IDFC First Bank : Introduction
The IDFC Bank ( Infrastructure Development and Finance Company Bank) is an Indian Bank with the majority of the stake with IDFC Limited which is an Integrated Infrastructure Finance Company. The IDFC crisis provides good learning opportunities to the concerned parties.
IDFC Bank started its operation in October 2015 after getting the universal banking license from the Reserve Bank of India in July 2015. It is headquartered in Mumbai. It has been operating with 242 branches, 102 operations as asset service branches, and 354 rural branches.
IDFC Ltd applied for the license for the bank and was among the few 26 entities who got through the tedious process on the inspection to be given the license. It was the first infrastructure lending company followed by Bandhan Bank. The Reserve Bank of India gave the license to the IDFC because of its diverse ownership and brand value since its conception in 1997.
In 2014 it got the in-principle approval to work as a bank. Though it had a strong experience in infrastructure lending it lacked in retail banking experience ( in contrast to the Bandhan bank) The bank was formed with three goals:
- To build a corporate bank using the existing network.
- To create the retail business or banking services with a primary focus in tier-1 cities.
- To build a bank with strong technological backing
In January 2018, IDFC bank merged with Capital First to form IDFC First Bank with Mr. V.Vaidyanathan as its new Managing Director and CEO. Capital First is a Non-Banking Financial Company founded in 2012 by Mr. Vaidyanathan. Capital First provided loans and debt to small entrepreneurs, Micro small and medium enterprises, and personal loans. Formerly Capital First was called Future Capitals Holdings.
|Funded Assets||Rs. 1,10,400 crore|
|Retail Asset/Total Funded Assets||37%|
|Net Worth||Rs. 18,159 crore|
|Number of Customers||7.3 million|
IDFC First Bank Crisis
IDFC First Bank has been in trouble since its inception. IDFC crisis is an exemplary case that reflects the failure of management, regulatory bodies, and the whole banking system. IDFC bank showed various irregularities since its inception. IDFC crisis led all other banking institutions and regulatory bodies to consider the organizational structure as an important component to be kept under regulations.
The bank failed miserably in achieving the above set goals which led to the IDFC bank crisis. If we compare the CASA ratio with the peers like HDFC who have a ratio of 48 % the IDFC bank has CASA of 5.2 % of all the deposits as per the Bloomberg report in 2017.
Similarly, if we compare the Price/Book Value Ratio of the peers with the bank we can identify the gap between if operational efficiency.
|Kotak Mahindra Bank||4.11|
If we take a quick look at the Financial Statement (Balance Sheet) of the Bank for the past years we can see that its Liabilities and Provisions have increased dramatically.
|Provisions and other Liabilities |
If we look at the above data we see that the merger of the Bank with the NBFC Capital First led to the initial desired outcome of lowering the liability due to decreasing the provision from Rs. 7011.20 crore to Rs. 5778.37 crore but eventually the success was not stable and eventually the bank again came to the black zone with the high provision in 2019.
Reasons for IDFC First Bank Financial Crisis
- Structure after the demerger of IDFC Bank Limited from IDFC Limited
As we all know that the IDFC Bank was initially an infrastructure financing company and use to deal with a huge amount of loans in infrastructure-based projects. Even after getting the license from the RBI the model for infrastructure lending was not much changed and from 1997 to 2009 the loan book expanded to cross over Rs. 200 billion.
In 2015 when the IDFC Bank was incorporated the same structure was followed and the Infrastructure loan book came under the Bank’s control with around rupees Rs. 140 billion Net Worth.
- Poor Performance of the Infrastructure Section
The loan book comprised heavily of Infrastructure based lending for the IDFC Bank. The performance of the IDFC bank was influenced by the performance of the Infrastructure sector during that period. When the Infrastructure sector was going down so does the performance and shares of the IDFC Bank.
During the financial period of 2017-18, India’s infrastructure growth has slowed down to a 3- year low of around 4.2 % from as high as 4.8 % in the previous financial year due to slower growth in the production of coal, steel, and electricity. More than 356 infrastructure projects, each costing 1.5 billion rupees or even more, have been stalled for around 5 years or even more, leading to a total cost overrun of 2.2 trillion rupees, according to the government estimates. Various infrastructure projects, like coal, crude oil, natural gas, steel, cement, and electricity accounts for nearly 40 % of India’s industrial output.
|Highway construction in km||2345||9829||8231||6061||4410|
- Plunging Profit due to bad loans
In 2019 IDFC bank reported a 3266% plunge in its standalone net profit to come around rupees Rs. -1944.18 crore due to bad loans in the form of infrastructure-based financing and increased provisioning.
The provisioning for the bad loans has increased on a continuous basis from Rs. 24.17 crore in 2016 to Rs. 410.31 crore in 2019.
|Net Profit (cr.)||-1944.14||859.30||1019.74||466.85||-2.58|
|Bad Loans Provisions (Cr.)||410.32||236.09||282.50||24.17||–|
|Gross NPA (Cr.)||2136.04||1779.05||1542.10||3058.30||–|
|Net NPA (Cr.)||1106.63||891.16||576.47||1139.04||–|
|Gross NPA (%)||2.00||3.00||3.00||6.00||–|
For quarterly analysis the gross and net NPA of the Bank as of 31 March 2019 was at 2.43% and 1.27% as compared to 3.31% and 1.69% as of 31st March 2018 and as compared to 1.97% and 0.95% in the previous quarter.. Regarding NPA increase, the 2 key reasons for this could be:
- The long gestation period for the infrastructure-based lending projects to give any returns.
- Alignment of NBFC NPA norms with Bank NPA norms has resulted in an increase in Gross NPA.
- Inability to utilize the merger with the Capital First
Even after the merger with the Capital First ltd. The IDFC Bank was not able to put a check on its cost.
The IDFC First Bank has the loan asset book of INR 1.03 lakh crore worth of retail loan book. This was still only 32.46 % of the total loan bool for the bank after merger.
Net Interest Margin: The Net Interest Margin broadly remained in the range of 1.14% – 2.0% during the years of operation. The reason for the low NIM is the low yielding wholesale infrastructure financing by the bank and comparatively higher cost of funds.
|Net Interest Margin (NIM)||1.91||1.42||1.79||1.14||–|
|Cost of Income (%)||47.19||20.46||21.06||19.34||–|
As can be seen from the above table that the cost of income is very high and has increased considerably from 2015 onwards only to decrease very very minutely in 2018 after merger with Capital First to finally rise to a drastically new high of 48 %.
- Delusional Profitability of IDFC First Bank
IDFC Bank reported a very high ROE (return on equity) of 7.02% in 2018 for the 12 months on a consistent basis, which was in line with the industry average of 8.57% during the same period.
When we analyze this ROE in a more detailed way we see that ROE gives the measure of the profit against the level of its shareholder’s equity In layman terms we can say that If the company invests rupee 1 in the form of equity, it will generate rupees .07 in the form of earnings.
Now when we analyze ROE against the cost of equity, which is measured using the CAPM or capital asset pricing model, the Cost of Equity for the IDFC Bank is coming out to be 14.20% in 2018. This is almost two times the ROE for the same period for the IDFC Bank. Since the IDFC Bank’s return does not cover its cost, with a significant difference of 7.00%. This means its use of equity is was not efficient and not sustainable.
When put in a simple way we can say that the IDFC Bank pays more for its capital than what it generates in return.
From the above table, we can say that the profitability indicators were never very promising after the inception of the IDFC Bank and eventually they came down to negative in 2019.