DCB Bank Ltd
NSE:DCBBANK
DCB Bank Ltd
NSE:DCBBANK
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Ladies and gentlemen, good day, and welcome to DCB Bank Limited Q4 FY '23 Earnings Conference Call. Joining us on the call today are Mr. Murali M. Natrajan, Managing Director and CEO; Mr. Satish Gundewar, Chief Financial Officer; and Mr. Ajit Kumar Singh, Chief Investor Relations Officer. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Murali Natrajan. Thank you, and over to you, sir.
Thank you very much for joining this call. I am talking to you from our boardroom in the corporate office. We have Satish Gundewar, our Chief Financial Officer; then we have Praveen Kutty, our Head of Retail Banking; then we have Meenakshi, who is our Relationship Head for FI and Investors. We have Meghana, who is our Branch Operations Manager. We have [ Venky ], who is our Operations, HR and Technology Head. We have Sridhar, who is our Chief Risk Officer. We have Ravi Kumar, who is our CFO In Charge and currently handling our Operations and Special Projects. Then we have Satish, our Head of FI and Treasury; and sorry, Ajit, my fault, who is the Head of our Treasury and FI. Thank you very much for dialing in. We also have our support staff from finance.
So this is a Q4 results and full year 2022, 2023. I believe that we have a very robust quarter. Our balance sheet has crossed INR 50,000 crores, now it is about INR 52,000-odd crores. The total business has crossed the INR 75,000 crores. Deposits have crossed INR 41,000 crores. CASA is about INR 10,500 crores. So we personally feel very happy and proud of achieving these numbers, and we are putting the bank on a trajectory to double the balance sheet in about 4 years. Our intention is to reach INR 100,000 crores of balance sheet in about 4 years' time.
The performance on net interest income has been good at 27.7%. What is very important to know about our income is that there are 2 big income stream, which was present last year, which was more or less nonexistent this year. For example, PSLC, we made a very decent amount of revenue in the year FY 2021, '22. But in '22, '23, because of market conditions and regulatory changes, there has been a steep fall. And despite that, the overall fall in the other income category has been very limited, primarily because of the good work that is happening in third-party distribution fee, on our processing fees and other items, which are all the core items. So that is really something we are very happy about.
Operating profit is pretty much flat to last year. Of course, the year FY 2021, '22 had some one-off items. But nevertheless, the operating profit for fourth quarter has been very good at 11% higher than previous year same quarter. But again, important thing is that as we have made investments in the front line and in one of the charts in the investor presentation, you can clearly see the quarterly disbursal without considering the co-lending, how smartly it has moved up. And we are confident that given the frontline capacity and the productivity that we are working on and also some of the frontline investments we are doing in technology, we should be able to consistently improve this number further.
From a cost-income ratio point of view, the fourth quarter was 59.9%. Usually, the fourth quarter is far better than the previous quarters because of the momentum that we have. And if you look at the same quarter previous year, again, you have seen that we have delivered INR 113 crores of profit, which was all-time high. This year, we have done INR 142 crores, which is again an all-time high. We believe that the profitability in a steady manner will continue to improve.
One of the other things that has gone up very well throughout the year for us is that our upgrade and recovery have been consistently equal to or higher than our slippages. And that is one of the reasons why we have been able to substantially reduce our provisions for this year, in fact, compared to previous year.
The other point to note here is that pre-COVID, our operating profit divided by provision used to be in the range of 4 to 5x. We are back to that level, which clearly demonstrates the robustness and the strength of the business model. The net NPA is pretty much close to 1%. Our intention is to bring it down further over time. Initially, our target was 1.5%, but we have been able to surpass that target. For the fourth quarter, ROA is 1.1%, and ROE is almost close to 14%, which has been our intention.
Again, usually, as you know, in the first quarter, the cost comes in of salary increases. So I do expect some impact of that in the quarter in 2023, '24. However, we are confident that if we consistently improve our performance the way it has been seen now, we should be able to deliver the kind of results that are coming through.
So those are some of the details I wanted to share with you. And we have declared a dividend of 12.5% this year. And we also raised the capital of about INR 300 crores Tier 2 in the fourth quarter, which is also reflected in our capital adequacy. Our capital adequacy continues to be strong, and we believe that given the efficiency of usage of capital, we should be able to grow our book and without having to raise capital for at least another year, maybe 15 months. That's our current thinking.
So with those observations and with those commentary, I would like to hand over for questions.
[Operator Instructions] The first question is from the line of Darpin Shah from Haitong India.
Congratulations on good set of numbers. So a couple of questions. First is on margins. So sir, you have mentioned that in the PPT that you are targeting margins of 365 to 375 basis points. We are already at roughly around [ 420 ] basis points of margins. So do we see that kind of a sharp drop in '24? Or this is just the long-term target which you are looking at?
See, our business model and the product mix and the kind of slippages and upgrades that we expect and the kind of deposit profile that we are working on, we have built a business model, which can deliver higher than 1% ROA and closer to 14%, maybe higher than 14% ROE, with 365, 375 basis points of NIM, okay? Now the methodology. Yes, always there are so many moving parts in this NIM. The methodology of passing on the increase of interest rate in EBLR is that as soon as the Reserve Bank of India changes the repo rate, we pass on that to the customers. However, the deposit cost would be actually coming through. So I do believe that the deposit cost that is like -- is coming through.
In fact, fourth quarter deposit costs was high, especially for retail term deposits. I believe that it will have an impact on margin. And even for the current year, at least from a business model point of view, we are not assuming margins of 4.18%, okay? Also, we have had some benefit. There has been an interest that we did consider in the margin, the INR 3 crore of tax. No, so we did not consider that. That doesn't really matter. So I think the upgrades and recoveries were very strong, and that also results in some amount of reversal of -- that is a recognition of the income, which was not previously recognized. So that also impacts the margin in that positive way.
So you know in terms of -- sorry?
That's my response, I said, yes.
I was saying this -- how much is the [ deposit price ] has already happened for our book? And how much more it can happen and lead to increase in cost of deposits then?
See, the cost of deposits, last -- change the cost of deposit must have been at least one month ago, somewhere in March. Yes, March, we changed, I think, the deposit. Since then, I don't think we have changed the deposit rate. It is published in our website. And I don't believe that deposit rates are coming up. But what I'm trying to say is that all the new deposits will come in the higher rate that has been -- when I say all the deposits, most of the retail deposits, and we are taking longer-term deposits because of our mortgage book. We target 20, 24 months kind of bucket for our deposits. So that will have an impact on the cost of funds. And we won't be able to pass on further. Only in MCLR you can pass on, but not in EBLR portfolio. So that will impact NIM.
Okay, fair enough. And sir, lastly on the asset quality front. We have seen a sharp improvement in slippages during the quarter. What trend you see for FY '24 as well?
We should be in similar trend, but there may be some month up, down and all. But if I remember right, I had mentioned in the first quarter of last year itself, that is about 2 to 3 quarters, the slippages should go back to pre-COVID levels. And I think without gold, our slippages are about 2%, which is what 2%, 2.5% was the slippages there. If -- the way we have analyzed our portfolio, if slippages do go up in any particular quarter, we are pretty confident that our collections and our recoveries effort would bring it down. So we don't see any issue with our portfolio. Only if you see an issue in the portfolio, then consistently your credit slippages and all will increase. There may be some up and down in 1 or 2 months here and there, but other than that, we don't see any challenge at the moment.
Okay. Just one data keeping question, if I can get the breakup of provisions for the quarter and full year.
Satish, you have that? Yes, Satish will...
Data for the quarter, I think for the earlier calls, we had given the data for the respective quarters. The NPA provision is about INR 39 crores. Floating provision is about INR 4 crores, and the provision relating to standard asset, restructured standard assets and other things, they are the rest of it. The total provision for the quarter was [indiscernible].
See, Darpin, I want to tell you something. I looked at that the IBA publishers, all the private bank and [ SFB ] results, of course, they are one year late, they have published that for 2021, '22. And I looked at the floating provision. We are the only bank, I repeat, we are the only bank for the last several years consistently have been making floating provision quarter-on-quarter. And our floating provision currently is about INR 137 crores, which is considered in the calculation of provision coverage. And touchwood, we have never had to use the floating provision. Some of the banks have used the floating provision. So that's a very important strength, which is there in our bank.
[Operator Instructions] The next question is from the line of [ Jai ] from ISI.
Congratulations on a good quarter. First, on asset quality. For the slippages, we have had high slippages on gross front because of the some daily recognition and some of the gold-related products, OD-related products. Has that now normalized with this quarter slippages coming down significantly? So can we say that the entire -- whatever technical reason that has now ended?
See, if a customer does not pay their interest or principal and/or principal for, like the installments are 90 days, there's nothing technical about it. That is an NPA, okay? The November 12 circular, what we were impacted, the gold loans are impacted by that is because we are giving an OD product. Many of those OD product customers have after, what is it called, closing their current loan have switched to installment loans, okay? So in installment loan, that 90-day problem on November 12 circular does not happen because even if there's [indiscernible] interest, there will still be all right as long as they don't slip to 90 days past due.
So to that extent, I think a lot of that issue has been addressed. But I do believe that in -- while addressing that issue, we may have lost some target market who are only wanting to have OD kind of product. But we did a cost analysis, the cost of chasing them and collecting versus doing -- loosing the business, we took a call saying, let's just do this because it impacts productivity of [ branch office ], have to chase up these customers.
Regarding mortgages and commercial vehicle and the rest of the other kind of retail products, like KCC tractors and all, we very much believe that those portfolios seem to be intact, barring any unforeseen situation, the slippages should be pretty much close to, if not better, to pre-COVID levels.
And sir, in this quarter, how much were the slippages from the restructured book? There is a...
We don't present those information. The entire -- whether it is from slippages from restructured book or non-restructured book, everything is the slippages. And that is how it has been every quarter. And the recoveries and upgrades were also from both restructured and normal thing. So we are not presenting that information. Don't worry about the restructured book. For 1 year, it has performed. So you should worry about that. Anyway we don't, so you shouldn't also.
Sure. And [indiscernible] almost entirely has come out of moratorium, right? I mean they would be starting to...
Only very small fraction is left, which will come out by, I think, July, but it's almost a very, very small portion is left. Everything else is out of the moratorium. And when they come out of the moratorium, we have to struggle with the customer for about 2 to 3 months. And because there are muscles of repaying has [indiscernible]. So they, despite our pushing and whatever, doesn't work. So finally, when the collections team is constantly following up with them, they start repaying and then it gets almost normalized in about 2, 3 months. So that part will be there even for the ones that come out in July. But overall portfolio includes slippages from restructured and recoveries and the upgrade also includes slippages from restructured.
Sure. And sir, if you have the number for ECLGS, right, if as in -- I mean, how much is the ECLGS...
[Foreign Language] ECLGS slippage is also in this. ECLGS recovery is from government also in this. Everything is all inside this. And we didn't give ECLGS to any unsecured customer at all, very good thing. [Foreign Language]. Even I don't look at it, by the way.
And on the cost of deposits, sir, would it be fair to assume that your card rate on TD would have peaked? Or do you think you may still have to increase the card rate of TD, while cost of deposits may keep going up because of the -- as deposits reprice. But the fresh TD in your view, the card rates would have peaked or that is...
Probably Praveen, our Retail Head can answer it.
Jai, Praveen here. So currently, the peak rate we have on term deposit has remained there all through Q4. And there is no reason to believe why we should increase the rate for getting the kind of term deposit -- the kind of deposits that we've got, right? I mean Q4 is by convention, the particular quarter where the most highest amount of renewals and highest amount of acquisition happens. We've been through it. I don't see -- at least personally, I don't see that increasing any further for the kind of loan demand that we have going forward.
Sure.
In between buckets based on our ALM profile and things like that, we do keep doing that. For example, let's say we decide that we want to attract more deposits in, say, 1-year bucket or more deposit in the 3-year bucket, that ALCO will keep doing some changes depending up on the profile, right? So overall peak doesn't seem like an issue at the moment at least.
Sure, sir. And last 2 questions, sir. The first is, in the last 1, 2 years, we have added a lot of capacity in terms of branches and head count, right? And so if you can share if there is any qualitative improvement in the loan sourcing also. So I mean, if one were to club connectors as, let's say, outside bank channel, so is there any meaningful change in the way we would be sourcing business just because we have added a lot of branches and employed in the last 1, 2 years?
In the metros, like I mentioned in many of my calls -- previous calls, almost 70-odd percent of the business comes from connectors, okay? But in AIB and non-metro business, almost 70%, 80% will come from our own sourcing. And that mix is how it is proceeding. But to give you some more sense, if you look at the total disbursal without co-lending, in Q4 of 2021, '22 versus Q4 of the year that has just gone by, there is a 50% improvement in the disbursal, whereas our average head count has gone up only by 27%, 28%. That's quality in terms of what we have put in. And I'm quite sure, the more ones that we do in terms of improving productivity, improving products, the process, systems and that's a continuous process. We believe that we can improve it further.
We put up a software called CUBE, which is for processing, current and savings account and a few other deposit products. We have been able to reduce 98% of the errors that were being committed by frontline. We invested, say, one in that software, we have been able to save 4 because of that software of various categories, like printing, stationery, productivity, reworks, blah-blah, all that put together. Also, the number of applications that we process by CUBE, which started, let's say, at 100, has gone to, let's say, about 10,000. That's a kind of volume that is being called. So frontline improvements that I keep talking about has power to improve the productivity, and we are working on it.
Sure. And last question, sir, maybe it is too early, but if you can share the -- your thoughts on the succession planning, when do the bank starts to do that? Would you -- would the bank have a parallel run? And when does this entire process starts. I mean the new guy, whoever it is, either external, internal, who does a parallel run with you understanding bank culture. If it is -- more important if the person is outsider, but just to the handholding kind of a thing, the parallel run.
Okay. So the Nomination Committee will decide the agency, the headhunting agency that would be appointed and the search panel. I believe all that should get completed soon. We believe that we need to put in the application for the new CEO by end of November because RBI needs about 4, 5 months to process this thing. So I believe that we are well on track. Both internal and external candidates will be evaluated and then [ NRP ] and Board will take a decision.
The next question is from the line of Akshay Gupta from Investec Capital.
Sir, just 2 questions from my side. Sir, currently, there is 33% growth in -- year-on-year growth in OpEx. So what is the OpEx growth for the next year, we are expecting?
It will be much less than 33% because we have already increased the capacity. So for example, we have added average headcount of 27% year-on-year. I don't expect the increase to be -- I mean it won't be more than maybe 14%, maybe 12%, 14%. That's what the current trends are indicated. So that would result in whatever because headcount is our biggest cost. And number of [indiscernible] would continue to be about 25, 30. That's is unlikely to change.
Okay. And sir, second question on like what's your PSL income for FY '23 versus FY '22?
One minute. We don't disclose the PSL income. No, we are not disclosing that income, but -- yes, okay.
Okay. And sir, last question, sir, I missed...
So last year, the overall PSLC income was close to INR 80 crores. And this year, the entire year's full year PSLC income is about INR 20 crores. So there has been a big fall. And as MD mentioned in the initial comments, I think despite a severe fall in the PSLC income as well as we not having the opportunity to have any treasury gate. The overall fall in the noninterest income has been really contained to robust disbursements and a very good growth in our processing fee income as well as a very good trajectory that we have seen in insurance and investment income.
Okay. And sir, last question on gross slippages, like, I missed your commentary on the gross slippages. So just I want to know like when we will -- like when will they go below to the pre-COVID level or something?
No. When we were -- at pre-COVID, we are doing very well on slippages. And going back to pre-COVID, we are pretty much there at pre-COVID level if you just exclude the gold. And gold, I told you is not a problem at all. Gold is [indiscernible], and gold will get upgraded. That's not a problem at all. So I would say that our slippages are about 2% without gold. Pre-COVID this used to be about 2.25%, 2.4% like that. So I think we are there already.
The next question is from the line of M.B. Mahesh from Kotak Securities.
Just a couple of questions. One, in terms of the demand side for loans, how is the situation today?
Well, we haven't got any resistance from our sales side, and we have not changed our credit policy -- okay, we have not loosened our credit policy to accommodate more target or more customers or anything like that. That all has remained as it was. If any, we probably may have kind of refined it further based on the learning and so on and so forth. So we are not getting any [ results ] from our frontline. We still hope that we should be able to grow the core products, don't include corporate in it because corporate is a very opportunistic kind of business that we run. So without that, we are still pretty confident that we should be able to double the loan book in about 3, 3.5 years, like.
Second question on your outstanding stock of NPAs on the mortgage book, how is -- has the situation improved in terms of resolution time lines?
I don't know. Praveen can comment. I'm not sure because -- yes, go ahead.
Mahesh, Praveen, here. Mahesh, so what you're seeing is that the 2020 -- early '20, first half 2020 NPAs have gotten to a 24-month kind of cycle. So by now, judicial proceedings are really giving us results in terms of verdicts on the court, and that is helping us kind of [ tempt ] the customer to make the adjustments, try to sell the assets on his own and then give us back the money. So we are seeing incrementally what we can collect that we are collecting that early vintage NPAs have been giving us a result, and that's how the momentum had happened in the first -- the initial months.
Now we are seeing that the older vintage where the ability to pay was a problem, where asset sale had to happen. You are getting the resolutions of [ DRP ] and [indiscernible] coming in as an influencer to help us convince the customer to sell the property and then move on. So both are -- so the early vintage clearly is behaving like pre-COVID. And later with the GNPAs, you're getting the benefit of the court orders to help recover.
One important thing is at the -- some of the target margin that we have, which is like a small ticket home loan like a 15, 20 lakh kind of customers or even those ticket size lakh customers, we don't have to do repo at all. Just the legal notice that all can actually result in recovery proceedings taking shape. So we don't really have to go and go the court, report and all these things. So those customers are -- I mean, we don't have to push them to that extent.
Murali, we've hit about 50 basis points credit cost for FY '23. In terms of the outlook that you are looking for the next, let's say, 1 or 2 years, does this number go below this? Or do you think this is a bottom that we can reach?
The collection team and the analytics team believe that it can go below that. But there are so many things that happen in our country that doesn't give me the confidence. There could be any event that can actually cause the issues. So I believe our business model is back to the same what it was before COVID, which is at 40, 45 basis points of 50-basis-point type of credit cost. The intention is to do better because I think during the COVID one benefit that we have got is, you got better as some of the collection process mechanism, and we are also introducing some technologies there to improve productivity. Those should come in, hopefully, in the next few months. We've definitely got better in collections during COVID. I mean, capacity-wise, planning-wise, all that has happened quite well.
The next question is from the line of Rakesh Kumar from B&K Securities.
So firstly, just one question to understand that how much spread that we are making on cost of deposit in ABL regime and in MCLR regime. So if you can say that what is the spread in each of the regime that we make?
So all that is a composite number that has been reflected in our financials. And it's very hard to calculate all that because there is a part of MCLR book, there is part which is an EBLR book. There is a book which is semi-fixed, which over period of 1 year will come into either EBLR, MCLR depending upon what was the contract at the time of booking that customer. That deposit profile just keeps changing. So I don't believe that I can even attempt to answer that question. But all we are saying is that our business model is somewhere around 370, 375 basis points. And we believe that with the mix of products on both deposits and loan side -- sorry, yes, loan side, we should be able to achieve that.
Secondly, sir, on the gold loan book side, which is close to 8% of our loan portfolio, so did we have a double-digit gross delinquency rate in this quarter?
Means what?
In the gold loan book, the gross delinquency rate was -- annualized number was in double digit this quarter?
What worries you in gold, if you can explain to me then...
No, sir, first thing is that at the first place, why should we have this kind of a gross delinquency rate. So the recovery happens as I -- as you were telling that recovery happens in this book. But at the first instance, what is the reason for such a high delinquency in the book?
Gold loan book will be high delinquency, and I won't apologize for that. The reason is these are small customers, 1 lakh, 2 lakh, 3 lakh, 5 lakh, small customers who use gold loan for their business purposes and for emergency purposes, sometimes even for putting money for their property margin, money or whatever all these things. These are small customers. They have -- don't have great discipline. Many of them are serviced by NBFCs, where they actually would have taken a bullet loan, they don't have to service on a monthly basis. Whereas when they take it with the bank, we have to kind of bring in the credit discipline of making them pay.
As long as we have taken good quality loans and our LTV is intact, we don't worry about the gold loan portfolio, okay? And we have very good sales out to ensure that we are not taking either some syndicated fraud gold or some [indiscernible] gold in our branches. And wherever we find any issues in terms of process and all, we try to address it very quickly so that it doesn't become a problem for us. So gold loan delinquency goes up. I don't think any of us worry about it.
Understood, sir. Understood. Sir, what is the [ LGD ] that you were mentioning, sir, in this book? [ LGD ] for this book?
I think Praveen can -- I think last was 0 almost.
Rakesh, see, the [indiscernible] is virtually nothing. There is actually gold on business, right? I mean look at this way, INR 133 crores was NPA stock when we started the year. That has come down to 119 -- come down to INR 19 crores. So during the year, gold NPA stock has come down from INR 133 crores to INR 19 crores.
Next question is from the line of Rishikesh Oza from Robo Capital.
Sir, my follow-up is with regard to the OpEx. You just indicated that the next year OpEx growth would not be more than 14%, 15%. But if you could also share...
So that is not what I said. I said that it will be much lower than 33% or whatever 32% that we have this year. And I also said that we have added 27% average headcount year-on-year. I don't believe that it will be more than 10% to 14% or something else. So I didn't say that it will be -- operating expenses will increase only by 14%. Please correct that.
Okay. Basically, my question was regarding the cost structure. So basically, at what OpEx level with our cost structure flattened and by when?
Cost structure will not flatten. We are running a retail and SME business, and it's a very people-oriented business. The business is about continuously adding people to grab more and more business geographically target or whatever, I mean, different target markets and so on, and invest in frontline technology process systems and all to make them productive, have good credit control and collection mechanism so that your NPS -- that is our basic model.
We will -- this is not a corporate bank model. This is an absolute retail, retail model. Our average ticket size is about INR 30 lakhs, okay? For example, you take any of the small finance bank. Their business for [indiscernible] will become INR 2 crores, INR 3 crores, and they probably will have about 25,000, 30,000 people for similar or slightly bigger balance sheet than us, right? You can verify what I'm saying.
So we will continue to add people, but we lost out momentum in COVID years. So we took the courage to invest in a huge amount of frontline, like 2,000, 3,000 people we invested, and that is showing in our disbursal volume, quarter 4 2021, '22 versus quarter 4 2022, '23. Here on, we may not have to have such a step change in increasing our headcount. I hope that provides you with some clarity.
Sure, sir. Just one last point on this. In your PPT you've said that your target cost to income, you want to maintain around 55%. Can you attach a timeline to it?
We believe that we should be able to do it within 1 to 1.5 years. And we are working towards that. We have said that we are targeting 1% ROA and 14% ROE. This quarter, we have been pretty close to it. Of course, quarter 1 costs would come out first and then business grow very slowly in quarter 1. If you see our last year fourth quarter ROA and ROE, we are better than that, right? And last year, as you -- we may have had some one-off income, but this year, even that is not there, okay? So we are moving in the right direction. Exact timeline and all is not so easy to give because there are many variables. But directionally, it looks like in a year, 1.5 years, we should be consistently delivering it, if not earlier.
Next question is from the line of [ Drashti ] from ThinkWise Wealth Managers.
Congratulations for a very good set of numbers. Sir, with regard -- my question is with regards to our cost to income ratio and more to do with the productivity of our branches. So you've mentioned in a lot of calls that it takes 2 years for a branch to breakeven, after which we start seeing incoming coming in. But when I map out total income per branch now over the last few years, we've not seen a significant improvement in our total income per branch metrics despite now our branches -- most of our branches are already 3 years old. So if you could -- 3 to 5 years old. So if you could just help me understand this? And how can we see this going forward?
Yes. So if you see that last year, we had -- last year meaning I'm talking about '21, '22, I think we added about 50-odd branches, 40-odd, how much -- how much, 52 branches are something we added there. And this year, we have added 27 branches, right? A lot of the branches last year came towards the later part of the year, right? So we review branches to say how they are performing. There are branches which are already broken even in about 8 to 9 months' time. I mean I just visited a branch in Gujarat. It's just remarkable that we've been able to build a very strong book in a matter of just 8 months.
But there are branches, 1 or 2 of them, I can say [indiscernible] in south, that is in Tamil Nadu, where even after about 2.5 years, they still not crossed the line, okay? So there are variations within these. We have a very strong focus. We can actually pinpoint the revenue per branch and the cost per branch and track it productivity per person, we are able to track it, and we are pretty confident that on an average, when you put a bunch of branches, we can break even in about 22 to 24 months.
Of course, there will be some outliers on both sides. But generally, that is a direction in which we are proceeding. On cost income ratio, please look at any bank, which has got a retail portfolio. If you have corporate book, definitely cost income ratio can be much below 50%, right? But if you just look at only the retail, retail kind of book and probably some of the small finance bank can give you a clue on what is pure retail. Our retail book is about 85% of our book. There to manage cost income ratio below 60% is a very tough art. But still we are targeting a 55% cost income ratio over a period of time. And we are confident that...
Absolutely point taken, sir. But if we leave aside the last 2 years, you've again started increasing the branch count, if we leave aside these 2 years. Even before that, since 3, 5 years, we've seen this total income per branch very stagnant, at a very stagnant level, so which why that concerns you.
[indiscernible] and all because we have to put -- when we add 100 branches, we have put 25% of those branches in unbanked locations, unbanked locations, where the population will be 2,000, 3,000, okay? So that is not a metric that we can look at. But I can tell you that we're looking at our business per employee, which is about 8 something, what is the number this -- 7.8. So it is close to 8 and we will be able to improve that. The second point that I want to tell you is that we have added a substantial number of headcount last year. And many of that head count hasn't yet completely given the peak productivity for us. So all that also has to kick in.
And sir, my second question is regarding competition. So there are a few NBFCs, which have got very active in Tier 2, Tier 3 cities and specifically in the MSME segment. So do you face too how much competitive pressure from these? And how do you look at that?
I mean one of the advantages that NBFC has is that they can open branches and they don't have to worry about unbanked and all the other constraints that banks have, like us, because if I open a branch in a small location, then some percentage of those branches have been opened in unbanked locations. So they don't have that thing. Other than that, from a cost of fund point of view, we have a much better advantage. I don't believe that small NBFCs have cost of funds like what we have because we lend to many of those NBFCs, so we know exactly what their cost of fund is. Those kind of competition hasn't given us any dampener from expanding our business or achieving the kind of disbursal goals that we have been pursuing for the last 4 quarters.
Next question is from the line of Nitin Aggarwal from Motilal Oswal.
Sir, sorry to belabor the point on cost income, again, but is there any non-rating expense that we are incurring currently in other expense? And because what will drive this cost income reduction as we are also looking at some pressure in margins.
No, no, you guys have a framework saying that cost income ratio should be 50% or 45% and then trying to fit to all banks into that. It doesn't work for us that I want to tell you right away because if you compare our business of 85% retail with 50% retail of another bank, obviously, and we do those comparisons in our boardroom and see what impact on that is. What I'm saying is we have invested in front line heavily last year and that is because for 2 years, our average CAGR growth on '21 and '22 was only 7% or 8%. Now we lost the balance sheet of about at least INR 5,000 crores because of those 2 years of COVID because we pursue SME business.
Now the option in front of us is, okay, should we just go back to trying to grow the cost by only 10%, 12% and invest or put in the investment because we know the business model, we knew how to make it work and grow the business, which is an option we have taken, and it's already demonstrating results. So this year, our cost increase is unlikely to be in the 32% range. It will be much lower than 32% range. And we hope that income -- the income growth is higher than our cost growth. And that is how our cost income ratio will keep coming towards 55%.
Right, sir. Actually, I was just asking because we are building in some compression in margins also, which may limit the improvement by FY '25.
Boss, we have been running this model, and we did it very successfully pre-COVID. You guys are worried about the operating cost increase. We have demonstrated that in our growth. Look at our mortgage growth, it is 27%. Look at our AIB growth, it is 30%. Look at the co-lending growth, it is, I think, about 50-odd percent. So everywhere, we are growing very, very strongly with the investment. It takes time, and we are pretty confident, and they have flexible cost. They are not sticky cost. If a set of salespeople or frontline don't perform, there is a clear forecast, which helps us address those costs.
The next question is from the line of Krishnan ASV from HDFC Securities.
Are you able to hear me, Murali?
Yes, yes. Sure.
So my question is a little more on just the MSME business and where they are at, given the kind of rate cycle or the steep acceleration in rates that we have seen over the past year. So you -- I mean given that you tend to be -- I mean, you tend to be kind of with the banking predominantly with the MSMEs in India. Could you just throw some light on where we are at? We tend to think that housing and autos are typically rate sensitive, that has been proven to be [indiscernible]. Are MSMEs reflecting any sense of rate sensitivity at all?
Praveen, do you want to answer that? Praveen will...
Krishnan, Praveen here. I just tell you with the particular segment that we are looking at. And that is the micro part of the MSME. Our average ticket size hovers around the INR 30 lakh mark, okay? The products that we do either cater to capital requirement of the customer or specific business loans for those installment loans for particular customers. That's what they're looking at. Where this particular book is concerned, we are seeing that there's an increasing demand coming in. And the delinquencies and early delinquencies for those customers of a similar vintage is better -- is actually better than the pre-COVID levels. So good demand, reasonably good performance, that's why.
It's a pretty large market, okay? It's a pretty large market, more -- a lot of our -- this particular segment is having -- is an assessment based on an ability where these people are still not having recorded verified income. Quite a lot of these customers are new to credit as well. And it's a growing market. In India, the MSME segment that you're speaking about is a 63 million base and over a period of time, they will get formalized. And then when they get formalized, our ability to assess income will be better, and we'll be able to give higher loan. If really you're very conservative, give higher loans. So there are built in moats for these customers.
There's an ability that the bank has. We've gone through a couple of credit cycles of average of, let's say, 5 years, 6 years, right, two 6-year cycles you pass through. You've gone through headwinds of pandemic and demonetization, what have you, GST, right, multiple headwinds. And now you're seeing the results of that in terms of the NPA stock post pandemic decreasing the way it has been decreasing in an absolute sense for getting the percentage sense. So it's a very thriving market where there's an expertise the bank has.
Right. So we -- this is what I think I'm trying to just make sense. So reconcile the macro headwind with the put micro tailwind because at an enterprise level, it seems that companies have almost infinite capacity to absorb rate hikes. It's also reflecting in fairly superior recoveries and upgrades, organic upgrades that you yourself are seeing and the rest of the banking system as well. So what gives here is all that I'm trying to...
The parallel you can draw is this. So these are customers primarily in the service industry, right? So take an example of something like a marriage hall. They've been -- the business has been virtually nil from March 2020 to a good part of 2021. They've definitely become NPA because there was no revenue coming in. But what you see happening currently and that's the proof of putting is in the in the stock numbers, not only are many of them, most of them, servicing their EMIs, but also have had a benefit of increased business, which is allowing them to pay back the entire overdues, otherwise it will continue to be in NPA. So if you were to take mortgages, among this INR 342 crores of NPA stock is now INR 270 crores. That movement you see is because there is a resilience and robustness of the business.
Some people have gone completely out of the business, started new businesses, which are income-generating, and that income-generating resilience is what is key to this MSME, SME segment, which is allowing them to come back into the regular installment paying capability plus knocking off the overdues in most cases. Another point, which I want to tell you, Krishnan, is that if you see our recoveries, it's got 2 components in it. There's an upgrade component and there's a recovery component in it. Recovery is when the customer throws up his hands and says, look, there is no way, I can't repay this particular loan. My business is not working. Upgrade is where the customer finds an alternative revenue stream or an increased revenue stream where he clears overdues and becomes a normal customer.
The reason why -- one of the reasons why you're seeing the improvement in NIM is because these customers -- the NPA customer continues to be a revenue-generating, revenue accruing customer and is giving us a flow. So you're getting the overdue flow, minimum 3 months, maximum could be as high as about 12 months. So there's a very big resilience in this particular segment. So we talked about the demand. We talked about the size of the particular market across geographies, and we talked about the ability of the customer to find -- to come back normal. So I'm not 100% sure of the micro tailwind that you're speaking. We don't see that. We see the clear resilience in the kind of customer selections that we had of this particular segment to not only to service installments, but to service installment and clear overdues so far.
Right, that's very helpful. So just one other question, which is more about the target segment that we have been going after pretty consistently only for the last 15 years. I'm asking this to you, Murali, because you have kind of reengineered the bank from the time that it was in trouble. And we've seen all the difficult years, and now it's seen kind of easier years ahead. And so all credit to you and the rest of the team that has been through with DCB all these years. But I just wanted to understand, has the addressable market that DCB wants to go after, how much has India [ stack ] helped you to kind of expand your own target universe. Could you just kind of index it for us just to understand the addressable market just for DCB Bank looking at it inside out.
I think a lot of the items have helped us. Aadhaar has helped us, no question about that, because it makes life so easy in terms of doing KYC. And all the items that are linked with Aadhaar. GST has helped us immensely. Many of the customers, at least are partly in the GST bracket. Our own ability to kind of all the digitization that has happened, whether in the electricity bill or supplier bill and all those things, all that has given us the confidence of looking at things a lot more carefully and be confident of what we are doing. So I'll say that -- and then we also learned a lot about the target markets, either though some of the target market, which we didn't understand by doing a little bit small experiment and now, we have been able to go into those target markets as well. I mean when we started this journey, I don't think our ticket size was INR 20 lakhs, INR 30 lakhs. It probably would have been INR 50 lakhs, INR 60 lakhs. But over time, we have been able to kind of successfully enter these target markets and create at an individual level, very profitable kind of loans.
And Murali if I can add, geo location, digital collection, the ecosystem in the country has significantly changed and really helping us big time. We know where the customers are. We know the customers have an ease of payment, rather than going 40 kilometers away to the nearest branch to pay back the money. There is a sea of change.
Next question is from the line of Sohail Halai from Antique Stock Broking.
Congratulations on a good set of numbers. Sir, my question actually relates to from the provision coverage ratio. So we have reached on books PCR of around 68% and closer to 80%, including technical write-off. So from a book perspective, which has around 25% in terms of the mortgage NPL, is it relatively fair to assume that all the legacy NPL provision in other books had been basically taken care of? And probably in terms of this was the question asked in the past as well that, can you actually understood the credit cost probably because of the increase in the provision that you have made for, sir?
So I don't know what you mean by legacy. We are the legacy right now, okay? Whatever we have created, we own it, okay? That's what I said, right? So I don't know how to respond to you on that legacy part of it. All I want to say is that 85% odd of our book is secured, right? 50-odd percent of our book is mortgages. Even the entire SME book is -- most of the SME book is the secured, except for [indiscernible]. [indiscernible] is not set secured. If I look at our tractor, KCC, all that has security. And each of that, we understand the loss given default and probability of default. All these also have improved post-COVID also because of our collection efficiency as well as various other kind of analytics that we put in to improve our performance on that.
So I believe our coverage ratio is pretty strong. We don't have any target coverage ratio. We wanted to be above 70%, and we are above 30%. We keep making provisions as per RBI norms or more. Like in mortgage and all, our provision norms are higher than what was expected by RBI. So we will continue to build on that provision, while trying to do the best that we can in terms of recoveries and upgrades on these slippages. So I do think that our credit cost should be in the range of 45 to 50 basis points, which was our pre-COVID level number.
Sir, another question pertaining to this only. In terms of write-offs is something that we are doing it for the last 3 quarters around INR 40 crores to INR 60 crores range. And is it fair to assume that some of these write-offs have also started flowing through the [ PM ]? So in terms of -- from the income level, so recoveries from written off has actually improved over the last 2, 3 quarters?
I'm not sure. Satish, are you able to relate to this question.
Sir, I'm not able to relate to the question exactly.
So probably in terms of [indiscernible] that you are actually writing off around INR 40 crores to INR 50 crores per quarter. And historically also, in terms of last 2, 3 years, you have written off some amount of these loans. If I just back calculate in terms of write-off and the cumulative write-off books that we have, so is recoveries from written-off account also started picking up in the last 2, 3 quarters?
So you're saying recovery from the written-off accounts?
That will actually come into provision, correct?
Yes. Yes.
So recoveries that are coming from written off accounts also come as -- come in the provision line, not in the income line.
Okay. Okay. But sir, is the trend improving there as well?
Yes. I mean when we look -- see, the collection team does not have any idea what we have written off at the head office. They don't have any idea about it. They are collecting on account as well as an NPA. I mean, like collection team will have no clue which item we have, which account we have written off and which account we have not written off, right?
And sir, final question in terms of on the yield on loans. I understand that some amount would be because of the upgrades and recovery as well. But post 3 or 4 quarters, our yield on loans actually moved up. So is the pricing environment better as compared to what we have seen in the last year? Any qualitative comments on that?
No, the competition is as tough as it would be. We keep doing analytics and making sure that we are pricing as much as possible from a credit risk point of view so that we don't lose the margin and the margin for both making money as well as to absorb the credit losses. The mix of portfolios that we have on the deposit and the loan side, we are targeting a NIM of about 370, 375 basis points. If you do very well on collections, recoveries and all, you may see some improvement in our NIM, which is what we have seen here in this particular quarter. Also, the EBLR, it works like this, and you actually make the change in EBLR as RBI announces that repo rate changes and the deposit cost follows. So we do expect some compression in our NIM in the coming quarters.
Okay. And sir, this basically in terms of if you could just quantify how much of the yield benefit would be because of upgrades and recovery? Any ballpark numbers?
We don't have that information. Everything is comprised in the NIM. Yes, so we don't have that information.
The next question is from the line of Pallavi Deshpande from Sameeksha Capital.
I just wanted to understand what would be our term deposit costs right now currently? And what would be the share of deposits, which get a special rate above the card rate in the deposit mix?
Why would we give a [ commercial ] rate over the card rate, but bulk rate is also published. So whatever -- see, some of the banks are not publishing bulk rate. We publish all the rates. What you see in our website is all the rates that you see. And I think our bulk rates have been brought down probably in April or something, I don't know, something like that. Some data, I don't remember. We brought it down. So there are no rates that are not published. All the rates are what you see.
Right, right. Got it. And secondly, sir, on the co-lending side, which you're seeing very good growth. So what drives -- on take rates, what are the kind of take rates you have to offer to the fintech partners for these?
What rates?
The take rates for the fintech partner or...
What is the rate split between as you are saying.
Yes, I understand that's 80-20, is that right?
The 80% of the loan is written and 20% of the loan -- you want to explain that, Praveen? Praveen will explain, hold on.
So Pallavi, what we do is we have co-lending partnerships, where there is minimum skin in the game of 20% for the originator. And depending upon what kind of product it is, it can go higher. So the reward and the risks are shared equally, so with 20%. Everything is shared. 80% of the book comes to us at our agreed pricing, and the customer pays whatever the origination pricing is to the originator.
Right and in case your partner cannot have the book, like somebody like a Paytm or some [indiscernible] keep the book on the [indiscernible]. So you wouldn't have those kind of partnerships I'm assuming.
I'm not too sure whether I got the question. Can you say that again?
Some players in the market, the fintech players, they can't keep orders on their books. And so this 80-20 may not work with those players. So would that prevent you from those -- being with those players? I'm talking of the likes of Paytm.
So Pallavi, there are 2 things. There is one is a co-lending. What I will explain to you was the concept of co-lending. We have a significant -- we have a sizable book on co-lending. What you're talking about is a referral arrangement with fintechs. Most of the fintech referrals are coming under the buy now pay later or personal loans, mostly in the unsecured segment, right? That's how the industry currently -- or checkout financing, et cetera. That's an area which we're not invested in. Where there are fintechs, which are providing you with mortgage or SME leads, we take that, but that follows a similar to the connector model. So it's more a lead referral thing than -- there is no identification, et cetera, of the customer, Aadhaar identification of the customer at the fintech end. We take it full on and then do the appraisal entirely [indiscernible] reject or accept as per our criteria and move on.
The next question is from the line of Akshay Gupta from Investec Capital.
So my question is like one, you received lower [ PSLC ] income compared to the last year. So why the PSL rate fallen? And do we expect it to recover?
So Akshay, on PSLC, the bank's priority sector lending as a percentage of the total advances that we have, have remained as healthy as it is. So there is no supply problem. But the rate at which the PSLC is being purchased in the year 2023 has plummeted as compared to '21, '22. And the reason for this is not a demand issue, it is a supply issue. Earlier, for the customer to become -- to be eligible for private lending, you had to necessarily get a [ DM ] certificate, which had to meet certain norms of what kind of activity the customer is doing. And it's a stringent way of ensuring that, that particular customer is meeting the particular norms and getting a certificate [indiscernible]. That has been significantly relaxed in the last year, which has resulted in an increased supply.
The moment supply has increased, 2 things have happened. Many institutions, which were deficient in [ PSL ] has by virtue of easier launch got -- fulfill the PSL criteria or near fulfill the criteria. Secondly, the need for purchase also has become significantly less, which is resulting in drop in the price. What will happen in the future depends upon how much of PSL is required by whom in the market and that will drive the price. So right now, there's no clear visibility of what the price is going to be.
Okay. Okay. And sir, my second question is like related to our new CFO appointment, like when we are expecting a new CFO in our system? And it will be from internal or external, some comments on this?
So as of now, Ravi Kumar is going to be taking charge from Satish. Satish is here with us until June 3. And the [ NRP ] and Board will work with the management team, and we will finalize the candidate in about a few weeks, which is what we have represented in stock exchange.
Thank you, operator, and I hope that's -- is there any other questions left?
No, sir, that would be our last question. Would you like to add any closing remarks?
Yes. Thanks very much for dialing into this call. It's been a pleasure interacting with all of you and look forward to talking to you again next quarter. Thank you very much.
Thank you very much. Ladies and gentlemen, on behalf of DCB Bank Limited, that concludes today's call. Thank you all for joining us, and you may now disconnect your lines. Thank you.