IDFC Bank – a new dawn on Indian Horizon

On 1st  of October, 2015, IDFC Bank has commenced its operations as a universal bank. Reserve Bank has recently issued licences to two universal banks - Bandhan Bank has already started operations in August this year.

IDFC Bank has been curved out of  Infrastructure Development Finance Company (IDFC Ltd) which is a finance company based in India; and provides finance and advisory services for infrastructure projects as well as asset management and investment banking.  As per RBI norms, IDFC Limited has set up a non-operating finance holding company (NOFHC). Underneath the NOFHC is  the de-merged IDFC Bank and other four subsidiaries that IDFC currently has including the mutual fund, IDFC Alternatives, IDFC Securities, and IDFC Infrastructure Debt Fund.

Dr Rajiv Lall, Executive Vice-Chairman and Managing Director of IDFC Bank, explained -  Starting with a predominant share of corporate banking business, IDFC Bank expects to garner Rs 15,000 crore business from rural banking and aims at 10-15 per cent net profit growth. It targets to grow the client base from current 400 corporate customers to 15 million in next five years.   The bank will start with about 23 branches out of which 15 will be 'Bharat Bank', rural branches. By the year end, total branch network will go up to 60, with 40 in rural areas. The bank will be using the latest technology for customer acquisition rather than open branches across India. Rajiv Lall, understanding well the New Banking Paradigm wherein branch network is not a very important medium of connect with the customers, said, "The way the world is moving, branches are becoming less relevant for a connect with customers. The goal is really to use technology intelligently in a way that builds a trusted relationship with customers at scale and at lower cost"

Challenges and Opportunities

1.    As compared to the current operations of IDFC, where it focuses on financial long-term projects, IDFC Bank will be universal bank and operate in wholesale, retail and rural banking. This will help diversify its risk and yield better returns.

2.    In the beginning, the bank will have to function on borrowed funds since it will take time to build the deposit base, but slowly the bank will be able to reduce its cost of funds and improve its spreads.

3.    Since the loan book of IDFC will be transferred to IDFC Bank, the latter will have the initial  balance sheet size of Rs 75,000 crore with the loan book (mostly infrastructure advances) of Rs 55,000 crore containing gross non-performing assets (GNPA) of 1.52 per cent as of June 2015. IDFC also restructured 8.4 per cent of its loan portfolio (80 per cent accounted for by energy and power sector).

4.    As the huge loan book contains infrastructure financing, it will be grand task for the bank to meet  the target of priority sector lending. The bank will have to aggressively finance under priority sector, and may have to pay penalty in the initial years for not meeting the requirements.

5.    With the present structure of IDFC Ltd, its core fee income has been among the lowest in the private banking sector. The core fee market share of IDFC stands at 0.1 per cent, while for peers such as ICICI Bank, HDFC Bank and Axis Bank, it is 8-10 per cent of the total income. With the commencement of full fledged banking operations, IDFC Bank's revenues from the core fee segment are likely to get a boost.

6.    Post listing, IDFC Bank will be among the few private banks with the lowest levels of foreign equity holding (23 per cent, against the sector limit of 49 per cent), which gives room to foreign institutional investors to expand their holding.

7.    Till date, the Bank's core strength is term (infra) lending, but now it will enter into financing working capital, guarantees and letters of credit etc.

As ICICI Bank, which was curved out of Industrial Credit and Investment Corporation of India (ICICI),  has given a new dimension to banking, let’s hope IDFC Bank will be a new dawn on Indian banking horizon.

(For better understanding of how  Universal Banks, Payment Banks & Small Finance Banks are different from each other, please read my article on "Small Finance Banks- an Overview")

(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)

Tilak Gulati,  Assistant General Manager, UCO Bank. 

Author:  www.itstrgulati.blogspot.in