As investors look for more clarity on the proposed merger of IDFC and Shriram Capital, Rajiv Lall, MD & CEO of IDFC Bank seeks to clear the air on many important issues including the role of Ajay Piramal and how IDFC Bank is set to gain deposits. Edited excerpts:
IDFC Bank needs deposits, not assets. How will the merger help the bank to get deposits?
IDFC Bank is gaining access to over 1 crore customers. There is a synergy to have a separate transport company. Today, the sales person from Shriram Transport Finance Company [STFC] has a strong relationship with his customer. But he is however constrained as he can offer only lending products. It only happened recently that RBI regulations have become flexible. There was a time when RBI did not allow banks to distribute deposits through an NBFC [non-banking finance company]. So, I could not have a strategic tie-up with an NBFC to sell my savings accounts to NBFC customers. Now that has changed. So, I can retain STFC effectively as my banking correspondent [BC] so that they can systemically cross sell. So my deposits can go to STFC customers.
So, Shriram Transport can act as a BC and get you deposits?
Yes, correct. This was not possible before, even when we became a bank in 2015. This happened only later, which was a big breakthrough. This [the decision] was what allowed us to acquire Grama Vidiyal [GV] — this was the logic. We are first in the market to use this model, at scale. So we will do the same thing with Shriram City Union Finance [SCUF] and we will do the same thing with STFC.
But, won’t SCUF be merged with the bank?
It will be merged like GV. All the GV branches remain as subsidiary of IDFC, as a dedicated BC. All their assets and liabilities have come to the bank. The same will happen to SCUF. Most of their branches will become BC and some of their branches will become IDFC Bank branches.
So, you are saying the main game plan for the merger is to get deposits?
From the bank’s perspective, it is two things. One is to get retail assets so our immediate profitability improves and second is to gain the distribution reach and customers through which we can rapidly increase our deposits.
So, the strategy is grow deposits organically…
Yes, you could say that. We are using our asset-led model to acquire customers profitably so that we can also get liabilities rather than attacking them completely, separately, and incurring a huge cost of acquiring a liabilities customer just through pure distribution expenditure.
You have said that only one approval will be required for the merger. Can you please elaborate?
All the mergers, whether SCUF merging itself with the bank, STFC becoming 100% unlisted subsidiary of IDFC Limited, the insurance companies becoming a subsidiary of IDFC Ltd., etc. — all these mergers will happen with just one approval for a composite scheme of amalgamation. So you get the approval once and then you have the authorisation to do all of the things at the same time. We will require approvals from all concerned.
The other issue is what will be Ajay Piramal’s role in the merged entity?
He will just be a minority shareholder complying with all the requirements of RBI, in terms of governance and caps on ownership. That’s his only role. Whenever there are significant minority shareholders they contribute in different ways. But there is no question of — he himself is very clear about it — backdoor entry for a promoter to take control of the bank. RBI will just not allow it. And Mr. Piramal knows that.
Do you see Mr. Piramal having a board seat at IDFC Bank?
You know the RBI as well as I do. I will be guided entirely by RBI. My sense is that it is unlikely.
At the end of last month, Shriram had appointed Rajesh Laddha, the CFO of Piramal Enterprises, as CEO of Shriram Capital. What will Mr. Laddha’s role be in the merged entity?
I think he will play an important role in helping execute this transaction. He plays a key role in that process. And we will sit down at the end of 12 months, and it is not only Mr. Laddha but about all senior executives on what role they will be playing.
Have you informed RBI before making the merger announcement?
What we have disclosed to the market will not come as a surprise to the RBI.
What will happen to branding of the bank and other companies?
So, all the operating companies, we will like them rebranded as IDFC-Shriram. So the bank, subject to RBI concurrence, we would like to call it IDFC-Shriram. Similarly, IDFC-Shriram Transport Company, IDFC-Shriram AMC etc. It will be a very powerful brand.
You have said the retail loan portfolio of the bank will be 50% by 2018. Are you on course with that guidance?
Yes, we are on course, because we get ₹25,000 crore portfolio by merging SCUF, our own portfolio will grow to ₹15,000 crore — so it is about 50% of the overall book of ₹80,000 crore.
But you have to get deposits to match the assets…
We are confident of mobilising the deposits, we will get retail fixed deposits, if not savings, because that takes time. But our current accounts are growing very rapidly because of our corporate relationships. We have excess SLR and CRR also. So, we don’t have to worry on that front.
You are confident of getting retail fixed deposits because you have give them a higher return, is that it?
Correct.
But then why are you not offering a higher rate on savings bank deposits, which is at 4%?
Because that becomes a long-term challenge. Once you raise the savings bank rate it is difficult to lower it.
