Vikram Limaye, managing director and chief executive officer, IDFC says the RBI circular on easier lending to infra companies is not applicable to the company as yet.
While the steps are positive for the sector, the company will approach the RBI to get clarity on whether it can avail these eased norms as the company hasn't yet transitioned to a bank.
"This circular is applicable only to banks and its not applicable to us because we are not a bank as yet and we need to operationalise the bank in October 2015," he adds.
Below is the verbatim transcript of the interview to CNBC-TV18
Latha: What is your sense for IDFC and when you become a bank some time in 2015 I would assume, 18 months get over by October 2015, around that time how will it work for an IDFC Bank?
A: This circular is applicable only to banks and its not applicable to us because we are not a bank as yet and our transition to bank, we need to operationalise the bank in October 2015. At the outset I would like to say this is positive in general for incentivising that into infrastructure and cost of that for infrastructure because both on cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending (PSL) side the government and Reserve Bank of India (RBI) has done its bit in terms of incentivizing the structure investment including affordable housing which is a good addition to that.
However, for us what it means is that when we become a bank in October '15; right now this is no bank, so this is part of an approval from the RBI to establish a bank and IDFC want to be promoter of that bank. All the infrastructure assets today reside in IDFC's balance sheet. When the bank gets formed and operationalise the bank will necessarily have to take over the infrastructure assets in the entire lending book from IDFC and at that point in time the assets will be taken over and liabilities will also be issued by IDFC Bank at that point in time because today there is no legal entity called IDFC Bank. So, the holders of IDFC debt will have to become holders of IDFC Bank's debt and issuance of those bonds obviously IDFC Bank will do only once we get operationalise in its part of demerger scheme of assets and liabilities from IDFC to IDFC Bank.
Therefore, at the outset I would say that this is a huge positive for us, we will seek appropriate clarification from RBI since we are in a unique position because we are not a bank as yet but we will be bank in 15 months but our interpretation of when we read the circular, what it indicates is that since the bank would be taking over the assets from IDFC under an approved scheme of RBI then the entire book becomes eligible for CRR, SLR and PSL to the extent that we have the right tenure of bonds because this is capable only to long-term bonds that are issued for financing infrastructure. So, that is our current interpretation of the guidelines when we look at it but as I said we will as part of this bank process get appropriate clarification from RBI.
Sonia: Can you tell us exactly what is the total book or the total exposure that you have to the eligible infrastructure loans or even the affordable housing segment?
A: We do not have anything on affordable housing but under the definition of infrastructure, obviously as being an infra finance company most of our assets are within the definition of infrastructure as per RBI and right now what the circular talks about is project loans for infrastructure. Therefore, today our loan book is about 55,000 crore. Large part of that would be infrastructure but I would say that probably 70 percent of it would be project loans because there are other types of loans that we do to infrastructure as well but this circular talks about project loans applicability and so from that perspective it would still be a substantial part today but this is applicable to what our book looks like in October '15, not today. Therefore, between now and October '15 there will be an evolution of the book in terms of the assets and liabilities and we will do what it takes to make sure that as large component of our book becomes applicable for the CRR, SLR and PSL benefit that this circular provides.
Latha: For the existing banks RBI says their existing exposure to infrastructure will be counted at 16 percent of exposure in the first year that is this year another 16 percent next year and so on – that won't apply to you because you are not a bank?
A: Yes because this is applicable to outstanding loans on the date of the circular. So, on the date of the circular, which is yesterday, there is no bank; so there is no outstanding loan of the bank on the date of the circular, it is not relevant for us and so it is outstanding loan only on the date of issuance of bonds by the bank and when we operationalise the bank in October '15, around that time is when the bank would also be issuing liabilities that are IDFC Bank's liabilities and so that would be the relevant date to look at.
Latha: So now you are not under pressure to finance all your incremental needs with seven year bonds? What you are saying is only on October 2015, when you are refinancing your loans, your old lenders, you will issue seven year bonds or have you to issue seven year bonds here after itself?
A: That is a detail that we will obviously have to look through carefully but from our perspective since the benefit is available only to long-term bond issuance for financing of infrastructure, it would make sense for us as we are thinking about the liability side of the bank as well in this transition period to issue more long-term bonds because everything that we are issuing today is going to finance infrastructure in some way because our asset side is largely infrastructure.
Latha: So short point provided RBI allows the transfer, your entire current exposure to eligible infrastructure should not require reserve requirements or priority sector as you understand it now?
A: Yes subject to the clarification that we would seek because this would be transferred from IDFC to IDFC Bank in October, so our view is that the entire book for project loans should be available for eligible assets and provided again it is driven by long-term bonds. So our liability profile will have to evolve between now and October for eligibility. So it has to be seven-ten or higher and whatever the guidelines mentioned for bond issuance.
Sonia: How much can your RoE scale up to because of this?
A: That is a level of detail that we have to work out because this has been done last night and we will get clarifications from RBI so that we are clear about where we stand.
My view is that if the entire book on the asset side has a large chunk of the liabilities fall into this circular then the RoE erosion or a large part of the RoE erosion that was anticipated was on account of CRR, SLR and PSL as we transition into a bank. So a large part of that would therefore not be relevant when we look at RoEs going forward. It also gives us more degree of freedom in terms of growth because on an existing book of Rs 50,000 crore if we had to apply Priority Sector Lending (PSL), that would have been quite a large number that we would have had to meet within one your of operationalising the bank, that was the guidelines for the new bank licenses that you had to meet PSL requirements within one year of operationalising the bank. So that would have obviously been a very large number that we would have had to focus on in order to comply with the bank guidelines and so the amount of growth that we could have had in other areas would have been lower because of the compliance requirements on PSL.
Now if all this becomes applicable to us in October and therefore the amount of PSL that we have to meet is substantially smaller, then it obviously also feeds into how our balance sheet would grow now and once we become a bank because the compliance requirement is good.
Latha: I have a doubt with respect to you in your current status as an infra lender, lets not assume its IDFC, any infrastructure lender or housing finance lender, will he benefit at all because banks may be willing to lend to him to on-lend to an infra project or will professional infra lenders like PFC, REC if not IDFC or the housing finance companies actually find it a competition because banks they give their loans to their own housing finance clients will be able to give it at a cheaper price. So, will life be difficult for infra lenders?
A: It will be lot more competitive but that also depends on how RBI thinks about base rates. Now it is not clear to me whether the banks will be able to have differential base rates because the regulatory requirements for certain asset classes are different. So when the banks still have to have one generic base rate or could they have a differential base rate for infrastructure and affordable housing, would also determine how they price the loans. Today you are not able to price loans lower than base rates. So to some extent the competitive dynamic is caped because that is the floor, you cannot go below that. But if the cost of infrastructure and affordable housing from CRR, SLR, PSL standpoint is lower because of these guidelines, I don't know whether you can have multiple base rates.
Sonia: Infact another banking analyst had told us a while back that banks actually cannot lend less than base rates. So in effect do you think that interest rates may not fall too much, it may just be about a 10-20 bps impact on rates.
A: But I am just saying that that is provided you do not have a differential base rate for infrastructure and affordable housing. If RBI permits that, then the competition for non banks and housing finance companies could be more because then the base rates of banks for lending to infrastructure and affordable housing could be lower. And even in a blended sense it will be lower anyway because certain part of their book will get some benefits and the cost will be lower. But targeted for that asset class if they were to have a different base rate then that could be a different number from the blended base rate is what I am saying. So to that extent the competition for that asset class could be different, base rate is determined separately but that is not known right now. At this point in time I agree on a blended basis the impact will not be substantial but we will have to see how it evolves.
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