Talks with the Shriram group to explore merger options may have been called off. Yet,Rajiv Lall, MD and CEO of IDFC Bank, is convinced that the inorganic growth option makes sense. Excerpts from an interview:
The proposed merger with the Shriram group was important for you to grow your retail portfolio quickly and improve efficiency parameters. With the deal now off, what is the road ahead?
We continue to focus on organic and inorganic growth. We now have terrific evidence of executing organic growth. Year-on-year, ex-infra funded credit growth is 76%. Retail is also growing rapidly. Our outstanding assets as on September 30 were ₹18,000 crore. Of that, direct retail was ₹ 5,000 crore. We are doing ₹500 crore a month, and by end of the financial year, we will be ₹8,000 crore. And the total retail loan book will ₹ Rs 22,000. at the ran rate we have - that’s how fast retail is growing Non-infra corporate lending is growing 60% year-on-year.
We are now 102 branches, and in the next two months, we are opening another 17. By March, we will have150 branches of which 50 will be in metro and tier-I cities. We have 2 million customers now, growing at 125,000 per month so by year end we will have 2.5 million.
Liabilities are growing 150% a year. We have retail deposits of ₹7,000 crore. , very comfortably going to be over Rs 12,000 crore by March. So, whether it is retail deposits, whether it is network or customers, non-infra credit growth, fee-based income -- On all fronts, our track record is rapidly getting established on execution. So, our confidence in growing organically is much higher now. than what it was nine months ago. And we are confident enough of giving forward looking guidance to our investors - which we have started doing from this quarter on these parameters
If you are doing so well organically, why do you need inorganic growth?
Our legacy is costing us ₹600 crore of profit-before-tax drag every year. A large part of it is not because of stressed assets, which cost a drag of ₹175 crore ... but a ₹400 crore [drag] comes [annually] from fixed rate bonds which we cannot reprice or retire. Those bonds will stay with me till fiscal 2021. So, every year, I have an annual RoA negative drag of 0.35% on account of my legacy. Therefore, my return on assets and return on equity for the next 36 months cannot look as good as they should be looking. That is why it still makes sense to explore inorganic growth options because that would allow us to significantly cut the time to get out of our legacy.
Will you still look at inorganic growth possibilities?
We will keep an open mind. about looking for other possibilities. We will look at all three - bank, NBFC and also MFI.
Given that the Shriram deal was a complex one, why did you decide to look at it?
No doubt it was too complex. But the opportunity was substantial. We would have regretted it had we not looked at it carefully. It’s stupid not to be ambitious but it is foolish to be blinded by ambition.
Why did the deal fail?
The only reason was lack of agreement on relative valuation. The deal makes sense but at a particular value. If we did not get the value, we must have the courage to walk away. That is what we did.
Are IDFC shareholders a reason for the fallout?
This is not because of IDFC shareholders . Once the deal was announced, we worked very hard to get systematic feedback from key shareholders. Initially, there was lot of confusion since the presumption in the market was that the deal was already negotiated ….so we can’t support this… the dilution is too high etc…but they found out that we actually started negotiating and we have not finalised a transaction structure ... key shareholders gave us very valuable feedback. That allowed us to ...with confidence, and with consultation with government of India ... to arrive at the board level at a valuation that we were confident that we would be deliver the deal - that we will get majority support. So, we made an offer. We said at this value, which represents actually a significant discount to some of the parts value and represents a deeper discount than we are applying to view Shriram Capital, we are confident that we can do the deal, so can we shake hands? Remember this. On our side, we have many shareholders. So, it is complicated. But on their side, it is only four shareholders.
What happened then?
What we found was that they did not have consensus among the four shareholders about the fairness of our valuation. They never came back with a formal counter offer. Last week, when we met Mr. Thyagarajan, we finally said ‘if you do not think you can [arrive at the ] grounds we think as fair, there is no point in continuing the conversation’. They did not come back presumably because they didn’t think they would be able to get a consensus around a price acceptable to us.
The government would have faced significant dilution. Was that a concern?
The government was okay with the valuation we had offered. It said that below a certain valuation, it would be difficult for it but that if the market was supportive, it would not oppose it.
