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IDFC First Bank experienced a significant 53% decline in net profits during Q3FY25, primarily attributed to increased provisions for its microfinance (MFI) portfolio. This downturn, however, is not indicative of a broader systemic issue within the bank. CEO V Vaidyanathan clarified that the operating profit from other segments, including home loans, loan against property, vehicle loans, consumer loans, corporate loans, SME loans, and credit cards, actually saw a robust 32% year-on-year increase, reaching ₹4,560 crore in the nine months ending December 2024. This highlights the resilience of the bank's diverse lending portfolio outside of the MFI sector. Vaidyanathan emphasized the stability of these other portfolios, indicating that the challenges are concentrated within the MFI segment alone. The bank attributes this rise in provisions to industry-wide trends impacting the microfinance sector, suggesting that it is not a unique challenge faced by IDFC First Bank.
The bank's foray into microfinance lending, while currently presenting challenges, stemmed from its strategic transformation from an infrastructure development financial institution (DFI) to a full-fledged bank. Prior to this transformation, the bank lacked the capacity to effectively serve the needs of weaker sections of the population and small borrowers. The MFI business thus served as a means to achieve profitability while simultaneously meeting priority sector lending targets. Furthermore, the MFI segment initially offered attractive margins and demonstrated profitability. However, acknowledging the current challenges, the bank plans to scale back its MFI operations, adjusting its strategy to meet priority sector lending requirements through other, more stable business segments. This recalibration reflects a proactive approach to mitigate risk and maintain overall financial health.
IDFC First Bank anticipates a significant reduction in the size of its MFI book. The bank projects that by Q4FY26, the MFI book will constitute only 3-3.5% of the overall portfolio. This reduction is coupled with an expectation that the current stress within the microfinance industry will largely dissipate by that time, owing to the implementation of industry-wide reforms and regulatory changes. This strategic shift highlights the bank's intention to minimize exposure to the volatile MFI sector while focusing on the more stable and profitable segments of its business. The bank's management remains confident in its ability to navigate the challenges in the microfinance space and achieve its long-term financial goals.
Despite the challenges in the MFI sector, IDFC First Bank’s overall financial position remains strong. The bank’s non-MFI segments exhibit impressive resilience, with low special mention accounts (0.71% for 1+2 categories combined), gross NPAs (1.81%), and net NPAs (0.49%). These figures clearly indicate the isolated nature of the MFI-related stress. In contrast, the gross NPAs for the microfinance portfolio stand at 4.45%, and net NPAs at 1.1%, emphasizing the need for the bank's strategic recalibration within the MFI segment. This data underscores the bank's overall financial health, suggesting that the issues are contained primarily within the MFI portfolio, not affecting the broader financial stability of the institution.
The bank's deposit mobilization efforts have proven successful, with deposits growing by 28%. The CASA (Current Account and Savings Account) ratio stands at a healthy 47.7%, reflecting strong customer confidence and efficient deposit-gathering strategies. The bank attributes this success to its focus on improving customer service levels and providing a positive customer experience through its mobile app. Furthermore, the bank’s management demonstrates confidence in its ability to continue attracting deposits, even in anticipation of potential policy rate cuts, by focusing on superior customer service and experience rather than relying solely on interest rates as an attraction. This reinforces their long-term vision focused on delivering value to customers and building a solid foundation for sustained growth.
Concerns regarding potential impacts from future policy rate cuts or regulatory changes, such as the Liquidity Coverage Ratio (LCR), Expected Credit Loss (ECL) provisions, and project finance regulations, were addressed by the bank's management. The bank stated that it doesn't engage in project financing, effectively mitigating potential risks associated with those regulations. Regarding the other regulatory changes, the bank adopts an approach of accepting these as given circumstances and focusing on core business growth. This approach is reflected in the bank's development of diverse business lines such as wealth management, cash management, and Fastag, highlighting a diversification strategy that minimizes reliance on any single segment and creates resilience against regulatory shifts. This clearly emphasizes that the bank prioritizes long-term sustainable growth over short-term reliance on treasury income or specific segments of the market. Finally, the bank’s management projects a multi-decade growth trajectory, referencing the sustained growth of larger banks over time as evidence that profitability does not necessarily peak in a growing economy characterized by strong capabilities. This long-term vision underlines the institution's confidence in its ability to sustain profitable growth despite near-term market fluctuations.