Equitas Small Finance Bank Ltd
NSE:EQUITASBNK
Equitas Small Finance Bank Ltd
NSE:EQUITASBNK
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Ladies and gentlemen, good morning, and welcome to the earnings conference call of Equitas Small Finance Bank Limited's financial performance for Q1 FY '24. We have with us today Mr. P. N. Vasudevan, MD and CEO; Mr. Sridharan N, CFO; Mr. Murali Vaidyanathan, Senior President and Country Head, Branch Banking, Liabilities, Product and Wealth; Mr. Rohit Phadke, Senior President and Head Assets; Mr. Natarajan M., President and Head Treasury; Mr. Dheeraj Mohan, Head Strategy and IR.
[Operator Instructions]
Please note that this conference is being recorded. I would now like to hand the conference over to Mr. P. N. Vasudevan. Thank you, and over to you, sir.
Thank you. Good morning, and thank you all for dialing in this morning. The year started off well, both at the macro level and at the local economy where Equitas operates. The credit momentum continues to be robust and with the early signs of inflation softening, the momentum may continue for the rest of the year. Tractor, 3-wheeler sales, vehicle sales and other indicators all point to the right direction and hopefully, monsoon ends well, giving rural and semi-urban economies a boost.
Coming on to Equitas. The bank delivered strong growth across its diversified loan book. We are seeing growth across states. Newer products like commercial vehicles, affordable housing are maturing well and will start contributing meaningfully to the bottom line soon. We are also working on products like personal loans, car loans, credit cards, forex cards, et cetera, that can be offered to our depositors, which can help us improve our overall engagement and stickiness with the depositors. Over the next 12 to 15 months, we hope to see these products rolling out.
On asset quality, things are back to normal with the gross slippage calculated on a daily basis. I repeat, calculated on a daily basis, hovering around the 3% level and a stable GNPA. Our restructured book is now only about INR 213 crores and we have a 97% provision for NPAs arising out of this book. And with that, I guess, the entire restructured issue is completely behind the bank. Rohit will talk in further details about advances.
On the deposit side, the environment is getting tough with most banks increasing their deposit rates. Over the last 15 months, we have narrowed the difference between our peak deposit rate to those of the large banks by about 50 basis points. We were one of the earliest SFBs to focus on CASA. At one point, we had exceeded 50% CASA ratio. Though this has come down sharply over the last few quarters, yet it remains very good in the banking industry. We continue to back up our attractive interest rate on savings accounts through high-velocity engagement with depositors through our various channels. We also upped our new CASA acquisition.
The story of the quarter for Equitas clearly is our retail TD. We have been able to mobilize almost INR 500 crores per month of net accretion to RPD and channels like NRI and the virtual irons are doing quite well to help us deepen our relationships. Murali will take you through more details on this.
While deposit mobilization has been good, our cost of funds has seen an uptick largely in line with the industry. As you know, more than 80% of our loan book is fixed rate loans and this had a corresponding impact on NIM. During the past year, we also increased our lending rates. Our yield on disbursement for the quarter is about 8.4%, which is up 35 basis points compared to last year's first quarter. However, we feel the changing [indiscernible] will continue to put pressure on the NIM, but should be offset to some extent by an improvement in OpEx and credit costs.
Last quarter, I mentioned that we delivered a 2% plus ROA for the second consecutive quarter. Today, I'm happy to make that the third. I can never keep my philosophies or my governance standards out of any dialogue, and please indulge me for a couple of more minutes as the ramble along on this.
Equitas and ESG. I now want to talk about our approach to customers. As you all know, our borrowers are typically from the informal economy, comprising of the base of the pyramid segment. I repeat base and not the bottom, but the base of the pyramid segment. Moratorium, where RBI announced a moratorium during wave 1 of COVID, we offered it laborly to our customers and 90% by value and 97% by number of customers avail the moratorium, which might probably be the highest amongst many banks. After that in post 2, RBI offered a special restructuring window. At that time when investors were giving drowning points to those banks who showed the lowest percentage of restructuring, we again offered it liberally to our customers. Outside of micro-finance, we restructured about 31,000 customers, of which about 27,000 customers did not move into NPA.
This means that if we had not been very empathetic and considerate to our borrowing segment, out of this 27,000 customers, most of them might have to reach NPA if they had not offered the restructuring. And we would have ended up reprocessing their only house property in their life and then brought them to settle. As I have mentioned before, in Equitas, we are not just running a bank. We are running an organization in fact in the most vulnerable segments of society, and we have to be extra supportive in the times of need and in return, they always stand up for us. I believe that these actions of the bank propel us to the higher standards of ESG benefiting real people in an immediate and direct manner.
For all stakeholders associated with Equitas, we not only offer a bank run on high standards of governance, professionalism and financially attractive, but also a bank which positively impacts large segments of base of pyramid population. At Equitas, we believe in circle of life. The good you do comes back to you. I repeat, the good you do comes back to you.
And so I end this with a big thanks to all of you who have supported us and hope that the circle of life, such as your life too and [indiscernible]. Thank you. And I now hand it over to Rohit.
Thank you, Vasu sir, and good morning, everybody. Advances have grown by 36% and disbursements of 46% year-on-year. Collection efficiencies has been stable and GNPA has been maintained at the same level as the previous quarter. In small business loans, there is growth in the non-Tamil Nadu disbursement. In June '22, the composition of disbursement was 65% in Tamil Nadu and 35% in non-Tamil Nadu. At the end of June '23, the composition of disbursement has now changed to 61% in Tamil Nadu and 39% in non-Tamil Nadu. The business has seen growth in the states of Andhra Pradesh, Telangana, Karnataka and Maharashtra.
The new loan origination system has been rolled out and is active in 100 branches across the country. Another 100 branches will go live this quarter. The micro finance business has recovered from the COVID impact and ex-bucket collection efficiencies are stable at 99.51%. 82% of all customers acquired last quarter were on-boarded using E-KYC. 46% of all customers, e-signed the agreement, eliminating the use of physical equipment for this set of customers.
The Vehicle Finance business, the used car book has grown and is now 11% of the total vehicle finance advances. The focus is on funding to customers for personal use. The used car market in the country is huge and we aspire to grow this product. The UCV and new CV portfolio comprised primarily of small commercial vehicles, LCVs and PikUp. In the New Small Commercial Vehicle segment, we have a market share of 10% in Tata Ace in the geographies that we operate. The market share in AL dost has reached 4.5%. We also aspire to increase our market share in Mahindra PikUp where we have a market share of 4.3%.
The Affordable Home Loan business is scaling up and now operates out of 34 branches in 5 states. The new LOS for the business will also go live in the coming quarter. Rural demand is looking up, as indicated by various macroeconomic indicators like rural car and 2-wheeler sales, even FMCG companies have reported improved rural demand. In short, things do all well for the coming quarter. I'm quite hopeful that the coming quarter will also be good.
Thank you so much. Handing it over to next.
Good morning. Bank is actually taking a very sustainable and very scalable effort towards building a very stable and retail-oriented franchise as we know through differentiated segmental approach and very importantly, creating a differentiated channel. I would like to stay put on this for 2 more minutes.
Our retail deposits, that is our CASA plus RTD remains a healthy 78% and that is actually a very healthy same for 2 reasons. One, our product holding at the house level and also penetration at the market level for NTB is getting enhanced. Our relationship management structure, where we have put VRM, which is data, voice over data and the physical RM structure is helping us to grow the RV by 8% to 10% across the spectrum of customers whom we offer. And please note, we also have a VRM based on time zones for the NRI segment.
And now what we are doing through this is, we are actually focusing on family banking as an opportunity. This has helped us our premier program, elite to cross INR 12,500 crores. And very important point today is close to 77,000 families are totally banking with us through this proposition. Glad to see our Wings proposition, which we have revamped, focused predominantly towards salaried as a segment is seeing an encouraging, not only encouraging, seeing a higher penetration of salaried segments coming in towards close to 40% to 42% of the book today of savings account is through salaried as a proposition.
RTD is a very, very good story. It continues to be. There are 2 things. One is mobilizing INR 1,500 crores, INR 1,600 crores net, which means at a gross level, it should be INR 2,200 crores to INR 2,300 crores, but the reality is we could spread it across to 1,20,000 customers across the spectrum, both NTV and existing book. So 60% of the existing customers opting for TD inside this enhances our product holding as well as foot on door syndrome, and this will give us an enhanced opportunity.
Our channels, which we have dedicated have started giving most productive results. For example, NR, now we are present across 100 countries and the book has crossed INR 1,500 crores of RV. So is our Institution business, which has crossed INR 7,000 crores of RV with 30% of CASA in insti. So the important segment here, what I want to push on insti business is close to 92% of the book is on noncallable deposits. So all these things put together has helped us to maintain a healthy SLR and LCR ratio. And most importantly, we have on-boarded 1.3 lakh customers during the first quarter, which means our acquisition rates have gone up.
And second important part is leveraging on physical and digital, our full KYC conversion of digital basis account has gone up. And our engagement based on propensity and analytics model has helped us on debit card activation and importantly, primary and active accounts reaching closer to 60% mark, and our product penetration across TPT is getting enhanced. Our retail and trade focus on current account is helping us to be in top 17 in terms of acquirers and we will continue to monitor our current account and progress there. And overall, digital side, I think it's been a very encouraging quarter from prepaid to micro ATM to full conversion, and we will sustain our journey there.
Thank you. Let me hand it over to [ Gopi ] on treasury views.
Good morning, everyone. Q1 has been largely steady quarter in the market. Bond prices improved as yields cooled off with inflation edging down even as the growth outlook consolidated. Our product or RBI parting the interest rate, high cycle in April and maintained [indiscernible] June. Despite comments from the RBI governor emphasizing that the back-to-back process by MPC should not be construed as a definitive change in policy direction. There was a cause for optimism that interest rates are nearing their peak on the back of CPI numbers pulling within RBI tolerance band.
First quarter of the new fiscal witnessed largely positive developments in Indian economy. Stable rupee and macro conditions helped attract foreign fund flows into domestic financial markets. Rally in equity markets says that primarily driven by steady FCI flows, resilient domestic economy and lower crude oil prices.
A few areas of concern continue to cover mainly uneven monsoon and El Nino, which may have some impact in the inflation. We have seen that bond yields are slightly coming up in July as well, reflecting these developments.
Now coming to Equitas treasury performance for this quarter. This has been another stable performance from Equitas treasury. Profit on sale of investments stood at INR 26 crores. Our funding profile has been stable with the opportunities available to raise funds, both in the form of refinance as well as DTC.
Now I hand it over to Mr. Sridharan.
Good morning to everyone. Our net interest income for the quarter came at INR 743 crores as compared to INR 581 crores during the same quarter last year, registering a growth of 38% Y-o-Y. Other income for the quarter came in at INR 150 crores as compared to INR 100 crores during the same quarter last year, registering a growth of 50% resulting in a net income growth of 31% year-on-year. The total operating expenditure came at INR 581 crores as compared to INR 412 crores during the same quarter previous year. The increases on account of annual increments for employees, payout of performance bonus and new recruitment.
The bank also invested in the brand by advertisements in IPL. The cost was accounted for in Q1. Lastly, investments in technology increased as we spent on various IT projects relating to loan systems, customer apps, data warehouse and other enhancements. This led to a marginal increase in our cost to income to 65.05% for the quarter. Pre-provisioning of profit, PPOP grew 16% year-on-year to INR 312 crores and PPOP to assets remained healthy at 3.42% for the quarter. PAT for the quarter came at INR 191 crores as against INR 97 crores during the same period last year, raising the growth of 97% Y-on-Y. ROA and ROE for Q1 FY '24 stood at 2.10% and 14.54% respectively.
As on 30th June 2023, bank restructured loan book stood at INR 213 crore, which is equivalent to 0.72% of the gross advance book. NPA on the research book was INR 160 crores and provision made against its book was -- book stood at INR 156 crores.
Now moving on to asset quality and provisions. The bank added a total provision of INR 574 crores, NPA provision of INR 446 crores, provision on standard assets at INR 129 crores. In order to strengthen the PCR, the management made additional provision of INR 14 crores and total provision for the quarter is INR 60 crores. GNPA remained flat at 2.6% in Q1 FY '24 as compared to Q4 FY '23 and improved by 135 bps as compared to Q1 FY '23. NNPA came at 1.12% in Q1 FY '24 as compared to 1.14% in Q4 FY '23 and 2.07% in Q1 FY '23. Provision coverage ratio improved to 57.79%. If ECL is implemented by the bank, the ECL provision will be lower than the IRAC provisioning requirement and to meet the minimum IRAC provisioning requirement, additional provisions will be made as management overlay.
As of June 30, 2023, total CRAR stood at 22.06% with a Tier I at 21.36% and Tier II at 0.70%. Lastly, the bank has made investments in setting up its own corporate office building at the heart of city and we hope to complete the work by early FY '26.
With this, I would like to hand over to operator and we'll be happy to take questions from your end.
[Operator Instructions] The first question is from the line of Deepan Narayanan from Trustline PMS.
Good morning, everyone, and thanks a lot for the opportunity and congratulations for good set of numbers. So firstly, I wanted to understand. So if RBI holds rate at these levels for a couple of quarters, do we foresee pressure in NIMs continuing or we can pass the rate pressure to our customers fully without affecting growth profile?
This is Dheeraj, Deepan. So as you know, 80% of our book or 80%, 85% of book is largely fixed. So the place where we can actually pass on rate is on incremental disbursements. Incremental disbursements over the years just for some numbers have actually gone up about 40 basis points. But as you see, our portfolio yields are around 17%, 18%. So that's also the limited room for us to expand it equal into how we see rates going up. But still adjusted for that to see what impact it will have in the bank from a yield at a portfolio level, we should be able to hold yield directives and also keep in mind that there is a slight mix change with housing, new commercial vehicles, disbursements as a share improving, but we still should hold yields.
So one, yes, we have passed on rates to certain segments of the customer. Two, the portfolio mix is playing out well from a long-term cost to assets and credit cost. So we will have that deal passing out being compensated or negated with the portfolio mix. Last -- thirdly, the cost of funds, yes, is moving up. You've seen it spike in Q1. From our estimate, from a cost of funds is that we may end the year at about 7.5%. This is taking into account where we feel inflation rates, competition in deposits, all of that play out. It will have an impact on NIM at this stage for all of that. Hopefully, for the full year NIM should not deteriorate below 8.5%. But if you look at quarter-on-quarter, you may see it go below especially in the later half of the year, but we still should maintain a NIM for the full year at about 8.5%. This is about a 0.5% drop from last year.
Okay. Okay. So our NIM profile should be substantially improved the rate title goes -- starts going down, right?
Yes, if rates reverses like we get the -- we have the bad side when it increases, our portfolio yields will not drop because we don't have floating-rate loans, so we should start seeing that benefit play out. But the question is, when it will play out? I think it's still everybody's imagination of the interest rate cycle.
And secondly, so now our growth profile has increased substantially, so what kind of cost to income are we expecting for FY '24?
So like what we've been saying, this is actually an investment phase we're going through. We are investing largely in products like credit card, personal loans, AD1 license, a few products being launched. And also in technology largely on the digital side, Rohit had talked about the loan organization systems, which we are putting in place, which all eventually should help us improve productivity and scale up faster.
And largely -- lastly, on the brand, some investments were made on IPL like Sridharan had mentioned. So we are still in the investment phase and like we said earlier, through cost to income, this where it is right now, marginally may improve. We've been saying 63-odd percent. So let's see how it goes. Officially, income builds up for us in the second half of the year. So all of that should compensate to where cost to income should remain at, let's say, 63%, 65%.
The next question is from the line of Renish from ICICI Securities.
Congrats on good set of numbers. Sir, just 2 questions. One, again, on the deposit rates. So this quarter, we have seen almost 30 basis points increase in the cost of deposit. So it is fair to assume that on the blended or let's say, the portfolio basis, we are near to pick on the deposit rate side?
No, we are not at the peak. Like we said, we -- are you asking on -- are we going to introduce any more products with higher rates of interest.
No, I'm saying, let's say, our cost of deposit is at 6.94%. And within that, if you look at ED cost...
Yes. Renish, that will go to 7.5% like I just explained because there will be some deposits getting renewed at a higher interest rate, plus our retail term deposit momentum is very strong. So we see that going up to about 7.5%.
Okay. Okay. And that will have a consumer impact on [indiscernible] , right, for this year?
Yes, it will. So I don't know if you heard in my previous -- so it should be somewhere around that. For the NIM, like I said, full year, 8.5%, but I think you will see NIM go below that, at least in the third and fourth quarter. But hopefully, interest income will be also compensate -- about 8.5% is what we should look at.
Got it. And just a follow-up on that. So when we delivering this 2% plus ROA as of now and now there is a sort of some bit of pressure on the NIM, how confident we are that we'll be able to sustain this 2% ROA because we're also highlighting [indiscernible] investment phase, so there is no lever on the cost side. Our credit cost, I think it is at the best of the level, so how do we sustain this 2% ROA?
See, the point is that this year, there are to be 3, 4 elements, which we expected to be at play. One is the basic interest income arising out of the growth in portfolio, which should be one positive support. Second thing is that we saw the highest increase in terms of percentage from the OpEx per sector in the first quarter because typically, we do give out the annual increments effective April, so the staff cost goes up sharply between March to April and that obviously will steady up after that. And through the rest of the year, the employee cost was an extent except for the new additional people will remain constant, whereas the productivity of those people will start coming in from the second and the subsequent quarter onwards.
So we should see an OpEx, which is about 32% increase year-on-year in the first quarter. We expect that to come down as a percentage of growth year-on-year for the subsequent quarter. So while the NII should go up because of productivity of the staff, improving as well as new stuff coming in and adding to the business of the bank, the OpEx should come down as a percentage of growth compared to the first quarter.
And the third element at play, we expect during the current year is, of course, the credit cost. As you know, across the industry, across the banking industry, I think this is one of the best credit cycle that we are seeing. And even in our own case, we have seen the first quarter was probably the best that we have ever seen in a long time. Though it is supposed to be a seasonally weak quarter, but actually, it was pretty good from a collection perspective. So the credit cost might again come in a little bit from a support perspective.
So while these are all the positive factors at play, the negative factors at play for the current year, as you mentioned, as Dheeraj mentioned, would be the increase in our interest rate -- interest cost from 6.95%, it may go all the way up to 7.5% is what we believe as the old network get repriced to the current level of deposit rates. And NIM, as Dheeraj mentioned, last year, we had an average NIM of around 9% and this year, we expect it to be averaging for the full year at around 8.5% so that 0.5% NIM, we should try and meet out by the other positive factors at play, which I just mentioned. And so we are aware -- I mean, so obviously, that's a target 2% RoA is something that we would try and focus on. And some of these factors as they play out should hopefully help us make that.
Vasu sorry to just rounding back to the same question. So let's say, the productivity or employee costs will remain same or activity will improve, but as we continue to invest towards the franchise buildup, do you see cost to income, which is coming down because in opening remarks, we did mention that the cost to income will remain at around 60% to 65%. So how will cost to assets will come down? I mean, of course, in one part, there will be saving on the employee cost, but at the other part, there will be investment going towards the product, et cetera.
Yes, that's right. So the investments, as we have mentioned, there are a few areas on which we need to keep investing, which is one of our digital and second is on our products. As I mentioned earlier also, we are introducing new car loans, personal loans, credit cards and Forex cards and AD1 products, which will all happen between 12 to 18 months from today. But for those products launched during that time, there's a amount of working that needs to be done in advance, which will add to some level of investment from the bank side.
The only silver lining for the bank is that we have, in the past, invested in a very strong network of branches. And so that is one thing that we will be riding on for the next maybe couple of years. While we invest in products and digital, we may not have to invest much in terms of physical infrastructure because that's something that we have already done in the past. So all put together, yes, so OpEx growth, as I mentioned from 32% year-on-year in the third quarter should come down over the rest of the 3 quarters. And cost to income is around 65% in the first quarter. It should marginally come down, maybe 63%, 64%. And when that comes, I think that's going to be releasing some level of income to the bottom line.
The next question is from the line of Abhishek from HSBC.
Congratulations for the quarter. So 2 or 3 quick questions. One, when you say your cost of funds could reach 7.5%, you're talking about a full year average, right, because -- or an exit rate for 4Q?
We are talking of an exit rate for the fourth quarter, but full year average interest costs could be in the range of 7.25%.
Got it. Got it. And in your term deposit, I think your cost of TD has gone up almost 90 to 100 basis points from the bottom. Is there a lot of repricing that is remaining? Or do you think you're pretty much at the end of it?
See, we have done 2 things on TD. One is if you -- up to 1-year bucket, the rates are in line with what markets are offering. Between 888 days and 444 days are differential like Vasu sir said in the call, between our cost of funds and other banks' cost of funds with the dip 50 basis points. And we are offering a differentiated rates only in these 2 buckets for short to medium-term savings and medium to long-term savers. So only in these 2 buckets, which accounts to close to 60% of the book, we are offering more than the -- they grow by 50 basis points. So I think the rates are more or less stable. We are not seeing any rate hike to go up unless there is something dramatic happens in the open market.
Got it. Can you please repeat the 60% of the book is just those two 444 and 888 days?
Correct. So that sales as one long-term book, this is for the one short to medium-term service who is having a gold-based approach and the other one is for slightly longer term, who is actually keeping a destination-based approach in the saving.
Got it. So 444/888 should reflect current yield, whatever you're offering today? And the remaining 40% may have one part, which is at a lower yield, which will get repriced as it matures?
Yes.
Yes. The second thing is on slippage rates, now you're at 3.3%. If you look back before COVID annualized, so if you look back before COVID, you were ballpark at 3.5% plus minus, obviously, good times, bad times, but 2.5%, 3.5%, do you think these should sustain here or go down? And correspondingly, your credit cost, last year average was about 1.5%, 1.6%. This year, you've started at 0.84%. Do you think this should definitely remain below 100 bps for the year?
Pre-COVID, yes, our gross slippage used to be around 3.5%. And during pre-COVID, it had crossed to 5%, I think, around 5.5% to 6%. Now it's come down to 3%, but there is one crucial difference. Pre-COVID, we had -- we are reporting gross slippage based on untend figure, which means that during the month, if someone flips into NPA, and then base back in full and stops being an entry within a month, it was not getting a calculator for gross slippage, which we changed and we had informed this. So I think about 4 quarters or so back, we had informed that we have changed it daily.
So that way, the pre-COVID 3.5% is actually not very comparable to the current quarter of 3. And to that extent, I believe that even our portfolio quality are actually further improved compared to even pre-COVID to that extent.
And second thing is from a credit cost perspective, as last year, I think we had a credit cost of around 1.55%. And this year, we have guided for 1.25%. And we'll have to keep our fingers crossed and I believe that we are in for a good credit cycle, as I mentioned earlier, and let's see how the whole collection goes. And hopefully, we should be in for some good collection performance for the current year. But parallelly, our PCR is around 58%. And so there is obviously some aspirations from our side on the PCR to also try and increase it over a period of time. So that might come in for some level of credit cost, it's not necessarily from just the normal provisioning that we made to an extra provisioning only from the first sector moving the PCR app.
Vasu, any target for this PCR? Because I mean, in case there's more than expected NIM pressure, can you push it out because the PCR is already at a reasonably good level.
Yes. I mean our destination PCR is the standard typical 70%, which most banks are, so that's our destination PCR. And we have been looking at it to try and take it to that level over the next few quarters. So we'll have to just take it over the next few quarters to move it to the 70% level.
The next question is from the line of Deepak Poddar from Sapphire Capital.
So first, just a clarification, I mean, PCR to 70%. So that effectively means some INR 90 crores to INR 100 crores of additional provisioning, right? That we expect to come in the remaining 3 quarters, right, apart from the standard provision that we have been doing?
Not necessarily. We are looking to take it to the 70% level over the next 2 years. So that means the balance of maybe 7 quarters or so. That's what we are broadly looking at I mean, this was not something hard cast or that's in stone but broadly, that's what we are looking at.
And sir, in terms of your percentage of portfolio, which has not been repriced as of now, so how much would that percentage be?
See, our fixed rate loan book is approximately around 83%, 84%. The balance is floating rate.
So 83% of our portfolio is not yet -- I mean...
They won't get repriced. They are fixed rate loans. So they will earn at the same level of interest rates.
Understood. And what would be the tenure?
In our scenario, typically, what happens is in the rising interest rate scenario like currently. So naturally, we will have the negative impact of it and hopefully somewhere down the line on the interest rate cycle changes, that could be the opposite effect for the bank.
I understood. And what would be the average tenure of that 83%?
Gopi.
Yes, the average maturity of assets is around 2.5 years.
And sir, I also wanted to understand in terms of liquidity. I mean, do we hold any kind of surplus liquidity, which is having a negative carry on our NIMs or on our spreads?
Yes. So the liquidity per se, we do continue to maintain the liquidity, which is adequate to meet our forecasted funding requirements and yes. And the LCR is -- we also maintain a higher level of LCR that we have seen from the numbers. So the LCR for June stood at around 230% to 240%.
Yes. So any thought process to reduce that if it is having a negative carry on our P&L?
See, LCR is a byproduct of quality of deposits, while our SLR stands at 18% to 18.5%, we are able to maintain higher LCR because of the quality of deposits. So since the quality of deposits is predominantly individual and retail skewed, this is having this impact and it will have an impact of 30 to 40 bps.
Okay. So it will continue, right?
It will continue.
Understood. And sir, in terms of cost income, you mentioned about this year, but if I have to see over the next 2 to 3 years, how do we see cost income panning out?
Yes. So from a cost to income, we see the next 2 years as an investment phase. But obviously, the return ratios will improve. So cost to income at least in our forecast, by next year, it should be a lot more palatable. It should be, hopefully, somewhere around 60% or below. And from a medium term, we've always been saying that it should be between 55% to 60%, and that's how the model works except [indiscernible] models for Equitas. So we don't see cost income going below 55%. And in the investment phase, it will be between 60% to 65%. So it should taper next year. And the year after that, it should be at least where the model is.
The next question is from the line of Nitin Aggarwal from Motilal Oswal.
Congrats on good set of numbers. So sir, one question on the liability franchise. While we have been reporting a very healthy CASA run rate, but the things on the peak has come down by 30-odd-percent. And so when you now look at the cost of funds going up to 7.5%, what sort of further CASA decline are you building in?
Presently, if you see cost of funds, it has 3 components: CRAR, which is at zero cost; SA which is 6.18%, which is actually lower than last year. This shows 2 things. One is book that has moved into TD. So it is having a TD cost yet. Second, up to 5 lakh bucket, our average cost is only closer to 4.8%, 4.7%. That book has expanded also. So which means a spender is building balance, a saver is moving the bucket from savings account to TD and rightfully so. So we are looking at retail pool of liabilities as a strategy, adding more consumers into retail is very key at this point of time.
So we see a temporarily 1%, 2% dipping down and then stabilizing and we're taking it up. So what this has gained to us at this point of time is we have incrementally added 1.5 lakh more customers whose product holding has gone beyond 2%. So that is why we are saying that incremental TD costs will be between anything between 7.6% and 7.7%. Savings account will be moving it by 7 to 8 basis points. And overall, the cost being coming to 7.5%.
Okay. And CASA [indiscernible] 35% plus. And the other question is on the MSE Finance that has been a segment, which we have not been going. There has been a Y-o-Y decline, but if I look at the average ticket size in that segment, that is still higher versus what it was in the last quarter. So with the unwinding that is going on, on a Y-o-Y basis, so while the ATS is going up? And how do you look at this segment when it comes to the growth going forward?
Yes. The MSC is contributing about 5% of the book now. And so that's one product where we are basically keeping it as part of the bank book of offerings to meet the working capital needs of the micro entrepreneur. We are really not even in the small and medium, they're really in the micro part of the MSME segment. And if you see the data that we have put out, the NPA in that particular segment actually is on a higher side level also. So that is an area where some amount of changes was done sometime about 2, 2.5 years back in terms of the credit filters and the LTV norms. And so the group that has been being built over the last 2.5 years has a much better quality.
And so somewhere down the line, we expect that NPA to come back to more normal levels. And then you will see that the portfolio should start growing at a rate, which is more or less in line with the risk of the bank products.
The next question is from the line of Ashlesh Sonje from Kotak Securities.
A few questions from my side. Firstly, on the CD ratio, we have indicated that we want to bring it in line with some of the larger banks. So what is the target here? What is the horizon over which we want to meet this and what does this mean for the deposit growth outlook that we have?
So on the CD ratio, there is no hard and fast norm that we have put in place. It's something that is more directional and rational that we want to do over the next maybe couple of years or so. So currently, our CD ratio including the refinance that we get from institutions is about 95% or so. And so we would like that to come down to maybe about 85% or so over the next couple of years or broadly in that range.
Okay. Perfect. And secondly, if I look at the granularity of deposits, that seems to have worsened a little bit. If I look at the proportion of deposits held by individuals that has declined even in the SA and TD deposit breakups, which we have given, there is a clear shift from lower ticket deposits to higher ticket deposits. So what exactly is happening here? And when do we expect this shift to stop happening?
See, at the portfolio level, 78% is retail and 22% is, we call it bulk. Within the bulk today, we are having an institution opportunity to build a stable noncallable deposit base with a tenure of 1 year. So that is helping us to gather 2 things. One is to get the pool of money in and second, through that, we are also getting the transaction-centric accounts of them. So this will continue to be in this direction where 75%-25% will happen very soon. So our direction is we'll continue to build granular accounts. 5%, 10% LCR centric account, keeping the focus of product holding at a retail level.
And as and then insti opportunity comes in, we will start getting it into it. So these are all the institutions which we are taking in which is the noncallable base and most importantly, the institution, which is giving us the duration. So this will continue to grow in this direction. So if you see 1 lakh to 5 lakh if you are predominantly what I said spend that as a segment, is close to 18%, which has gone up compared to last year.
Okay. Perfect. Just one follow-up on that one. The newest deposit base, which we have, the amount of deposits there seems to be -- the growth there seems to be quite weak. Any plans to ramp that up?
Yes. Total our book is close to INR 1,200 crores at this point of time as we speak from a digital segment. Niyo now what we are doing as a conscious activity is no longer called as Equitas Savings Account only. We have deputed a dedicated VRM channel and a specific engagement platform through which we'll engage and deepen the customers going forward. So you will see a traction in line with Selfe as a product. So Equitas as a Selfe and Equitas as NiyoX so both are digital combo product, one caters to the geographical concentration that is where our branches are there, we focus those customers. So Selfe is predominantly geographic-centric, Niyo is demographic centric.
So Selfe the biggest advantages since it's a geographical centric, consumers are preferring branch being a closer vicinity. Now that we have engaged a VRM channel to get NiyoX, it will continue to sustain the growth.
The next question is from the line of Nidhesh from Investec.
Sir, on the IPL branding, can you quantify the costs that we have incurred in Q1? That is first question. And secondly, on the productivity after implementing LOS in the vehicle finance, can you quantify what is the improvement in productivity or any other benefit, which can be quantified after this rollout? And what can we expect to productivity to improve in the other segments where we are rolling out LOS?
The first question on the IPL cost, it's the INR 7.5 crores. So on the benefits of LOS implementation, how the productivity will improve, one, the LOS will create a completely paperless transaction. So from -- when we implement eKYC to eSign, there is no paper involved. We can onboard the customer easily onto the hatch and straightway going to disbursement. So you will see the productivity in terms of, one, number of files per person that we can onboard. Number two, the number of back-end people will need lesser number of people to process the file. So once all the LOS gets into full implementation, we can see these productivity benefits.
So in vehicle finance, I think it has already been implemented. So have you seen any...
In vehicle finance, 92% of all disbursements are currently in Hedera, but there is still 8% of functions to be implemented. In vehicle finance, you're already seeing the productivity go up because a number of you have not added many people there, but the volumes in vehicle finance have grown. You see a 39% growth in advance in vehicle finance.
Okay. So that has happened without addition of employees?
Absolutely, very less people we have added.
The next question is from the line of Darpin Shah from Haitong India.
Sir, most of the questions have been answered. Just one thing on my part is, Vasu sir on the TV interview mentioned that slippages will still be around 3%. Is thing looking better on the ground, we are growing at a faster rate. So why then still have a 3% kind of guidance or for slippages?
Yes. So see, the gross slippage is,I don't know which number you have to compare because what we have seen is not too many institutions put out gross slippages, which can be comparable. So which is why 3% is the healthy run rate which we have and it should remain steady at this level.
My prior question was in first quarter also, you are roughly at around 3%. So this seasonally weak -- seasonally weak quarter, right? So when things get better now in terms of seasonality for 2Q, 3Q, 4Q, then you spend...
Yes. Sorry, for a seasonality. Q4, actually, you will see it improving much better, but like what we said that we are in a good credit cycle. So assuming that 3% slippage for the full year is not too off and if Q4 typically plays a wait play as every year, it will obviously be below 3%.
The next question is from the line of Shreepal Doshi from Equirus.
The question was pertaining to the MSCsegment. Therein, if you look at the GNPAs have really been going up. So I mean whereas if you look at the share is not so significant, but the GNPA in that segment has been going up. So could you please throw some light, what is the reason and what is the outlook for this particular product?
So see, these are basically term loans given to MSME customers over a period of time. So during COVID, a lot of MSME customers got impacted and some of them have still not come up. So that is why the GNPAs are still high here because they're all collateralized and there is property. So it takes time for us to proceed legally against them and utilized the property, but you will see some decent reduction in GNPA this year. We are all lap siding for that.
The ticket size here is also like 48 lakh, 50 lakhs at the time of disbursement. So are we able to invoke surface in these cases?
Yes, we are able to invoke surfaces as all of these are backed by collateral.
Okay. Got it. And sir, to Vasu sir, what's the update on the universal banking license, any time line for that?
As we have mentioned before, that the merger was on licensing condition and now that is behind us, though technically, we have now completed all our licensing conditions. So now we have to just wait somewhere down the line. We assume that the regulatory will probably come with some kind of a guideline on who can apply for converting from an authority of universal bank. So some kind of a guideline probably will emerge from the regulators. And as and when that comes, then we'll have to see whether we comply with those requirements under those guidelines. And if we do compliance, then we'll be in a position to apply. So there is no particular time line that we have in mind, we have to just wait and take it as it comes.
Okay. Okay. Sir, this question was on the back of our thought process to launch new car, personal loan, credit cards. So then, say, products like credit card would be a tie-up product only broadly, is that a fair understanding then?
What, tie-up product?
Yes, like with some other banker or..
See, the new car loans that we will be launching during the current financial year is largely a product that will be targeted for the perfect customers and our own massive customers. There is largely a cross-sell product to the existing customers. So that's not an area where we will be seeking to go to the market and acquire open market customers through the dealership where the kind of commission payable, et cetera, makes it still unviable for someone like us. So that will be largely a product that will be targeted only for cross-sell after the existing customers, essentially the deposit customers and some of the asset customers.
In the deposit side, we've already taken out certain data. We have a few large customers whose credit bureau score is over 750. So those kind of segments is what we'll really be looking to cross-sell a product like new cars and minus the dealer commission because it will be direct to customer. So hopefully, it will be a viable product for the bank.
As far as credit card is concerned, I think we have mentioned it the last time also that's something that we are working on and we'll be launching our own credit card but that we expect it to happen only around maybe a year plus from today. So there will be some amount of cost we may incur in terms of setting up the system that over a year's time, we hope to launch it subsequently.
Next question is from the line of Harsha from Dimensional Securities.
My first question is on the OpEx and the digital strategy. If you look at last quarter, our employee costs have almost increased from [indiscernible]. You have spent around [indiscernible] in digital spend. Loans also increased to the same extent. So why are we not seeing the impact of productivity that when we are speaking off because we already spent almost INR 400 crores in technology in the last 12 quarters itself.
See, some of these technology costs will take time to actually start showing from a P&L benefit. But just to add on to also what we were asked earlier in terms of productivity benefits. You really look at disbursements for employee last year to this year from roughly about 18% is actually moved up to about 22 -- 18 lakhs has moved up to about 22 lakhs. This is -- and some of these benefits can be directly attributed to the loan origination system being put out, especially for vehicle plans, where the tax for disbursements are much, much faster than it was historically.
And again, some of the other investments in technology is really from a scaling up perspective. So 2 years, 3 years from now, from a back-end perspective and there are investments in cloud, investments in APIs or micro services, investments in platforms like Microsoft dynamics, et cetera. All of these will actually give you benefits only after a couple of years, but will help the bank really scale up, which is why we are saying that this year and next year, you may see that not positively adding to the P&L but after that, you should start seeing some of those investments pay off.
Okay. And given that the tenure of our loan is at around 3. What is the thought process of doing most of the lending at fixed rate and not floating, 2.5 years fairly long period to have some sort of interest rate risk. So I just wanted to understand your thought process there. And incrementally, what is the ratio between fixed and floating?
See, we have already -- Vasu sir has already said that fixed rate loans are at about 83%. Secondly, this whole thing about fixed and floating. It also depends on the product. For instance, you can't do vehicle loans at floating. We have to do D-Max because that's how the industry operates. Whereas home loans, yes, home loans, we are doing at floating rates. So it depends on which product that you're lending, so your fixed and floating will depend on that.
Okay. Okay. And last question, just a bookkeeping -- on the fee income, if I look at it as a percentage of disbursement has come up from 1.5% to 3%, the last 4, 5 quarters, it was around 1.5% has come off by 25 bps. So is it just one-off or any -- yes?
So about 70% of our fee income is linked to disbursements, which are processing fee and logging fee, et cetera. That has actually remained healthy quarter-on-quarter. If you compare with the last quarter of the year, there were -- I think we did some disbursements in NBFC loans, et cetera, which is why the percentage may be looking skewed. But otherwise, the processing fee and our disbursement linked has remained healthy at about 70%.
We take the next question from the line of Pritesh Bumb from DAM Capital.
Sir, one question was on recoveries. How do we see recoveries going ahead? Is the pool now getting lower and lower? And is it due to the high buckets, some sense on the recovery and upgrade spend, it has been lower this quarter.
Yes, yes. So recovery has been lower this quarter. Just from a -- to give you a number, last year, roughly about INR 36 crores was the income, which we got from recovery and that pool actually has come down. So this quarter is about 3-odd crores. So this line item will start coming down.
So actually, I was talking about the GNPA [indiscernible] under written-off recovery.
Upgrades.
Yes, this will become upgrades sir.
Just the pool actually has come down. If you look at it, the opening NPA numbers have come down from 861 is come to 723. So correspondingly, you will see the average come down.
It's also build up as the year goes by. So this is only the first quarter, so recoveries will -- from the pool will happen.
Sure. So why I was making a sense because you report on a daily basis, the NPA. So you said that 3% is a normalized slippage which come in, but what we've not seen is that the recovery is not coming through this quarter, at least, that's why the question basically.
Yes. And the second question was on the PCR. Vasu sir mentioned it to be moving on a normalized basically 70%, but what will be the triggers to increase the PCR voluntarily or any triggers because asset quality cycle is benign and your secure book does not require that kind of provisioning. But what will trigger it to move up towards at least 65% something from that?
It's more of general prudence, really. And just going back to your previous question in terms of the recoveries and upgrade, if you look at it, last year first quarter, which is on Page 20. Last year first quarter, the recovery and upgrade was INR 51.75 crores and INR 95.64 crores, you add that and take it as a percentage of opening GNPA, it's about 18%. And this year, first quarter, similarly, if you take INR 87.38 crores and INR 49.38 crores and sum it up and divided by the opening GNPA that is INR 723.96 crores again, it's 18%.
So broadly, what happens is the first quarter, whatever the seasonality that one typically experiences, the first quarter has been quite in line with what was the similar upgrades and recoveries of the first quarter of last year. And hopefully, this -- and it was a higher -- I mean, lower level of gross slippage. So I think it's a good combination that we had a lower level of gross slippage, but an upgrade, which is practically in line with the last year first quarter. And hopefully, the -- as a collection seasonality kicks up which happens typically after the first quarter, we should hope to see an even better upgrade and recovery going forward.
Thank you very much. Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. P. N. Vasudevan for his closing comments. Thank you and over to you, sir.
Yes. Thank you. Thanks, all of you. Thanks for dialing in and giving us a lot of footfall through your questions and we shall continue to work to try and create the best retail franchise for the bank in the informal economy sector of the country. There is a large unmet demand as we keep mentioning. And we do hope that we will be a banker of choice for those millions of people in that base to the pyramid segment and looking forward to all your support on an ongoing basis. Thank you so much. Bye-bye.
Thank you. On behalf of Equitas Small Finance Bank Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.