Retail alone grow between 23% and 25% year-on-year for the next two years. That is our ambition, V Vaidyanathan, MD & CEO, IDFC First Bank, tells ET Now.
Edited excerpts:
IDFC First Bank got listed today. It has a very low ROE. How are you going to deal with it?
It is pretty straight. We agree that right now ROE is close to about 2% but any startup bank in its early stage always starts with a low ROE. It builds over time. Here too it can be built. As we do more retail-isation, the yields on retail loans get better, the credit quality of retail loans are more stable and predictable and therefore the margins from that business improve in the long run.
Capital First already has close to about 15-16% return on equity on its Rs 32,000-crore loan book. When the retail proportion increases, the margins will improve.
Secondly, as the book scales up, we find that the operational leverage for the same cost higher book will play out.
The book is a mix of retail and corporate. Correct me if I am wrong, right now the share of retail is somewhere around Rs 32,000-crore odd and we would be having a broad asset size of nearly around slightly over one lakh crore. How do you see the mix between retail and wholesale and within that any key segments change over the next four to five years?
Our key focus will be on building this. Needless to say, we think wholesale is very important, There are many thing wholesale banking brings to the market place in terms of cash management, foreign exchange, trade in terms of supply chain financing etc. There is a lot in corporate but the focus definitely will be the retail.
Five years or six years from now, we want to be 70% retail and 30% wholesale. We are starting with the other way round, we are starting with 70% wholesale, 30% retail today, we think this flip will happen somewhere in the middle of the year but certainly at the end of five year you will see the flip.
Right now, a lot of the retail book is SME lending book. Would you further diversify from the SME into other segments and if so, what would that be?
Both organisations have launched retail products and therefore I see it as a combined institution. Now on this combined institution. a significant portion is of course SME financing. That will continue to grow in the years to come. Housing finance for affordable housing will be a big growth area in India as well as for us. Thirdly, consumption financing will be a big story. All these things put together will help retail alone grow between 23% and 25% year-on-year for the next two years. That is our ambition and I think we can get there.
On the liability franchise, there are certain challenges. The CASA ratio is still very low for IDFC Bank at around 13% odd. A good amount of work still needs to be done to build the liability franchisee to get the real benefit of lower cost of funds. How would you build your liability franchisee?
That is the question to ask because many people ask us what is your liability strategy and I am sure investors and customers would want to know that. As far as we are concerned, first of all we acknowledge the issue. A CASA percentage of 12% is not our desired goal, we want to grow.
More than that, retail as a percentage of the total borrowing of the bank has to grow. It is close to about 10% or 11% today. We want to take it to close to about 40-50% in the next five years. It will both CASA as well as retail deposits. Now that is definitely a growth area for us. How we set up branches, introduce payment solutions, introduce greater reach and greater focus is our focus number one, priority number one.
There are some concerns coming on the SME and the LAP book where Capital First is present and the phenomenon has just started in the last couple quarters itself with the NBFC crisis. How do you see the challenges on the asset quality front in terms of your credit cost for the merged entity for the next one year?
First of all, you should compliment us that we got the access to banking platform just in time, but hopefully they will all be fine in due course. With regard to what is our strategy like, I said we are very conscious that we want to be able to be put out the branch network in the country. Right now we have close to about 200 branches and of these, about 100 are in urban areas and ow 100 in rural areas. We want to be able to be put out the branch network in the country. Right now we have close to about 200 branches and of these, about 100 are in urban areas and ow 100 in rural areas. We want to roll out at least 500 more branches over the next few years and then you will see a lot more branches, a lot more ATMs and a lot more action.
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