Letter to Shareholders

Equity capital

Equity capital is a key foundational element. In June 2020, we raised ₹ 2,000 crore of equity capital which took our capital adequacy to near 15%. With extreme chaos in markets worldwide and in India, most potential institutional investors wanted to stay in their bunkers. Investors had their own redemption pressures to deal with. Also, from their point of view, there was no visibility on the credit losses that may hit because of COVID-19 disruption, and in the chaos, projections were meaningless. Under these circumstances, we got our Board clearances, pitched to potential investors, got legal clearances, secured shareholders’ approval and all this just operating from behind video screens. Our Bank raised ₹ 2,000 crore of fresh equity capital from top-notch investors by requesting them to look beyond our current P&L numbers and focus on the core business we are building. We thank you, our new investors, for your trust in us, we will not let you down.

The best part is that we did not even engage an investment banker; these were direct deals by our Bank, and in this process our Bank must have saved about ₹ 30 crore in investment banker fees alone!

Many people believe that this capital has been raised to cushion losses that may accrue because of COVID-19 disruption. Indeed this was an insurance availed by us because of COVID-19, but we hope and believe we may not need to use it as we work our way through the next few quarters.

Culture

Culture is not just about how things get done around here, it’s a much longer list such as about how people conduct themselves in office and in society, how committed they are the mission, how to resolve conflicts, not using offensive or abusive words, imbibing the organisation’s policy that the customer comes first and so on. For instance, when recently one private sector bank was in the news for wrong reasons, I wrote a mail to all our employees asking them not to chase down that bank’s customers to move their deposits to us, and not to talk ill about that bank or about any other bank for that matter. If you have to comment, respect other banks for their work. We educated our staff to say that the regulator is monitoring the situation closely and we are sure the situation will stabilise for them soon. To prey on someone else’s customers, particularly, when they are down is not our style and that’s not how we want to grow, was the message. I am happy that our employees stuck to this theme entirely.

The Bank honoured all offers that were made to new hires before the pandemic, including all lateral hires as well as 550 management trainees even when COVID-19 uncertainty was at its peak. This is in keeping with the Bank’s philosophy of honouring its commitments in all circumstances.

So, culture is not a slogan, but it is what is practised day in and day out; and I assure you that we work towards instilling good practices in our people.

It is not without reason that CRISIL, India’s premier rating agency has evaluated and rated our fixed deposit programme FAAA, which is the rating category indicating highest degree of safety. They evaluated all the above factors before assigning us the rating. CRISIL also rated our long-term subordinated unsecured debt at AA stable, the rating for unsecured debt very few banks in India enjoy and that tells you something about the inherent strength of our Bank.

Growth

A number of investors have sought to know when we will see growth at the Bank. I agree we have not grown the overall loan book last year. It’s deliberate. Because as mentioned earlier, on the liability side we had low CASA ratio at merger. If we continue to grow the loan book, then this issue of low CASA ratio and low Retail Deposits % will never get fixed. I see it as my responsibility to get all our foundations firmly in place before we start growing the loan book, and retail liabilities is one of the foundational items for a bank. So, we grew retail liabilities instead.

Safety first

Let me share with you a quick instance of the benefit of not growing loan book in FY20. As mentioned earlier, during the last financial year, we raised ₹ 20,710 crore of Retail Deposits but used it all to retire Certificate of Deposits (short term institutional borrowings) of equivalent amount. Our CD book (short term money) came down from ₹ 28,754 crore as on March 31, 2019 to ₹ 7,111 crore as on March 31, 2020, a reduction of ₹ 21,643 crore within a year!

It turned out to be very prescient because when COVID-19 struck in March of 2020, which is a once-in-a-century event, suddenly many institutional markets like Insurance companies and Mutual Funds practically froze and stopped investing. CD markets and NCD markets, which was flowing freely until a quarter ago, stalled as Mutual Funds were facing extreme redemption pressures. But we had worked on this matter all through the year, and were well prepared for a crisis, if any. Because we hardly had any significant CD to repay, we were in a comfortable position

We closed March 31, 2020, with high liquidity, with Liquidity Coverage Ratio of 141%. To sum up this point, safety first is one of our foundational principles, and we demonstrated it during the year in ample measure. I assure you we have a highly stable liabilities platform.

As far as our institutional borrowings are concerned, they are the most stable, as they cannot be called on demand, and are payable on maturity, which are generally between 3-5 years.

It is not without reason that CRISIL, India’s premier rating agency has evaluated and rated our fixed deposit programme FAAA, which is the rating category indicating highest degree of safety. They evaluated all the above factors before assigning us the rating. CRISIL also rated our long-term subordinated unsecured debt at AA stable, the rating for unsecured debt very few banks in India enjoy and that tells you something about the inherent strength of our Bank.

Asset quality

Our Bank maintains high asset quality. Our retail loan book, which is the large and growing proportion of our Bank’s book, has seasoned over a large number of credit cycles over 10 years (including both entities’ lifetimes). We have strong monitoring and collection capabilities, and strong checks and balances. Our portfolio and processes have been stress-tested through economic problems of 2010-14, Demonetisation (2016), GST implementation (2017). Through a 10-year period including the stress periods mentioned above, our retail Gross and Net NPA have broadly been at 2% and 1% respectively. In January and February 2020, we were experiencing our lowest quarterly retail credit losses in recent times. As far as the impact of COVID-19 on our retail portfolio is concerned, the exact impact on the portfolio is yet to be known, but we are working our way through this;we have time-tested systems, processes and capabilities. We will share more with you as more clarity emerges.

COVID-19 impact on our business

During April and May 2020, our incremental lending volumes were practically nothing. Our book growth is therefore stalled this quarter. But as things begin to normalise, people will begin consuming again. We are beginning to see that consumption businesses like personal credit, two wheelers etc. have already picked up to about 50-70% of pre-COVID-19 volumes, where ever lockdown is lifted. Demand in SME lending is still low, say 20% of pre-COVID-19 levels. My sense is that we have lost about one year of book growth. Once we see through this phase, then India will be back to its growth phase, and we will be back to our growth ways. We provided moratorium to almost all customers who requested for it. Right now we are actively reaching customers and providing them funding under the Emergency Credit Line Guarantee Scheme from the GOI.

Why 7% on our Savings Deposits make ample sense

Our Bank has a unique history because of two lending institutions merging with each other. Capital First’s borrowing cost for Q2 FY19 (quarter prior to the merger) was ~ 8.5%. IDFC Limited borrowings, specifically pertaining to infrastructure and long-term bonds that were transferred into IDFC Bank at de-merger, were at ~ 8.9%. Together, including some other similar borrowings, we are servicing ` 43,875 crore (as of March 31, 2020) of such borrowings at ~ 8.6% anyway. Hence seen in this light, 7% is pretty inexpensive money for us and is a positive trade for the Bank! Further, the business lines we have chosen for incremental lending comfortably support these rates.

Our responsibility

I often talk to customers from different socio-economic backgrounds and understand their cash flows. In the last one year alone, I have spoken to newspaper vendors, rural microloan customers, buffalo and cow owners, taxi drivers, coconut sellers and the like, at their place. They live in difficult conditions with family income of ` 5,000-15,000 a month. We realise that even if we take a penny from them which does not belong to us, it would be inappropriate. A lot of them are not very literate and may not even know if we did fine-print banking with them. If we take it systemically, it would be terrible; it would be ungainly money for us.

The information arbitrage between them and us is huge, and this adds to the responsibility of our employees to be ethical at all times with all of them. No matter the wealth of the counterparty, to behave appropriately and accurately with them is our responsibility. Through this letter, and even in our internal communication, we say this at large, so that if any employee plans something inappropriate in any segment for pressure of P&L, or tries fine-print banking, then their colleagues will hold them back and point to our principles, which is an inherent check and balance.

Customer Experience

Our commitment to customer experience is extreme. When I do come across customer issues in customer review meetings, I take them very seriously. We deal with millions of customers, so any solution we find has to be systemic. We have developed systems whereby every issue is drilled down to the root so that it does not occur for other customers.

Based on customer surveys, the trend of Problem Incidents percentages and their trendlines, the descriptions of customer goodwill by our branch teams, etc. our staff fels that

on the whole, we do provide outstanding service. But “on the whole” is not the “whole thing”. Though in percentage terms mistakes are low, but in terms of absolute numbers we are making many mistakes. This is one of the issues with the early stage of our Bank, because of huge inflow of customers at this early stage of our Bank. Our systems were down on April 1, 2020, our Mobile App was very slow, and it caused great inconvenience to customers who logged in that day. I once came across a customer complaint where our response had rather long-winded pleasantries and platitudes, included a sales pitch for 7% savings account to boot, but did nothing to solve the customer’s problem. In another instance, the call center sent a holding mail to the customer, had redirected the query to another internal department for a solution, while in that case, the call center could themselves have decided in favour of the customer in an empowered way. In another case, instead of giving a customer precise information for a query, we had sent a mail with many links embedded, a lazy job, almost saying “go discover yourselves”. These things upset me. In each of those cases, we have set up teams who are automating the processes, implementing STP, delegating authorities, increasing team capacity if required, empowering them, training them, and eliminating the root cause in each case. We are also introducing technology-led solutions using data analytics and digital workflows to address these issues. Most importantly we are educating our staff to be empathetic to our customers if we want to be a great bank.

However, I must say that the drive of our employees to deliver outstanding services, is unparalleled. On one occasion, our customer, a respected septuagenarian, called us one day at the contact center, expressing urgency for his wife’s operation to be done, and needed cash urgently at the hospital. Our customer service executive reached out to the nearest Ahmedabad branch executive, who carried the FD liquidation form to customer at the hospital, and delivered cash at the hospital. The customer’s wife’s operation was successful and customer was thrilled. On another occasion our staff had gone out of the way to deliver a lost Debit Card to a householder in time for festivities at Kolkata in 24 hours as courier services were not available at that time. Our staff proudly share hundreds of these stories with us, sometimes even customers write in with these stories. We appreciate all those employees immensely. The ideal solutions are of course systemic. Our Bank ensured uninterrupted services at both the Branches and the Contact center during the lockdown. We quickly arranged for telephony apps, VPN and other critical infrastructure, and we ensured that almost all services were available for our customers throughout the pandemic crisis and lock-down.

We are still in our early stages, learning, improving our processes, and finding systemic solutions to every problem. I am quite confident that with this constant process of introspecting, learning, rapid re-learning, willingness to scrap what we built and rebuild, and our willingness to build new technologies, we will improve our services going forward and fill our gaps.

They live in difficult conditions with family income of ` 5,000-15,000 a month. The information arbitrage between them and us is huge, and this adds to the responsibility of our employees to be ethical at all times with all of them. No matter the wealth of the counterparty, to behave appropriate and accurately with them is our responsibility. Through this letter, and even in our internal communication, we say this to them, so that if any employee plans something inappropriate programme in any segment for pressure of P&L, or tries fine-print banking, then their colleagues will hold them back and point to our principles, which is an inherent check and balance.