Speaking exclusively to CNBC-TV18’s Latha Venkatesh, Rajiv Lall, the CEO and chairman of IDFC stressed on the importance of boosting coal production to plug the power crisis.
He also spoke about the state of the economy and stock markets. While he believes that investors are excited about India, he expects the next union budget to be a landmark event.
Lall said that if the Budget disappoints, there would be a “devastating reaction” in the markets.
Below is the verbatim transcript of Rajiv Lall’s interview to CNBC-TV18’s Latha Venkatesh.
Q: First I want you to wear your infrastructure hat. You have your finger on the pulse of many pieces of the infrastructure sector. Do you think things are turning at all?
A: The short answer is yes things are turning, they are turning faster in certain sectors than in others. I think the challenge is how do we accelerate the pace of that change. Indeed our challenge is to ensure that what has started with resurgence in confidence translates systematically and in a sustained manner into actual investment and asset creation on the ground.
Q: Are you getting a sense that an asset that would have turned bad is now not going to turn bad.
A: So clearly, those assets that had to turn bad or were turning bad have turned bad. Now whether they have been classified appropriately as bad or bad enough that is a debate many people can have but in that sense the situation is not getting worse.
Q: Give us an idea of the power sector’s problems?
A: I will give you a sense, it is very complex. There are 2.5 lakh megawatts of generating capacity overall that exists in the country that is operating. There is another 50,000 megawatts that is under construction that is supposed to come on-stream by 2017. Of these 3 lakh megawatts of capacity, about 1 lakh megawatts is facing some kind of difficulty. Now of this 1 lakh megawatts, about a quarter is on account of non availability of gas so that is 24,000 megawatts out of 1 lakh. There is another 25 percent that is on account of domestic coal not being available as expected. If we get the domestic coal production significantly raised in a relatively short period of time, you have addressed at least a quarter of our problems in the power sector.
If you are able to find a solution for gas then you have solved another quarter that is half of your problems are taken care of. So if the coal secretary tells you and he has inspired confidence in you that government now have a measure on domestic coal production, that is very positive.
If we in the next three-four years are able to raise production just through the coal auction route by another 150 million tonnes, that is huge.
Q: About 80 percent of your incremental restructured assets actually are energy sector or gas related. So in gas are you seeing any resolution of the problem? Imported gas has gotten a little cheaper.
A: Imported gas is a little cheaper, we now have domestic gas pricing policy in place. What we don’t have yet and it is in active discussion is a blue print for the revival or the completion of gas generating capacity that is under construction and gas generating capacity that is currently distressed. So that requires coordinated action between ministry of finance, petroleum and such. There is a concrete proposal that has been actively discussed. I hope that something comes of that proposal and if we get a breakthrough on that, 50 percent of our problems in the power sector will be well on their way to resolution.
Q: How much of the infrastructure problems can really be resolved by the rate cut? There is so much of clamour that that seems to be the obstruction to growth. Inflation numbers are looking better and better. What is your sense, when should the governor cut and how important it is to growth?
A: I won't comment on when should the governor cut but how important is it to revive infrastructure, my own view is that the importance of rates for infrastructure investment can be exaggerated and the reason for that is while it improves the cash flow of individual projects and therefore the return on equity to the developer, there are much bigger issues that are coming in the way of a revival of infrastructure investment. So policy reform is more important than the rate cut. The one aspect however in which the rate cut is important is its impact on markets.
Necessary condition for a revival of the capex growth cycle in infrastructure is repair of balance sheets. And the balance sheets of corporates that have been in the infrastructure space they need to recapitalize themselves. If the equity markets open up which will be certainly facilitated with a rate cut, then that could trigger a virtuous cycle.
Q: At the moment the revival you are seeing in equity markets is not enough to capitalise infrastructure balance sheets.
A: No that is not.
Q: In any case when are you expecting, you think a rate cut might come mid 2015, early 2015?
A: I cannot guess.
Q: Give us some idea of the blueprint you have in mind? On day 1, October 1, 2015 if that is the date it is, how many branches will you expect you will have?
A: I am still not in a position to tell you how many branches we will have on day 1. but I can give you some sense for our blueprint if you like. We are going to be a universal bank and what that means is that we will address three segments of the land scape, the wholesale bank which will be a natural and logical extension of the business that we currently do.
We will systematically build a consumer bank, which will be focused primarily on tier I and tier II India and we will focus on mass banking, which will be focused on tier V and tier VI India. So we are going to hit all three of these customer segments or different segments of the market plays, so in many ways you can expect and this is -- I keep saying this building a bank is not a sprint, it is a marathon. So when we do launch in October of next year, this will only be the beginning of the journey but at the beginning what you will see is -- what I call a bimodal approach. So you will see us in the metros, you will see us in corporate banking at one end of the extreme and at the other end of the extreme, you will see us in a bunch of concentrated districts, we cannot be in 640 districts but overtime we expect to be in 40 odd districts where we will have a very significant presence in terms of rural banking.
Q: You are planning to have a large number of business correspondents, have you signed up with a lot of -- NBFCs can be business correspondents that would be one of the modes you will use?
A: It is a wider question that you are raising and it is worth spending a minute on this. For a bank, a new bank in this day and age, there are two things that are going to be very different, one is technology. Clearly technology has to become a defining feature of the new IDFC Bank and that will translate into how we connect with customers, how we deliver services to customers and at what cost we are able to deliver that service to the customer. That is one.
Second is, again running in this marathon and given the very rapid changes that are taking place in the market place, partnerships of different kinds will be extremely important for us. It is not just business correspondents, we are looking to partner with other types of companies, other types of firms that will help extend our reach in ways that you haven’t seen so far with banks.
Q: Your recent P&L -- give us some indications of you preparing for the eventual bank. First what will be under IDFC Bank, the demerged entity, all financing activities, what will not be other there, what will be with IDFC?
A: IDFC will basically be a holding company that will have only a non-financial subsidiary, the only one that we have and that is IDFC Foundation.
Q: The holding company?
A: The holding company then there would be a non-operating finance holding company underneath that you will have five financial subsidiaries, the bank, IDFC alternatives, which is a private equity and infrastructure equity franchise, IDFC Mutual Fund, IDFC Securities and IDF NBFC, which is going to be our infrastructure debt finance NBFC.
Q: We saw you increasing your provisions, how much do your provisions cover in terms of restructured and non-performing loans (NPLs), the provision coverage ratio would be?
A: Today, it is very high. Our loan loss coverage ratio we are at close to 3 percent of our assets and in terms of our restructured assets, I would say our loan loss coverage is at least 60 percent.
Q: You would do more of that?
A: We want to do more of that. We are in the fortuitously good position that we have sufficient amount of capital. So we can be much more transparent about the nature of our challenges and our goal is to provide sufficiently.
Q: Sufficient would be what, 80 percent you would want to provide?
A: At least 70 percent -- between 65 percent and 70 percent I want to be able to provide against our stressed assets that we can start the bank with a completely clean slate.
Q: One of the advantages should be that you will not have to keep statutory liquidity ratio (SLR) or cash reserve ratio (CRR) for a substantial portion because RBI’s rules have now changed especially if you are going to finance them with infrastructure bonds, have you got any indication of how much you may get exemption from?
A: At least third of our existing balance sheet will be eligible for this treatment and we know that with each passing year, an increasing share of our existing loan book will become eligible for these dispensations.
Q: I assume you have to get specific permission from the RBI, have they told you how much of your loan book will be eligible for this exemption?
A: We don’t have an exact number yet.
Q: Somebody was guessing 60 percent, one of the research reports said. Is that a fair number to go with?
A: We will not know until we sit down with the regulator.
Q: When will this conversation happen?
A: We have to first migrate our assets to the bank. So that will happen over the next few months. So I expect that these details will be sorted out -- let us call it a quarter before our launch. So it won’t be until June-ish of 2015 before the launch.
Q: Until then we will also see you investing more in G-Secs and tapering your exposure to infrastructure?
A: Yes, tapering our exposure to infrastructure -- that depends on what the situation or circumstances are in the infrastructure space if a lot of these risks that currently look high begin to get mitigated, we will return to growth in our infrastructure book. Right now, we are not looking to grow the book at least through the transition over the next 12-18 months but we are in no hurry either to run the book down.
Q: Other signs of moving towards the bank were that you sold, made some principle gains as well, your non-interest income was big, will we see more of that?
A: Yes, you will see more of that.
Q: That will be spent on booking space for bank branches, recruiting staff, is that the reason why you are making these non-interest incomes?
A: There are two reasons - one is that there are capital market exposure limitations etc. We need to make ourselves complaint with all those restrictions and second is that it allows us to underwrite some spending -- spending for the transition as we get ready for the bank.
Q: But the problem also is that some licenses were given ten years ago and those two guys are still raising savings deposits at 6 percent and 7 percent, that will be a challenge you will have to encounter, you have to match that?
A: We don’t have to match that if we don’t want to. I think that it will take a long time to build depository franchise; it is not going to happen magically overnight. I am not convinced -- we will have to test all this. So we don’t have a magic formula but I am not convinced that the sustainable effective way of building a depository franchise is just to offer a much higher rate than everybody else. I think that it is much more complex than that and that is the challenge. That is going to be a biggest challenge.
I think the way of building a sustainable depository franchise is to deliver a quality of convenience in service and reliability that customers have not seen. That is easy to say but that is very difficult to deliver and I think our goal is to deliver that and our belief is that as we do that and people experience the IDFC Bank service, over time we will build our depository franchise.
Q: I agree with you but even now every other day somebody is trying to buy ING Vysya Bank simply because that is the fastest way to grow, are you also throwing your hat in the ring?
A: No, we are not.
Q: Any acquisition simply because it is not easy to reach such a large country, would acquisitions be something we will hear even before October 2015?
A: No, you will not. I can say that categorically. I will tell you why I can say that categorically. Our goal, as I said, is to deliver a differentiated value proposition to customers. I want for IDFC Bank to be a distinctive bank. Our biggest advantage today is that we have no legacy. We have no technology framework or platform nor do we have branches, nor do we have large employee base. If we don’t take advantage of this starting position to try to do something different that the customer will connect with differently, we will lose our one and only chance. If we just buy something else then we become just another bank. I certainly don’t want to start with that mindset.
Q: I take your point that this could be turned into an advantage nevertheless in a country like ours where brick and mortar is needed for a bank especially in unbanked areas. So branches at some point in time it maybe attractive for you to buy an existing franchise?
A: I am not thinking about it today because I believe that -- there are different parts of the marathon that can be run differently but the first leg of the marathon will not be run on the back of an acquisition.
Q: As you become a bank in October 2015, what percentage will be exposed to infrastructure because we have seen that you are increasingly giving working capital loans, so you would have a reasonably diversified portfolio by October?
A: No, our portfolio will be very concentrating infrastructure to start with because that has been a history and legacy. I think even five years from now, our exposure to infrastructure would be proportionately much larger than almost any other bank and I don’t think that infrastructure will remain in doldrums forever. Infrastructure looks like it is going to come out of it and we will then take advantage of our experience and our pedigree to do a disproportionate amount of infrastructure business relative to our competition in a commercially profitable manner.
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