The banking industry is facing its sachet moment

Even as the paradigm shifts for an entire industry, Dr. Rajiv Lall, MD & CEO, IDFC Bank, tells Rouhan Sharma the bank aims to be at the forefront of that change.

How do you plan to compete in the new scenario with payments banks?
Telecommunication companies only have payment licenses so they can only take deposits. They can´t lend. What´s happening in banking the world over – and I don´t think India is going to be an exception – is that banking services are being unbundled. This is an old quote from Bill Gates who said that banking is essential but banks are not. There are different service providers providing different services that speak to different aspects of banking. That´s a challenge that the Indian banking system will now have to deal with. All banks will have to respond to this pretty quickly. Our advantage is that since we don´t have any legacy, we have the ability to navigate this very fast-changing environment with significantly greater ease than a giant bank with 80,000-90,000 people and 2,000-3,000 branches. I think it is only a matter of time before banking becomes mobile first. Branches are going to become history. We don´t know exactly how much time it will take us to get there but it´s happening and I don´t think anybody should have any doubt.

That said, there is the local economy, the domestic remittances market of which you will need to have in-depth knowledge to be competitive.
All that information is accessible and available. There are well defined corridors for remittances so we intend to be in those flows through our model that we have developed (in partnership) to deliver payments convenience to our customers. One other aspect of banking in this new, very dynamic, very rapidly changing environment is that banks will have to learn to partner with others. I think the days of holding a customer from cradle to grave are gone. A new-age bank has to be a bank that is able to connect with a whole bunch of partners that are providing different aspects of the unbundled banking service experience with a connect to the clearing and settling platform and balance sheet that is the bank. The customer is the banks´ in the sense that the transaction eventually hits our general ledger, but it is happening through a variety of intermediaries who are sharing the economics of delivering that service to the customer to different degrees.

If I want to create a proprietary branch infrastructure that is 3,000 branches strong and if I had started building the bank 10 years ago, I would have done just that. Today, I cannot contemplate that. It will be too high a cost. I have to keep our infrastructure as lean as possible and as flexible as possible to facilitate these partnerships so we can reach the largest number of customers at scale and the lowest possible cost. Nandan Nilekani has called this the Whatsapp moment for banks. I have a slightly different way of expressing the same sentiment and would call it the sachet moment for the banking industry. This is the holy grail for the new-age bank. i.e. you must be able to reach a whole generation and segment of customers at much bigger scale, at much lower cost, in a way that no previous bank has been able to do.

Unless a new-age bank is able to do that, it´s no fun and you are just becoming another bank. I can´t claim to have solved the problem but I know that this problem will be solved in the next five-six years.

Technology is going to be the key…
Technology is going to be key along with changing customer behaviour, and also regulation. Those three things have to come together and we aim to be at the forefront of that change.

How do you see a huge un-banked area like North-East India, for instance?
We have made an investment in a company called ASA which is a micro-finance company focussed on the North-East. That is just one type of partnership. We have a minority stake in the company. We haven´t made the investment for financial reasons. We have made the investment to craft a strategic alliance with a last-mile facilitator. They will underwrite to our standards and invest in last-mile infrastructure that could be used to generate and acquire customers that they and us will share. We will provide technology for them and they will provide the last-mile connect to customers. The concept of banking correspondent is well understood. Our goal is to take the banking correspondent relationship to the next level, use that regulatory construct and create partnerships that really generate value for the two partners involved.

At the same time, these kinds of tie-ups will also help your priority sector lending. Yes, that goes without saying.

You have said it is going to be difficult to achieve your PSL targets.
Only because our balance sheet is large. On our ability to start underwriting loans, we are already seeing it on the ground. We are already generating the PSL business but it takes time to build it to scale. We are in all respects a start-up bank except for the fact that we have a large balance sheet! The large balance sheet imposes some regulatory burdens on us like a PSL requirement. We just have to live with that and we have to try and accelerate the pace at which we build out this franchise.

Can you give us any update on the RBS transaction?
There is no transaction with RBS.

What has been reported are rumours?
I cannot comment on rumours but I can tell you that we are not in any negotiation with RBS.

Let´s talk about your corporate loan portfolio and how you plan to grow that. Take us through the strategy here.
First and foremost, we are mining our existing customer base to diversify our products suite and sources of revenue. We aim to actually take away market share from our competitors in the corporate business. I think where public sector banks are today, they are likely to be capital constrained for some time and therefore that creates an important opportunity for us actually to take away market share that otherwise might have been harder to fight for. Our corporate business is about diversifying our products suite and expanding market share. Initial indications are quite robust. The new products we have introduced in the market have had a good reception. Our existing customers are very happy to see us become their full-fledged bankers.

We are also originating new corporate business with new customers that are obviously outside of infrastructure. On top of that, we are also seeing opportunities within infrastructure in the renewable space and in road infrastructure. I think those two aspects of our infrastructure portfolio – notwithstanding all the challenges we have in thermal energy – are showing signs of life.

When you say roads, is it because the government is especially focussed on reviving this segment of infrastructure?
The range of developers is wider than it is in thermal power. Thermal power requires more capital and there are fewer people who have the courage and the balance sheet strength to actually venture into it but roads is more diversified. I have to say that the ministry of surface transportation and NHAI have been quite proactive in resolving the problems of existing developers. They have been much more pragmatic actually.

Do you think the UDAY scheme can finally help the power sector?
What I like about the UDAY scheme is that it is a participative process, unlike earlier. Here, the states themselves are involved in crafting the scheme and participation has also been left for them to decide. There would, therefore, appear to be the prospect of greater sustainable buying from the states and their focus on getting their distribution companies to function better. The second thing which I hope becomes a differentiator is that the previous schemes did not link transfers from the Centre or facilitation of debt relief to results in terms of tariff increases. My understanding is that UDAY explicitly links the two. This might be a second differentiator which would bode better for the success of UDAY relative to previous schemes that we have tried in the past.

Also, there is much greater control and discipline that is enforced on how state governments actually service their debt. All this should make us more optimistic than in the past that this will lead to some improvement in the performance of the distribution companies over time. If that were to happen, it would be a very fundamental change because this is the nerve of the problem in the whole electricity supply chain. If you are able to materially mitigate this problem then there could be a resurgence in power generation from private investors. That would be a huge thing that could happen.

Do you have a desirable mix as far as sectoral portfolio is concerned?
We have a balance sheet of about Rs 50,000 crore which, today, is mostly just infrastructure. Over time, the share of infrastructure will continue to fall. In five-six years, infrastructure should be down. It is difficult to project but it will be down to about under 50 per cent.

Which sectors will take on that role?
Who knows what will happen in five years but right now, it´s looking like renewable and roads.

How do you see the overall economic growth?
We see tepid growth. Our best guess is that it will six-ish per cent kind of real GDP growth, which, in the global scheme of things, is not bad, although by our recent historical standards, it may not be great. The reason why it is six per cent and not eight or nine is that it has to do a lot with the infrastructure bust. A lot of decline in private corporate investment has been related to the decline in investment in infrastructure which is very capital intensive. It was really private corporate investment that was in large part fuelling the boom in 2010-11 and at that time.

Since then, if you take out big ticket infrastructure, other sectors of the economy require much less capital. Therefore, on an average, private corporate investment growth has been quite tepid. What is carrying the economy is some growth in consumption spending, and government spending. Global economy also being weak, net exports are weak, their contribution to growth is diminished and the only two engines of growth are public investment, some public spending and some private consumption. I am expecting to see signs of private corporate investment come back in mostly non-infrastructure sectors. That will give us growth of about six-ish percent but for us to get back to something more dramatic, I rather suspect, will take improvement in the international environment. It will also take more fundamental reform that can bring back big ticket private corporate investment back to the table.