IDFC Bank on Wednesday reported a 21% fall in its Q3 net owing to a multi-fold jump in provisions. IDFC Bank CFO Sunil Kakar said the bank is expected to see margin pressure owing to lowering of lending rates following demonetisation. Edited excerpts…
What is the size of your watch list?
The watch list is around Rs 9,000 crore roughly. So this Rs 9,000 crore has not changed since the beginning and they have just changed classification from restructured to bad loan. Currently Rs 3,587 crore is the gross NPAs and the movement is difficult to predict. Having said that, it is no longer critical for us since we have already provided for that. The movement from restructured assets to NPLs will not have any impact on the P&L and the profitability.
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What has been the impact of demonetisation?
Demonetisation has had an impact in a second order impact if I may say so. The fact that demonetisation has resulted in a sharp decline in marginal MCLRs, will put some pressure on our margins. That is because we are largely wholesale and corporate bond funded and so in that extent, the margin pressure will come but the asset quality has not been impacted by demonetisation. As a matter of fact, our collection ratio – since we have just acquired Grama Vidiyal Microfinance – has been consistently been 99% and have not faced any problems.
I am anticipating that margins will come under pressure. All large banks have reduced their MCLRs significantly driven by the fact that they have large deposits during the demonetisation phase. Whereas a young bank like us does not have any significantly large amount of deposits continue to borrow from the markets. And MCLR formula is more related to the incremental cost of funds.
Has demonetisation affected your recoveries?
Our exposure is largely to the infrastructure sector and the recovery from the infrastructure sector is related to power, gas, coal and the pricing by the state electricity boards. So it is not a function of demonetisation.
What were the reasons behind the jump in provisions?
It has always been our philosophy that once there is a provision to be taken, we are prudent and that is reflected in the quantum of provisions we have already taken in the infrastructure book.
The provision we have made are for the legacy book. In the legacy book at a portfolio level, 50% of provisions or about Rs 4,500 crore are still adequate. But there are 50 assets which are specific assets and some assets have deteriorated and some we are very confident will not need the kind of provisions we have done. But I cannot interchange between the two because they are specific. There have been no ARC sales.
One asset requires more than what was provided for in the legacy book. Assume there were 50 assets and of these there is a possibility that 8-10 assets may require more provisions than what we had provided for while another few may need less provision. But when the asset which requires more provision moves then at that time we have to increase the provision.