IDFC First Bank has had a mixed Q3FY25 but MD and CEO V Vaidyanathan estimates the provisions for the microfinance book will come down starting Q1FY26. Vaidyanathan tells Anupreksha Jain that other portfolios are stable. Excerpts:

Could you explain the reasons for the 53% fall in net profits in Q3FY25?

The fall is due to increased provisions for the MFI business. We are seeing it across all players in this segment. The operating profit of the rest of the business has actually risen by 32% year-on-year to `4,560 crore in 9 months to December 2024. We’ve put out all the facts and figures of all individual businesses like home loans, loan against property, vehicles, consumer loans, corporate loans, SME loans credit cards, etc, they are all stable.

Then why was the microfinance business built if it was prone to issues?

We were an infrastructure DFI that converted to a bank overnight. It did not have ability to do lend to weaker sections or to small borrowers. So, the MFI was like a silver bullet to be profitable as well as meet the priority sector loans target. Plus, it gave us good margins and was profitable. We will do this business in moderation and replace other businesses to meet the same PSL requirements.

What share are you targeting for the micro-finance book?

By the fourth quarter of FY26, we expect the MFI book to be around 3-3.5%. Also by that time, the stress build-up in microfinance, we believe would have been largely behind for the system because of the changes that are being implemented in the industry.

Do you see any stress build-up in categories like MSMEs, unsecured loans segment in coming quarters?

As we have said, there is no stress build-up in other businesses. Excluding MFI, the special mention accounts 1+2 for all segments put together is just 0.71%, while the gross NPAs are 1.81% and the net NPAs are only 0.49%. The gross NPAs for microfinance portfolio is 4.45% and the net NPAs are 1.1%. So, it is clear from the numbers that the issue is in MFI business.

Will deposit mobilisation pose a challenge in FY26?

Our deposits are really coming on very well. We are entirely focused on better service levels to customers and giving them a good experience on the app. And we have built a good brand. Our deposits grew by 28% and our current account and savings account or CASA ratio is good at 47.7%

There are expectations of a cut in the policy rate either in February or Q1FY26. How do you see this impacting deposits?

The Indian deposit market is around `240 lakh crore. We don’t have any problem raising deposits as we focus on service and experience. 

With expectations of a rate cut, are you anticipating any improvement in treasury income?

As a bank, we focus on building our core business and do not depend upon treasury income. The core operating profit without treasury income, is up 24% over 9 months of FY24 at `4,560 crore, excluding the MFI business. We only focus on this.
Do you think profitability has peaked and will moderate in coming quarters? What factors can lead to this moderation?

This is a multi-year, multi-decade story. Look at other big banks. What was their profit 10-20 years ago and what is it today. They are still growing. Profitability never peaks in a growing economy with good capabiliites.

How do you see guidelines on the Liquidity Coverage Ratio, Expected Credit Loss and project finance impacting the bank’s earnings?

We do not do project financing. On other matters, our job is accept these as given and grow our bank. We are building so many other businesses like wealth management, cash management, Fastag and so on. These have nothing to do with these norms.