IDFC may find it difficult to open its doors for banking services by October this year. The company has asked the finance ministry for a tax support for its infrastructure bonds to add capital to its balance sheet but it is not working out.
IDFC is one of the only two financial institutions which got a banking licence from RBI in the last round of issue of these licences. The other is Bandhan Financial Services.
The problem is simple. IDFC, like most other financial institutions, has run up a long bucket of loans that have gone sour in the infrastructure sector.
When converting to a bank it will need additional capital as buffer for those loans as per RBI guidelines. The company has been raising tax-free infrastructure bonds for some years and would like to migrate the sum to the bank to be clubbed as part of the additional capital.
But the revenue department in finance ministry is not willing to allow this to happen. It also has a reason for it. The bonds were offered to reputed non-banking financial companies (NBFC) like IDFC, PFC and others for them to raise money at attractive rates.
Revenue secretary Shaktikanta Das said he has received the application from IDFC. “It has been forwarded to the Central Board of Direct Taxes. Let us see how they respond to the demand,” he said.
In response to an email from The Indian Express, the Mumbai-headquartered financial institution has claimed its schedule for setting up an IDFC bank is on track.
Unlike banks which raise deposits from the public, large NBFCs do not opt for this route. This gives them freedom to focus on their core competencies and ensure better status with rating agencies, a critical requirement to finance projects.
Giving IDFC the leeway is likely to raise copycat demands from other banks to give them access to this route. Indian banks have been under tremendous pressure to raise funds to provision for their non-performing assets. According to a report by Crisil issued in May, the level of gross non-performing assets of the Indian banking sector is expected to reach 4.5 per cent of total assets at the end of reporting year, March 2015. This will, however, be less than the actual numbers since some of the banks might be able to show better numbers through new methods of restructuring those loans, approved by RBI.
For instance, as per latest published figures, IDFC’s net NPA is 0.2 per cent for FY15 almost the same as last year. But its net restructured loans have reached 7.8 per cent of assets. It was 4.5 per cent in FY14. In absolute terms the restructured loans are Rs 4,270 crore, almost 54 per cent more year-on-year. The sum is considerable since IDFC’s total loan book is Rs 57,381 crore.
An IDFC spokesperson in an email reply noted: “Our Scheme of Demerger has been unanimously approved by IDFC Board of Directors and also by IDFC shareholders … There are several complex technical issues that need to be addressed in this transition, the treatment of 80 CCF bonds being one of them. We are working systematically through each issue in consultation with stakeholders, including the Ministry of Finance”. Of the loan book of IDFC, over 41 per cent is to the power sector. The NBFC had to make a sharply higher provisioning of Rs 1,013 crore up by 61 per cent from FY14.