IDFC First Bank Ltd Management Discussions

MANAGEMENT DISCUSSION & ANALYSIS GLOBAL MACRO-ECONOMIC ENVIRONMENT

Global monetary policy rates peaked in FY24 as central banks made significant progress in their fight against inflation. The Covid-19 induced supply-side shock eased with moderation in global commodity prices and normalization of supply chains. The US Fed Funds rate peaked at 5.38% as of July 2023, after cumulative rate hikes of 525bps since Jan 2022. Apart from rate hikes, the Fed also initiated Quantitative tightening, which resulted in Fed balance sheet reducing to US$7.5 trillion as of March 2024 vs post Covid-19 peak of US$9 trillion.

Core PCE inflation reduced from peak levels of 5.4% as of September 2022 to 2.6% as of March 2024. The moderation was led by goods disinflation with moderation in global commodity prices and supply chain normalization. Meanwhile, tight monetary policy kept services inflation contained, despite strong growth conditions. The imbalance in US labour market reduced with reduction in excess demand for labour, as demand for labour reduced and supply picked-up.

The disinflation process was uneven with inflation pressures briefly rising in Q4FY24. As a result, the FOMC members indicated that restrictive policy will be maintained for as long as needed. The FOMC dot plot indicated one rate cut in 2024 versus three rate cuts earlier. Growth conditions in the US remains on the stronger side compared to other DMs, supported by consumption demand. While the labour market is more balanced, the demand for labour remains higher than supply, keeping wage growth, above pre-Covid-19 levels. Another factor which has supported consumption demand is expansionary fiscal policy in the US, supporting employment creation. The US consumer has been able to withstand aggressive pace of Fed rate hikes as household leverage reduced and majority of mortgage loans are fixed rate.

The US is facing a unique combination of strong growth and sticky inflation, which could force the Fed to remain on a prolonged pause. Economic conditions in other DMs differ from the US, with weakness in growth and easing of inflation pressures. This has force DM central banks to diverge from the Fed in FY25 and initiate rate cuts.

DOMESTIC MACRO-ECONOMIC ENVIRONMENT

Indias growth recovery remains on strong footing with FY24 GDP growth at 8.2%. Growth recovery was led by investment, supported by government capex- both Centre and state government. As a result, investment to GDP growth rose to 33.5% in FY24, which is a 11-year high. Meanwhile consumption expenditure remained muted with rural demand showing weakness, countering strong urban demand. Uneven monsoon and weak rural wage growth dampened rural demand. Meanwhile, urban demand remains on the stronger side, supported by relatively stronger urban wage growth and formal sector employment. Drag from net imports increased in FY24, led by weakness in merchandise exports.

By sector, growth recovery has been led by services sector with continued recovery in contact intensive ‘trade, hotels and transportation and real estate sector. Manufacture sector growth also improved with improvement in profit growth of listed companies. Listed company profit growth in both services and manufacturing sector was supported by lower input cost in FY24. Construction sector growth was supported by government capital expenditure.

The strong growth in urban demand conditions is also indicated by revival in bank credit growth which rose to 20.2% in FY24, led by retail and services loans. A more gradual recovery was seen in industrial loan growth, especially large industries. Share of retail credit in overall bank credit has risen to 32% vs 26.3% in FY20. Credit growth was led by private sector banks, whose share in bank credit increased to 42% as of March 2024 from 39% as of FY23. Meanwhile the share of PSBs reduced to 53% of total bank credit vs 55.9% in FY23.

Strong credit growth was associated with improvement in credit quality with overall banking system GNPAs reducing to multi-year lows to 2.8% as of March 2024. Improvement is seen across public and private sector banks. To ensure credit quality holds-up and enhanced transmission, RBI increased the risk weights for consumer credit for Banks and NBFCs in November 2023. Risks weights on bank lending to NBFCs was also increased.

Source: CEIC, RBI, IDFC FIRST Bank Economics Research

RBI - strong growth provides policy space to remain on pause

RBI is facing a combination of strong growth conditions and moderation in inflation pressure. CPI inflation moderated to 5.4% in FY24 from 6.7% in FY23. Food inflation has been volatile in FY24, due to adverse weather conditions. Monsoon in 2023 was uneven both temporal and spatial distribution, due to El Nino conditions. There have been successive food price shocks, spread-over vegetables, cereals and pulses. Food inflation remains elevated at 7.0% in FY24 vs 6.7% in FY23. Meanwhile, core inflation dynamics have been much more favourable with broad-based moderation spread across services and goods. Core CPI inflation has eased to 4.4% in FY24 vs 6.3% in FY23. The coexistence of strong growth conditions and softness in core inflation indicates that the economy is not overheating. The RBI paused its rate hiking cycle in April 2023, after hiking repo rate by 250bps (over May 2022 to February 2023).

To improve transmission of rate hikes, RBI tightened liquidity conditions by imposing ICRR of 10% on incremental NDTL in August 2023. Liquidity conditions had eased in H1FY24, due to surge in Balance of Payment surplus in Q1FY24, higher government expenditure and reduction in currency leakage due to withdrawal of 2000 rupee note. The ICRR was withdrawn in a phased manner over September 2023 to first week of October 2023. Subsequently, liquidity conditions tightened post the festival season due to rise in currency leakage and reduction in BoP inflows. The weighted average call rate was closer to MSF over October 2023 to January 2024. RBI liquidity management showed preference to keep overnight rates near MSF. This is likely to aid transmission of RBI rate hikes.

The transmission via the banking system has been faster due to external benchmark regime and tight liquidity conditions in H2FY24. Weighted average lending rates on fresh loans increased by 174bps over April 2022 to March 2024. Meanwhile weighted average lending rates on fresh term deposit rose by 250bps over April 2022 to March 2024. Higher deposit rates also reflected focus on mobilizing deposits, as credit growth at 20.1% outpaced deposit growth at 13.5% in FY24.

From February 2024 onwards there has been a change in RBI liquidity management with RBI conducting two-way operations (VRR and VRRR) to align weighted average call rate with repo rate. Interbank liquidity conditions eased from March 2024 onwards, with pick-up in government expenditure. Moreover, RBI used FX operations to infuse INR liquidity. BoP surplus increased in Q4FY24 with reduction in trade deficit and strong services surplus.

Strong growth conditions provided RBI policy space to remain on hold, to ensure CPI inflation aligns with target levels. The key risk to inflation outlook in FY25 remains from food inflation, which has been volatile in FY24.

10-yr G-sec yields reduce to 7.06% as of March 2024

For more than half of FY24, G-sec yields closely followed the trend of UST yield, rising to peak levels of 7.38% in October 2023 and subsequently eased to 7.06% by March-end 2024. The higher G-sec yield in H1FY24, was led by higher UST yields, rise in crude oil prices and Fed rate hikes. On the monetary policy front, the RBI paused its rate hike cycle in April 2023, while the Fed rate hiking cycle only paused in September 2023. In H2FY24, there was a moderation in both G-sec yields and UST yields, but the moderation in G-sec yields was more pronounced due to index inclusion expectation and announcements. Indias inclusion into the JP Morgan EM Bond Index started from June-end 2024 onwards and will bespread-over 10 months. Index inclusion is expected to get inflows of US$25bn to US$30bn in FAR G-secs. In anticipation of index related inflows, there was a pick-up in FPI inflows into FAR G-secs in H2FY24. As a result, FPI ownership of FAR G-sec rose to 4.5% as of March 2024 vs 2.8% as of September 2023. Another factor which supported moderating in G-sec yields was easing of CPI inflation pressures in H2FY24, led by moderation in core inflation and some easing in food inflation pressures.

The G-sec yield curve flattened in FY24 with reduction in long-term yields due to investor demand. Investor demand for g-secs has been rising, supported by formalization of the economy and households allocating a wider share of their financial savings in insurance, PFs and pensions. The ownership of long-only players increased to 39% of outstanding g-sec as of March 2024 vs 35% as of FY20.

Banks demand for government securities (centre and state government bonds) was strong in H1FY24 and weaker in H2FY24, due to changing liquidity conditions. In H1FY24 banks demand was supported by easing inter-bank liquidity conditions. In H2FY24, liquidity conditions had tightened considerably in Q3FY24, resulting in lower demand from banks. In Q4FY24, revival was seen as liquidity conditions eased. As a % of NDTL, banks investment in government securities reduced marginally to 29.2% as of March 2024 vs 29.9% as of March 2023. The slight moderation in banks holdings of government securities (% of NDTL) was also due to surge in credit growth. Credit-to-deposit ratio rising to 80.3% as March 2024 vs 75.8% as of March 2023.

USDINR: ranged-bound depreciation in FY24

In FY24, INR depreciated against the USD by 1.5%, reflecting dollar strength (DXY was higher by 1.9%) and CNY weakness (depreciation of 5.1%). There was a lot of volatility in DXY which saw phases of strength supported by unwinding of markets Fed rate cut expectation. The first phase of dollar strength was from Q2FY24 to Q3FY24, supported by rise in UST yields as Fed remained on pause contrary to market expectation of sharp rate cuts. Meanwhile, the second phase of dollar strength was in Q4FY24, again led by unwinding of market expectation of Fed rate cuts in 2024. Growth conditions in the US remained strong with consumption demand supported by strong labour market. Meanwhile, fiscal policy in the US remains expansionary which has supported employment growth.

Against the volatile global backdrop, USDINR remained relatively stable with RBI intervention limiting two-way volatility. The relative low volatility in USDINR also reflected improved external metrics of India with subdued current account deficit and adequate reserves. The reduction in current account deficit was led by lower trade deficit and robust services surplus. Trade deficit reduced to US$240bn in FY24 vs deficit of US$265bn in FY23, reflecting normalization of global supply chains and lower commodity prices. Indian Crude Basket averaged at US$82.5pb in FY24 vs US$93.5pb in FY23. Apart from lower crude oil prices, the decline in oil import bill was also aided by rising share of imports from Russia. In FY24, the share of Russia in Indias crude oil imports (volume) rose to 36% vs 22% share in FY23.

Meanwhile, services surplus surged to US$162bn in FY24 from US$143bn in FY23. The rise in surplus was partly due to decline in services imports (-3%YoY in FY24) which balanced the slowdown in services exports growth (4.5% in FY24 vs 27.8% in FY23). Current account details reveal that the pick-up in services surplus is led by software services and professional services. Post Covid-19 there has been a sustained rise in professional services surplus, reflecting the rise of global capability centres (GCCs).

On the flows front strong pick-up was seen in FPI inflows spread-over equity and debt. Net inflows rose to US$41bn in FY24 vs -US$5.5bn in FY23. However, there has been a slowdown in FDI inflows to US$15.4bn in FYTD24 vs US$25bn in FYTD23.

FX reserves remain adequate at US$646bn as of March 2024 vs US$578bn as of March 2023. The rise in FX reserves was led by RBI FX purchases followed by revaluation gains. Import cover is tracking at 11.6 months including spot reserves plus forward book.

FINANCIAL SUMMARY

In FY24, the Bank celebrates a significant milestone as we mark five years since the successful merger that propelled us into a new era of growth and opportunity. Over this period, the economy encountered various convulsions, including the NBFC crisis of 2019 and 2020 when the bank has to write-off large amounts that eroded the networth and book value per share significantly. Then unprecedented challenges brought by the COVID-19 pandemic in FY21 and FY22 impacted the growth and earning further during these two years. The global economic uncertainty stemming from the Eurozone conflict in 2022 along-side the geopolitical tensions in the Asian sub-continent, compounded by subsequent global rate hikes including rate hikes in the US and the European regions, further impacted the economic growth.

Overcoming from such adverse circumstances, Indian Banking Systems Credit grew by 20% in FY24 to reach Rs. 164 trillion; adjusting for the merger of a large NBFC to a large private sector bank, the credit growth was around 16%. Loans and Advances (including credit substitutes) of our Bank grew by 25% in FY24 to reach Rs. 2,00,965 crore.

Similarly, the Deposits in the banking system grew by 13% to reach Rs. 205 trillion, primarily driven by time deposits due to high interest rate scenario. Against this industry backdrop, the deposits of our Bank grew strongly by 39% to reach Rs. 2,00,576 crore which forms 1.0% of the total deposits in the Banking system.

Our steadfast commitment to prudent risk management, operational excellence, and unwavering dedication to our customers have been instrumental in our ability to not only weather these storms but to thrive and deliver exceptional performance against all odds. Despite navigating through these tumultuous times, the Bank has emerged remarkably resilient, exceeding expectations set at the time of the merger on certain growth parameters and met most guidance given at the time of the merger (Guidance 1.0).

Deposits

FY24 witnessed policy rates getting peaked with central banks globally making progress in the battle against inflation. The Reserve Bank of India (RBI) also maintained status quo in the policy rate during FY24 after increasing the repo rate by 250 basis points in six tranches from May 2022 to February 2023.

Even amidst this rigorous competition, the Bank managed to amass Rs. 56,941 crore of incremental customer deposits during FY24, a 42% YoY growth, increasing from Rs. 1,36,812 crore as of March 31, 2023, to Rs. 1,93,753 crore as of March 31, 2024. This surge was primarily driven by a 46% YoY growth in granular retail deposits, rising from Rs. 1,03,870 crore to Rs. 1,51,343 crore during the same period. Total retail deposits now constitute 78% of overall customer deposits as of March 31, 2024, compared to 76% as of March 31, 2023.

FY24 posed a challenge for the industry in terms of CASA (Current Account, Savings Account) mobilization due to increase in interest rate in the previous year, as CASA deposits outflows resulted into inflows of Time Deposits which grew comparatively faster in FY24. However, IDFC FIRST Bank saw a steady increase of Rs. 22,785 crore in CASA deposits during FY24, representing a 32% YoY growth from Rs. 71,983 crore as of March 31, 2023, to Rs. 94,768 crore as of March 31, 2024. Notably, the Banks current account deposits increased by 25% YoY, and savings account deposits rose by 33% YoY in FY24.

The granular retail term deposits of the Bank increased by Rs. 27,060 crore, or 66% YoY in FY24 and it was the main driver for the growth of the overall term deposits of the Bank which increased by Rs. 34,156 crore in FY24, a 53% YoY growth, from Rs. 64,829 crore as of March 31, 2023, to Rs. 98,985 crore as of March 31, 2024.

Further solidifying its financial position, IDFC FIRST Bank reduced its reliance on Certificates of Deposit by 13%, decreasing from Rs. 7,826 crore as of March 31, 2023, to Rs. 6,823 crore as of March 31, 2024.

Consequently, Banks overall deposits crossed a landmark of Rs. 2,00,000 crore during the year. The Banks overall deposits, including CASA, Term Deposits, and Certificates of Deposit, expanded by 39% YoY in FY24, growing from Rs. 1,44,637 crore as of March 31, 2023, to Rs. 2,00,576 crore as of March 31, 2024.

Despite slowdown in overall deposit growth across the banking system, IDFC FIRST Bank managed to maintain a CASA ratio of 47.2% as of March 31, 2024. This figure ranks among the higher CASA ratios within the private sector banks in India. The Bank has successfully maintained its CASA ratio in the high 40s during the last four years.

Borrowings

In FY24, the Bank successfully reduced the total borrowings, excluding money market borrowings, by 16% YOY, from Rs. 40,292 crore as of March 31, 2023, to Rs. 33,845 crore as of March 31, 2024. IDFC FIRST Bank is successfully repaying its legacy borrowings, including long-term bonds, infra bonds, and high-cost refinance by raising retail deposits. Such amounts repaid declined from Rs. 17,673 crore as of March 31, 2023, to Rs. 11,809 crore as of March 31, 2024. The Bank also decreased its new refinancing portfolio from Rs. 18,176 crore as of March 31, 2023, to Rs. 15,682 crore as of March 31, 2024.

In FY24, the Bank also successfully raised Rs. 1,500 crore of additional Tier-II capital through the issuance of Tier-II bonds to prominent domestic institutional investors which aided to its overall capital adequacy.

Network

The Bank has made moderate expansions during FY24, with the addition of 135 new branches and 239 new ATMs. As of March 31, 2024, the Banks network encompasses a total of 944 branches and 1,164 ATMs across the country.

Further, the Bank has invested in robust digital capabilities to enhance efficiency and elevate the customer experience. It remains committed to further developing its digital infrastructure in the future. Moreover, the Bank has plans to continue expanding its branch network in different regions of India, adapting to the specific requirements of each geography. By doing so, it aims to strengthen its presence and better serve its customers across the nation. However, the Bank would have slower branch additions in the near to mid-term, depending on the incremental deposit requirements and utilization of the digital capabilities.

Funded Assets (including advances and credit substitutes)

Overall funded assets of the Bank crossed Rs. 2,00,000 crore mark during the fiscal year 2023-2024 which was driven by steady momentum in its well diversified loan book across retail, rural, commercial and corporate segments. Total Funded Assets, which include advances, credit investments, and PSL buyouts, net of Inter-Bank Participation Certificates (IBPC), increased by 25% year on year to Rs. 2,00,965 crore as of March 31, 2024, compared to Rs. 1,60,599 crore as of March 31, 2023. The legacy infrastructure finance portfolio continued to decrease through normal book run-off and stood at Rs. 2,830 crore which is just 1.4% of the total funded assets.

Among the different retail and commercial financing product segments, products with higher vintage and seasoning experienced steady growth, while new segments like credit cards, education loans, digital loans, and gold loans registered comparatively higher growth due to the low base effect. The Bank introduced prime home loans in 2021, which became a key driver for the growth in the overall home loan portfolio.

This Home Loan portfolio increased by 14% year on year to reach Rs. 22,325 crore as of March 31, 2024, accounting for 11% of the overall funded assets. The Bank has been increasing the home loan origination to its existing liability customers using the branch as a channel. The Loan Against Property (LAP) portfolio plays an important role in the Banks overall book for catering to the MSME segment with secured financing. The Bank has steadily growth the LAP portfolio to reach Rs. 24,247 crore which constitutes 12% of the overall loan book of the Bank as of March 31, 2024. The Bank has made steady progress in the vehicle financing segment during the year and maintained position in two-wheeler financing, maintaining its credit quality over cycles and multiple economic downturns. The Banks vehicle financing portfolio reached Rs. 20,827 crore, constituting almost 10% of the overall loan of the Bank as of March 31, 2024. The Banks consumer loan portfolio primarily caters to the growing personal financing and durable financing needs of the customers, especially in the urban geographies. The Banks consumer loans portfolio reached Rs. 26,499 crore, 13% of the overall loan book as of March 31, 2024. Majority of the retail and commercial products have a vintage of around 14 years on the book including Capital Firsts vintage, as it merged with the Bank in December 2018.

During the last 3 years, the Bank has also launched many new products like credit cards, gold loan, education loans etc which have been growing steadily from a small base. In the credit card segment, the Bank started the business in FY22 and by FY24, has issued 2.5 million credit cards primarily to its existing customers without involving any third party / DSA sourcing. The credit card portfolio of the bank stood at Rs. 5,546 crore, 2.8% of the overall loan book by March 31, 2024. The Bank issued 14.57 lac new credit cards during FY24. The Bank has a strong focus on increasing its gold loan portfolio which was launched in FY22 and has grown to Rs. 1,029 crore as of March 31, 2024. The Bank has also launched Education loans in FY22, primarily catering to the urban customers opting for financial assistance in fulfilling their higher education and skill development aspirations. Educations loans portfolio has reached Rs. 2,160 crore, 1% of the overall portfolio by March 31, 2024.

The rural finance portfolio of the Bank plays a critical role for the Bank as it caters to the regulatory requirement on priority sector lending for the Bank and drives the financial inclusion agenda for the economy. The rural finance portfolio of the Bank grew to Rs. 23,882 crore as of March 31, 2024. This growth was primarily driven by growth in Kisan Credit Cards (KCC), tractor loans, and in microfinance through joint liability groups (JLG), which now contribute to 53% of the overall rural portfolio.

As a Universal Bank, IDFC FIRST Bank strengthened its product offerings for the SME and corporate banking segment with products like Business Banking, Business Instalment Loans, Micro Business Credit, Trade Credit, Term Loans, Working Capital Loans, Commercial Vehicle, and Construction Equipment Loans. Some of these products were launched in the last three years and being scaled up steadily, which are also catering to a specific section of the priority sector lending requirements as per the regulatory guidelines. As per the strategic plan disclosed during the merger in December 2018, the Bank has been reducing its long-term legacy large ticket corporate and infrastructure financing book. Instead, it has been focusing on good quality corporate credit at lower ticket sizes, primarily in terms of working capital loans or term loans. The non-infrastructure corporate loan book grew by 17% year on year in the fiscal year 2023-2024, reaching Rs. 30,306 crore as of March 31, 2024. This growth was driven by new credit provided to emerging corporates and the financial services sector, which grew by 18% year on year. The emerging corporate and financial service financing portfolio now contribute to almost 90% of the overall non-infrastructure corporate book as of March 31, 2024. The legacy infrastructure financing portfolio decreased by 39% in the fiscal year 2023-2024, reaching Rs. 2,830 crore through normal run-off. It accounted for 1.41% of the overall funded assets as of March 31, 2024.

Over the last five years, since merger, the Bank has grown its organic capabilities to cater to the priority sector lending required as mandated by the RBI. In this regard, the Bank has launched and scaled many products like tractor financing, kisan credit cards (KCC), micro finance, MSME credit, commercial vehicle financing etc. As a result, the Bank has fulfilled its priority sector lending requirements and did not need to subscribe to any additional RIDF bonds over the last 5 years. The RIDF portfolio outstanding has reduced from Rs. 3,456 crore as of March 31, 2019 to Rs. 926 crore as of March 31, 2024. The Bank reduced the PSL Buyout by 35% during the year. The Bank has also reduced the PSL certificate (PSLC) requirements of the Bank over the years and has been able to sell PSLCs with the help of surplus organic PSL compliant loan assets on the book. The Bank had a net earnings of Rs. 58 crore in FY24 by selling more PSLCs than buying as compared to PSLC buying cost of Rs. 33 crore in FY23.

Overall, the wholesale banking book, including corporate loans, infrastructure financing, PSL buyout, stressed equity, and security receipts, remained stable in the fiscal year 20232024.

IDFC FIRST Bank has built strong capabilities and foundations, including a diversified granular product portfolio with strong asset quality, customer-friendly processes, robust credit underwriting, efficient collection machinery, and digital innovations. These factors will drive the Banks growth going forward, catering to different customer segments such as urban and rural consumers, entrepreneurs, SMEs, and corporates across the country. With strong regulatory frameworks and ongoing digital innovations and interventions by government bodies, the Indian credit market, especially for consumers and SMEs, is expected to experience steady growth. IDFC FIRST Bank, with its capabilities and competitive strengths, is well-positioned to participate in this growth journey.

Asset Quality

During the year FY24, IDFC FIRST Bank made steady improvement in its asset quality, primarily driven by the improvements of NPA ratios in the retail, rural and MSME financing segment which forms the majority in its advances book. At the same point of time, the Bank has significantly improved its provision coverage ratio in the retail, rural and MSME finance segment as well as for the overall advances at the bank level.

The improvement in the asset quality was driven by improvement in the Loan Underwriting standards focusing on better customer profiles; especially for the recent sourcing; improvement in collection efficiencies and recovery and improvement in early delinquency buckets as depicted by Vintage Analysis. The Bank continues to onboard around 90% of its portfolio with customers with credit bureau history.

The Bank proactively tightened the credit policies across different product segments to strengthen proper customer selections through underwriting. The Bank maintained high collection efficiency throughout the quarters in FY24. The early bucket collection efficiency was maintained at 99.6% by the end of March 2024. The collection efficiency is calculated as the following - the total EMI collected in the month (excluding EMI arrears and prepayments), as % of total EMI due in that month. In retail and commercial financing portfolio, steady collection efficiencies during the year FY24 have helped the bank to significantly reduce the SMA ratios (SMA book as % of the total retail and commercial finance portfolio). SMA ratio, especially SMA 1 (31-60 days overdue) and SMA-2 (61-90 days overdue) are the indication of the NPA formation in the near future. The Bank has improved the SMA1+SMA2 ratio from 0.87% as of March 31, 2023 to 0.85% as of March 31, 2024.

All the factors as mentioned above played significant role to improve the NPA ratios of the Bank. The Gross NPA (GNPA) ratio of the Bank improved by 63 bps in FY24, from 2.51% as on March 31, 2023 to 1.88% as on March 31, 2024. The Net NPA (NNPA) ratio of the Bank improved by 26 bps in

FY24, from 0.86% as on March 31, 2023 to 0.60% as on March 31, 2024. Provision coverage ratio (including technical write-off) of the Bank increased by 629 bps in FY24, from 80.29% as on March 31, 2023 to 86.58% as on March 31, 2024. Provision coverage ratio (excluding technical write-off) of the Bank also increased by 236 bps in FY24, from 66.43% as on March 31, 2023 to 68.79% as on March 31, 2024.

The Gross NPA% of the Retail, Rural and MSME Finance Book improved by 27 bps in FY24, from 1.65% as on March 31, 2023 to 1.38% as on March 31, 2024. The Net NPA % in this segment improved by 11 bps in FY24, from 0.55% as of 31 March 2023 to 0.44% as on March 31, 2024. The Provision Coverage Ratio (including the technical write-off) of the retail, rural and MSME lending segment has also improved by 591 bps in FY24, from 82.43% as on March 31, 2023 to 88.34% as of March 31, 2024.

For the wholesale financing book, the Bank continues to improve on asset quality as the incremental credit underwriting process remains prudent and stringent. The Bank has reduced the concentration risk in the wholesale portfolio in a significant way. As a proactive strategy, the exposure to top 20 single borrowers has been reduced from 7% as of March 31, 2023 to 6% as of March 31, 2024. Further, the exposure to top 5 industries also has also been reduced from 22% as of March 31, 2023 to 19% as of March 31, 2024 which has further strengthened the balance sheet. The legacy infrastructure financing book has been brought down from 2.9% of the overall funded assets as of March 31, 2023 to 1.4% of the overall funded assets as of March 31, 2024.

In the non-infra corporate book, the Gross NPA also reduced by 32 bps in FY24, from 2.87% as of March 31, 2023 to 2.55% as of March 31, 2024 and Net NPA was at to 0.26% as of March 31, 2024 as compared to 0.01% as of March 31, 2023. The provision coverage ratio (including technical writeoff) in this segment was at 94.84% as of March 31, 2024 as compared to 99.84% as of March 31,2023.

The legacy infrastructure financing portfolio is a run-down portfolio which was reduced by 39% during FY24, from Rs. 4,664 crore as of March 31, 2023 to Rs. 2,830 crore as of March 31, 2024. In this infrastructure financing segment, the Gross NPA was at 26.45% as of March 31,2024 as compared to 25.11% as of March 31, 2023 and Net NPA was at 15.55% as of March 31, 2024 as compared to 15.73% as of March 31, 2023. The Gross NPA in infrastructure financing segment has reduced by 37% YOY, from Rs. 1,114 crore as of March 31, 2023 to Rs. 699 crore as of March 31, 2024. The provision coverage ratio (including technical write-off) in this legacy infrastructure financing segment has improved to 64.00% as of March 31, 2024 as compared to 56.18% of March 31, 2023.

As the legacy infrastructure book is a run-down book, without the same, the Gross NPA and Net NPA of the Bank would be 1.55% 0.42% respectively as of March 31, 2024 with provision coverage ratio (including technical write-off) at 89.51%.

The restructured pool of the Bank has reduced by 36% in FY24 and forms 0.31% of the overall funded assets as of March 31, 2024 as compared to 0.59% as of March 31, 2023. The Bank improved the net stressed assets including net NPA, net Security Receipts and net Restructured Assets as % of the total asset from 0.84% as of March 31, 2023 to 0.56% as of March 31, 2024.

Although the recent natural calamities like floods in Tamil Nadu and heatwaves across India along with usual seasonality in early summer of FY25 have temporarily impacted the collection efficiencies, especially in the rural areas, the Bank has taken corrective steps to mitigate the impacts to remain range-bound and cleaned up within couple of quarters. With all the guardrails and initiatives in place as well the improving key indicators including the bounce rates, collection efficiency and the SMA ratios, the Bank is well placed to maintain its high asset quality and improve certain aspects further going forward as it gears for the steady growth in the near future.

Net Worth (Share Capital and Reserves & Surplus) & Capital Adequacy

The Banks net worth stood at Rs. 32,161 crore as on March 31, 2024 compared to Rs. 25,721 crore as on March 31, 2023. The Bank raised Rs. 3,000 crore of fresh equity capital by way of QIP at Rs. 90.25. The book value per share stood at Rs. 45.49 as of March 31, 2024. The Bank reported Capital Adequacy of 16.11% with CET-1 ratio of 13.36% as on March 31, 2024 as compared to 16.82% with CET-1 ratio of 14.20% as on March 31, 2023. During October 2023, the RBI increased the risk weightage of some of the product segments for the Banking industry, which consumed 105 bps of overall Capital Adequacy Ratio and 87 bps of CET-1 ratio during the year. Even with this, the Bank still maintains a healthy capital buffer much higher than the regulatory requirement for the Capital Adequacy Ratio of 11.5% with CET-1 ratio of 9.5% as per the RBI Guidelines. In July 2024, the Bank has further raised Rs. 3,200 crore of fresh equity capital at Rs. 80.30 per shares from marquee domestic investors including the largest life insurance player in the country to have enough capital buffer and improve its capital adequacy beyond 17%.

Profit and Loss Statement

Operating Income

The Total Operating Income (Net Interest Income plus other revenues) of the Bank grew by 31% YOY from Rs. 17,102 crore in FY23 to Rs. 22,453 crore in FY24. The growth in the Total Operating Income included the 36% decline in the trading gains which was Rs. 207 crore in FY24 as compared to Rs. 325 crore in FY23. Excluding the same, the core operating income of the Bank increased by 33% from Rs. 16,777 crore in FY23 to Rs. 22,245 crore in FY24.

The Bank reported 30% growth in Net Interest Income (interest earned less interest expended) from Rs. 12,635 crore in FY23 to Rs. 16,451 crore in FY24 against the growth of funded assets at 25% YOY. The Net Interest Margin (NIM = Net Interest Income as a % of interest earning assets gross of IBPC and sell-down) for the year FY24 was 6.36% as compared to 6.05% in FY23.

In FY24, the Bank had a strong YOY growth of 40% in fee & other income, from Rs. 4,142 crore in FY23 to Rs. 5,795 crore in FY24. Fee Income growth was contributed primarily by the fees related to loan sourcing, higher transaction fees, third party product distribution and wealth management fees, CMS, trade finance, toll & transit etc. Fee & Other income as % of total average assets improved from 1.93% in FY23 to 2.16% in FY24.

The Bank intends to generate fee income through sale of insurance, mutual funds and other wealth management products to our customers including wealth management customers. The Bank has significantly expanded its Wealth management business last year. The Wealth management AUM has increased by 66% from Rs. 9,494 crore as on March 31, 2023 to Rs. 15,762 crore as on March 31, 2024. The Bank is a significant player in the FASTag and Toll Business and has already issued 17 million FASTags as on March 31, 2024.

The fee & other income also included the fees obtained from the non-funded assets of our Bank, which increased by 7% from Rs. 22,465 crore as on March 31, 2023 to Rs. 24,063 crore as on March 31, 2024.

Operating Expenses

The operating expenses for the year ended March 31, 2024, were Rs. 16,216 crore, an increase of 33% YOY from Rs. 12,170 crore for the year ended March 31, 2023.

Compared to its large peers who have been around for 2025 years, our bank has lesser vintage, and hence it had not yet developed the number of technology-based solutions for products and services which are essential for our customers, such as current account propositions, saving account solutions, launching new loan products like prime home loans, credit card, education loan, gold loans, tractor loans etc, revamping the mobile app, creating effective and efficient customer service units and so on. These investments are unavoidable as the Bank needed to grow the granular retail liability base to replace the bulk deposits and wholesale borrowings in order to de-risk the balance sheet.

During the last 5 years, our Bank has built many such capabilities which will help to shape up our future. The Bank launched advanced new Mobile App with state-of-the-art features Personal Finance management, customer service, Mutual Fund investing, ASBA-IPO facility, and more. The Bank also launched contemporary wealth management solution with dedicated RMs, online MF research, PE investments, AIFs, PMS, paperless Demat account opening, offshore investment solutions, etc. The Bank launched digital Cash Management solutions including mobile-based cheque scan, chatbot based auto-pay (e-NACH), corporate wallet solutions, API based working capital solutions. The Bank launched its start-up banking programs with special features.

The Bank launched integrated app for individual and business banking with single sign-on across trade workflow, forex rate booking, cash management and paperless working capital based on GST filing. For corporate banking customers, the Bank launched cutting-edge corporate banking portal with unique industry-first features such as single window experience, intelligent report builder capability, and unique online trade regulatory portal. In the toll & transit segment, the Bank was the first bank to launch ‘3-in-1 FASTag solutions with Tolling+Fuel+Parking on single Fastag with complete mobility solutions.

The Bank also introduced revamped, easy, digital customer journeys for the retail loans with quick processing and attractive interest rates. The Bank had introduced many new products including credit card, gold loans, education loans, tractor loans etc. Specifically, the Credit Card product was launched with many differentiated customer features such as low and dynamic interest rates, never expiring reward points, zero annual renewal charges etc for which the necessary systems, technology, architecture, workflows, API connects required to be built. Further, as a new bank, the Bank also required to invest in developing the modern technology stack to be able to incorporate all the new products and services mentioned above which involved acquiring licenses, building core systems, enterprise service layers, integration with channels, API connects with external counter parties while taking care of the cyber and digital security aspects.

Retail businesses, both assets and liabilities, by their very nature, are opex intensive in their early stages. Since the strategy was to build a stable Bank with high level of granular retail deposits and low dependency on corporate deposits, the Bank launched large number of branches and ATM in order to raise the necessary retail deposits of the Bank. The Bank increased its footprints across India by opening 738 new Bank branches and 1,052 new ATMs (incl. Recyclers) since merger, out of which 135 branches and 239 ATMs were opened during FY24. The expansion of branches also has come with increased cost of employees. The newly launched businesses like credit cards, toll & transit businesses, retail liabilities have high cost to income ratio (C:I) in their initial stages.

Despite the above essential investments that the Bank had to make to build the infrastructure and product propositions of the Bank, the cost to income ratio (on core income excluding the trading gains) for the bank reduced from 95.1% (premerger, Q2-FY19) to 72.9% in FY24. The cost to income ratio in three businesses i.e., Assets, Credit Card and Retail Liabilities broadly sum up to the overall cost to income ratio of the Bank. The cost to income ratio for the asset businesses including retail loans as well as wholesale banking was 53.2% in FY24, broadly flatfish over FY23. In credit card segment, with the Bank improved cost to income ratio from 165% in FY23 to 116% in FY24, driven by the increase in business volume and scale. In the Retail Liabilities (Branch Banking) business, the cost to income ratio remained high in FY24 at 196.7% as the competition for deposit mobilization intensified.

In order to drive the improvement in cost to income ratio from the current level, the Bank initiated a number of cost saving measures. There were multiple cross functional squads created to work on specific areas which included reducing administrative expenses like courier, printing, stationary, travel, and other such overhead expenses. Successful implementation of technology projects also helped reduce costs. Such concerted efforts over the last two years have been helping the Bank in reinvesting such savings into productive measures and initiatives.

Subsequently, the Bank has been witnessing improvement in cost to income ratio in all these three segments during the first quarter of FY25. The Bank plans to reduce C:I to around 65% by FY27 from the current level of 72.9% in FY24, aided by the increase in profitability in credit card business, gradual replacement of high-cost legacy borrowing of Rs. 11,809 crore at 8.90% and scale in retail liabilities & branch banking.

Pre-Provision Operating Profit (PPOP)

The Bank followed a multipronged approach to increase core pre-provisioning operating profit (excluding the trading gains) in a sustainable way. The Bank scaled up the overall loan book and other fee-based businesses in a steady manner which increased the overall core revenues for the Bank. In FY24, the Bank reduced the interest rate from 4.00% to 3.00% for the savings accounts up to Rs. 1,00,000 which helped the Bank manage the overall cost of funds. In parallel, as explained in the section above, the Bank also undertook many initiatives to manage the operating cost and bring efficiency, while making productive investments to improve its product and services propositions to its customers.

Such multipronged approach has resulted in the Core PreProvision Operating Profit (PPOP excluding the trading gains) growing by 31% YOY, from Rs. 4,607 crore in FY23 to Rs. 6,030 crore in FY24 while the funded assets (net of IBPC) of the Bank grew by 25% from Rs. 1,60,599 crore as of March 31, 2023 to Rs. 2,00,965 crore as of March 31, 2024. This establishes the improved operating efficiency and the inherent strength of the overall business model which would drive the profitability improvement going forward as the business volume grows.

The core PPOP of the Bank as % of the average total assets has improved to 2.25% for FY24 as compared to 2.14% in FY23. The quarterly annualized core PPOP to average total assets for Q4-FY24, the exit quarter of FY24, was 2.32%. Including the trading gain, the Pre-Provision Operating Profit (PPOP) increased by 26% YOY, from Rs. 4,932 crore in FY23 to Rs. 6,237 crore in FY24.

Provisions

The incremental provisions for the year ended March 31, 2024 was at Rs. 2,382 crore, which as a % of the total average funded assets stood at 1.32% for FY24, which is below the guidance and in line with internal risk estimates. With the normalization of the credit environment and shrinking of the written-off pool for recovery, the Bank expects the credit cost to increase in a range bound manner in the near to mid-term.

Net Profit (Loss)

The Bank posted a growth of 21% YoY in its net profit, from Rs. 2,437 crore in FY23 to Rs. 2,957 crore in FY24. The ROA of the Bank was at 1.10% in FY24 as compared to 1.13% in

FY23. Similarly, the ROE of the Bank was 10.30% in FY24 as compared to 10.79% in FY23. The Bank is executing on the strategy to build a profitable retail lending book and reduce overall cost of liabilities with strong retail deposit growth. As the Bank achieves the scale in businesses, and as the legacy liabilities are paid off, the profitability ratios of the Bank would continue to improve further.

Financial Performance of Subsidiary

IDFC FIRST Bank has one wholly owned Subsidiary Company, namely IDFC FIRST Bharat Limited (IDFC FIRST Bharat/ ‘IFBL).

During FY 2023-24, IFBL has sourced loans worth H 17,516 crore. IDFC FIRST Bharat reported a Profit After Tax of H 58.41 crore for FY 2023-24 as against H 47.61 crore for FY 2022-23 as per IND-AS.

IDFC FIRST Bank has only one Associate Company as on March 31, 2024, viz. Millennium City Expressways Private Limited, in which it holds 29.31% equity share.

RETAIL LIABILITIES

Fiscal 2024 was a year of transformation for the Banks Retail Liabilities business. Our Liabilities function achieved significant breadth and scale which enabled the Bank to have a competitive advantage and deliver superior customer experience. The Banks franchise strength is evident from the growth in its Liabilities franchise. The Bank has well diversified product suite for its liability customers as given below:

Savings Account

The Bank offers Savings Bank Accounts to its customer with attractive interest rates and zero fee banking on all Savings Account services such as IMPS, NEFT, RTGS, ATM transactions, Debit Card, and SMS Alerts among others. In Savings Accounts, 55% of customers connect to an agent on video on the date of account opening for KYC and managed customers get allocated a Relationship Manager within one hour of account opening. Customers get to know their Relationship Manager through the Mobile App and can reach out to them directly via a phone call, Email or WhatsApp. Along with the normal savings accounts, the Bank offers other products like corporate salary accounts, senior citizens savings accounts, First Power Savings accounts for women customers with specific health benefits and offerings. The Bank is the only universal bank in India to offer monthly credit of interest to all its savings account customers.

Current Account

IDFC FIRST Bank provides varied range of Current Account solutions featured with solution offerings:

• "BRAVO" - an auto sweep feature - on all MSME current accounts and startup accounts. This unique feature allows users to set up an auto-sweep into Fixed Deposit (FD) without any penalty on premature withdrawal of FD

• ‘Banking with texting for Business is a reality now with WhatsApp Banking. WhatsApp Banking for Current

Accounts and TASC segment users is available now for the most frequent user need like - balance check, account statement, mini-statement & offers

• MSME customers can enjoy a complimentary general insurance cover of up to Rs. 2 Lakhs with IDFC FIRST Bank

• Bank has collaborated with ~ 100 Partners and provides 150+ Offers for our customers

• Bitly Banking is a unique feature that has been initiated by IDFC FIRST Bank for the new generation customer experience for our MSME Customers. Users can fulfil servicing requests by sitting at home

• INWARD REMITTANCE OPTIMUS & MOBILE JOURNEY: With this enhanced functionality, customers can conveniently submit disposal directly through their mobile devices, saving time and effort

• SWIFT GPI Tracker: Enables real-time tracking of payments from initiation to receipt, ensuring greater predictability and reliability in international transactions

NR Account

The Bank offers various products and services to its nonresident Indian customers, including NRE Accounts, NRO Accounts, Seafarer Accounts, NRI deposits etc. With the Vision of providing a digital led approach for NRIs starting right from the Onboarding stage, the Bank launched the DIY Journey for Non-Face to Face Digital Account Opening. The Bank also launched Instacart with NRI customer getting an onboarding kit with account number, debit card and cheque book instantaneously at the time of application. The Bank offer excellent services like retail remittances where cross border remittance services are offered at highly competitive exchange rates, zero processing fees along with zero correspondent bank charges. The bank undertakes real-time tracking service over APIs, in association with SWIFT, for money sent abroad using its Mobile Application and Internet Banking.

Startup Banking

Startup Banking sector has emerged as a powerhouse, achieving remarkable growth. The division now proudly serves over 15,000 startups, witnessing a year-over-year growth of 100%. Total book value of the startup portfolio has soared to more than Rs. 5,700 crore, which is a significant 2.3 fold increase from the previous year. Some of the new product launches include No Lien Account - Specialized accounts for startups to receive grants from government, Business Credit Card - Industry first corporate credit card for startups with step-up credit, ONDC Solution Stack - ONDC stack with ONDC compliant bank account and tech support. Additionally, bank has introduced a new Digital Entity Onboarding Journey for the Business card, which has revolutionized the onboarding process by reducing the turnaround time by nearly 40%. Division has also focused on delivering unique customer experiences. Banks FIRST Symphony initiative is a collaborative platform that brings together cross-functional teams within the bank to enhance synergy with startups. In its inaugural session, in partnership with 3one4 Capital, 6 startups from sectors like Fintech, Agritech, and Cleantech participated. Another key program, ‘Leap to Unicorn program ended its first season on a high note, with 100 startups being featured in Forbes India as "Top Startups to Watch Out For" marking a significant recognition for these burgeoning enterprises.

Business Banking

The Banks Business Banking vertical supports Micro, Small and Medium Enterprises (MSMEs) by meeting their working capital requirements through a diverse range of offerings for both funded and non-funded lending. The Bank developed capabilities for the Relationship Manager to onboard customers digitally in a hassle-free manner. This includes e-stamp and e-sign for loan documents through which Digital stamping has expedited the stamp duty payment process and has reduced the turnaround time for loan agreement stamping by over 70%, from days to mere minutes. The Bank also launched Legal-technical valuation workflow which allows better tracking and monitoring of the valuation process and facilitates real time handshake between relationship manager operations and vendors.

Government Banking

The Government Banking business has built a robust Liability Business model by creating partnerships with Central & State Governments apart from Public Sector Undertakings and multiple government entities by offering new banking solutions, backed by technological capabilities and agile services. The Bank has taken proactive participation in the e-Governance initiatives of the government through customized solutions to meet their requirements and ease of transacting for the citizens has been the divisions focus area. The Bank is offering multiple product suites to government clients including Account Management Services, Corporate Salary Solutions, Transaction Banking, e-Auction and other digital solutions, benefiting the citizens. A significant milestone has been achieved in the year ended March 2024, with Central Government Departments & RBI granting Agency Banking Accreditation to IDFC First Bank. With the roll out of these Agency Banking Services in FY 2024-25, customers of IDFC FIRST Bank as well as General Public will be able to make payment of Taxes and duties under Central Board of Direct Taxes (CBDT) & Central Board of Indirect Taxes & Customs (CBIC) through IDFC FIRST Bank. The Bank will also be able to extend banking services to Central Government Pensioners and disburse pension under CPAO (Central Pension Accounting Office).

Privilege Program

IDFC FIRST Bank provides Privilege program banking with exclusive banking programs that offer unrivalled benefits and privileges to match their lifestyle and make everyday banking a rewarding experience. The Bank launched a Digital Onboarding Journey which provides Direct-To-Customer Digital Onboarding and features ranging from Digital Grouping & Program Upgrade. The Bank provides best-in- class banking experience, right from a robust investments platform to preferential pricing on financial products, to exclusive lifestyle benefits along with an unparalleled banking experience comprising expert management services.

RETAIL, RURAL & MSME LOAN ASSETS

Within Retail, Rural and MSME asset segment, the Bank has witnessed profitable book growth with focus on high quality assets. Secured business like wheels, mortgage & new businesses like gold loan, education loan have been drivers for growth in FY24.

Urban Assets business journey over last 5 years has been focused on driving operating leverage through digitization. Bank has adopted all cutting-edge digital solutions as part of Digital Public Infrastructure (DPI) such as Account Aggregator (for instant cash-flow assessment-based underwriting), biometric eKYC, e-Sign, eStamp, e-Mandate, UPI based mandate etc. Adopting digital first approach has helped the bank reduce cost of acquisition, ease consumer journey and drive broader financial inclusion agenda.

In vehicles business, the Bank has significant presence and book size and has large volumes across OEMs. In used car loans, Bank is positioned as key players amongst Pvt banks. The focus on electric (EV) & CNG vehicles has increased across wheels business establishing the Bank as leader in Green Financing. The Bank has stayed invested in enhancing customer and partner experience through seamless and automated processes e.g., using QR code for quick approval at point of sale in consumer durable, car loans & two-wheeler business.

The Bank has built customer centric business banking proposition where we provide loans for income generation and business expansion purpose to small and medium entrepreneurs (Loan against property). The Bank additionally offers different business loan solutions for MSMEs. Drop line overdraft proposition has enabled the Bank to provide funds for business requirements to MSMEs with flexibility of need- based utilization.

Micro Business loans has enabled providing quick and accessible credit to the underserved and unserved segments. Operating with unique persona-based lending approach, the business has provided avenues for funds to small business owners while maintaining excellent asset quality leveraging a strong connect with local communities.

FIRSTmoney is a unique credit line personal loan product offering for new to bank & existing to bank customers, providing flexibility & convenience. It extends line up to 10 Lacs through the Mobile Banking App with pre-approved sanction process using the automated credit underwriting models and analytics with instant seamless disbursals, fully digital journey with unlimited withdrawals. Customers can get additional funds for emergency needs with a do it yourself journey on IDFC FIRST Bank mobile app. In line with ethical banking philosophy, FIRSTmoney offers industry-first zero foreclosure charges on repayment.

Funding for productivity enhancement and skill development has also been a key focus area for the bank, contributing to 17% of total advances. The bank has maintained its position to be a key player in consumer durable loans, with best-in-class proposition of instant approval at point of sale. In education loans bank has created an Industry first Edu Loan ecosystem - FIRSTUNI, with 30k+ courses approved for financing across 4000+ universities.

In Gold Loans the Bank offers Instant, quick and over-the- counter disbursements Range of repayment plans like Bullet, Monthly Interest, Nil Foreclosure, Agri Gold Loans are curated to suit individuals financial needs.

The fundamental underwriting framework of bank has two pillars i.e., cash-flow based assessment (to onboard high-quality customer with good credit bureau history) and direct debit instruction to bank (digital repayment). Further, the Bank has leveraged digital capabilities in collections by utilising artificial intelligence/ machine learning models to derive preferred touch point channels to optimise customer experience. This has increased collection efficiency in collection across buckets, which has helped in maintaining high asset quality.

Rural Banking

The Rural Banking has continued its mission of transforming lives and livelihoods across Rural India. The unit was setup with the objective of providing access to formal banking services to the last mile customer in Bharat. Over the last several years, this objective has been delivered, across 8.5 million + customers spanning 20 states of our country.

This quest of spreading financial awareness, building banking habits and championing inclusive growth has guided the business expansion since inception. What started as a single state - single product proposition to empower the rural customer, has manifested into a multi geography - multi product customer offering, taking all universal banking products to the last mile in our country. The customer segments being served are diverse and inclusive, spanning small and medium farmers, first time entrepreneurs, and women group borrowers. The rural customers have been educated and onboarded on state of art banking services such as the Banks Mobile App and Internet Banking.

In this quest, customers and communities have been empowered, employees lives transformed and traditional stereotypes and myths on rural customer behaviour challenged.

The business core strength of "Customer and Community Connect" has remained its cornerstone. The unit has continued to pay it forward through every phase of its expansion. In FY24, we conducted several Community Outreach activities such as Cyber Security Awareness, Financial Literacy, Importance of Cleanliness and Hygiene, Tree Plantation drives and Blood Donation Camps. Over 10,000 volunteering hours were invested in supporting the local communities and catchments through these initiatives.

Along with our responsibility towards local communities, we continue to heavily invest in the growth and development of our employees. Most of our employees in rural locations belong to local catchments and are first-time formal workforce participants in their families. While their intent and passion are unquestionable, it is our responsibility to develop capabilities and provide opportunities for employee growth. As we enter the next phase of growth as a business, our focus aligns on transforming local/state leaders into national leaders via outsized investment in coaching, mentoring, and strategic thinking. Initiatives such as Management Development Program in collaboration with IRMA, Fundamentals of Banking in collaboration with IIBF, and Leadership Development Programs with IIM Bangalore and ISB Hyderabad are steps were taking in pursuit of this promise.

The Rural Banking team will continue to grow responsibly, championing the cause of transforming families and communities in the process, all along remaining humble and serving to the diverse and unique opportunities provided in our country.

Some of the noteworthy achievements of the unit in the FY23-24 are mentioned below:

1. The Aadhar project delivered by our government has been a resounding success; the Unique National Identity is now a ubiquitous presence across rural markets.

As a financial service provider, we are riding on the Aadhar Stack to deliver last mile financial services at scale; championing our cause of Financial Inclusion.

2. Digitization of Bharat: Over 98% of our customers are digitally onboarded via Electronic KYC and sign loan agreements via Electronic Signatures; in some pockets customers are even executing document stamping via Electronic Stamps.

3. Paperless Lending: Weve turned lengthy loan documents into electronic communication.

4. Weve financed over 4 million small entrepreneurs via our flagship business loan product.

5. Creation of Culture of Credit Awareness in Rural India

Progress in extending of Banking Services through Business Correspondents (BCs)

To extend the Banks outreach and to provide banking services to underserved customers, the Bank has engaged Corporate BCs to disburse / service loans and appoint / manage customer service points through the said BCs for providing interoperable transactions services (Deposits, Withdrawal and Remittance) on behalf of the Bank, primarily in Rural and Semi Urban areas.

As on March 31, 2024, the Bank has engaged 7 corporate BC partners (including its wholly owned subsidiary IFBL) who have presence across 27 states and union territories in India through 754 branches and 9,656 active customer service points as of March 31, 2024. Out of 754 branches, IFBL branch count stood at 638. The Bank originates Joint Liability Group (JLG) Loans in the rural geographies through IFBL and other business correspondents.

IFBL disbursed Rs. 12,768 crore of JLG Loans in FY24 as compared to Rs. 9,011 crore in FY23. Apart from JLG Loans, IFBL also disbursed Rs. 4,748 crore of other loans including personal loans, mortgages, vehicle loans, consumer durable loans etc in FY24.

However, the Bank reduced the loan book originated by the other corporate BC partners, which decreased to Rs. 180 crore as of March 31, 2024 from Rs. 392 crore as of March 31, 2023. The disbursal through other corporate BC partners reduced from Rs. 450 crore in FY23 to Rs. 153 crore in FY24.

Digital Banking Unit

Digital Banking Units (‘DBUs) play a crucial role in delivering banking services through advanced digital infrastructure. DBUs act as catalysts in expanding and accelerating the digital footprint, surpassing the limitations of traditional brick- and-mortar banking outlets.

In fiscal 2023, the Government of India announced the launch of DBUs to encourage customers to engage in and benefit from digital transactions. The Bank launched its first DBU in October 2022, offering a wide range of services such as account opening, cash deposits and withdrawals (via ATM, debit card, cardless, or cheque), RTGS/NEFT/fund transfers, cheque book issuance, demographic detail updates, loan servicing, product cross-selling, credit and debit card services, bill payments, and internet banking access. As on March 31, 2024, the Bank had 4 DBUs, out of which 2 DBUs were opened during the FY 2023-24.

The number of deposit accounts including saving bank accounts, current accounts and term deposit accounts through DBU was 3,166 in FY24. The Bank also originated 18 loans through DBU in FY24. The Bank carried out 45,240 financial transactions and 2,055 non-financial transaction through DBU in FY24. During the last financial year, the Bank also carried out 46 digital awareness / literacy camps for using DBU for banking services.

WHOLESALE BANKING

During FY23-24, your Bank continued its focus on the long-term strategy for Wholesale Bank as set by the board. The team succeeded in achieving excellent portfolio-level performance as per the board guidance. Wholesale Bank has shown 8% YoY funded balances growth mainly on the 17% YoY growth in corporate sectors and reduction of 39% in infrastructure sector. Non funded book grew by 5% YoY. On liability side, Wholesale Bank achieved 25% Y-o-Y growth in average CASA and 8% Y-o-Y growth in Fixed Deposit balances. Wholesale Banking has added ~175 NTB clients, thereby continuously working on the granularization strategy of the book.

The Bank continued the transition of its exposure from infrastructure project lending and from large-ticket lending to a more diversified and mid-sized lending. In doing so, not only did the bank maintained excellent asset quality, it also has successfully resolved legacy stressed loans and made significant recovery from them during the year. The Bank continued its effort in providing a full-service suite of Corporate Banking to its clients, including Large Corporates, Emerging Large Corporates, NBFCs and Financial Institutions. The Bank now offers wide array of products encompassing Lending & Liability Accounts, Trade Financing, Financial Markets, Cash Management, Payments handling and Debt Syndication. Focussed technological developments to improve the customer experience is a target across all the above products. Further, the Bank is improving profitability from its Wholesale division through improvement in its product penetration and fee earning across its clients.

Corporate Coverage

The Banks Corporate Coverage Group further improved its performance in getting higher number of new to bank clients from operating mid-sized corporates. This is leading to granular assets from the corporate sector and is substantially reducing portfolio credit risk on the Banks balance sheet as compared to earlier years long-term and big-ticket infrastructure legacy assets. The bank continued following a very disciplined credit evaluation process which has led to a steady performance on the wholesale loan book.

During the year under review, the bank grew the corporate sector (non-infrastructure loans) balances by 17% from Rs 25,894 crore as on 31st March, 2023 to Rs 30,306 crore as on 31st March, 2024. This growth was the outcome of last few years continued effort focused on granularizing the portfolio and working on new to bank clients in the sector.

The Banks credit rating threshold for initiating a relationship continues to be in a healthy zone with most of the business being initiated with the high-quality investment grade corporates. Going forward, Bank will continue to focus on growth of corporate book built through more new-to-bank customers and enhancing the limits utilisation by the existing clients.

Financial Institutions Group

The Banks Financial Institutions Group (FIG) addresses the finance and banking needs of Domestic as well as International Financial Institutions apart from addressing the cross-border requirements of the Banks customers.

The FIG team engages with the domestic commercial banks, Insurance Companies and Capital Market participants such as Exchanges, Clearing Houses, Mutual Funds, FPIs, AIFs etc. The Bank works on-boarding large liability-strong Institutions by offering superior transaction banking services through innovative products and assuring client-centricity for product delivery. The Bank has been able to create traction with large Institutions, thereby improving its footprint substantially.

The Banks FIG team is also responsible for relationship management with International Banks, Multilateral Agencies and offshore Financial Institutions. Further, the FIG team actively engages with Institutions like SIDBI, NABARD, NHB and Exim Bank to avail refinance and with overseas branches of domestic banks to avail foreign currency borrowings. Leveraging on its strong relationships with banks, the Bank has been a serious player in the Priority Sector Loans Certificate (PSLC) market. The bank, in order to meet its regulatory requirements on Priority Sector, actively participates in IBPC buyout and sell-down with other relationship banks.

The Bank continues to strengthen its network of international banks and FIs to deliver efficient Treasury and Trade Finance solutions to the Banks local customers, who have banking requirements offshore. The Bank also offers complete suite of products encompassing Financial Markets, trade finance and financial advisory to the offshore banks and FIs, thereby enabling them to provide seamless India linked service to their clientele. Through strong relationship management and distinctive service, the Bank has built up strong network in prominent India linked trade corridors. As of March 2024, the Bank has been able to develop strong correspondent banking network of over 330 global entities, spread across 57 countries.

In line with your banks vision and ethos of using technology to achieve the status of world class bank, the FIG has been using technology to offer cutting edge solutions in some products being offered to the clientele. This has resulted in your bank gaining a sizable market share in certain products. The team shall continue to focus on implementing technological solutions going forward.

Financial Markets Group

The Banks Financial Markets Group consists of Balance Sheet Management (BSMG), Trading desk, Foreign Exchange (Fx) & Derivative Sales and Fixed Income Sales.

BSMG is responsible for management of funds and liquidity in all currencies and for compliance with various limits as per the Asset Liability Management (‘ALM) Policy, Investment Policy and FX and Derivatives Policy of the Bank. This desk is also responsible for managing the interest rate risk in the banking book.

Trading desk is responsible for dealing and market making in Fixed Income, FX and derivatives products and other Investment products. All transactions are carried out within risk limits of the Bank as per the Investment Policy and FX and Derivatives Policy, with an aim to facilitate customer transactions.

Financial Markets Sales desk is a customer centric desk catering to customer requirements in FX and Derivatives products, subject to regulatory and internal requirements as per the FX and Derivatives Policy and Suitability and Appropriateness Policy. There are ten dealing centres pan India to facilitate client requirements. The team provides automated pricing channels for dealing along with end-to-end solutions to handle remittances for both retail and corporate clients. Technology is used as an effective lever by the Sales team, thereby delivering customized solutions to various client segments.

Fixed Income Sales team caters to delivering customized investment solutions in government / corporate bonds to various client segments.

In-house research desk disseminates timely reports on macro-economic developments and trends in Financial Markets to keep our clients abreast of market developments.

Transaction Banking

The Banks Transaction Banking business has embarked into a fully digital transformation journey covering the overall ecosystem requirements of corporate customers. All solutions & digital journeys are designed keeping in mind 4 key principles viz. a) Right customized Solution, b) Seamless onboarding & migration, c) Convenience of transacting platform and d) Effective customer service on an on-going basis.

Keeping these principles at the core, refer below are the steps taken to provide solutions which are best-in-class, technology-led and client centric with seamless experience.

a) Right Customized Solution - Sector specific customised solutions (such as NBFCs, Pharma, Utility, etc) are designed keeping in mind needs of customers Treasury, Finance and Operations team along with their end consumers. Transaction Banking team has also launched two variants of Current Accounts offering viz Rocket Current Account and Super Current Account, which provides return led proposition along with ease of liquidity, especially for credit-light and liability heavy corporate customers.

b) Seamless onboarding & migration - IDFC FIRST Onboard platform has been developed which provides seamless onboarding journey for customers to avail various Transaction Banking solutions including pricing, documentation, digital agreements, digital forms, etc. In addition, state of the art, API developer portal has been launched, which provides self-serve access to core APIs to accelerate path to production for digital savvy clients.

c) Convenience of transaction platform - Fully in-house developed one-stop universal financial platform has been developed as the corporate internet banking channel for customers. This platform empowers faster business decision to optimize earning for customers, in addition to having all products access under one umbrella of platform.

d) Effective customer service - For our anchor and high value customers, a platinum customer service desk has been created which provides personalised and timely customer service, along with periodic visits and reviews with customers for seamless experience. We have also launched Techbot, which provides real time information on any technical and functional queries of customers. In addition, whatsapp based chatbot has been created for customers, which is a self-service tool for various reports and statements.

The Transaction Banking franchise continues to work closely with technology partners, regulators and service providers on various strategic projects & dedicated focus across the customer engagement layers led to ensure that our customers are well equipped to be digital FIRST in all forms of transactions bringing financial benefits & superior client experience.

During the year, specific emphasis was made around system stability and multiple technology led initiative were undertaken such as system performance regression testing, scheduled downtime to perform system and regulatory changes, enabling data server to archive the data for better system performance, etc. The Bank has also initiated working on re-vamping the existing CMS system with completely new micro-services architecture-based platform, along with analytics as well as eco-system related journeys. The building blocks include various initiatives which will enable better system performance, enhance customer experiences and have industry FIRST innovations.

Few new solutions introduced earlier such as Connected Banking, Virtual Account plus (Payment on behalf of solution), real time API notification for Cash & Cheque to update instant pick-up status, Corporate Mobile App, etc continues to gain traction and the team continues to build enhancements over such unique solutions.

The positive impact has also been corroborated by the Bank being awarded with two prestigious awards by AAA Asset team at Asia pacific level: 1) Best Solution for Clix Capital Services and 2) Best Solutions for Fivestar Business Services. In addition, 4 team members of the Bank has been awarded as Best Sales Manager and Best Relationship Manager by AAA Asset team, as well. The Bank has been actively collaborating with key partners by offering unique propositions around Digital Escrows and Corporate Expense management solutions. The Bank continues to explore synergies in this domain. In the Trade Finance & Remittances space, Bank consistently focused on the digital agenda for Trade flows, providing smooth and faster turnaround time for clients for transaction processing. A next-generation portal technology integrating Trade Finance Solutions, Remittances, FX Solutions and Regulatory Submissions (IEDPMS) enables clients to transact from anywhere in a few clicks. With its comprehensive and unique solutions, Bank has converted substantial percentage of Trade Finance & Remittance transaction flow to Digital mode.

During the year, the Bank has implemented e-Bank Guarantee facility in partnership with National E-Governance Services Ltd (NESL) to facilitate clients with end-to-end digital solution for BG facility and e-BRC facility introduced by DGFT to facilitate digital solution for BRC issuance for exporter clients. In addition, Bank upgraded Trade Finance systems to timely comply with key market developments like SWIFT SR2023 for cross border transactions. On the Supply Chain Finance space, Bank implemented paperless and scorecard-based credit appraisal document process for supply chain finance solution to enable faster credit sanction to customers. Bank also started key projects to revamping the supply chain financing system which will enable customers for seamless onboarding, financing & tracking under defined credit programmes.

In addition, the team has embarked on a new journey to start International Banking Unit (IBU) in GIFT City, Gandhinagar, which shall enable offering overseas financing for trade transactions to client in India.

OPERATIONS

The Banks retail banking operations team has played a crucial role in successfully executing business priorities and digitization processes across various business. Their Operating Model services various businesses with best-inclass Delivery model which include Retail Assets, Liabilities, Business Banking Group, Credit Cards and Retail trade with promised Service Level Agreements and performance metrics with continuous focus on building operational resilience.

To enhance efficiency and turnaround time, the Bank has implemented paperless processes through nodal hubs, which have also contributed significantly to advancing the Banks environmental, social, and governance (ESG) agenda.

Guided by the Banks vision to be a world-class bank powered by technology, their core operating philosophy & principles are coupled with customer delivery mindset and right technology platforms to keep pace with fast changing environments and Business responsiveness.

The Banks Wholesale Banking Operations provide exceptional transaction delivery to meet business needs and priorities. They provide focused customer advisory and services as evidenced through client surveys wherein we have received market leading NPS scores. Wholesale Banking Operations cater to cash management, treasury, trade finance, lending, and structured finance needs of corporates, financial institutions, and government entities. Furthermore, they handle common enterprise functions like Clearing and Cash, supporting all customer segments. They also support the banks E-tolling business wherein we are market leaders in both the acquisition side and in fast tag issuance handling the largest volumes of transactions in this segment. The team takes pride in its strong, knowledgeable, and professional members who ensure best-in-class delivery support and assurance for customers. Wholesale Banking Operations continues to constantly leverage technology across all areas to improve turnaround and efficiency and maintain a strong control environment.

TECHNOLOGY

The bank continues to invest and build on its technology platforms to create differentiated end to end digital products and services to address the needs of our next generation customer expectations. The bank is focused on creating customer experiences that enable a range of services across retail & corporate banking, lending, cards, payments and remittance services across customer acquisition, transaction management and servicing while maintaining customer privacy with high degree of security. The bank is also working towards developing innovative and disruptive solutions to simplify customer experience, deliver market leading products with high degree of digital engagement and adoption.

The Bank is stilling building a number of new product variants and features, and has a large workbook of pending projects, which the technology team is working upon on continuous basis.

RISK

The Bank promotes a strong risk culture throughout the organization. A strong risk culture is designed to help reinforce the Banks resilience by encouraging a holistic approach to management of risk and return, and an effective management of risk, capital and reputational profile.

The Bank operates within an effective risk management framework to actively manage all the material risks that it is exposed to or the ones it may face in the future, in a manner consistent with the Banks risk appetite, making the Bank resilient to shocks in a rapidly changing environment. The Bank aims to establish itself as one of the key leaders in risk management practices and strives to reach the efficient frontier of risk and return for the Bank and to its shareholders, consistent with its risk appetite. The Board has the ultimate responsibility for the Banks risk management framework. It is responsible for approving the Banks risk appetite, risk tolerance and related strategies and policies.

Following are the key principles followed by the Bank to set up a robust risk management framework:

• Segregation of duties across the three-lines of defence model whereby front office functions, risk management & oversight and assurance roles are played by functions independent of one another.

• Risk strategy is approved by the Board on an annual basis and is defined based on the Banks Risk Appetite to align risk, capital and performance targets.

• All major risks are managed via risk management processes including credit risk, market risk, operational risk, liquidity risk, business risk and reputational risk.

• Policies, processes and systems are in place to enable the risk management capability.

• Risk Management has the appropriate representation in management committees of the Bank and its respective businesses, and other governance forums as appropriate. At these forums, Risk Managements approval is required for decisions impacting the Banks risk profile.

• Risk monitoring, stress testing tools and management review processes have been established to monitor the performance against approved risk appetite.

The Bank has a robust risk governance framework. The Board reviews all risk exposures on a Bank wide basis. The Board has established Risk Management Committee (RMC) to ensure that the Bank has a sound system of risk management and internal controls in place. The RMC assists the Board in relation to the oversight and review of the Banks risk management principles and policies, strategies, risk appetite, processes and controls. The Risk Management Committee assures independence of Risk Management to the Board and constructively challenges the managements proposals and decisions on all aspects of risk management arising from the Banks activities. The RMC also ensures comprehensive periodical risk reporting for all segments of risk including credit risk, market risk, liquidity risk, operational risk, reputational risk, fraud risk etc. It also oversees stress testing framework to measure the plausible impact of unusual market conditions on the Banks financials and plans for contingencies.

Management Committees like the Credit and Market Risk Management Committee (CMRC), Asset Liability Management Committee (ALCO), Operational Risk Management Committee (ORMC) and Information Security Committee (ISC) together play a key role in the risk management of the Bank. They receive guidance from the Risk Management Committee (RMC) of the Board, and oversee risk by identification, measurement, monitoring and mitigation.

Credit Risk

Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a Banks portfolio, losses stem from outright default due to inability or unwillingness of a borrower or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. The Banks credit risk is controlled and governed by the Board approved Credit Risk Management Policy and Credit Policy. The Credit Risk group has been established to independently evaluate all proposals to estimate various risks as well as their mitigation.

The credit risk governance framework establishes the responsibility and approach through which the Board of Directors and the management functions (viz. Business, Risk, Control functions) of the Bank govern credit risk management issues. An effective governance framework ensures the independence of the credit risk function (viz. risk managing function) from the business function (viz. risktaking function). The Banks governance model is transparent and accountable which ensures all material credit risks are identified and measured, exposures are accurately aggregated and reported.

The Bank has rigorously adhered to the RBI mandated prudential norms on provisioning, which is aimed at creating and protecting shareholder value. The Bank has also de- risked the portfolio by diversifying the credit portfolio across sectors and focused on increasing granular retail advances. Further, the Bank has run down its legacy large infrastructure exposure and has reduced the concentration risk in the portfolio.

Market & Liquidity Risk

Market Risk refers to the risk of financial losses arising on account of movement in market prices of securities. The Market risk is measured based upon, but not limited to, an assessment of the following evaluation factors:

• The sensitivity of the Financial Institutions earnings or the economic value of its capital to adverse changes in interest rates, credit spreads, foreign exchanges rates or equity prices.

• The nature and complexity of market risk exposure arising from both the trading / non-trading positions.

The Bank has robust Board approved Market Risk management policies such as Market Risk Management Policy, Funds and Investment Policy, Forex and Derivatives Policy & Limit Management Framework which sets out broader Market Risk frameworks and processes. Management of market risk encompasses risk identification, measurement, monitoring & reporting of market risk positions and ensure that the risk positions are within the Market Risk Appetite approved by the Board.

The Market Risk Department independently measures and reviews the risk of its investment and trading activities using advanced tools & techniques such MTM, PV01, VaR, Stress testing, Capital Charge assessment etc. and continuously monitors all risk limits as stipulated by the Market Risk Committee / Board on daily basis.

Liquidity is a banks ability to meet the scheduled and unscheduled funding requirements, asset growth and obligations at reasonable costs without incurring unacceptable losses. Liquidity risk is the inability of a bank to meet such obligations as they become due, without adversely affecting the Banks financial condition. The Board approved The Asset Liability Management Policy primarily governs the liquidity risk management framework of the Bank. The Asset-Liability Management (ALM) of the Bank is governed by the Asset Liability Management Committee (ALCO). The purpose of The ALCO is to act as a decision-making unit responsible for integrated balance sheet risk-management from risk-return perspective including strategic management of interest rate and liquidity risks. ALM function within Risk Management department supports measurement and monitoring of Liquidity Gaps, resilience to liquidity stress using tools like Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and Interest Rate Risk in Banking Book (IRRBB) by assessing impact on Net Interest Income (NII) and Market Value of Equity due to changes in underlying interest rates. The Bank strives to support asset growth through suitable stable funding avenues. The Bank has been building a stable & granular retail deposits base over past few years. The Bank is replacing legacy borrowings with customer deposits thereby moving towards the objective of attaining optimal funding mix.

Operational Risk

Deregulation and globalisation of financial services, together with growing sophistication of financial technology and increasing complexity and volume of financial transactions, are making the risk profiles of banks more complex. A growing number of operational losses and risk events, recent regulations, industry trends and new types of threats and exposures have highlighted the importance of Operational Risk management. Operational Risk touches every part of the organisation from products, people, processes and technology and hence it is important to identify and manage proactively. The Bank has put in place Board approved governance and organisational structure to manage Operational Risks. A Committee comprising senior management personnel namely ‘Operational Risk Management Committee (ORMC) is responsible for overseeing implementation of the Board approved Operational Risk Management policy and framework. Operational Risk Management Department engages with the First Line of Defence (Business and Operating Units) on a continuous basis to identify and mitigate operational risks to minimise the Risk and its impact.

Information Technology and Information Security Risk

The Banks expansion strategy has been progressively more and more digital. Given this, cyber/Information Security risk is identified as a material risk for the Bank. The Information Security Group (ISG) as a governing team works with IT team and are jointly responsible for Cyber/Information Security and works continually towards adoption of newer and better security practices. The Bank operates under the Information Security Management System framework (ISMS), which is aligned to ISO 27001 and RBI Cyber Security Framework and other guidances issued from time to time. The Bank is an ISO 27001: 2013 and PCI DSS certified organisation. The Bank follows systematic approach through people, process and technological security controls to prevent, detect, respond and recover from cyber-attacks and manage sensitive company information so that it remains secure by design and practice.

This risk is governed by the Information Technology Steering Committee and Information Technology Strategy Committee (ITSC) a Board level Committees responsible for the Information Technology governance in terms of direction, advice, regulatory guidance & support.

The Bank is working closely with the Regulators to ensure that high level of compliance is maintained across various advisories received. The Bank is also working on an augmentation plan in maturing its security posture with renewed focus on risk based remediations towards improved Secured Digital Bank as a continuous endeavour.

Information / Cyber Security Framework

The Bank, since its inception, has put in place a robust Information/ Cyber Security Framework. Information Security woven into its banking platform and seamlessly merges both culturally and technologically. A dedicated team of security professionals are part of the Information Security Group (‘ISG) who govern the Information Security practices in the Bank. The Bank has put in place state of the art security technologies including several industry ‘firsts technology solutions and adopted ‘defence in depth approach & industry best practices as part of its security framework and architecture. In addition to the ITSC, the Information/ Cyber Security is governed by the Information Security Committee (ISC) which is responsible for the information security governance and also oversees the risks related to Information / Cyber Security.

Last year, the Bank worked closely with the Regulator towards an augmentation plan to improve its cyber security maturity.

This year, while continuing on its journey to mature its posture, the Banks focus will continue to be on consolidation and improving its deployment posture of the technologies invested in the previous years. In addition, the Bank has initiated some additional initiatives including:

• Accelerating its risk-based remediation program

• Improving its threat detection and response capabilities

• Enhancing its cloud security program

• Deploying zero trust model

• Data discovery and life cycle management

The Bank continued to maintain and upkeep its compliance posture to standards such as ISO 27001 ISMS (Information Security Management System), PCI DSS and regulatory requirements. Given the changing threat landscape, the attempt is to progressively move towards maturity of proactive and adaptive platforms for automated detection, response and recovery.

Capital Adequacy

The Bank manages its capital position to maintain strong capital position well in excess of regulatory and Board approved minimum capital adequacy at all times. The strong Tier-I capital position of the Bank is a source of competitive advantage and provides assurance to regulators, creditrating agencies, depositors and shareholders. In accordance with the RBI guidelines on Basel III, the Bank adopts the standardised approach for credit risk, basic indicator approach for operational risk and standardised duration approach for market risk.

Capital management practices are designed to maintain balance between risk- reward, while ensuring that businesses are adequately capitalised to absorb the impact of stress events. The Internal Capital Adequacy Assessment Process (ICAAP) forms an integral part of the Supervisory Review Process under Pillar 2 of the Basel III Framework. ICAAP is a structured approach to assess the risk profile of the Bank and determine the level of required capital, commensurating the scale and complexity of Banks business model and operations. As part of the Basel III implementation, the Bank has developed a comprehensive ICAAP policy and document, in line with regulations prescribed by the RBI.

The ICAAP assessment aims to assess the risk profile of the Bank and plan for required capital under normal and stressed conditions. It also contains projections of financials for the Bank, and its capital adequacy projections for next three years under normal and stress conditions. It also contains relevant details of plans and strategies for meeting capital requirements. Stress testing forms an essential part of ICAAP. It requires the Bank to undertake rigorous, forward-looking assessment of risks by identifying severe events or changes in market conditions which could adversely impact the Bank. Bank uses Stress-testing framework as its primary indicator to evaluate the ability to withstand tail events and maintain sufficient levels of capital under all circumstances. It is used to evaluate the financial position of the Bank under various plausible scenarios (base, medium and severe) to assist in decision-making. It also assists the Bank in improving its risk monitoring processes.

Environment and Social Policy (E&S) and Appraisal Process

The Bank has a comprehensive environment and social policy and a robust environment and social risk management framework for its lending businesses. The Environmental Risk Group (ERG) of the Bank works proactively with clients/ internal teams to identify, mitigate and manage E&S risks associated with projects/ transactions. The Bank obtains environment-related regulatory compliance information so as to ensure that the projects/ transactions it finances are in compliance with the applicable national environmental legislations.

The Bank has developed and adopted an exclusion list comprising sectors in which it will not engage in any financing activity. The Bank continues to hold the distinction of being Indias first financial institution to sign up for the Equator Principles (EP) - a credit risk management framework for determining and managing environmental and social risk in Project Finance transactions.

For the purpose of financing activities, the Bank has also identified sensitive sectors which have potentially high impact on the environment and communities, and where the Bank may have to deal with critical E&S issue.

INTERNAL CONTROLS

The Bank has an independent Internal Audit Function, headed by the Chief Internal Auditor. The Internal Audit Function of the Bank constitutes the third line of defence of the Bank and adopts a risk-based approach to provide independent, objective assurance to the Board, Management and other stakeholders, on the effectiveness of internal controls, risk management practices, information systems and cyber security, compliance with regulatory requirements and corporate governance. The Internal Audit Department is appropriately staffed with qualified and competent personnel and is provided with full budgetary support to perform their duties as outlined in the Internal Audit Charter, which is approved by the Board of Directors. The Internal Audit Function adopts appropriate international and local audit standards and is also subjected to periodic independent external reviews.

Internal Audit reports all significant observations and their follow-up actions to the Audit Committee of the Board. Further, the Audit Committee reviews adequacy and effectiveness of the Banks internal control environment and also monitors the implementation of audit recommendations. The Audit Committee reviews and evaluates the functioning of the Banks Internal Audit Department through independent meetings, reviews and formal annual evaluations.

HUMAN RESOURCES

At IDFC FIRST Bank, we value our strongest and most valuable asset: our people. They are central to the Banks growth - demonstrating resilience and ambition by contributing to the Banks vision. Over the past year, our Human Resources (HR) department has placed significant focus on partnering with business units to achieve organizational goals.

Key HR Focus Areas

The key focus areas for HR included aligning with the organizations goal, vision, mission, and brand promise;making learning the USP for the Bank; providing a world- class experience to employees; building a high-performance workplace; and creating the right culture guided by our SEAL and One Bank principles, while driving efficiency and productivity.

Talent Acquisition and Management

We have built capabilities to attract and hire for edge and niche skills, particularly in Technology, Data and Analytics, Digital Platforms, and Digital Marketing—our new-age functions. The Bank has become more resilient - managing change more easily and excelling in retaining top talent. Numerous tools and initiatives have been introduced to improve the employee experience to customer-grade levels. These include digital hiring and candidate journeys, seamless onboarding, transparent and fair performance management, competitive rewards, world-class learning platforms, and comprehensive employee wellness programs covering mental, physical, and financial aspects. Recognition schemes to motivate and award employees are also key initiatives.

Employee Experience

The employee experience platform, iConnect, helps streamline work for employees and managers, thereby enhancing workplace productivity. Another aspect of employee experience is ensuring a safe working environment, which has been achieved through quick resolutions to employee queries and grievances. The Bank scored 4.1 on Glassdoor. Our LinkedIn page has over 1 million followers, ranking us 4th in engagement, and 2nd in post engagement metrics. Our career site has over 27 lakh page views.

Talent Management Platform - iTalent The launch of the Talent Management platform iTalent is in line with our vision to create a skill-based organization, ensuring the right person is hired for the right role. This initiative will shape the Banks future horizon on hiring, developing, and retaining great talent. With the introduction of mentorship programmes and gigs, the iTalent platform is set to redefine our talent management approach within the Bank. Moving onto our workforce strength, our overall headcount has increased to 41,141, an increase of 16% from the previous year. At the time of merger, the bank was short of priority sector lending by a wide margin and subsequently hired a large number of employees in rural locations to build the necessary franchise and cater to the priority sector lending requirements organically. In rural locations the entire activity of sales, relationship management, operations, credit, monitoring, collections, servicing, and many other related functions are directly managed by our local employees. Over 30% of the total employees of the Bank are in rural locations. For servicing our customers at the contact centre, again, our bank directly employs agents on its rolls and does not outsource its customer call centres. We believe the experience of customers are better when employees are taken on rolls. Close to 5% of our staff are in servicing customers at different contact centres of the Bank. Close to 5% of the banks staff are in backend operations for booking, presentation of debit instructions, cash management and reconciliation etc. Our branches engage about 30% of our total staffs, most of whom are in account soliciting and account opening activities. We have about 15% of our staff in underwriting and collections. The above roles account for close to 85% of our staff. Our onboarding program, Get Set. Go!, makes new employees productive within their first 90 days.

Learning and Development

The Banks strong focus on capacity building and learning is evidenced by an average of 59 learning hours per employee, this year. There was particular emphasis on leadership training while ensuring robust delivery of technical knowledge and skills, with 100% completion rate for mandatory learning. Training programs were curated to individual needs in partnership with businesses and functions. The Bank also invested in developing leadership skills to create leaders for tomorrow. Digital learning platforms like Pluralsight, Immersive Labs, and CUBE complemented various virtual and classroom training sessions in our journey to make learning the USP of the Bank. Self-service learning options for essential skills were also introduced.

Employee Engagement and Wellness Strong employee commitment is the foundation of an enhanced customer experience. The Bank rolled out a range of initiatives aimed at creating an environment that helps employees stay committed and succeed. These included virtual wellness sessions, rewards and recognition programs, sports tournaments, and a transparent performance management system. A dedicated team addresses employee queries, and to encourage physical, mental, and financial well-being, the Bank has introduced the wellness microsite - Tan Mann Dhan. Employee communication has been timely and frequent, ensuring employees are fully aware of what is happening in the Bank and their responsibilities. Ongoing branded initiatives like ‘The Captains Bridge, iBelong, and communications from the MD, CHRO, and other leaders at regular intervals align and engage employees to build the right culture within their teams and ultimately the Bank. Amber, our employee engagement BOT, has shown increased traction with higher response rates and industry-best engagement scores.

Data and Analytics

The Banks approach to business is influenced by the latest developments in technology and data science. To enable informed decision-making and predictive modelling of human resource data, data-rich dashboards have been made sharper and available to more managers. This enhancement has improved the Banks ability to track employee effectiveness, productivity, and key KPIs.

Through strategic talent acquisition practices, creating an inclusive and innovative workplace culture, and investing heavily in employee development and wellness programs, the Bank is not only preparing its workforce for the future but also driving sustained progress and excellence. Our commitment to excellence remains steadfast, ensuring that we remain at the forefront of the banking industry, poised to meet and exceed the challenges of tomorrow. Together, we are shaping a brighter, more prosperous future for everyone.

ESG

On ESG, IDFC FIRST Bank has taken an integrated approach to embed Environmental, Social and Governance (ESG) considerations into its business, employees, and customer operations. The Bank is constantly working on how to create sustainable business value for customers, communities and all stakeholders. The Bank is closely monitoring global developments in climate related financial risks, especially physical risks which can translate into credit risk on the banks lending portfolio. Based on emerging regulatory and global trends, the Bank has focused its attention on ESG right from the management and board levels. IDFC FIRST Bank is an official participant of the United Nations Global Compact (UNGC), an official supporter of Task Force on Climate- Related Financial Disclosures (TCFD) in the Indian Banking sector (now under IFRS Sustainability), and compliant with the Equator Principles for project finance together with an ESMS framework.

IDFC FIRST Bank has achieved significant milestones in its ESG initiatives since the past two years. On the environmental front, the Bank has received IGBC & LEED Gold certification for multiple large offices. Its headquarters are fully powered by green energy and certified under ISO 14001 and 45001 certifications for safety, facilities and environment. The Bank has a live portfolio of over 1.96 lakh units ( 1452 crore) of EV 2-wheelers and over 5,100 units of EV 3-wheelers as of FY 24. IDFC FIRST Bank has free EV charging facility for employees in its headquarters and additional EV charging points in two other offices, encouraging EV adoption among employees. As part of its commitment to sustainability, the Bank is planting a tree for every home loan disbursed from March 2024 onwards and sharing the tracking details with customers.

On the social front, IDFC FIRST Bank employees spent over 20 lakh learning hours in FY 24 and impacted over 2 lakh lives through their volunteering activities. Around 11,150 employees volunteered approximately 19,800 hours in various programmes in FY 24 for social good. Over 14,000 employees are also registered on the Banks mental wellness portal averaging participation of over 500 employees per session. On governance, IDFC FIRST Bank is certified with ISO 27001 (Information Security Management System) to mitigate risks related to data security and ISO 26000 certified in accordance with ISAE 3000 (revised) on social parameters. Looking at the road ahead, IDFC FIRST Bank is transforming its ESG challenges into opportunities by bringing in new initiatives such as automation of ESG data collection; identifying a glide path towards Net Zero and Climate Action; identifying possible responsible lending opportunities; proactively assessing climate risks at a Bank level through detailed assessments and scenario analysis; and adhering to guidelines from RBI on green deposits, to name a few. The Bank is also aligned to global and national best practices in reporting and adheres to Frameworks such as Integrated Reporting, GRI, SASB and BRSR.

Detailed information on ESG initiatives is covered in the ESG section of the Integrated Report.

OPPORTUNITIES & OUTLOOK

FY24 has been a challenging year for the Banking industry as it went through a liquidity crunch and high interest rate environment following the repo rate hikes in FY23. Some of the regulatory announcements like increase in the risk weightage in certain product categories also impacted the financials and capital buffers for the baking players. The global macro scenarios have improved although sticky inflations remained a concern pushing the early rate-cut expectations by the Fed further. Even within the high interest rate scenario, the growth in the domestic environment remained quite strong as Indias GDP growth continued to improve. The comparatively high inflation is still a concern which also percolates to a hold stance on the policy rates by the central bank. The credit growth in the overall economy remained quite strong and the personal credit segment continued to grow steadily as the economy recovered strongly after COVID in the last two years and the asset quality remained strong across the system. With the strengthening of the overall digital stack and infrastructure in India including AADHAR, UPI, Account aggregator framework, increasing mobile penetration, strong matured credit bureau database etc created the necessary guardrails for a strong growth opportunity, yet with caution. The emerging technologies and digital innovation including generative artificial intelligence framework are opening door for new opportunities for product and service offering across customer segments and geographies. The credit growth, hence, remained strong at 15%+ during the year, higher than the historical levels before COVID and likely to remain strong growing forward.

The Banking industry faced the tough challenge in deposit mobilization in terms of liquidity crunch and high interest rate environment. Especially, across the industry, there was little movement of CASA mobilization as money moved from CASA accounts to Fixed Deposits during the year and hence, the CASA ratios declined resulting in the increase in incremental cost of funds for the Banks. There has been an intense competition in the market for deposit mobilization which is beyond the interest rate war. The digital innovation, ease of use, customer experience, product innovations are becoming the key factors for attracting the new depositors. Despite the challenges, as the credit growth remained strong in the economy, it also fuelled the growth of the overall bank deposits for the country. The deposits in the overall system grew by more than 13% in FY24 which was one of the highest yearly growth of deposits in the last decade. The payment businesses in the economy also surged due to more adoption of digital processes and cash-less transactions. The outstanding credit cards increased by 19% whereas the QR codes including UPI QR codes and Bharat QR codes increased by 35% in FY24. This has been helping a get a large segment of individual and small business owner under the umbrella of banking which were largely unserved for a long time before COVID.

IDFC FIRST Bank, has been building strong capabilities to utilize such opportunities in all the facets of businesses including deposits, credit as well as payments. Despite the intense competition and tough liquidity, the Bank has been able to register a strong growth of overall customer deposits as well as CASA deposits, primarily due to its digital innovation, customer experience, expanding network, customer-friendly products and services using contemporary systems, analytical engines, AI capabilities etc. The Bank is well positioned to cater to the new generation of banking customer with its differentiated value propositions as a one- stop financial solution provider including savings, investment, insurance, payments and life-style requirements. The Bank is confident on maintaining steady deposit growth much higher than its balance sheet growth in the near to medium term with CASA ratios between 45-50% going forward.

On the credit growth front, the Bank has one of the most well diversified and granular loan portfolios in the country with more than 25 products across retail, rural, MSME and corporate customer segments which are primarily driven by robust underwriting framework and strong digital process for origination and servicing of these customers needs. The Bank has been creating specific capabilities to service the wide spectrum of customers through a large bouquet of products suitable for the specific requirements which utilizing the industry credit guardrails and infrastructure like Aadhaar, UPI, account aggregators, ONDC framework, OCEN etc. The Bank has a unique blend of niche products usually offered by the non-banking lenders as well as usual traditional products offered by the banking players. the Banks decade- long experience in such products, across multiple economic cycles, adds to its advantage for future growth with strong asset quality.

With the growing consumption in India, the Bank is also making a strong footmark across multiple payment products and ecosystems. The Bank has emerged as the market leader in the FASTag segment, both as an issuer bank and toll acquirer bank with more than 25% market share. The rapid development of road infrastructure programs by the government of India, coupled with the growth of the auto segment, presents significant opportunities for the Bank in this business.

The Bank is well positioned with the capabilities built to utilize the opportunities provided by the growth in Indian economy in various product segments in India. We endeavour to have stable asset quality and improved profitability, driven by effective leadership and an energetic team, and to provide steady growth at the Bank.

CAUTIONARY STATEMENT

"Statements made in this Management Discussion and Analysis Report may contain certain forward-looking statements based on various assumptions on the Banks present and future business strategies and the environment in which it operates. Actual results may differ substantially or materially from those expressed or implied due to risk and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India and abroad, volatility in interest rates and in the securities market new regulations and Government policies that may impact the Banks businesses as well as the ability to implement its strategies. The information contained herein is as of the date referenced and the Bank does not undertake any obligation to update these statements. The Bank has obtained all market data and other information from sources believed to be reliable or its internal estimates, although its accuracy or completeness cannot be guaranteed