You have raised extremely good questions. Let me share my perspective on them.
Does IDFC bank have a right to win against HDFC Bank on the liability side? I think yes. Simply because IDFC excels HDFC Bank in customer service (both digital service and offline branch service). And you can see that playing out over time. The cost of funds gap with HDFC is being narrowed each quarter. I don’t see other banks being able to do that - for example Indusind Bank or Federal Bank are unable to narrow their cost of funds gap with HDFC Bank. In that sense, IDFC is an unique challenger.
Does IDFC bank have a right to win against Bajaj finance on the assets side? I think the answer is again yes. As IDFC keeps lowering it’s cost of funds, it will be able to provide cheaper loans than Bajaj Finance. This will demolish the main advantage that Bajaj Finance has - which is not it’s credit analysis - but rather it’s very low cost of funds. Once the cost of funds of IDFC is much lower than Bajaj Finance, it can provide cheaper loans, and then cherry pick the most credit worthy customers. If IDFC finances a mobile phone purchase at 250 bps lower interest rate than Bajaj Finance, where will borrowers flock to? They will flock to IDFC and not Bajaj Finance.
Third question is - can IDFC do all of this operationally more efficiently than the other banks and NBFCs. Well, IDFC has invested hugely on tech/digital and I hope it translates into operational efficiency. We do see some signs of this. For example, the quantum of business done by an IDFC bank branch which is only 2 years old is often larger than a HDFC Bank branch which is 20 years old.
We will have to wait for next 5 to 7 years and see if IDFC wins on all three counts above. If it does, then we are looking at a bank that generates 25% ROE. I think chances are good based on how Vaidya has played the game the last 6 years.