Ladies and gentlemen, good day, and welcome to AU Small Finance Bank Q2 FY24 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Prince Tiwari, Head, Investor Relations. Thank you, and over to you, sir.
Thank you, Michelle, and good morning, everyone, and welcome to AU Small Finance Bank's earnings call for the second quarter of FY 2024. We thank you all for joining the earlier call early in the morning. As some of you may have seen, we made a major strategic announcement yesterday evening, and we appreciate that you all might want to hear from the management on the strategic thinking and the road ahead. We thus have tweaked the format for today's call a bit. After providing you with brief commentary on the quarterly results, I'll invite our founder and MD & CEO, Mr. Sanjay Agarwal, to share his thoughts on the proposed merger and the way forward.
In the interest of time, I have requested Uttam to kindly skip his business highlights for the current quarter, and post Sanjay's comment, we will straightaway jump into the Q&A session with the participating analysts and investors. Apart from Sanjay and Uttam, we also have few senior members of our management team on the call today to answer any questions that you may have. With that, let me start by sharing some of the key operating highlights for the quarter. The overall operating environment for the quarter continued to remain challenging, with uncertainties around geopolitics, interest rates, and inflation. We all know about it. While India looks quite good, overall festive demand holds, and consumption in the rural and urban looks quite okay, supported by government CapEx.
However, on the liability side, we continue to see competitive pressure amidst tight liquidity and higher inflation, leading to higher interest rates and persistent interest rates. In this backdrop, our second quarter performance remains consistent with the expected outcomes, and we are navigating the headwinds quite deftly. So some key highlights for the quarter. We onboarded 3.6 lakh new customers during the quarter, and our total customer base has now reached 45 lakh customers. We have crossed a landmark of INR 75,000 crore in deposits and INR 100,000 crore in asset book or balance sheet size, if you include securitized book. On our overall deposits, it grew by 30% year-on-year basis and 9% quarter-on-quarter basis, supported by a CASA growth of 6% on a quarter-on-quarter basis.
However, as I talked about, due to tight liquidity and higher pressure on the interest rates, with credit offtake, there is pressure in CASA mobilization, and our CASA ratio is down by 4% since March 2023. We are navigating the challenges and focusing on optimizing the liquidity and managing the cost of funds. We'll continue to lay strong emphasis on CASA and retail deposits. And one key thing we have changed during the quarter, we have created a new banking unit called Swadesh Banking, to maximize organizational effectiveness and focus on the upcoming semi-urban and rural areas to unlock the potential. During the quarter, our peak deposit rates increased by 25 basis points across savings and term deposits, taking our FD rate to 8%, the peak FD rate for non-senior citizens to 8% and peak savings account bucket at seven quarter.
Consequently, there was an impact on our cost of fund, which increased by about 12 basis points from the last quarter, reaching to 6.7%. On an average cost of fund for the first half of the year was 6.64%, which is 87 basis points more than the September 2022. While our costs have gone up, our overall yields have remained flat and this obviously has some pressure on margins. But what we'd like to emphasize is that yield flattishness in the yield is more structural in nature as we move towards a more credit cost lower credit cost business and more better risk customers on profiles. Our NIM for the quarter was 5.5% and 5.6% for the first half of the year.
Now, this changing mix, where we are moving towards lower-yielding franchise businesses like business banking, agri banking, home loans, will continue to put pressure on margins. As I said, it's structural. However, these businesses are also better credit quality and offer savings in terms of credit cost and operate OpEx vis-a-vis our traditional businesses of wheels and SBL. On the overall NIM, we continue to remain within our guided range for this particular year. Our advances growth for the quarter stood at 2%, and on a year-on-year basis, we grew about 24%. However, we did securitize INR 2,922 crore of loan assets during the quarter. Gross of securitization, the loan book growth stands at 5% on a quarter-on-quarter basis. 63% of our loan book is now fixed rate and 37% is floating.
Our fixed rate retail book will be advantageous once the interest rate cycle turns. A key thing to note is that we continue to see uptick in our disbursement yields. After increasing our disbursement yields by about 28 basis points last quarter, we have additionally, our disbursement yields have gone up by 27 basis points in the current quarter as well, taking the total disbursement yields up by 41 basis points over the last year half year compared to FY 2023. The wheels business, which saw a disbursement about INR 3,689 crore, the disbursement IRR was upwards of 15% at 15.06, an increase of 77 basis points on a year-on-year basis, and 48 sequentially. This is expected to help the margins in the coming years, as our lower-yielding book created during pandemic in some of these businesses starts receding.
Additionally, we have expanded our traditional SBL business to add newer products like business loans for micro entrepreneurs in rural and semi-urban areas, offering cash flow-backed loans without collateral and under the government guarantee program. We have also rebranded our SBL function as micro business loans, as is synonymous with the MSME growing requirements across MSMEs. The asset quality trends continue to remain normal and within the range. While during the quarter, the gross NPA increased by 15 basis points to reach 1.91%. Almost eight basis points of this increase can be attributed to the base effect due to higher securitization volumes of INR 2,922 crore during the quarter.
We assure you that this is our feedback from the ground. There is absolutely no pocket of stress in any particular segment or sector, and the increase in GNPA and consequent credit cost can solely be attributed to seasonality, and we hope to see a strong performance in the last quarter of this financial year, as has been the case over the last 20 years. Our quarterly slippages. We also get comfort that our quarterly slippage ratio has remained similar to last few quarters at about 2%. However, as we exhaust our contingency buffers, which were created during the COVID time, our credit cost has started to get normalized. We have a conservative policy in our unsecured lending, where we provide 100% on 180-day past due.
So some amount of increased credit cost is on account of write-off from credit card book as well, as that book grows and as is expected in the normal course of business. The PCR on the overall book continues to be at 73%, including technical write-off, and bank still has about INR 96 crore of additional provisioning or provisioning in the form of contingency and standard restructured assets. In a nutshell, we expect the asset quality to remain within our range, with no specific pocket of stress or any early warning signals. So far, with recovery expected in the second half of the year. Coming to our cost to income, our overall cost to income for the quarter was 61%, down by 4% from Q2, and we continue to focus on efficiency and head count efficiency.
Our cost to income ratios remains a key monitorable, and for the full year, we expect to be, to land somewhere very similar to last financial year. Our NII growth for the quarter was 15% on a year-over-year basis, and thus, net profit increased to INR 402 crore, an increase of 17% on a year-over-year basis. The resulting ROA and ROE stood at 1.7% and 13.9% respectively. The bank remains well capitalized with a capital adequacy ratio of 22.4%. The core PPOP growth, a key measure which has been monitored by analysts and has been one of the biggest concerns, has surged to 28% on a year-on-year basis and 20% on a quarter-on-quarter basis.
And this is supported by other income from credit cards and distribution of third-party products, and we believe that this is structural in nature and not a one-off. To prepare ourselves for our next phase of growth, we have also reorganized ourselves into five businesses group, which will support the existing SBU structure. The first one is urban branch banking, which will focus on catering to urban affluent market and customers. Second, as I said, Swades banking, which is, and clubbed with government and wholesale deposits, which will focus on rural banking, financial inclusion, and impact banking strategy. Small and marginal farmer lending and financial and digital inclusion has been embedded along with this Swades banking.
The third large group, which we have formed now, is retail asset group, which continues to have our key retail lending businesses, which is Wheels, micro business loans, and home loans, as they are all mapped under one umbrella for building synergies and leveraging benefits, as they share similar geographies, customer profiles, and behavior. Fourth is commercial banking, which continues to operate four lending books across business banking, agri banking, real estate, and NBFC lending. We are expecting that with the operationalization of our AD1 license by the end of this financial year, trade and transaction banking will be the newest addition to this group.
The last, which I believe, is the digital banking group, where all the digital business initiatives of the bank, like credit cards, UPI, credit card, QR codes, merchant lending, personal loans, video banking, AU 0101, have been brought under one umbrella and one leadership to align strategy and bring synergy under the leadership of Mayank. Notably, our digital products continue to scale. Our credit card business has now reached 700,000+ live credit cards, with monthly spends of INR 1,350 crore. Additionally, we opened 54,000 savings accounts via video banking. We went live with our Wheels origination lending system, in collaboration with Salesforce and FICO. So far in the initial phase, our STP rates on the car loans have gone to about 40% and decline rates have reduced by 50%.
In line with our philosophy of Badlaav Humse Hai, we did launch our new brand campaign, Soch Badlo Aur Bank Bhi featuring our brand ambassador, Miss Kiara Advani. This campaign was strategically designed to align our objectives of catering to evolving aspirations of our customers and role of women in financial decision-making. We also announced our partnerships with Max Life Insurance, Bajaj Allianz General Insurance, Bajaj Allianz Life Insurance, Star Health Insurance, as bank assurance partner to further strengthen bank third-party products offering to its customers. Among the key product launches, after the super success of Ivy Premium League banking program, we have introduced Zenith Plus credit card, a super premium metal credit card program offering luxury and convenience, accompanied by a range of exclusive benefits.
We also, on the World Sustainability Day, the bank became one of the few first banks in India to launch a green fixed deposit, fully compliant with the RBI's latest framework on green deposits, and this has been assured by CRISIL. We request all of you to kindly open green deposits and make your contribution to the environment. So all in all, we continue to focus on executing on our strategy for March 27, by emphasizing on building a brand, by providing complete suite of products, and gaining trust of all our stakeholders. Our latest announcement is a step in this direction, and will make us complete as a retail bank across products, geographies, and customer segments. To talk more about our announcement, I now invite our founder and MD and CEO, Mr. Sanjay Agarwal, to share his thoughts on the merger announcement.
Yeah. Thank you, Prince. Good morning, friends, and thanks for joining us early in the morning. Prince has already spoken about last quarter's performance. I strongly believe we remain on course in our business in terms of deposit growth, asset growth, people, and technology, and are putting our best foot forward to handle challenges, uncertainties due to macroeconomic environment. Now, I will speak about the transformative merger we announced last night. As an institution, we have come a long way from our humble background of being in NBFC to becoming the largest Small Finance Bank in the country. Throughout our journey, we have believed in our vision of becoming one of the world's most trusted retail bank, and have been governed by our dharmas, which are a true reflection of who we are and what we stand for.
Another institution which started its journey in a similar fashion and has built up, ground up, is Fincare Small Finance Bank. Fincare has witnessed remarkable growth while pursuing an inclusive business model, and created immense impact on lives of millions of people at the bottom of the pyramid. I'm absolutely delighted and thrilled to announce the coming together of these two strong, established, and well-governed SFB franchises, with a common charter of promoting financial inclusion. This is just not a merger of two entities. It is a union of shared values, common goals, and a vision for the future. This is an all-stock merger, with Fincare Small Finance Bank merging into AU Small Finance Bank, and shares will be issued to all Fincare Small Finance Bank shareholders as per the agreed share swap ratio.
The merged entity will have around 2,000 senior touchpoints, serving over 98 lakh customers through 43,000 plus employees. I want to share my thoughts on why this merger makes a lot of sense for our bank, and what capability it would, it would bring to the AU franchise. First foremost reason is around Fincare's extremely strong and experienced management team, led by Rajeev. The team has been around for many years since Fincare's NBFC days, and has shown remarkable resilience with balance, building the business from ground up. Fincare team have a deep understanding of the MFI segment, along with a strong connect on the ground, a trait which we share and value very highly. This has helped them face multiple industry-level challenges over the last few years. Second, second point is around the complementary nature of business, both in terms of geography and the product.
The addition of Fincare's touchpoint would accelerate build-out of our pan-India distribution network through doubling of touchpoints from 1,000+ to now 2,300 across 25 states and UTs. This would significantly increase our presence in South, where 49% of Fincare's touchpoints are located, and add significant presence in Tamil Nadu, Karnataka, Andhra, and Telangana, along with UP and Bihar. Post-merger, over time, we would convert Fincare's smaller MFI-focused branches into AU asset centers and expand product offerings. Merger would help diversify our product portfolio with access to rural impact and inclusion-focused MFI business and government. Let me first admit that I had a different view on MFI business previously. However, the industry has proven its resilience over economic cycles. It has emerged stronger with reforms and regulation and having faced multiple challenges over the years.
Promoting financial inclusion by catering to unserved and underserved segments of society was a key objective as an SFB. Lending to small and marginal farmers was a gap in our offering. Merger with Fincare would provide us this capability. Merging with an MFI on a bank platform made more sense from our perspective, given common regulatory and compliance requirement. Fincare is a well-governed bank with a strong board and market private equity investors. MFI has grown a CAGR of 32% over the last year, last 10 years, actually. The strong India has strong and widespread economic growth, and I believe that industry is poised for a sustainable growth and profitable in years. Hence, we took the decision.
Finally, in my opinion, Fincare has one of the most experienced MFI in the country, with a strong collection expertise and ability to sustain it over the years. Post-merger, MFI would be 8% of our balance sheet, and we would intend to keep it around 10% of our balance sheet going forward. We have also looked through our cyclicality, simply profitability and credit costs in the second half, and we believe MFI can sustainably produce ROI, ROA of 3.4% on a through the cycle basis, with credit costs of 2.2 to 2.5-3%. We will provision the business conservatively on through the cycle basis. Along with the MFI capability, we also benefit from Fincare's gold loan capability, which has grown, which has a gross advances of INR 1,100 crore and gained further scale in HLM micro business loan.
The merger also brings multiple synergy opportunities from funding costs and scale-driven cost synergies over time. This is not a cost cutting, but benefit that accrue from scale and reduction in future hiring requirements. Fincare has a strong IT team of 200 people and have developed in-house development capabilities around process digitization. This would further add to our tech capabilities and complement our strong customer-facing applications. Finally, I think Fincare's size is ideal in terms of integration, neither too small, nor too big to integrate. Rajeev will be appointed Deputy CEO of AU SFB post-merger. He will continue to lead the Fincare unit within AU. Additionally, he will jointly lead the IT and digital unit of AU SFB, along with me, to ensure smooth IT integration post-merger. Detailed plan of operational integration will be worked out post completion of merger.
We have onboarded Aon Hewitt to help us with the HR aspect of integration, too. As always, with M&A, there could be some challenges as we integrate the two businesses, but I feel there are more knowns than unknowns. In the end, just want to assure you that we'll make everything in terms of a better integration and smooth transition, so that, you know, we emerge as a very strong franchise in coming years. I also want to assure that we are absolutely on course, and remain confident of delivering our March 27 strategic agenda. Thank you so much. Good to work, please.
Yeah. So, Michelle, we can now open the call for question and answers.
Thank you very much, sir. We will now begin the question and answer session. Anyone who wishes to ask questions may please press star and one on their touchtone phone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking your question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Ladies and gentlemen, in order to ensure that the management will be able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, please rejoin the queue. Thank you. We'll take the first question from the line of Bhavik Dave from Nippon India Mutual Fund. Please go ahead.
Yeah, hi. Hope I'm audible, sir. Sir, two questions. One is on the merger, and, sir, you alluded to the thought process behind it. So sir, just wanted to understand a little more on how did you think about this merger? How long did you evaluate it? And also, sir, because we are at a size wherein we are, like, trying to build up our deposit, and we are growing very healthy at 25%. Was there, in the journey, isn't it too early to get into a merger, which takes time? Maybe the deal is really good in terms of size and geographical opportunity and the product that they are bringing in, along with the management team, which is quite strong.
But doesn't it, like, derail the process that the way we were going about things over the last three to four years, and adding 20,000 more people, very different culture, maybe? How do you think about it? And now, unsecured becomes a reasonably large part of our business versus the way we used to run a more secured franchise. How do you think about this? And second question is, sir, on the competitive intensity on our main business. And when we look at this quarter, the yields have remained quite stagnant, and we've, like, created a reasonable size balance sheet over the last three to four quarters as well. So is there competitive intensity that is leading to yield not getting passed on to the customer?
Or, if you could just throw some light on what's happening on the yield front, wherein the margins are, like, down to 7.5%. So these two questions, one on yield and second one on the merger. Thank you.
Yeah, Bhavik, so let me answer the first one. So, you know, as you know that we are, in my opinion, we are, one of that franchise which has become lot much stable, lot much, having a confidence in the last, maybe last six years. You know that our overall deposit franchise or asset franchise or digital franchise, overall governance, you know, everything remain in shape, you know, and I'm very happy the way we have built ourselves in the last six years. And, you know, there will be a in my opinion, in my journey of for entrepreneurship, you know, you can't time yourself, right? It is about the availability, it is about the opportunity of that time, which we need to understand and, you know, and decide, right?
As you know that, the overall objective of SFB is also to create an impact in the overall customer across segments, right? We were missing the microfinance as a subject for the last maybe 28 years. You know that, you know, I had my own stance around the MFI business and, of course, the overall unsecured piece. But, you know, we need to evolve ourselves, you know, we need to understand the risk around it, and we have seen that through cycles, you know, in the last 10 years... The MFI business has cost of around maybe 3% kind of credit cost, you know, including the one-off events every 5 years, right?
So I think if you understand that we being a bank franchise, we have a cost of an advantage. You know, Fincare is more of a south-based franchise. We are more of a northwest franchise, so it's complement, right? So it's complement in terms of geography, complement in terms of product. It's not, anything is not overlapping. And as I already commented that, you know, size is amazing, right? Because the size of Fincare is around, what? 20% of ours, right. So I think—I want to sum up that it is one of the most... I'm very excited and thrilled because it will add on to our product range, it will add on to our geographies.
You know, it is well-governed, it is bank, you know, and we as a team also have to learn how to do all this kind of integration, all these kind of challenges, how you should manage these kind of challenges, the communication and everything. So, and you know, you know that, you know, what we have already done over the years, you know, should give you people a confidence that this team has the ability to manage this kind of transition also. And, you know, of course, we haven't took not much time to decide this. You know, I started-- we all started understanding this business from last maybe two quarters.
I think I should give my team and the Fincare team the entire people who handled this transition so swiftly and so smoothly that we are able to announce in this month only, right? So that is there, but I think I would say that a lot, much around operation data we'll share, but I'm absolutely sure that, you know, AU team will deliver along with the Fincare team, maybe next six months, an amazing franchise which can last forever, you know? And so that's there. Of course, the overall competitive space remains, I would say more challenging in the terms that, you know, of course, there is a huge credit demand there, but there is an intense competition around deposit franchise.
Every bank is looking to build their own, you know, and we as a bank are also on the same course. We are also putting our best foot forward to raise money at a decent rate. But sometimes, you know, market doesn't allow you. And, but I think in terms of our product offering, communication, customer focus, ability, you know, so that is there. So, I think it's a testing time for us, and I strongly believe that we will sail through it. You know, there will be some couple of more quarter challenges. But in the long term, I strongly believe that we are on the course of our March 2027 agenda, where we believe that our first 10 years should be very noise-free. We should remain focused on our execution.
You know, we should remain on course in terms of achieving everything in terms of asset growth, asset quality, digital, digital franchise. So overall, I'm very happy the way we are building us. You know, there are little hiccups, but which we, we should manage it because it is beyond our control.
Right. But it's not like we've done. We've not been able to drive the assets higher. So my question was more on that. Is our competitive industry too high, or are we, like, like mentioned, we are going towards better quality customers, in fact, leading to yields dropping? Because I see every segment, our yields have increased on a YO basis, but the overall yields tend to not increase. So just on that perspective, if you are going to just summarize.
Bhavik, Prince here . Again, what we are seeing today on an overall basis, like as I said in the call as well, in the opening remarks as well, that we have been able to increase the disbursement yields in some of the core businesses, right? The vehicles have gone up by 77 basis points over the last year. Similarly, the SDL also, while we have not really been able to increase disbursement yields, but the profile is changing. I think fundamentally what you have to appreciate is the structure of the business, right? The commercial, the overall business, construct is changing a bit, and which we have articulated in earlier calls as well.
If you go back to March 2022, our overall lower-yielding businesses, which we have on commercial banking and home loans, which yield about 11%,11.5%, that used to be about 23%. As on date, as on September, it has now reached to about 31%. And consequently, there is a mix change that's happening in the business. The low- the higher-yielding businesses of Wheels and SDL or NDL are coming down, whereas home loans and commercial banking has gone up, gone up. But we have also articulated in slide 30 of Q4 FY 2023, that the lower yield doesn't necessarily mean a lower ROA, right? The credit cost in these businesses is much, much lower. The OpEx in these businesses are much, much lower.
To that extent, if my retail business gives me a ROA of about 3.8% on an advances basis, the commercial banking also gives us about a 3.3% ROA, right? And which is already there. One last thing I'd like to articulate is, even within the existing businesses like NDL and Wheels, like in Wheels, our personal car segments have gone up. In NDL, our ticket sizes have gone up post-COVID. So earlier, if you look at March 2021 data, our more than INR 10 lakhs ticket size, it used to be about 56%, and that's a lower ending book compared to less than INR 10 lakhs, where you have more options to price better. This book, we have now increased in the new disbursements as on March 2023.
71% is more than INR 10 lakhs, and lesser than INR 10 lakhs is only 20%. So what we also realized during COVID is the vulnerability of the customer who is over-leveraged and has a smaller business tends to be more risky as compared to, you know, people who have a higher borrowing and thus have a more second business, right? So I think structurally, you will find that our credit cost, which used to be about 1%, 80 basis points to 1% through the cycle, will now probably stabilize at about 50-60 basis points as we move forward. And that's also an impact of the. So while we are might not be able to increase the overall cost yield, but definitely there's a saving in the credit cost.
Last point that I will make on that is also the yields and SBL, mostly yields. Some of the business that we created during the pandemic time, because there was abundant liquidity, and that business did get created, because we were very cautious, the credit filters were too tight. We did create a business which was slightly lower yielding as compared to historically where we have been. And that book is ensuring that even though the newer disbursements are happening at a higher yield, that book will slowly start receiving now, and probably going into next year, we'll start seeing some uptick in the yield. So hope that comprehends, Vivek.
Yeah. Yeah, thank you.
Thank you. We'll take the next question from the line of Renish from ICICI Securities. Please go ahead.
Yeah, hi, sir. So just two questions from my side. One is on the, you know, the fee income part, wherein the general banking fee has seen a very sharp jump in Q2, you know, from INR 55 odd crore in Q1 to almost INR 150 crore in Q2. So can you please throw some light on what is driving this sudden jump in this income line? And whether this is sustainable or not.
So it's a sustainable business. Mainly, it's related to insurance, where we have the other insurance partners, and our insurance income, insurance business is also increasing, so it's a sustainable business.
Also, there is no... there's a credit card. If you see, Rinesh, the credit card fee, I mean, we have been saying this all along, right?
Yeah.
Almost for two years.
Yeah.
Yes, and this side, so I think, you know, this is well laid down strategy of last, maybe couple of years, where we have focused on our insurance business. We have really want to build a wealth proposition for our customers. We really want to build our credit card business. And as we move forward, you know, once we get our AD1 license, you will see lot much, other income coming in. And you know, and we know that, you know, once we get customer on board through our branch and franchise, we need to cross-sell them so that the relationship become more deeper and the relationship also become more fruitful, right? So I think as we move forward, and there is an, rationalization around the other industry also in terms of, the governance and the compliance, that is also is helping us.
You will see lot much, other income coming up, and it will be sustainable and more predictable.
Got it. Got it. So I mean, this quarter, there is nothing new which-
Nothing.
We have done. It is just the past investments has started giving good results. Right. Okay, got it.
We haven't sold any PSL also, so-
One off.
There is no one-off. You know, as we move forward, you know, post this merger, we will have an ability to have more PSL book, and then we'll have the ability to have more PSL income, too.
Got it. No, sir, actually, my question is on the one line item, which is general banking and deposit-related fees, which has gone up from INR 55 crore to INR 150 crore.
Which is where,
That captures the insurance income on that.
Yes, and it captures the cross-sell, third party distribution as well.
Okay. Okay, got it. And then secondly, again, on this, you know, the merger part, you know, so the employee addition is close to 20,000, you know, wherein I will say it is similar to our size as of now. So once we start the integration process, you know, there will be a lot of management bandwidth which will go into you know, this integration part, whether it is HR or tech integration. I mean, does that possess a risk of some growth derailment at the final entity?
No, I think good question, Rinesh. Let me address two things first. Like, you know, like Prince just announced that we already built five business units, you know, which is around urban banking, overseas banking, digital bank, retail asset, and commercial banking. You know, we have built it not yesterday, we are doing it from last six years. The whole purpose to build this business units are to bring more effectiveness, more focus, and the leadership itself takes care of their own bandwidth and their own agenda and their own commitment towards an overall organization alignment. I don't think that there would be any derailment because Rajeev and his team is also very capable.
You know, they are doing this business for last, what, now 20 years? And the more I meet them, you know, the more I get confident that, you know, this, this team has also not only performed in good days, I think this team has actually built their businesses through bad days and very low from lows of the industry, right? So they bring that resilience, that fighting spirit on table, which AU is known for. And I think we don't want to integrate them, you know, in the sense that it's a, it will be like a Fincare unit in a bank, which will take care of their own business. Of course, there would be some necessary alignment, right, around liability franchise or maybe, you know, around the control functions.
But I strongly believe that Fincare Bank will become Fincare unit, and they will continue to work as usual. So I think there won't be any such bandwidth issue with the business heads of AU. You know, of course, the back-end people, you know, me and, you know, the other leadership need to give them some time to have that belongingness, to have that communication, that coordination, so that it becomes a very smooth integration. And, you know, just for a data set, it's not about 20,000 people, it is about around about 15,000 people, and we are 30,000 people. So they are one third of us. And, you know, most of them, most of the 15,000 people, you know, maybe around two third of them are in MFI segment, which we don't have, right?
So, I think that is why I'm saying that it's more knowns than unknowns. Completely complementary in terms of geography, product, people, you know, and the way we have thought through, you know, you people will have, I know, the jitters and, you know, because of the track record of so many M&A. But I can assure you that, again, AU will build one of the... We'll try to build or we'll try to show that, you know, this integration, this M&A can be so different from the previous ones, you know? And that's our commitment, that's our commitment to ourselves. And I think me and Rajeev are bent upon to execute on those lines.
Got it, sir. Just, just last thing, sir, does this merger will you know will have any impact on cost, maybe over the next couple of quarters?
No, so I don't think that there would be any additional cost. You know, as, I commented that there would be some synergy, but it will be only in next maybe three to, maybe twe to three years. But I don't think there will be any additional cost. There will be one-off cost, like, you know, transition around, stamp duties, maybe a retention bonus and all those things, but it will be taken care by in... We have built it in our future ROE expectations.
Got it, sir. Okay, thank you from my side, and that's all, sir. Thank you, sir.
Thank you, Renish. Thank you.
Thank you. We'll take the next question from the line of Rohan Mandora from Equirus Securities. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. So, sir, if we look at AU Bank, it has had certain strengths in its business model, which has enabled it to deliver strong performance over the years. So I just want to understand, when you are evaluating this transition with Fincare, what, as per you, are the key strengths in the business model of Fincare, other than the complementary geographical presence and MFI book that comes in? So on the core business understanding perspective, is there something which differentiates Fincare? That is one. And second, sir, associated question here is that we have been following a continuous expansion strategy as we were expanding geographies. Now, with Fincare, while south geography gets added, but the product profile was relatively different.
So we probably don't have that understanding of the geography. So does this expansion will it take time to drive operating synergies, or how should one look at it from that angle? This was the first question.
Yeah. Should I reply now, or you want to ask second one?
Maybe you can reply that, and then I take second one.
Yeah, okay. Fine. So I think brilliant question. So, you know, I think you are, you're absolutely right that, you know, we have a long-standing position that we don't want to do microfinance as a subject. But, you know, we also have gone through our own evolution mindset in terms of, you know, what we should do or what we should not do on a bank platform, you know? And, you know, microfinance also has gone through all those ups and downs in the last, maybe, 15 years. But I think if you see now, the whole regulation framework, the focus, the kind of support the entire ecosystem is giving to this segment, it's tremendous, right?
And we as a bank also have to have some objective around priority sector norms, the inclusion norms, the inclusion impact. So I think microfinance is one format which can fulfill all these things, you know? So I think we, we changed our mindset that, you know, we have to look, re-look this strategy of not looking towards microfinance business at all. And, and, you know, last maybe two quarters, I commented that, you know, we really want to build more organically, and we started on that path.
But once I met Rajeev and the team in maybe two quarters back and, you know, and figured out their own experience around building this business from grounds up, you know, and this team has really managed a remarkable growth in spite of so many challenges over the years, you know, be it 2008 challenge, 2010 challenge, maybe around two thousand sixteen, 2017, and then, of course, again in 2020, post-COVID. But they have always become more stronger, and they emerged better from every crisis, right? So you need to have the best team to handle this kind of business, right? And that is- that remain our core in our whole ethos, right? It's people who matters, right?
And that is why if you see our journey, whether it's being in our credit card journey or a commercial bank journey or maybe retail assets, you know, we have done phenomenally well because we back people, right? So we as in bank sought and let's back people, you know, who has done so much hard work, who has a fighting spirit, who understand this business in and out, you know? And they have shown their entrepreneurial mindset to come up with some all those challenges, right? So I think first the business segment itself, and then the team which we are getting is tremendous, right? I think these are two things which, in my opinion, made us more in favor to merge the entity with us.
And of course, very complementary nature where, you know, they are more South, you know, they have the 49% touchpoint in the South, which we don't go naturally. You know, we need to understand people's psyche. We need to understand, you know, overall psyche of people who want to join us. It gives us in an easy way, maybe a foot in the door to understand those markets emotionally. And it's very important to understand markets and people more emotionally, because that's the way we operate in India. So that's one. Second thing, and third, I think they are banks, right? So they are well-governed. You know, there's a lot of transparency. There is a strong board, strong private equity players who are with them for the last maybe now 10, 12 years.
So they have shown that they can be with the company for maybe... It's a long, long time to be in a, for the private equity player to be in the company, right? So I think these are three, frour things, you know, which really impressed us a lot. And we pushed around, right? Because there was a lot of push from, on the board, both of the sides, that they really want to make this deal happen. And of course, I strongly believe that it is, the price is also very right. You know, they were generous from the, from the, the other side, that they accepted our offer. But I strongly believe that, price is also very good. And of course then, the size is not too big, not too small.
So, I think there are four, five things which we believe that is in favor to do this business. So very happy. Very happy. I know there would be some questions around the people, but we will answer it as we move forward, right? So that's one. And any other question?
Sir, sir, on the contiguous expansion, please.
Yeah. So, so that is there. So I don't think that we are changing our stance, you know. Rather, you know, we have around 130-odd liability branch like AU in, in Fincare, which will add on to our overall growth strategy. And we rather want to have more rational growth strategy at AU distribution now, because if you're getting around 1,300 touch points, you know, how we can leverage it? You know, how we, how we can make it more effective, right? How we can have the well-rounded distribution built around those centers, you know? So, so I don't think that... So that's why I'm saying again and again, that there are more knowns than unknowns.
We have gone through very thoroughly in terms of overall understanding and then want to build very, very patiently, you know? So I think the bandwidth issue or the cost issue or the things which we may not control, you know, I don't think, as of now, we are able to understand that. But and I'm sure that there will be none. So but small here and there, we should manage it, and we should learn also to manage it.
Sure. The reason I was asking the question is that, like, if you look at Fincare SFB, they have slippages that are around 7%, 18% and 7% in 2021- 2023. Whereas if you look at AU, historically, we have had category-leading performances. So nothing stands out as what I got as the initial feel in Fincare's microfinance business. So that's where I was asking this question. And second thing, sir, in the presentation, we have made a comment that the management continues to focus on seamlessly executing our strategy till 2027. So does that mean that we are comfortable operating as an SFB till 2027? How should we read that statement?
So those are one at a time.
Sure.
Again, I can only say you this, because it's difficult to comment everything so upfront, you know? But you know, we'll cross maybe now INR 1.25 lakh crore total balance sheet by next March. So the size and the scale and the width, you know, will allow us to take better informed decisions. What I'm saying is this, that, like, you know, just now, six and a half years of us, you know, we being in SFB, we had one agenda. You know, we have fulfilled that. You know, there are nothing as such, you know, where we should be worried about. You know, our asset quality is in amazingly well in shape. You know, our digital franchise now building up very well.
You know, of course, deposit franchise is not where things comes very easily, but we have well-rounded it through the other product range, you know, be it wealth, be it insurance, be it payments, be it credit cards. So I think, you know, we are, we are walking on that path where, you know, where the franchise will become a formidable force in coming years.
Yeah, and just on your point, Rohan, around the slippages, of course, we all know that the entire MFI industry has gone through a cycle, right? And the pandemic was relatively much harsher on them as compared to a secured, secured lending business. And that's what we have also factored in when Sanjay Ji talked about in his opening speech, that through the cycle, if you look at the MFI business, with adequate provisioning, you can generate a high decent ROE. So honestly, while one or two years, it is prone to even risk.
But the trick that we figured out in the last 10 years, given that it has become much more regulated, the players are much more accepted, the overall practices have evolved over a period of time, is to make a very consistent provision, even in good times, because that take care of you when the event risk strikes.
Sure, sir. Thanks.
... Thank you. The next question is from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.
Yeah, hi, good morning, Sanjay and team, and, congrats on, on the merger. Two questions I have, like, first is on the securitization. We, we have been going in for higher securitization this quarter, which is around INR 2,900 crore. So what is your strategy on the same going forward? And the second one is on the, stronger growth that we have reported in commercial assets, along with the securitization again that we are doing, how will, will that impact the PSL compliance? So if you can share some color as to where bank stands on the overall PSL compliance, and how do you see that, going forward with the strategy that you are adopting on the securitization front?
Thanks, Nitin, but I think I will ask Vivek to reply on this.
Yeah, Nitin, so again, securitization, as we have been saying, that it serves multiple purposes. One, obviously, it diversifies my funding profile to that extent. It helps me on the liability side, puts lesser pressure on the team, especially in an environment where the interest rates is high and, you know, we don't want to load up ourselves on the bulk deposits. So securitization obviously proves the way to generate liquidity. Second, it obviously frees up capital, I think, but that's not the main reason. I think the last point or the second part of the question is very apt. Where you said that the overall PSL. So our strategy this year is more to sell non-PSL as compared to priority sector assets.
And again, so far, whatever we have securitized, bulk of it has been on the non-priority sector lending book that we have. So that also helps me achieve a higher percentage of PSL achievement against the regulatory compliance requirements. So purpose is dual. One is liquidity, but at the same time also ensure that my PSL compliance goes up.
You want to add something, Vivek?
Yeah. So on the second question on the commercial banking assets, most of the business banking is retail banking, to the extent that 90% of our retail banking and almost 85% of our business banking assets are retail. The only book which is in, you know, financial institutional lending, NBFC lending, that's a largely NPSL book. And within the real estate also, almost 40% of our advances are actually PSL, because we lend to projects which are classified under affordable house. Is that right, question, sir?
Yeah, answer the question. Yeah, that, that answers. And then how do you see the overall loan growth, the on-balance sheet advances growth with the securitization approach?
I think we have already guided, Nitin, that for the full year basis, we are looking to see anywhere around 25%-26%, right? I mean, our overall stated range is live, stand is that liabilities will drive our asset growth. And we, when we speak with our liabilities team and given whatever we have been able to do in the first half of the year, of course, Q1 we chose not to grow our deposit because of the liquidity. But I think on the liability side, we can see that we can grow anywhere between 25%-30%, on annual basis, with the constraints around the cost of funds that we want and the kind of deposit mix that they want.
So that basically will ensure that we should do our asset business anywhere around 25%-26%.
Okay. So that basically is not changing, because if I look at over the first half, we have grown around 10, so we are looking at a 15% growth in the second quarter, second half now, broadly around that.
Around 11%. 11%, yes.
Yeah, yeah, got you.
You're absolutely right.
Yeah. Right. And Sanjay, one more question-
Assets we didn't securitize.
Got that. And one more question that I have is on the universal banking license plan. And so now after this merger, where... what are our thoughts on that? Will that get deferred? And any like comments around that?
Nitin, again, I repeat, one at a time, you know? So the idea is to, to very honest, idea is to really, build a bank with, all-round capabilities, right, you know? So I think universal is one word, you know, which is just comes, in every discussion. But if you see AU, maybe in, in April 2024, you know, you will see, you know, with around, 30 product lines, you know, and with the cross-selling ability of wealth, insurance, AD1 license, that means FX, you know, the payments, the entire credit card, UPI code.
So I think I would sincerely believe that, you know, we should be viewed by the people as us, you know, that we have that all-round capabilities in terms of product, in terms of customers, you know, because once you start microfinance, you know, it will add on to our customer range, which haven't served at all by us in last maybe 28 years, right? So I think the kind of width, the kind of, I would say depth we are building us, you know, building our franchise, it's very good in my opinion. And then, of course, once we settle down, we will look for, you know, the next thing, you know, but I would only say that as of now, one at a time.
All right. Sure, Sanjay. Thanks so much. Wish you all the best.
Thank you, Nitin. Thank you.
Thank you. The next question is from the line of Anand Dama from Emkay Global. Please go ahead.
So thank you for the opportunity. Sir, what is the reason for the INR 700 crore fund increase in Fincare SFB? Is it more to do with that basically you want some cleanup act before the merger happens?
No, Anand, you know, I think everybody knows that, Fincare was about to launch their own IPO, you know, and they were, they were supposed to raise capital and, and they're high leveraged in that sense. So, and they- and, you know, merger will take some more time, right? You know, it is not happening today, tomorrow, right? You know, so and they need a capital for their own, business as usual, right? So their own team has, or their own, investor has committed, to the team that, you know, they will put this money and, and we accepted that, right? So it's that simple, in my opinion. Yeah, and, Anand, on the GNPA side, again, on the cleaner part, the book is already fairly clean.
As on 30 September, this is the audited financials, the gross NPAs are in the range of 1.6%. If you see, over the last three years, or at least last two years, definitely, they have written off a lot of COVID-related NPLs. In fact, this is whatever interactions we have had and the due diligence feedback that we have got, they have been recovering almost, you know, quite a decent chunk out of that written-off portfolio. The expectation is they might be able to recover more than 10% in the current financial year.
But, you know, basically, the existing limited kind of issues also basically had its own issues, you know, when it was merged. So just wondering, basically, you know, if this is true for the supplier, which is between them. So secondly, what will happen about, on the holdco structure, whether the holdco will exist, for the SFB? And secondly, what is your view that, you know, RBI would take, particularly given that we are acquiring a very healthy, SFB?
What's the second question? The RBI view? Sorry.
RBI view on acquiring a healthy SFB.
Healthy SFB. Okay. No, no, no.
Yeah.
So I say thank you for this compliment, you know. So that, that's not the whole purpose, because we strongly believe that this is a very healthy, very well-established, well-governed SFB and we would go to a regulator to really allow us to do this, you know? And so but we strongly believe that the kind of complementary position we have to each other, you know, the regulator would be, I would say, would see would only support this, but it is their own decision, but we will put our best foot forward to convince them. So that's one thing. Second, on the point that you made around past merger between Disha and Fincare, I'm guessing that's the question.
Yes.
Now, holdco. Yeah, holdco. So no, I think, I think, I think the holdco structure, I think that is their own decision to be made once we get to that level. But, initial understanding is that the holdco investor will get the shares of AU by liquidation. But I think they will take their own decision, so it's early to comment as of now.
I was just wondering about, you know, if RBI would take any objection to the merger, because, you know, there is an acquisition of a healthy SFB, whereas RBI has given a license for these entities to operate separately.
No, there is no acquisition. It's a merger.
Sure. Yes, yes.
Okay.
Sir, any concerns that you feel in terms of integration that would come by and any integration-related cost that you see?
Not much, Anand, because, as I already commented, that it is... They are more south-based, bank, you know. We are more north and west-based bank. Like, you know, 10,000 people work in, work in MFI business, which we don't have, so that they will continue to work with us. You know, the complementary, the, the function which, which maybe have a similar kind of job profile would be not more than 100. We need to sit together to understand those things and how we can align them, them also with the overall strategy of the bank. In terms of tech integration, you know, as you know, the bank is not that big, right? The deposit base is around close to INR 10,000 crore, you know, and we are working more on Oracle and all those things.
So it is more of a now, now API-led integration. So that should also help us a better transitioning there. And also in that sense, and they are well-governed in terms of the overall inspections, overall umbrella of regulators, so that is there. So I think I. That's why I'm saying there are more knowns than unknowns. You know, of course, M&A will throw us some kind of challenges as we move forward. But as a team, you know, we need to have that that kind of mindset that, you know, we will understand those challenges. We'll sit together and try to resolve it, because the common interest is now one. You know, the common interest to really build one of the finest retail franchise for this country.
Sure, sir. Thanks a lot and best wishes.
Thank you, Anand. Thank you.
Thank you. The next question is from the line of Umang Shah from Kotak Mutual Fund. Please go ahead.
Yeah, hi. Good morning. Thanks for the opportunity, and congratulations to the team for this strategic merger. Sir, a couple of questions. One is on the shareholding of Fincare Small Finance Bank. Now, we do understand that there are quite a few private equity players, both at the holdco level as well as the operating bank level. As per the DRHP, they, some of them have expressed their intent to pare some of their holdings as well. So as a part of the merger agreement, is there any lock-in for the existing shareholders for of Fincare SFB or the holdco? Or how does that work?
... So, Umang, as you rightly said, there are private equities, but they are all at the holdco level, and holdco owns about 80% of the bank, and the merger is between the bank, and the holdco is not a part of the entire merger process. And hence, we will be issuing shares to the holdco. And as Sanjay said in the earlier question, the holdco doesn't. It's a non-operative holdco. They don't have any other assets, so it's up to them to decide.
But our understanding is that even if they go for distribution of this asset or the shares of AU to the underlying investors, they'll have to go through a dissolution or liquidation process, which will take, you know, I mean, who knows how much, but, it's, the NCLT process is expected to take a longer time. So we don't really expect, expect a lot of liquidity, you know, and,
Of course, I don't think that there is one of, you know, investors holding a large chunk.
Yes.
You know, it's well distributed, right? And just all put together, they would be taking around 10%, right?
Um, hmm.
You know, if they have maybe around 20 investors, so the average out holding wouldn't be more than 1% each, right? So other than one or two, right?
Um...
Yeah, so-
And, and-
Yeah.
Also, we have some investors there who are common, you know, and they would like to probably hold on because they already hold AU. So we don't really see a lot of liquidity flooding the market, you know, over the next at least 15-18 months.
Understood. And sorry, just one clarification. The share swap will work in the same fashion for both the promoter entity shareholders as well as some of the public shareholders, right?
Share swap is for all the shareholders, including the ESOP holders.
Got it.
It'll work at the same ratio.
Understood. Sir, the second question is, again, in part, Sanjay's already kind of answered it, but typically the way we have seen in mergers, now, we do understand synergies will take some time to kind of show up. But are there any one-off costs which we are foreseeing at this point of time, which can hit us maybe in next 6-12 months?
Okay. Yeah, so, by one-off, do you mean sort of integration costs, or, I mean, is this deal-related or, or some other, business-related aspect?
I mean deal related, and again, to the point on asset quality, which Prince and Sanjay answered earlier, but I mean, if you look at the headline NPAs and credit costs of Fincare are relatively higher compared to AU, so maybe one-off expenses or stuff like that?
No, so as I said, among the Fincare, again, during the last two years, they have provisioned a lot and written off a lot of book. In fact, they are seeing recovery from that book. So to that extent, they in fact also did a ARC transaction last quarter to sell some of the legacy NPLs in their secured asset book. The microfinance book is already pretty clean. They have a net NPA of about 0.6%. So to that extent, we don't really think there'll be a lot of provisioning requirements. Their policy on provisioning and write-off on unsecured book continues to be as stringent as ours.
They write off their unsecured book at 180 days or provide 100% as 180 days. So we don't really see any major, material, you know, provisioning coming to our book just because of the change in the mix. In as far as the integration and other costs are concerned, of course, as Sanjay alluded, there will be some amount of transaction-related expenses around stamp duty and other things. But that, that's normal in nature. We don't really see a lot of integration cost because the businesses, as we said, are very complementary. You know, the MFI business can continue to run as a MFI business because we don't really have it. Some of the other businesses are very complementary around the affordable housing finance and around the entire small business loans.
So, to that extent, we are not really envisaging a large integration cost. Whatever, minimal that might come in because of system and other things, has already been baked into our ROE profile, as Sanjay said.
Perfect. Perfect. And just one last data point, the 9.9%, post-swap equity, which the existing shareholders of Fincare SFB will get. Does this include the INR 700 crore capital infusion by promoters, or that would be over and above this?
No, absolutely included in that.
Okay, so this is a fully diluted one?
Absolutely.
Okay, perfect.
Including the ESOP holders.
Okay. All right, great. Thank you so much, and wish you all the best.
Thank you.
Thank you. The next question is from the line of Santanu Chakrabarti from BNP Paribas. Please go ahead.
Hi, thank you for the opportunity. Two questions really. One relates to the merger, and the other relates to your own business. The first question related to the merger is, one of the calling cards of AU, even in its existence as NBFC, was that even while it was present in high end and, you know, smaller customers and so on and so forth, it was always able to deliver NPAs and credit costs which compared with the best-in-class bank, and, you know, there and thereabouts, something that very few other companies have managed. And we know the stories around how Sanjay himself was so focused on, you know, the credit culture of the company should remain pristine....
So in that context, bringing in an MFI book, where, you know, as you guys are yourself admitting that every three to five years, there seems to be, you know, occasional, meltdowns. That is the nature of the business. While it's profitable in good times, it is also susceptible to large drops in sporadic years. How does that fit into your credit culture of where every rupee must come back that goes out? That's my first question. And how do you maintain that sanctity across the organization with this new kind of business coming in? And the second question relates to, you know, your segments of wheels and MSME. Now, we have been talking about this.
What I want to understand is that, you know, if current cyclical concerns around a lot of new entrants, et cetera, are holding you back a little bit in terms of higher growth in the high-end segment, when do you expect that to turn? How much of this is a cyclical concern versus a structural concern? Because if I look at the opportunity headroom that you still have, even in existing geographies, including that effect, I mean, that seems to be high. So, you know, at what point do you see that turning? And, your thoughts about this, does this change basis what is incoming?
A follow-on to that question: now that the book composition, the loan book composition is changing a little bit with microfinance coming in, et cetera, what are you revising your own thoughts regarding what you consider as leverage threshold for the overall balance sheet? Because that is so critical to your dilution timeline. You have been doing in excess of ROE, and it's, and therefore, there's been an opportunity to make your compounding even larger. Investors have benefited from it. Do these thresholds change? Do the dilution timelines change? This is the evolving new parameters within the broader loan portfolio. These are my questions.
So, thank you, Shantanu. You know, thank you for the kind words. So I will answer the first one, because that's very important that, you know, we always discuss that, you know, why AU should not be in the microfinance business or in such unsecured profile. But again, we'll say that, you know, the world has changed dramatically over the years. The whole economic segment has changed dramatically over the years. Whole, loan profile, the segment also has changed, in India, too. We have got lot much data available now, you know, and as you would have seen that why we started credit card, why we started personal loan also, that it makes your, banking franchise complete.
You know, once if a customer is there, and if you don't offer them credit card, if you don't offer them personal loan, you know, they don't feel that you are, you are complete as a banking franchise, right? So I think sometimes it's driven by the, the customer needs, driven by, the customer's, overall expectations from a banking franchise. And, and, you know, you also have to believe that the team has done tremendously well over the years to understand the risk and understand the execution capability around, even around the difficult product like Wheels and MSME. Those products are not easy, right? But over the years, we have built the, the overall, I would say, the, the process, the policies, the overall culture that you know, how we should lend, how we should collect.
You know, that is why I'm saying again and again, that once I met Rajeev and his team, you know, and, and saw their tremendous capability to work under pressure, work under uncertainties, you know, coming out through those time when nobody was supporting microfinance and to remain there, right? So I found that they also come with a similar kind of mindset, which we have also performed over the years. Microfinance, of course, is not that secure product, but nowadays, you know, by the overall credit culture coming in the country, I think that those segment is also now addressing to the need of the hour. You know, there's no habitual defaulters, there are no over-leveraging. There's lot much compliance has come in, there's lot much clarity on the ground and all those things, right?
So I strongly believe that by virtue of these changes, and by virtue of bringing teams with so much of confidence, so much of vintage, so much experience, you know, and again, the overall attitude of AU as a team that we won't lose our money, you know? You people need to support us for some time that, you know, we at AU, you know, might change this whole perception also that microfinance is a risky business, right? And, you know, of course, it has its own risk around credit loss, and that is why we are saying that we will provide adequately. You know, we don't want to say that this year the market is good, then we just won't provide anything, right? So I think as we move forward, you know, we will sit together and want to understand the whole cyclical challenges.
Of course, we want to provide adequately. I just want to reassure you that. I don't think that it will create an unnecessary challenge on overall bank's continuity or bank's overall approach towards business. You know, it will be just around 10% of our overall book. It helps us to add on one more customer base. It helps us to get, you know, the private sector requirement, you know, because you know that we aspire always to have a very sustainable business model. I think this will add on to all those things. I think the overall character of AU in the sense that we should have a very predictable asset quality, will continue, will continue. You know, I can assure you that. Of course, I know that this has its own.
Challenges are different challenges, but I believe that because of our experience, because of the way we have taken the calls, the way we execute ourselves on the ground, should help us to maintain similar kind of business as we move forward, right? And so overall, I would say that business will evolve because that's the way we should be. Because, you know, if you go back in history, you know, when I started, it was only wheel business, then when we moved on to we started HBL, you know, which was not heard in the industry, then we started affordable housing again. So every time we have done something new and has proven that, you know, has proved that we can very well understand the whole business from the grounds up, and it can execute very well, right?
So I hope that this time also the story won't be different, and we'll go on the same path. Mm-hmm. Okay, so you want to add on? So Shantanu, I have forgot your second question, so when we agree.
Yeah. The second question related to, you know, the core HBL, MSME, and wheels business little bit of slowdown, how much of that is cyclical and structural? And also I asked that, you know, given that the asset mix on a blended basis is changing a little bit because of the acquisition, how does that impact what kind of leverage thresholds you are comfortable with? Does that change, and therefore, how does it impact your dilution timelines? These have been so value specific for us.
No, no, no. I don't think, Shantanu. So I, I will allow, I will ask Bhaskar to comment on our HBL and other business, but I'm, I'm not able to understand this dilution piece. We've been continuing to get the market a bit here.
So typically, Bhaskar, whenever you grow-
Capital, right?
Yeah, yeah.
We will be getting around close to 2,400 network. So it will allow us to leverage maybe another one more year on this money. So but, you know, it's very. Again, you know, our stated requirement that we don't want to go below 18% kind of capital adequacy. We don't want to grow more than we don't want to leverage more than eight times. So I think it all, the max will be around this. We'll go and raise more capital, right?
Right. So Bhaskar, I'm asking, is any of that changing because of the-
Nothing, nothing, nothing, nothing, nothing. Yeah.
Yeah. Hi, my name is Bhaskar. And just to answer on both, wheels as well as the HBL business, both continue to be on track. It is just a matter of getting our, rate adjusted to the cost of fund. And that is the only one reason, because we also do know during the festive season, we have to come be a part in the marketplace, it gets competitive, and hence, we have been building our rate buffer on both the businesses. Otherwise, by design, by structure, by people on the street, we continue to remain, the entire team continues to remain there on the street, and we are, doing whatever is in our plan for the year. So, truly nothing to, no mistake, no mistake. It's all, going as per plan.
So, Bhaskar, basically what I'm asking is, see, in this year, these businesses, these core businesses have been doing very well for you. And obviously, as you have also highlighted, and it's clear for us to see, there's a lot of headroom there in terms of opportunity for you to sustain long-term high growth. I understand that because of increased competition, you have to hold back a little bit, as a lot of NBFCs, small finance banks have entered, right? And probably not with as much experience as you. What I'm trying to understand is, at what point do you see that cycle turning? What are the evolving realities of that competitive space, if you will?
So, Shantanu, yeah, Uttam here. I want to add here that it's not that we are holding ourselves because of competition or because of competitive match. It's a function of rate, you know. As Bhaskar has said that, our cost of fund are little bit elevated because of our deposit franchise, as we all know in the market. So it's a function of rate for us, and we are, we, we are already funding at 15%, you know, on a, on a mix of used and new and tractors and two-wheelers. My HBL business is around 14.5%. My housing is around 11.5%.
Right.
As you already said, that there's enough headroom, even in Rajasthan and all the geographies we operate, but we are just holding ourselves because of the function of rate.
Uh.
Because enough, enough potential in our present operating geographies, but because of rate only, we are holding this. Otherwise, we can have any, any number of growth and any number of opportunities capturing in these markets. So just as, as, as the cycle rates gets evolved, gets slowed down, because the franchise is there, we are there to catch on all those opportunities. So it's not because of competition on that. It's our own vision, our conscious approach of towards our growth, yeah.
Shantanu, I hope that answers your question?
Yes, thank you. Thank you for the opportunity.
The next question is from the line of Param Subramanian from Nomura. Please go ahead.
Yeah, hi. Thanks for the opportunity. Most of my questions relating to the merger have largely been answered. So just a couple of questions. Firstly, on this securitization, which you have done, you know, large amount of securitization in this quarter. So you've also had a very strong deposit growth, right? So could you just explain the reason for the securitization? Your CD ratio has come down, and I'm also seeing the NIM has come down, you know, quarter-over-quarter. So you know, you explained that securitization is helping you on the liquidity front, but I just wanted to understand, you know, how you're looking at it from the perspective that you... You know, despite having a strong 9% quarter-over-quarter deposit growth, you know, you had to do such a large securitization.
That's the first question. I'll come back to the second.
... Yeah. So you know, my friend, you know, we, we actually plan ourself for whole year basis, right? So again, I, I'm- I want to comment that, you know, because, it is, it is, it is not that, it will be available maybe last quarter, and then we need the money, right? So I think we as executive need to take decision day in, day out to really see our sustainable growth. And, you know, if you're doing some transition in the month of September, like, you know, what Prince commented, it was non-PSL. Non-PSL, a better rate, you know, may be offered you in September only, right? So I think it's based on those, businesses requirement, which we take decisions.
Sometimes it doesn't look nice on the balance sheet as such, but, you know, like you're saying that we grow our deposits so well, and so why we need to securitize it. But, you know, we, we can presume that, you know, next six months, you know, there will be more intense competition around deposits, right? And the cost may go up, right. So we need to be more smart enough that, you know, what is good as of now, and we need to take kind, that kind of decisions. You know, sometimes it, it goes well, sometimes it goes wrong, but that's the way the life is. So I think that's the one thing which we need to appreciate, that whatever we have done over the years, you know, that has helped AU to become more formidable, more stronger and more, more sustainable, more reliable, right?
So that's one thing, right, which I want to say that, you may know, it's very small decision making, which we take every day to remain relevant and to remain sustainable, right? Yeah, that is one right.
No, just on the LCR point, again, Param, as we had articulated earlier, last quarter, we had abundant liquidity, and it was a very conscious strategy to consume whatever excess liquidity buffers that we had. So-
Yes, yes, Param, so what Phil mentioned, because in first quarter we had excess liquidity, and we decided that we will not grow our deposit much. But this quarter we are on average, average 125% LCR. So it was mix of our decision that we will go for some securitization. This, this quarter, we didn't have any PSLC, so it was mix of some deposit rate and securitization.
Yeah, I get that. Just, on this again, so your loan book has just grown 2% quarter-on-quarter, right? But your deposits have grown 9% quarter-on-quarter. So does that imply because if the average LCR has come down, does that imply that most of the deposits were back-ended? Because I, I still don't get how the LCR could have dropped, quarter-on-quarter.
No. So again, Param, as to two, couple of things, okay? The first is the entire securitization is typically back-ended, right? So most of the liquidity, in fact, you'll start seeing in the next quarter, right? Because you end up doing securitizing generally as a quarter end transaction. That's the way the market works. As far as the entire LCR is concerned, if I mean, if we had higher deposits, you'll also appreciate that we didn't have any deposit growth in Q1.
Yes.
So to that extent, the Q1, the quarter to deposit growth at 9%, it cannot really be back-ended. And we have also given the monthly average numbers as well. So you'll not find a lot of variation between the month-end numbers or the quarter-end numbers and the average numbers for that particular month. It is given on the slide on the liabilities.
Got it. Got it. Fair enough. My second question was on the credit cost. I think, in your opening comments, you had mentioned something about, you know, the credit cost, you know, some amount of the credit cost being led by the unsecured segments. So now that we are at this, you know, say, credit cost level of the 80 basis points, maybe, you know, X of the contingent provisions we reverse 90 basis point of credit cost this quarter. So sustainably, how do we see this number, you know, evolving going ahead? Yeah, that's it from me. Thanks.
So I don't think it is 90 basis points. Again, there is a base effect, as I said, you know. But having said that, it is about 60 basis points for 50 basis points for this particular quarter. And on the mean reversion basis, we are saying that it could go anywhere around 60 basis on a more sustainable number, yeah, rather than 20 or 30 basis points that we have been seeing in the last year. The credit card accounted for INR 30 crore of write-offs this particular quarter.
Okay. Okay. And are we comfortable on that book right now, with the INR 30 crore write-offs or?
Yeah, yeah, very comfortable. I think we, I mean, we understand that it's a, it's a business which has some amount of inherent risk, and to that extent, our provisioning policies and write-off policies take care of that. Mayank, you want to add anything on that?
So, on the credit card book, we are quite comfortable on this piece, because we normally provide write-offs at 180 DPD, so that's the reason. And the book is growing, and it's a 2.5-year-old book, so we are getting the seasoning now. Maybe another six months, we'll be as good as any other industry player, competition numbers. We'll be there at the NPA numbers. Our book will get seasoned in the next 6-7 months.
Yeah, I just want to add on here, Sanjay this side, that, you know, we run a model for every product side. So wheels will have its own, the main and of course, the own, credit cost, and vis-à-vis commercial banking will have its own. As we move forward, microfinance will have its own, credit card will have its own. But I think overall, we always believe that any asset which gives us a north of 2% ROA, we really want to concentrate and want to build from there, right? So, I think you will find that, you know, maybe on a credit card, our NPAs around maybe 3%, right? Or 4% in credit card, in microfinance also.
But overall, I strongly believe that every business in next, next, by March 2027, you know, will start giving you north of 3%, another 2% kind of ROA, you know. So that's our basic principle. I just want to put on the table, right? They might have their own names, they might have their own credit card, but that's our overall principle, right.
Thank you, sir. Yeah. Yeah, yeah. Thank you, sir. Thank you, sir. Thank you so much. I just wanted to understand this, INR 30 crore, is this something that is recurring, that you see will be recurring going ahead, write-off? Because if I look at that number on an annualized basis on the credit card book-
It is credit card, INR 30 crore write-off.
Yes, yes. So, so, if you see in last, we have been growing by INR 500 crore book, every quarter now, in the next two quarters, you'll see that. INR 400 crore, we have already grown in the past, six months. So it'll be, it'll be INR 30 crore will be thought of, which will get, it will be in line with this only. Okay, operator, sorry, we are, I hope we have answered your question, Param?
Yeah, yeah. Thank you. Thank you so much, Sanjay, sir.
It's INR 24 crore, not INR 30 crore.
Twenty-four crores.
My bad, Param, it's INR 24 crore, not INR 30 crore.
Okay. Okay.
Overall, it's INR 30 crore.
Yeah.
Okay. Operator, in the interest of time, can we take one last question?
Sure. Ladies and gentlemen, due to time constraint, this will be the last question for today, which is from the line of Manish Shukla from Axis Capital. Please go ahead.
Yeah, good morning, and thank you for the opportunity. So firstly, Rajeev and his team, which will join AU after the merger, is there a tenure lock-in for the team to stay with the bank?
No, nothing like that, because it's more basis trust, it's more basis that, you know, we want to work with each other, right? So I think that bonding is far, far better than, you know, any kind of documentation bonding, because those are very highly experienced team, you know, and Rajeev is working as a DC of a bank. So we expect that, you know, he should be, he should be given the same treatment, same respect. And we really want to make it a very happy merger, where people come voluntarily, you know, for the common cause and put their effort.
But overall, yes, because we have appointed Aon Hewitt to advise us on a better integration, because people will have their own choices, people will have their own mindset, but the challenge will be to really how quickly we can align them. But I strongly believe the way we have built assets over the years, where people really have mattered us most, and we will continue to do that, you know? No, no, no, no forceful kind of agreements, but very high on feeling kind of agreements.
Sure. The 700 promoters would infuse, will it happen at the same valuation that AU is paying?
Yeah, same, same. Everything remains same, right? Yeah. Yes.
No, I'm saying the INR 700 crore, which they'll pump into the bank before the merger, that will happen at the same valuation for Fincare as you are paying for the bank.
Absolutely. Absolutely, Manish.
Okay. In terms of profits for Fincare, first half is INR 220 crore. Last year, full year was INR 100 crore. Are there any one-off in first half this year?
No, no, I think last year was more... They were still continuing to write off or clean up the book, which was post-COVID. And, this year, the normalized operations have come in. So you can actually take the run rate of the first half year as a more normalized run rate as compared to, what happened in the last year.
What would be the proportion of recoveries in this INR 220 crore?
120 crores... Sorry, INR 120 crore PAT, you're saying?
INR 220 crore first half profit, right? INR 219 crore.
20 crore first half PAT? Okay.
Yeah. What is the recovery number in that?
They are recovering about INR 10 crore every quarter.
Monthly.
Monthly, sorry.
INR 10 crore monthly.
10 crore monthly. Okay, so about INR 60 crore of this could be-
Before tax, right? INR 60 crore before tax.
Okay, understood. That's clear. Thank you. Those are my questions.
Yeah.
Thank you. Ladies and gentlemen, as that was the last question for today, I would now like to hand the conference over to the management for closing comments. Over to you.
Yeah, thank you, Michelle, and thank you everyone for participating. We really look forward to this merger. We have really hard on this in the last quarter, and it was very exciting and a lot of learning experience for the whole team, including myself. We look forward to your support. Give us an opportunity, and we'll not prove you wrong. Thank you so much, and if you have any residual questions, you can always reach out to the investor relations team. Thank you.
Thank you, members of the management. Ladies and gentlemen, on behalf of AU Small Finance Bank, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.