About a month ago, Crisil downgraded infrastructure lender Infrastructure Development Finance Company (IDFC) from AAA to AA+. However, CEO and Managing Director Rajiv Lall tells Shobhana Subramanian that IDFC has sufficient capital and that its business model is robust enough for it to be able to keep pace with the growth in the financial system. Excerpts:
How do you respond to Crisil's downgrade?
We are somewhat disappointed obviously since maintaining a triple-A rating is important because the cost of funding is sensitive to that rating. Crisil noted that our asset quality was robust, our management systems were superior and the reason for the downgrade was an expectation that our capital adequacy might fall short because of the huge opportunity for growth.
So the context in which we were downgraded is a bit surprising, since they didn't do it last December when the problems in the financial market were at their peak. The good news, however, is that ICRA has reaffirmed its AAA rating and Fitch will let us know soon.
Does this put IDFC in a bit of a spot as to whether it should leverage further and grow the balance sheet?
There's always a silver lining...we may now be able to evaluate our own comfort with respect to Tier-I capital adequacy. We have been fairly open about our view that 20 per cent was an unreasonably high threshold.
We now believe we can safely maintain a Tier-I ratio of below 20 per cent, which will imply our ability to take on a little bit more leverage than we have in the past. But we will have to do that in a way that keeps ICRA and Fitch comfortable about the fact that our business model remains robust.
Are you saying that you're willing to bring down the capital adequacy below 20 per cent and are not worried that Crisil will downgrade you further?
We have very little of Crisil's debt outstanding and we're not working with Crisil any more. We have faith in our judgement as to what a prudent capitalisation for our business is. We have delivered results consistently through good times and very bad times and these are there for the regulators and the market to see.
So you won't be raising capital right now?
We don't think there is any immediate need for us to raise equity capital - there's sufficient capital to accommodate reasonable growth this year. We think we can grow assets at 15-20 per cent in the next two-three years, and then, we will raise capital at an appropriate time.
We have always maintained that we won't grow just for the sake of growing but will pursue balanced growth - that is to say, we will grow our balance sheet in a manner that we also allow non-balance sheet revenues lines to grow so that we have a well-diversified revenue mix. And we reaffirm our commitment to profitable growth.
Has your cost of borrowing risen?
We haven't issued any paper yet but, no, the cost hasn't gone up. Our spreads tend to be volatile but, historically, our spreads have been 30-40 basis points over government securities. We believe we can maintain that though, going ahead, our balance sheet will be larger and other factors will come into play.
Do you believe your business model needs to be tweaked? At one time, you had explored the option of buying a bank. Is that a more urgent need now from the point of view of liabilities?
Not really, because the markets have improved after the turbulence, and there's no shortage of liquidity. Of course, the reasons for excess liquidity are both higher risk aversion and low demand. We thought about buying a bank because there was a specific opportunity but no strategic opportunity is without its pros and cons.
I can think of many reasons why remaining just as we are is the best thing for us, because it gives us so much flexibility. The particular bank that we were looking at had a certain reach in terms of the branch network; it had a certain size and there was a management-culture fit - most mergers fail on account of the difference in cultures.
It would have given us a greater control on the cost of funds, which, as a wholesale borrower, we don't have. And, over time, it would have given us greater stability over the funding base. Of course, it would have brought with it so many obligations.
So do you feel IDFC is fine as it is?
I don't think the only solution for us is a bank, though it could be a bank. On the other hand, if the financial system continues to grow at 20-25 per cent, there's no reason why in our current construct, we can't comfortably keep growing at that same pace. So, as long as our funding requirements do not become disproportionately large relative to the rest of the financial system, we can keep growing.
It's a very good situation to be in. So for us to contemplate a strategic option, there has to be something compelling about it. If we can, in our current construct, deliver return on equities of 15-20 per cent consistently, it would be quite good.
Is the AMC business making money?
Yes, we've done extremely well. When we acquired the business we had around Rs 12,000 crore (Rs 120 billion) of assets under management. Today we have Rs 25,000 crore (Rs 250 billion) and our market share has gone up because we have moved up to number ten from number 16.
Our fees would be a little less than one per cent. However, with changes in the regulation, there would be some pressure though in the long run that's probably good for everybody because the distributors were becoming usurious.
Is there a slowdown in infrastructure projects?
There's a slowdown in the roads sector but there's so much in the pipeline for the power sector. More and more projects are reaching financial closure and in the next three or four years, you should see several tens of thousands of megawatts come on stream. After the financial crisis, the debt portion is no longer a constraint and the equity markets, too, have rebounded.
So many promoters are able to access international markets. I do get a sense though that the markets have become more discriminating than they were at the peak. Therefore, not all promoters will have the easy access they had earlier. So people who have a poorer track record will find it harder to access money.
Why aren't road projects taking off?
There's a lack of confidence and there were problems with bidding processes and access to credit. There have also been problems relating to land acquisition that kept promoters from bidding for NHAI projects because it has been accumulating challenges of delivering land for projects that had been bid out. There were also problems with the settlement of disputes.
I don't think money is an issue now, credit is available. And since economic activity is picking up, traffic volumes for the national highways should be, generally speaking, high enough to not warrant too much government intervention in the form of viability-gap funding. Obviously, for the secondary roads, it has been hard to get private bidders interested without a certain amount of government support.
There were some concerns that banks were over-exposed to infrastructure?
Things have changed because of the refinancing scheme from India Infrastructure Finance Company Limited (IIFCL). As banks start lending more, they will, I expect, start to rely on refinancing from IIFCL. Over a longer term there will always be a concern: How much of the burden of power sector financing can the banks really take? But my hypothesis is that with the IIFCL refinancing available, this should buy us very valuable time.
