Entering banking will help us service clients better: Vikram Limaye

Interview with MD and CEO, IDFC

 

IDFC Ltd, which revamped itself by forming a whole new management team eight years ago, is changing course with the infrastructure sector now facing several headwinds. Vikram Limaye, who was appointed the managing director and chief executive officer of IDFC a few weeks ago, tells Manojit Saha why the company wants to foray into banking. Edited excerpts:

What will be your immediate priority in IDFC?
Immediate priorities from a lending perspective are to focus on risk management so that asset quality is preserved, and to figure out relatively low risk and diversified opportunities for growth. The pipeline of new projects is weak. Last year, 50 per cent of our growth came from refinancing operating assets. We also want to grow our non-interest income revenue streams in asset management across infrastructure funds, private equity and mutual funds.

Your non-performing asset (NPA) ratios are pretty low. Since you are saying that maintaining asset quality is a priority, you see stress, going ahead?
We have said over the last few quarters that while our NPAs are currently low, they will most likely increase over the next 12 months. We have guided that NPAs can increase to one per cent of assets in the next 12 to 18 months. We will do everything to ensure that asset quality is under control, but given the environment we’re in, we cannot be immune to the risks. I would also like to mention that we have been prudent and conservative in our provisioning policies. We have more than Rs 1,000 crore of general provisions that we have built over time and we will continue to build provisions.

In 2008-09, IDFC was contemplating to foray into the banking space, but the proposal was shelved. Now, with the Reserve Bank of India planning to dish out fresh licences, there is a renewed interest by IDFC to enter the sector. What has triggered the change in stance?
We are keen on applying for a banking licence to service our infrastructure clients better through a broader suite of products and also to diversify our asset base and liability profile. We also believe there is an opportunity for a new entrant to address the issues surrounding financial inclusion more creatively.

So, you have the board’s approval for applying for a banking licence?
The board has given in-principle approval for us to pursue a banking licence and develop a business plan. The final business plan will be approved by the board before the application is submitted.

Deepak Parekh recently stepped down from the IDFC board and as non-executive chairman. Was that decision also due to IDFC’s banking aspiration, as he is also on the board of another private bank?
Parekh has been our founder chairman for 15 years and we have benefited immensely from his involvement in building this institution. He will continue to be associated with IDFC as chairman of the advisory council and we will continue to seek his guidance and counsel on various matters of importance to IDFC.

What is the reason for him to step down?
He has a lot on his plate and thought this was an appropriate time for him to step down from a formal governance/ fiduciary role, while continuing to be associated with the firm through the advisory council on matters of importance to the organisation.

The infrastructure sector is facing several headwinds. Which are the sectors that need immediate attention?
The power sector issues need to be resolved on an urgent basis to restore confidence. Power is an extremely important sector for the overall economy. We cannot hope to get back to seven per cent plus (annual) growth without power. The issues that we are facing in power are quite well known. One positive development is that the restructuring of state electricity boards (SEBs) is on track and many SEBs, which were incurring large losses, have agreed to the restructuring  package. On the generation side, we have issues surrounding availability of coal and gas and increased the price of fuel being passed through to SEBs. We have to be pragmatic about resolving some of these issues. There is a lot of money invested in power projects and the exposure of the financial system is large.

Apart from the power sector, which is the other sector where reviving it is going to be challenging?
Telecom. Issues regarding spectrum pricing, licence renewal remain to be sorted out. About 24 per cent of our loan exposure is to telecom, but largely to the highest quality telecom operators and tower companies.

And why you are relatively optimistic about the road sector?
The problems in the road sector are more manageable and there is no major regulatory road block. Also, there has been some progress in speeding up the process for environment clearances for linear infrastructure since many of the road projects are about widening the existing stretch and not entirely new alignments. We are optimistic that there will be renewed activity in bidding on roads though the kilometres that are likely to get bid out may not be large.