Ladies and gentlemen, good evening, and welcome to HDFC Bank Limited Q2 FY 2023 earnings conference call on the financial results presented by the management of HDFC Bank. 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 a brief commentary by the management. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.
Okay. Thank you, Rutuja. Good evening to all. Let's start with a brief overview for the context. We believe that the continued recovery in domestic demand, boosted with the onset of festive season and higher government CapEx, provides support to the growth. While there are risks stemming from the possibility of global slowdown, higher inflationary pressure, and an uneven monsoon, consumer demand and fiscal spends are likely to keep the economy stimulated. Geopolitical instability, strong U.S. dollar, et cetera, continue to occupy center stage during the quarter. Activity indicators released during July to September quarter indicate that economic activity continues to hold up despite global risk. High-frequency indicators have risen so far this year and are also promising to provide further opportunity and optimism in the economy.
Labor market conditions are also improving in the rural areas, as seen by the fall in the MGNREGA work demand and a rise in wage growth. RBI raised the policy rate by 100 basis points in the quarter, taking the repo rate to 5.9%. The Central Bank has hiked rates by 190 basis points since May 2022. The Central Bank has kept its stance unchanged at withdrawal of accommodation while supporting growth. We estimate that the GDP growth to be around 7% for financial year 2023. Let's go through key themes. On the distribution expansion, we added 121 branches during the quarter, and about 500 more branches are in various stages in the pipeline to be opened in the next few months. We have 15,691 business correspondents, an increase of 73 over prior quarter.
Gold loan processing are now offered in 2,960 branches, an increase of 900 branches in the current quarter and up 2.2 times over March 2022. Payment acceptance points have grown by 269,000 in the quarter to 3.5 million and have grown by over 1 million versus prior year, a growth of 41%. Wealth management is now offered in 502 locations through hub-and-spoke model. We have expanded by 145 new locations in the quarter. We plan to drive increase in market share through deepening in B30 cities. In customer franchise building, our people have acquired 2.9 million new liability relationships, exhibiting a healthy growth of 22% over prior year and 11% over prior quarter.
Over the last five quarters, we have steadily acquired over 2 million new customer liability relationships per quarter, enabling us to further broad base and deepen our relationships in time to come. On cards, we have issued 1.2 million cards during the quarter. Total card base is now 16.3 million. During the quarter, we also closed 2.4 million cards which have been inactive for a period of time in accordance with the RBI circular. We are focused on granular deposits. Total deposits amounted to INR 1,673,000 crore, an increase of 4.3% over prior quarter and up 19% over prior year. In retail deposits, we added INR 71,000 crore during the quarter and INR 235,000 crore since prior year September. Retail constitutes about 83% of total deposits.
Retail deposits have been the anchor of our deposit growth. CASA deposits recorded a strong growth of 15.4% year-over-year, ending the quarter at INR 7,59,000 crore, with CASA ratio at 45.4%. Retail CASA grew by 19%, and retail total deposits grew by 20.4% year-over-year. Term deposits registered a robust growth of 22% year-over-year, ending the quarter at INR 9,13,712 crore. On the advances side, which were at INR 1,479,873 crore, grew by 6.1% sequentially and 23.4% over prior year. Our retail advances growth was robust. Domestic retail grew by 21.4% year-over-year and 4.9% quarter-over-quarter. Card spends have grown 9% over prior quarter.
Commercial and rural banking, which drives our MSME and PSL book, continued its momentum with a year-on-year growth of 31% and quarter-on-quarter growth of 9%, 9.4%. Our SME businesses are present in 90% of the districts in the country. Rural business reach expanded to 1.42 lakh villages and is on track to reach the objective of two lakh villages. Wholesale segment witnessed a strong growth year-on-year of 27% and quarter-on-quarter growth of 9%. On the technology front, the bank continued its momentum on the technology and digital transformation to provide greater customer experience through a digital and enterprise factory. HDFC Bank One, that is the customer experience hub, was launched and we migrated phone banking, virtual relationship banking, and telesales on this platform in the recent quarter.
It enhances our customer relationship management process using AI, ML, and conversational bot, enabling round-the-clock self-service capabilities akin to a human interaction. Phone banking voice support rollout is underway across the country, adding more cities along with multilingual support. We see this as a significant step in our journey to create an engaging customer experience, while at the same time bringing in productivity improvements to our call center operations. We launched PayZapp 2.0 to a closed user group for performance optimization and improved payment experiences. We expect to broadcast the rollout shortly. SmartHub Vyapar app, a one-stop merchant solution, was formally launched to facilitate instant digital and paperless merchant onboarding and allow merchants to accept interoperable payment across multiple payment modes, including cards, tap and pay, UPI and QR code. The platform is adding more than 60,000 merchants every month.
As of end September, over 1.6 million small businesses are on the SmartHub platform. In Q2, we received a total of 261 million visits on our website, averaging about 30 million unique customers per month with a year-on-year growth of around 12%. Our well-established distribution network, combined with our focused digital offering and relationship management, continued to fuel growth. Balance sheet remains resilient. LCR for the quarter was at 118%, capital adequacy ratio is at 18%, and CET1 is at 16.3%, including profits for the half year ended September 30, 2022. Let's start with revenue. Net revenues were at INR 28,617 crores.
Core net revenues were at INR 28,870 crores exclusive trading and mark-to-market losses, which grew by 18.3% over prior year and 6.2% over prior quarter, driven by advances growth of 23%, deposits growth of 19%, and total balance sheet growth of over 20%. Net interest income for the quarter at INR 21,000 crores grew by 18.9% over prior year and 7.9% over prior quarter. The core net interest margin for the quarter was at 4.1%. Prior year was also at 4.1% and prior quarter was at 4%. Based on interest earning assets, the core net interest margin was at 4.3%. Moving on to the details of other income.
Fees and commission income, constituting three-fourths of other income, was at INR 5,800 crore and grew by 17% over prior year and 8% over prior quarter. Retail constitutes approximately 93% of the fees. Forex and derivatives income at INR 948 crore was higher by 9.3% compared to prior year. Trading and mark-to-market losses were INR 253 crore loss. The mark-to-market losses are mainly from our AFS investments in our corporate bonds and PTCs due to rate movements in the front end yield curve. Prior quarter was also at a negative INR 1,312 crore and prior year was a gain of INR 676 crore, which were then opportunistic from an investment portfolio. Other miscellaneous income of INR 1,098 crore includes recoveries from written-off accounts and dividends from subsidiaries.
Excluding trading and mark-to-market losses, total other income at INR 7,849 crores grew by 16.7% over prior year. Moving to operating expenses for the quarter, which were at INR 11,275 crores, an increase of 21% over prior year, an increase of 6.9% over prior quarter. As I mentioned earlier, we added 813 branches and 2,226 ATMs since last year, 121 branches and 248 ATMs last quarter, taking the total network strength to 6,499 branches, 18,868 ATMs and 15,691 business correspondents. Cost to income ratio for the quarter was at 39.2%. Moving on to PPOP.
Our core PPOP grew by 16.6% year-on-year and 5.8% sequentially. Our pre-provision operating profit was at INR 17,392 crores. Pre-provision operating profit for the quarter is 5.37 times of total provisions. Coming to asset quality, the GNPA ratio was at 1.23% as compared to 1.35% prior year and 1.28% in the prior quarter. Out of the 1.23%, about 19 basis points are standard. Thus, the core GNPA ratio is at 1.04. However, these are included by us as one of the other facilities of the borrower is in NPA. Net NPA ratio was at 33 basis points, prior year was at 40 basis points and preceding quarter was 35 basis points.
The slippage ratio for the current quarter is at 36 basis points or about INR 5,700 crores. During the quarter, recoveries and upgrades were about INR 2,500 crores or about 19 basis points. Write-offs in the quarter were about INR 3,000 crores or approximately 22 basis points. There were no sale of stressed or return of accounts in the quarter. The restructuring under the RBI resolution framework for COVID-19 as of September end stands at 53 basis points, INR 7,851 crores. In addition, certain facilities of the same borrower which are not restructured is approximately nine basis point. On provisions, the total provisions reported were around INR 3,200 crores as against INR 3,900 crores for the prior year and INR 3,200 crores during the prior quarter.
The provision coverage ratio was at 73% as against 71% in prior year, and it was at 73% in prior quarter too. At the end of current quarter, contingent provisions and floating provisions remained at close to the prior quarter level at INR 11,000 crore. General provisions were at INR 6,800 crore. Total provisions comprising specific floating contingent and general provisions were about 171% of gross non-performing loans. This is in addition to the security held as collateral. Floating and contingent and general provisions were about 1.19% of gross advances as of September quarter end. Now coming to credit cost ratios, the total annualized credit cost for the quarter was 87 basis points. Prior year was 130 basis points, and prior quarter was 91 basis points.
Recoveries which are recorded as miscellaneous income amounted to 22 basis points of gross advances for the quarter as against 23 basis points for prior year as well as prior quarter. The total credit cost ratio net of recovery was at 64 basis points as compared to 103 basis points in prior year and 68 basis points in prior quarter. Now coming to profit. Profit before tax was at INR 14,152 crore. Net profit after tax for the quarter at INR 10,606 crore grew by 20% over prior year. Now some highlights on HDB Financial Services. This is on a year basis. The momentum in disbursements continued during the quarter, which was at INR 9,860 crore, registering a healthy growth of 29% year-on-year and 8.5% sequentially.
Customer franchise grew to 10.4 million customers with 6% additions during the quarter and an increase of 33% year-on-year. HDB Financial Services has started to augment their distribution network and opened four branches in the quarter, taking it to 1,407 branches spread across 1,009 cities and towns. The total loan book as of September end stood at INR 63,112 crores, with secured loan comprising 70% of the total book. Net revenue for the quarter was INR 2,201 crores, a growth of 14.9% on a year-on-year basis. Cost to income for the lending business was at 38.4%.
Provisions and contingencies for the quarter were INR 351 crores as against INR 398 crores for prior quarter and INR 634 crores for prior year. Quality of the book in the current quarter has sustained the improvement shown in the last two quarters. Stage three as of end September stood at 4.9% after factoring in the 1.1% impact of the new RBI guidelines from late last year, reflecting sustained healthy collections. The provision coverage ratio on secured and unsecured books stood at 46.5% and 92% respectively. Profit after tax for the quarter ended September 30 was INR 471 crores as against INR 192 crores for the quarter ended last year same time. Return on assets slightly over 3% and return on equity 18.5%.
Earnings per share for the quarter INR 5.96, and book value per share was INR 131. HDB remains well capitalized with a capital adequacy ratio at 20.8%. HDB also continues to augment its digital investment to enable the next level of growth in its business across segments while maintaining healthy asset quality. Now moving on to HSL, again on a year basis. The physical network for the customer acquisition remains steady. HSL has 215 branches across 147 cities and towns as of end September. HSL has grown its client base very strongly with a year-on-year growth of 36% over prior year September, taking the overall client base to 4.14 million. HSL's digital offerings are enjoying very good traction in the market.
Over 91% of retail broking revenue is from trades that are originated digitally. The total reported revenue for the quarter was INR 468 crore as against INR 489 crore in the prior year, and net profit after tax was INR 191 crore as against INR 240 crore in the prior year. Earnings per share in the quarter was 120, INR 120.59 and book value per share was INR 1,084. In summary, strong momentum coupled with our seamless execution in delivering comprehensive range of products and services has helped us capitalize on growth opportunities. Our results reflect continued robustness across various parameters, advances growth 23%, total deposits growth of 19% and retail deposits growth of 20.4%. Core operating profit growth excluding bond sales of 16.6%.
Profit after tax increased 20.20%, delivering the return on asset of over 2% and ROE of over 17%. Earnings per share reported in the quarter is at INR 19.1. Book value per share stands at INR 456.2. With that, may I request the operator to open up the line for questions, please.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to limit their questions up to two per participant. If time permits, you may join the queue for any follow-up. The first question is from the line of Mahrukh Adajania from Nuvama. Please go ahead.
Yeah. Hello, sir. Congratulations. Sir, my first question is on the liability growth going ahead. Of course, this quarter was impressive with strong retail growth. As we move closer to the merger, and if you assume that RBI does not give any dispensation, then how would the liability strategies change? Would it be focused on wholesale borrowing, wholesale deposits?
Even this quarter, your wholesale borrowings have also grown with deposits. What is the color or I mean, what kind of borrowings would these be?
Mahrukh Adajania, thank you. In terms of the deposit strategy or the funding strategy, as we have articulated over the last three months, including the May month or the June month when we have met many of you, continues that is a very important aspect, focus area for our execution. There are several components of that strategy, which is branch-led, relationship-based, and we articulated in terms of how self-funding across various products to deepen those relationships and get the funding is an important. We gave you some examples of various opportunities that exist there, right? That remains and it continues to be the focus and that is why you see that the retail push is there, INR 71,000 crores of growth in the quarter in retail.
The same way last quarter, retail did INR 50,000 crore of deposit growth last quarter. We are building up that momentum in retail as you see. The branch network that we open is a more medium term, long term, so that the pipeline in two, three years' time continues to be there. That's what the branch is. Currently it is about harvesting and utilizing those branches. 60% of those branches are migrating from one vintage bucket to another vintage bucket. That is what is driving and including bringing in the new customers, right? That continues to be the mainstay of the strategy. There are other market borrowings that opportunistically happen and that will continue depending on what happens in the market.
Our treasury takes those calls and depends on what funding for the day is required. That is how that is handled there.
Got it, sir. Sir, my next question is if you could share any outlook on margins, not necessarily in the very near term, but where do you see margins going, say, two to three quarters down the line on a standalone basis? I know merger will put pressure on margins. Any outlook on standalone margins?
I generally talk about margins rather than an outlook where you see, you know that the bank does not provide any forward-looking guidance. I do want you to take back and so that you can think about what that margin means, right? Typically we have operated between 3.94%-4.45%, right? That's the typical range at which we operated. When we operated at that range, the mix of products is very important, which is, the retail mix between 53%-55% and the wholesale mix between, wholesale component of that mix, 45%-47%. Over the last two, three years, it's switched. Retail is now at 45%. Wholesale is at 55%. It's switched, right?
We are at the low end of that range and now the rate cycle is going up, right? You are seeing some slight pickup in the margin because there's a lead and lag effect. Most of the wholesale products, we have about 54-55% of the book which is floating index-based floating rate. We have another 45% that's fixed rate. Fixed rate mostly is in the retail type of loans. Within that floating rate, as the rates moved up, you're seeing that lead effect on the asset repricing happen, right? That's there. There are two aspects. One, the interest rate cycle moves a bit up, there is always an opportunity to the extent the rate goes up, lead and lag. Lag on the deposits, lead on the loans.
That is there. The second aspect is that we should continue to see the mix change that needs to happen. As we have said, the economy is 60% consumption led. That is how over a period of 10-20 years we have had the lead in the retail. Now that momentum is picking up. You saw the last quarter, retail book growth over 20% on advances, call it, sequential growth close to 5%. Even in the June quarter it was similar. We are seeing that it is 20+, right? That's the kind of rate at which the retail is moving. But as long as you see that continue to pump and move up, you'll see that the mix is moving.
That has also given the opportunity for the margin to move up. These are the two aspects you can keep in mind in your models to think about how the margin moves.
Okay, sir. Thank you.
Thank you. The next question is from the line of Suresh Ganapathy from Macquarie. Please go ahead.
Yeah. Hi, Srinivasan. I had two questions. One is on the deposit rates itself. The Reserve Bank of India has hiked rates by 190 basis points, but none of you banks have even hiked deposit rates even by half of that amount, right? If I look back at your own deposit rates in the one-year to two-year category, they have only gone up by 50, 60 basis points in the last six months. There is a significant gap between what RBI is doing versus what you guys are doing from a monetary policy transmission. Now that the second half is going to be a bit tighter and tougher, what is the outlook on deposit rates itself? Because it is grossly inadequate compared to what the Reserve Bank of India itself is doing. How do you see that panning out?
That's point number one. The second question is on branch addition itself, that you have a targeted branch opening of 1,500-2,000 branches every year. If I look at the first half, the number of branches added, if I'm not wrong, is 350. Again, significantly below that target. How do you look at the branch additions and you think this second half is going to be very strong? I'll just squeeze in one more question with respect to this NCLT approval which has come for convening a shareholders' meeting. Does this mean that the pace of approvals are better than expectations, which means that the September deadline that you're talking about, the merger which was initially said in the presentation, can be brought forward? Thank you.
Okay. No, thank you for that, Suresh. Yeah. Three really important one. First is in terms of the deposit rates as such. See the way we think about the deposit, you know, the CASA is a different aspect, right? It's completely administered, so we leave that to the side. This is about the time deposits that you're talking about.
Yeah.
The way we price the time deposit is that, if you think about certain public sector peers and private sector peers, so the bank in its ALCO determines in terms of how to be competitively priced, right? And when you look at that, we are more or less in line with certain private sector peers. That's how the pricing is, so that it is not at an advantage or a disadvantage. We are there. It is only about the execution capability. It is not rate-based, rate-driven kind of a sales or a marketing process. It is more of a relationship-based and a kind of a our ability to go network and bring the customer point of view.
If you think about the public sector peers, there are certain points in the curve that we are higher. Typically in the middle to medium to longer end of the curve, we are slightly higher. In the shorter end of the curve, we are slightly lower. Not by our design. If you look at our time deposit yield curve, it is a clear upward sloping yield curve, right? Point to point in the curve, it's upward sloping. But there are other players who have different from their ALM management, I guess a different pricing. That's how we monitor that and see how at which price point we need the money and thereby the pricing is done in such a way.
There is no such formula of any repo pricing or other kind of a treasury bill or a GSEC type of pricing that determines the deposit rate. It is about the demand. It's about the positioning in the market in terms of at what price point we are able to get that. That's how we approach it in our ALCO and go through that. That's one aspect of it. The second aspect of it, you touched upon the branches. Yes, you are right. We have been slow in the first half. Typically it is like that. As we put the strategy together and get those places scanned and analyzed as to in terms of where the maximum propensity is there for us to be present to get those customers and the deposits.
We have done a lot of that, and we do see here that there is a ramp up going to happen in the second half, on the branch build. As I told you, the branch build, it is more a medium-term to long-term returns because the break-even itself is 18-24 months. As soon as we get the branches, there is some new accounts that come in, so there is a new account value that we measure and monitor to manage that so that there is a good traction gained. Then there is existing customer depth of relationship and so on. That is a secondary aspect that we monitor and manage that.
Yes, you will see in the second half, accelerated process in terms of the branch opening. We have at the moment more than 500 branches in the pipeline in various stages of completion. In the coming months we will get them to be open soon. Right? The third aspect of it in NCLT, the short answer and then I'll give you a little explanation. The short answer is, are we on the timeline? More or less we think we are on those timelines. Maybe there is a quarter or a few months early. We had previously indicated September, call it, Q2, Q3 kind of a timeframe. Maybe the way it is going it may be Q1, Q2. That's where I would put it.
Maybe there is a few months, it's running ahead, but not a big deal on that front. There are still lots of processes left, right, which is after the EGM is done, we need to file a scheme petition with the NCLT seeking their approval. Again, the scheme should be in line with what the shareholders approve, and that's what goes finally for NCLT consideration. Once that is done, NCLT goes to various agencies in the country, right? Government agencies and various state agencies and so on, so to get an NOC. That is a long drawn process, right? That happens. Then there is some newspaper advertisements and calling for hearing or calling for any comments or questions and so on.
That is the big process that gets followed. After all of that is done, that is when there is an NCLT sanctioning that happens. This could take 6-8 months, the entire process after the shareholders' approval.
Okay. Sorry, clarity on RBI exemptions.
As regards the RBI's exemptions, we continue to be in dialogue on that. There is no particular clarity or anything. That conversation continues on that front.
Okay. Thanks, Srinivasan.
Thank you, Suresh.
Thank you. The next question is from the line of Kunal Shah from ICICI Securities. Please go ahead.
Yeah. Congratulations, Srini and team. First question, particularly with respect to payment products, growth on both a quarter-over-quarter and year-over-year. It seems to be lagging a bit to the industry, but we are not seeing any loss in market share with respect to spends, credit card spends. Is it more in terms of the behavior of the transactors versus revolvers? How should we look into this? Or maybe it's more of another payment product contribution that is leading to mere 2% sequential growth?
Good. No, thanks for asking, Kunal, on that. Yes, on the spend, we see good amount of traction coming on the spend, and it is not transactor-driven spend, right? We do see customers who are spending have very good liquidity. That is, I think last time also I said, and it's more or less at the similar level, which is, if you look at our card customers' liability balances is close to 5 times the loan balances, right, of those customers. On average total, right? Of the total average. We see enormous amount of liquidity. The paydowns are quite high. The revolver rates have not picked up. Revolver rates are still at that 70%-75% of the pre-COVID level. Last quarter to this quarter, we haven't seen revolvers picking up.
We do look at revolvers into three or four buckets, which is, call it for lack of a better term, chronic revolvers, which means somebody who revolves more than six times, nine times in a given 12 months. Somebody who revolves three to six months, somebody who revolves zero to three months, right? Those kind of analyses we see. We see that people who have the tendency to revolve over a longer period have actually come down. There is an early sign for the pickup. That means that one to three months, revolver type of profile customers are slightly picking up. We do see something, but it's very early. We've not seen the credit card customers revolvers coming bang on, post the COVID. We don't see that.
Sure. Secondly, with respect to the commercial banking, so again, when we look at the breakup of GNPA, there is still improvement as far as retail and corporate is concerned. Commercial ex of agri is still steady. Given the entire inflationary impact which we are seeing, some export-oriented industries might also get impacted because of global recession. What would be our view with respect to the outlook as far as commercial banking is concerned, given that the growth is also at a rapid pace? What incremental measures we are taking in this kind of a scenario of global slowdown? Yeah.
Okay. See, the strength of the commercial banking, excluding the agri that you are seeing about, to call it the SME segment, more particularly the heart of the SME segment, we see quite a robustness, and that goes to the model, origination model and management model, relationship model of that customer. Lending is one of the value proposition.
I think previously we have talked about or we have said that, or even in May month we presented, where the self-funding ratio, as we call it, which is the liabilities generated by this segment, through their own cash management account and through their promoter's account and through their employees account, that's 85% self-funded, which is part of the business model to ensure that there is a kind of a good monitoring process for credit management, right? That's part of that model. That's part of the stability that comes from there. Again, the secondary collateral, more than 85-90% is secondary collateral. In addition to the primary collateral of land or plant and machinery and stock in trade and so on, the secondary collateral is also very important.
There is much more skin in the game for the bank and the customers to work together. That's part of how we handle. Irrespective of the cycle that you're seeing even through the COVID cycle, this particular segment actually came quite unscathed and quite good.
Are we tightening any norms over here? Just looking into global slowdown or maybe exports could get impacted.
We haven't seen the need yet. We still see good cash flows, strong cash flows coming in. Our credit takes the call on a case-by-case basis on these types of loans.
Okay. Yeah. Thank you. Thank you, and all the best. Yeah.
Thank you, Kunal.
Thank you. The next question is from the line of Rahul Jain from Goldman Sachs. Please go ahead.
Yeah, thank you. Srinivasan, hi, and congrats to you and the team for good numbers. Just had two important questions. One is, can you just help us understand, on the headcount side, we've added about close to 9,000 in this quarter. How many more do we need to hire for this year? I would imagine we may have preempted, or maybe preponed some hiring for the upcoming branch expansion. Is that the right way of looking at it, or we need to do more hiring as we move along this year? And even for the next couple of years, how do we think about the headcounts?
Okay. Good. Yeah. See, yes, there is some level of hiring for the branches happened and will happen for more new branches as we determine and complete that location, we start to go into hire, right? As soon as the location is signed, the hiring starts so that as the fitment in the branch is happening, the people are lined up to come. That happens and will happen. However, the broader question that you asked is how we should think about the headcount itself at the total level. Yes, we do think that with the digital efforts that we are putting through and the journeys, several of the journeys, I think last quarter we talked about a calendar of various digital journeys to go through in Q3, Q4.
We do see a lot of traction gaining on the digital front, so thereby, at the rate at which historically we added, we probably don't need to add, right? At that rate. That's one. And there are certain kind of a sales force, feet on street sales force which may be operating even in our subsidiaries, and if necessary, we're going to bring them on our books too. So it may be simply a shift of headcount coming from a subsidiary into the bank because for better management, we're going to give them a higher value relationship management, so we bring them into the bank and hire. So this, it is not a particular number that determines anything. In terms of these are the two, three ways in which we think and do. One, branch we need.
Two, we need to not replace attrition from as we go into the digital journey and as we bring people the pure feet on street sales force into the bank for higher relationship management, there will be some addition. That's how we should think about it.
Just if I may, do a follow on. How much would be sales force out of this 161,000 employees?
Okay. There are-
Would it be a significant number?
There are about 45,000, I think, the last number we reported I think was in March, but that is similar number that, 45,000 people if you see, is the sales force which is there. Then there are a few layers above that that are supervisory layers of the sales force, right? And if you look at those levels, they'll be level 10 or 11 below the CEO.
Understood. Got it. Just another question was, you know, on the credit deposit, which you know, seems to have expanded in this quarter, and it is now at about closer to 88%-89%. In addition to this, when we see your incremental market share in deposits has increased quite a bit in the last year or so. When you look ahead, you know, in the future, let's say the next couple of quarters, how do we think about the combination of credit and deposit growth, you know, playing out? Can we sustain this incremental market share gains, because the system is now, you know, ratcheting up the efforts on deposit mobilization by offering higher rates, et cetera?
We'll also have to kind of, you know, up the game there, you know, because the CD ratio, whatever we had to juice out, we have already juiced out. How do you think about these prospects, Srinivasan Vaidyanathan?
See, in terms of the CD ratio or in terms of the deposit growth and the advances growth and how to see that, I know we are in a particular interest rate cycle, but if you have to go back to five years or even 10 years in the past, right? When there have been two or three cycles and see what has happened over those two or three cycles, right? If you see that, 2012 to 2017, 2.4-2.5 times, that's the rate of growth on both sides. If you go to 2017 to 2022, that is the kind of a similar 2.3 times, right, rate of growth.
I'll point you through the interest rate cycle over a period of time, call it a decade, we can go one more five-year block behind that. Over a period of decades, that is the kind of rate of growth and that is how we are capitalized and that is how the execution happens.
Okay. Got it. Thank you so much, Srinivasan Vaidyanathan, and wish you good luck for the coming quarters.
Thank you very much, Rahul Jain.
Thank you. The next question is from the line of Abhishek Murarka from HSBC. Please go ahead.
Hi, Srinivasan Vaidyanathan. Thanks for taking my question, and congratulations for the quarter to you and your team. Just a few questions. One is going back to the NIM conversation. You pointed out that the mix is where it is, and that's why you're at the lower end of the range, and it's the rates that are going up that is playing out. You know, to sort of figure from this that as the deposit rates start catching up, we should get back to a 4% kind of level for NIM. Or is that not going to be the case and you would be able to maintain this additional spread that you've got?
Okay. See, as it relates to rate related, that's where we are focused on.
Yeah.
There is a lead and a lag effect, right? Which is, if you see the rates that have changed, 90 basis points in the June quarter and 100 basis points in the September quarter, and as the market prediction is that there is more to come in the December quarter and March quarter, right? We don't know what the terminal rate is for sure yet, right? As these rates go up, there is this continuation of this lead and lag effect goes through, right? That is one. Two, it is also about the deposit mix funding, right? We have the opportunity to increase our penetration in time deposit. We see the time deposit grew by 22%.
The objective of that time deposit mix is that we have a very low penetration, 14%-15% of our customers is where we have penetrated on time deposit and we think there is an enormous opportunity through the engagement process that in the past we probably didn't need and so the engagement was light and now we are enhancing our engagement to ensure that we are able to have the right kind of a dialogue with the customer on that. It depends on the mix of the deposit product and it also depends on the lead and lag effect and how long the rate cycle goes, right? That determines.
Understood. Basically what you're saying is even with the same mix, you expect yields to be going up more and your deposit gathering strategy will not be entirely rate dependent. To that extent you should be able to gain on spread. Is that a correct understanding?
To the extent that we lead the rate on the advances and lag the rate on deposits, we should see a pickup coming.
Got it.
Whether that is what we will do, I will not know because it depends on market circumstances as we execute on the ground.
Got it. My second question, Srinivasan, is on HDB. When I look at the GNPA there on a sequential basis, they're pretty flat. Can you just give some color on, you know, what's happening there in terms of asset quality? And also, what's the restructured book there? How much of it is in moratorium and any provisions you're carrying on that? Just some color on asset quality for HDB.
Okay. See, the HDB asset quality, I think I did allude to say in terms of the improved delinquency, or the stage three NPA from 5% to 4.9% I think. We are in the trajectory of that improvement. We believe that as the trajectory continues, right, it should continue to be there. That's one thing. The second thing in terms of the provision coverage, right, on the NPA. The secured book provision coverage is 46%, and the unsecured book provision coverage is 92%, right? On the overall loan book itself, 75% of the total loan book is secured loan book. Right? This is quite a good type of book.
The customer segment is such a customer segment that got significantly impacted in the course. That's part of the NPA spike that you see. As the economy is stabilizing and became stronger, you see that slight improvement, but more to go with that.
Okay. In GNPA also, is it 75% secured and 25 unsecured? Or that was for the full book?
The 75% secured is for the whole book. For the GNPA, I don't have it in front of me, but I'm sure HDB at some point in time may be publishing when they publish their results, yeah.
Sure. Restructured book in HDB, how much would that be? Excess provisions, anything that you're carrying over there?
There is some management overlay like the way we do have and continues to be there. That restructured book on HDB, I don't think they've published yet.
Okay. No worries. Just a last question on this, MTM loss. We still have trading losses, whereas, you explained or you alluded to, you know, corporate bonds and, PTCs co-contributing to that. Can you sort of explain the, reason for this? Mostly rates have gone up on the short end, and there, you know, you don't need to do any MTM on the T-bills, et cetera. Can you just explain this?
Okay, good. Yeah. See, if you look at the corporate bond book. It's not about T-bills, it is about the corporate bonds and the-
Yeah.
Pass-through certificates, which are predominantly PSL driven, or qualified pass-through certificates, right, which are there. If you look at the rate, the base rate that determines the valuation of the bonds and PTCs are published by the CRISIL and various association that publishes the rate. The base rate is the GSEC rate. The 6-month rate is up 77 basis points in the quarter, one-year 67 basis points, two-year 42 basis points, and so on. That's the kind of front end part of the curve where the rates are up. The long end part of the curve, if you look at the 10-year rates are down nine basis points quarter on quarter, right. These bonds and PTCs that we have, they are more on the front end side, right.
They are more there. If you look at the dispersion of the bond book, it's like a pretty good normal distribution around that 1.5-2 year type of range of buckets. That's where the normal distribution is there. That's one element. The GSEC yield curve on the front end of the curve, that is one of the element of that goes into valuation. As the rates spike, you'll see the value coming down. Right? These are, as you know, these are not marked to market. The second aspect of it in the valuation is also the spread, bond spreads. Right? And as part of the valuation process, the bond spreads have come down, right? Which is, you would imagine the bond spreads are down to some extent.
If you see the bond spreads, I think in the front end also the bond spreads are down. If you see, for example, the NBFC AAA spreads in the six months is down six basis points and one year down 21 basis points and two year down 11 basis points, right? It is down. Similarly, corporate AAA on year is nine basis points down, two year is 11 basis points down. So the bond spread is another element of the valuation. They are also down. However, as you know, in the valuation, the bond spreads are floored. Right? They are floored at 50 basis points. So until the bond spreads grow past that level and then starts to improve up or down, it is inconsequential on that front.
lot driven by the GSEC. In this case, the positioned portfolio is towards the normal distribution around that two-year, 1.5-year, two-year mark. It depends on the rate that is changed in the front end.
Okay. Got that, Srini. That is clear. Thanks for this. This is very useful. All the best.
Thank you.
Thank you. The next question is from the line of Prashant Kumar from Sunidhi Securities. Please go ahead.
Thanks for the opportunity. My question is on credit card business. Three public sector banks, Union Bank, PNB and Union Bank has launched RuPay credit card on UPI.
I'm sorry to interrupt you, Mr. Kumar, but your voice is not clear, sir. It is breaking in between.
Hello. Is it audible?
Yes. Please go ahead, sir.
My question is, with linkage of RuPay credit card on UPI, what will be the impact of credit card business, slightly on pricing perspective, pricing for like low value UPI on credit card or higher value transaction of MDR for UPI on credit card will be similar to other credit card. I mean, or it will be settled down to the incentive to given in the range of around 2.2% to 0.4%. I mean, you can give some color, sir.
Okay. These are very early stages on that front. How the market settles, we'll have to wait and see what happens to that. As far as we are concerned, we are predominant Visa, Mastercard issuers, on that front. The RuPay cards are of a small proportion of our card base. That's one. The second, as it goes to UPI, what is the kind of how that UPI pricing itself settles and how it is going to impact, we have to wait and see where it goes, right? At this moment, it's not clear and the transaction sizes that come through these are also important and, but currently what we have through Mastercard, Visa, the transaction sizes, average transaction sizes are quite high and good for us.
Yes. On the asset quality side, just on data keeping. What is the slippages and what is the write-off and upgrade and recovery, if you can give handy if it is handy?
Yes, I did provide that previously, but I can give that again to you. The slippages, I think, in the current quarter was about 36 basis points or INR 5,700 crores. The recoveries and upgrades, about 19 basis points, INR 2,500 crores. The write-offs, about 22 basis points, INR 3,000 crores.
Okay. Thank you so much, sir. That's it from us.
Thank you.
Thank you. The next question is from the line of Saurabh from JP Morgan. Please go ahead.
Hi, Srinivasan Vaidyanathan. Sir, just can you talk about the corporate banking fees, you know, this 9% quarter-on-quarter growth. So where is it coming from? Are you displacing some public sector banks in some of the large corporates, or is it just, you know, just reducing the risk filters on the corporate side? Just a related question on that will be, sir, I mean, the consequence of that build-up, should we NIMs could obviously come off, but at the ROA level, it should still be a 2% business, or how would you think about it?
Yes. Two aspects of it. First, let me address your ROA part of it. Yes. All our pricing decisions as well as the business decisions are determined, the models determined through what returns it provides, right? The models don't go through to say what NIM it provides. The models go through to say what returns it provides. Yes, these are quite a good relationship-based businesses in the wholesale. We've had quite a good traction again during the quarter largely contributed, I think, by the telecom sector. There's some energy-related that came through. There are some PSUs also in this, right? Very high quality, good PSUs with whom we already have good relationships. We have done that. Yes.
They are priced very well, and they are priced to get the returns that is in line with the bank's overall returns, the 2% that we have seen and which you have seen, which you have published for the March report also. I think you'll see that, wholesale or retail, our returns are quite good and we continue to do business on those lines.
Okay. Right. The second question.
Again, which I didn't mention it, but I will, since you have touched upon whether there is a price competition or what. Yes. INR 20,000-30,000 crores of wholesale loans we have let go this quarter, because we have been, as you have seen our pricing, how we moved on pricing right from May, quite fast. There are others who take their time or their own internal process to price to catch up. When the price is not good, we let go of the volumes. We let go of that particular transaction, not let go of the relationship of the customer, because these are all good relationship business. We keep the relationship, but if that particular transaction doesn't work, we are very clear that particular transaction doesn't work.
Got it, sir. Sir, the second question is, you know, there was an interview by Mr. Parag Rao where he said, you know, half the digital transformation is over and, you know, the IT costs will probably peak out. He also mentioned that, on the SmartHub, it was going to reach about 21 million merchants, from approximately 3 million today. So how should we think about this impacting your OpEx? Should we now hope that your OpEx at some point moderates off, or you would choose to reinvest any gains you get on, you know, either your credit costs or your NIM on OpEx side? How should we think about this?
Okay. Again, you have two aspects to this. One aspect is in terms of the digitalization itself in terms of that. The context of that, I think, was that merchant SmartHub Vyapar that we formally launched. I think I had mentioned that the merchants, the SmartHub Vyapar, when it took off earlier, had quite a good traction, right? We're getting almost, call it, per month, 60,000 merchants in the recent months. And we have more than 1.6 million signed up under this app, right? You know, as a merchant, we have more than 3.5 million merchants, but 1.6 million under this smart, smarter platform, which is the SmartHub Vyapar, right?
That's part of what I think we alluded to. That is where, in that context only we said that, we will go past the 20 million in terms of getting the merchants into this. Again, this is not just a payment product initiative, right? This is more of a both a liability relationship, asset relationship, in addition to getting that payment relationship. That is, that's what this does, and it helps, it gives a lot of value to those merchants to do business with us because there's a lot of value-added features that go with it. That's one part of what you asked. The second part of what you asked is what does it do to cost and so on, so forth.
I think in the past we have said that our cost to income before COVID was about 39.5%. Through the COVID, as the retail kind of a transactions and the opportunity to do various things were lower, it came down all the way to 36%-37%. Now it's past 39%. It's back to 39%, 39.5%. That's where the cost to income is. I think we said it can go to 40%-41% quarter to quarter. Quarter to quarter is not a measure, but over a period of you know a year if you see, 40% is not a place that you would imagine it can go to 40% as we make those investments to come.
Because the average credit cost, if you see this quarter, 80-90 basis points, last quarter, 90-95 basis points. There is an opportunity to lean into this and get that maturity cycle up, right, on anything from a branch maturity cycle to people maturity. Branch maturity cycle is 18-24 months. People maturity cycle could be six to nine months. That's part of what the investments go to. We take this opportunity to invest in it, but, and of course, within the overall return framework.
Got it, Srini. That's very clear. These 20 million merchants is just HDFC Bank, it doesn't include your fintech partnerships or does it include?
That is right. It is the bank merchant relationship is with the bank, yeah.
Okay. Thank you, sir.
Thank you.
Thank you. The next question is from the line of Manish Shukla from Axis Capital. Please go ahead.
Yeah, good evening, and thank you for the opportunity. Srinivasan Vaidyanathan, first question is can you remind us what are some of the key dispensations or reductions that you sought from RBI for the merger? Realistically, by when do you think you will start getting visibility on the same?
Manish, on this front, the same items I think that we talked upon on May 31st remain, right? Which is there a possibility on the CRR, SLR glide path that will continue to focus on greater and faster credit growth both in the economy and supported by us, is something that we are in discussion, we told you. The second thing is also in terms of the priority sector lending, which kicks in 12 months after the effective date. In this case, for example, continue with the same September kind of a timeframe, 2023. We're thinking about December 2024 kind of a timeframe from when that will come. What part of a glide path that can have so that we could organically originate, right?
I think we alluded to that 1.42 lakh villages we have moved to now, right? We were less than 100,000 villages if you go back 12, 15 months ago. We are on track to go to that 200,000 villages to operate. That is part of how we organically build this. Certain other things that we told you in terms of opening up a little around the 3,000 mark now on the branches, originating gold loan, and we wanted to do to around 5,000 branches. Again, part of that initiative to ensure that we get the right kind of quality on the priority sector lending.
There are these are the action plans that comes for organic, but the kind of call it a glide path is to get to that, we organically do this. That's what. Where are we on the state? We continue to have that conversation with the regulators, yeah.
By the time you seek shareholder approval towards end of November, are you expecting any visibility on any of these?
There is no particular timeframe, Manish, for this, right? The bilateral conversations with the regulators are private, so there's no details about that. At least, that is something that there is no timeframe.
Yeah. The other question which I had is on the funding side.
One thing that I do want to highlight to you that which we mentioned it in May also, the merger is not predicated on this, right? The models not necessarily assume that these need to come. These are good to have, not necessary as such.
Sure, Srinivasan. That's clear. Moving on to liabilities, once you acquire a large mortgage book from HDFC Limited, potentially you can fund it using long-term affordable housing bonds. What are your thoughts around the same? How many of those bonds you think you can issue? Does that mean that in the interim, your LDRs as a merged entity could be higher than what historically we've seen for HDFC Bank standalone?
Certainly that is part of the equation. We would use those opportunities to get that. Because from a cost point of view, we'll be indifferent to that, right? Because we know that the assets on the other side are floating rate assets, priced off the market benchmark. There are hedging instruments in the market to ensure that the interest rate risk is managed, but at the same time, the liquidity maturity is also managed through these affordable bonds. These affordable bonds do provide, as you know, offset means relief from a CRR, SLR, subject to certain qualifying criteria. They also offered opportunities to take off the ANBC and thereby reduce the PSL.
Sure, Srini. That's very clear. Thank you. Those are my questions.
Thank you very much. Yeah.
Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments.
Thank you, Rutuja. Thank you, participants, for coming in today, joining us. It was our pleasure. If you still have open questions or any other things to interact, we are open. At any time, we can talk. Thank you. Bye-bye.
Thank you. On behalf of HDFC Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.