How IDFC is transitioning to a bank and what to expect?

Personally, I think IDFC was made into a bank a wee bit too early. Given how China and even India is pushing new development financial institutions to fund infra, we might have to soon look at domestic front too. We actually might need a few more IDFCs in future.  Anyways, nothing can be done now. In finance, we have to go in circles and keep pulling out old wine in new bottle.

In this interview, IDFC chief Rajiv Lall explains how the transition is happening. Interestingly, the bank starts big from MP of all places:

When will you start operations and with how many branches?

We are planning to start operations in the first half of October, with 20 branches. Of those, 15 will come up in three districts of Madhya Pradesh — Hoshangabad, Khandwa, and Harda. These are tier-VI centres (with a population of less than 10,000). The remaining will be in Delhi and Mumbai. But before that, we will launch pilots in the three districts, in June. Several branches will be opened as pilots.

Why Madhya Pradesh?

We did a lot of research. It’s a combination of things — competition, infrastructure and agriculture. After applying all these filters, these three districts turned out to be pretty attractive.

We will have a binary strategy —one set of branches will be in metropolitan cities and the other in bottom-of-the-pyramid districts. We have hired a very senior person, Ravi Shankar, to drive our banking activities in Bharat. The strategy is to focus on developing a network of service delivery points, a mobile sales force and a customer relations force, and to develop this franchise district by district.

You acquired a banking licence in April last year. How has the journey been so far?

Hectic! The transformation and transition of IDFC was very complex, for regulatory reasons. It is listed with a large balance sheet and has to be made to conform to the new banking regulations. That means rearranging the structure of IDFC, which is a long-drawn court-assisted process because assets and liabilities have to move from IDFC to IDFC Bank. You can’t move assets and liabilities from an entity to another without taking the permission of creditors. That process has to be supervised by a court. We have travelled three quarters of the way but a quarter is still left.

How will the new corporate structure look?

Today, IDFC, an infrastructure finance company and a listed entity, has three finance subsidiaries — IDFC AMC, IDFC Alternatives, and IDFC Securities. Now, we have to create a non-operative financial holding company (NOFHC) under IDFC and these three finance subsidiaries have to be under the NOFHC, a 100 per cent subsidiary of IDFC.

Two more subsidiaries will come and the fifth will be a bank. And, on day one, the bank will be listed. So, IDFC, the parent, and the bank will be listed. The parent will become the holding company and will have two subsidiaries: First, the NOHFC and second, IDFC Foundation.

So, if you are an IDFC shareholder, for every share you own, you will get a share in the bank. IDFC will have 51 per cent stake in the bank and the rest will be held by existing shareholders. FII (foreign institutional investor) holding in the bank will be less than 25 per cent, against the regulatory ceiling of 49 per cent.

Hmm..

He also points the need to trade-off setting up branches aggressively. There is a possibility that majority of people stop going to branches in some 10-15 years. Older banks will have legacy issues but IDFC can look at the slate very differently.

Further, the differentiating factor:

What will be your strategy on the current account and savings account (Casa) deposits front? Will you offer a high savings deposit interest rate?

That is not out first preference. Our view is pricing is just an element attracting people to a bank. Accessibility and service quality are equally important, if not more. It is easy to simply raise the price, but much harder to deliver a service people admire. We strongly feel we cannot start a bank and be lazy about it.

This will be a major challenge for banks going forward. As people limit visiting branches, the customer interface will not matter as much. The functioning of channels like mobile and internet banking will play a crucial role. As this blog keeps saying, it is technology which has reshaped banking in big way…

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