IDFC reported a 47% fall in net profit for Q1FY16. The infrastructure financing company, which will commence banking operations in October, plans to make incremental provisions of Rs 2,500 crore in Q2FY16. In an interaction with reporters, Vikram Limaye, MD & CEO, and Sunil Kakar, Group CFO, IDFC, say these provisions are being made to avoid any overhang on the bank’s balance sheet. Excerpts:
The NII from loans has fallen 18% y-o-y. What has led to this decline?
We are focussed on lending to higher quality credits and, therefore, the spread on infrastructure loans has come down relative to the first quarter of last year.
That has been the trend for some time. Part of that decline has been compensated for by the increase in NII on the treasury book. Our treasury book has ramped up quite significantly in preparation for the bank where we have to do compliance from the CRR and SLR perspective from day 1.
What has led to a rise in gross non-performing loans?
Our gross NPLs have gone up largely on account of one asset. The coal block that was allocated to this asset got cancelled, which has impacted the viability of this asset. That has resulted in the NPLs going up. We have an exposure of about R350 crore to this particular asset.
You have indicated an incremental provisioning in Q2FY16 of R2,500 crore. Could you elaborate?
It is important for us to protect the bank’s balance sheet going forward and not to have an overhang from a provisioning or profitability perspective on assets and issues that we have been aware of for the last two years. In this September quarter, we plan to make incremental provisions of about R2,500 crore. So, against the aggregate stressed assets of nearly R8,000-R8,500 crore—80% plus of which relates to coal and gas based assets—we would have provided an average of 50-60%.
These assets are not NPAs, many of them are restructured. We are creating this buffer because we do not want the bank’s balance sheet to have any overhang of incremental provisioning as the situation evolves surrounding these assets.
How will you go about this incremental provisioning?
We are in the process of trying to do this from special reserves on the balance sheet, which are non-distributable reserves that we have created over the last several years. We are in the process of getting the appropriate approvals to try and use these special reserves as provisions because of the unique situation we are in and the special circumstances under which we are making these provisions.
What would be the impact on capital?
The net impact of what we are doing is approximately R1,600 crore on our net worth. Having done that, the bank will still be capitalised at approximately R13,000-13,500 crore with a Tier-I ratio of 15-16%.
What is the size of the restructured book?
Our net restructured book — NPAs and security receipts — is about 8.4% of our loan book.
