May have provisions of Rs 2500 cr in Q2: IDFC

Two, in the first quarter of last fiscal we had just got the in-principle bank license therefore the bank related expenses were only Rs 5 crore. However, this quarter the bank related expenses were Rs 85 crore. So, there is huge increase because we are close to operationalising the bank which will happen on October 1. The third item is on the treasury side. There was a trading loss of about Rs 45 crore. Whereas last year first quarter there was a gain of about Rs 17 crore, so there is swing of about Rs 60 crore.

There was a period when the bond markets reacted very negatively to a certain Reserve Bank of India (RBI) statements and certain RBI policies and that resulted in temporary loss that we had to go through from a market-to-market perspective. So those are the three large items.

Q: On the asset quality front there has been significant addition to stress this quarter, if you could clarify? We understand you have made provisions to buffer against the possibilities of higher non-performing assets (NPAs) but right now what is the total stressed book for IDFC and going forward since you say that coal and power sector issues continue to remain unresolved, do you expect it to worsen a lot more before it becomes better? A: So, first addressing the non-performing loan (NPL) issue for this quarter that had largely to do with one asset where the coal block that it had, got cancelled and viability of that asset is compromised. From a larger standpoint, as I have articulated before, the volume of stressed assets that we see in our book is between Rs 8,000 and Rs 8,500 crore, these are not non-performing assets. These could be restructured assets; a couple of them could even be standard assets.

There is a small portion that are non-performing, the non-performing assets obviously we have disclosed including this quarter but the reason we are categorizing them as stressed assets is because of the nature of risks that surround these assets, and more than 80 percent of these assets are gas assets or coal assets through special non-distributable reserves that we have created over the last several years and this obviously requires appropriate approvals.

Our hope is that if we were to get those, then we would be able to create these provisions from the balance sheet reserves and that certainly has an impact on our capital of about Rs 1,600 crore but this would more than adequately provide for the stressed asset portfolio that we believe we have to the extent of creating on average 50-60 percent provisions against this book. I want to highlight one more thing ­-- the existing provisions that we already have which are in excess of Rs 2,000 crore are more than adequate from a regulatory perspective to provide against these assets. The reason why we are creating incremental Rs 2,500 crore is because as we transition to a bank, we want to make sure that the bank’s balance sheet is completely protected against known risks and that there is no overhang from a capital perspective or from a future profitability perspective against the risks that we are already aware of and despite taking what I have said will have an impact of about Rs 1,600 crore on capital.

The bank will be very well capitalised with total capital of Rs 13,000-13,500 crore and tier-I capital of more than 15 percent, so the bank will be very well capitalised even after taking these provisions. Q: While you are takings steps to be adequately buffered and making high provisions more than what is required will gross non-performing assets (NPAs) jump up when you operationalise the bank? Because of at least the change in reporting standards as well of course the continuing stress in some of the power sector to which you have a very large exposure? A: So, it could because like I said if some of these restructured assets deteriorate or are not resolved then they could migrate to NPAs. However, even if that were to happen like I said while our gross non performing loans (NPLs) might reflect that our net NPLs will be well under control because as I said on average we are providing 50-60 percent right now. That is in addition to our existing provision which is more than adequate from a regulatory perspective already. Q: We have a fair idea of what your books will look like when you become a bank in terms of your size etc but the net interest margins (NIMs) right now have slipped marginally around 3.2 percent in this quarter. Do you expect that will improve going ahead by the time you opertionalise the bank? Is there a target you are working with? A: I don’t expect the spreads to improve for the simple reason that for the last several quarters we have been saying that our spreads will keep coming down as they have, that has largely to do with the fact that the kind of risk that we are booking is obviously much higher quality. Therefore it will be necessarily at lower spread. The other thing that we have been doing is that we have been building our statutory liquidity ratio (SLR) portfolio in order to make sure that we are complying day one from cash reserve ratio (CRR) and SLR perspective which we are confident we will be. Obviously when you book SLR securities, you don’t get lot of spread, when you are borrowing and investing in government bonds so therefore I don’t expect the spreads to improve in the immediate term till be become a bank. Post that, it will depend on how the situation evolves in terms of the type of risk that we book in the bank. As you know as an infra finance company you can only book infra risk. In a bank we can be more diversified in terms of the type of assets we book.