IDFC First Bank aims to lower credit deposit ratio to 92% in FY25

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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IDFC First Bank targets a 30% growth in deposits this financial year (FY25) while projecting a slower loan book growth at 22-23% as it aims to lower its credit-deposit (CD) ratio further.

In a post-earnings conversation with CNBC-TV18, V Vaidyanathan, the lender’s MD & CEO, said, “Our CD ratio, which was at 140% four years ago, we brought it down below 100 in FY24, and this year, we’ll bring it down to 92%.”

Vaidyanathan said gold loans will be one of the key areas of growth. The target is to grow the gold loan book to ₹3,000 crore by the end of this financial year from ₹1,000 crore now.

The bank also aims to launch tractor loans as part of the agri priority lending offerings.

These are the edited excerpts:

Q: Credit cost likely remain elevated in the first half of the fiscal. Why and what kind of stress are you seeing?

A: First of all, we are not seeing stress. Our gross NPA, on the bank level running at 1.88 which is the lowest ever in the history, our net NPA is 1.6%, also quite lowest in the history and our SMA (special mention account), which is the pipeline leading to the NPA (non performing asset), SMA is the pre-NPA stage, the zero to 90 DPD (days past due) that is also very low; SMA one and two is just 0.85%.

So, there is no stress at all. We are running a credit cost of less than 1%, but percentage of loans outstanding was 1.32% this year; we are guiding for 1.6% next year because we are expecting normalisation. Until last year we were getting recoveries from COVID. We are now guiding for normalisation but even 1.6 is pretty good for the bank.

Q: So, is there some calibration on growth that we should expect in FY25? Is that where this is coming from?

A. No. you get loan growth from deposit growth. Our bank grew deposits at 40% last year. Next year, we are planning to grow the deposit by 30%, which we need to grow a loan book and to repay some legacy liabilities. Accordingly, will grow the loan book. So we always want to grow our loan book less than the deposit growth, because we want to improve our credit deposit ratio.

Q. What do you expect it to grow by? I think FY24 advances growth was about 28%.

A. If you take percentage of assets it’s 23% and as percentage of loans it’s 25%, in FY24. This year, we expect it to slow down a bit, maybe 22% or 23%. But we will grow deposit by 30%. So, our credit deposit ratio (CD ratio) will come down. We want to keep incremental CD ratio at 80%. And the CD ratio, which was at 140% four years ago, we brought it down below 100 in FY24, and this year, we’ll bring it down to 92%.

Q. I wanted to understand about the cost to income ratio. With that declining, what is the medium term target that you have for the cost to income ratio. It was elevated at more than 72% in the Q4 of this year. Going ahead, what can we expect?

A. We should see it in context because in the last few years we grew branches from 200 to 900; ATMs grew from 150 to 1,100; we launched so many businesses for doing rural banking because we were short on PSL (priority sector lending). The good news is that those will start paying back. We’ve seen that it has come down from 95 to 72, a good progression. This year, our cost to income ratio did not improve. You know, it did not improve because interest rates went up. But by Q4FY25, we expect credit costs also to come down for the first time in our history to the 60s. As businesses scale up and start growing profit, the cost to income ratio will come down.

Q. Which segment will drive loan growth going forward?

A. Currently, on the unsecured retail side, our loan book is about 15% of the total book of the bank. We want to grow the secured book more than that. Therefore, our areas of growth will be gold loans. Currently, it is at ₹1,000 crore and by end of this year we’re planning that book to be ₹3,000 crore. We want to grow the home loan book. We expect to grow loan against property. We want to launch tractor loans because we want to do the agri priority sector.

Q. What’s the outlook on the cost to income ratio?

A. Cost income ratio right now is 72%, and can expect it to come to the 60s by the end of this year. Q3 and Q4, we expect the cost income ratio to meaningfully come down. And we will celebrate when it comes to 60s, because most people believe that we are nearly stuck in the 70s. I’ll show all of you to come 60s.

Q. Will there be a capital raise this year?

A. Yes, we are planning one capital raise this year. Let me just say sometime during the course of the year. We are already running capital adequacy of 16%. We’ve just taken a ₹5,000 crore bond approval from the board that we will raise sometime during the course of the year. We will also probably raise another round of capital this year. That will also strengthen the balance sheet.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow