“WE DON’T HAVE THE LUXURY TO GROW ORGANICALLY”

According to RAJIVLALL, managing director of IDFC Bank, the merger proposal between Shriram Capital and IDFC Group comes from a very strong gut feeling that the relationship would work, no matter the complexities involved in a three-layered deal. Edited e

You are growing very fast. You became a bank only in 2015. Why such a hurry? The reality is that we started with a very large balance sheet and we started with listing. So, then, the constraints under which you have to devise a strategy are different than those of a start-up bank. You have to find a balance between the luxury of building something at a more leisurely pace versus diktats of the market. It would have been impossible to satisfy a very strong group of stakeholders by doing it completely organically.

Therefore, inorganic growth, strategically, we believe is the right response to the challenge we found ourselves facing, of satisfying a very large number of shareholders as a listed company. Those include the government, also one of your shareholders? Everybody, yes. It is a case of very different organisations trying to merge in a complex deal? We need to systematically communicate to you that your perspective of what a bank is, and what a banker’s perspective of what a bank should be, all need to change in the interest of the country and of all stakeholders. We didn’t get a banking licence from the Reserve Bank (RBI) in such a competitive landscape only to build a bank like any other. We were given an opportunity to build a new-age banking institution that takes advantage of all the changes in regulations, the changes in technology that have been brought about to actually take banking much deeper into the country. How can you have Shriram Transport Finance (STF) with IDFC Bank under the same roof, given the RBI rules? Not true. You have to carefully read the regulations. Look at the 2016 ones; that’s an evolving thing. The RBI, at its discretion, is now willing to entertain the idea of some business continuing to be held outside the bank as part of the NOFHC (non-operative financial holding company), provided there is no duplication of business.

That discretion, our judgment says, is possible if the business is particularly focused on financial inclusion. In that case, the RBI is likely to be more sympathetic to the idea of preserving it as a monoline. About 98 per cent of what the STF does is priority sector loans compliance. Therefore, we feel the RBI should look favourably upon our application. Did you discuss this merger before with the RBI? We talk to them all the time. So, nothing that we have communicated to the market will come as a surprise to them. Is the RBI fine with the arrangement? We cannot assume they are fine with anything until we get the final approval. We are going as per their regulations, as these have evolved. How will you integrate the two brands? At the operating level, it would be IDFC-Shriram. With the RBI’s permission, we would like to call the bank IDFC-Shriram Bank. Shriram Transport, hopefully, would be called IDFC Shriram Transport… so on and so forth. Analysts say the deal won’t help grow shareholders’ wealth in IDFC and IDFC Bank. That is not true. When the diligence is done and the final numbers are disclosable, we are quite certain that it would be EPS (earnings per share)-accretive for both shareholders. IDFC Ltd today is a small stable, with two-three ponies. The value of some of these ponies has not reflected properly because of the holding company discount at the level of the parent shareholding. We are proposing to build a larger stable, with serious horses.

The transport finance company will bring ~1,300 crore of annual profit, growing at 15-20 per cent a year, directly to IDFC shareholders. Therefore, their dividend yield will definitely go up. IDFC Ltd is going to have very substantial stakes in the two insurance companies, which are eminently listable and profitable. Given the valuations of listed insurance companies, imagine what happens when those valuations are unlocked. How can IDFC Ltd shareholders lose? How would your minority shareholders react to the proposal? The approval in the EGM (extraordinary general meeting) for whatever transaction takes final shape will be placed before all shareholders. In this deal, what the promoting shareholders would be getting is exactly the same as the minority shareholders. As long as 75 per cent of all shareholders, including promoting shareholders, vote for the deal, we will have the requisite support. So, minority shareholders need not feel they have been treated any way inferior to any other shareholders. No merger is easy but a lot of the job is about communication. No jobs are threatened, everybody gets accommodated. What about the Piramal stake? This is another misunderstanding that needs clarification. The promoter of Shriram Capital is Shriram Trust. PEL (Piramal Enterprise Ltd) is not the promoter. And, the beneficiaries will be employees and those employees would be working for IDFC Group. Shriram employees will have a share of the merged company through their trusts. What about IDFC employees? IDFC people have stock options, a reasonably good level of stock options. Analysts say it would take about five years for the integration and in the interim, both won’t grow that much. When we were doing Grama Vidiyal (GV), there was the question of integration. GV had 4,000 employees; IDFC Bank had 3,000. But, we did integrate. Alignment of purpose is the most vital and it should come from the top. That alignment of interest is remarkable with Shriram Group. There is chemistry. The best decision I made in my life is when I married my wife. I proposed to her in four weeks and we’ve been married 33 years. There are some decisions that are made from an instinct, a feeling of gut. This is how chemistry works. And, that feeling on both sides is very strong. What do Shriram shareholders get? The STF has built a phenomenal business by developing a deep relationship with their customers. But, they feel handicapped, as they are unable to offer all the services an entrepreneur needs, from banking and finance perspective. You can have a business correspondent relationship such that our savings products are now systematically sold to the customers of the STF. Second, with IDFC HoldCo being the owner of the STF, their cost of funding from the market is going to come down.

Third, we in the bank have made very significant investment in very sophisticated technology in retail distribution. Think of the data you can collect from the three-four million customers the STF has. Gaining access to data - it might sound futuristic today - will democratise access to credit. For example, registration under the GST (the new goods and services tax). It is much more valuable than getting some kind of physical collateral in terms of our ability to underwrite. But, you could have always done an alliance. We could have but an alliance is a very nebulous thing. The level of commitment and requirement for seamless data sharing, alignment of purpose might not be there in an alliance.

IDFC LTD TODAY IS A SMALL STABLE, WITH TWO-THREE PONIES. THE VALUE OF SOME OF THESE PONIES HAS NOT REFLECTED PROPERLY... WE’RE PROPOSING TO BUILD A LARGER STABLE, WITH SERIOUS HORSES