You gambled the merger NBFC With a bank that was heavy in infrastructure but without a deposit base. What has been the good, the bad and the ugly?
I don’t see much of the bad part of it, because having a banking license is a big deal. Even in the toughest of times, access to public deposits is a huge factor. The start-up phase of any bank is very difficult as they do not have operating profit. Your expenditure is almost equal to your income, you will have to build branches and ATMs. Both the institutions were heavily assets and had no liabilities, making it the most difficult thing to deal with, especially in conditions of low profitability. I don’t see a gift horse in my mouth. The merger (of Capital First and IDFC Bank) brought with it a banking license which is super precious.
Bad loans started piling up – DHFL Reliance Capital, Toll Road and Cafe Coffee Day. Did you regret the deal?
It is just that the cycle went from bad to worse after the merger. The IL&FS crisis happened in November 2018, so you are talking about many of these names, which became problems from that crisis. All these issues are in the past, and they are all accounted for. We should not go back to the past. A lot of good things also came with the merger like bank licence, readymade bank, good brand, branches, good people etc. So if you ask me, were you disappointed? I still say no, it is the price of doing something.
How have you gone about fixing problems that you may have inherited or that have arisen due to unfolding events?
What we did right in the end was that we didn’t grow the loan book for three years and used all the deposits raised to pay off Certificates of Deposits worth ₹28,000 crore and corporate deposits of ₹30,000 crore. That decision helped us establish a strong foundation, build CASA and navigate the COVID crisis without any liquidity issues. Now, the bank has a really strong public image; This is very important when making a deposit. The products we are rolling out to the market are truly customer-first. We are the first bank to introduce monthly credit on savings accounts, and we have cut a lot of fees in the market. We removed a lot of fees, about 20-25 services. We can’t advertise these little points, it won’t last, but customers who use us will realize the value this bank is offering.
Investors look for fee income. How do you assure them?
Our fee income is coming from value added services for which customers are specifically paying. Our fee business is growing at 50% per annum. So it’s not that we don’t charge fees; We are very particular where we charge fees. We are telling employees – it is like saying that money is going from customer’s pocket to our pocket in the form of bonus, incentive, ESOP or share price. So, all the money coming into the bank should be clean income, otherwise what we get in our pocket is not clean money.
One factor that worries analysts is why the bank’s cost-to-earnings ratio is so high.
This is the bank stage. We must not forget that 92% of this bank’s cost of income was pre-merger, and we have brought it down to the mid 70s. From then on we would bring it up to the mid-40s. And one of the reasons it’s still in that area is because it’s a new bank. We had to set up branches and ATMs, and hire people, we made 50% of the CASA – obviously, the infrastructure was built for that. The second reason is that the bank is honing infrastructure high cost bonds at 8.8%, we have another Rs 22,000 crore. So basically these are high cost legacies sitting on us.
You have to repay these bonds for a few more years. How does this play on your profitability?
Yes, significantly. Today we have ₹22,000 crores at 8.8%, so you have to repay them and replace it with 5.5%. So that is ₹700 crores directly on the bottom line by just paying back. Also, we have recently started new business like credit cards, which are earning negative at the moment, but when we touch 2 million cards, it will become very profitable. So, I believe the profit we generated in the quarter is just the beginning. It won’t stop here. Because after paying off the old bonds, the profit of the bank will increase directly every quarter.
Where does the bank go from here in the next few years?
We are a Universal Bank with major focus on Retail. We are building vast intellectual property in retail because we have age-old expertise in this area, to diversify our exposure to millions of customers and help us with credit bureaus. But, although we do not expect corporate banking to grow as rapidly as retail, it does come with trading and forex earnings. We will also focus on Wealth Management, Cash Management, Credit Card and other segments.
Everyone is going after retail. Isn’t this becoming a crowded business?
The thing about retail is the size of the opportunity. Today we have a $600 billion market for personal consumption, which will grow to $1.5 trillion in 2030. Tools for evaluating credit were previously only available to large- and medium-corporate, so those at the bottom of the pyramid remain credit-hungry. Now, we have four credit bureaus with AI technology, and unprecedented cash flow assessment tools — so the ability to serve this segment has opened up.
There is a lot of optimism about banking in general. What about IDFC First in terms of profits, bad loans and growth?
Our operating profit in FY 2012 is 45% higher than in FY 2011. We have guided for 45-50% growth in FY23, which is what we are on track for. We may again increase profits by the same amount in FY24 as it is all based on core income. We have already reached 1% return on assets within three and a half years. Our gross non-performing assets are only 2% and net NPA is only 0.7%. Our SMA 1+2 is only 1%. Once the ₹750 crore toll road account is resolved, the net NPAs at the overall bank level will come down from 1% to 0.7%.