A landmark year
The fiscal year 2019 turned out to be an eventful year for the Indian economy and alsofor the banking sector. Economic growth faced some headwinds in the form of enhancedglobal protectionism volatility in the global financial markets as also some domesticissues such as weak consumption and decelerating private investment demand.
Domestic sentiment was also hit due to problems faced by the NBFC segment anduncertainties related to the elections. Consequently GDP growth that was reported in thefirst quarter at 8% fell off to 5.8% in the fourth quarter. However full year growth wasat 6.8% and by that metric India continued to be the world's fastest growing economy.
As a result of the slowing growth momentum inflation dipped through the year andopened up space for the RBI to reduce interest rates.
Despite a challenging year the economy although weakening has remained resilient withthe outlook looking positive into FY20. Importantly uncertainties pertaining to electionsare behind us and the majority mandate for the incumbent government provides hope for afaster pace of economic reforms in the coming years.
Provided the monsoons are about normal one might expect some renewed buoyancy toconsumption demand. That said we must recognise that challenges do remain in the form ofheadwinds from slowing global economic growth and also problems that the NBFC sector inIndia has been going through.
It is encouraging to note that government and regulatory efforts to address thetwin balance sheet problem of the financial sector as well the corporatesector continue. Within banking the three-way amalgamation of public sector banks is astep in the right direction towards strengthening the sector.
During the year RBI has also sought to ease out the problems for the NBFC sectorwhereby it announced relaxation of liquidity norms for NBFCs and also permitted banks tolend to non-banking finance companies (NBFCs) facing asset-liability mismatches.
The other big development for the banking sector in FY19 was related to RBI's February12 circular which was a turning point for asset quality recognition. Under this circularbanks had to classify an asset as being in default if repayments were missed even by aday. This has now been replaced by a revised prudential framework for stressed assetresolution that allows banks 30 days to monitor the account and frame a plan instead ofmandatorily having to use the bankruptcy courts. The move provides some flexibility tobanks in the resolution process for stressed assets while continuing to hold them tohigher standards of financial discipline and corporate governance. Nevertheless theprogress under the Insolvency and Bankruptcy Code (IBC) continues to hold the key totimely resolution of stressed assets and a credit repayment culture.
A significant year for IDFC FIRST Bank
IDFC Bank launched operations on October 1 2015 with 23 branches and astate-of-the-art digital platform.
It was formally inaugurated by Prime Minister Shri Narendra Modi at 7 Race Course inNew Delhi. Within 35 days of starting operations IDFC Bank listed on the Bombay StockExchange and National Stock Exchange.
As part of our evolution we wanted to be able to provide financial services to alarger segment of the population diversify away from infrastructure and provide bankingservices in underbanked locations in the country.
With that in mind IDFC Bank was founded by demerging the lending business of IDFC Ltdwith a view to transforming its business from infrastructure financing to a diversifieduniversal bank.
As part of the demerger the Bank inherited the large infrastructure book of its parentIDFC Ltd. In order to diversify the balance sheet we took a call to build a retailbanking franchise.
By FY19 the Bank had successfully expanded its reach to serve new customer segmentsboth on the retail as well as the wholesale side of the business and was well on courseto build a sustainable banking franchise.
The Bank rolled out its retail businesses both on the liabilities front as well as onthe retail assets side and the business was growing well. The Bank built an integratedtechnology architecture for delivering digital-enabled banking services to our customers.In three years until September 2018 the Bank had raised द 2555 crore of retail CASAfrom over 400000 customers and had acquired over 1.8 million MFI customers includingcustomers of Grama Vidiyal. Quite a remarkable achievement in such short timespan.
Even so it was recognised that since the bank was converted to a bank from a largeinfrastructure finance institution the Net interest margins of the bank were low at 1.7%and resulted in low profitability thus impeding our ability to invest in business likeretail. To build deep last-mile connectivity and work out technological solutions wouldtake heavy capital expenditure in the initial years an investment that would pay backonly over time. Further building real scale in a retail business with deep last-mileconnectivity and a sustained competitive edge in a highly competitive environment would bean expensive and time-consuming proposition. Further the pace of building a retailbusiness has to be calibrated and tested to ensure resilience through business economicand credit cycles.
In view of this it was deemed strategically vital for your Bank to expedite thebuilding of retail assets and retail liabilities at scale through the inorganic route. Wetherefore actively looked out for a partner who had already achieved these capabilities aswell as developed last-mile connectivity scale and profitability and would be a perfectcomplement to the franchise we had launched.
In this context we first successfully acquired and integrated Grama Vidyal in July2016 one of southern India's largest micro finance companies.
Next we proposed a merger with the Sriram Group in July 2017 including their transportfinance and consumer finance businesses. But this merger was not pursued because of noagreement between the two parties on a swap ratio for combining the businesses. We thenworked out a proposition for a merger with Capital First as it met all our strategicrequirements and in fact turned out be a better cultural fit for the Bank. Capital Firstas a company had built tremendous intellectual property over eight years and had a largeretail franchise with a strong return on equity and continuously growing profitability(net profit for FY17-18 was द 328 crore). In fact the added bonus of pursuing a mergerwith Capital First was that we were also getting a strong leader with a terrific trackrecord to take the institution forward.
Our merger with Capital First was transformative because it brought together theexceptional and complimentary strengths IDFC Bank and Capital First. IDFC Bank's assetsand success included among others a banking platform a superior technology platformwholesale banking skills and our newly launched retail business with a fast growingdifferentiated and highly profitable rural lending franchise. In addition the Bank hadTier 1 capital of over द 15000 crore and a great reputation and respect in themarketplace for corporate governance risk management contribution to nation buildingthrough infrastructure a loan book of over द 70000 crore a micro-financing businessacguired from Grama Vidyal rural presence and the team of committed employees. CapitalFirst brought with it a strong and differentiated retail asset franchise with over 7million live-to-date customers of which 4 million are live customers.
Its loan book and most importantly seasoned over years largely to small entrepreneursand consumers of द 30000 crore was growing upwards of 25% per year with an ROE inexcess of 15% and with profits growing at a 5-year CAGR of 55% (FY18 PAT grew by 37%).
More importantly the technologies developed by Capital First could serve customershitherto underserved by the existing financial services system through unique creditmodels built by them. Such excellent intellectual property built over eight years at scaleis hard to build and takes time and got automatically transferred to the combined entitythrough the merger.
Such strong complementarity is hard to find between merging institutions.
It is thus value accretive for all shareholders in the long run.
It has been an absolute pleasure to serve as Founder MD & CEO of erstwhile IDFCBank for three years since its inception. Mr. Vaidyanathan Founder & Chairman oferstwhile Capital First who is now MD & CEO of IDFC FIRST Bank comes with anextraordinary track record of success in financial services. Mr. Vaidyanathan had earlierbuilt ICICI Bank's retail banking business to great scale of द 130000 crore built alarge liability franchise with 1419 branches 4713 ATMs large Retail CASA and RetailTerm Deposits for the bank internet and mobile banking and subsequently in anentrepreneurial role founded Capital First and took it to scale with a loan book of overद 30000 crore in underserved segments. I have no hesitation in endorsing him as theleader of IDFC FIRST Bank.
I have no doubt that the combined entity will be a strong institution and I am happythat I was able to lead the organisation to such scale with multiple businesses built overthe last 15 years navigate a complex transition from an infrastructure-only non-bankfinancier to a Bank that is now positioned successfully for future growth.
As my role transitions to Non-Executive Chairman of IDFC FIRST Bank I would like totake a moment to thank you our shareholders for your continued support over the years.
Over the past three years I have had the privilege of working with many talentedcommitted and enthusiastic people who laid the foundations of this Bank. My sinceregratitude to all of them.
Dr. Rajiv B. Lall
IDFC FIRST Bank Limited