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What would a venture capital firm that does impact investing have to do with starting and running a bank? Pretty much nothing, you would think. But Rajiv B. Lall, Executive Chairman of IDFC Ltd, does not think so.
He believes the lessons on financial inclusion that he learnt from Lok Capital, which he founded and is still associated with, will help the infrastructure financing company he heads as it seeks to transform itself into a bank.
IDFC is one of the several players that have applied to the Reserve Bank of India for a banking licence.
“It is a nice, interesting irony and coincidence that my outside-IDFC activities are helping a great deal in fashioning what I believe to be a very differentiated and promising business model for a new bank,” Lall said, during a recent interaction here.
Lok Capital experience
Lall, who turned 56 on Friday, says Lok Capital is all about financial inclusion. “This experience is now coming in useful when I think about the bank. It is partly the learning from Lok and its impact investing activities that I have been able to develop a fairly granular understanding of what it takes to deliver financial inclusion to the poor,” he says.
Lall, a doctorate in economics from Columbia University and who has been in the investment banking industry for more than three decades, is convinced that transforming into a bank is the only way forward for IDFC, which was set up as an exclusive infrastructure financing company.
He also believes that IDFC’s infrastructure focus will not get diluted if it turns into a bank. On the contrary, he says, it will only increase. True, as a percentage of the overall balance sheet, the infrastructure sector’s share will come down if IDFC gets a banking licence, but that is on a larger balance sheet size, he says.
Also, IDFC — a “one-trick pony”, in Lall’s words, in that it is now only able to offer its infrastructure sector clients term-lending — will be able to offer a whole range of services, which its clients are now getting from “my competitor banks”. “I can serve my clients better if I have more products. I can do that if I get a bank licence,” says Lall.
IDFC has grown at a fast clip since 2005, riding the wave of India’s infrastructure story, says Lall. “We were always believers that the development of infrastructure for the foreseeable future will be a secular growth story because of the extreme shortage of infrastructure services. That very basic and fundamental premise has come under a cloud.”
Infrastructure relies heavily on government regulation and policy, and the orderly, transparent, predictable interface of the private sector and the public sector. If that does not happen, can infrastructure really be a secular growth story, he asks.
It would only be an irresponsible management that would wait for things to improve, Lall says. IDFC preferred to think of alternative options proactively. “What is very clear is that asset diversification is very critical for us. We have to grow our business beyond infrastructure. And the most sensible and regulatory-wise the most stable way of doing that is as a bank,” he says.
“Coincidentally, it happens that once in a decade the window is opening up for new bank licences. It only makes sense for us to raise our hand for it.”
IDFC’s strategy for a bank will be two-pronged. One, it will serve its existing clients better. Second, it does not have the legacy issues and technological handicap that existing banks face in raising the level of financial inclusion. IDFC will be able to use the latest technology and reap the advantages of regulatory changes that allow partnerships with others to improve financial inclusion. “Banking correspondents, telecom companies, all kinds of other people who can help a new entity improve the last mile delivery at a fraction of the cost of an existing bank,” explains Lall.
He admits that even he was initially sceptical about IDFC entering the banking space, but after spending three months in putting together a business plan, he has become a total believer.
But what if the application for a licence is rejected? Lall says IDFC is prepared for that, too. “We still have to diversify our assets. We will have to pursue other forms of financing,” he says. “Give us a couple of months, we will roll them out,” he adds.
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