IDFC First Bank Limited

I have nothing but high regard for what VV has accomplished at IDFC FB so far. If anything they have gotten to many of their targets much sooner than what they had initially projected. And his experience at Capital First is no doubt very valuable, growing an NBFC while keeping NPA’s in check is no mean achievement.

It is just that the base rate of success in banking in India is not high. Most players have struggled to become pan India players, leave alone becoming a leading bank. In that sense IDFC FB has the right mix to become an urban centric pan India bank without having too much allegiance to a particular region or customer segment. Many banks with good underwriting skills struggle to get a cosmopolitan, contemporary culture going which prevents them from expanding successfully outside of their comfort geographies and areas. IDFC FB has this part sorted out so far.

However, in the quest to grow assets at 20% without having the advantage of low cost of funds there is always the possibility that certain risks have to be knowingly taken. Large banks have already built switching costs (credit card, demat account, insurance payments linked to account, mutual fund investments happening from the account, lifestyle benefits, automated mobile payments) for the customers who are already credit worthy.

There is a chasm that every mid sized bank needs to cross in India before it becomes a large bank with a strong competitive position. Take enough calculated risks to build scale but the risks should be granular enough to not affect balance sheet quality too much. It is a very tough task to pull this off even in a developed economy, leave alone one like India where the real addressable target market for lending is hardly 6% of the population on the retail side.

There is potential in IDFC FB for sure but investors should not conclude too much too soon, even if the operational piece of the puzzle is falling into place. We always need to do qualitative checks before developing a high conviction on lenders (any lender for that matter, not just IDFC FB) before we start thinking about whether they can become the next big, successful bank. There have been too many misfiring engines in the lending space over the past decade for a variety of reasons.

I sincerely hope that VV takes IDFC FB on the path to becoming a large, successful bank for many years to come.