Payment bks will eat into some banking rev pools: IDFC Bk

Investors are getting mixed signals as far as growth numbers are concerned, says Rajiv Lall, MD & CEO of IDFC Bank adding that credit offtake and other metrices don't reflect the 7 percent growth rate. "Topline is arguably some level of infirmity, which doesn't seem to square with 7 percent GDP growth," he says. However, robust growth in indirect taxes and government spending, especially on infrastructure, are certain positives. Speaking about non-performing assets in banks, Lall said entire book in absolute terms have not gone anymore. Any improvement here can be attributed to the discovery of stressed assets, he said.Lall is confident of IDFC Bank getting its share of corporate as well as housing savings over a period of time. On the subject of payment banks, Lall said: "Payment banks are going to eat into certain segment of banking revenue pools like remittance." Banks will have to be more payment bank-like and telco-like to compete with these payment banks. Below is the verbatim transcript of Rajiv Lall's interview with Latha Venkatesh on CNBC-TV18.Q: When you were speaking with the corporates and even as a banker and a financier, are you getting a sense that the economy is turning around, are you getting a sense that the worst in terms of problems is over. Are people at least telling you that next quarter the topline will grow?A: We are at an inflection point. The truth probably is that there is in the investor community -- even in my own mind -- a little bit of confusion. There is a lack of clarity because the data are all over the place. So you have had this revision of gross domestic product (GDP) data which was controversial, it still remains controversial in some circles. Although people are getting comfortable or used to the idea that we are growing at 7 percent, so the concern of people has been that it doesn't feel like 7 percent, credit off take and other metrics don’t seem to reflect all of that. Q: You know the hard numbers, you know loan growth, you know non-performing loans (NPLs) or people not paying their interest in 90 days. You speak to corporates and you look at their toplines and bottomlines. Are you getting a sense that Q3 is the growth giving quarter, Q4 will be the growth generating quarter, is that feedback coming to you? A: Not yet. What we are seeing in the corporate numbers, certainly the topline, bottomline people have squeezed out cost and they seem to be managing, but at least on the topline, it is arguably some level of infirmity which doesn’t seem to square with the 7 percent GDP growth. However, then you have a third data point which is very robust growth in indirect taxes. So, there is clearly something happening in the economy. If I were to speculate, my hypothesis would be that the promised government spending or infrastructure in particular, the shift of spending from subsidies to national asset creation is now beginning to percolate in the system. So, whether it is spending on roads and the associated contracts, whether it is spending in the railways and its associated contracts that is pumping some cash into the economy and that has cascading effects.Q: You are still one of the biggest financiers of infrastructure even after your new avatar. Are you sufficiently convinced that expenditure by the government is well and truly underway? A: Yes.Q: Are you seeing it in mid-corporates or in the corporate payables?A: I don’t have the data to demonstrate that it is happening on the corporate level but we have the data at the government level to confirm that yes the spending is taking place. That is why I am saying that there must be some level of knock-on benefit and percolation of cash in the economy that should bolster some form of consumption spending. So, that is the good news. Q: You yourself have your finger on the pulse of many large corporates, project builders and contractors. Fitch and Moody's have put out a report saying that the worst is known for public sector banks, they have upgraded their outlook to stable from negative. Can you say with confidence that the worst is over in terms of non-performing loans (NPL) recognition?A: I think so. I don't know about NPL recognition because there is technicalities here. The worst is over in terms of the discovery of stressed assets and as a distinction. There are different degrees of transparency on the stressed assets.   I think that entire book in absolute terms is not growing anymore. There could be some reallocations, if you were classified it as restructured asset, it might become an NPL in some books. So in that sense the line has been drawn underneath the problem. The problem is not growing in absolute terms. The challenge now is to shrink the problem in relative terms so the overall balance sheet of the system has to grow as the problem assets have stopped growing and therefore the proportionate dream that these assets represent on the total system should diminish over time. Hopefully diminish faster than has been the case hitherto assuming certain instruments such as the bankruptcy law are put into place relatively quickly that permits more expedition, resolution of problem assets.Q: You said that as the amount of good loans grow, the problem of NPA will look smaller in percentage terms.A: There will be some injection of capital that is required. So, you cannot grow good loans until you also recapitalise the system. So, there will be an injection of equity that is required some of which has been promised by government and that will be very key to providing constructive support for the economic recovery more generally because unless you have that capital, the bulk of the banking system will not be able to support the demand for credit that will manifest itself as growth picks up and you could have a balance sheet recession which you want to avoid. Q: What is your sense about loan growth per se, the capital problem apart? The State Bank of India (SBI) Chairman after her results said that she is quite confident of 14 percent loan growth which is much better than the system loan growth and that is 25 percent of the banking system talking. Are you confident that loan growth is picking up in the second half? A: 14 percent I think is doable. Q: For the system?A: For the system and therefore SBI and therefore certainly for IDFC Bank parenthetically. Q: Reserve Bank of India (RBI) puts out the banking sector loan growth numbers, you think that 14 percent or loan growth is accelerating, you are confident of that?A: Yes, I think it will accelerate. I am not sure it is accelerating, it is not yet accelerating but it will accelerate. I am pretty confident of that. Q: Let me come to the issue of the banking system itself and to your bank? You have chosen the path of growing your deposits through technology rather than through branches. Can you give me an idea of what might be the deposit at the end of one year, your retail deposits -- current and savings plus fixed term loans? Any target you are working towards?A: I cannot predict that at all. I have zero visibility right now. I have only theoretical targets. We will know better, we should have a conversation 8-9 months from now and I will be in a much better position to share with your our experience. The first task for us is to connect with the customer in the main urban centres of the country, which is where the bulk of household and corporate savings for that matter resides. We are more confident about getting of a share of corporate savings than we can be objectively speaking today about the speed at which we will get our share of household savings in the urban centre. What we do know and what we are in a medium-term sense pretty confident about is that the value proposition that we will sequentially over the next several months unveil in the market should be attractive and powerful enough that it will provide us a connect with the core group of customers and once that stabilises and we are confident that value proposition is catching then we will accelerate the pace of acquisition.Q: But that core corporate clientele that you have, would already be banking with somebody, because they are all large corporates. So you would still be able to get deposit banking business from them?A: Yes. See, people tend to forget that banking at the end of the day is a service and customers like in all consumer facing businesses they respond to the service. So, if our relationship and our service proposition, is indeed compelling there is no reason why they will not at least indulge us with some share of the business they are currently conducting with other banks.Q: You said that you will have more clarity eight to nine months down the line. But eight to nine months down the line the first of the payment banks will have been ruled out and the pace with which Paytm has captured the payments transaction, does it give you a feeling that that is going to be very a difficult piece. You will have the Idea's, the Airtel's, all of them backed by their own Non Banking Financial Companies (NBFCs) selling loans. So is the problem more difficult than what you thought 18 months back?A: No, I am not sure it is more difficult. We knew all this was going to happen. We had a pretty good sense that payment bank licenses would happen. I think those of us who were focused on it had examined the space. We are not surprised that these licenses went to telecom companies. I think that makes good sense. There is a method to why that happened. So that was expected. When were conceptualising the bank, we knew that it is only a matter of time, and not too much time that there would be a confluence of telecoms and financial services and technology and financial services more generally. So strategically we are prepared for that. So there is no doubt that there is going to be more competition and that is why we are quite clear that we will not compete on the same basis as the previous generation of banks. We will actually have to be more payment bank like, we will have to be more Telco like in how we present ourselves to the market. So it will be a very interesting journey.Q: But that may be challenging, isn't it, because Telenor doesn't have the same reach as Idea and Airtel. Will not therefore that be a challenge. I mean their access to customers is easier. State Bank of India (SBI) has one kind of reach and with Rel Jio will have its own access and technology and Idea and Airtel will have their kind of reach. Would you not find yourself in extremely competitive environment?A: I am not sure about that. I don't think that is the case because the payments banks are very narrow construct. What they can do, cannot do is very narrowly prescribed. So, the way I see it is that the payment banks are going to eat into certain segment of the banking revenue pool. So anything that is to do with delivering transactional convenience. So, let us say the remittance business.Q: Maybe even the credit card business?A: Yes, so the two things. They are related. When I say a transactional convenience what it means is that the expectation is that don't know what period or time but the dependence of cash in the economy will come down. So, whatever banks were able to earn because of those inefficiencies that revenue pool whether it is cheques, drafts, remittances, ATMs, cash ins-cash outs, all those kinds of things will be under competitive pressure. For us today we have zero revenues from any of that. So, we only have upside. We have no downside. Q: I wanted to take you upon one more thing that you told my colleague Ritu Singh earlier that you are not going to have too many branches because your model is different. Around the same time, Development Credit Bank (DCB) actually said they are going to increase their branches. They have been there, done that and they think branches are needed not for liability but actually for asset creation and that you need to be close to the MSME and the SME if you want to give loans. Won’t you find that need to give loans to an SME sector or an MSME sector? A: They are welcome to the brave new world. We are not going to be just a digital bank, let us be clear about that, but we are going to be a click-and-mortar bank. What is clear is that the mortar we invest in will be significantly less than the mortar of existing banks. That said, I don’t know if other people are, I am absolutely convinced that over the next five years, our financial system is going to see very dramatic change. What are those changes? The first is that the speed with which public sector banks are going to lose market share is going to be accelerating. There will be some consolidation, it will settle down eventually, but there is for the next five years a big opportunity for private banks, old and new, to take market share from public sector banks. So, that is one thing that is going to happen. The infrastructure for interface with customers, to deliver them access to financial services is going to grow dramatically thanks to the payment banks. The Paytm’s of this world, Telenor’s, ourselves, all of us are going to invest in this infrastructure than with the National Payments Corporation of India (NPCI) payments backbone, it is going to be dramatic improvement in convenience for a customer. This will put pressure on margins of various kinds for the banks. Third thing that is going to happen is there is going to be an explosion of data, of available information on customers. So, analytics, one has to think very imaginary, five years from now analytics based lending already there are so many NBFCs which are mushrooming left, right and center. There are going to be specialising on analytics based lending. This is the future. So, in a future like that, a new bank has to think very differently and very nimbly is my view. Therefore, we have to invest very heavily in data. Our handicap is we don’t have customers on to do analytics. So, we have strategies and various other plans to get up that curve as quickly as we can and figure out how we position ourselves in that future. So it is a brave new world but it is a very exciting world that will unfold in the next five years. Q: If you were not an IDFC Bank MD, if you are only an observer of the scene, would you say that all banks, the big guys today, even the ICICI’s, Axis’s, HDFC’s, SBI’s will all see an erosion of margins? A: Yes, undoubtedly. This is happening the world over. Return on equities (RoEs) in banking are shrinking. If you go to Europe and the US, everybody says banking is a terrible business. There are other reasons for that, they have a huge regulatory overhang which fortunately we don’t. Our market is still growing much faster. However, yes there will be greater competition. Margins will be under pressure for everybody. More people will be competing for the same liabilities and there will be different axis of differentiation now that people will have to develop, bankers will have to develop to make themselves relevant and attractive to a rapidly changing customer base.  Q: You have promised me an assessment interview eight to nine months down the line. Give me some numbers by which you will measure yourself. What kind of an return on equity (ROE) 12 months from now, what kind of a cost to income ratio 12 months from now. Even if they are at the moment only visionary.

A: The only numbers I am sharing right now and they will become more granular as we keep doing these conversations, but the numbers I am sharing right now is for this financial year, we expect to deliver profits after tax (PAT) of Rs 1,000 crore which would be our trough ROE at around eight percent. Thereafter, we feel pretty confident that year on year for the next five years 10-15 percent growth in PAT is very much achievable. When it comes to cost to income ratios, they would be very highly distorted upfront, because the income will be very low, the cost structure very high, so it will not really be reflective of where we want to go. This is a five year journey. So at the end of the fifth year, we should be coming to cost to income ratios that look different and should give people who are tracking us, the confidence that these guys will continue the way they are and then they will deliver a sustainable long term cost to income ratio that will be significantly lower than the industry. But that is a journey and I do not want to make any brash statements five years is a long time.

Q: You have seen the entire spectrum of finance and the economics, that is why I am asking you. Give me a guess as to 24 months down the line; what will be the share of public sector banks either total piece and also 24 months down the line actually 45 legacy banks plus 21 new banks, we should be 66, all of you put together, how many entities will you all be, 24 months down the line? I assume there will be a lot of consolidation.

A: Consolidation is very unpredictable because it is as much a political and cultural process as anything else. The first question, I think that it has taken us 30 years for the share of public sector banks to come from 99 percent to 70 odd. In the next five to seven years, they will be around 50 percent.

Q: That is very interesting. That definitely changes the texture.