership then there is a payments bank.
Q: So, what is your plan on the payments bank front? Let me just get you with then. Now you have a partnership with Telenor?
A: Those plans are being formulated as we speak. Mr Shanghvi of Telenor and ourselves are sitting down to develop those plans but at the end goal is to use the payments bank infrastructure to deliver complimentary services between the bank and the payments bank to a very large growing customer base.
Our target is to have 15 million customers within five years. If we are able to do that think of the franchise value this creates for us. Go forward 10 years and we have 15 million customers we acquired and in 10 years we will be closer to 25 million.
The 15 million customers that we will have acquired in the first five years within 10 years will presumably be much wealthier than they were when we first established a relationship with them.
Q: Let me get to the key issue of asset quality of banks which has been deteriorating. You have made excessive provisions which will of course curb your non-performing assets (NPAs). But can you tell me an overall picture of what when you are starting operations as a bank what will the asset quality picture look like, what will be the net and gross NPA figures be around?
A: Net NPAs are around 2 percent, our total stressed assets which is basically restructured assets and gross NPAs is a large number. It is in the range of 9-10 percent of our book and against that we have 4,500 across provisions.
Q: What is the longer-term plan by the end of the fiscal by next year?
A: In percentage terms, these things will shrink as our balance sheet grows but in absolute terms, these assets are not going to disappear. By taking these aggressive provisions we have created de-facto mini bank and our goal is now to recover more than we have provided for against this portfolio.
Q: You believe this 2 percent net NPA that you are starting with will come down now that you are taking these measures?
A: It should come down is the short answer.
Q: So, you will close the year below two percent NPA, is that you hopeful at least, this fiscal?
A: Should be.
Q: On the base rate fund, could you give us a clearer picture? What rates you are offering your customers now, will competitive pricing come into play to poach customers now to start with?
A: You are getting an exclusive now, I will give you our base rate, we are starting with 9.5 percent.
Q: Given the interest rate scenario where the RBI will focus on bank's transmitting more rates, do you think these rates will come down in the next few quarters as most banks are hoping they will?
A: I hope they do.
Q: Is there headroom right now. When you are starting with 9.5 percent base rate is there head room?
A: It depends on really how the market behaves. We are not a price maker or price setter in the market, we are a price taker. So it depends how the competition behaves. We will try to set out base rate at a reasonably competitive benchmark.
Q: What about your margins, will that be stretched right now because the costs are high, you don’t have the deposit base? What will the margin picture look like at the close of the fiscal and also any long-term target if you have?
A: Margins will, if you mean net interest margins (NIMs) and all of that, so that is difficult to say exactly how it is going to pan out. It depends as I said on how the competition behaves, how interest rates track, how quickly we are able to bring our own cost of funds down.
I don’t see very significant shrinkage of margins vis-à-vis last year. Our overall cost of funds only, cost of operations obviously is higher but our cost of funds is not going to be much higher than it was last year.
Q: Your margins will be in the range of?
A: They have always been in the range of about 2 percent odd.
Q: On the listing of the bank, you are starting operations on the October 1st. Just take us through the listing process, what it means for the shareholders, the demerger process.
A: We will list on the November 6. October 1st the two entities become demerged, IDFC Bank and IDFC Limited. If you are an existing shareholder of IDFC, you will get one share in IDFC Bank such that you own 47 percent of your shareholding in IDFC Bank directly and 53 percent of your ownership in the bank will come indirectly through IDFC Limited which will also have three other subsidiaries.
Q: Aside from that another thing I want to focus on when you talk about shareholders is the valuation of the stock. It is more comparable to the public sector peers than the private sector peers. Why is that, do you think other investors are not buying the growth story?
A: I think that there is a lot of confusion right now understandably so about how the scrips will trade. People don’t have full visibility into the bank; the bank is not listed yet.
I suspect that once the bank gets listed and we start engaging investors directly and all the disclosures that go with it and there is direct communication between the investor race and the bank that things will change.
Q: On the NPA picture the Reserve Bank of India (RBI) regulators introduced various measures – strategic debt restructuring (SDR), outside of SDR the transformation, the Joint Lenders’ Forum (JLF) now creating an empowered group, 5:25, etc. Do you think all of these measures are enabling enough that we have seen the worst of the asset quality problems and now there might be better times ahead or do you think there is more handholding required from the government or any more regulatory enabling environment that further needs improvement?
A: A lot has been done but one thing that could really help this whole process will be the enactment of a solid bankruptcy law.
The flexibility that banks have in ensuring that equity owners take their fair share of the pain will be greatly enhanced if we have a solid, well functioning bankruptcy law. That will increase the ability significantly of banks to actually lead the resolution rather than prevaricating as a lot of them are today.
Q: Since credit growth is so closely linked to the growth of the economy, I just want to your outlook on that as well. The RBI seems a little hawkish, what is your view, do you think things on the ground, the ease of doing business, investment cycle, is that returning, has there been an improvement and do you anticipate better growth going ahead?
A: I do anticipate better growth but I am again on record saying that even a 50 basis point cut does not get us to 9 percent growth. There is a lot more that needs to be done for us to break out of the 7.5-8 percent range if we want to get to 10 percent.
The intend of government is very clearly demonstrated but to translate that into action that people then experience and say it is now much easier for me to just set up a business and be confident about that, that is a process.
We will require some years before it really becomes real. My personal view is that until that happens, the ability of our country to grow comfortably and sustainably without too much inflation or asset price bubbles, etc developing, too many other stresses and strains developing, at 10 percent we are not going to be able to do it.