Joel Rebello

Mumbai: Set up on January 30, 1997, as a specialised financial intermediary for infrastructure projects, Infrastructure Development Finance Company (IDFC) has come a long way. Today, it defines the breadth of the infrastructure financing field in the country, from the traditional power, road and port projects, to the newer areas of telecommunications, healthcare, integrated transport, education and tourism.

IDFC has also diversified into share brokerage and mutual fund businesses, having bought the brokerage firm SSKI and the Indian mutual fund business of Standard Chartered.

IDFC executive director Vikram Limaye spoke to Joel Rebello on the company’s plans and the challenges it faces.

A 20-basis point improvement in spreads quarter-over-quarter is excellent considering the current market conditions. What is the reason for the success?

There are a couple of points in it. From a spread perspective, it depends on where we are in the interest rate cycle, whether rates are rising or falling and what part of spreads are moving differently.

On the asset side, we are price takers. We have to arrange funds from banks like SBI, and these banks may price it or misprice, it depends on liquidity and the rate situation, which is not in our hand.

The other part in the spreads is the product mix. Our product mix is diversified — we are into project finance, corporate loans, promoter finance… many of them are banking products.

Is there pressure on your spreads currently?

We are a conservative company. We choose to under-promise and over-deliver. But lending all around the world is commercially driven and spreads will get driven down by competition.

In the long term, we see a contraction of spreads.

In the shorter term, it depends on many factors, like what the RBI does to rates, what it means for the rest of the financial services sector, and what happens if banks decide to reallocate retail lending to the corporate sector.

Also, now with the Basel II norms, the risk weightage to infrastructure would be higher. PSU banks may either cut down their lending to infrastructure or charge more, both of which would be profitable for us. We have already seen real estate lending by banks plummet in the last one year while lending to infrastructure has increased.

What are the challenges in this quarter, considering how macros such as inflation, rupee, slowdown etc are stacked up?

We should not look at this business on a quarterly basis, because we could be in the middle or end of the project in a quarter. A better way is to look at it over a 12-month period. But it will be nothing different from what we are doing this quarter. In the next 12 months, the challenges would certainly be more, because there are enough uncertainties globally. There is volatility in equity markets and some portions of our business are linked to the equity market. Overall, there is caution on the risk perception and policy matters. Elections are due, so there is likely to be a slowdown in projects. Also, there are uncertainties on interest rates, inflation is up and the cost of business is also high, with steel, cement, fuel as well as people costs increasing.

What about the shortage of skills in the infrastructure sector?

There is a shortage of both skilled and unskilled people. It’s a huge shortage and will take time to go away. In financial services, there is a problem in getting quality people. Our business is more sophisticated and a different understanding of the sectors is required. Even among banks, there is limited exposure to this sector… so finding talent becomes difficult for us. On the borrowing side, companies are facing a shortage in the construction and engineering space which is leading to delays in projects... And the shortage is right from civil engineers to labour.

Our operating costs have risen to 1% from 0.5% 12 months ago, mainly because of the cost of people, nature of business and talent required for investment banking and private equity.

What is your attrition rate and how do you attract talent?

Our attrition rate on an average is 5-6%.We encourage people to move across departments, which helps them learn diversified fields in financial services while being with the same company.We have our in-house training right now, but are tying up with education institutions to customise a course.

Has the consolidation of brokerage SSKI been completed?

I think we have done well, (but) of course in some areas it is still a work in progress. But the slowdown in the equity markets, investment banking, capital raising and lower trading volumes because of lesser FII investments may impact SSKI.

The income of brokerages has taken a beating. In the light of this, what are the offsets that IDFC has planned?

Our business model is based on diversified revenue streams and blended return on equity between low and high risk, which smoothens the volatility. For example, our investment banking, asset management and lending have a steady stream of revenues with lower risks.

So would you put more thrust on bancassurance, retail loans etc? Would you be entering these fields?

Banking and insurance require permission from Irda and RBI. Whether we will remain a non-banking finance company or obtain a banking license is a strategic question for more discussion and deliberations. But we will not do retail loans, we are an institutional player.

At what stage is your $1-bn project equity fund plan? How much money has been mopped up on this front?

We expect the fund to get $1.5 to $1.75 billion in the next 2-3 months. This includes the $1 billion mentioned. We have already got commitments from investors and are awaiting approvals from RBI and Sebi and the foreign venture approval.

What is the difference between project equity and an infrastructure fund or a private equity?

Project equity is investment in an asset or a particular company. For example, IDFC may invest in a particular road or port built by GMR. In India, currently because of where we are in the infrastructure cycle, there are more greenfield projects than operating ones, but in the next few years, we will certainly see more operating projects.

What’s the update on StanChart Mutual Fund that IDFC bought?

Technically, we are yet to become owners until May 30. The mutual fund business will give us scale and size, but not high margins and profitability. It gives us another product mix. There has been talk that IDFC is planning some infrastructure funds along REIT lines… That is true. But we are awaiting clarity on regulations for real estate mutual funds… we will certainly offer that product.

Do you plan to finance real estate projects?

We never financed land acquisitions and do not plan to do so, because RBI is not comfortable with it. However, we have projects of large townships, industrial projects, IT and SEZs. We also have hotels and we would do commercial and industrial build-up. Real estate projects account for 10% of our portfolio.

How has infrastructure financing been going on in India?

The trend in infrastructure in the last 3-5 years has been in the right direction. But the pace is not fast enough, we need it to be a lot faster. Also, there are phases like the coming elections when there will be a slowdown. But we are still bullish because India doesn’t have an option if we have to achieve that 8.5% growth. We need ports and airports to continue growing and there is a huge demand-supply mismatch. For example, infrastructure is just 4% of GDP in India while it is 10% in China.

What are the policy bottlenecks you face in terms of infrastructure development?

There is a policy bottleneck in the public-private partnership model we use. The private sector can’t go on building without policy. But the policy and regulation clarity has improved in the last five years. But there is still more to be done in risk sharing, power transmission and distribution. There is also confusion over SEZs and whether airports should be privatised or airport authority should bring in funds. But there will be a lot more clarity going forward.

How has the government’s role been so far, both at the state and the central level?

The government has a role which will remain the same if not increase going forward. But hopefully, it will become more standardised. Five years from now, the government will still play a significant role because there are areas like rural sector and irrigation which are very large.

Where do you see IDFC 5 years down the line?

I see IDFC as a unique financial institution with a unique culture, talent pool — the best in the industry. There will be various products, but infrastructure will continue to be the core anchor.

Source : DNA