Please note that this conference is being recorded. I now hand the conference over to Mr. Saptarshi Bapari, Head Investor Relations. Thank you, and over to you, sir.
Thanks, Darleen. Hello everyone. Welcome to the call. Thanks for joining the call. Today we have Mr. V. Vaidyanathan, MD and CEO of our bank, and Sudhanshu Jain, CFO and Head of Corporate Center for our bank. We'll start the session with the opening remarks from V. V., followed by the brief on financials from Sudhanshu, and post that, we'll open the session for Q&A. So right now, I will hand over the call to V. V. for his opening remarks.
Hello everyone. Good evening, everybody. Very happy to speak to all of you. Is Sudhanshu able to hear us?
Yeah. Good evening, everyone. Sudhanshu here.
The way we're doing this is that Sudhanshu will first take you through the numbers, and I'll come in a little later with my perspective, which I've not done here, and Sudhanshu, I'll take over.
Yeah. Thanks, IDFC. I'll keep it brief. I'll touch upon the key financial numbers for the quarter as of 31st December 2024. If you see the balance sheet size, that has now expanded and reached about 3.3 lakh crores. That was an expansion of about 24% on a YoY basis. If I go into the components of the balance sheet, both the advances and deposits continue to grow at a faster pace. The deposit traction continues to be very much there. In fact, our customer deposits have increased by 29% on a YoY basis, and it is now at about 2.27 lakh crores. Within this, the growth in retail deposits is at 30% on a YoY basis. If I move on to CASA deposits, that has also increased by 32% on a YoY basis. In fact, on an average basis, CASA deposits have grown by 35% on a YoY basis.
CASA ratio, while it has come up from 48.9% to 47.7% in the current quarter, but I would say that this has remained quite stable over a period of time. Term deposits, it grew at 26% on a YoY basis. Here, again, the retail term deposits grew at a faster pace at 30%. During the quarter, our branch network expanded to 971 branches. We opened 10 branches during the quarter, which takes the tally for the year to about 27 branches. Moving quickly to the high-cost legacy borrowing, which has been giving us a drag because this is at 8.8%. Happy to report that we have retired another INR 1,000-odd crores during Q3. The book, which is of this high cost, is now at about INR 6,700 crores.
We have given details in the presentation on slide 23, where you would find that about INR 1,850 crores is further matured in Q4, and bulk of it will retire into the next year. Moving on to the credit deposit ratio, which I think nowadays is an important parameter. Again, here we continue to do well as deposits are growing faster than advances. The credit deposit ratio at December quarter is now down to 95.7%. This is roughly 200 basis points improvement from the previous quarter. If you look at the incremental credit deposit ratio during the last one year, then we are coming at 76.5%. Moving on to the cost of funds, which is connected to the deposits and borrowings. The cost of funds for the quarter was at 6.49%.
We saw a marginal increase of 3 basis points during the quarter due to the tight liquidity environment, which is sort of prevailing, but if we look at the deposit cost, that has been quite stable at 6.38%. The same was the number, I would say, in the last two quarters as well, so net-net, both of this, I think, has been quite stable all around. If I move on to the asset side of the picture, the overall funded assets registered a strong growth of 22% on a YoY basis to reach INR 2.31 lakh crores. Sequentially, the growth was 3.8%. The growth was largely driven in this quarter and even on a YoY, largely by mortgage as a business, then from the vehicle segment, largely in two-wheelers, where we have a strong foothold. The business banking segment, which is essentially working capital backed by FDs and property as a collateral.
Wholesale business, you would have seen that we have registered a strong growth in the last two quarters, and also by certain products which are coming from a small base like gold loan and credit card. We have given a detailed product-wise cut in the investor presentation. The credit card base now stands at 3.3 million cards. The book size is about INR 6,918 crores, and this has grown at 40% on a YoY basis. The gross spend on credit cards increased by 45% on a YoY basis in the nine months. If I talk about asset quality, then the gross NPA of the bank was at 1.94% at 31st December, and the net NPA was at 0.52%. If we exclude the microfinance book, then the gross NPA, in fact, stood at 1.81% and improved by 7 basis points on a sequential basis.
The PCR on the NPA we hold is at 73.6%. If I give some further details in terms of the GNPA in retail, rural, and MSME segment, then that stood at 1.63%, and the net NPA stood at 0.59%. Again, the increase here sequentially was more because of MFI. The rest, if you exclude MFI, then the numbers would have slightly come off. The overall standard restructured book continues to come down, and this is further reduced to 0.2% of the funded assets, and we hold sufficient cover here. The 97% of the book is secured in nature, and we hold about 18% provision on the same. On the SMA front, the SMA I and SMA II book, excluding GTL, that improved by about 3 basis points to 0.82% in this quarter. This was 0.85% in the previous quarter.
We saw, however, an increase in SMA I and II of MFI book, where it increased from 2.54% to 4.56%. If we talk about now the gross slippages for quarter three, then this was at INR 2,192 crores, and in the last quarter, this was at 2,031 crores. So the delta increase is about 160 crores, and I would say that about 140 crores of this has come from MFI alone. Even on the net slippage front, the net slippages for the quarter was at 1,541 crores, vis-à-vis 1,392 crores of the previous quarter. The delta increase of 149 crores is largely attributable to MFI. The recoveries and upgrades for the quarter was around 651 crores and pretty much the same as the last quarter. Last quarter, it was about 638 crores. If I move on to profitability, then I will start with NII.
The NII for the quarter increased by 14% on a YoY basis to INR 4,902 crores. The net interest margin on AUM for the quarter was at 6.04%. This, however, contracted by about 14 basis points sequentially. I would attribute this reduction largely to the reduction in the MFI book. The impact was about 6 odd basis points on that count, and also because we have started scaling the wholesale book in the last few months. So the average book increased, and about 5 dips of impact came because of that. And just 2 to 3 dips I would attribute to the increase in the cost of funds, which I sort of elucidated earlier. Moving on to the fee and other income, that increased by 20% in Q2 to INR 1,757 crores. Sorry, my bad.
In Q3, and this was largely retail led, which is at 92% of the total fee. Moving on to operating expenses, this grew at a reduced pace of 16% on a YoY basis, and for the full year, this increase in OpEx is about 18%. Again, in this quarter, because there was a heightened activity, increased disbursement because of festivals and so on, operating expenses sequentially in value terms have grown, but we saw some of that impact even into the fee line items. The core operating profit, which is NII+ fees excluding trading gains, this grew by 15% on a YoY basis to INR 1,736 crores. Moving on to provisions, provisions for the quarter stood at INR 1,338 crores as compared to INR 1,732 crores. During the quarter, the bank has not utilized any contingent provision.
If you remember that we had created contingent provision of about INR 315 crores against microfinance portfolio in the previous quarter, but we have not done any utilization during the current quarter. The credit cost for the bank for this quarter stood at about 2.3%. If we exclude the provisions on the MFI book, then the credit cost is at 1.8%, and this was pretty much the same number in the last quarter if we exclude MFI and one toll account. So the provisions have not sequentially increased but have been broadly stable, is the point which I want to make. The profit after tax for the quarter is at INR 313 crores compared to INR 201 crores in Q2 of the previous quarter.
Of course, on a YoY basis, this has come off because of the decline which we have observed in the MFI book, which led to an impact on the top line, as well as increase in provisions on the MFI, as well as some normalization of credit costs, which have sort of come in through the year. Moving on to the last section, which is capital adequacy, the bank has maintained strong capital adequacy, and including profits for nine months, the capital adequacy was at 16.11%, with CET1 ratio being at 13.68%. This also factors in an increase which came on account of merger. In terms of a positive impact, that benefit was about 25 basis points. The liquidity also, we continue to maintain healthy liquidity levels. The LCR was stable at about 114% as of December 31st.
With this, I am broadly done with the key numbers which I wanted to touch upon. Maybe I'll ask IDFC to sort of give his remarks for the quarter.
Good evening, everybody. So I just want to share with you the brief approach and strategy we've been following on dealing with the current situation. So number one, if you notice why the cost-to-income ratio of the bank is high. So we've called out the reason already to many of you that this is a new bank. This is six years old. I know many of you have heard this before and know the facts also, but it is a fact. We are losing close to about INR 2,000 crores a year in setting up the branch architecture of this bank. Basically, the branches, the ATMs, the people, the technology stack had to be completely built up from scratch. The teams had to be hired, all that stuff. So all that is consuming.
So if you see the core profit of the bank, as and when this INR 2,000 crore winds itself down to zero, you should be able to estimate that this is something that you can add back and estimate the bank. Now, on this front, I must say that we have made one new disclosure this time. If you see page 66 of the presentation, we have actually shown how much the liability business has been losing as a percentage of the average deposits and average retail deposits. And this number in FY20, when we started the bank, meaning the bank started in 2016, but really until two years, it was still very much a startup stage. Our deposits were only INR 10,000 crores in retail. Think about it like practically startup.
In FY20, our OpEx, sorry, our loss. What is loss and liabilities? Let me just tell you one second, but then I'll come back to the point. Loss and liabilities is what the income the liabilities team makes, net of what it pays to the customers and any fee income that it generates. That's what is really the net loss. That number was 4.2% of the average retail deposits of INR 23,000 crores. In FY21, this came down to 3%. In FY22, this came down to 2.1%. In FY23, the loss went down to 1.8%. In FY24, it came down to 1.7%. In nine months of this year, it comes down to 1.3%. You should believe me when I'm telling you that when the branches are scaling up, then they are becoming profitable. It's just, of course, it is easy to understand.
It's common sense, but when we put the numbers to it, hopefully, you will be able to realize that 4.2% has continuously come down to 1.3%. It's five years. I must remind you, it's five years. Unlike other banks being 30 years, it is taking its time. Now, we believe that this 1.3% will wind itself down to zero, certainly by 2030 or 2029. So the direction is clearly there, and this is why you should, when you model our bank, just don't go by the final numbers reported by us. Please factor for the fact that this INR 2,000 crores that we're losing today, or 1.3% of the deposits that we are losing today, will wind itself down to zero.
The second item, which is important to know as far as and talking of cost to income, let me just share with you that the cost to income on the liability side, staying with liabilities, in FY22 was 227%. In FY23, it was 182%. FY24 is 197%. In nine months of FY25, it has come down to 178%. So our guide is that we are seing this clearly going. I hope none of you are doubting our ability to raise deposits. It's really coming well. So this number coming downwards to 100%, which means it will not lose any money, 100% by FY29-ish or 29-ish or 30-ish, if you want to even stretch itself by a year in that zone.
So this direction is very clear, and I request you to please factor this in when you consider our bank, when you compare our bank with any others we've been around for a long time. Now, let me move to the next item. When we talk of cost to income, in the cost to income on the credit card side, we are currently running in FY22, we were 240%. '23, we came down to 165%. '24, we came down. Rapid movement came down to 116%. And in nine months, FY25, we've already come down to 100%. Already done. Meaning that there is cost income ratio of credit card down to 100%. And we believe that by the time we head towards the '29-ish or so, it should come down to about 60%. That's the way the book is growing.
And then we have also provided a particular slide, page 67, where we have also shown the loss in credit cards as a percentage of the average credit card outstanding. So in FY2022, it was 27%. 2023 is 12%. 2024 is 3.78%. And nine months has already come down to - 0.11%. So by giving out this very specific disclosure about how much which business is losing and what's the trend line over five years, and therefore, it should hopefully give you a really good picture that these numbers are truly moving in the right direction. Now, you might then say that, "Listen, why would you need to launch credit cards?" And that would be a perfect question. Let's say, "Listen, you guys, listen, you guys are not even making money. Your ROE is low.
So why launch so many businesses?" Now, I must say that the way to think about this, and I must very clearly tell you the way we have thought about it, and I have personally, I stand by it because I am personally definitely architecting this broad thinking, and I stand by it. I must tell you that the way this works is as follows. We are building a liability base. Now, in the liability business we're building, now we have close to 2 lakh crores.
I must explain to you that if we don't launch a credit card business, can you imagine telling a customer that we are going to be a big bank of the future, which we really believe we are, but listen, open savings accounts with us, have fixed deposit with us, but for credit cards, go to some other bank, which we can't do, or we will distribute some other bank credit card? Well, it just cannot build a full relationship. Then the customer will have a credit card elsewhere also keep a savings account there. Why should the customer come to our bank? So these are essential parts of building the bank.
Secondly, if we have not started the credit card business in 2021, if we're not losing INR 300 crores per year, which I believe is inevitable, then after becoming profitable, we'll have to come back and tell you, "Now we're launching credit cards. Now we're going to lose INR 300 crores for five years from here on." So we believe to do it all one shot, to build a complete comprehensive integrated franchise is a very important part of building a proper universal bank, which has to have a long-term future. Because once we start generating 16, 17, 18 return on equity, we don't want to turn the clock back and say we're investing in new businesses. Let me give you one more example. Let's talk about wealth management. We get customers over for the liability business.
And because of our service levels, technology, app, etc., really, customers are coming in, and our products are very good. Our culture is good. So I mean, our wealth management business is going like gangbusters. It is growing by 50%–60% per year. It is already touching something like 40,000 crores if you add both the AUM as well as the deposits of the customers with our bank. Now, can you imagine telling a customer, bringing them for liabilities, and telling them that for wealth management, you go to some other wealth specialist bank or go to any peer bank? It just won't work. Why would the customer only leave savings with us and do wealth management elsewhere? So I must share with you to build the kind of we have a vision of building a really amazing bank for the future.
There is not a choice for the bank to say that wealth management, we will postpone for another day. We just have to do it. And for you, you've got to build the team, the technology, the systems, the culture, the people, the leadership. Everybody has to be hired, and they need to work well together. Now, let me give you cash management. That's the other business we're investing. So right now, we have current account balances of close to about INR 4,000-odd crores, which is a really fantastic piece that is now coming along. Now, in the cash management business, again, let me just say that we lend to a lot of customers on the lending side, on corporate banking also. As you know, we've been doing corporate banking quite strongly now, but close to like maybe 20-odd%.
Now, and let me tell you that it's been five, six years have gone by. Not a single, not one new NPA has been created in the bank in corporate banking. And we are really, really happy and proud about that. And we have a good committee with the board and everybody, and we are proud about how we're running that. But coming back to the point, so when we do current credit corporate banking, and we do that, we give loans to people. Really, can we tell people that, "Okay, listen, you take money from me, but we're pretty foolish to tell the customer to go and say, 'Now, you can do cash management somewhere else'?" It's not possible. I mean, it's possible, but it would be pretty, it would be not very smart. It won't be adding much value to us.
We said we need to do cash management. When you do cash management, you need to hire the team, build the people, build the coverage team, the product team, the technology team, the builds, go and find customers. You've got to do all that. I genuinely believe there is no choice but to do it. We've got to build a future bank of the future. I gave you just three examples. I have many more, like close to about 15 or 20 products. We believe that we're building a good long-term bank with all these features. Whatever the pain, whatever the hit, whatever the negative, we are taking it today. When we come out of this whole thing and we come through with this, I'm very proud. By that time, we'll not have to look back and invest all over again.
My objective of this opening part of the conversation was to tell you we are building the bank like this. I gave you three examples. There are many more where we are building a complete integrated bank. Now, what is the unifying factor between all these businesses we're launching? There are maybe a couple of them. One is that they've got to meet a specific need, like a cash management meets a need or a FASTag meets a need or a wealth management or cards or whatever. Now, the thing is that what is connecting them all? They're all connected to one thing, that they're all phenomenally technology-enabled.
If any of you tried a cash management services, if any of you tried a credit card business or tried our even app, you'll find all of them are really connected to technology and in a very, very advanced technology. Then the other thing they're all connected with is that they're all very good in customer experience. We are just going crazy about the concept of customers getting superior experience at this bank. Now, so when you have good service, good technology, good culture, then every product that's coming out is a winner. Let me tell you, cash management has been around for four or five years, already INR 4,000 crores of current account in the bank. No chance on earth our bank would have got current account of this scale if we had not launched that business.
This is my short point of just sharing with you how we are thinking of building this. Now, you might then say that, "Listen, Vaidya, every first two years between 2019, 2020, 2020, 2021," you might say that, "Listen, at that point of time, you had legacy bad loans, and you said you were writing it off or charging it off or you're collecting." Then this next situation came that your then COVID came. Fine. That happened to everybody. Then for two years, we had peace, meaning like 2020, 2024, 2023, and 2024. Path looked up. Direction was good. Everything was good. Life was looking great. Now, suddenly, you've come up with the MFI problem. And now, how long the MFI will last? Why did we do MFI?
Let me, therefore, very specifically address what we think about the fact that now you've set us up with a new problem. And let me just address that as honestly as I can. Let me tell you the first part of the situation that we faced in, let me say, 2019 was honestly unavoidable. Whether you had me in this job or anybody else, nobody could have avoided taking a charge-off for Dewan or Reliance Capital or the entry point, Mumbai Entry Point, this account that we had, 1,100 crores. No, that's just no one. It was just there. Any management had to account for it. And I took it. Now, then our operating profit was very low. So we have moved ahead and gradually built the operating profit. In fact, I wouldn't say gradually. Quite strongly, I'd say. Our operating profit has now touched 2.3%.
It's very tough to build operating profit. It's, in fact, easier to charge our credit cost, but harder to build operating profit. So we built it from literally 0.3%, 0.4% to 2.4% now. So that thing is built. Now, let me tell you this issue about what you might think that we have set you up with a new problem. We just say that, "Look, this is a bank, early stage. It just goes through its you get one jab at the face and one front, then you fix it, then you fix the next one." But the core is coming strong.
Let me just tell you. Let me specifically address the issue of MFI because we owe you a genuine and straightforward answer on why we did MFI business and then what is the plan, how much is the hit, and where is it going. The MFI business has one of the key reasons why we do the MFI business is that it meets our PSL requirements. Let me give you a simple reason. As a bank, we are required to meet the following. We are required to meet 40% PSL. Out of that, we're supposed to meet 18% agriculture PSL. Then small and marginal farmer, you need to meet 10%. Now, your microenterprise is supposed to meet 7.5%. And loan to weaker section of the Indian population, you need to meet 12%. Now, IDFC was into infrastructure. They were not doing any of these.
Capital First did a bit of these, but really, not a bit and a little bit of this, but still is doing something of it. In fact, IDFC has not chartered some of the businesses to meet the requirement, but really, it was started on the ground. So therefore, now, how a bank, early-stage bank, meets a loan to weaker section, 12%? How does a bank meet a small and marginal farmer, 10%? So the microfinance business was an amazing silver bullet, which met three requirements. One, it made money. We were lending at 22%, 23%, 24%. We had some additional fees on top of it. Our cost of funds was really nothing, like 6% or 7%, and it just made a lot of money. Number two, it also met the requirement of small and marginal farmer, 10%. It met the requirement of loan to weaker section, 12%.
So it was an amazing product. Now, therefore, this issue that has come to us in the MFI front is not an IDFC issue alone. It's come to everybody. Just let us say a little bit of collateral damage that has happened by a mishap, so to say, on a highway. But I'm really happy to tell you, and we'll discuss during the Q&A, we'll discuss specific numbers that except MFI, our bank has close to about 25 products. We are on record in telling you that all of them are performing well. And they've not been performing well today. They've been performing well for 15 years now. I mean, the ones which have been alive for that long. Some have been launched later than that. So think about it that for 15 years, our home loan has not troubled us.
Our loan against property has not troubled us. Our used car has been perfectly behaving perfectly well. Our personal loan is doing perfectly well. Our credit card is doing perfectly well, in fact, much better. We put some numbers of our banks inside the industry. Our microenterprises business, which do Kirana shops, salons, etc., finance is doing perfectly well. So every single business of ours is doing well. So one item has got stuck somewhere in the center. Now, how do we deal with this? So we have a provisioning policy whereby in MFI, we charge off 75% at 90 DPD, and at 120 DPD, we are charging off, or 123 DPD, we are charging off 100%. So our methodology in all products, including this product, is to be really upfront about everything. And really, 90 DPD, 75% is very stiff.
So when the MFI book is having problems, it is hitting us first. But when the MFI business will recover, we will recover fastest. That's how it works. Now, because of the same logic, now, our credit cost in MFI business for these nine months is close to about 8%. And we have not reversed the SMA1, SMA2 provision we took last quarter. We still have it in the buffer. So that's the last point. Now, on MFI, one closing comment I want to tell you is that now we're slowing down the book. Now, it's not only that it's hitting us in credit cost, it is also income is also coming down because I told you it's an amazingly profitable product. So to that extent, income is coming down.
It's a bit of a double whammy, I should say, because suddenly now we also have credit costs coming in, no income coming from that line because book is coming down. So this is a real issue. Now, how do we look ahead? Now, when we look ahead, let me just say that we have two very simple approaches of dealing with this because really, it's quite uncomplicated. What is it? One is that on the cost front, we are very clear that our cost growth of the next year will come down. We have given a breakup of this time we've introduced a new slide on what is our costs. And we have given a proper breakup of how much of our cost is IT expenses, how much is employee, how much is infra, how much is channel sourcing, how much is volume linked. We have disclosed everything.
We have found something we have not found something. We know it, but we want to share something with you that, let me tell you, how the operating leverage of the bank is already beginning to come. The operating leverage of the bank is coming as follows. If you notice, when you go back in time, maybe two or three years ago, our OpEx was growing by 30%, and income was growing by 30-32%, and that's the way it was. This year, our OpEx has grown in the nine months of this year. OpEx has grown by 18.2%, but the business of the bank has grown by 25%. When I say business, I mean the profits business that has grown by 28%, and the loan book has grown by 22%. So when you add that up, you'll find it 25.
When OpEx is growing by 18% and your book is growing by 25%, you know that this bank is now beginning to build serious leverage. When you look ahead, our own estimate is that for 2025, 2026, our OpEx will not grow more than about maybe 13%, what is now growing at 18%. Now, you might say, "How will that happen?" That's because a couple of things are happening here. One is the income itself will be lesser next year. I mean, income will not be lesser. I mean, the growth in income will be even slower than this year because the microfinance business is gone and it has to reset itself. But the good news is OpEx will come down next year. So now you might say that if you've been growing OpEx by 18%, how will it come down to 13%?
Now, it is doing many, many cost-cut initiatives. Some of them are individual product-related loans, some cash-back propositions, some licenses we're taking from various technology companies. What are the kind of credit bureau pulls we're doing? Can we do it through alternative bureaus? It can become at a cheaper rate. Can we do multi-bureau structures? How to rework our IT licenses? How to rework our travel conveyance costs? There's a major project running out here. I mean, how to have double occupancy, single occupancy, printing, stationery, whether people are sending through SMS to customers, can you break it up into single SMS standard? How can we change the sourcing cost of the bank? How the credit cost is going, the credit expenses, how many people are doing credit evaluation, etc.? So all the ATM costs. So there are a lot of projects that are going on, etc.
This is all one part of the work. That is cost. Some serious work is going on. Then there are a large number of transformation projects that are going on. That is even beyond the normal touch about SMS, etc. It is about real transformation. For example, if you have maybe 100 CPUs in the country, how to collapse them into three? Or how to digitize a particular process where we eliminate the entire chain of work going on in the chain. So let me just say a lot of transformation work is going on, a lot of operational activity is going on. So one big area how cost work is going on, and we believe next year it will come down to like 30%.
Second thing that will happen is that one information we have not provided, but hopefully we'll provide next time, is that we want to break up our OpEx and show you how much of that is fixed and how much is variable. And the book is growth, what percentage of this, how much will fixed grow by, how much will variable grow by. When we do that work also, we believe next year we'll deliver about 30%. So this is a very material moment in our life. We believe next four, five years since the OpEx has been incurred for the last five years and at least essential building blocks have been built, we believe on a CAGR basis, our OpEx should stabilize somewhere at the 13-ish league.
Then next year, our income will probably grow by, I mean, I have to hazard a guess, so please, the analysts can do a little more deeper work, etc. But maybe like the 14-ish or 14.5-ish, somewhere, that's how the income will grow. But the year after that, that's because the microfinance business would have stabilized. The base case, the lower base would have been achieved. But once that is achieved in 2025, 2026, I honestly don't see any doubt in the bank continuing to grow the bank on the loan side by 18, 18, 20, 20%. We already guided to 20.5%, and I see honestly no problem going to loan book at 20+ . And the deposit will grow by maybe 22%–23%.
And then come 2029, whatever guidance is given that we'll be a five lakh crore loan book and six lakh crore deposits, we don't see a risk to that. So once that comes through, then the rest of the equation is very good because our NIM is 86%. We make fees of 2%. If our cost income eventually, I believe, will come down to the 50s, and then you'll have like a three and a half-ish, four-ish operating profit. You have 1% of credit cost. You'll be operating, posting ROA of like 12%. So probably a bit more than that on an even more longer basis. So our theory is very simple that this is MFI is a temporary situation. It will go. I have personally seen, I've been in business for a long time, and we've seen many cycles in life.
The good news is that neither on the retail front or wholesale front, we have put one foot wrong on credit. MFI is our first big issue, let me say, post-merger. But we will deal with it. It is a bit of an industry accident. So this is my quick brief. I hope with that opening comment about how we plan to, how we think about the future. We are frankly very bullish. We believe at some stage our bank will turn. I'm requesting you all not to get very concerned about one quarter's result or what's going to come up in the next two, three quarters. I mean, this time we'll be, obviously, we'll be looking upwards, but I can't promise that exactly it will be through you. It will be good. But let me just say that as the 2026, 2027, 2028, 2029 comes, this is on record.
You can check it out. I'm pretty confident that once the basis is met, like 2025, 2026, then after that, next four, five years, I'm looking at a good story because there is no single business that has let us down in 15 years. I'm not expecting to have any problem in any other business once we see the back of MFI. So thank you very much, everybody, and with that note, we're open for discussions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to please use handsets while asking a question. Ladies and gentlemen, we will now wait for a moment while the question queue assembles. We have the first question from the line of Gao Zixuan from Schonfeld. Please go ahead.
Okay. Thank you so much for the opportunity and congratulations on the quarter. Just on the MFI, do you mind sharing with us your outlook? Because the SMA1+ 2 seems to have increased sequentially more than what we have seen in some peers. So do you mind sharing with us what kind of credit costs are we expecting in the next one, two quarters? And also on the overall credit costs, are we thinking about FY25? Because our previous guidance is, I think, to 225 basis points. And just look at nine months, I don't know whether that still stands. That will be my first question. Thank you.
Yeah. Thank you for the question. Maybe I'll take that. So on the MFI, we have seen an increase in the, certainly in the SMA I and the SMA II book, even the NPA levels have gone up. As you would have noticed on the presentation, that we had an impact which was felt because of the holidays in October, essentially Diwali, coincident with Diwali. And because we have a weekly collection cycle, the last week of collections got impacted, and which also led to some slippages into the subsequent months. So we have seen a pile-up in the MFI book, and the challenge very much continues to be there. We are also closely monitoring the portfolio. As you would have noted, that we have consciously slowed down on the disbursements. The good part is all of our incremental disbursements, what we are doing is also CGFMU insured and so on.
So on this book, if I give you the nine-month number, we are already coming to credit cost of 8%. And this doesn't bake in the additional contingency provision of INR 315 crores, which we have, right? Which we have because the SMA book levels went up, the NPAs went up. We felt it was more prudent to hold on to the provision and not utilize at this stage. On your question on 225 basis points, as I sort of covered earlier, that excluding MFI, the rest of the book is very much coming in line, right? We have not seen increase in SMAs. We have not seen increase in slippages. So we feel that on the rest of the MFI book, we could still hold on to this number even into the next quarter. However, the overall guidance for 225, that may slightly inch up a bit.
We, of course, need to see how the situation sort of pans out in Q4. But that would be a few bits of increase could be because of MFI because we are seeing slightly higher losses sort of coming there vis-à-vis the anticipation which we had maybe in the previous quarter. But our own sense is that the credit cost of MFI should peak out in Q4. So it should be even more than this quarter. But when we estimate the credit cost based on the collection percentages, assuming collection percentages continue to stay what it was in December, and maybe probably even improve from here. But we expect that Q4 to increase, and then Q1 2026 to be less than the prior quarter, Q2 to be less than Q1, Q3 to be less than Q2, and Q4 to be less than Q1. So basically, there's a peak of it.
Our estimates are that the quarter that's ongoing right now is the peak of it.
Thank you. And my second question is on the 14% revenue growth estimate for FY26. Do you mind sharing with us what's the breakup in terms of the growth that we are likely to do and also the margin outlook? But it seems that the strategy for now seems to have changed to grow more corporates in the last one, two quarters. So how should we think about margins and growth?
Basically this year, next year, we believe loan book will continue to grow by about 20-odd%. And deposit will probably grow by maybe 24-ish, 25-ish% next year. The reason why the income will not grow directly in proportion is that the microfinance, like I said, is a highly profitable business. We're lending at 24%. Incidentally, though the microfinance book is only maybe 6%, 7% of the book, maybe until a couple of quarters ago, it's now come down to even less than that. The impact of the withdrawal symptom of not doing that high-yield book is also coming in the form of income lines. So that is the reason why we expect the 2026, the income line to get affected. But the good news is that OpEx, like I said, we expect to be low because I told you a lot of initiatives are going on.
And therefore, by Q3, Q4 of next year, I mean, you should see a reasonably sharp upward movement of operating profit, let me say. And for those of you who are going to be with us until that time and see how the worm is turning, you'll be able to see how the margins are expanding. And frankly, like I said before in the opening comment, that once that MFI will then probably by the time be probably even 4% of the book or something like that. So it won't be much. And it would also have been the spring cleaning of the MFI book would have happened by that time. Our book would be insured largely by that time. So we expect that from there on, MFI shouldn't give us trouble. And then the rest of the book is anyway doing well.
So we expect that, like I said before, after that, the rest of the story will keep moving in a positive direction. Yeah. Just to add, this is our.
Oh, this is your thing.
Just to add, this is our current estimation. Of course, this factors in that the stress in the MFI portfolio continues for a few quarters. If things sort of ease out, maybe some growth sort of comes in here, then we could see some uplift in these numbers. But these are current estimates that income could grow by about 14.5%–15%.
Guys, sorry. Just to double-check, you were saying that the material drop of OpEx growth, which should be much more visible in the second half of 2026, right? Is that—did I get it right?
You will see it every quarter. You can see it in even already this quarter itself. You see Q1 to Q1 of this year, Q2 to Q2 of this year, Q3 to Q3 of this year. For example, our OpEx growth in Q1 2025 was 21.1% YoY. In Q2, it's 17.7%. In Q3, it's 16.1%. So our OpEx is stabilizing and definitely coming down. I'm first of all happy that you're asking this question because many people do believe that, listen, this bank is spending and spending, and this OpEx never seems to come under control. What's going on. Well, you see the numbers. It's dropping quarter by quarter, at least in a percentage YoY sense. And we are confident of next year because we believe that the bulk of the investments have been done.
Of course, investments are never completely done in life, but at least, like I said before, whatever we had to launch, we launched. So we're not going to sit here with a new business launch tomorrow morning and say, "Oh my God, we're losing money." That's not coming. That trouble is not coming your way.
Got it. Thank you so much, sir.
Thank you. The next question is from the line of Jai Mundhra from ICICI Securities. Please go ahead.
Yeah. Hi, V. V., sir. And thanks for additional disclosures on slippages, MFI, and a lot many things. So first question is on MFI only. So outstanding book is around INR 10,900 crores. That is the MFI book. But I wanted to check, is there any other loans that we offer to this customer, maybe two-wheeler, maybe small auto loan, or any other PL loan, or these customers get only MFI loans from us?
Ladies and gentlemen, the management line seems to have disconnected. Please stay with us while we reconnect with the management. Ladies and gentlemen, we thank you for your patience. We have now connected with the management. Over to you, sir.
No, we don't sell very many other products along with it. It's a regular MFI. It's short-term, sir. Right, sir. Okay. So sure. Second question is, sir, just to get this correct, you have mentioned that you have a conservative provisioning policy, and you have not utilized any contingents, right? So as against the SMA1+ 2 outstanding of roughly around 500-odd crores, as of now, we still have 300-and-few crores provisioning that we had at the end of the Q2, right? That is the right understanding. That's correct. In fact, if you sum up the NPA book on MFI and the SMA I and SMA II book, the cumulative provision which is held is about 70%.
Oh, okay. Great. Thirdly, on MFI book again, so collection efficiency, you mentioned that it has come up to 98.6%.
But what we can also recall is there is likely to be tighter guardrails, which will be coming into effect from April 1st, which would create further disturbance, at least for the people who have slightly higher share of lenders. If you can comment, are you factoring into that development while saying that the MFI should be peaking in fourth quarter?
No, when we say MFI should be peaking in fourth quarter, basically, we have estimated the collection percentage that is coming currently and assumed a little more improvement because the trend line is in that direction, slightly assumed. And then we know the flow in the portfolio. So our estimates are that Q4 on this basis should be the peak.
The other thing is that in terms of your question about the changes in the industry, about the norms with which others are going to work with, they're going to work with, etc., we are going to follow all the norms of the industry. And we have a little more controls over and above that at our own end. So basically, once we follow all the norms of the industry, number of lenders, amount of exposure, etc., we will probably be in line with the industry, let me say.
Right. And then lastly, if you can elaborate your assessment of the current situation in the state of Karnataka and what is the portfolio that we have in the state of Karnataka? You want to find out something?
Yeah. When you move to the next question, as soon as we get it, we'll 61.
Karnataka.
Karnataka.
Karnataka.
9%.
9% Karnataka. Yeah. So we have about 9% in Karnataka. That's the number.
Okay. Sure. And lastly, sir, your consumer loan growth, right? So consumer loan growth, it has been coming down as is with every other bank also. But if I look at now, it has come down to 10% YoY. Is this more or less stabilizing here, or you think it can more or less continue to see a bit of a moderation because of the ongoing cautiousness at the system level?
I think frankly, for us to grow any of these businesses is not difficult at all because, like I said, obviously, they are coming on a low base as compared to, let me say, industry leaders who have a very large share of the market here, like nothing or nobody. So we're not so concerned about market share.
We're not even talking that language within the organization or outside. But more specifically on consumer loans, we feel that they're all growing well. There's no issue.
Right, sir. And then lastly, last question from my end, sir. We now estimate that cost to income should be ideally 65 by FY27. And of course, we mentioned.
Sorry to interrupt, Jai, but your line seems to be unclear right now. Could you please repeat the question?
Sir, I was talking about cost to income trajectory that you have given that by FY27, we should be hitting 65% mark. Assuming we do that, what kind of an ROA would you expect on 65% cost to income? Thank you.
I think we got different analysts have different estimates on this front. The way, if you don't mind, can I just take you a little larger question about the breakup of our various lines of businesses and their economics. So if you move to page 65 of the presentation, we have shown the operating profit as a percentage of the loan book of the lending business. We have broken our bank into three parts. One is the entire lending business: retail, MSME, rural, corporate, all put together as one family. Now, on that front, we are having 4.3% of the loan book as our operating profit.
This includes MFI, by the way. So before the MFI crisis struck, it was 4.7%. We actually expected to go to 4.8 or 4.9 because of our operating leverage. But of course, it's come down to 4.3%. But still, 4.3% is 4.3%. There's nothing bad about it. It's pretty good, actually. Now, and we believe this should go up because at the end of the day, even as our loan book grows from 2.2 lakh crore, which is today, to say 5 lakh crore in the next four or five years, this has to go up. Obviously, we're not going to keep on spending more and more money in the same proportion of the loan book growth. So this will come. So think of this number a little higher than this.
Now, the second thing is like you take the second business I told you, the liability business, which I said that you must expect us to take it to zero, which means that the loss will become zero. So let us assume for a minute that does head to zero. And let us assume for a minute that the credit card business, after all, we're not doing this for a social work or a research work. We're actually going to do a profitable business. We want to make money on it. So that business is already touched 100% cost to income ratio. And we believe it will touch the 60s odd in the next four or five years. So that should be making like 500-odd crores a PAT by that time.
Today, it's making a loss of INR 300 crores last year, probably about INR 180–200 crores this year. Next year, breakeven for sure. Then from next year after that, I have to bite my tongue and see for sure because sometimes it may play out, may not play out. But we are expecting, highly confident that next year, credit cards should be positive. And by that time, like I said, FY 29, 30, it should be making like INR 500–600 crores a PAT. So therefore, if you take this 4.3%, which is today, and get some operating leverage on it, take it as maybe 4.7–4.8% by that time, probably more, and then you assume both liabilities are going to become positive at least, then you see what happens. On this 4.3, you take some credit cost of maybe 1.1% off or 4.5%.
You take 1.1 off because we're comparing everything to assets, and then you subtract 1.1, assuming credit cost stays at current levels, like what we're seeing MFI. You take that off, so 4.4- 1.1 are looking like about 4.3, or sorry, we should take the percentage of loans. My bad. Let me correct myself. Let me say this: 4.6–4.7. You subtract from that about 1.7% as the credit cost by that time, so you'll be looking like about 3-ish or so. Then you have tax on it of maybe 2.9, and you take tax on it of maybe 60–70 basis points. This bank is surely headed to the 2%+ ROA basis or 2%+ for sure. It will be a 2%+ ROA bank. It will be a growing bank. It will have unique technologies. It will have growth.
It will have its own moats, and culture is very good, a customer-friendly approach. So we will tick all the boxes. Today, we tick five boxes, but we don't tick one box, which is the cost to income ratio. But we are conscious of it. We will fix it. So that's the only way to think about this bank in the longest run. Honestly, I have zero doubt in my head, the bank is heading in that direction. Now, you may have one year plus minus whatever, but I'm pretty sure the bank is heading in that direction.
Right, sir.
So, your assessment of the current situation in Karnataka for MFI? There are quite a few developments, state government trying to sort of intervene. If you can update as to what is happening on the latest front. Yeah.
Before I come to the question, let me just give one finishing touch to the previous question because I already answered that detail. So think about it like I was saying earlier that this 4.5 odd and you take 1.7 odd for credit cost. So you're left with 2.8-ish or so. And then also remember that's all percentage of loans. We got to convert the percentage of assets. That'll come down to something like 2.4 or so. And then you take the tax off, comes down to 2. I'm sorry. I just want to make the distinction between percentage of loans and percentage of assets so that you can get the math right. So in this math, if you did the math, went to a spreadsheet, you will get to see a 2% ROE bank. And the only catch here can be credit cost. There's no other catch here.
Now, in the credit cost front, well, it's a long period of 14, 15 years running a good credit cost company, except with MFI and MSME, that'll happen now. You should believe that you should be able to run the credit cost on the lines we're talking about, 1.7-ish% of loans, which will probably be 1.2-ish% of assets. So sorry, that's a previous question. Now, back to your question again. Yeah. And with respect to Karnataka, again, this is a very latest development. This has come in the last three days. So we will closely watch this situation. It's difficult to sort of give out what could be the impact on that front, but we are quite watchful anyway from the overall MFI portfolio.
Thank you, sir. All the very best, sir. Yeah. Thank you. Thank you.
Thank you. The next question is from the line of Piran Engineer from CLSA. Please go ahead.
Yeah. Hi. Thanks for taking my question, and thank you very much for all the enhanced disclosures. Just firstly on MFI, the three-member rule that's coming up next quarter, have we proactively moved to that?
No. We are currently following what is allowed in the system. I told you there are two reasons we like the business also. It makes the money, and it's insured. So we are happy the way we're doing it right now. We are just following the rules of the broader ecosystem.
But don't you think it makes sense to tighten right now when it's eventually going to come a quarter later? I mean, if you're going to be the fourth lender today and it's not going to be allowed, say, April 1st onwards, and the next lender is not able to, let's call it, evergreen that borrowers, you'll default to you, right?
No, that's true.
But we are very carefully, very, very carefully watching this. So basically, what we have done is we put some extra controls in our MFI business over and above the normal market rules. It's just we're not restricting ourselves to the ecosystem rules that have come with the four lenders, the three lenders. That's not our only condition. We have developed actually a very active scorecard where we have introduced a lot more number of parameters, which we believe will give us a much more scientific decision-making process than blunt rules.
Got it. And do you also track the entire household debt?
Well, you know, as part of the appraisal process, certainly our people ask the question, "We understand the household debt, and we're supposed to meet certain requirement of as a percentage of the household debt is what we're supposed to lend," etc. We follow all of that.
Thank you.
You get the best estimate from the situation. We go by our best estimates of what our people assess on the occasion, actually. But you can understand only that much of these households anyway.
Thank you. The current participant seems to have dropped from the queue. We have the next question from the line of Rohan Mandora from Equirus Securities. Please go ahead.
Good evening, sir. Thanks for the opportunity. So coming back to the slide 65, 66, 67, I just want to understand a couple of assumptions here. One was the OpEx, which is linked to the technology part or the head office and other things, which are not allocable to a certain business. They are not captured. You're just trying to get that right. And second was on the fee income piece, like is it getting captured in if it's a wholesale business fee, is it getting captured anywhere? And if not, is that missing in this analysis, or is it getting captured somewhere? And third was on the liability business, the ratio that we are showing. Are we building in any transfer pricing income and the interest income for the liability business? So that was one part of the question.
Rohan, let's take one question at a time, no boss. It will be easier for us. Let's take the first one. So don't you want to take that?
Yeah. So maybe I'll tell you how this has been constructed. So essentially, if you take the P&L of the asset book, if it includes retail as well as wholesale, so these numbers capture both the businesses, then we have a liability business, then we have put out a credit card business separately, right? Then we have a small income and OPEX, which comes to the toll business. Essentially, these are the broad lines of business. If you sum all of it, then it becomes the bank's numbers, right? In terms of how are we assessing this, so this is based on an internal transfer pricing and a cost allocation methodology, which we have put in place.
So to your question on IT cost, even the portion, all of it is allocated in any one of these businesses, right? So it's on a fully allocated basis how these numbers have been drawn out when we are computing the pre-provision operating profit for all of these businesses. So on your question on liability in terms of how this number has been computed, let me just quickly dwell on that. So there is an NII, which is the liability unit earns on the deposit which it mobilizes, right? So they could mobilize current account. They could mobilize savings account. They could mobilize term deposits, right? We all know current account is the best form of money to have, right, because it comes with 0% cost. So we give an internal transfer pricing income to the retail liability unit. Similarly, on savings, we give some transfer pricing income.
And so is the case with TD, which is more a commodity product. It will be much lesser there, right? So that would be the NI income from the retail liability group. Then there are fees which can be directly identified and attributable to the retail business. This could be fees you are earning by not maintaining average monthly balance or quarterly balance by the customer. Could be ATM link fees. Could be fees on account of insurance, Forex, distribution of mutual funds, and so on. So that would be the second pool of income for the liability branch. They could also sell assets or, say, sell a home loan, a personal loan, loan against property. We give them certain internal transfer pricing fee to the liability unit, okay? So, NI and said fees, all of these components make it the total income.
In terms of a cost, there are costs which are directly attributable to the branch, which could be the people cost, the housekeeping, salary, the DICGC premium, ATM running cost, and so on, and second, as I said, it's also loaded for the allocations, right, which could be for IT, which could be for operations, which could be for customer service, which could be for the corporate center teams, so it's on a fully loaded basis. That's how finally the P&L is arrived for each of the businesses, right? Like for an asset-specific, you will load it with the sourcing cost. You will load it with the collection cost, so some of these items change according to the nature of the businesses.
Sure. So sir, I was just trying to reconcile this number. So if you look at FR24, the asset income is coming at 4.7%, and this is on total advances, which is roughly two-thirds of the total balance sheet. If you look at the retail liabilities, the cost is 1.7%, which is again roughly two-thirds of the balance sheet. So if we adjust this, 3% is the net that we make. If I add the interest on investments, that is roughly 1.4%, so we get to around 4.4% at a PPOP level. And if you take two-thirds of it, it comes to around 3% odd. Whereas the computed ROAs for the bank was coming at around 2.4%. Roughly 50 basis points gap was coming in, so that's where I was trying to understand what could be explaining the difference vis-à-vis the analysis that you shared.
We also have the credit card business, which also then needs NI and fees, right?
But that was a small amount on the total loan book, so that's fair.
Yeah. Then on the investment income, as you said, you have taken a certain component. I'm thinking we have treasury investments. We have a few other investments. So let me assure you all of this adds up to the bank's number, right? And these numbers are in that way very frank to frank.
And they're also shared with the board. And I mean, in the sense that whatever we're sharing with you, they've all gone past the board already.
Maybe this reconciliation, we can take it offline, and we'll be able to give you more details around this.
Sure, sir. And secondly, sir, this was on the deposit piece. See, if you look at it, you have been delivering healthy growth on deposits. So I was just trying to understand in terms of the contribution, if we are in the journey wherein an asset customer is coming to us first, and we are converting them into liability subsequently, how would that journey play out, and what could be the contribution in terms of incremental growth? And overall, how is the mix of new-to-bank customers on deposits vis-à-vis the organic growth on deposits? Some color around that.
So currently, as we are a new-to-bank bank, in the sense that if you think of any bank which has been around for 20, 30, 50, 100 years, they'll have a large customer base. And even if they give one interest credit of 5% to all of them, the balance just goes up by that alone. And then they got to get a little less of the external market, so to say, because they're flying on two wings. A bank like us, which is starting up right now, since we start with zero-base, today we're no longer zero-base. We're still 2 lakhs. But in the context of what we want to build in life, maybe 10, 15, 20 lakh crores over the next many years, we're still zero-base. So a large part of our business is still very heavily NTB.
And the good thing is that we built really good journeys to make it smooth for customers to bring money to us. So that's the way we think about it. So right now, we're still a zero-day company and a zero-based company. And we still have a good percentage that is coming from new customers.
Sure. Anything on the asset linked originations?
What was that?
Any mix that you can share on how much deposits may be coming from the asset customers whom we were originating first?
Yes. Assets are useful, but frankly, all asset customers are not really good liability customers, so in the sense that we are not finding customers with consumer durables or two-wheelers, etc., bringing any meaningful liabilities at all. They are really relatively more modest income, and therefore, they're borrowing to buy a two-wheeler, so it's unlikely that they'll have much money with them, so I mean, they may keep INR 5,000, INR 8,000, INR 10,000, so that's not big balances, but the customers who are available, say, a home loan, for example, or customers who are availing these kinds of products or even low-value property for that matter, these are the people who have money, and the credit card customers are usually coming in, they have more money because they're the credit selected people, so what I'm trying to say is that the high-affluence customers is what will bring the money.
Not all asset customers of our bank are affluent.
Okay. And lastly, on the slide.
But we do have people who open home loans, etc. We do open their savings account to a very, very high degree, actually.
Sorry, before you put up the next question, just on the previous question, the number question which you asked, see, as you said, 4.4% is the PPOP on assets, right? And 1.7 is the negative on liability, which makes it 2.7. And the asset book, advances book is roughly 70% of the asset balance sheet, right? And on the rest, 30% is essentially investments or incomes coming from toll, right? If you apply these proportions, you will get a number of about 2.3% on PPOP, which is the disclosed number for us for the nine months, right? So PPOP to total asset is about 2.29%, and this is the broad reconciliation.
So this is very useful.
So you added that interest income from investment also in addition to this? Because if you include that, then it matches. If you include that, okay, I'll just take it offline and then just reconcile that.
That's okay. And also to the previous questions I was answering on how the economics of the longer run will play out, this advanced question answers it very well because this 4.4-ish we've shown there, which we believe will move towards the 4.7-ish or so comfortably, and you take off the 1.7 from that, it comes down to the 3-ish, and then that math when you do that, we also will come back to the same answer because we'll come net of your credit cost, we'll come down to the 3-ish, and then because of the fact that they're now going to compute as % of assets, not loans, that 3 will start looking towards like a 2.4-ish or so, and then you subtract the tax from it, you come back to 2.
So we feel that any which way you look at it, this bank is heading there. Whether you can reach there in 2030 or 2031 or 2032, I mean, it will be very hard to really pick a number. But this bank, we will have zero doubt in my mind that this 1.7, 1.8 kind of ROA, this is not a difficult thing for a bank with our economics. The real issue is that our true economics, which is a true incremental profitability of this bank, is getting clouded by the fact that all of you are looking at the whole thing, and you're not factoring for the fact that the legacy loses money, or capital loses money, or by the way, there are many products which are not called out to you because it'll become too complicated. There are many other business banking that launched.
Like I told you, we've launched so many. They're all in negative zone, but we have no interest in running business in negative zones wherever. They're just meant to become profitable, which is a matter of time. So every product is going to its own J-curve of loss to profit, and when they all come up together, it'll become it'll all come together.
Sure, sir. And then lastly, just on this compilation of operating expenses slide, the volume-related expenses and channel sourcing expenses, if you can help us understand what will be the contribution from the asset side and the liability side, if there's anything that you can share there?
Yeah. So sourcing linked expenses, channel sourcing expenses would be essentially from the asset side, right? This is cost for your DSAs, DSTs, business correspondence, and so on. The volume linked, largely, I would say it would be across, right? Because you could have for credit cards, the reward point expense which comes in, you could have the cashbacks and propositions which go along with the credit card. On the liability side, it could be the DICGC's premium. It could be IMPS, RTGS, NEFT, and so on, right? On the asset side, it could be the collection linked cost. It could be even like a bureau cost and all between credit origination. So it's across all of these verticals, I would say.
Sure. Sure. Thanks. Thank you.
Thank you. Ladies and gentlemen, we request you to please keep your questions brief. We have the next question from the line of Ritesh Bheda from DAM Capital Advisors. Please go ahead.
Hi. Hi. Good evening, team. Good evening, sir. Sir, just wanted to check on two-wheeler. In our slide also, we've shown that the industry is seeing some uptick in terms of 30+ DPD and asset quality issues. What is our sense? We have that as a large book, and it's a high-yielding, high-credit cost business as well. So what do you see there?
I'm not playing quite stably, but in this business, we all learned never to be too sure, so we'll be very, very watchful. We built a business. We built this business over the last maybe 10, 15 years, actually more 15 years than 10, 15 years probably. We've seen lots of cycles, so it's not behaving very well for us.
Yeah. Come to me.
Hello?
Bulk of the book in the vehicles segment, that's roughly at about 70% of the vehicles book. If you see the presentation, we have also given SMA1, SMA2 numbers, and NPA, right, at the vehicles level. So it has been holding up quite well. Two-wheeler has been growing quite nicely for us. We have a formidable market share here. We have been, again, invested in this business for quite long, right? So while we are quite watchful because of the economic environment, but we feel comfortable at this stage, probably in terms of the sourcing and the portfolio sort of which is sort of moving on this front. Hello?
So the current participant seems to have dropped from the queue. We will proceed to the next questioner, which is Mr. Piran Engineer from CLSA.
Yeah. Hi. Sorry. I probably got dropped off from the line earlier. So just on MFI, how much money can we expect back from CGFMU right now? Is it fair to say that since half the loans are insured, and assuming the same slippage ratio between the insured and the non-insured book, this should be the amount we get back?
Yeah. So essentially, today also when we have an NPA pool which has got piled up, this has some proportion which is out of the CGFMU portfolio, and there is some portion which is out of the old sourcing, right? So particularly on the CGFMU insured book, right, we would start getting claims starting from FY27, right? And the recoup of credit losses could be as high as about 70%, right, of the losses which we incur on the CGFMU linked NPA.
Oh, it's only up to 70%?
Yeah.
It's up to 70%.
So like 30% is sort of co-pay, is it? Is that how I have to think about it?
In insurance terms. So let's take it, let's skip two years ahead just for simplicity's sake so that let us assume 100% is insured.
Okay.
Let us say that 2028 you wake up and you find that credit cost in microfinance is 4%. So your credit cost at least the books will probably be 30% or 28%, we're more precise, 28% of that. If it's 3%, it'll probably be 1% will come to us, and 2% will go to CGFMU. It's like that.
Yes. But the policy which we have, we intend providing earlier, right, while the money generally comes within two years after the date of disbursement. Hence, I said for the disbursements which we started from January 2024, we expect the cash to sort of come in from FY27. So we would have provided to a great extent on these NPAs. So we could expect a recoup in credit costs in that year.
Got it. Got it. Fair enough. And just lastly, how are things on the credit cards front? I see that your NPA stable, SMA1 and 2 has improved quite a bit. Your comments on this would be useful.
Our credit cards are doing well. You could see our numbers. Our SMA1 and 2 credit cards has come down last quarter. It's come down from 1.69% to 1.32%. In fact, last three quarters come down to 1.88, 1.69, 1.32. So even on the NPA number.
Yeah. The NPA has come up to 1.91% vis-à-vis 1.95% in the previous quarter. I had mentioned in the call last time that on credit card, we feel quite comfortable because of various timely policy interventions which we had done. Sometimes credit cost in credit card on the book is marginally lower than the previous quarter. And we expect we have the view that this trajectory could continue. Okay.
Reason to get very disturbed when things are bad. We have one problem, and that's a known problem in MFI. It's not in credit cards.
Understood. Okay. No, because for the industry, it's been an issue. And since you all have now started disclosing SMA 1, 2 data, it was quite useful.
Yeah.
Yeah. Thank you.
Yeah. Okay. That's it from my end. Thank you, and wish you all the best.
Thanks.
Thank you. The next question is from the line of Anurag Mantri from White Oak Capital Management. Please go ahead.
Yes. Hi. Just one question on the credit cost ex and FI. So essentially, if I do the math for this quarter and for the last couple of quarters, it seems that the normal book ex MFI and ex infra that we had last quarter. The credit cost is coming more like 1.7%, 1.8%, 1.9%, right? The trajectory for the last three quarters as such. So just wanted to understand how you're looking at it because there has been a margin increase every quarter in that as well. Do you see the current level as more stable? Do you see maybe potentially some bit more increase? And if you can point to any reasons why this increase is happening in the last couple of quarters, that would be useful. Thanks.
Yeah. So on this front, the credit cost ex-MFI and the two-wheeler account, if you also keep it aside, for Q1, the credit cost was about 1.7%. In Q2, it was 1.8%, and Q3 has also come in at 1.8%. We feel that this could broadly remain in this range. Maybe it could be maybe 180–190, that kind of range. So we per se don't foresee this to materially go up, or it could marginally sort of inch here and there, right? So we feel quite comfortable on the rest of this book.
In fact, people often ask us because it's a concern because if you're an investor, you should worry all the time, so you should. Many people do ask, not just us. I've seen some television interviews on these business channels, etc., saying that, "Is the issue on MFI going to spill over to consumer credit?" and people do half an hour discussions on these things. Really, we are not seeing any spillover or anything like that. This is just a very rural. This MFI is a very rural kind of stuff. Within urban cities, there's no impact at all. There's no reason for any impact. So what is the question of spillover? Now, we're talking of rural. The microfinance is a very unique business as compared to any other business. What is unique about microfinance?
Microfinance is when the group of borrowers are coming together and repaying, when our people have to go to the customers or to a common venue and customers to come and pay, meaning we have no right to debit the customer's bank accounts for an EMI. Every other product we sell, we have a right to debit the customer's bank account, and we have to only deal with the returns that come. In MFI, the nature of business is different. We give the money on the due date to go and sit in the college or the school or somewhere and at a joint, and customer has to pay. So MFI is a unique thing. It's a unique thing behaving differently. It has its own behavior sometimes. It's only very, very MFI-focused things for us. Rest of the book, we said that before. I'm saying it again.
It's behaving well. I mean, in a sense, the entire corporate book is behaving well. Our retail book is behaving well. Our MSME book is behaving well. Business banking is behaving well. Credit card is behaving well. They're all behaving well. And you've seen the numbers. And let me just tell you one very, very important thing, which towards the closing, I'll share with you. We are giving you not just NPA or credit cost. These are standard. Of course, everybody should give it, and that's part of the job. We have, in our investor presentation and even otherwise, we are explaining our basis of lending. We are giving an EMI check bounce, EMI bounces. We are giving collection percentage efficiency on those bounces. Then next step, we're giving SMA data. Then we give SMA data by product. Then we give NPA data. NPA data, we give by product.
Then we give NPA data by product and by the four quarters that are stretched. Then we give vintage analysis. Then we give industry comparison, 30 DPD of our bank versus our industry. So the amount of detail we give is something. I mean, we're giving the full funnel to you. So it should not be difficult to estimate any number. And all our numbers reconcile. So it should not be difficult for you to realize that this is only a microfinance problem. Others are behaving well. All the numbers are there. In fact, if you went to page 13 to maybe 45, you'll find all the information.
And just to add, even into the next year, so as Vedya said, that on MFI, we expect the peak to sort of come in in Q4. And the credit cost should keep coming down into the next year every quarter. And for the rest of the book, we feel provisions could be very range-bound or more or less around this current levels, right? So which means that the overall credit cost is expected to come down for the next year with some of the pain on the MFI which we saw into this year.
Only as a caveat, just to be safe, because we're speaking and a lot of people listening to us, etc. Now, we have seen this, like I said, for a long time. I'm talking ex-MFI. I told you, we have given every part of the chain and funnel we've given to you. Publicly there in the presentation. Now, we have seen that every business has their own nature. They have their own credit cost behavior. If you do some product of all of that, you'll get a reasonable estimate of our bank credit cost. This is the 1.8% we're talking about. Well, we are human. We're running a business. So the 1.8% can become 1.9%. Maybe it can become 2%. Who knows? Maybe it can become 1.6% also. But it's going to be range-bound. It's going to be here.
It's not like I'm not saying, by the way, it'll become two tomorrow morning or something. But I'm just telling you that it is the range. It is never going to become; it's never gone completely off track because there is a certain credit criteria we lend to. We don't fiddle with our credit criteria. We have lent and we learned and we refine and we refine. So as long as you don't get greedy and you don't want big business and you don't want to get aggressive, etc., which you don't want to, it'll behave a particular way, and it is behaving a particular way. It'll behave a particular way because it has a particular cadence to it.
Got it. Thank you so much.
Yeah. I think it's quite a while though. Anything else?
Thank you. The next question is from the line of Anand Dama from Emkay Global Financial Services. Please go ahead.
Yes. Thank you for the opportunity. So my first question is on your OPEX. You said that 18%–19% of OPEX will go down to 13%. Any three to four key drivers that you see where basically you will see this kind of a cost reduction going forward?
Sorry to interrupt, Anand, but your line is not very clear.
Is it better now?
Yes. This is better. Request you to please ask the question again.
Sure. Sure. So basically, you said that your OpEx, which is about 18%–19% growth, is expected to come down to 13%.
It's not your answer. Yeah. Yeah. So essentially, the overall overarching theme is that we expect the operating leverage to play out, right, clearly as we move along into the next year. If you see, we have given some level of details, like if you see employee costs, right, that was growing at a much higher pace, and the pace has considerably come off. So even into the next year, we expect that employee cost percentage increase could come down, right? It's a combination of the number of employees which we foresee could sort of come in in terms of addition for the expansion which we are planning and so on, right? So we expect that the employee cost to taper down. Even on the non-employee cost, right, I'm saying there, as I said, there is some fixed component, and there is some variable component, right?
So there also, the fixed cost will grow in a particular trajectory. And the volume is something which is linked to the volume, right? Some of the examples which I can sort of give here, like we have said that I may grow the deposit to 25%. The branch may not come in that tandem, right? We may add about 75–100 branches into next year, which is 10% over the current stock. So clearly, some leverage sort of comes in there, right? Then your tech cost and so on, we have already done a lot of front-loading in last few years, right? So that could increase at a particular pace. So we feel that because a lot of expenses have sort of already come in, there is clearly an operating leverage or the proportion increase could definitely come down from the current levels.
And would that also mean that next year, our growth could be sub 20%? And that also, to some extent, will contribute towards this kind of a lower OpEx?
No, we are not planning to slow down the growth. I mean, like 20% of the loan and about 22, 23, 24 of the deposits. Because frankly, as you've seen for the last many years, we are good at deposits. If we wanted, we could grow 25, 27, whatever we want. But the need may come down next year. So therefore, about 24-ish?
Yeah. So we may require only 23%-24% kind of a growth on deposits next year for fueling a 20% growth on the asset side.
Our deposit is growing well already. We don't need very many branches. The short answer is, to Sudhanshu, should we prioritize some of it for you? On the loan side, on the deposit side, because deposit is one part of our expense, as you know, on that front, we are not planning to add very many branches because current branch architecture of about 1,000-odd is good enough to give us roughly the numbers we want. Of course, we think a little ahead. I don't want to be caught on the wrong foot for 2027 or 2028 or 2029. Just as insurance, we'll still go and put about 100-odd. But we are comfortable. And of course, we may tinker with the size of the branches.
We may reduce the size and put a little more, or we may increase the size and put a little less, whatever. But you get the drift that this is out of magnitude we're planning to grow. So let's call it 100. So if our current base is 1,000, it will go 100. You're going to add only 10% branches. But we are expecting book to grow by 20%+ . So that is operating leverage.
Thank you. Ladies and gentlemen, we will take that as our last question for today. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments. Over to you, sir.
I wanted to thank all of you. I think you've had a long time with us today, and we thank you for being with us for this long, and we do request you to think a little ahead. We've given you quite a few new things. I think for four years, there were no issues. Suddenly, we come with the MFI issue. We're feeling we are also feeling a little disturbed by that, so why we are surprising like this, and we are a bit unhappy with ourselves that after settling everything right, suddenly this MFI has come at us, and we are having to have this conversation, but we believe after this, we see the back of MFI. We are not seeing any major crisis other than that. Thank you.
Yeah. Thank you, everyone. Just to add to Vaidya, so I'm saying while we are seeing some top-line pressures which could come in, but clearly, we are working towards improving the operating leverage. And that's why the OpEx growth could moderate and so on. I also touched upon that provisions could be lowered on an overall basis. So we are very much sort of working on improving the set of numbers. And thank you for a patient hearing, and have a great weekend.
Thanks, everyone. Thank you.
And really, from all of us at IDFC FIRST Bank, if any of our employees are hearing this call, I wanted to just take the opportunity to say that you're building an amazing bank. Have confidence in yourself. In a long journey, things can happen in a quarter or two, quarter or three, quarters, but have confidence that we're building something amazing. Yeah. Thank you, everybody. And if any employees are hearing, that's for you. Thank you, everybody.
Thank you. That concludes this conference, ladies and gentlemen. Thank you all for joining us. You may now disconnect your lines.