“We were hit by the impact of microfinance but it is behind us now,” said V Vaidyanathan, MD & CEO, IDFC First Bank, in an interview with ET Now.
He added: “You will now see our net interest margin improving. The repo rate pass-through is complete, the balance sheet is growing well and asset quality remains strong.”
Asset quality stable, credit costs declining
Vaidyanathan pointed out that the Special Mention Account (SMA) figures and slippages have been continuously improving over the past six quarters.
“Our SMA-1, SMA-2 and NPA numbers are declining quarter over quarter. It’s very direct: when SMA goes down, the cost of credit goes down,” he explained.
The bank’s gross and net NPAs have declined both year-on-year and sequentially, indicating recovery. “With the MFI restructuring largely completed, we are confident in credit quality and confident of stronger income growth,” he said.
Deposit base has grown six times since the merger
IDFC First Bank’s deposit franchise continues to strengthen rapidly. From ₹40,000 crore in December 2018 – when the merger took place – deposits have risen to ₹2.7 lakh crore today.
“That’s more than a six-fold increase,” said Vaidyanathan, who attributed the growth to brand credibility, strong corporate governance and stable product performance.
“Every year, deposits are growing by ₹45,000 to 50,000 crore. That shows the confidence we have built,” he said.
Margins will improve as financing costs decrease
The bank’s net interest margin (NIM) stood at 5.59% this quarter, but Vaidyanathan expects it to rise past 5.8% in FY26.
“NIM fell this quarter as repo rate transmission was fully passed on to customers. But now, with fixed deposit rates turning lower over the next two quarters, margins will start improving,” he said.
He added that it takes about 12 to 15 months for FDs to adjust their prices, and IDFC First Bank “has been in that cycle for six months already.”
CASA ratio remains robust above 50%
The bank’s CASA ratio has remained strong at over 50%, supported by competitive savings rates.
“Yes, we have offered attractive rates, but we have also started rationalizing them. The 0-5 lakh slab is now at 3%,” Vaidyanathan said, adding that the bank aims to stabilize its CASA ratio in the 45-50% range, which he called “healthy and sustainable”.
Return on assets (ROA) to recover
The bank’s return on assets (ROA) has been under pressure in recent quarters due to MFI cleanup, but Vaidyanathan expects this to improve steadily from the third quarter onwards.
“Think of it as a matter of a year and a half. The problems are behind us. As new companies become profitable and credit costs normalize, ROA will rise again,” he said.
ECL, risk weights and operational guidelines ‘marginally positive’
On the new Expected Credit Loss (ECL) norms and related regulatory changes, Vaidyanathan said the initial assessment looks favorable.
“Our initial analysis suggests that the combined impact of ECL, revised risk weights and operational risk standards will be marginally positive for us,” he said.
Microfinance book will stabilize in the fourth quarter
The lender expects its microfinance portfolio to bottom out in the fourth quarter of FY25. “There is still a run-off, but the books should stabilize by the fourth quarter. After that, growth will resume alongside the broader portfolio,” Vaidyanathan noted.
Outlook for FY 26-27: Growth momentum, margin expansion
Looking ahead, the bank has targeted a NIM of more than 5.8% and steady balance sheet growth.
“With deposit costs declining, earnings rising and asset quality remaining stable, the coming quarters should see consistent improvement in both NIM and ROA,” Vaidyanathan said.
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