Ladies and gentlemen, good day and welcome to the Bajaj Finance Q2 FY 2020 earnings conference call hosted by JM Financial. As a reminder, all participant lines will be in 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 touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Karan Singh from JM Financial. Thank you, and over to you.
Thank you. Good evening, everybody, and welcome to Bajaj Finance's earnings call to discuss the second quarter FY 2020 results. To discuss the results we have on the call Mr. Rajeev Jain, who's the Managing Director, Mr. Sandeep Jain, who's Chief Financial Officer, Mr. Atul Jain, who's CEO of Bajaj Housing Finance, Mr. Anup Saha, who's President, Consumer Business, Mr. Deepak Bagati, who's President, SME Business and Collection, and Mr. Ashish Panchal, who's President, Rural Business Insurance and Liabilities. May I request Mr. Rajeev Jain to take us through the financial highlights, subsequent to which we can open the floor for Q&A session. Over to you, sir.
Thank you. Good evening to you all. I'll be referring to the investor presentation that we have uploaded on our website. Let me quickly take you to panels four and five. These essentially capture the quarter in essence. We remain focused on all three dimensions of growth, profitability, and sustainability in the current quarter. Assets grew 38%. Core assets in Q1 had also grown 38%, to INR 135,500 crores. New loans booked grew by 23%. Overall Q2, in terms of loan growth, was slower than Q1, given the general demand slowdown on one side and cautious view of risk on the other side. If you look at our Q1 accounts growth, Q1 accounts growth.
Just one second. 29%.
Was 29%, and it came down to 23%. As I said, a poorer outlook from a demand standpoint on one hand, and our cautious risk view on the other hand. Overall, growth was pretty granular. Our finance business grew 19% versus 23% in Q1. B2C grew 46%, rural grew 35%, SME grew 34%, mortgages grew 43%, auto 61%, commercial lending 18%, and so on and so forth. Pretty granular growth. Between two quarters, sequential as well, pretty narrow range in which both have moved. It's pretty granular growth from a balance sheet standpoint. New customer acquisition, we acquired 1.92 million customers. Overall franchise is just a tad below 39 million now. 70% of the loans were existing customers in Q1 versus 66%. In general, our long-term view is 72%, 74% of the loans, eventually, in a medium-term horizon, should come from existing customers as they're better risk customers.
Given our cautious stance, and whenever we have to manage risk better, the right way to do is to reduce new customer acquisition. It's more by design than by anything else that 70% of the loans in Q2 were existing customers and 30% were new customers. We added 102 locations, taking us just a tad below 2,000 locations. We will add between 160 to 200 locations in balance second half of the year as well. Cost of funds continued to go down given surplus liquidity in the banking system in general. Versus 8.49 in Q1, we came down to 8.38 in terms of cost of funds. It could fundamentally still be lower, if not for the overhang that we are continuing to carry in the balance sheet in terms of cash. As of September 30th, we stood at INR 8,000 crore of cash.
As of today, actually, we're sitting on INR 10,000 crores of cash and cash equivalents. Does create a cost of carry, but given the environment, that's probably, in our internal ALCO assessment, the right thing to do. ECB we raised. Raised at a pretty attractive price. Raised at INR 790 all-in cost from a three-year fully hedged facility standpoint. We've also taken a board approval today to go and seek approval from RBI to raise another INR 700 million in balance half of the year subject to RBI approval. Deposits book continued to grow well. Both ECB and deposits are creating significant amount of diversification on a liability profile for us as a company. Grew 60% on a year-on-year basis. 15% of the liability profile is now retail and corporate deposits. INR 11,000 of this is retail and INR 6,500 crores is wholesale. Focus on fees and commission remained, grew 66%.
The differential mainly contributed by three core lines. Came from credit card fees, came from penal fees, and other fee lines like financial fitness report, convenience fee, et cetera. Loan losses were higher than in general what it's been so for the past few quarters. In line with Q1, overall number grew by 80% in Q1 as well. Stage 3 loan losses and provisions grew by 80% in Q1, grew by 80% in Q2. In general, the way it's looking like is that Hello, are you there? Steven?
Yes, sir. You may go ahead.
Yeah. Okay. In general, the way the year is looking like in
Ladies and gentlemen, the line for the management has disconnected. Please stay connected while we reconnect them. Ladies and gentlemen, the line for the management is reconnected. Thank you, and over to you, sir.
I was on point number 12. In terms of credit costs, the way it's looking like, it's looking more like FY17, which was a demonetisation year. Our credit cost in that year came in at 162 basis points. If you add ECL to it, fundamentally, you add anywhere between 12-14 basis points, depending on which portfolios are slipping. The number is likely to, on a full year basis, look like 175-178 basis points. That's really how our outlook at this point in time is on credit costs for the year. Doesn't change the operating metrics, doesn't change the earnings profile of the company. Given the cuts that we're taking in incoming and by tightening underwriting standards, we think we should start to see reduction by fourth quarter or the first quarter of next year. OpEx trending continued to improve.
Came down further sequentially and on a year-on-year basis. Year-on-year came down from 35.5% to 34.5%. Overall NIMs were strong. Gross NPA and NPA, year-on-year there was a movement because of the IL&FS. Sequentially, they were flat. As a result of the tax cut, adjusted for DTA, profit before tax grew 41%. They grew 43% in Q1. Consolidated profit for the quarter post-tax grew by 63% to INR 1,506 crores. Return on equity as a result of the tax cut is looking very strong. Annualized return on equity is looking like 28%. Capital adequacy, we actually added to the capital in Q2. Q1 was 15.66%. I think we've come in at 15.9%. There was accretion to the capital. Actually, in terms of core Tier 1 capital in Q2, I think we have got the board approval, as everybody's aware. Standardized provisioning was steady at between 87 and 91 basis points.
BHFL continues to grow well. It delivered a profit after tax of INR 130 crore. Pretty solid and steady growth. Bajaj Financial Securities, and if you are happy to become our customers, open a Demat account and start access to our broking services. That's really quarter in general. There are detailed slides that are there. I think what I would do is to open up for questions and try and refer to the slides based on the questions.
Thank you. The first question is from the line of Devesh Mehta from Investec Capital. Please go ahead. Mr. Mehta, your line is in talk mode. Kindly go ahead with the question.
Hello.
Yeah.
Can you give us some clarity regarding the write-offs?
Write-off-
In the last two quarters.
Write-off is referred in the presentation on panel 41. Between INR 200 crore and INR 275 crore, INR 280 crore in the current quarter. In general, we don't write off. A smaller part of the write-off is write-off. We generally sell down the portfolio based on the NPV of the portfolio. Rather than recovering from it, we'd rather sell down to an asset reconstruction company. As you can see on panel 40, there was a INR 13 crore of recovery from realization on sale of NPA and the entire data is here.
Okay. Can you give me some clarity regarding this write-offs? Which segment contributes a major chunk of it?
No, these are millions of customers. These are in general written off consumer portfolios. In general, out of 293, INR 35 crores would have been INR 32 crores was mortgages.
Write-offs.
Write-offs.
Write-off was INR 15 crores.
Write-off was INR 15 crores. Out of INR 293 crores was mortgages. Rest were all consumer portfolios.
Consumer and SME.
Consumer SME portfolios.
Okay. One last final question. If you go to the new to Bajaj Finance customers in the new loans book, both of them, as you said already, declined the growth on a YOY basis. This is only due to the respect regarding you being more cautious, or is there any competition that scenario playing out here, because on the ground level, many of the banks have also started promoting their activities aggressively?
They've been promoting for a while so it's not new. As you can see, the data here on panel 25 is last six quarters. During these six quarters on an active year most of the competitive activity is in top 25, 30 towns in India in point of sale businesses where majority of the competition that you're referring to is.
Okay, I got it.
Competitive activity is driven by our cautious view on the business.
One last final question. If you go to the customer franchise slide where you have the triangle.
Yeah.
In fact, there's an overall cross-sell franchise and the non-delinquent customers. Can you give me an explanation regarding what this is? If I would subtract both of them, would I get the delinquent customers if that fair math, would it work out?
That fundamentally means if the client could have bounced and we are not willing to do business with him. He's non-delinquent. Client may have bounced, may have paid me fully but I'm not willing to give him any more lending products. I'm happy to give him insurance products, wallet products, happy to give him deposit product, but not lending products.
Okay. The difference between two of them can be taken as delinquent customers like he has defaulted any one of the time and you won't be lending to him?
Not delinquent. Default at some point in time, yes.
Now recovered. Okay.
Yes.
Okay. Done. Thank you.
Thank you. The next question is from the line of Kuntal Shah from Oaklane Capital. Please go ahead.
Hi Rajeev.
Hi Kuntal.
You surprise us and reconfirm that big and clean is getting bigger. Yeah. My two questions are firstly, how does it all function?
Rate, activation rate, activity rate, activation rate is distinctly better than a physical plastic. Today, in a way, out of 20 million, 11.8 million are sitting balance 9 million, we are making efforts to onboard on our wallet platform. That's response to your point number 2 in a way. Point number 1, these are two separate instances. If you go onto the App Store, you will see MobiKwik Wallet and you will see Bajaj Finserv MobiKwik Wallet. These are two separate instances, fully ring fenced from each other and have nothing to do with each other. We work with MobiKwik, manage, operate, invest in add capabilities to Bajaj Finserv MobiKwik Wallet.
We, on a month-on-month basis, are moving from the 20 million EMI card franchise anywhere between 600,000 to 700,000 customers every month from EMI card to digitized EMI card stroke wallet. That's really how the structure or the partnership structure with MobiKwik is organized at.
Rajeev, at some point of time, we can consider that Bajaj will be launching co-branded wallets and cards people with large customers. Like say, a store card for a retailer or a coffee shop or people who don't want to invest in that area but could piggy ride on the technology and the landing platform of Bajaj? It's conjecture. As and when we are ready, we will update all of you. Secondly, Rajeev, what is the fully hedged cost of ECB today you are raising at?
Mr. Shah?
Yep.
Just a minute, sir. Ladies and gentlemen, the line for the management is disconnected. Please stay connected while we reconnect them. Ladies and gentlemen, the line for the management is reconnected. Thank you.
Sorry.
Mr. Shah, you may go ahead.
Rajeev, what is the fully hedge cost of ECB borrowing and how does it compare with the local borrowing apart from the diversification and the maturity curve analysis?
The bank monies in general come at one year MCLR which are between 8.15% to 8.25%. This money has come in between 7.90% to 7.50% and all in, interest payable on maturity and local currency borrowing, which is NCD in the marketplace are coming in at between 7.55% to 7.65%. It gives us diversification. It sits right in between bond market borrowing and banking borrowings. Helps us target new pools of liabilities.
Kuntal, this is Sandeep Jain here.
Yeah.
The domestic bank borrowings are about INR 830 or so, INR 825-INR 830 corridor. The interest is paid on a monthly basis. When you do annualized number, it works out to 8.5%, 8.55%.
Versus that the ECB money has come in at 7.95% and the interest is payable on an annual basis.
Excellent. Rajeev, just one suggestion. Please do consider an ADR next time when you raise the fund. We'll tell the board. Yeah, it comes with more disclosure, I think the cost of borrowing and cost of equity both will drop. That's just a suggestion, diversify the investor base as well. Okay. Thanks. Thank you. All the best.
Thank you. The next question is from the line of Anuj Gupta from Perfect Value Fund. Please go ahead.
Good evening, sir. I've got two questions for you. First is, in consumer durable finance, what competitive advantages do we have against someone like HDFC Bank with someone like Home Credit, IDFC for having more appetite? All these players are also able to tie up on financing business for subvention. This is the first. Another question is, what risk will we see in long run from digital players like Apple Pay, Google Pay or Paytm coming in digital finance?
The core benefit fundamentally remains who is reducing friction, number 1. Number 2, who has risk management understanding? Number 3 in the process, who has customers? All these three are, in general, a response to both your questions. If you look at Q2 data of ours, we did 6.5 million loans. Let's say, safe to assume 6 million loans came from point-of-sale. Fundamentally, somebody to be able to underwrite 70% of those 6 million loans came from existing customers. Existing customers being defined as ready to do business with a line. It's a set of many things, Anuj, that fundamentally create a moat or a heft at the point-of-sale business. 70%, let me convert the point into data to demonstrate the heft point. 70% of overall financing market in consumer electronics, we help move. This is manufacturer subvention data.
It is not data from 15% of mobile phones sold in India or 30% of electronics sold in India, we move. 15% of mobile smartphones sold in India, we move. 8-10% of organized furniture market, we move. If we are moving those kind of volumes and velocity in 2,000 cities across millions of customers in a given month, at one level means we have developed ability to reduce friction, manage velocity, and the earlier four points that I made. Does that answer your question?
Yeah. I understand the point of sale thing. If you could throw some light on the digital lending part.
Digital lending is Wallet in general, to your earlier question as well, or whether it's Google Pay or Apple Pay, wallet is a railroad infrastructure. Gives you velocity of data that becomes a variable or a set of variables for you to build risk models, for which you need to have risk understanding. Just because a Google Pay and an Apple Pay, Apple Pay is not here, they have input data or variables emerging as a result of you using the railroad. Without having understanding of the risk need not convert into a proposition based on which you would do lending. They are two different things. Payments platforms need not fully result into a risk business or a lending business. Not that they cannot be, but they are two distinct businesses. As long as they are run distinctly for the same consumer, there is an opportunity.
To believe that you have the railroad on which you will just, as a result of which you will be able to do lending, is misplaced.
Thank you.
Thank you. The next question is from the line of Nischint Chawathe from Kotak Securities. Please go ahead.
Yeah, hi. My question actually pertains to the credit cost guidance. You're guiding for around 170, 175 basis points of credit cost for the year as compared to around, I think 140 last year.
150.
150 last year. This is incrementally in the B2B digital and lifestyle business and two-wheelers?
It's across. There's marginal movement in general across.
More so in three businesses. In two-wheeler, yes. In digital, yes, and rest is all margin.
The B2C segments broadly look okay for now?
Yeah, data is here for you. If you see sequentially, let's take personal loan cross-sell. March 2019, let's take 122 basis points 30-plus, is 155 basis points 30-plus. Doesn't change the trajectory. It was two years ago. More so, Nischint, let me make a point. As I said earlier, it's looking more like a demonetisation year, which is 2016-2017, where credit costs were 161 basis points. If you add ECL to it, because in bucket one and two, by two, in general, if you take aggregate basis across, of course it differs by portfolios. On aggregate basis, we land up provisioning 21%-22% already, which was not so the case prior to ECL being deployed. If you actually add that number, you'll get to 180. Actually, a little more you'll get to.
Yeah.
That's really how we are seeing the year play out.
Sure. Do you see further tightening of credit spreads?
It's month every time, Nischint, at this point in time. July was okay. August was better. September was not so good. October is looking better. The default metrics are volatile at this point in time. I don't know whether a bottom has been formed as yet.
Sure. 70% of your loan comes in from existing customers. In terms of percentage of disbursements in value terms, what could this ratio be like?
We don't even compute it. Actually, we don't even compute the 70/30 except for you guys. We're focused on our business. We get to know about it only at the end of the quarter. Sandeep can help you with the number.
Yeah.
We don't have it handy. We don't even track that.
No issues. Just one final commentary if you could give on the festive sales month till date. Thank you.
Festive season till Navratri, if you take discretionary consumption. Let's take out the retail products. Let's say with B2B products in general, till Navratri was not good. Dussehra onwards, it's improved dramatically. I would say significantly. Dramatic would be a wrong word, because we are all looking for hope. The way it is, next 10 days are very critical till Bhai Dooj, which is next Wednesday. Can you hear me, Nischint?
Yes, very much.
Okay. However, I would say the following to you. This quarter will go till the last ball of the last day. Because the way we have seen in general-
Mr. Chawathe, please stay connected. Ladies and gentlemen, the line for the management is disconnected. Please stay connected while we reconnect them. Ladies and gentlemen, the line for the management is reconnected. Thank you.
Sorry. Nischint, are you there?
Yes. Very much.
The way we have seen wherever Diwali is a little early, is that we will fundamentally see a slump after Diwali, but then December picks up much earlier than. In general, if your Diwali is early November, December picks up by 20th or 21st of December. In general, when Diwali is early, then it picks around 10th or 12th of December. I think it'll be a last ball, last man play. Given the actions that the government is taking and the cascading impact as it starts to play, we are sitting very pretty prepared to seize on that.
We should not get too much distracted by the big numbers reported by the online players.
Online players, we have to read the fine print and see what is their year-on-year growth.
It's been very strong for us. We are reasonably large contributor of both, but for one larger. We've contributed reasonably on a year-on-year basis strongly to their sale. Look at their core year-on-year metric. Core year-on-year growth are much weaker.
Okay.
So.
Thanks for the update and all the best.
Thank you.
Thank you. The next question is from the line of Adarsh P. from Nomura. Please go ahead.
Hello. Hi, sir. Very good set of numbers. On the fee, just wanted to understand if you can break up the fee either of this quarter or the first half. What's the fee which is not linked to any balance sheet-related activity? Credit card distribution or value added.
Credit card fee is not linked. Penal fees that we collect from clients is not linked. Insurance that we distribute is not linked. EMI card fee is actually not linked, because I may sell you an EMI card, but if you default, it's not linked. These are four lines that are not linked. Other than that, there are a set of other services where, let's say at the point of sale, you want to increase your loan limit. You can pay small fees and increase and so on and so forth. There are various lines over the last few years that we've created, which are "not linked" to loan.
I just wanted to have a proportion of this fees as a percentage of the total fee because that pool's becoming pretty large.
Each of these components, whether you look at credit card revenue, insurance and valued services revenue pool or EMI card, or for that matter, penal income, they are reasonably large in the overall number. It's not that one particular number is contributing to the overall growth for the quarter. These numbers individually also play a very large role in that number.
Yeah, no, I'm just trying to assess over a two-year period, what's the addition to the ROA number without actually having a risk-weight consumption. Just trying to get a sense of what percentage would it be, which really doesn't eat into capital consumption.
Fundamentally, let me make a different point. There are 19 different lines that contribute to fee line. Okay?
Yeah.
Comes differently for different businesses. From a disclosure standpoint, that's all really we can tell you. We're not giving line item by disclosure because let me make a different point. We see it as an IPR infrastructure that these are the lines that can get created in a retail business. Overall, as an investor, I would just tell you that we remain quite focused on ensuring that the sustainability of the business model should not be linked to balance sheet. Fees should grow non-linear to balance sheet. We've demonstrated that over a few years, and we remain committed to continue to deliver that.
Perfect. That is helpful. Thanks.
Thank you. The next question is from the line of Umang Shah from HSBC Securities. Please go ahead.
Yeah. Hi. Thanks for the opportunity, and congratulations to your team for a good quarter.
Thank you.
I just had one question. During this festive season sale, we have seen a lot of cashback being offered by Bajaj Finance as well. What proportion of that is being borne by Bajaj, and how much of it is being borne by the OEM?
OEM is not bearing anything. These are different structures by geography, by retailer, by better customers. We are investing very deep in existing customers, and so it's promotions being created to fend off competitive activity to attract footfall into the store, is really what the driver is. Manufacturer does not bear anything. If at all, at times part of it can be borne by the retailer.
It has to be netted off from your product IRR, and from the OEM standpoint, it's just a subvention that he shares with you.
Yes. There is a sales and promotion expense line for every festival season that we invest in to generate velocity. Would it be more stronger this year than it was in prior years because of the tax cut benefit that has emerged? The answer is yes, but that is all.
Okay. Understand. Just my second question was related to the tax cut. What proportion of the benefit you think you would be able to retain, let's say, from a 2-3-year perspective or how much you think will have to be given off either in the form of margins or higher OPEX to kind of sustain the growth and profitability?
Let me make a point. We are the first company to go out as the tax cut got announced and announced for out of 19,000 of our people, 16,000 people, we increased their salary by 5%. We remain committed to add value to shareholders, customers.
Employees
employees. These are the three main constituents and accelerated investments. I would say we're working on all four areas. It's difficult to quantify what goes where.
Basically, what I'm trying to understand is that your medium-term ROA, ROE target, which you put in your presentation, doesn't really change for now at least.
No, it does change because we're in the middle of a capital raise. We've actually removed that. We do believe that from 18%-20% medium-term guidance, we look more like 20%-22% medium-term guidance.
Okay. All right. That's pretty helpful. Thanks and all the best.
Thank you.
Thank you. The next question is from the line of Jignesh Shial from Emkay Global. Please go ahead.
Yeah, hi, and congrats on a very good set of numbers.
Thank you.
Just two things. One, if I see your zero DPD delinquencies, I guess everywhere sequentially we are seeing a rise had been there, right? Across products.
Yes.
Obviously, two-wheeler had been much higher.
Yes.
Does this mean the pressure is getting built up, right? I understand part of it is also because you are cutting down the addition customer base. That is understood. Don't you think so? What's your assessment? Do you think this trend seems to be getting even further worsen off going forward? The difference is sizable. If you see almost 100 basis points, if I'm seeing it in the two-wheelers, 30 basis points, 50 basis points across. What's your sense over this? Though it is not reflected in NPAs, but it is somewhere getting reflected in your 0 DPDs. There is a pressure which is getting built.
No, it's a fair question. If you look at portfolio by portfolio, in a slow environment, our business being financial services is a tough business because when the demand slows down, not only you get hit by a slowing NIM, you also get hit by credit costs. It's a double hit. Fundamentally, right? That's the nature of our business. If you look at it in a difficult environment, if you stay with, let's say, panel 45, if you say consumer durable, the rightful way to look in a difficult environment would be where are you on 30 plus? Because zero plus is material, but credit costs will eventually flow from 30 plus.
Okay.
Okay. We started to see things slowing from November onwards.
Ladies and gentlemen, please stay connected while we reconnect the management. We have the management line connected. Thank you, and over to you.
Sorry. Jignesh?
Yeah.
We started to see things slowing from November onwards. What used to happen was zero and one clients used to be collected by same collections infrastructure.
Okay.
In June this year, we separated zero and one. If you see, let's say, 30 plus in consumer durable, you see 87 basis points, 30 plus move to 84 basis points. If you see lifestyle, while we have stamped it as yellow, you see a 14 basis points movement versus March to June of 21 basis points.
Yeah.
If you see digital, it's actually improved.
By February, March, we expect things should improve. If you go to the next panel, you will see 13 basis points movement versus a 20 basis points movement between March and June.
Okay.
We are salary percentage steady. Things are not deteriorating. As you see, business and personal loans 96 has steady. Is the environment slow? Yes. In parts slower? Yes. In geographies slower? Yes. We are watching carefully. We are investing deeper in collection structure.
Okay.
We are prudently tightening underwriting standards wherever we see a yellow emerging.
As I said earlier on the call, I see the year to look like FY 2017, which was a demonetisation year, where overall credit costs adjusted for ECL went to 175, 178 basis points. We look like 180 basis points. It doesn't change the operating trajectory of the business or the earnings profile of the business.
Okay. Since now your lifestyle, your auto, and your digital is yellow. The only one, technically speaking, is white goods, which seems to be green right now. Overall, your customer addition has anyhow slowed down in last quarter. Is it a fair assumption that the slowdown will continue at least for a quarter or two? If that happens, do you think the momentum to grow aggressively will stay? Do you think there is a risk emerging on the growth, AUM growth as such as well?
This panel does not represent AUM. Actually, we retain lifestyle because this panel of yellow is only INR 1,000 crore of assets. The largest block in this panel is actually consumer durable. We never wanted to remove it, because if we remove it, you guys start doing WhatsApp. It's INR 800 crore, to be precise. We didn't want to remove the panel in any given manner. The largest panel is consumer durable, but that's on one side. On the other side is that, one of the things that I didn't talk about is that when Nischint was asking on demand how the festival season has been. I have no view on how Q3 will look. I was not even guiding. I believe that's really how it'll be. We won't know till December 31st, because that's also a big season sale day as to how Q3 will pan out.
I do believe very strongly given very strong monsoon, well-distributed monsoon, reservoir capacity, we are running at 25% ahead of last 10-year average. That semi-urban rural demand revival will emerge by fourth quarter. Urban demand is difficult to predict. As I said, we are well prepared for growth. We are in 2,000 cities in India and towns in India. Revival will emerge from there. Penetration rates are lesser there. Profitability is better there. Access is harder there, so the moat of the business is stronger. It's difficult for me to guide or predict how things will look in the near term. I can guide you for long term, that in the long term, we will continue to grow in a robust manner.
Sir, the line for the current participant is disconnected.
Okay.
We move to the next question, which is from the line of Shubhranshu Mishra from BOB Capital Markets. Please go ahead.
Hi. This is a question for Deepak. I just wanted to understand your collection infrastructure, how many people are deployed, and what would they be as a proportion of your total manpower. Is it split category-wise? If yes, what are these split in terms of manpower, in terms of category? That's my first question.
Deepak has unfortunately stepped out. Out of 20,000 people in the company, 4,800 odd people work in collections.
Right.
They essentially work with managing agencies. They don't collect directly. They manage agencies. We have very deep, well-oiled collections engine. We think it's an entry barrier to the retail business. In general, we've created one of the lowest cost collections infrastructure in the country.
How many agencies? I just want to understand your infrastructure there in terms of collections.
We would work with close to 16,000 agencies in 2,000 towns in India.
Right. This is for all the products or just for your consumer products here? Consumer and personal.
Of course, all products. It differs. The company is verticalized on business risk underwriting and collection.
Right.
If there are 15 key lines of businesses, we'll have 15 different collections heads and collection structures. They may have distinct collection agencies or common collection agencies, but distinct teams within collection agencies.
Right. Out of these 16,000 agencies, how many would be in the top 10 cities?
40% of our business comes from top 10 cities. Reasonable to assume, not be 40%. It's more consolidated. It'll be probably 20% of the agencies will be in top. Atul can respond.
So what-
Atul used to be our collection head earlier. He's now the CEO of BHFL.
What happens generally is when we say 16,000 agencies, because we work in 2,000 towns and cities, as you go below, the absolute volume per location is low. You will have more people when the agency there may represent one person or two person, but when you come to top city like Bombay, one agency can represent even 200.
200 agents.
or 200 FOS or so. Number of agencies would not be a right criteria. Basically, you have to look at it only in terms of a basis of volume, the people are available to collect in each of the market. Just to get back at the number, 40% of your business comes out of top 10 cities. That's the correct number?
Yes.
Sure. My second question is with regards to your leaning towards the existing customer as in 70% of your new originations are for the existing customer. This existing customer lies within the same slowing down economy that you and I are. How is he any different from the new-to-credit customer or any other customer?
The basic principle of banking remains that existing customer is lower risk. It is not no risk.
Right.
Right? It's lower risk. I have to do business. We remain committed to growth on one hand, and we remain committed to sustainable growth on the other.
No, I understand that part. What I'm trying to allude to is that, which you have also alluded to, that the entire economy is slowing down.
Yes.
Is in a slowdown. The festive season hasn't been great. This existing customer is also part of the same economy that you and I are.
If he's part of the same economy, and if he's not behaving properly in some place based on bureau data, I would also not offer him.
Okay.
It's as simple as that.
Is he likely to behave improperly, or has he in the past six months?
Okay. We are not seeing. The EMI card customer has not moved. Okay, both have moved. New customers have moved much worse off than existing customers.
Can you put a number to that, please?
What would you mean by number?
Any zero DPD for new customer or 30 DPD for a new customer?
Said in public domain in the past that existing customer gives 1x to 5x loss versus new customer gives 1x loss.
Has this proportion changed?
Hasn't changed.
Okay. Sure. Just one last question, if I can squeeze in? In your commercial lending, which you do to your auto ancillaries. Auto ancillaries are also slowing down.
Mishra. Hello.
Yes.
Sir, please stay connected. The line for the management has dropped.
Okay.
Ladies and gentlemen, the line for the management is reconnected.
Hi. My last question is for your commercial lending, where we are lending to the auto ancillaries. I understand we do it for the Bajaj Auto ancillaries. Auto ancillaries in general are also slowing down. They have had plant shutdowns. How do we see that particular book growing? Any kind of incremental risk management strategies in that particular book itself?
Yeah. We don't do only to Bajaj.
Right.
They're only 40%. It's a consolidated supply chain.
Right.
Those who work for Bajaj, in general, there would be very few people who would only work for Bajaj.
Right.
In 2007, 2008, the auto ancillary industry went through a structural change where they realized that too much reliance on a single OE represents existential challenge for them.
Right.
In general, in the last 12, 13 years, the entire auto ancillary industry has created its own model, small or large or medium, that they only do particular amount of business with a single OE.
Right.
Industry structure.
Right.
We don't do only Bajaj, we lend to auto component manufacturers.
Incident after the IL&FS incident last September.
Otherwise other parts of our FIG businesses continue to grow in a healthy manner.
Sure. Thank you so much for your time. Best of luck.
Thank you.
Thank you. The next question is from the line of Parth Sanghvi from Emkay Global. Please go ahead.
Hi, sir. Just a quick question regarding to the balance sheet. Sir, I see a big jump in the other receivables compared to the same item as on 30th September of 2018 and 31st March of 2019. What is this attributable to?
Arun, I'll let Sandeep respond.
Other receivables. We had a mutual fund tail down at the second of the quarter end, and the money came in on the first day, which is after the working hours of 30th September. That's what shown as other receivable instead of being shown as investments.
Okay. Got it. Thank you.
Thank you. The next question is from the line of Piran Engineer from Motilal Oswal Securities Limited. Please go ahead.
Yeah. Hi. Congrats on the quarter. I just have a couple of questions. Firstly, in the HFC subsidiary, I've noticed over the last few quarters that our cost of funds is 50, 60 basis points lower than the parent. Firstly, am I right? Secondly, how is it that we get such a low cost of funds around 7.4%, 7.5%?
Anuj, to answer, the cost of funds in BHFL, Atul here, is same as BFL. Our cost of funds for the last quarter is also in the same range of 8.4%-8.45%, which remains. The reason why you see a higher name or a higher spread is because the HFC as of now is much more capitalized than the capital level required. The spread looks poor, but cost of funds is not different.
I mean, I'm just doing the simple math of dividing interest expense by the borrowing book. INR 371 crores divided by average borrowings of INR 20,000-INR 23,000 crores. I've seen that for the last few quarters that the cost of fund is significantly low even compared to other HFCs like HDFC and all. It's much lower. I just wanted to know if there's some allocation of interest expense to the parent, or is that a correct way of looking at it?
Nothing of that sort. Two things. One, this is a growing balance sheet, so the monthly acquisition of borrowings is not same as the quarter divided by three. That's one point. Second, if you notice in the current quarter, we have borrowed a lot of money at the fag end, which we have parked in the investment as well. When you are calculating the interest cost to average borrowing, you are counting the borrowings raised at the fag end of the quarter into the average number. Once you correct that, you come to a number close to 8.4, 8.45. There is no transfer or allocation because both BFL and BHFL borrow independently separately on their books. There is no cross transfer or allocation between BFL or BHFL.
Got it. Thanks for that. My second question is basically, in digital products financing, what % of our customers are new to BFL and what are existing? Because my assumption was that digital products customers are a subset of the consumer durables customers. In which case, the delinquency should have actually been lower than consumer durables. Is my thinking correct or?
It is correct except even the existing customer who takes a refrigerator versus takes a mobile behaves differently.
He gets more likely to default on the mobile.
Yes. Conceptually, it is correct. Same customer behaves differently for a panel versus a refrigerator versus a microwave versus a mobile. We run them as six different businesses, not as one. The risk metrics change. You may be offered a refrigerator but may not be offered a mobile. Never some won't happen. That's one part. Second, digital products would be 75%-78% existing customer. Going back to the earlier conversation, we have tightened underwriting standards, so newer customers, right now we are not encouraging that much in digital products. On an overall basis, digital product, if we are 70, digital products will be 75%-78%.
Okay.
It's 75%-78%.
Understood. What would be the LGD in these products?
Yeah. If you look at, let's say customer crossing bucket 3, which is let's say NPA bucket, the provisionings are generally in the corridor of 80%. That represents the LGD in digital and consumer electronic business. Of course, if the customer crosses five, six installment overdue, then the LGD becomes 90% plus.
Okay, understood. Just lastly, on Nischint's question on credit cost, Rajeev said that by the time you reach stage 2, you make 21%-22% provisions. I didn't really follow that. If you could just repeat what you meant.
Yeah. Once the customer moves from all installment paid on time to customer with one or two installment overdue, we end up making anywhere between 16% to 24%-25% provisioning on the account. It varies product by product. If you take an example of consumer electronic or digital product, maybe the number moves almost to a 40% level. If you take an example, let's say, of mortgage business, the provisioning may be in the corridor of 15%-18%.
This has changed under the ECL model, is it?
Yeah, exactly. It is ECL model based on statistical empirical evidence. As I said earlier, for AC it can be different, and for a PC it can be different and different for, let's say, digital product.
Okay.
On aggregate, anywhere between.
20
18%-20%.
Yeah.
2%
What your point was that earlier, since it was a standard asset, you made only 40 basis points of provisioning, but now you're making 16%-24% of provisioning on that 30 to 90-day bucket.
That's correct. Between bucket 1 and 2. Bucket 3, any which way, it was always NPA-
Yeah, of course.
We would provide whatever was our conservative provisioning standard. Now, even as accounts move from one and one to two, on the incremental flows, as Sandeep said, between 18% and 22% gets provided for.
Okay, I've understood that. Thank you so much for your time and all the best.
Thank you.
Thank you. The next question is from the line of Dhaval Gada from DSP Mutual Fund. Please go ahead.
Hi, Rajeev. Congrats on good set of numbers. Just one question on the rural business. I just wanted your thoughts around the 30-plus sort of rising, and I was checking the heat maps, where we used to give the data on-
Mr. Gada, sorry to interrupt, sir. Please stay connected while we reconnect the management. We have the line for the management connected. Mr. Gada, you may go ahead.
Yeah. Sorry, Rajeev. Checking on the rural business and the 30-plus seems to be on rising there. If I go back in history where you used to share the overall rural lending 30-plus data, this number in the B2C and probably even in the B2B segment seems to be at the upper end. I just want to understand till what level are you comfortable doing business here and at what point do you say that this comes into the sort of yellow category? That's the first question I have.
Metrics of the business actually, just at a structural level to the earlier point that I made, margins are better, credit costs are lower, access is harder, which means the moat is stronger. If you just compare, let's say rural lending B2B business with a blend of on two panels prior on with consumer durable and digital, you see distinctly better, safer, stronger rural business. It is just that we are doing comparison, even a 98.87 or 84 basis points 30-plus leading to, let's say, 40 basis points loss rate business relatively looks worse off. That is not so the case. Our internal models show that we can go far lower. That is not really how we run business. We have pruned between January and June in the rural lending B2B business and B2C business around 20%-25% of the business in the last six months.
We do see it as important profit moat and want to hold the current standards of underwriting and risk matrix.
Understood. The second question that I had was on the, you sort of partly answered that earlier as well, but just some color more. On the new to Bajaj customer base, what are the triggers that one needs to sort of watch out from outside to get a sense that that engine which you're sort of filtering it far more prudently today, sort of gets back to the normal sort of momentum that we used to see maybe a couple of quarters ago?
Credit cost should come down. We should go back to 150, 155. We'll be fine.
Right.
It's quite simple. At the end of the day, all the English will be of no consequence if the credit costs go up. As credit costs start to go down by, I'm hoping reasonably by the fourth quarter end, we will hopefully be back to much more stronger growth from a durable growth.
Understood. Okay, perfect. Thanks and all the best.
Thank you.
Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Karan Singh for closing comments.
On behalf of JM Financial, I would like to thank Mr. Rajeev Jain and the senior management team of Bajaj Finance and all the participants for joining us.
That concludes this conference. Thank you.