Tamilnad Mercantile Bank Ltd

NSE:TMB

Q1-2026 Earnings Call

[Operator]

Ladies and gentlemen, good day, and welcome to the Tamilnad Mercantile Bank Limited Q1 FY '26 Earnings Conference Call.

This conference call may contain forward-looking statements based on the beliefs, opinions and expectations as of the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict.

[Operator Instructions]

We have with us on the call today Mr. Salee Nair, Managing Director and CEO; Mr. Vincent Menachery Devassy; Executive Director; and Mr. Sanjoy Kumar Goel, Chief Financial Officer.

I now hand the conference over to Mr. Salee Nair. Thank you, and over to you, sir.

[Salee Nair, executive]

Good morning, and thank you, Rio. And it's better to be part of this conference call today morning. Yes, I think if you look at the performance of the Tamilnad Mercantile Bank for the first quarter of FY '26, I think we have delivered a creditable performance. And also, if you look at the larger picture, we have stabilized, more or less, the operations also have now been stabilized. The foundation is getting laid rather a strong foundation for a take off in the subsequent quarters.

If you look at the business, I think business has always been a very particular deposits, whether we would be -- we are in a person to raise it. I think that's something that has seen an uptick, both deposits, the total business. Now it stands -- at 30th of June, it stands at 98, 93% is up 9.86%. And deposits -- on a year-on-year basis has more than doubled to 9.38% is at 53,803.

Incidently, this bank has topped crores. I think that's the first page that has been [indiscernible] will follow. So deposits, as I said, it has more than doubled the growth pace of growth has doubled. So we are really, really seriously getting back into resource mobilization for the kind of growth that we are anticipating.

The CASA been varied across the system and in the bank as well. And I did outlay that outlined the last quarter and the previous quarter that we have taken a number of initiatives in this it is beginning to deliver, including the transaction business units that set place. And in the first quarter, I think, again, the trend of declining CASA has been arrested, and we have been able to reverse it with year-on-year -- modest year-on-year growth of 4.51%. On a quarter-on-quarter basis, this is an improvement of 34 as the 34 basis point on the CASA.

RAM continues to be our focus and that's up 11.93%. It currently stands at as on the 30th of June 2025, and at INR 42,100 crores. There has been a slight compression of NIM. I'll come to that later.

The operating profit is at INR 112.26 lower on a year-on-year basis. There are reasons for which, which I'm sure that will explain. Net profit is up 6.13%.

So on the operating profit, what we have also done is we have upgraded some of the costs that in the first quarter itself, we normally provide the performance-based incentive in last year, that was about crores, INR 37 crores, it's normally amortized. So first quarter of last year, in FY '25, we have taken just INR 8.7 crores. This year, the entire INR 41.27 crores has been printed and has been absorbed in the quarter. So despite that, we have been able to deliver a 6.13% growth. Again, on the net profit side on the operating profit, a both interconnection, of course, is that we did have one-offs in the first quarter of which including recoveries in the technical return of accounts that was not available in quarter 1. So accounting for all that, I think it's a decent operating profit that we have delivered a decent net profit that we have delivered.

And coming to the stress side of it, the credit cost is just about 6%. Again, had control GNPA down on conical basis, 1.22%. NNPA, I mean year-on-year, 33 basis, 32 basis down virtually does half Return on assets was at 1.88%. And it has come down to 1.82 a reduction of 6 basis. But sequentially, if you look at what we stated last quarter when we were analyzing the result of Fy '25 and the part of FY '25, the march quarter of FY '25. It was at 1.81. So is [indiscernible], but more or less stable at the moment. Then PCR, on book is 73.04%. So -- and that's a sharp increase that you have seen up from 55.2% [indiscernible] we have ramped it up to 73%. That is on book. That is the PCR on book. And if you also take the technical write-offs, it is 94 points, please do.

As I was saying that we did take a lot of initiatives on the CASA side, including -- we did -- we in fact, opened 7, both on the digital side and on the retail side and on the branch expansion side, I think this goal, have opened new branches, all aimed to all aimed at deposits and also, in particular, CASA, the transaction business group that we have initiated in quarter and last quarter -- early last quarter is slowly beginning to help us turn the tide on CASA. We have also introduced online account opening towards this. And so certain of the aggregated initiatives taken is we have seen a year-on-year growth of 4.51%. The CASA stood at 14.4% level, which I'm sure going forward, the initial -- riding on the initiatives will get strengthened.

Retail deposits continues to be good for us, 11.25%, including the bulk. Bulk is also pointing out to the kind of high net worth individuals that sort of banks with 11.43% term deposit [indiscernible].

So on our resource mobilization, I think our initiatives, the branches are beginning to take, and the growth is now beginning to come, I think as I said earlier, it is more than double what we have done on a year-on-year yes. So CASA is up 34 business. I just mentioned, it is at 26.7% of some 26.44%.

So year-on-year deposit growth, I think, has been steadily picking up over the quarters from 4.64, it has moved up now stands 9.8. So in no quarter, we have the growth at end, which points out to the kind of focus that we are bringing into the area -- into book and we expect the task of also to mirror that going forward, riding on the initiatives we have taken.

On the advances. Yes, on the MSME side, we have a lot of incentives being taken. As I did mention in the last call as well that we are setting up credit management centers and the quarter we have spent will start speaking this and training a large population of who are going to be in the CMT, the predictions or set managers, larger religion undergoing training and as well as we are also looking at setting up the online platform. So there has been a bit of a disruption there, which is in the nature of laying the foundation strong foundation for the investment sector. In fact, this is 1 sector that this band would be seriously focused on. And you can see some of these as the quarters pass by.

Overall, on the RAM side, I think we did deliver the bank delivered 11.93% and growth. And overall, the growth stands at 10.44%. 30 June, we close to 45%, INR 120 crores. The CD ratio continues to be 3.86%, I think it's under 85%. We would like to see it remain around 85% or under 85%. We're not really worried about this because our capital equity ratio is in excess 32%, and the leverage ratio is 12 points, which is something that gives us -- I'm sure not just this bank, so the invest community also will take a lot of comfort on that.

There has been a lot of talk in the market about unsecured portfolios, right? I think and the system, the back in the state is worried and then I come to Tamilnad Mercantile Bank unsecured portfolio just an ad 0.28% of the advances. That is 0.28%. So we are largely secured. Our portfolio is largely secured or almost entirely secured. And even in the answer to the exposure, the NPA is at 0-point control of continues.

On the financial performance, interest income is up 8.20% and the operating profit operating. The total income is at 7%. Again, like I said earlier, there was a one-off in June of FY '25, which helped sort of improve the interest income in data.

If you look at the expenditure, you will see that there's a number, 20.24%, and particularly the employee cost was 24.2%. That is on account of, as I suggested that the entire performance base instant INR 44.27 crores that partially in the previous years was more tax over the quarters. We have taken as a constant decision to up in the first quarter itself. So if you remove that, if you even the employee cost comes down to 6.7% from 24.2%, 4% that is done there. That also has impacted the operating profit. And at 6.13 if we are done, [indiscernible] already have been in net worth of sensors.

So the shareholders' value, we continue to deliver book-value of INR 589 and a net worth of INR 928 crores.

On the NPA, I think this is, again, continues to be our major focus in the bank to control this test. And if you look at it, it is below INR 550 crores, and that INR 550 crores has been delivered with the 0 write-offs. It is entirely the reduction is entirely say, cash recovery and upgrade and also accounting for the ads. So that's something that we are fairly proud of. GNPA, like I said, is at 1.22% and GNPA 33 basis points. Slippage ratio, 5 basis points, I think another -- it is just a INR 22 crores and down from INR 54 crores in the previous quarter and year-on-year down INR 55 crores.

SMA continues to be an acceptable level of 3.05% and as I said, 1.88%.

And the other aspect that I would like to bring to the attention of the analysts is the collateral coverage that we have. On the stress book, as I said earlier, our stress book GNPA is below INR 550 crores. It stands at INR 549.21 crores and the collateral cover of this book is and 8%. And we have provided this book INR 370 crores. So which means that once resolving this, which I'm sure will happen over the next year is through the year and bigger plus. This provision that we have given is likely to largely likely topical. So on the key ratio, then, we did take a bit of a cage, 3.84%. Then this is something that was anticipated, and if you recall, I did mention in my last analyst call that our memory between 3.80% and INR 3.9 crores. So of course, we did have to rate cuts that happened after percent still and 0.5% subsequently, I think that would -- that impacts the NIM as the repricing of tenders I think bulk of it or about 66% of our term deposits is in the 1- to 2-year bucket. So it takes a bit of time to reprice it. And that is impacting the cost of deposit. But even when it is 6.01% and the yield on advances is also, I think it was marginally come down 10.2% and 3.84. And this number of NIM 3.84% going forward, we expect. It will be in that range or marginally.

I stop here, and I think I will take some questions and answer questions, and I'll be happy to answer them. Thank you.

[Operator]

[Operator Instructions] The first question is from Jay Johan from Trinetra Asset Managers.

[Unknown Analyst]

So I just have 1 question. So moderating from 4.25% to 3.84% in Q1 and your guidance of 3.80, [indiscernible]. Like I just wanted to know what specific strategy, are you implementing through your transaction business growth and arteries initiative to improve your funding mix? And how sustainable is your deposit cost management given the competitive environment? And what levels do you have to defend margins in a plant cycle?

[Salee Nair, executive]

Yes, of course, I think it goes without saying that the market is really competitive for deposits, particularly when you look at the flight of for higher yes and happening in the mutual fund industry. So we were conscious of it and that's why, in fact, in the last year call or last year's call itself, I did mention that we have started a transaction business unit aimed at getting the CASA or maintaining and strengthening the CASA base. And I think over 100 relationship managers have been posted exclusively for particularly the current accounts. And current accounts is the focus, current accounts and the past accounts, and they have been posted. And they are now in the market, and that's beginning to show in some of the numbers that are coming in. So the CASA mix, as I just said, riding on the transaction business that have been initiated at virtually across many of our strategy branches. We do have a relationship manager in strategy branches placed to look at the CASA, car, particularly to car part of it. And like I said, that beginning to show some results on a quarter-on-quarter basis, our CASA share has gone up 34 basis, and this is something we will continue. We have just launched, in fact, in this month, an online onboarding process for the current account holders. And we are also looking at several initiatives at the branch level itself. In fact, we are looking at nearly 200 data entry operators to relieve pressure on the counter counteract so that they can start also looking at offers and asking for savings bank accounts. In addition to this, we have also setting up motion launched Elite services group, that is aimed at the existing depositors, particularly the sales bank holders. And this services group would have relationship managers giving them end-to-end services to some of the high net worth or high deposit customers of tubes. So that's just been set in place, and both the initiatives together, I trust and I'm sure will help us retain the existing customers as the last improve the CASA, the CASA customers going forward and the CASA share in the advances, we are hoping that it will start inching up. And I think that you want -- is that okay? Or -- did I miss out any of your -- any part of your question?

[Unknown Analyst]

No, sir. Nothing.

[Operator]

The next question is from Alexi Narayanan from Tunga Investments.

[Unknown Analyst]

Yes, 2 questions. Yes. As a bank, I look at it, we have 1 of the best ROEs among all the private sector banks, especially the old gen private sector bank, and we have the highest capital adequacy, we have the best GLP right. But I find something is holding us back from growing our core, which is the MSME. And if I look at the last financial year, the growth has come from gold loans and MSME has actually been struggling for us. Is it a conscious choice or we are actually losing market share? Because when I look at some of the large private sector banks like the ITC, HDFC potash or even Industrias. But the growth is coming from the so-called business banking, SME banking. While we seem to have either consciously holding us back, and I mean, it's just trying to see why it's that strong positioning, we are holding back growth.

[Salee Nair, executive]

Lakshmi, let me tell you that is the focus for the bank. It's obviously Mercantile. Now when you look at the name Tamilnad Mercantile suggests that we have to SP1 We are there in the MSME space. If you look at the first quarter, I was just mentioning that we are putting in place a lot of initiatives being the foundation. I did mention in the last call also that we have started, we have set up the risk management centers. And when we were looking at centralizing some of the process, we realized that it has to move in concession with the automation of the appraisal process itself. So I think that process -- so we have sort of stepped back from that. The automation process is now being pushed, and we expect by September that process to come online. [indiscernible] was looking at me processing in a manual it. And that -- you can't have -- you can't scale up when it is done that way. So we have now contracted with 1 of the top service providers or software providers in the country to source LOS per package and the loan management system package. With that implementation, we have already contracted that implementation has started last quarter. It is not an easy -- it takes time to get this get it on the ground and get the productivity gains from that to start coming in. And that's 1 aspect of it.

The second aspect of it is that we have -- we have also recognized that some of our -- when we enter the market, we should enter it with relation managers and credit tests of adequate skills. And that's something that we focus in the first quarter so that we have the foundation laid for us late in a strong foundation made for a takeoff in the other quarters. So there have been a substantial trailing several -- in fact, credit lists have been paid twice in the first quarter. And in addition to that, even the relation managers have been trained even not within the bank, we have also sent them to plan outside. So this skill set improvement that we are focusing on, along with the kind of investments that we are doing it on the online patient just has mentioned, the loan ordered software, the loan management software in the MSME gives me the confidence that the numbers if you look at the first -- second quarter it will begin to show.

And in addition to that, we have also set up enough TMCs in the other centers. We have 1 formalized it. We have faced our leadership there and we are getting them to move into the market and start looking at new business. The DUCs also yielding some business, some kind of flow is happening and today, when I look at the pipeline, and I'm having a healthy pipeline of close to INR 1,000 crores, which is under process and which I'm sure is going to show some numbers which is going to increase some numbers for the second quarter.

So to put it -- to summarize it, yes, that is going to be our focus, and that is where you will see some numbers happen in the second quarter and going forward.

[Unknown Analyst]

So what is the growth bank is either internally budgeting is it? And which is the key segment because last year, the growth has come from gold loans and particularly in agriculture. So what would make you happy at the end of 1 year when you when the full financial year is indeed, what kind of growth will keep the management?

[Salee Nair, executive]

Yes. Lakshmi, let me just -- let me tell you that the growth or the focus gold to us is an OTC, over-the-counter products, that will continue at the branches that the current growth momentum will continue. There is absolutely no reduction in that we will continue that. But where the focus of the bank is currently in ramping up the MSME. So you look at MSME the continued growth in the gold loan. I think together will -- I did mention last call also that we are looking at about 15% kind of growth. I'm not anticipating, particularly the MSME side even in the first quarter, we anticipated that there will be a bit of a disruption and growth will not happen. Like I said, the foundation is being late.

Second quarter also, I don't -- there will be some growth, but not to the extent. But in the second half of the current year, that is when we would have both our focused areas, filling on staff as well as the loan margin -- the Phase 1 of the loan management system also would have gone live, I think we will see the benefit of that in the second quarter happening. So both together from the 10.44%, that is largely riding now on the gold loan. We expect once the growth also starts coming into the mass sector and MSME portfolio, I think together, I think you should see the growth moving up to about 15%.

[Unknown Analyst]

And sir, 1 question related to your annual report. In the annual report, certain accounts are actually mentioned at fraud. So I just want to understand, how much of that has seen has actually been provided in the last 2, 3 years, what is the breakup?

[Salee Nair, executive]

No, I think let me tell you as to regulation, the fraud account has to be fully provided in the same year. And obviously, the fraud accounts, we have about 100%. But what is the number in the area?

[Unknown Analyst]

No, because there is 1 which has happened and I think 2 years back, on cotton thing in Andhra, which is almost like INR 165.

[Salee Nair, executive]

Yes, Andhra-based accounts, and it is, in fact, the largest of our NPA, and we have provided it 100%.

[Unknown Analyst]

And that has been provided as a caller accounts?

[Salee Nair, executive]

See, it was declared, but they went to quote and RBI has advised us to actually take the tag off. So it is not called a fraud can at the moment, but despite that, we have provided as a prudent measure 100% supposition.

[Operator]

The next question is from Sana from Evergreen Capital.

[Unknown Analyst]

Sir, I have a few questions. Like the first 1 is a retail and retail advances, we have seen significant growth at 27.9% on a Y-o-Y basis. Can you please elaborate on which subsegments like are driving it? Like is it housing loan, personal loan or vehicles?

[Salee Nair, executive]

No. I think housing loan has really not sort of stable at the moment. It's largely coming out of the personal loans. And to a large extent is coming out of the gold loan, where we have not started prying open that segment as well from a roll-down perspective.

[Unknown Analyst]

All right. Sir, no. And sir, in MSME book, what is the life to -- and -- or an MSME loan portfolio, can you peal share the composition in the terms of subsegment and which areas are currently under stress? And what is the average ticket size of our MSME loans?

[Salee Nair, executive]

In the MSME side, we do have -- you are looking essentially for the stress in the MSME side, right? Or you're looking for the segment of the MSME?

[Unknown Analyst]

Sir, I'm looking for like subsegments in it.

[Salee Nair, executive]

That segment of the MSME. Just give me a second, I'll just get you that. Can you quickly come to the page. Yes. No. Come to the next year, by then, I'm sure I can get you that. I think we Textile is a major area for us.

[Unknown Analyst]

And 1 question I have, like in the changing -- like there is a continuous changing interest rate environment. How are we pleased like are we going to maintain our CASA ratio forward? And how are we looking to build it up?

[Salee Nair, executive]

I did mention this earlier also that -- we have taken a few initiatives here. I did mention about the initiative that we took in the last quarter of FY '25 where we said we are setting up a transaction business group. And we have a sizable number of rate pages in the market to look at the current accounts and the take accounts. And in the first quarter of this year, we have also taken other initiative in the form of setting up in each service group that is looking at the high net worth, the higher deposit -- high-value depositors and particularly on the current account space. I think that we have sort of initiated in about 50 RMs elite services group RMs have been sort of set up sort of we have sort of set them up in the first quarter. And together with the transaction business group, I'm sure that the CASA space will come back. We have seen some erosion there in the last year, and that's something that we wanted to reverse. And happy to state that in this quarter, I think some results are being seen on that. And we have seen, like I said, the 34 basis uptick we have seen in the CASAs share. So reversal that erosion sort of seems to have been able to arrest and in fact, in fact that the catheter has moved up. And I am sure that with the kind of initiatives that we are taking, we are also looking at several deter initiatives in this space. We have bought in the Customer experience package has been implemented in the first week of July. We are in the process of completely revamping our Internet banking package so that the customers get the conveniences and several services cost, they have to come to the customer, the branch today is tackled through the Internet banking. So that's something that we will see happening over towards December of this year. It's a near distance away, but these are all initiatives that we are taking to arrest the to strengthen the current account and saves bank the CASA ratio. And in the branch itself, we are looking at business process management, where we are trying to reduce use the current manual workload on the branch staff so that they have -- they are free from the daily routine, the maintenance work and then put into, they can be shipped into the sales growth. But it's also a working process, and I'm sure we can as the day goes by, we can give you more color on that. And the -- what you did mention earlier about the areas that we are in. I just got that breakup of advances that we have. We are significantly on the textiles. We have 1,000 out of the total portfolio, we have about 1,100 plus on the textile food processing. We are quite strong. We have about INR 772 crores engineering. I and steel about INR 200 crores, INR 230 crores jansan jewelry, chemicals, engineering income I think we are there across several sectors. So it is a fairly well-diversified portfolio that we are looking at. And within the MSME itself, if you look at the micro, we have about INR 9, INR 9,000 crores small -- the small enterprises at 3,800 it and the medium about 600. So it's, again, fairly well diversified. And the ticket size, I think, would be -- I think that's where 1 we are focusing and improving the ticket size and it's about 20 to 25 lakhs, closer to 25 lakhs.

[Operator]

The next question is from Rohan Mehta, who is an Individual Investor.

[Unknown Attendee]

I had a couple of questions. Just wanted to get your opinion on what your growth expectations are in terms of deposits. Do you see them outpacing advances? And if we have any particular strategy on that front?

[Salee Nair, executive]

See, the initiatives that we have taken, we have taken on both sides of the balance sheet. We are focused on the liabilities. We are focusing on the assets. I just mentioned that there must be made that we will see the growth coming back to the MSME. The first quarter was a conscious call to lay the foundation. So both sides, the growth we expected to move up the deposits, we did -- on a year-on-year basis, I did mention that we doubled the pace of growth. So that will -- that growth would continue there, and we are hoping that we ended the year in excess of 10%, maybe between 10% and 12% is what personally I anticipate it all the -- in response to the kind of initiative that we have taken on the liability side, the revamping the branches, branches are coming on stream. We have just done 7 branches in the first quarter. And we have just appointed the 29 branch managers for new branches. So that methodology also we are now looking at -- we have the branch managers in place before the branch at so that they can connect with the market and on day 1, they can start with a certain critical mass. So that's also happening. So the branch expansion is on. There are several initiatives being taken on the retail side. So altogether, we are hoping that we end up the year on the deposit side. on a 10% to 12% of growth. And on the advances, our ambitions are slightly higher. I think I did mention earlier in response to a call that once the growth in the MSME cues park, which is bound to given the kind of initiatives we have done. And given the kind of pipeline that we currently have across the country and across the centers. We expect the MSME to contribute equally to the growth. And we are hoping to close the year with a 15% kind of growth. So it's happening and on both sides the advance growth may be -- continue to be a little higher than the deposit growth, deposit we anticipate right in the 10 to 12 points and advance was closer to 15%.

[Unknown Analyst]

Sir, in the second half of this year, do you see our cost of funds stabilizing or reducing since that accelerated some pressure on our NIMs in the first half?

[Salee Nair, executive]

In the second half, I expect this need to stabilize. In the sense like I was mentioning earlier, the repricing of deposits that we have a substantial is it will take a while and as the repricing gets passed on because much of quite a bit of repricing on the asset side has already been absorbed. So we expect the NIM to not be stabilized, my personal anticipation is that as we close the year, we should be looking at a NIM in the 3.85% to 3.95% kind of range. because that is the kind of numbers when I extrapolate I get. So it all depends on -- again, on the MSME side also, we are consciously looking at how do we price our MSME for a finer that we get a larger chunk of the market in areas that we operate. So even after accounting for that, I think that we should be in the 3.85% to 3.95% kind of NIM in the year.

[Unknown Analyst]

I see. That's helpful, sir. Just a couple of more questions. Would you expect our GMRA to move a little higher since SMA 2 has also moved up to 1.02% in the coming quarter?

[Salee Nair, executive]

SMA 2, again, it unfortunately was a function of the size time when the quarter closes. You had 2 holidays that give us there. So ordinarily, I think because there was a bit of a spike essentially on that count. Going forward, I think -- I don't see that happening on the SMA 2 or SME think we are at 3.05%. I think that's the kind of number I think perhaps even will be even better than , right? It will be even better than that. So I don't anticipate some of them flipping into the NPA status going forward. We will continue to keep the NPA. My own reading of it is that it will not go beyond 50 at any case. And as the expansion advances portfolio happens as a percentage, it should continue going down.

[Unknown Analyst]

Sir, just 1 last question. If you could give some color on since some of our shares have been in litigation, any visibility on when there can be some closure on that since it's been weighing on our capitalization and valuation.

[Salee Nair, executive]

We did have -- there was a on the seventh or ninth of July, I guess, which date is just we the litigants were before the High Court and they have postponed to be October for a final closure. So sometime in October, that's likely -- I mean you can never know on the legal side. how much time it takes. But what is happening is, see, that is not impacting the bank in any way. So that is something that we are ensured and we have also -- if you look at the [indiscernible] notices, and we have got expert opinion from the top -- 1 of the top vehicle firms in the country. And they have stated that it's not going to really impact us even the fact that the focus notice was for the conversion or the issue of bonus stars, which involved no additional funding funds. So I don't think that's going to impact the timing anyway. But we also like you, sir, of the issues before the quote. And I'm sure -- and I really, really can't put a time frame into that, given the kind of the timeline that is normally taken in the legal -- while handling the legal remedies, yes.

[Unknown Analyst]

Fair enough, sir. Fair enough. Just to close it, you spoke about MSME, sir, so since our SMA 0 and I both have increased, do you see any stress towards MSME? Or if you could give some visibility on that? Like I said, 1 advantage this bank.

[Salee Nair, executive]

I did mention also that while talking about the GNPA, that our GPF current INR 549 crores is and covered by collateral to the extent of 8% when the GNPA gets -- and we are sitting on INR 370 crores of provision. So when the GNPA is resolved, this provision will come back. So that also gives us an advantage in actually managing the same play itself. In the sense that the recourse mechanism is very strong. And that -- you see it moving between SMA 0 12, et cetera, but it never sort of flows into the GNPA. And that's something that we have been seeing, and it sort of problems come back between SMA1 and SMA2. Some -- and even in the SMA space itself, it's moving around the 3%. So I don't anticipate the stress in the MSME sector in the current portfolio. And I guess that the incremental portfolio that we are looking at, the new additions we are looking at, we are -- our Lam and LOS packages are getting implemented. To just add to that, I can also tell you that we have just built a business rule engine. We've got a top management consultant of the country to help us build the business rule engine, that's just been completed. No, we are in the process of validating the risk modeling that has got into it. I'm trying to impact that into the llamas package. And hopefully, by September, I think we should be able to do that. And that should improve the quality of the incremental portfolio that -- the new portfolio that we are going to add some time. So the existing portfolio largely collaterals, we don't have much of an issue there on the suite. And the incremental portfolio we are putting in place systems to see that the quality is maintained.

[Operator]

[Operator Instructions] The next question is from Anant Mundhra from Mytemple Capital.

[Anant Mundhra, analyst]

Sir, my first question is, sir, on the Agri and retail side, most of our loans are bolt-ons. Is that understanding correct?

[Salee Nair, executive]

When you say mostly, your understanding is right.

[Anant Mundhra, analyst]

Okay. Okay. And sir, so MSME, you mentioned that you are implementing the LMS Q3, Q4, we should start seeing a pickup. But is there any kind of guidance that you can give us as to what number should this scale up to by the time we exit Q4?

[Salee Nair, executive]

See, this implementation that we are on. I did mention that the -- even without the implementation itself, we have strengthened our relationship mechanism, and we have generated a substantial pipeline. So quarter 2, we hope to focus on the implementation of the Alm. Hello, of course, is when you look at the retail side of it. So LM, the loan management system, which not really looks at the appraisal side of it, it also goes beyond the disbursement into maintenance of the tech com as well. So it's going to take some time. I think Phase 1 would be here in the first -- in the second quarter. And Phase 2, we hope to have in the second and the third and the third quarter, we hope to complete Phase I. So despite some disruption that will happen on PAT, I anticipate the MSME growth to be about -- it should be in the 8% to 10% or maybe closer to 10%. That's what we anticipate. And overall, with the kind of focus that we are going to bring into the personal segment, the continued focus on the gold loan Collectively, we expect the advances number on a year-on-year basis phase towards the 15% mark.

[Anant Mundhra, analyst]

Sir, we are holding on to whatever guidance that you had given last quarter, right? There's no change in any of the guidance that you had given us.

[Salee Nair, executive]

No. No, no. The first quarter, like I said, was an aberration because of the foundation that we wanted to lay down for our growth.

[Anant Mundhra, analyst]

And sir, even the cost to income. So I mean there's a presentation, I think, on Slide 26 that the cost to income has constantly been going up.

[Salee Nair, executive]

I did I mentioned -- Anant, I did mention this in my opening remarks that there is the personal -- sorry, performance-based incentive that we usually give to our staff that last year was -- in fact, it has been amortized over the years. It has been amortized across 4 quarters over the years. And we picked up only INR 8.7 crores of that in the first quarter of last year. This year, we have decided to absorb the whole PV either performance-based incentive in 1 shot in the first quarter itself. That is INR 41 crores plus. If you negate that impact, your cost-to-income ratio would be closer to 46%. I think something that you can yourself calculate. So that was INR 41 crores that we did. And that also impacted the operating profit that impacted the net profit obviously have been much, much better as we amortized it. There was a constitution that we thought of updating the entire expenses because this expense actually beat to the previous year.

[Anant Mundhra, analyst]

So this -- I mean, then, of course, this should kind of peak in Q1 and then normalize Q2, Q3, Q4 onwards?

[Salee Nair, executive]

No. 2 is a bunch it has been yes, yes, obviously, obviously. So once it has been absorbed in Q1, it gets anatase of Q2, right?

[Anant Mundhra, analyst]

Yes. And sir, my final question- sorry?

[Salee Nair, executive]

Yes, tell me.

[Anant Mundhra, analyst]

So my final question was, sir, we are taking a lot of initiatives in terms of take initiatives and a lot of CapEx is going on. So I mean most of these expenses have been capitalized or we are expensing it directly from the P&L?

[Salee Nair, executive]

Software will be less with the depreciation. See, the software is being capitalized. Much of what is happening is on the software side has been capitalized, and it has been capitalized over a 3-year period. That means 1/3 of it, 33% is actually only will impact the P&L in terms of depreciation it is being capitalized and it will be expanded off over a 3-year period.

[Anant Mundhra, analyst]

Got it. And sir, did you give some color on the -- I think we were planning to set up some NRI centers and some credit management centers. And I think we had even started some pilot on that. So could you give some color on where we are on that front?

[Salee Nair, executive]

Two things. NRI Center, we did -- the initiative is on. And we have located the place and the infrastructure is getting ready. We are also going into the market if you have seen it, that we are looking for a for lead to head the GFC that the global NRI center, we are looking at it, if we just come out with advertisement, we have had 2 rounds, 1 round internally to get the right person. So we went out, and there was some bit of an issue on the person we store. So we have come out again. So that process is on, and I expect that in the second quarter, that process to be completed. And we would have a global NRI center ready for Axtel. Meanwhile, the focus continues across the branches. We need the leaders so that we get into the linkages not within India also abroad. So unless that happens. So that continues to be a work in progress. On the CMP, like I said, we have set up the CMC on a pilot basis in cutout. And I've also stated earlier that the leadership for the CMC, the vertical heads and the CMC hedge, we have appointed across all the 12 regions. And while the CMT is getting formalized in the other regions, we have told them to move into the market and start looking for MSME business. In the pilot, which is happening in [indiscernible] region, the other project is on, and that is where, like I said, the canalization of process is working well. It is resulting in some -- in a fairly sizable or a significant reduction in the turnaround time. But like I said, all this at action once the platform is there and that Lm platform is the 1 we are currently working on, on the Elmos platform is completed in September, the Phase 1 I mentioned. And the CMC pilot in Totect is on the platform so that we can test out the platform. And once that is completed, I think sometime in October, we will sort of move the CMCs into the other regions as well. So while the platform is moved, the infra is already being built, like I said, the leadership has already been posted for the kind of take-up that we are hoping to happen in the third quarter.

[Operator]

[Operator Instructions] The next question is from Jai Prakash Kumar from Coman Capital.

[Unknown Analyst]

So a question on MSME account, so if you can collaborate on that?

[Salee Nair, executive]

SME account?

[Unknown Analyst]

Yes.

[Anant Mundhra, analyst]

Well, what specific are we looking at in SME?

[Unknown Analyst]

What is this definition of SMA account, is it due for some days or because restructured you have reported separately. So I just wanted to understand what is SMA.

[Anant Mundhra, analyst]

when you're looking at the definition of SMA?

[Unknown Analyst]

Yes, yes.

[Salee Nair, executive]

SMA is essentially per 1 day. After 90 days after that it becomes NPA. And within that 90-day structure, a 90-day period, you have to pay to 60 days of meta 60 to 89 days or 90 days of SMS -- sorry, 2, 1 and 2, 30 days, 30 days areas, right? And 90 days, it becomes [indiscernible]. So these are -- what you're seeing is all in the 90-day bucket.

[Unknown Analyst]

Got it, got it. And sir, you mentioned in the last quarter, there is some extra capacity we are doing in terms of automation and maybe some system implementations. So do you expect this full year to continue that increase CapEx? Or there will be some quarter let's buy [indiscernible] not have that.

[Salee Nair, executive]

On the IT side, it would continue. Like I said, we have contracted several packages of which some of them have already been implemented in this quarter on the seventh of July. Customer experience package that we have taken from 1 of the leading software companies in the world or Al. So that has been implemented in the first quote of July. So that's aimed at giving the leeway for improving the product per customer and the counter in the branches and giving a 360-degree of the customers, so that the customer interaction relationship with a clear impact on CASA happens. So that is on the FX side. We have implemented the VMS package, which is the vendor management system, we spend about INR 1,200 crores for running the bank. So that package has also been implemented in July this month and several others are in the offing I did mention about the LMS, the Phase I is on. LOS also is on. That is also looking at the retail element is looking at the some on. And I think the first Phase I, the Phase 1 is likely to be completed in September. And apart from that, we are also looking at the Internet banking. We are completely revamping our Internet banking package, whatever services is available across the counter, we want to make it available through the Internet banking package. So Edgware, which is the infracos company, we have contracted them for a complete revamp, which should be ready by December. And from Perten, we hope to have it fully launched the benefit of our customers. So that's the other package on. And within the branches, it start to improve the productivity and reduce the manual way of handling it. We have brought in the business sort of management. And I think several projects are underway. Some of them have already been done. And we have already started getting the benefit of it. I think going forward, I think we hope significant improvement of productivity will happen there. Apart from that, we are also looking at the old record, cognizing and recharging the old records and moving it out so that we revamped some of our branches from a customer perspective. So a lot of initiatives are being taken. I think that's the first set of initiatives I did mention across whenever I have calls with the analyst in the last 2 quarters. And that's something on, and we will consolidate this for the benefit of a business. We expect the second half to have some impact of it. And that is there that my confidence comes from the fact that I can increase the deposit will certainly cross the 10% year-on-year and advances will reach closer to 15%. Confidence comes from the fact that some of these initiatives are going to give me a leg up in the second half.

[Operator]

The next question is from Sara from Bolsa. There seems to be no response from Sara. We move to the next question. Next question is from Darshan Dara from Invest Group.

[Unknown Analyst]

Yes. Firstly, congratulations with a reasonably good set of numbers, especially adjusting for the Q1 FY '25 figure as well as the accelerated provisioning on the performance incentive, which you've taken in this quarter. My question is for regarding the loan mix. So currently, what percentage of our loan book would be fixed in nature versus linked to EBLR versus MCLR.

[Salee Nair, executive]

No EBLR and MCLR is about 50% and 50% in the last 50% would be.

[Unknown Analyst]

So in terms of fixed -- yes. In terms of fixed is it 0?

[Salee Nair, executive]

The fixed book? So fixed book doing is what is the extent of sales book? That is negligible, right? I'll get you that number, but it is almost entire is floating split between MCLR book and EBLR book. Like I said, the INR 45,000 crores is evenly split between the 2. Almost even I think but is very, very late. Not really good impact.

[Unknown Analyst]

Got it. And you said that the average -- the deposits will take about maybe overall like maybe a year, 1.5 years to so about our loan book. Like what is the tenure of our loan book?

[Salee Nair, executive]

The average maturity, I think I will have to get to that number because do you have that number in this tight I'll give you that number, test. Okay.

[Unknown Analyst]

All right. Got it. Is a significant...

[Salee Nair, executive]

You need to get the average maturity of the term loan. I think that's what you're looking for, right?

[Unknown Analyst]

It would get repriced anyway. I'm assuming it will get repriced either.

[Salee Nair, executive]

That's why we look at the term deposits, the it's 6%, as I said, in the 1- to 2-year bucket? Another 20% in the 6:1. So 86% is in that. But it takes a bit of time. I think that's where the pass-on nature of your repo cut impacts.

[Unknown Analyst]

Got it. And just in terms of the MSME space, you did mention that in terms of your loan book, you all see stress because of the collateral that you have in space vis-a-vis the loan amount, the outstanding loan amount. But generally speaking, you're seeing a slowdown in cash flows or in growth of the MSME sector.

[Salee Nair, executive]

In the MSME, the unique time is that the kind of loyal base that we have been having are trying to expand beyond that, ensures that the collateral factor that is in pilot the whole mechanism of credit delivery ensures that [indiscernible] even if it gets to a SMA it sort of powders back into the standard. It keeps moving up and out. On the -- so that's not much of a worry for us. our worry is the kind of incremental. When we renew a contract, a new MSME business, how do we maintain the same level of quality. Obviously, it can't be collateralized to the extent that the existing book is. So to that extent, that is 1 of the reasons why we are investing in the B and the kind of lame packages and the linkages that with outside world in terms of data collection so that we can clash the data quality appraisal. That's something that we will take it. But on the cash flow side, as of now, we have not seen any kind of a lowering of it or an area of concern from a cash flow perspective. I think that continues. And let me also give you said that we are putting in place a standard monitoring mechanism to study the cash flow from that perspective, that's the other -- 1 of the other projects that is in takeup that is coming onstream, maybe in the third or the fourth quarter. But as of now, we have not seen much of our either.

[Operator]

The next question is from Santosh from SK.

[Unknown Analyst]

Sir, am I audible?

[Salee Nair, executive]

Yes.

[Unknown Analyst]

Okay. Great. I have 2 questions. One is about the -- you spoke about NIM in the forthcoming quarter to be something like 3.85%, 3.95%. So what [indiscernible]. Yes. So what gives us this confidence in the rate reduction -- rate reducing scenario when the venture reduction environment and expedient our needs are much lower than that. What was this [indiscernible]?

[Salee Nair, executive]

See, what we are also trying to do is on the MSME side, we have actually dropped our rates to align assets to the market so that -- to update any takeover that may happen. On the -- so if we have a sizable gold loan that is growing, right? And there, we are introducing -- in fact, if I tell you, we are introducing 18 products, get into separate segments in the gold loan portfolio. And this is 1 portfolio that has been giving us the kind of support for the profit earlier, and we will continue focusing on that. And there, the yield, we anticipated it to be a little higher than what we are getting earlier because the new products, particularly aimed at the consumption segment will carry a higher rate of interest. And I noticed that, that segment is, in fact, growing. So that will help us whether the policy cuts that we are seeing. That is where the confidence comes that we can, in fact, look at 3.85% up. and we are sure about the demand in the gold room. I'm telling you from the kind of growth I'm seeing it across my branches.

[Unknown Analyst]

Okay. Okay. Second question is about the disclosure -- separate disclosures from gold loan. So what's happening is that when you see a permutation, we just see a disclosure for Ram at sector, retail, agriculture and MSME. But there is no separate mention on the gold loan amount that's outstanding. So any reason that because many other banks do that, and they safely disclose gold loan. And then we can understand...

[Salee Nair, executive]

I think that's something we can do it next quarter onwards so that you get a better insight anyway. There is no reason. There's no particular reason. This is done and it is that. So if there is a demand, we will certainly better to it. We'll have that done for next partners.

[Unknown Analyst]

Okay. That's great. So just for the sake of information, what could percentage of total ramp up [indiscernible]?

[Salee Nair, executive]

40%. A little over 40%.

[Operator]

Thank you very much. We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

[Salee Nair, executive]

Yes. Thank you, Rio. I think like I said earlier, the first quarter is -- I look at it more as a stabilizing quarter, a quarter that is being the foundation, and I think the numbers that have been delivered, particularly when I look at the deposits I think the -- I'm satisfied that my prunes are now beginning to deliver, particularly when I look at the fact that the deposit growth has -- the pace of growth has doubled the profit space is reasonably good, particularly when I look at the fact that the onetime expenditure I printed it. And again, on the NIM, I think the NIM, I don't think we expect the NIM to go down from where it is today as of -- the growth around the NIM is likely to push up will generate the profit as it comes in the next few quarters of initiatives that are being taken. I hope we'll reserve and I'm sure he will result in the number, the growth numbers moving up. I did mention that we expect the deposits to grow in excess of 10%, and the advance is closer to 15%. So I hope my words will be validated by the performance of the next quarter and the quarter and follow. Thank you. Thank you all for participating in this analyst meet and if there are any questions separately also, you can take us with us, and we'll be happy to share it. Thank you.

[Operator]

Thank you very much. On behalf of Tamilnad Mercantile Bank Limited, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.