 "Rajiv Lall")
Infrastructure Development Finance Company Bank, the newest lender in the country, has decided to go the "un-bank" way in an effort to do hatke (differentiated) banking. It is set to kick-start operations on Thursday. The management is in place, the brand identity has been unveiled and 23 branches are already operational. The bank is confident of being profitable from day one.
Executive Vice-chairman and Managing Director Rajiv Lall's confidence stems from the accumulated profit of Rs 1,800 crore on the books of IDFC which has been moved to the books of IDFC Bank. "We'll still have Rs 1,000 crore even after expenses are incurred. Every year, we will increase that profit 10-15 per cent," Lall told Business Standard last week.
A special dispensation from the Reserve Bank of India has also helped the bank to stay profitable from the start. RBI has allowed the lender to utilise Rs 2,500 crore non-distributable statutory reserves for creation of specific provisions against stressed assets. Banks are not allowed to make bad loan provisions from reserves without the banking regulator's permission. If the dispensation was not granted to IDFC, the provision would have been charged to the profit & loss account, which would have impacted its profits.
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Lall had added that IDFC Bank's balance sheet will grow from Rs 70,000-80,000 crore to Rs 150,000-200,000 crore within five years. Much of this growth will come from wholesale banking. According to Lall, about two-thirds of the balance sheet will be corporate and wholesale banking. That is understandable: having been in the infrastructure business, IDFC has a large exposure to the corporate sector and has a customer base of 400 companies. The bank wants to leverage this book by cross-selling working capital, letters of credit and guarantee.
"Despite the scope for diversification into various asset mixes, IDFC Bank would continue to be a wholesale lending institution in the medium term. We also note that the current slowdown in banking credit amid adequate systemic liquidity provides IDFC Bank with the opportunity to pick up non-infrastructure assets while keeping its borrowing costs under check," rating agency ICRA said in a report.
No easy task
Analysts say it won't be a cakewalk for IDFC Bank. Its real challenge will be to make a mark in retail banking. In fact, the lender is commencing operations on Thursday without starting off the retail and SME vertical which it plans to launch only in January.
Another challenge will be the high concentration of stressed asset (non-performing and restructured assets): 15 per cent. Even though the new bank has already provided for Rs 4,500 crore, which is more than the regulatory requirement, starting with high NPA may not augur well for it.
The key operational parameter in banking is the net interest margin: the difference between the average cost of deposits and the interest earned on loans. To keep the ratio healthy, it is essential for a bank to get hold of as many low-cost savings and current account deposits as possible. With an existing corporate book, IDFC Bank will not find it tough to garner current account deposits.
But attracting savings accounts may not be easy, warn analysts. "Building up a deposit franchise will be one of the major challenges that IDFC Bank will face as it evolves as a bank. Intense competition for savings account deposit and limited branch presence will limit its ability to quickly ramp up the savings account franchise," said a report by Prabhudas Lilladher.
Considering that IDFC Bank has no plans to match the interest rate on savings accounts offered by its peers - YES Bank, Kotak Mahindra Bank and IndusInd Bank - when they had begun operations, attracting retail deposits may become even tougher.
Many feel that it won't be easy for the new bank to manage its retail operations, especially meeting the priority sector lending targets. According to the Reserve Bank of India guidelines, banks are required to extend 40 per cent of their loans for the priority sector.
However, unlike Bandhan, the microfinance institution that was also granted the universal bank licence last year, IDFC Bank is not expected to meet this requirement for at least the next three or four years. (However, unlike IDFC Bank, Bandhan will find it a challenge to grow its corporate loan book.) "As the size of our balance sheet is huge, it will be difficult for us to meet the requirements on our own initially. So, we will have to pay a penalty and meet the requirements," Lall said in the interview.
Like any other new lender, keeping costs under check will be the other big task for the management as high costs could prove to be a drag on profitability. "IDFC Bank will have to front-load a lot of technology and marketing costs," Nomura pointed out in a report.
"The world is moving to smartphones; so, the focus on technology design will be a phone. The idea is you should be able to do everything on a smartphone; you don't have to go to a bank branch. You should be able to get your queries answered 24x7; you should be able to withdraw cash in places that are more ubiquitous than automated teller machines," Lall said. "The idea will be to use technology to customise banking needs."
In its attempt to do differentiated banking, IDFC Bank has decided to approach not only the operations but even functions like hiring with a fresh approach. As a result, the lender has also hired people with no or very limited banking experience. IDFC Bank, unlike several of its predecessors in the private sector, has begun operations with a majority of branches in the hinterland of Madhya Pradesh and not the urban centres.
In the interview, Lall explained that at every induction, the brief given to the employees who have been hired from other organisations is to learn to "un-bank". "We have been hiring people from other banks and they came with their own baggage of how things work. To co-create the training programme and cultural acclimatisation with us takes times. And so the word that we are using, "un-banked", comes into play and is very powerful," said Lall.
