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For IDFC, infrastructure had been a booming segment. Now with new projects almost coming to a standstill, though, managing director and CEO, Vikram Limaye tells Clifford Alvares that in the future the company would have to look beyond infrastructure.
The government has made some positive announcements in the power sector, but infrastructure investment has slipped a lot the past two years. How long do you think it will take to revive?
There have been some positive developments in the power sector and with state electricity boards, but there’s more to be done and it will take a while before we see the benefits. In telecoms, issues concerning spectrum have yet to be resolved. In roads, talks are on between the NHAI, developers and the Ministry to figure out if some projects are stuck because of high premium payments made and whether the premiums can be adjusted. On an NPV basis, developers get some cash-flow reprieve in terms of back-ending premiums. But that has yet to be resolved.
Beyond that the issues surrounding land acquisitions and obtaining environmental clearances on time continues as bottlenecks. Unless some of those issues are resolved, fresh project activity will take some time to pick up. Even if those issues are resolved, it will take at least twelve months for investments to resume.
How much progress has there been in the Delhi-Gurgaon Expressway toll issue. How soon will we see a solution?
We are talking to all the parties and trying to resolve the issue. We hope for a solution soon. All the parties, that is, the lenders, the concessionaire and the NHAI have made much progress but the final outcome has yet to be decided. We are looking at the interest of all the lenders and at all the solutions possible.
IDFC's loan growth has slowed considerably in the last quarter. How do you see the year panning out?
A slowdown in infrastructure in general has had an impact on IDFC's growth. Last year, we were able to grow at about 16 percent largely supported by refinancing operating assets due to our advantage of cost of funds. That opportunity doesn't exist now. For two to three months, as you know, bond markets were unstable. Our loan growth now would be, at best, flat if not marginally negative. In the last few years, no project pipeline has been seen, and it will definitely have an impact on the next two to three years till new projects take shape.
What's the exposure to the under-construction segment? How will it impact your net NPAs?
In an economic environment that has slowed down dramatically and where interest rates are still high, stress will be seen. Our NPAs cannot continue at 0.2 percent when everything around us has altered so dramatically. People should expect NPAs to be in the range of 1 to 1.5 percent, and we maintain that stance.
How do you see your spreads now, as interest rates have increased and infrastructure-lending slowing down?
We are doing low-risk, high-quality lending and, on a risk-adjusted basis, spreads will narrow. In the past, our spreads were greater because we were implementing greenfield development projects. With low-risk high-quality projects, the same spreads are not available. We have stopped borrowing on our ECBs because, on a fully-hedged basis, ECBs are more expensive than domestic borrowings.
Given the slowdown, how fare your other businesses such as asset management and private equity?
The asset-management business has done well and we have raised our assets under management. In private equity, we have announced the first closure of an infrastructure fund in a very difficult environment. We hope that the final close will happen at around $1 billion. The first close was around $650 million dollars. The investment banking and broking business has slowed down as deals aren't taking place.
How will a banking license benefit your business as banking is now very competitive?
Strategically, it's important for us to diversify beyond infrastructure. We can lend only to the infrastructure segment and that, we see, can be quite volatile. Banking gives you the broadest sectors to lend to. It also provides a much broader product suite for your clientele. Today, we are unable to offer banking products to infrastructure clients. Banking would not only help us service our clients better, but also diversify our asset book beyond infrastructure. And the RBI is looking favourably towards non-banks like us getting into banking. Besides, we will be able to raise funds at a lower cost and potentially lower our risk across a pool of resources.
Building a bank is not easy. The cost of conversion is not small, either. There will obviously be a drag on the return on equity due to CRR and SLR requirements. You have to be willing to live with the long-term costs. But we have a Rs.70,000 crore balance sheet, and so the starting position is strong.
How will the banking license affect your existing structure?
Only the lending and treasury businesses will go to the bank. The private equity and other businesses are already under different subsidiaries. Under the NOFHC rule, the bank will also be a subsidiary.
