Ladies and gentlemen, good evening, and welcome to the Earnings Call of Equitas Small Finance Bank Limited's Financial Performance for Q4 FY 2024. We have with us today Mr. P. N. Vasudevan, MD and CEO, Mr. Sridharan N., CFO, Mr. Murali Vaidyanathan, Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth, Mr. Rohit Phadke, Senior President and Head, Assets, Mr. Natarajan M., President and Head, Treasury, Mr. Dheeraj Mohan, Head, Strategy and IR. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. P. N. Vasudevan. Thank you, and over to you, sir.
Thank you. Good evening, and thank you for joining the call on what's a very busy week of results. The year has been a good year for us. We have been able to continue our investments in technology, products, and people to help us grow sustainably and create a robust banking platform. The bank has been able to navigate well during the rising interest rate cycle and kept our margins, yields, and profitability reasonably protected. With about 85% of our loan book being fixed-rate loans, we had a high impact on our NIMs over the last few quarters. As you may have noticed, on the loan side, we took a call to defocus from lending to NBFCs, as well as slow down on low-margin products like new commercial vehicle loans.
On deposits, we have increased our focus on retail TD, given the customer's propensity to move money to TD to lock in at higher rates of interest. We have also been able to pass on some of the interest rate increase to borrowers in the form of improved lending rates to ensure our margins are reasonably healthy. Parallelly, we also worked on improving the CD ratio, improving it from 103% as of March 2023, to bring it down to around 87% by March 2024.
We had written to RBI and received a clarification that in case of co-borrowers, say, an account with borrower A and co-borrower B going into an NPA, then an account with B as borrower and C as co-borrower, and if you have an account with C as borrower and B as co-borrower, and an account with B as borrower, et cetera, all of them will need to be marked as NPA, even if individually these accounts are standard. We also received an advice from RBI that in case of ESOP, given to staff who are not covered under the guideline of material risk takers also, against the current practice of accounting for them by way of intrinsic value, we should account for them under the basis of fair value method using Black-Scholes model.
After accounting for all of this, we were still able to deliver a decent bottom line for the quarter. Technology has been a key focus area for the bank all the while. While the LOS for was rolled out for Vehicle Finance last year, during the fourth quarter, we were able to roll out the LOS for Small Business Loans and Home Loans. Implementation of state-of-the-art CRM is underway. A revamped mobile and internet banking platform is also soon to be launched. We have also upgraded our core banking and other technology infrastructure. We also introduced a few innovations like Banker on Wheels, which is being piloted currently. We are confident all of these investments will help the bank in its quest to give a differentiated experience to customers.
While we have been using digital effectively to enhance customer acquisition, we are also focusing on how to harness technology to bring about enhanced controls over critical processes in the bank. We have committed to a certain level of resources to give focus to these action plans. These initiatives would further add to the bank's ability to sustainably grow. In this quarter's presentation, we also try to provide some direction on what the bank's long-term strategies around technology and liabilities are. We are strongly committed to put in place key enablers to help us become more competitive in the next three to five years. Our strategy continues to be to build a well-diversified, new-age bank, delivering consistent returns over a long period of time and showing resilience across market cycles.
We also stay committed to giving back to society through our two trusts, Equitas Development Initiatives Trust and Equitas Healthcare Foundation. While the Equitas Gurukul schools continue to do well and help produce good quality students from economically weaker sections, our cancer hospital has started operations effective November 2023, and that has been progressing well. We have completed over 155 surgeries in the last three, four months. We also treated more than 4,000 people in just a few months. So with that, I hand it over to Rohit to talk about assets.
Good evening, everybody. Advances have grown by 23% year-on-year. SBL Advances have grown by 30%, Microfinance by 20%, Vehicle Finance by 19%, and Affordable Home Loans by 60%. Ex-bucket collection efficiencies have been stable at 99.5% in SBL and Microfinance.
... and 99.7% in Home Loans, and 99.1% in Vehicle Finance. In SBL, Small Business Loans, the Merchant OD product has scaled up very well, with 39,000+ customers and advances of INR 950 crore. We intend to keep growing these volumes. Other than Merchant OD, the focus in the coming year will be growing the micro LAP book. Microfinance has gone fully digital, with 100% adoption of e-KYC and e-Sign. We continue to maintain that the unsecured book will not exceed 20% of advances. In Vehicle Finance, used car advances have grown by 71% year-on-year, with advances at 1,224 crore. The focus in the coming year will be on the growth of the used car and the used CV book.
We will defocus on NCV, but we'll continue to run the product. Affordable Home Loan portfolio has scaled up well, with advances growth of 60% year-on-year at INR 2,500 crore and a GNPA of 0.5%. On digital initiatives, Newgen LOS has gone live for both Small Business Loans and Affordable Housing. We have also launched a customer app called Selfe Loan, which will serve as a one-point contact for our existing and new customers. We have been able to increase disbursement yield by more than 1% from 17.43% in March 2023 to 18.74% in March 2024. Demand at the field level continues to be strong, and I'm hopeful of a good year ahead. Thank you, I'm handing it over to Murali. Good evening, friends.
Let me take you through a few of the snapshots other than the figures, which is available there for your perusal. I think this has been a very testing year, not only for us, but across the industry. I think overall, in terms of retail focus, which we have been talking about till this point of time, building a scalable and sustainable franchise so that we can leverage you know over a period of time. So we are deriving two phases to it, what has happened and what is going to happen. We'll cover it in you know two chapters. First thing is, through the year, few significant milestones, which we want to say is, this year, while TD growth has been phenomenal, we have you know got into the triple four days as a unique proposition.
The good part is number of new-to-bank customers entering the stream. We could add close to 1.2, 1.3 lakhs of new-to-bank customers who have come into this as an option, and then migrating into savings account is one, distinctive edge which we could get into these customers. Second part is our NR book has crossed INR 2,000 crore, and we are now present in 110 countries. That's customers across. So that's a significant, thing with AD- 1 project being, on the, anvil. I think, this is going to grow further, and our time zone-based VRM is actually helping us to deepen further and further.
Third important thing is our relationship management structure, what we have put in at this point of time is yielding good dividends because despite being a tough year, you could see as we end the quarter for our growth on SA, our growth on CA, our growth on RTD, and importantly, retail mix of what we are maintaining, 72 and, you know, 28 on bulk, we could hold that. And so this is helping us to go deeper and deeper into these families. And fourth important thing is, most important thing, which I want to say, that digital book has crossed INR 1,500 crore, which we have acquired through digital and full KYC accounts. So this four is on the liability side.
On the TPP side and the fee-based revenue, thanks to the InsurTech, where we, like, Vasu sir was saying, that, we are using technology, not for only disruption, sometimes technology as a facilitator. InsurTech is going to be one sort of a thing which has helped us to garner general insurance and health insurance totally through the same platform. Now, life is also integrated. As we move along, I think this will be the biggest productivity enhancer. Adding to the TPP, we have a range of AUM growth in form of mutual fund. Predominantly, we focus on SIP. We have added close to 18,000 active SIPs in last one year, who are now doing, you know, continuous investment through us.
Third important proposition, which has helped us to build size as by what we discussed in the last call, we are now close to 20,000 customers whom we have mentioned in the presentation also, who are, you know, ability to use and block and then, you know, then it's their allotment. But the good part is now from a saver to investor to, you know, we are getting into the trader segment also. So all these three segments, we have a proposition, and all can be done digitally, is one unique proposition that had happened.
And last but not the least, as we keep expanding now, we are philosophically moving towards a situation, what we have mentioned in the presentation, that is moving from unit resourcing to family sourcing as one key vertical, which means going deeper at a family level, having a family level proposition, one. Second is focusing on mass, only focused as, as a segment through digital sourcing. And third, getting AD- 1 and NR as a proposition is going to be—these three is going to be one of the key forefront drivers as we get into coming years, because only through that, we believe that our cost of funds can be managed. And fourth and last thing is transaction banking and current account, which we'll touch. So overall, it's been a very encouraging year.
Overall, I think, the patronage of customers as well as, you know, employee productivity has been good, and I wish, you know, we will sustain this momentum in coming years. Thank you. I'll hand it over to Nat.
Good evening, friends.
Q4 of FY 2024 has been a relatively good quarter in the market front. On a quarter-on-quarter basis, Indian ten-year yields trended lower and closed just above the 7% mark as U.S. rate cut expectations and anticipation of inclusion of Indian bonds in global Morgan Stanley Bond Index triggered a risk-on rally in India bonds. However, the U.S. Fed continues to be data-driven, but ongoing geopolitics has slightly tempered expectations of earlier and faster-than-expected rate cuts, and market is divided on the horizon of the U.S. Fed's attempt to bring inflation below the targeted level of 2%. It is a good quarter for equities globally. Dow Jones gained almost 6%.
Indian equities also continue to see a run-up, but more modest in Q4 FY 2024, with gains of almost 2.8 for the frontline NIFTY 50 Index, which continue to rise above 30,000 levels. For the upcoming quarter, short-term volatility, volatility is not ruled out as we approach national elections. Street has priced in a likely outcome of elections, and barring any negative surprises, we expect both equity and bond markets to stabilize towards the second half of the quarter. Supply lines can be an issue, especially for oil, if situation in Israel and Gaza worsens and result in higher inflation. Escalation by Iran continues to stoke fires. As such, geopolitics could be a slightly more pressing issue as we move ahead.
Despite India's economy continuing to stabilize, consolidate, and grow, considering the global nature of trade and supply chain, we can expect volatility going ahead, despite a strong local economy. Hence, we view the market as cautiously optimistic. We continue to remain positive on the India growth story over the medium term to long term, as domestic economic activity continues to be resilient and is expected to further pick up in the new financial year as government's infrastructure spending, along with private CapEx, are expected to accelerate. We will await the budget post-elections for further clarity on focus areas for the new government. Thank you, and I hand it over to Sridharan.
Good evening, everyone. Our net interest income for the quarter came at INR 786 crores, as compared to INR 707 crores during the same quarter last year, registering a growth of 11% year-on-year. Other income for the quarter came in at INR 222 crores, as compared to INR 215 crores during the same quarter last year, registering a growth of 3%, resulting in a net income growth of 9% year-on-year. The total operating expenditure came at INR 634 crores and remained stable with an increase of 4% sequentially. Pre-provisioning operating profit, PPOP, grew 4% Q-on-Q to INR 375 crores, and PPOP to assets remained stable at 3.45% for the quarter.
Tax for the quarter came at INR 208 crore, as against INR 190 crore during the same period last year, registering a growth of 9% year-on-year. ROA and ROE for Q4 FY 2024 stands at 1.91% and 14.22% respectively. Next is on the one-time P&L impact items in Q4 FY 2024. The first one, based on the bank's proactive clarification obtained from RBI pertaining to classification of loans of co-borrowers, when the primary borrower's loan account becomes an NPA, the bank also classify the co-borrower's loans as NPA. The bank has classified INR 38.45 crore worth of loans as NPA during the quarter, and INR 15.17 crore has been provided as a provision on account of this classification.
Second one, due to change in accounting policy as per the RBI advisory, the bank has expensed INR 29.21 crores additionally as an ESOP cost in respect of the grant issued after 1 April 2021 in respect of non-material risk takers and control staff. Third one is a benefit which is of INR 11.89 crores on account of the excess provision for gratuity and leave encashment as per the actual valuation. We estimate that our PAT, ROA, and ROE, adjusting for this, would have come in at INR 233 crores, 2.15%, and 15.93% respectively for the quarter. On the one side, one time impact, cumulatively for the year, we have taken a hit of approximately INR 75 crores towards additional provisions and employee costs on account of ESOP.
The recurring costs on these items will be marginal. During Q4 FY 2024, the bank has securitized and assigned advances worth INR 584 crore pertaining to HF and VF advances. The total provision for Q4 FY 2024 is INR 107 crore, which also includes a provision of INR 15.17 crore pertaining to provisions under the co-borrower accounts, which has been explained, even though they were standard on a DPD basis. GNPA improved by eight basis points year-on-year to 2.52% in Q4 FY 2024, as compared to 2.6% in Q4 FY 2023. Including the securitization book, GNPA would stand at 2.39%, and NNPA improved by two basis points year-on-year to 1.12% in Q4 FY 2024, as compared to 1.14% in Q4 FY 2023.
Based on the current advances mix, the bank is maintaining healthy PCR of 56.06%, and it continues to follow stringent provisioning norms across all asset segments. On a full year basis, the bank has registered a balance sheet growth of 30%, PAT growth of 39%, ROA of 2% and ROE of 14.43%. Our net worth now stands at INR 5,968 crores, with a book value at 19.01 per share and earnings per share of INR 7.12.
...As of March 31, 2024, the total Tier [capital] are at 21.7%, with the Tier 1 at 20.71% and Tier 2 at 0.99%. The board of directors have proposed a dividend of 1 per share, subject to the approval of AGM. With this, I would like to hand over to operator, and we'll be happy to take all the questions from your end. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Shreepal Doshi from Equirius. Please go ahead.
Hi, sir. Good evening, and thank you for giving me the opportunity. So the first question was pertaining to the RBI clarification impact on the PNL. So, like, which segment of you know loan book was this you know coming from? And just wanted an update on the Tamil Nadu flood related impact on each of the segment for us.
Hi, Shreepal. Rohit here. Most of the co-borrower impact is coming from the HBL portfolio. And, Tamil Nadu flood impact is now more or less gone away. It's a very minor stuff which is remaining, which will get even. As of now, there's no, there's no future, this thing, it will get evened out.
Okay. And so on the MFI front, like, in the deck, it is mentioned that it is doing well, and we are seeing improved loyalty from the customers as well. But if you look at the GNPA for that segment has been inching up in the last two, three quarters. What explains that? Are we, like, if you can throw some light on that?
Sure. Sure, Shreepal. So, in Microfinance, if you look at the industry, everybody has written off a large amount of, you know, a book, I mean, some amount of book every year. We have not written off a single rupee this year. Secondly, if you look at the data which is released by MFI Association, they have given data on the PAR 90 - 180. On the PAR 90 - 180, the industry is at 1%. Small finance banks are at 1.1%, and Equitas is at 0.9%. Third, you know, we post-COVID, we realized that some of these customers do come back when you go to collect, and we have beefed up our collection to ensure that, you know, we go and collect that money.
Otherwise, earlier the trend was the moment, you know, 90+ happens, the industry would simply try to write it off. But I think post-COVID, we've seen that, and that is why we beefed our collection. I think the Microfinance GNPA will be range bound between 3.5% and 4.5%. Does it answer your question?
Yes. So that will be the new normal for us.
Yes.
For the industry also, you feel that it will be an elevated number?
Yes, for the industry also, it will be an elevated number, is what I feel.
Got it. So one last question was on the cost of fund side. So, like, do you feel like are we nearing to peaking out on the cost of fund? And just how do you see the trajectory on the NIM side, because of the cost of fund implication?
See, with regard to cost of funds, I think more or less interest rates have peaked, and as we keep on repricing, another 10- 12 basis points is what is seen as from the higher side. So which means present position plus 12 basis points is what seen for this quarter or for this half year. Now, this will be because of two reasons. Now, it is directly related to what is going to be the rate cuts post the second quarter. So till that point of time, our maturities, which were, supposed to be repriced at a higher level, almost 80%-82% is already through, and incremental, deposits are almost frozen as a rate for last two, two and a half quarters.
So I think, another 10-12 bits is what we are seeing as a cost of it, rather than NIM.
On impacts on NIMs, so just to recap, FY 2024, the impacts on NIM were largely because of, one, interest rates going up, second, enhanced liquidity in the balance sheet because of improvement in CD ratio. Today, where we are, we don't think these two are driving forces for FY 2025, so NIM should largely be where it is, and only have an impact of the portfolio mix changing over a period of time. So you should expect NIMs where it is right now.
Got it. I mean, there's no likelihood of portfolio mix changing, because I think what we had guided or what we had said is that we've broadly achieved our targeted mix. So is there a thought process to tweak that mix as well?
Yeah. So we have, what we've also said is in the medium term and in the long term, our secured to unsecured ratio will remain, you know, 18-20, while Microfinance as a portfolio will continue to reduce in terms of portfolio mix. So to that extent, there will be, some impact on the, NIMs.
Got it. Got it, sir. Thank you so much, sir, for answering all my questions, and good luck for the next quarter.
Thank you.
... In order to ensure that the management is able to address questions from all the participants in the conference, please restrict your questions to two per participant. If you have a follow-up question, you can rejoin the queue. The next question is from the line of Sudarshan Nachimuthu from Prosperity Wealth Management. Please go ahead.
Hope you can hear me. So, my question is on your CD ratio. So you have guided to close the year with 90% CD ratio. However, we have closed with 87% as of this quarter. So, what was the reason for bringing down CD, changing more bits more than the guided range?
To 85. What was the reason?
Yeah. So we had been working towards bringing the CD ratio down over the last year, and again, the plan of 90, it has come down to about 87. Yeah, so this year our plan is to bring it down further to about 85 by March 2025. So this 2% is something that we'll be working on over the rest of the year.
Okay, sir. You mentioned you have securitized Vehicle Finance and Housing Finance portfolio due to final clear dispender. However, the yield drop of around 40 basis points, mainly from this final clear securitization?
Yes.
Even the quantum of securitization and 50 basis point drop in yield. Can you explain a bit more further on it?
Yeah. So, yields at the portfolio level have dropped largely due to securitization. So about INR 1,700 crore of loans, and that's about INR 1,100-odd crore of Vehicle Finance, and the rest is Housing Finance. So that interest income is roughly about INR 60-INR 70 crore for the quarter. So that's what has led to the portfolio yield drop.
Okay.
We accounted as EIS in the other income. In the presentation, you will see it under other income and asset fees.
Okay, sir. Okay. And, your incremental disbursement during this quarter, those yields have also dropped. So, couldn't we focus more on high-yielding products and, what was the reason for it?
Yeah, so like we said, we are slowing down on loans to NBFCs and new commercial loans, new commercial vehicle loans, which are typically lower yield loans. So that is one direction which we have taken. We've done it the last couple of quarters, and also going forward, we've given that as a guidance. So that should ensure that yields also at a portfolio level stay at these levels.
Okay. So your Q4 yields would be the stable yields?
That is too fine to actually look at this Q4 as stable yield. But I think you should look at it from portfolio mix and from, you know, the guidance we've told you, how products will be, you know, slowing down and what we are accelerating. So don't hold us to Q4 as a number for the full year, but I think rather try to focus on NIMS, and we try to keep NIMS stable for the year.
Okay, yeah, understand that. Coming to the next part, so what is your current outstanding write-off pool as of this financial year closing?
Current outstanding write-off pool? Sorry, can you just repeat the question? Outstanding?
What is the write-off pool remaining with your bank? During two to three years, you've written off certain amount of loans. What is the remaining?
No, we have not written off anything this year.
Anything, okay.
Okay.
We have not written off anything.
Okay, sir. And just a follow-up question on your co-borrowing classification. So you mentioned it is for Small Business Loans. So, is it also gonna affect the Microfinance loans given the-
No, no. Just to correct you, see, this is at a customer level at the bank, so it is not specific to one product you do it. NPA is at the customer level at the bank. Where the NPA of INR 38 crore has come from is what we said: it is largely from Small Business Loans. Like, you know, Microfinance doesn't have co-applicants. Co-applicants are largely in the other books. But this norm is applicable at the bank level for all products, because it is at a customer level, not at the loan level.
Okay. Copy. Thank you. That's it from my end.
Okay. Thank you.
Thank you. The next question is from the line of Rajiv Mehta from YES Securities. Please go ahead.
Yeah, hi. Congratulations on good performance, and thank you for giving me this opportunity. First question is: What will be the share of 440-day and 880-day deposit products in the stock and in incremental TD sourcing?
In incremental TD process today, it is close to 60%-65% of the incremental sourcing.
Yeah, both the products?
Yeah.
Okay. And just on clarification, when you report yield on gross advances and yield on advances, this yield on gross advances will be including the securitized book, right?
No. Yield on advances does not include, that is on balance sheet what you see in advance. That's why we've added a new line, yield on gross advances.
Yeah, correct. So that is what I was checking. So when I look at yield on gross advances, which is including the securitized book, that has been coming down for the past two quarters, whereas yield on disbursement has materially increased.
... Correct.
So, why would this happen?
It's actually the underlying portfolio mix. So like, like, you know, Small Business Loans also has a range from 14%, 15% all the way to 20%, 24%. Same again from Vehicle Finance. So it's, it's got to do with some of those mix changes. And also possibly because Microfinance is now 18%, that's also dropped by 1%. It's largely linked to that.
Okay. Okay, just last question. I see the momentum in housing and used CV disbursement, but the momentum has been somewhat stagnating in recent quarters. So have we, have we changed, has there been any change in the approach?
No. So we have not changed focus, but the last quarter, the focus was more on increasing yields. The past six months, the focus was more on increasing yields. Now that, you know, the mindset of the field has changed, you know, they've grown used to now lending at higher yields. I think we'll get back, the growth in UCE.
And just lastly, Dheeraj, you can spell out the ex-bucket collection efficiency in MFI, SBL, Vehicle Finance, and Affordable Housing.
Yes. So the ex-bucket collection efficiency in SBL is 99.5%. In Microfinance, it's 99.5%. In Vehicle Finance, it's 99.1%.
No, March, March collection, ex-bucket collection. It will always be at one point in time.
Yeah, it is... See, all the collection efficiency is at one point in time. That is end of March, 31st March, for the month of March.
Okay. Not for the whole quarter?
No, no, no, no. It's not for the whole quarter. See, ex-bucket is always calculated for the month as a whole. Like, that month, how are you doing? What is your performance?
Okay.
Every month, if you do well, then your portfolio is good.
Got that. Got that. Thanks so much for answering all my questions. That's it, bye.
Thank you so much. Participants, requesting you all to restrict your questions strictly to two per participant. If you have any follow-up questions, you can always rejoin the queue. Thank you. The next question is from the line of Abhishek Murarka from HSBC. Please go ahead.
Yeah. Hi, good evening, everyone, and thanks for taking my question. So my first question is on CD ratio, and, you know, I'm just looking at the sharp drop this quarter. Of course, it was intentional, but at what level are you comfortable maintaining it? So you're looking at 85 by the end of the year, but, is that a level which you think the RBI is also going to be comfortable with? Or there's a chance that, you know, if they come back and say 80, you can go down to 80. So how do we think about this ratio going forward?
Yeah. So, we will be looking to take it down, as I mentioned earlier, also to about 85 by March 2025. And I think that should be a comfortable level, because in that 85, we are really not including the impact of refinance. So if we include the impact of refinance, obviously it will be even lower. Second thing is that unlike universal banks, small finance banks have a capital adequacy ratio requirement of 15%. And, because of that, you know, a small finance bank tends to have a higher level of capital contribution to the balance sheet. And, so the CD ratio of universal banks and small finance banks, in that sense, are not directly comparable.
I think we believe that 85%, without including refinance, is a very good, comfortable position to arrive at.
Okay. So if you include refinance, you've given that ratio in the PPT, so that also will go down by maybe 1 - 2 percentage points more, not, not anything more than that.
That's right. That's right.
Okay. And then in that case, incrementally, I think deposits and loans can grow in step, right? Loan growth does not have to lag deposit growth by a large amount.
Except, additional SLR CRA requirements.
Okay. So what kind of loan growth are we looking at? Are we... Because 20, I guess, is partly also because of the securitization that you did in the quarter. So if I look at the gross advances, 23%, are you looking at mid-20s as a run rate where you want to be?
Yeah, I think our portfolio growth, advances growth should be on a gross basis around 25%. That should be our focus.
Okay. And finally, just, just deposits. So now, you know, again, you don't need a 40% kind of deposit growth. There's a lot of bulk that you've classified, that 38% bulk TD. So that should ideally run off, which would be maybe a little higher cost. So is that something we should expect, that the mix should move more towards retail TD and less towards bulk?
No, in that bulk, there are two segments. One is institution as a segment, financial institution as a segment, and individuals. So if you see our book, it is 72% retail and 28% is from institutions. So depending upon the situation, bulk is, you know, dependency on the market rates and what is the requirement at a bank level. We will keep calibrating it. So as of today, out of 36,000, 35,000, 7,500-8,000 is what bulk is all about. And predominantly, ours is non-callable and one year. So we will wait and see how retail picks up in treasury. Today, we are at 72%. If we sustain 72%-75%, 78%, what you say is right.
Got it. Got it. Got it. Thank you so much. I'll come back in the queue.
Thank you.
For further questions. All the best. Thank you.
Thank you... The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund. Please go ahead.
Good evening, sir. I was actually going to pick up on the deposit side in terms of concentration of deposits only. Though you might qualified as retail, there will be a lot of FNI deposits and so on in the mix, and we've seen in the past that those are not very stable deposits. So how many—what percentage of your deposits are non-callable that provide stability? And increasingly, would you look at, you know, is there any way where you can increase the granular deposit growth so that there's stability in your deposit base? That's my question, thank you.
Thank you. Ours is the most stable term deposit base. If you go to the presentation, the slide, less than INR 2 crore, which is categorized as retail, 62% of the book of deposit is less than INR 2 crores, okay? Which means these are all those set of customers who have positioned INR 2 crores and individual average ticket size of INR 4.5 lakh-INR 5 lakh. That's the amount of customers who are having it, so it's fairly stable. Next comes the institution. We have close to 22%, as I said, from coming from institution. Out of that, 91% is non-callable with a tenure of one year. So it is one year block and non-callable. So our concentration risk in terms of non-callable to callable, if you see into it, there is callable less than 10% is the present mix.
Plus greater than INR 10 crore, okay? It is 30% of the book. This is a place where you have to see the non-callable, which is 90%, and it is only 30% of the total book.
Thank you very much, sir. That explains it. Thanks a lot. Good luck.
Thank you.
Thank you. Our next question is from the line of Nihar Shah from New Mark Capital. Please go ahead.
Hi, Vasu and team. Just a couple of questions from my side. My first question is, you know, thank you for, you know, pointing out some of the investments that you are making into the new product segments of credit card and, you know, personal loans and all. If I total that number, it comes up to about INR 520 crore. You know, can you give us an idea as to how you think about the timing over the next three years of the, expenses? And then, you know, how does that then play into what you think is the reasonable cost to income ratio, outlook for the next three years as well? That's the first question.
Yeah. So, one, this investment, this slide has come because last quarter we had a discussion around this, so we thought we would give clarity on, you know, what the investments will look like from a three-year horizon. Just to give you a nature of some of these expenses, some of them will come in the depreciation line item, and some will come as the regular OpEx line item, especially given with technology. All of this is baked into our, you know, our, let's say, soft, guidance in terms of how cost to income, cost to assets will look like.
What we can say is for this year, we think that cost to income will look, you know, a little sticky, and we've given that range between, you know, 60%-63% is what we think we will be in the cost to income during this investment phase. Some of those investments is what we've put in the slide. We may have a few more, depending on how, you know, the bank grows. Like, we talked about it earlier in terms of branches, in terms of brands, et cetera, brand building, et cetera. But these numbers from how it should pan out from a cost to income is, we should keep cost to income stable at where it is or in this range of 60%-63%, and still hopefully deliver, you know, consistent ROEs.
Got it. That's great. Thank you. My second question is just a little bit of a clarification on, you know, you mentioned the INR 60-INR 70 crores, impact of the NIM on, of the securitization. Now, from what I understand is that, you know, whatever the interest expense, you, on the securitized portfolio, the interest income is sort of recognized in the, in the interest income line, and then it's only the excess that is recognized in the other income. Is the INR 60-INR 70 crores the total interest income that you earned on the securitized portfolio, or is it just the incremental, or is it the incremental piece of it?
In the case of securitization, we don't take it into the interest income. So it is the excess in interest spread, which we call AIS, that is taken as other income. So the INR 60 crore or INR 70 crore which you have mentioned is the, what is actually, you know, coming to us actually.
Okay, so that's the total interest income that you earned on the securitized portfolio?
Correct.
Got it.
It's really because of the total interest of that portfolio, which is securitized, and the excess interest income comes in the other income and not part of the net income.
Yeah. Net interest income.
Got it. Hey, can you quantify that, that excess income that has come into the other income? Is it possible?
Total, total, yeah.
INR 22 crore will come in, other income.
INR 22 crore are coming for this quarter.
Eleven crores.
11 crore for the last quarter.
11 crore in the last quarter. Okay, fair. Yeah, that's it from my side. Thank you so much.
Thank you. The next question is from the line of Nidhesh from Investec. Please go ahead.
Hi, thanks for the opportunity. So if you look at the disbursement trends in this quarter, Q4, on a year-over-year basis, there is a moderation in disbursement growth across most segments, whether it is Microfinance or Small Business Loans or advances. So, what is the reason for that, and how should we think about disbursement growth next year?
If advances have to grow at 25%, obviously we have to grow disbursements, because there's always a foreclosure component in it. So disbursements will definitely grow across all products. We see strong demand in the field.
... Okay. Any particular reason why the disbursements were weak in this quarter?
As I said, you know, our focus was primarily on growing yields, right? Because we need to change the mindset in the field also, that, you know, you need to lend higher, at higher rates and, stronger disbursements. So the focus was more on yields, not really dropping disbursements. So disbursements will continue to grow, that is a given.
Okay, sure. From medium-term perspective, should we expect our yields on advances to trend towards yields on disbursements? So today, there is a gap of around 170 basis points between disbursement yield and on-book yield on advances. So over, let's say, couple of years, it should both of these should converge, right?
Yes. Not the entire yield on disbursement will translate to portfolio yields, but yes, you should see it pick up.
Okay. And lastly, what is the difference between yield on advances and yield on gross advances? Is the numerator same for both of them, or?
No, no, no. Numerator is not the same.
Yeah.
We have, the securitized portfolio is the difference. So in the denominator, the assets with the securitized will not show, and also in the numerator, that corresponding effect is given.
So, in the numerator, are we including only excess interest?
No, no, no, no. No, no, we-
Only gross advances.
No, no. Yield on advances, we are not. Yield on gross advances, we are. So I think for to bring clarity, and because securitization can alter these numbers, I think we should all stick to yield on gross advances. So I think over a period of time, or hopefully from next quarter, we'll stop giving yield on advances and focus on yield on gross advances. Then you won't have this disturbance which we see due to securitization.
Okay. Okay, fine. Understood. Thank you. That's it from my side.
Thank you.
Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.
Yeah, am I audible, sir?
Yes.
Yes, yes.
Yeah. First of all, thank you very much, sir, for the opportunity. So first up, just a clarification. I mean, you mentioned that our cost of funds may increase by 10-12 basis points, I mean, the repricing which is left. So, NIMs that we are seeing falling for the last five quarters, it has been falling on a quarter and quarter basis. So, but we did mention that, we expect NIM to remain stable at this level, fourth quarter level, in the short term, right?
Yes. Yes.
In spite of this 10-12 basis point increase in our,
Because the pressure on NIMs because of improving CD ratio would have lessened. From 100%, we've brought it down to, you know, 85, 86, 87, 87. You won't see that pressure on NIMs going forward. So we are adjusting to that. This is based on our calculation.
Mm-hmm. Okay, understood.
Yeah.
And how much impact we see on the NIMs on the medium term, which you mentioned, because may come because of reduced MFI portfolio mix?
We can't quantify it now, so the way at least we are looking at is, how do we protect bottom line? How do we protect, you know, overall margins? These are very fine-tuned for us to, you know, put it all out of the call, but these are challenges which we will take up.
Fair enough. Fair enough. And, and in terms of ROA, and adjusted ROA was about 2.15% for this quarter. And, and you did mention that our cost to income will remain sticky. So how do we see the ROA for next two years or for FY 2025 at least?
Yeah. So I was also trying to point out on the presentation, we've spoken about trying to grow the small ticket, Small Business Loan, or we call Micro LAP, which are higher-yielding products. So these are some of the strategies we are, you know, trying to deploy to ensure margins hold. So I'll complete that.
ROA.
On ROAs, yeah, so we're trying to build consistency in ROAs and improve ROAs as leverage picks up. That's what we are focusing on. Hopefully we should continue to deliver, you know, this 2% ROAs.
2% ROA. Fair enough. And my, and last query is on your PCR. I think we have been quite vocal about improving our PCR ratio to 70% over the next 1-2 years. So how do we see that trajectory? From current 56%, how do we see that going into FY 2025 and FY 2026, and what would be the implication for the credit cost of the increasing PCR ratio? Yeah.
So, the PCR ratio, yes, 70% remains our long-term target, and I guess, we don't have a very specified timeline, plan to achieve that, but I think in a matter of over the three-year timeframe, we should be looking towards, reaching that, those levels. And in terms of credit cost, you know, more or less, our portfolio has come back to the pre-COVID levels now, and I guess, we are fairly on a steady state basis as far as, credit cost is concerned.
I think we should factor in something in the range of 1.25% on advances as credit cost.
Advance, 1.2% on your, I mean, on book or the gross advances? Gross advances.
1.25% on gross advances.
On gross advances. Okay. And this is in spite of your target to increase your PCR ratio rate?
Right. Including that.
Including that. Okay, fair enough. I think, that's it from my side, sir. All the very best to you. Thank you so much.
Thank you, Deepak.
Thank you... The next question is from the line of Pritesh Kumar from DAM Capital. Please go ahead.
Hi, sir. Good evening. Just two questions from my side. Somewhere in the opening remarks, we mentioned something about the unsecured MSME cap. How are we looking at it, and what is the, you know, just wanted to clarify what cap we are looking at and what is the trajectory of that cap?
I guess, this is something we have been consistently mentioning over the last few quarters. We want to have an 80/20 ratio between secured and unsecured. As on date, the bank has Microfinance loans, which are the only unsecured product that we have today. I guess Microfinance contributes about 18% to the loan book as of March 2024. We will be introducing personal loans. In fact, personal loans are going live between April and May. This month and next month, it will be going live, and credit card should be going live towards end of the calendar year. So these two products will come into that unsecured portfolio mix. So all three of them put together should continue to be within that 20%, you know, contribution.
So given that, MFI is not that focus area right now, so if it hypothetically comes down, we could have a cap for PL and CC as well, only?
See, Microfinance will continue to be a strong offering from the bank, because it not only produces direct business impact in terms of volumes and profitability, but it also enables us to cross-sell our Small Business Loan, the you know, the lower end of the Small Business Loan product, it enables us to cross-sell. So that is a segment that we will anyway be continuing to focus. Only thing is that Microfinance, as a contribution to the total advances, will come down, meaning that Microfinance will grow at a rate which is lower than the rest of the advance growth, and so its contribution will come down. And as that contribution comes down, that space will be filled up between personal loans and credit cards.
Got it. Sir, just one follow-up on that. Credit cards will be our own sourcing, right? We're not tying up with anyone.
Yeah. See, lastly, the credit cards and personal loans, both of them for that matter, lastly, the purpose of introducing that is for offering it to the existing customers to ensure that we are able to deepen our relationship. So a significantly large part of it will be anyway cross-sold to the existing customers. And whatever NTB customers that we acquire will be acquired directly by us. We are not really planning to go through aggregators or through websites or through anybody like that.
Got it. And lastly, sir, how are you thinking on the TD rates? I think we have not changed post August 2023. And given that now we are at a healthy rate of growth and we have a decent CD ratio, what are you thinking on the TD rate side?
See, the TD interest rates, you're talking of interest rates, right?
Correct, correct.
Right, right. See, the TD interest rate will be a, to some extent, a factor of what's happening in the market, right? So currently, if you see, the peak difference in interest rates between our TD rates and some of the large banks in the country, that peak difference is about 1.25%. Lowest interest rate is 8, 8.5. The highest interest rate of some of the largest banks in the country is one quarter. So the peak difference is 0.25%. So if the market also moves, we are most likely to move along with the market. And over time, I think we have mentioned in our presentation, Liability 2.0 strategy, so we have some...
That's something that's been rolled out by Murali and his team, and over the next 3-4 years, that will be a key focus of execution for the liability team. As that strategy progresses, that strategy is nothing but basically building a deeper, stronger relationship with deposit customers and account holders by way of cross-selling and ensuring that they are having many more touchpoints with the bank and not just one or two touchpoints. As that strategy progresses and as we feel more and more comfortable and confident in terms of the customer being, you know, associated with the bank on a longer term basis, we will start looking at the interest rate structures.
Got it. Thank you, sir. Thank you for this. Thank you, I'm done.
Thank you, Pritesh.
Thank you. The next question is from the line of Pallavi Deshpande from Sameeksha Capital. Please go ahead.
Yes, sir. Thank you for taking my question. So I wanted to understand on the other income, you know, even excluding the ARC, which, you're giving slide 19, what would be the trajectory going ahead? We've seen a decline in Q4, versus last year's Q4.
Other income decline.
Slide 19. Trajectory of other income.
Yeah. So, what will reduce in other income?
No, I think, are you asking the trajectory of other income?
One is the reason, and then, going by the trajectory. So Q4 over Q4, even excluding the income from, say, the ARC, which you've highlighted in the slide.
So AIS income is sitting there, the INR 20-odd crores. That is sitting in Q4. So that is the bump. And going forward, see, there are multiple drivers for other income. There's liability fee income, there's asset disbursement fee income. So,
... All of those are drivers, and they've been growing at 30%-40%, so you should continue to see that as the bank grows. The only exception from here was that the AIS or excess interest spread is being shown in other incomes.
Right. Right. Secondly, would be on Microfinance. I think, you mentioned about this, you know, the cross-sell opportunity that it offers you, so that, earlier guidance in terms of reducing it to 15%, does it stand, or where, where are we on that?
Yeah, that stands. Rohit?
So yes, as just now, you know, Vasu, sir, explained that we very, the Microfinance portfolio offers a wealth of cross-sell opportunities, and the biggest cross-sell opportunity that Microfinance offers is the Micro LAP product. You know, the Micro LAP product is small ticket size, the customer is the same, and it's a secured product. So we will definitely be focusing on the Micro LAP product. And since these customers in the second cycle, third cycle, fourth cycle, have paid us very well, it is a phenomenal opportunity. So despite the fact that, you know, Microfinance portion on the unsecured piece might see a slight decrease, the same customer base, the secured piece will for the bank.
So this Micro LAP will be classified under which, not under Microfinance then?
No, no. It will be classified as a secured product, as a Micro LAP product in under SBL.
Right. Right. And, just, lastly, on the NBFC side, we're seeing a sharper, you know, I think, zero disbursements kind of scenario. So what is the outlook next year in terms of lending to that sector or, are we done with the sector, basically?
Yeah. So, you know, we had started lending to NBFCs at a point in time when we were sitting on a fairly high level of capital adequacy, and the interest rate structure was such that it was, you know, making a profitable bottom line sense to the bank. Today, what's happening is that on both fronts, it's not making sense. You know, interest rate structures are more in a different way, and it's... So to that extent, lending to the NBFCs, for at least for us, is not very profitable, and that's one factor. Second is that our own high capital adequacy, which used to be in the past, has been fairly leveraged through growth over the last two, three years.
Today, our capital adequacy has come down all the way to about 21.7%, and internally, we do have a target that, you know, we would really not like to see the capital adequacy going below, maybe 18-19%. So somewhere along the way, we'll keep raising equity so that it doesn't really go below 20% or 19%. To that extent, you know, at 21.7%, we are not having such a high level of capital adequacy that we want to distribute that capital to, you know, low-yielding products. So we have to keep looking at the allocation of capital.
So given all this, we believe that for the next one year, we won't be really focusing on NBFCs, and we should see the trending further down as we go by.
Sir, you mentioned it being a low-yielding product. That's where I was coming from. I thought it's on the higher-yielding side, and that is, you know, I mean, the capital adequacy is-
Doesn't give us high yield. You know, it does give us only a low yield, but it made sense at a point in time when the interest rates-
Right.
were at different level and capital adequacy was very high. Today, both of them have changed, so it doesn't make sense for us. And lending to NBFC is not a strategic part of our business ever, you know? For example, the other one that they mentioned that we are we have gone a little slow is the new commercial vehicle lending, because currently the yield on that is the lowest amongst all our loan products. So we have slowed down on that. But that's not something like NBFC will exit, because that's part of our key strategic focus for the long term. So we will continue to be in the new commercial vehicle lending space. Only thing is we'll moderate the growth at a time, and then we'll speeden it up when the situation changes. Whereas NBFC is never our strategic product.
It's just a kind of an opportunistic product that we were trying to make some returns when it was available, and today it's not available, so we have no problem working out of that.
Right. Got it. Thank you so much, sir.
Welcome.
Thank you. The next question is from the line of Anurag Mantri from Oxbow Capital. Please go ahead.
Yeah, hi. Just one clarification on the other income. The liability and distribution income on slide 35 is the one which has seen a big jump up this quarter. Just wanted to confirm if that AIS income is coming here or elsewhere?
It's insurance, mutual fund, and broking.
Got it. So the liability and distribution income is, like, the INR 60 crore is a more sustainable number, or there is a bit of a seasonality given fourth quarter?
Yeah, quarter four, quarter four peaks. Quarter four peaks and all the other quarter... Normally, quarter four, for any, fee-based activity, is 35%-40% of the income. So stable state will be 25% lesser.
Got it. Thank you.
Thank you.
Thank you. Well, ladies and gentlemen, we would take that as our last question for today. I would now like to hand the conference over to Mr. P. N. Vasudevan for his closing comments.
Yeah. So thank you. Thank you so much for all of you for dialing in and, and peppering us with a lot of questions, enabling us to learn in the process, and improving our own ability to focus on the right direction for the bank. Thank you so much. Wishing you all the very best, and be in touch. Bye-bye.
Thank you. On behalf of Equitas Small Finance Bank Limited, we conclude today's conference. Thank you for joining us. You may now disconnect your lines.