IDFC charts 9-year plan for banking journey

Broken into stages; existing shareholders will directly own shares in the new bank as well as through parent firm; impact on bottom line admitted for 1st three years

After getting an in-principle nod from the Reserve Bank of India to start a bank business, IDFC Ltd announced on Friday a nine-year plan for the new baby.

Its executive chairman, Rajiv Lall, described the plan as a “marathon run” rather than a “sprint”, to emerge as a formidable entity in Indian banking.

The first phase, spread over three years, would focus on RBI compliance and experimentation of the business model. It includes the 18-month period till end-September 2015 for pre-launch work and to meet regulatory norms. A majority of the loans which are, at present, on IDFC’s balance sheet, will move to the new bank’s books. The focus would not be on growing the present business and if it shrinks during this phase, it is okay, said Lall. For, the obligation is to meet priority sector lending (currently 40 per cent of total loans), among others.

Operations will begin in urban and rural India at the same time. Lall hinted at big action in financial inclusion, with the help of technology. “We believe some important changes have occurred in the last 10 years that make banking in rural India a more commercially interesting proposition than it was in the past,” he said.

This was, Lall said, apart from the fact that rural areas had become more dynamic. There have also been regulatory changes which have made it easier for banks to partner with business correspondents and use white-label automated teller machines (ATMs), owned by non-bank entities.

Building on its learning in the first three years, during the second phase (fourth to sixth year), the bank expects to consolidate activity and expand. Then, confident of taking on and giving competition, the bank would return to growth in the third phase (after the sixth year), said Lall.

Structure, capital

Under the proposed structure, IDFC, the parent and a listed entity, would be at the top of the heap, with a non-operating financial holding company (NOHFC) a step below. This NOHFC will hold four subsidiaries — for banking, investment banking, asset management and alternate assets class businesses.

While working on building blocks for the bank in the first 18 months, it will commence activity of home loans under a separate subsidiary. Later, this housing loan portfolio could be transferred to the bank. IDFC has already applied for a licence for the home finance business.

Ón the capital structure of the bank, the chairman said existing IDFC shareholders would get shares of the bank on a proportionate basis—the details are being worked on. IDFC Bank will be listed from the outset — we have suggested this to RBI, said Lall. Every shareholder of IDFC will own the bank directly as well as indirectly (through IDFC).

It will also be issuing shares in the parent company (IDFC) on a preferential basis to domestic investors, to bring down the stake of foreign institutional investors (FIIs) within the regulatory limit (49 per cent). At end-December 2013, FIIs held a little over 51 per cent in IDFC.

About building a team for the banking entity, Lall said it would hire at least 10-15 senior management people first, apart from the few already hired. We have 600 employees currently and that could grow to 1,500-2,000 over the next two years. However, the bank will be led by a person from within IDFC. Vikram Limaye will remain at IDFC and will not lead the bank," Lall said. “Between the two of us, we will find a way to lead the bank".

IDFC had hired a handful of people at the senior level for the bank. Ajay Mahajan, former YES Bank hand, has joined as head of new initiatives. He was part of the founding team of YES, serving as group president of financial markets, institutions and investment management.

Another recent appointment by IDFC was of Avtar Monga as chief operating officer. Prior to this, he worked with Bank of America as managing director, global delivery centre.

IDFC has got McKinsey, Accenture and The Boston Consulting Group to finalise the business blueprint.

Activity here will be aimed at connecting more people with the IDFC brand. “IDFC in our hands” was launched in August 2012 and its page on Facebook, the social networking website, has 172,000 'likes' and is targeted to engage with youth (16-22 years). The “In our hands” community is dedicated to creating awareness and “to address social, infrastructure and environmental issues.”

IDFC Foundation engages in corporate social responsibility activities across select states. The company has issued tax-free infrastructure bonds for two years in a row (FY12 and FY13) and has a large database of retail investors and some brand recognition. IDFC Mutual Fund also has a large base of retail investors, all of which put together are three to four million.

Impact on profitability

The transition to a bank, though, will not be easy, both operationally and from the profitability aspect. “There will be a compression (decline) in our earnings which will last till the banking platform stabilises and begins to grow. We see a shallow J-curve trajectory for our earnings over the next two to three years,” said Lall, while addressing queries on the impact on profits.

On its way to build an information technology framework for the bank, a lot of investments will have to be made in core banking solutions, data analytics and devices (to connect to customers), among many other things.

For the nine months ended December 2013, IDFC reported an 18 per cent year-on-year growth in net profit to Rs 1,545 crore. Its net profit for FY13 rose by 18 per cent to Rs 1,836 crore.