IDFC Bk to start ops with few branches by Oct 1: Rajiv Lall

Sonia: Can you tell us what the holding structure will be?A: The holding structure will be that IDFC Limited which is the current listed company will be the parent organisation underneath that a non-operating finance holding company the NOFHC which is mandated by the Reserve Bank of India underneath that the listed bank and other three or four subsidiaries that IDFC currently has including the mutual fund, IDFC Alternatives, IDFC Securities and IDFC Infrastructure Debt Fund. So those four subsidiaries and the Bank will set underneath the NOFHC which will sit underneath IDFC and in this whole structure IDFC the parent and IDFC Bank would be listed.

Latha: IDFC Bank’s shareholding pattern will mirror IDFC?A: I believe so yes. So every shareholder in IDFC will receive one share in the bank.Latha: Give us some idea of how the return on asset (ROA) or return on equity (ROE) of IDFC Bank will look like as on October 1? How much of cash reserve ratio (CRR), statutory liquidity ratio (SLR) it will have to maintain, what will be its assets under management (AUM) or rather its deposit base?A: We will not have a deposit base on October 1 but we will have a liability base. So what will happen is that substantially most of IDFC’s current assets and liabilities will transfer to IDFC Bank.Latha: 100 percent or is it like 90 percent or thereabouts?A: About 90 percent -- actually 95 percent because 5 percent of assets will go into the IDFC Infrastructure Debt Fund. 95 percent of assets and liabilities will move to IDFC Bank. So if we have a loan book of about Rs 55,000 crore substantially all of that is close to more than Rs 50,000 crore of loans will move to IDFC Bank as well the corresponding liabilities.Sonia: Can you tell us a little bit about the foreign institutional investors (FIIs) limit to give us more clarity? I understand that FII holding will be about 23 percent?A: What happens is that in this structure that I just described to you, IDFC Ltd which is the current listed company will become the promoter/parent of the bank. In IDFC Ltd today we have FII holding of about 48 percent. So since the parent will own about 50 percent precisely 53 percent of the bank and 47 percent will be held directly by the existing shareholders, so the direct FII holding in the bank will be half of what it is in IDFC. So that will be about 24 percent.

Latha: You were telling us about the CRR, SLR requirements, the RoA. First of all, how many branches are you likely to have on October 1?A: On October 1 we will start with few branches because we have fairly ambitious technology platform that we are introducing. We want to make sure that it is completely stabilised before we start accelerating the pace of branch expansion but we will have five or six branches in tier-I India on day one and we intent to have about 15 branches in tier-VI in India at launch. So total 20 branches day one and then as our system stabilise etc, we will keep expanding. Latha: Your SLR book is all ready?A: Yes, the SLR and CRR books are more or less ready. Latha: How much would that be? I was told Rs 16,000 crore. Is that right?A: Our total balance sheet size when you add up the CRR, SLR will come to about Rs 70,000, yes, so about Rs 16,000 crore.Latha: So Rs 70,000 crore is the loan book?A: No. loan book is Rs 55,000 crore. The total balance sheet size will therefore become over Rs 70,000 crore. Sonia: Can you give us an estimate of what the balance sheet size could grow to in the next couple of years?A: That depends on macro and all that kind of things but once we launch operations we should be benchmark to what is happening in the wider banking system. Latha: What is the distribution of the loan book? Is the entire 95 percent or 100 percent infrastructure?A: Today most of it will be infra; 80 percent would be infra and over time what will happen is that the share and contribution of infra in relative terms will decline as necessarily we diversify into other businesses but we will remain and important infra player.Latha: You have a payment bank plan as well, right?A: We have a payment bank plan in the sense we have invested in a company that has applied for a payment bank. So should that company get payment bank license, we will, as minority equity shareholder IDFC Bank would be a owner in that payment bank.

Latha: I am looking at what kind of retail products you will be able to launch. Do we see an IDFC Bank credit card shortly? What are the initial retail products? I guess your surge will be retail?

A: All in good time. IDFC Bank is going to be a universal bank so we will have corporate and wholesale banking, we will have retail banking and we will have rural banking, so three broad divisions for the bank. The wholesale corporate bank will capitalise on the strength of our position today in corporate India. The main goal there would be not only to expand our corporate relationships beyond infrastructure in time but also from day one seek to diversify our revenue base by delivering a wider speech of product. Today we can only do term lending and its very important for us that with our existing clients, with new clients we establish working capital relationship letter of credit (LCs), bank guarantees, Fx, cash management, transaction banking, all of that we will be ready to offer from day one. In parallel we will build the retail bank and that’s a marathon that will take time.

Latha: What is the distribution within infrastructure itself, power, steel and roads?

A: Today almost 40 percent is power more broadly defined that includes generation, transmission, renewable all of that. Telecom is then a significant second and then transport is the third.Sonia: Can you just throw a little more light on the ROA situation? I agree in the near-term there could be a bit of concern but once it settles, what could the average ROAs be, some analysts are pegging it at around 1.6 percent or so by FY16, is that a good estimate?A: By FY16 that is next year.Our core business will deliver a decent ROA but we have to decide how much and at what speed we want to spend in developing the bank. So net of spending for development of the bank, our ROA cannot be 1.6 percent. It will be lower but obviously our ambition, our goal is that within 5 years, we will be delivering an ROA that is best in class for the banking system.Latha: How much of priority sector lending (PSL) would you have already met because of the kind of loans you have given?A: The PSL clock starts affecting us FY17. So between now and FY17 we have to build up a PSL book. The drag on account of PSL however has been substantially mitigated because of the RBI regulations with respect to the exemption that a long-term bond financing for infrastructure book gets.Latha: How much of that would be exempted then in the first full year of operations?A: It is 30 percent. By the time we hit FY17, it will be closer to 40-45 percent of what infrastructure book will be exempted.Latha: How is the infrastructure book? Is it giving you a sense at all, the comfort that the worst is over or are you still at the peak of loans and you are yet to see a dip?A: That I can say that worst is over, things are not deteriorating but we have allocated a lot of capital against potential impairment. We will continue to allocate more capital in the coming months in the form of provisioning and then I think the biggest uncertainty with respect to our asset quality situation is the fate of gas assets.That is all in the public domain, we have more than Rs 2,000 crore of exposure into gas projects and depending upon how the gas pooling scheme works out, that could be a huge relief for us or not. So we have to be prepared for either way. In any event we have made absolutely sure that we have adequate capital set aside for the worst possible scenario.Latha: You start with 23 percent capital adequacy ratio (CAR)?A: Yes.Sonia: Since building a deposit franchise will take some time, borrowing will remain the main funding source for the bank, so can you give us an estimate of how much the cost of funds could be in the first year and then in the second year, just a ballpark estimate?A: It will not be materially different from what it is today. We are borrowing largely from the same sources. I think in the early months of our transition to the bank, our funding sources will change a little bit and we will have to manage that carefully to make sure that our cost of fund actually ironically in the beginning does not escalate because of the CRR/SLR implicit penalty on our liabilities.Latha: Bang in the first year, that is when you report your results on March 2016 or April 2016 for that year. Is it likely provisioning will go up because some loans are getting refinanced for the 5:25 rule as it is called, which will mean a little bit of net present value (NPV) hit?A: It is difficult to say but our goal is to provision proactively and pre-emptively and I want to make the capital allocation as much as possible before banking operation starts.