Despite a higher provisioning, IDFC reported a 48% surge in the consolidated net profits of the March quarter. In an interaction with mediapersons, Vikram Limaye, managing director and CEO at IDFC, and Sunil Kakar, group chief financial officer, say the provisions will continue to rise till in the transition into a bank as that would ensure it is adequately cushioned against known risks. Excerpts:
What is your outlook on net interest margins (NIMs) going forward?
NIMs have come down a bit. We are running at 3.4% compared with near 4% last fiscal. This is largely due to the fact that we are carrying a large amount of government security and treasury assets that do not generate much of NIMs. The NIMs would be in the range of 3.2% to 3.3% as we go forward.
How much have you borrowed and what is the cost of funds?
Our borrowings have been higher by 15-16% at an average cost of around 9% for the full year. Going forward, the growth in loan book will depend on demand and the growth in asset book. Cost of funds has been flat on an average, while on a marginal basis, it has come down by 25 basis points.
Have you passed on the rate cut benefits?
One of the reasons why our spreads have come down in last couple of years is that we have focussed on low-risk operating assets. That is partly because greenfield asset creation has been exceedingly low and partly because the risks surrounding infrastructure for the last couple of years have been higher. Unless we see those operating risks coming down, the entrepreneur in infrastructure is actually pulled back in terms of investing in these assets. So from that perspective, operating assets yield a lot less than under-construction assets. Therefore, our spreads have come down. We expect that to continue and, going forward, we will focus on low-risk assets rather than greenfield assets.
How is your provision likely to pan out?
Till the transition into the bank is complete, we will keep increasing our provisions for a simple reason that we want to be adequately cushioned for all known risks. The largest area of concern is the power sector, where our exposure is 40% of our loan book. We have said in the past that both coal and gas were two areas of concern. We do not want to get into a situation where in the first full year of the bank being operational, we end up making large provisions for risks that we were already aware of before we transition into a bank.
Do you have any external borrowing and is that hedged?
We do have external borrowings and they are fully hedged.
When you commence operations as a bank, what would your loan book look like?
The mix of the loan will change although the absolute quantum may or may not be significantly different. As a bank, we will be able to do a lot more products than we are able to do now. Right now, we are doing only term loans. As a bank, we would be able to do working capital loans, guarantees, forex and trade finance in areas beyond infrastructure financing as well.
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