Execution risk management key for IDFC's conversion into a bank: Ind-Ra

Posted By: Religare
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Execution risk management key for IDFC's conversion into a bank: Ind-Ra
India Ratings & Research (Ind-Ra), a part of Fitch Group, on Thursday said the Reserve Bank of India's in-principle approval of a bank license to IDFC Limited ('IND AAA'/Stable) will be beneficial to its credit profile in the long term, provided the transition is managed appropriately.

However, the rating agency cautioned that successful conversion from an infrastructure non-banking finance company into a commercial bank with a strong retail deposit franchise and a diversified loan book will be a major challenge.

Ind-Ra expects IDFC's profitability metrics (FY13: return on assets: 2.7%; return on equity: 14.2%) to drop sharply in the near-to-medium term due to the regulatory requirements of maintaining a statutory liquidity ratio of 23 per cent, cash reserve ratio of 4 per cent and priority sector lending of 40 per cent. Also, operating costs will increase significantly from a build-up of branch network and employee talent pool.

"Maintaining credit costs at low levels will be important as the company starts lending to non-infrastructure sectors, while the infrastructure sector is likely to continue to face a harsh operating environment," it said.

The agency, however, expects the company to maintain a robust capital buffer, as its loan portfolio will be diversified to include new borrowers/loan products in which it has little experience. While the loan book will become more granular than before, the efficiency of risk management systems for the new business lines will be tested.

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