Reserve Bank of India’s in-principle approval of a bank licence to IDFC Ltd will be beneficial to its credit profile in the long term, provided the transition is managed appropriately, according to India Ratings & Research.
However, the 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, it said.
India Ratings expects IDFC’s profitability metrics (FY13: return on assets: 2.7 per cent; return on equity: 14.2 per cent) 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.
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.
Retail business Meanwhile, ICICI Securities (I-Sec), said IDFC is not likely to be very retail focused.
“We expect branch numbers to go up to 25-30 at the outset (from four currently), but do not feel it would try to invest very heavily into an already crowded retail market,” said I-Sec.