Good and welcome to the Bajaj Finance Q1 FY 2020 results conference call, hosted by JM Financial Institutional Securities Limited. 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 Institutional Securities. Thank you, and over to you, sir.
Thank you. Good morning, everybody, welcome to Bajaj Finance's earnings call to discuss the first quarter FY 2020 results. To discuss the results we have on the call Mr. Rajeev Jain, who's the Managing Director, Mr. Sandeep Jain, CFO, Mr. Atul Jain, CEO, Bajaj Housing Finance, Mr. Anup Saha, President, Consumer Business, Mr. Deepak Bagati, President, SME Collection, and Mr. Ashish Panchal, 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, Karan. Good morning to all of you. I'll be referring to the investor deck, which was uploaded yesterday on our investor section of our presentation. We've added two slides, which are essentially page number four and five, which essentially cover the executive summary of the quarter that went by. I'm going to read some of the important points there to give you texture, and then we'll be open to Q&A. Overall, I would just open with saying that, as a company, we continue to remain focused on growth, profitability, and sustainability in Q1 FY 2020 as well.
Overall AUM grew by 41%, a tad below INR 129,000 crores. Adjusted for IPO financing book of INR 2,500 crores that sat there, core growth was 38%. Balance sheet came in at INR 126,340 crores. AUM growth was quite granular in nature, which has really been the way we've been building business over the last 12 years. Even the so-called slowing businesses, the consumer B2B business, which is discretionary spending business, grew by 24%, B2C grew 48%, rural B2B, which is discretionary again, grew 48%, B2C grew 65%, mortgages grew 45%, and AF grew 65%.
Commercial business grew overall 18%. New customer acquisition momentum continued to remain very strong. We added 2.5 Million customers in Q1. That's a pretty strong growth on a year-on-year basis. Total franchise came in a tad below 37 million customers, and cross-sell franchise stood at 22 million customers. The strategy remains simple: continue to just grow wallet share of our clients, these 22 million customers. Existing customer contribution went up to 66% from 63%. Company on a steady basis continued to add new locations, added 65 locations in Q1 to a tad below 1,900.
We'll probably get to 2,000 locations by March 2020. Cost of funds remained steady. Liquidity position remained very comfortable. Incremental borrowings given rally in G-Sec, given surplus liquidity in the system are clearly coming in both the short-term and the long-term, are both coming in at a much lower cost. Liquidity position was very comfortable. We are sitting on close to INR 6,500 crores of liquidity buffer and remain very comfortably placed. Since the sectoral crisis started, company has added close to INR 32,000 crores, INR 33,000 crores of additional balance sheet in the last three quarters, just as a separate point.
We will continue to diversify our ECB. We are all set. We will probably raise anywhere between $600 million-$750 million in the current calendar year. FD continued to grow, crossed INR 15,000 crore. Overall consolidated balance sheet was 13.5%. Stand-alone balance sheet was at 16%. We are continuing to invest deeply in growing retail fixed deposit channels to continue diversification of our liability profile. Fee revenue pool, that's in general a question you ask. We'll end up communicating that as part of a question.
We have now started to cover that. Overall fee revenue pool on a year-on-year basis grew by 65%. Loan losses came in at a 69% growth. As I mentioned here, last year Q1 was very strong. Loan losses grew only 7%. Q2 grew 43%, Q3 grew 69%, Q4 was 80%, and Q1 has come in at 69%. OpEx to NII , there's continued progress on that metric. Came in at 35% versus 37% on full last year. That number was 37% year-on-year, went to 36%, went to 35%, remained at 35%, and came in at 35% again. Gross NPA, Net NPA, sequentially, there's just a five, six basis points movement on gross NPA.
Net NPA went up by just a basis point. One could argue it didn't move at all. PAT came in very strongly at 43% at just a tad below INR 1,200 crores. Return on equity was at an ever high, came in at 23.5% as the overall overhang of the equity also went away. The return on equity has moved better. Return on assets remained very steady at 4%. Capital adequacy remains strong. Tier 1 is at 15.5. Consolidated leverage is now 6.6x. In general, as you've guided in the past, that we do go out and raise capital between 6.6x-6.8x.
That's really been the track record over the last eight, nine. Three raises that we've done in the last eight years. We may, subject to board and shareholders approval, may go out and raise capital. Bajaj Housing Finance continued to grow very well. The results are in public domain. Q1 profit came in at INR 70 crores. Overall balance sheet growth on overall mortgages was 45%. Given the year-on-year comparison for BHFL is not relevant because the company started its operations only in January last year. Bajaj Financial Securities has received all requisite approvals and has just commenced business .
We are quite excited about growing this business over the next three to five-year horizon. That largely in general covers the Q1. Given that, I would just now take you to panel 41, where given we are a risk business, we pride ourselves on saying that and doing that. Let me just take two minutes to cover that. From a management assurance standpoint, we've actually moved two of the portfolios, which essentially contribute to 11% of our book, from a green to a yellow, from a management assurance standpoint, not from a portfolio movement standpoint that much.
On a year-on-year basis, two-wheeler, three-wheeler is better off. However, given the sequential movement on one hand, and two, given our higher share of Bajaj Auto's domestic sales, as a management prudence, from a disclosure standpoint, from a guidance standpoint, and from a management assurance standpoint, have marked it as a yellow. Digital products, it is a yellow. We have seen movement in the portfolio. We've been taking action since, actually since last four or five months. We've taken harder action in the last two months, and it's a very short-term portfolio.
In general, if you were to actually look at this portfolio, and we've been publishing this data for the last six, seven years that we've done this business, this business was actually much worse off earlier. We got full handle on the business, full control on the business. In the last two months, we've seen It's 3% of our portfolio. Given the short-term nature, in general washes off in a quarter or so. Just from a prudence standpoint, and from a communication standpoint, I thought it prudent that we will communicate the same with you.
The red on the on-trend quality is loan against property, which essentially on a non-IL&FS remain very steady. There is progress that we are seeing even on our IL&FS exposure. We have begun to see sale of premises starting to sell. We've received monies into our escrow account, to the tune of INR 80 odd crores in the last 20 days. Company has received all requisite approvals and has actually gone out and put the building blocks on sale, which is really where our exposure is. We are quite optimistic.
Given the movement that we're seeing in the last 30 days, we are quite optimistic that subject to legal issues being behind for the company broadly, not on our exposure because our exposure is exclusive security, we may just be able to get out unscathed. Our total provision on IL&FS account at this point of time stands at 26%. That's really the highlights on the quarter. On panel 43, because we added a guidance. Commercial lending portfolios have only one NPA account that's published, and it's 65% provided for. Securities lending is 100% current.
Despite the volatile environment that we've seen since IL&FS crisis, we are in very good shape. As a measure of prudence, as we've written there, if we see data, as I said, we are data-dependent. If we see any of our portfolios deteriorate, the right thing to do in our business from an early warning signal standpoint is to act. What is done is done, you can reduce your exposures if you were to act in time. That's one part. Second, as I mentioned to a few people, when I read the newspapers, when I watch the television, it all looks gloomy and doomy.
Like any business manager, we are impacted by it. Given that we are building business with a next five to year view, when we look at the micro, it doesn't show up that way. When we hear the macro, it shows up that way. As a conservative company, the right thing to do from a prudence standpoint is to go out and prune the bottom 10%-15% of the business. That's really what we've done if you take an example in the Rural business. Rural business, the GNPA, NPA is structurally lower, and that's published, than urban businesses.
As I said, when I read and hear, as a conservative company, as a company building a business with a long-term view, as a company which if the gloom and doom is right we could get into trouble, you go out and act in time. That's really the context of the point number three, half part, point number four, full part. In AF, as I said, point number four, full part. The only point here, as I said, because on a sequential basis you've seen movement, we made the decision. In AF, half part.
That's really the context we would like to continue to provide and which we've done over the last eight, 10 years. Complete disclosure to all investors in the way we see the business. We want you to read the business that way. We're doing it for disclosure and for ensuring that our transparency is as good as it is for anybody. Read it that way is all just I would say. That's really from me, and I'm happy to take questions between me and my colleagues.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and . Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Pranav Tendulkar from Rare Enterprises. Please go ahead.
Hi. Thanks a lot. Congratulations on a great set of numbers in a tough environment. I just wanted to ask, what is the number of people that are employed in the origination side of the business, and number of people that are employed on the collection side? I frankly think that this proportion might change because the time of origination is, say, 15-20 minutes, but time of collection can be anywhere between one month if it is not paying on time, that is on auto mode. Thanks a lot.
Out of 20,000 people, 4,464 people, to be precise, work in collections across the country. You have to remember one thing. Only 8%-9% default. There will always be more people because one is to do work on 8% and another is to work on 100%. That's point number one. Point number two, as I said, to be specific, it's 4,400 people. Point number three, given, as I said, the gloom and doom conversation that's happening around, that's one part. We do track as a company how many days do we take to collect from the clients who default, which is 8%-9%.
In general, if I take a last five, six quarter view post demonetisation, once the demonetisation washed away in June 2017. That number has remained steady between 15-16 days to collect on an average every month. It's an internal metric we track every month. Just to give you texture. Third order point, we fundamentally have very rigorous, globally anywhere, collections, whether it's done through call centers or through physical or through agencies, is a capacity planning model. It needs sophisticated, rigorous, disciplined capacity planning models and execution.
You have that right with underlying metric being dovetailed into it. Unless and until a demonetisation-like event happens, in general, there is sufficient time that provides you. Fourth order point. five years ago, only 5% of our clients paid through digital.
Right.
Okay. Today, anywhere between 21%-23% of our clients pay through digital. That has ensured that we can continue to manage growth without adding correspondingly in a linear manner people. That number, the 21%-23% number, we, in a five-year horizon want to take it to anywhere around between 40% and 45%. For two reasons. It's better for the customer and it gives us the suspension and the width required to continue to grow the business. Third, it would bring down cost dramatically.
Right. Okay. Thanks a lot for the response.
Thank you. Next question is from the line of Prateek Chheda from IIFL. Please go ahead.
Hello. Hi, this is Abhishek from IIFL.
Hi, Abhishek.
Hi, Rajeev. Hi, Sandeep. Hi, everyone. I have three questions. One is on growth. Now, with your outlook, you're being a little prudent and trying to sort of take steps ahead of time to reduce the risky underwriting that may happen in this kind of an environment. What kind of growth are you building for yourselves in the medium term? We know your long-term target of 25-30, but in the next year or two years, what kind of growth you're building, and what kind of sectoral focus will you have in that growth?
The second question is really on cost. As your growth moderates, how much room do you have to keep your cost ratios where they are? What are those discretionary expenses which you would sort of cut back on? Given that in your annual report also, you mentioned that you have built almost 5x the capacity that you need enough capacity to handle the throughput that's coming right now. When do you start utilizing that capacity and reducing the investment intensity on people, technology, et cetera? The third is on asset quality.
With growth slowing again, you will see slippages increasing, and you're seeing that over the last couple of quarters, a few quarters, even FY 2019 over 2018. What kind of credit costs and slippage rates have you built in your estimates? Where do you think you'll be comfortable going forward?
Very fair. Two, three things. A 38% core growth or a 41% growth is a very high growth number, Abhishek. That's first point I want to make. Growth environment at this point of time, our medium-term outlook doesn't change. Okay? We are a growth company. We'll continue to remain a growth company. The environment, as I say, is patchy. You ask me this question in April, I would say, Look, what slowdown? By 15th of May, in May, things turned by 15th May. We expected that World Cup, just on super discretionary consumption, will lead to consumer walking in and spending. It didn't happen.
I am not as yet saying that, as I said, when I look at micro, a 24% super discretionary consumption does not represent a slowing customer. You add to it auto slowdown and this and that's a macro conversation you guys can do. That's not for me to opine on. We have to wait for the incoming data, wait for at least a quarter to say that there is a cyclical movement downwards. I won't sign off on that as yet is the first point I would make. We are a growth company, but I've always said, Abhishek, we are first a risk company.
Between risk and growth, we will choose risk. It's a pretty simple point. I've said this many times, but we are a growth company as well. We pride ourselves that I think given we are 115 basis points of the total credit in India, given we are a diversified company playing across many sectors and businesses, and our market share remains very small, there remains very large opportunity for a long period of time. Long term, there is no question on. Medium term, I would wait for a quarter to see how things are moving.
I would like to believe if you were to dovetail this into macro, if all the gloom and doom conversation is correct, you will see some action by respective people in places to stimulate growth. The entire conversation can change completely. That's one part. I'd rather look at micro. At this point, patchy. Q1 was very strong. We will take a Q2 view to determine so-called medium term, which is a two-year view. Costs. Look, costs have to be looked at separately. We run a reasonably high variable cost model. That's one point. I can dial up and dial down.
70% of my tech stack runs on cloud infrastructure, allows me to dial up, down time at a far more rapid pace than anybody in the country. That's point number one. My point of sale people are temp staffing. Allows me to dial up, dial down. I'm giving you texture so that we are all on the same page. My mid office, back office is run by BPO companies. Dial up, dial down. 90 days. Level 4, we remain a disciplined company in terms of managing costs. Sandeep has a unit which fundamentally runs a financial planning and analysis wing, whose goal is take out blind spots on cost.
This year goal alone is INR 250 crore of cost has to be taken out. I'm just giving you texture so that we're all doing a disciplined conversation on the way we run business rather than a transient conversation. That's really on management of cost and our approach to managing expenses and costs. Slippages, I have said 2018-2019 was a record best. Now, when I say record best, you have to read it as record best. What does that mean? Can record best become better than record best? Of course it can. In general, it need not be that. It's a glass half full and glass half empty.
That's point number one. Let's assume for a moment, fundamentally, that we are 130 basis points of credit cost last year. Unfortunately, we are unable to publish the last five-year data on it because of the change in methodology to ECL. Otherwise, I would have given you last five-year data, discussion would have got settled. I can do some math on it and give you data, but even then it would not be appropriate because that's a number that you will not be able to, let's say, validate. It's not fair to give you a number that you cannot validate. ECL has meant, let me first take that conversation away.
If we were not on ECL methodology, this number of 69% would have looked like 60%. Let me simplify that conversation first. Internally, ECL is very difficult. Our internal dashboards are all run on previous GAAP, because of the statistical methodology, small swings in 30 days past due can lead to swing in a month, need not be swing in a quarter. That's why internal management, even when banks transition, they will require to do that that way. Do our CROs and EROs run a walk against on a lag basis? Risk decisions are made not on lag basis.
Risk decisions are made on runtime basis. On a lag basis, they build the waterfall, but on a running the business basis, we run it on previous GAAP. The credit cost fundamentally, let's assume for a moment now, that has to take into account what happens to the environment. A week ago, we were sitting on 12% negative monsoon. Today, we're sitting on 19%. That was two days ago. I'm getting ready that if monsoon was to fail, would I act? I'm just giving you a texture so that you understand that agility in an environment which is perceptibly slow.
I'm not saying need to be slow. Will have to be higher, and will have to be watched carefully, and acted quickly. Let's assume for a moment, okay? Let's cut the conversation. Let's assume for a moment, 130 basis points comes in at 160 basis points. Let's do this conversation. Number does not change the material trajectory of the profit pool of the company for the current year. As I said, I believe these things will change. Even then it doesn't change. The number is not material. You know the math, you can do the math. From 130-160 basis points, if you do, what happens to the number? It's not material at all. Does that answer your question?
Okay. Yeah, broadly. Just one part of the first question in growth. Which sectors have you planned for? Obviously, you would have planned for something, and then depending on the environment, you'll tweak that strategy. Basically what I was trying to understand is what your plan is. Which sectors do you plan to grow in?
Wherever we are green on, we are growing. Come on. The management assurance green means what?
Yeah.
Technically, out of, we publish here four, eight and three 11 businesses, nine are growing. Okay, let me make it second order point so that we are on the same page. Even the yellows are growing. The net impact of growth on these yellows will be a net impact. What happens is when I go and tell the business manager in digital products financing for a moment that, look, I am pruning your bottom 15%, he goes out and finds ways and means to go after better customer in the process.
When he goes after better customers, the net impact of 15%-18%, in general, will turn out to be on a lag of a quarter or a lag of 60 days at 7%-8%. Let me make that point clear.
Sure.
As I said, we remain a growth company. The opportunity remains very large. Let me give you statistics on digital product financing so that we are all on the same page. Country sells 2 crore phones in a month. 90 lakh phones are feature phones, which we do not finance. 110 lakh phones per month are smartphones. We do not finance less than INR 10,000. That is 55 lakh phones is what we finance. Out of 55 lakh phones, company does, let's say, 8 lakh phones. Our goal is to be 30% of it, which is really where we are in consumer durable.
Right.
That gives you lay of the land from a depth of the market and breadth of the opportunity that it represents for us. We would go out and tell a business we are pruning your bottom 15. He will take 60 days and find better customers that he wants to do business with. The net impact in general will be 7%, 8 %, 9% depending on the effectiveness of your business manager.
Understood. Great. Thanks. I think that gives me part of the answer. Thanks.
Thank you.
Thank you.
Thank you. The next question is from the line of Parag Jariwala from White Oak Capital. Please go ahead.
Yeah. Rajeev, I have two questions. One is Digital product, B2C and SME, where you are saying that there will be some cut in disbursement. Is it fair to assume that barring SME, other products are very short in tenure, so a cut in disbursement would be a cut in the overall asset under management? That's one. Secondly, I know you have replied to the earlier question that the products which are green, we are growing. Is there any slowdown in the momentum in terms of, let's say, for Housing Finance, the number of file login you get it or what are you picking up from your staff on the field? Thank you.
Look, when I said patchy, what I mean is a month is harder, a month is softer. That's what the meaning of patchy is. July can be good, August can be bad, September can be good or great. That's the patchy conversation. I should have made that point even earlier. What would a company with 37 million customers do when it is finding the environment patchy? Why do we have the franchise? We have the franchise because then we go dig deep into the franchise. We find that clients who are great.
On 37 million customers, we today bank 18 million. 18 million we bank? 18 million we bank. Okay. Interesting part is longer the customer stays with you got to spend more to engage him or re-engage him, because he's a more prudent customer. He's a better customer. Lot more customers are chasing that customer. We see it structurally play in loan loss. The loan loss of a new customer is X. I've always said that. An existing customer is 0.33X. A greater than 18 months customer is 0.15X. What do you do? You go after them. You re-engage them.
You spend more on them because adjusted for risk cost, their cost is lower. See, in a way, this point is tied to the previous conversation on digital product financing. When I tell a business manager that look, you know what, we are pruning your bottom 15. Go out and find ways to grow. These are ways and means he goes out and grows. The second order point, which we have talked to certain people about is our prospect franchise. Given that in India, in general, super discretionary business remains a highly unorganized sector.
These retailers need help in organizing their data infrastructure. Over the last six, seven years, we have worked with these retailers to help them stimulate their cash customers and their credit card customers. It's part of our broader data as a project, and we continue to work with these retailers. We have aggregated working with these retailers to help them over the last few years, added over 100 million people in India, non 37 million that we have a view on. Okay? The number is north of 100 million. Very interestingly, over the last two years, these customers perform virtually like a store card customer.
We are accelerating that. We are accelerating EMI card. That's really what you would do in a patchy environment, a so-called slower environment. Dig deep, find the best customers, re-engage them, spend a little more money on them. Given the strength of the franchise and stickiness and loyalty of the franchise, we are very confident that it will mean on a forward basis, on a 12-month forward basis, eventually it will mean lower cost. So I'm just connecting the last question by Abhishek and by you to give you texture on how growth fundamentally will get generated from even if the environment was to so-called television and newspaper environment to stay the way it is.
Sure.
Does that answer your question?
Yes. Some color on the green ones.
Green ones, we continue to grow. That's my limited point. Some color on the green, mortgage business as a result of its separation, given what's happening externally through the sector. Two things came at a time. We separated the business, created a sharper focus. As you can see, pre-January or pre-March 2018 to post-March 2018, you take the last three-year data on mortgages. Business was growing 25%-28%. If you take the three-year number. That number in the last five quarters is growing on an average between 40% and 45%.
Mortgages, we think while it's tough for the team, it's a new company. They are still getting their arms around the new way to run a business. I would say represent this tremendous opportunity to become a dominant mortgage lender in this country in the next seven to eight-year horizon. That moment in a way is now, because tough times then also represent opportunities for company. That business will grow. I would say all our businesses remain on a growth mode, ones which are represented here in green. The yellow, we are pruning the bottom. We should be able to find growth.
Good. Thank you.
The relative size, I want to repeat, remains very small. Remains very, very small.
Thanks.
Thank you. The next question is on the line of Nischint Chawathe from Kotak Securities. Please go ahead.
Yeah. Hi, Rajeev.
Hi, Nischint.
Couple of questions. One was on a cost-to-income ratio on a year-on-year basis. I guess, these numbers are again comparable because these are in Ind AS.
They are comparable.
Your ratio actually went up from 50% - 56%. Cost to income.
To income. Opex to NII is what we track and publish.
Yeah.
I don't know what you are talking about. At least I don't have a number. I have OpEx to NII, which we publish. It'll be useful if you refer to that rather than a number that we don't publish. Nischint?
Sure. I'll take it up in that case.
That will be helpful, not for anything else. It'll just be helpful, nothing else. What we publish, because then we track it that way. I have last five quarters data on OpEx to NII. That number was 37, 36, 35, 34.6, and 35.
Let me just kind of discuss the cut offline.
Yeah.
The other thing is that RBL has indicated that their credit card losses, eventual losses, are somewhere close to 4%.
Right.
Would your experience be very similar?
Two, three things. We have worked with Bureau, and I am sure RBL can tell you that we work very closely with them. They have been a fantastic partner of ours. The business continues to grow well. We are helping them acquire close to 100 ,000- 110,000 new cards a month. We came in at close to 1.3 million cards in force as of Q1. We are well on course to grow with RBL the relationship to 2.2 million-2.3 million cards by March 2020. Second order point. The book is maturing now or has matured now over the last 2.5 years. They share with us the vintage loss curve data.
The vintage loss curve, they work with Bureau to look at how this portfolio that they originate with us, given that we work very closely with them, and the portfolio of, let's say, top four leading credit card issuers in the country pans out. Our numbers are lower. Let me make that point clearly. Company to company it may differ, but because Bureau cannot share company-wide data, it shares the aggregated top four card issuers data in the country. You know who are the four that we are fundamentally talking about because they have 85% of the market.
That number is structurally better. Okay. Not for anything else. It's better because we sell to existing customers of the company. Even there, let me make a second order point. Card-to-card customer operates much better. If you took a very harsh view and said we will only card the carded, because those numbers are half of that of a new-to-card because there is a learning involved of the customer. You have to educate the customer. For the long-term growth of a credit card business in this country, for a long-term growth of creating a dominant credit card issuing business in this country.
We think that road has to be traversed upon. Blended, it still comes through lower than the top four leading card issuers in India. We are committed to remain that way for us as a company over the next few years. Does that answer your question?
Yes. Fairly. That was it from my side. Thank you very much.
Thank you. The next question is from the line of Atul Bhole from DSP Mutual Fund. Please go ahead.
Yeah. Hi, Rajeev. This is Bhole here. Just a couple of questions. First is on portfolio quality. If you look at how we are shaping up in terms of increasing share of existing franchise customers in the portfolio and also the new flow that is coming through is far more filtered. Given the duration of our portfolios, would you expect that in the next six, nine months, the portfolio quality can actually be much better than where it is today? Would that be a sort of a safe.
I would just say to you, given the patchy environment, given the degree of, in general, the patchiness that we are seeing, I would wait for a quarter to fully opine on it. I would only just say to you what I said in the beginning, we remain a risk-driven business. Okay? In the short term, between risk and growth, if you have to choose, we will choose risk because we're building a business with a five to seven year view. Does it remain our aim to keep bringing down credit costs as a company? Because that is what represents what I say, a true engine of a risk business.
The engine of a risk business is not capital, not pricing. Engine of a risk business is risk cost. That is the foundation on which we have built this business. The long-term engine of a risk business is the risk cost, and that is why we are so conscious about this line. In the long run, it has to keep coming down. In a few forums, I've talked about what our collections efficiency used to be four years ago, three years ago, two years ago, and a year ago. All that represents keep working on bringing down credit cost. That does not mean it can mean one way down.
We run a real business. We run an operating business. We remain in a subsystem of a broader economic system in the country. However, if it was to deteriorate the environment, I can only just tell you one thing, that we will be amongst the less affected people, is the limited point I would make to you. We are agile, we act early, we mobilize the company, and ensure that we keep our head above water through difficult times. That is really all I would say to you. Does it answer your question?
It does. Just two more things. One is on the rural business. If you could just give, while it's in green, just qualitatively, if you could talk a little bit about how we've evolved this business over the last six, nine months, and some color or texture around that. Just one last thing is, in the last few months, how has the competitive landscape changed? I would assume that it would have got even more stronger for the company. If you could just talk a little bit around that, the business that we've evolved, and some texture around that. Thank you.
Look, fundamentally, it's a business which takes time to build. We've been invested in the business for the last six years. This is the seventh year of business.
Sixth year of business?
Yes. Sixth year of business. We took the first three years to put our arms around it. In the last three years, the business has grown much more rapidly. In the first quarter, the entire addition of 90, am I mistaken ? Most of the addition is in rural of branches that we've actually done. Can you just go to the. Just give me one second.
Yes. For the quarter, the entire addition, majority of the addition, if you go to panel 28, has been in rural. From 903 branches in March, we added 48 branches in rural out of the total 65, and balance 17 only in urban. You can see our stance on expansion is much more stronger in rural than it is in urban. That does not mean we are not growing urban. We are using a different way to grow in urban. One of the biggest challenges in urban is that the cities are expanding. We are actually, the number here may not represent the urban branch growth, but we are deploying in 120 + markets.
A very different methodology to actually grow the pool of customers that we work with in urban. That's a separate point, but I thought I'll just cover that. Stance on rural remains strong. Rural, while we don't lend to farmers, less than 2% of the total book is all of the B2Bs to farmers, zero on B2C to farmers. B2B to farmers is 2%. They operate in an ecosystem where they can be affected or impacted if monsoon fails. Now, that also doesn't work secularly. Wherever there is groundwater supply in abundance, monsoons have no impact.
Wherever it's lesser, monsoon has an impact. Having built the business over the last six years, every year as part of a disciplined process, we start to check in June which are the markets where there can be impact of monsoon and so on and so forth. So we are watching the movement of monsoon. So far, other than four districts in India where we are present in, we are fine. Second order point. Third order, overall in a strong growth stance will grow. There are parts of our businesses in rural which are starting to grow lot more strongly now.
We were very strong in B2B, we were very strong in B2C. Rural gold loans is something that we've been building for last three years. That business is now moving much more rapidly. We've just opened 23 standalone branches in rural which only do gold loans. We tested with 10 branches nine months ago. Performance was very good. We are adding 23 more. As we perfect the model, rural gold loan could be a 500 to a 700 branches business in the next five to seven-year horizon. We won't do gold loan in urban. It's 120 + cities, that's really where we would do.
We continue to look for opportunities, seize opportunities, find new areas of growth. That's rural. Has market opportunity become better in rural? Answer is, I would say no. Rural for us is 550 markets plus. It's a damn hard one to reach. Other than one of the leading private sector banks, there is very little presence. That market remains under-penetrated or unpenetrated at this point in time, and has remained so over the last five, six years.
Yeah. Sorry, just one follow-up. In rural gold loan business you talked about, how does that sort of come in the overall strategy of catering to affluent customer segment?
Our average ticket size. Very valid question. Our average ticket size of a gold loan is INR 85,000. Let me give you texture. I'm sure you track other. That means the client is placing the maximum loan that we can do in rural gold loan is INR 1 crore. If you're willing to place INR one and a half crore gold, we give you. The strategy remains affluent. Ticket size is upwards of, as I said, hover between INR 85,000-INR 90,000. So that's the texture. Third order point, it's a little more structural, I think. Somewhere I saw one of the brokerage presentations talking about how NASA is lit up, how India is lit up.
That was in NASA, you can trust the data. How India is lit up well in the last five, seven years. It's quite at one level, I would say shocking. Which means shocking in a positive way, how India is lit up. That is really how the demand outlook of the rural market would get transformed. Electricity is ensuring discretionary consumption moves. Second order, I think the overall law and order in most of the states that five years ago you would say, I struggle to do business in, has improved. I'll use
one state example, Bhole. People won't buy cars and homes and big televisions because they can be targeted. I'm just giving you texture. I'm just giving you what the people on the ground say to us, or retailers on the ground say to us. Gold loan fits in from affluent rural customers because it is one of the assets that they own in abundance. Second product that they own is land.
I can't do financing on land, the only thing that I do is gold. It's a three-year-old business. We found our way to growing and building it, we are quite excited about growing that business as we move from here. It remains on affluent-focused.
Perfect. Thank you, and all the best.
Thank you.
Thank you. The next question is from the line of Bharat Shah from ASK. Please go ahead.
Hey. Hi, Rajeev. Congratulations. While this quarter is a short period, I was just comparing the numbers for this quarter compared to last 12-year average on various key parameters. I was quite, I must say, impressed to see that even on a larger base, asset growth continues to be in line of what has been done over a 12-year growth. Interest income actually exceeds. Fee income exceeds. Net interest income also exceeds the 12-year compounded average. On a larger and larger base to achieve that, truly significant.
On three numbers I saw where the quarter numbers kind of have been a bit worse off than the 12-year average. One was interest expense, but which I guess probably what you mentioned that going forward, the cost of borrowing is coming down significantly. Probably that may turn again favorable. I would like to kind of hear your comments on that. On the operating leverage has continued, but little less than has been the case over the last 12 years. Third, which has been significant for this quarter.
Of course it is too short a period to make a meaningful comparison, but the quarterly provisions have risen materially at 69% compared to average loan losses of about 27% over last 12 years. On these three aspects, if you can just give some view, that will be helpful.
The first question was expense base, right? Bharat?
First was, I was saying interest expense.
Interest expense. Right.
For this quarter, it grew 55%. Last 12 years, if you see, interest expenses have grown at 40%. This quarter may be a bit of oddity, but I've seen the comments that interest expense incremental borrowings are at much lower cost. I suspect interest expense probably again will start turning favorably in sweating that leverage.
Two points, Bharat . Incrementally, whatever issuances that we do in the bond market and the CP market are available in public domain. Clearly, if I took a two, three months prior view to today, they're clearly coming down. From 8.5%, three-year bond that we were issuing, and I'm talking in quantum conversation, has come down to 8%. It's available in public domain. I raised money at 7% in 60-day CPs, I raised at 6.3%, 6.4%. Last raise was 6.3%, 6.5%. That's one part. Second order point, Bharat , is that capital adequacy, you'll have to tie this interest cost along with, okay?
That's a, if you adjust for those periods, capital adequacy, you may see a more steady line adjusted for given interest cost is a macro market-driven conversation. If one of the silver lining in the cloud of this whole patchy environment, slowing economy, is likely to be more surplus liquidity in the system, should lead to lower inflation, should mean tailwind on that line.
Previous.
Yeah. Should mean tailwind on the line. It's difficult to predict. We will continue to sharpen the pencil on that. There's a third order point, Bharat . You will see the line, however, adjusted for the macro, move up a little, because we are investing in building for the sustainability of the business, a retail deposits business. If I did not have this INR 15,000 crore or INR 15,100 crore of retail deposits, they do come in at a higher price. It's the cost of sustainability that I have to invest in to have a 10-year view on us as a company and a business. There are moving parts in this.
I can only tell you, we continue to chase efficiency in ensuring we keep bringing down our cost of funds adjusted for the macro, adjusted for retail, because it's an investment that we must make to deliver greater sustainability of the business model. That's part number one. Operating leverage, I have said in the past, I said actually last quarter as well, that so far OpEx to NII movement has fundamentally come in from movement in NIM than movement in OpEx. In fact, I want to add a dimension to just the earlier comment that I made that why have we not seen urban branches growing?
Okay, branch expansion in a retail business, and I'm giving an illustration to make my point, the branch expansion represents a 12-month forward investment. We realize that in urban business, we are already in 550 odd cities. Adding a location is dilutive. Given that these urban cities are growing on the fringes, to open a spoke in a city is more economical than opening a city. I'm just giving you texture. Earlier point I made as well, that is where the entire INR 250 crore number for illustration I was making the point on, is focused on costs.
We must as much focus on NIM as we focus on cost. We're investing very deep in areas like robotic process automation across the company to take out, let me say, headcount, whether variable headcount or fixed headcount. There's lots of work happening. I won't say I'm seized of it. I am aware of it and rightfully balancing between growth, controllership, sustainability. We'll keep navigating through that. On third point, which is loan loss and provisions, I've said this over the last one hour, that you, and as I said last year, they were at record best.
Given the granularity of the portfolio, that does not mean it can worsen from here. As I said, our intent remains to continue to improve it, because that is sophisticated nuanced risk management conversation. If environment is patchy in a given quarter or for a few quarters, until we readjust the portfolio to, let's say this environment was to persist, let me make a point. If this environment was to persist, you will see the 66% existing customer to new customer probably shift to 70%-75%. It will, in a three quarter, bring down loan loss, let me tell you.
My problem is, new customer represents the future growth of the company. I have to balance even that equation from a medium-term standpoint. It's a calibration, Bharat, keeping into account these dimensions. As I said earlier, I was not giving guidance, I just made a point that let's assume the full year credit cost came in at 160 basis points. Doesn't change materially the color of the business or color of the profitability in a material manner. I've left you with some questions, I realize, but I have to give a rounded, comprehensive answer rather than a straight line response. I hope you appreciate.
Yes, absolutely, Rajeev. I fully appreciate what you said. I must say, this is a remarkable performance in the overall context, and especially maintaining ROA at 4% and record return on equity at 24%. Congratulations to your team and you.
Thank you. We continue to be at it.
Thank you.
Thank you.
Thank you.
Thank you. The next question is from the line of Kuntal Shah from Oaklane Capital. Please go ahead.
Good morning, Rajeev.
Morning, Kuntal.
Since the gloom doom is the favor of the season, I have two questions on that.
Yes.
Sequentially, hardly any change in GNPA, NPA, but narrative has changed. Can you go to the slide 44.
Slide 44.
Run through that? You have already provided for INR 1,270 crore of stage three slippages and are aspiring to collect INR 824 crore of things which you think is recoverable based on your internal estimate. Is that a fair estimate to say? That you are over-providing based on ECL, 86 basis points versus required 40 basis points. That gives you the cushion, coupled with 61% coverage ratio.
Kuntal, this is Sandeep here.
Yeah.
Your point is correct. Based on ECL model, the net NPA number of INR 824 crore as of 30th June represent the recoverable amount that we expect on the portfolio. That statement is completely correct. As far as understated provisioning, which is provisioning on stage one and two, which is customers less than or up to 60 days overdue is concerned. Coming based on expected credit loss model, we are providing as the model is showing the numbers out. It is higher than what regulatory provisions required you to make in earlier environment, which is 40 basis points.
This is purely based on statistical outcome of how the performance of the balance sheet and the portfolio is being seen.
Thanks, Sandeep. We note that your metrics are far better than the other financial services players, larger ones and banking ones you get compared with. Comparing with them, when I see their fees-based income is almost 38% - 40% of their total income and almost 60% - 65% of their PBT, versus 38% of PBT for you. Any fire roadmap you can highlight, Rajeev, on how you are planning to increase your fees-based income, which is more distribution and not balance sheet linked and hence more sticky and ROE accretive?
Kuntal, it's already higher than my in general experience and in general expectation. I'm not saying steady and so on and so forth. Our focus has to continue to create products and services which our customers want to buy. It's limited by that rather than anything else. That's really how I would look at it. That's one part. Second part is, more we reduce friction, more it creates opportunities for our customers to do business with. We as a company remain very focused on that. As long as we remain focused on that, we'll be fine.
I'll give you a texture. We talked about in the AGM yesterday that we've invested in a new point of sale reinvent platform, which can process 50 million customers annually. From let's say, if you take 7 million customers on the quarter, that means we're talking about 30 million customers or 28 million, 30 million customers on a full year basis. The number used to be we would take three days to pay our retailer. The number is tracked at how many retailers you pay in three hours. 55% of what, the moment a transaction is done, we pay in three hours.
What does that do? Let me make a point. The point of sale boy invests less time in selling and documenting and so on and so forth, and more time in selling products and services that we create. We remain focused on improving efficiency, number one, creating products and services. This number can go to wherever it goes to. I'm giving you philosophy rather than a number guidance. Hello?
Get charges in some of the illiquid auto ancillary companies.
Sorry, I lost you. We didn't hear you.
There have been regulatory filings where Bajaj Finance has taken a pledge of shares of some mid-size auto ancillaries, which are prima facie illiquid and are loan against shares. Would you clarify, are these loan against shares or are these additional over-collateralization of other kind of auto ancillary loans which you are giving out?
This is over-collateralization of our security structure. The names are only two or three. First of all, I must just qualify that. The total exposure on that is some INR 30 crores. That's the second point I must make. I think consolidated is INR 40 crores. They are very well-run companies. We want to ring-fence our predominant position of working with those promoters and companies. Their ratios are very good. It's a commercial lending conversation on these two, three clients rather than anything else.
Rajeev, my last question from my side. At what price of sale of towers in GIFT City would you break even, and what kind of timelines you envisage? I know it's uncertain.
The sale I can tell, I don't know if it's in public. It may not be in public domain. Okay, let me make a point. Sale has happened at what we sold the last tower in 2017, December 2017.
You're confident of full recovery?
Yeah. I must just qualify subject to NCLAT proceedings.
What's the timeline you have in mind, approx?
Company says that given the nature of the collateral, CBRE says anywhere between four and six months' time.
Okay, thanks.
It can happen faster, but that's the internal conversations that management seems confident of.
Thank you. I'll join the queue.
Thank you. Ladies and gentlemen, due to time constraints, that would be our last question for today. I now hand the conference over to Mr. Karan Singh for closing comments. Thank you, and over to you, sir.
Yeah, 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 on the call today. Thank you and goodbye.
Thank you. Thank you, Karan. Thank you for hosting us. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of JM Financial, that concludes today's conference. Thank you all for joining us and you may now disconnect your lines. Thank you, ladies and gentlemen. With this, we conclude today's conference. Thank you all for joining us and you may now disconnect your lines.