Despite a strong continuity in deposit and loan growth in the September quarter, there is one part of the business that V Vaidyanathan, managing director and CEO of IDFC First Bank, would find disturbing. 

The delinquency in microfinance business has been rising, prompting the mid-sized Mumbai-headquartered bank to take a conservative contingency provision of Rs 315 crore for the quarter ended September.

“Microfinance is an issue and we cannot wish it away because the portfolio is disturbing in many parts of India. So, what we have done is that in SMA-1 and SMA-2 (pre-NPA stage), we have taken provisions. With this, almost all of SMA-1 plus SMA-2 has been provided for by the bank,” said Vaidyanathan.

Since the microfinance sector faces industry-wide stress, it may continue to impact the private lender’s near-term profitability. But spotting the stress in the sector early, IDFC First Bank started insuring its incremental microfinance loan book from January. While currently 50% of the portfolio is insured, the plan is to reach to 75% by March 2025. The bank has also taken a cautious stance, bringing its microfinance portfolio as a percentage of the total loan book to 5.6% in September 2024 from 6.3% in the previous quarter.

“We tightened all the screws on the lending side (to the sector). So, our disbursal came down from Rs 4,250 crore in Q2 FY24 to Rs 3,800 crore in Q3 and Rs 2,800 crore in Q4. In Q1 FY25, we disbursed Rs 2,800 crore and in Q2 Rs 2,000 crore. And we did one more thing. We started insuring incremental bookings in January 2024. So, today 50% of the book (microfinance) is already insured,” Vaidyanathan told analysts in a post-earnings call.

While slowing it down, Vaidyanathan has made it clear that microfinance is a very important segment for the bank. Personally driven by a deep desire to uplift the weaker sections of society, he rules out shutting their credit tap. “We are not getting out of microfinance. It helps us meet many variants of priority sector. It is an important book also because it involves small and marginal farmers, agriculture, weaker sections, women, micro entrepreneurs and all that,” said Vaidyanathan.  

Project infrastructure financing is the other disturbing force. Along with microfinance, a provisioning of Rs 253 crore for a toll account in Mumbai has punctured IDFC First Bank’s fiscal second-quarter profitability. The lender’s net profit dropped 73% to Rs 201 crore in the September quarter compared to Rs 751 crore a year earlier despite a 21% rise in net interest income (NII) to Rs 4,788 crore.

The loan accounts of the toll-collecting company had already slipped into a non-performing asset (NPA), but IDFC First Bank was getting paid some amount. The bank had a legacy loan exposure of Rs 1,100 crore to this company, which collects tolls when vehicles are entering or exiting Mumbai. Since the company was paying, IDFC First Bank had brought down its exposure to around Rs 500 crore over a period of time. But the Maharashtra government announced that there will be no toll and the company, which Vaidyanathan did not name, got stuck in the midst of it. 

“After the state government directive (announced in the September quarter), we know that our client will struggle to service the account from now on. We didn’t want to carry this problem on the books. So, we have taken 100% provision against this legacy toll account. Now with this, there is no more exposure left in the account. We don't think any government will really cancel a contract like this and not pay. So, eventually when the government will pay, we will recognize it back to our income,” Vaidyanathan told analysts. 

Vaidyanathan and his team have earlier handled legacy infrastructure loans which the bank inherited, bringing it down from Rs 22,000 crore to about Rs 2,500 crore. Over the last five years, they identified loans worth Rs 14,000 crore and dealt with all of them one by one. They thought the bank had finally seen the back of such infrastructure loans.

“I must tell you that many of them were very difficult to deal with. Some of them were in court, some of them were in the ARC. So, really, we took it out of great difficulty, and we finally thought we saw the back of it. But this transaction by the state government to waive off fees for toll came completely out of the blue. It was just nowhere in the picture. This is one of the reasons we don't like project infrastructure financing because we are hostage to this kind of movement outside of our control,” Vaidyanathan told analysts. 

Despite these hiccups, IDFC First Bank’s five-year goal of marching to a deposit base of nearly Rs 6 lakh crore and a loan book of Rs 5 lakh by 31 March 2029 is well on track. The fundamentals of the bank remain strong, reflected in the fiscal second quarter with deposit growing at 32.4% to Rs 2.18 lakh crore and credit at 21.5% to Rs 2.23 lakh crore. Retail deposits grew 37.4% year-on-year to reach Rs 1.75 lakh crore, despite the bank dropping savings account interest rates to 3% two quarters back. About 80% of the bank’s deposits are in the retail segment. CASA (current account savings account) grew 37.5% to Rs 1.09 crore and its ratio in the total deposit mix is 48.9% as of 30 September 2024. 

“One key strength for the bank is the growth in deposits. We don’t see any problem growing at 30%, frankly. This gives us a license to grow the loans and that’s a very big thing. Our brand has become very powerful and is attracting customers. So that growth should continue, both on the deposit as well as the loan side,” said Vaidyanathan.

While the retail loan book grew 25% to Rs 1.31 lakh crore, corporate loans paced at 20%. According to Vaidyanathan, the retail loans are accompanied with good asset quality, with the gross NPA in the segment at 1.57% and net NPA at 0.53%. “Our total loan book has now got reasonable traction. The asset quality on the retail loan front is still very good. Our corporate loans, which is non-infrastructure, grew at 20%. Initially, when the bank was merged, our fingers were scalded by the memories of what had happened in the past. So, we were slow on corporate loans, but now we are getting more comfortable with it having experienced it for five years,” Vaidyanathan told analysts.

Vaidyanathan believes that none of the stories on the bank’s projected long-term growth in deposits, loans, profitability and bad loans have fundamentally changed. The microfinance issue will play itself out, the legacy toll account is fully provided for, and “all these things” in the September quarter will be forgotten.   

“We have brought down the cost of funds from 7.8% to 6.3% in five years. And we are raising Rs 55,000 crore of money with just 1,000 branches. We are lending, we are getting a net interest margin (NIM) of 6.3%. Even if you add about 1.5% as fees or 1.6%, that makes it about 7.8%. Honestly, we are building a bank for the long run and we are building it strong,” said Vaidyanathan.