Hello, everyone. Welcome back to the Morgan Stanley Virtual Financials Conference. This is Sumeet Kariwala, India Financial Analyst, and I'm glad to host the next session with the HDFC Bank. From the bank, we have Mr. Srinivasan Vaidyanathan, who has been the CFO of the bank for the past 2.5 years. Prior to this, he had a long career with Citigroup for almost 27 years, and he has held various regional and global leadership roles across diverse geographies such as Singapore, Hong Kong, New York. We are also joined by Ajit Shetty from the Investor Relations team. Before I hand it over to Srini for some opening remarks, I'll read out the standard disclaimer. A couple of them.
First, there are participants in this session who are not from Morgan Stanley Research department, and their views can differ from that of the department. Also, this event is for Morgan Stanley institutional clients and financial advisors only. This is not for members of the press. If you are a member of the press, please disconnect and reach out separately. Thanks. With that, let me hand it over to you, Srini. If you can start with your sense of the macro, how much has that impacted banks so far? What will make you worry? Apart from that, if you can touch upon the RBI lifting up the ban and what could we expect from HDFC Bank now? What changes?
Thank you, Sumeet, and thanks to the participants for coming in and we're grateful for the opportunity to talk to you all. Okay, couple of things you touched upon. Let's go first on the macro, what's going on, geopolitical and what it means and what's impacting and so on, right? You know, indeed it is something that is getting closely watched, but from an impact point of view, at this moment, while it is minimal, it remains to be seen how long it persists. Thereby we can see what it means, right? Assuming that, in less than a quarter's time from now that this gets resolved, geopolitical issues get resolved, if you think about it like that, then what it means is like this, right?
You can look at it across two, three dimensions. Look at it from a total overall growth dimension, right? What does it mean to the country's growth, GDP, et cetera? When we are at this kind of a, it's mostly external influence, right, in terms of oil price. That is the biggest kind of an influencer. And some kind of a trade restrictions that happen, right, along with that. The GDP can be impacted by, call it from current estimate of 8.2% can be 7.5%-7.7%. Call it 0.5-0.7 percentage points impact can happen. Where does this impact come from, right?
If you see, if you take this forward to see how do you link it, link this up. See the personal consumption component of the GDP is call it slightly under 2/3, about 60-odd%, right? Personal consumption. About slightly under 20% is the component of the fuel and transport and things like that component in the personal consumption. That is where the impact is, right? From a cost pressure point of view, it comes there. Thereby the disposable income goes down net of this incremental cost that comes from here. The other spending that happens from the personal point of view gets restricted.
That's where you see this impact of either 0.5-0.7 percentage points on the GDP that can be impacted from there. Right? And then the other contributory factor would also be the global trade, right? Export, import. Even if that gets impacted at an aggregate level by 1 percentage point or so, that's a net impact on the GDP that you see, right? Can impact. But still with all of that, we, our economists' house view that we expect 10, 11% or so of credit growth in the following year coming. That takes you to the next aspect of the macro impact, right? Okay.
If this is what from a GDP point of view, credit point of view, what is going on with inflation and rates and so on and so forth, right? The inflation in the short run is expected to be surging beyond the 6% mark, right? It could be. Our view is that it could be as high as 6.2% or something is what they are estimating, but it's still a moving number, right? We don't know where it'll end, but that's the kind of north of 6% is what we see. The first half of the year could be somewhere around that range, right? Given the assumption that these things persist for another quarter or so, that's the kind of a range.
The second half is expected to come back to around 5%, 5.2% kind of range on the inflation, the second half of the following 2022, 2023 financial year. We expect in the short term inflation to go up and then come back down in the second half. From a rates point of view, we believe the RBI has always been accommodative, encouraging credit growth in the system. Just as things are happening before the geopolitical issues, just the things are happening that I don't think that there will be in the short term any kind of a rate kind of an action. One cannot rule out, but that's June is kind of a timeframe we believe that one has to see what will happen to the rate scenario, right?
Maybe that's the kind of timeframe we should see. We will know more in a month or two as things progress on how this unfolds and settles. That's from a macro point of view. The third order effect in terms of what it means to credit and so on and so forth is too early, right? Quarter of these kind of things don't necessarily make a big deal of an impact. These are all transient things that can come back to robustness. We'll have to wait and see. It's too early to predict anything on that front, right? We're closely watching that front.
From a price point of view, the early indications that we are having is that, to the little extent that certain things are percolating into the overall cost of inputs, the businesses, particularly the small businesses, are able to price in and pass it on, right? At the end of the day, it is about our ability of our customers. I'm talking about the corporate customers or the CRB type of customers, right now. Whatever the input costs are up to the extent that they're able to pass on means that hardly there is an impact. It only gets down to the ultimate consumption type of impact. That's where.
That's the early stage at which we see right now, but we'll have to wait and see a little later how this turns out. The second aspect of what you asked is about the digital and what it means and so on. See, on the digital front, yes, we did after a few quarters, we got that lifted. There are a few things that we've been working and which rightfully we've been both addressing it from a customer point of view in the digital factory and in the back-end systems point of view in the enterprise factory, which we have been working on. They are progressing well, some of them, in various stages.
For example, the customer experience hub, which is coming in phases, came up in January, February, the phase one, phase two, which is a small kind of an implementation, not yet seen in the overall market, but in a quarter or so, that should come. Similarly, we are progressing well on the payments hub that includes the revamping of the PayZapp, the SmartBuy and the entire payment system as such, right, to embed into one and make that into a robust platform. That's progressing well, maybe a quarter out that, more.
Quarter out more that we need to be patient before we get to a closed user group and then get past that stage and get to a public rollout of that to replace the existing PayZapp and come up with much more better functionality. Like that, there are a few things that at some point in time in the call, I'm sure you touched upon. We can talk about the various technology initiatives, but at least it's a step in the good direction. It has opened up. As we have always said, there is always some room for learning and room for bringing in robustness, which is what we focused, and we brought a lot of resiliency and we strengthened our capacity.
We strengthened our processes, more particularly, the processes that needed to be strengthened. We did all of those things. Simultaneously, we developed applications which imminently there are some rollouts coming. We're quite confident of taking this forward.
Thank you, Srini. Srini , I've started getting questions from investors. What I'm gonna do is that, I'm gonna bunch them up and start with questions linked to revenues first, because that's the key focus area. Let me start with loan growth and what we've seen over the past two, three quarters is that retail loan growth has continued to accelerate. If we can spend some time within retail, which segments have normalized, which segments are yet to recover, and in particular, if you can talk about vehicle financing and unsecured.
Okay. See, from a loan growth point of view, you have to look at it in three segments, and then you touched upon the vehicle segment too, but that is part of the call, the retail segment. Yes, let's touch upon that also. You have to look at it in three: retail, commercial and rural, and wholesale, corporate. On the retail front, you've seen that quite a robust pickup is more of our choice, right, in terms of credit policy opening up and getting back to pre-COVID level to get on with this, which for most part we are there. The cards was the last one that we were opening up and reviewing for the credit lines and making things available, which between December, January we did. That's a cycle.
We don't do it on one big bang approach to it, so we phase that in over time. But other than that, from a loan origination point of view, disbursements point of view, we're back on track in terms of what we were doing. You saw last quarter a sequential momentum of 4.5% or so. We are building further on that, right? That's where we are going. Within that, you touched upon the vehicle segment. Vehicle segment has been hampered through various supply chain disruptions in the past and also in the recent time period, right? Even after this geopolitical issues that are happening in the Europe area, it is even more an issue from that sense. It's more a supply side constraint.
There is adequate demand that is here, but there is a supply side constraint, which means there's lot of waiting time for delivery and so on. From our growth point of view, that has been subdued. Last quarter, I think we reported 1% or 2% growth in vehicle when the industry was shrinking, right? Industry had a degrowth. We had a 1%-2%, and similar kind of a is what we are seeing even as we speak now, right? The industry is having negative and we are trying to stay afloat and be there at the margin in a low single digit type of thing. That's where we are focused on, and we continue to sustain at that kind of level.
Other than that, if you look at the rest of the retail product is broad-based, right, across secured unsecured, which is mortgage, gold loans or unsecured personal loans, you're seeing across all of them that we saw last quarter. We continue to progress, make further progress on that. In the commercial and rural, that was something that important to the country and a big power for the GDP growth that we are seeing. Current year we expect the GDP growth to be closer to that 8%, 8% and change, right? That's the kind of rate of growth that we expect on the economic growth point of view. Commercial and rural is an important kind of a driver for the country.
You saw last quarter we had 6%-7% sequential growth, and we're confident of maintaining that kind of a momentum in terms of growth across various products that's there. That's going fine, both part of geographic expansion that we are doing, both in terms of districts in which we operate and offer, and the villages where we offer these products, that has expanded. Of course, supported by additional relationship managers because it's not only getting a broader wallet share from the various supply chain segments, it is also getting new-to-bank customers. We are bringing in several new RMs in that area to make expansions, to bring in new customers too.
That is doing fine and sustaining that momentum that we have seen. On the corporate segment, you saw last quarter about 4% or so sequential growth, which historically if you see means not just the last two years of COVID, even the year before COVID also, if you see, we were growing in high 20s, 30s type of %. It moderated to a sequential momentum of 4%, call that it's a mid-teens% annualized if you do. That's a rate at which we are okay with that because in the past we were risk off on the retail and commercial and highly secured, highly rated corporates. We were quite happy to do.
Now the rest have taken off in a good kind of robustness for growth, and this moderated to 4%, which is still very good, but moderated. We are happy for that mix change to reverse itself, where we get a higher proportion of retail and commercial. We are happy with that mix change to come, which is what we saw last quarter, and that similar trend is what continues.
Thanks, Srini . Let me ask a couple of quick follow-up questions with respect to loan growth, and then I'll get to fees. I can see a lot of questions around that. Within loan growth, are there segments where your risk appetite has not normalized even now?
No, I wouldn't say anything that risk appetite is not normalized. I wouldn't say any segment. Cards was the last one. As you would imagine that you would think that the customer, particularly in the retail segment, coming out of such kind of a COVID type of crisis, first, COVID was, first wave was economic, and then the second wave was both health-driven and economic type of crisis. You would expect that the customer when they come back, first thing is they would like to go into secured product because that's the least cost of borrowing. Then they will go into an unsecured, which could be in a low double-digit type of cost of borrowing. Then they will come to a card type of borrowing from a customer behavior point of view.
We wanted to be careful and not allow customers who could borrow at a higher rate come right in the front and do, because we wanted to be careful in opening it up, and which we opened up right now. I would say that across all the segments we are operating at the pre-COVID type of levels.
Okay. Let me try and tackle this from the other side. From a demand perspective, in the unsecured personal loan segment and credit cards, where are we in terms of demand? Have you seen that come back quite well because now we've normalized as an economy, so is that back?
Unsecured personal loan, we saw last quarter itself a good comeback in terms of demand, and that continues to sustain and grows from there, right? We have seen that come. On the cards front, it's a cycle. What happens is that first you get the sales down. The sales grew by 24%, 25% last quarter you saw. The sales are more driven from customers who are transactors. You saw the loan growth only 10%, right? Sales growth 25%, loan growth 10%. People more transactor types who have utilized the balance sheet and, you know, you don't earn much income, and then 10% loan growth, right? That even the 10% loan growth doesn't necessarily mean they are interest paying 10% growth.
It is total growth is 10%, lower than the top line growth you are seeing, right? As we see now, I would say that when you, that takes you to think about the card that you asked in terms of loans from cards, right? There can be a good amount of growth coming from cards on the balances. Then the interest paying customers, right, how robust they are growing. That customer behavior is marginally improving, but it is nowhere close to pre-COVID type of levels. Because you would not expect, I would not expect them, because first is they will exhaust their low-cost secured, then they will exhaust their kind of an average cost wallet in low double-digit type of credit.
They will come into a little more higher cost of credit in terms of what they want to borrow. I wouldn't say that area is back to fully pre-COVID levels yet. It is coming there. We have one more tide to overcome, right? Which we had a vacuum that we had eight or nine months of vacuum where the cohorts were not building, right? Because as the old customers go out for various reasons, they go out, the new customers come in. The rate at which you bring in in the normal circumstances, right? That some customers go out, the new customers come in. The rate at which the new customers come in always exceed the rate at which people go out.
Thereby you have a good build going on. We didn't have nine months of cohorts coming in. We have accelerated that cohort buildup. We had 1.3 million cards, and we continue to have accelerated buildup of new customers coming in having credit card. It will take two to four quarters for those customers to mature, right? You activate them in a quarter, get them to spend in the following quarter, then you start to increase the spend. Once they increase the spend, then you get into having the kind of revolving or interest paying and so on and so forth. That is the cycle that takes two to four quarters to happen.
We have begun that, so we have to wait and work through that cohort buildup again on the cards. Yes. Long answer I gave, but the short answer is personal loan. We are seeing that in the card loan. We don't see it back to pre-COVID level, but we are seeing good signs of coming back.
Srini, can I ask you to elaborate on that credit card explanation that you gave? There's a question from one of the investors that if you look at the fee income decline that HDFC Bank saw, it's slightly somewhat higher than the other peer banks. I think you in a way alluded to one of the reason around that, which was nine months of credit card ban. Can you talk in terms of what has been the decline in the overall rate for you vis-à-vis industry and how much time will it take to come back? Because I think that could be one of the drivers which is not present in the case of other banks.
Okay. Very good. Okay. See, our revolving rates, if you see, I think we did allude to it last time, which is they are at, like 70%-75% of what we have seen pre-COVID, right? The revolving rates have come down, that much. Whether it is in line with the industry or not, I won't know because there is no standardized industry reporting on revolving balances. Right. I won't know. All I can tell you is that there is no peer benchmarks or anything that we can allude to. Our credit card book is about, call it INR 70,000 crores, right? Little more than INR 70,000 crores.
If you look at the peer kind of credit card book, probably slightly under a third of that size, right? Less than one-third. I do not know what kind of a benchmark comparisons we can do. We have not been able to allude to it. The size is very different, less than a third or so. Similarly, when it comes to fees, you don't look at fees in isolation, right? It is interconnected to several things, particularly when you look at the credit card type of fees, right? You get a customer who spends some things and has got some revolving. The same similar kind of bunch of customers, some of them pay the amounts late.
The late paying customers, of course, you want them to be paying on time, but some of them you don't mind paying late because they are good customers. That is part of the credit model. That's part of the credit card's business model, right? Some of them you would want them to pay late, and they don't mind paying the fee. So that's a part of customer base. Over a period of time, these customers who are habitually late and pay, they have been stressed and are in the NPA bucket, or they have been in restructured bucket, and so either with us or in the bureau. Our bureau has told them to get them out and stop, right? Freeze all the credit lines. Some of them will come and take cash advances and take the fees again.
Cash advance is a high cost borrowing for a customer. If that is the kind of a customer, he would exhaust his other things before coming. If this customer is still doing, then our credit has tightened that aspect of allowing those credit. So much so. Some good customers whom we have, that is part of couple of other statistics that we have put in the market to show that if you think about the credit utilization, credit line utilization are at a 60%-70% of a pre-COVID level, credit line utilization, right? That means, the people are in first world. The spend is growing at 24%.
There's still a long way to go for that to come because things came down and then now it is, when you look at year-on-year, it is showing good 24% growth, but it's still long way to go back to pre-COVID level from a utilizing the lines available point of view. That is one thing. The second thing is the liquidity in the hands of the customers, right? We have little more than 70%-75% customers who are our own customers who have a liability relationship also with us, right? The ratio of card loans to deposits is 5 times, right? And pre-COVID, it was slightly under 4x . The people with whom we do business seem to be sitting with enormous amount of liquidity and with us itself.
In the banking system, they should be having much more liquidity with them. With us itself, what was 4x now has become 5x . People are sitting with good amount of liquidity. That is why you see some of those kind of a credit related type of fees are down. Last quarter, I also mentioned about there were certain other promotion types. Typically, promotion types go with some kind of offer rate. That's why the fees were down. Similar to what I had mentioned on the revolving, how long does it take and when does it come? We should wait because it is related to the credit of the customer, the credit behavior of the customer, right?
We need to be patient enough for two to four more quarters to say how that comes back up. It is also an absence of a cohort also impacts us. We were a little more impacted due to absence of eight months of cohort that was not there. Otherwise, there would have been some level of offset that would have come, but it wouldn't have still changed it in a significant way, but there would have been some kind of a plus that would have come that didn't come. Now the cohort is also building up.
Sri, let me move on to fee income with that discussion. What we've seen over the last two, three months, last two months actually, January and February, there is a reasonable slowdown with respect to sale of third-party insurance products. That's obviously a very significant part of fee income, particularly for the fourth quarter. Has that happened at the bank level as well? If you can throw some light on that.
See, typically our, call it the third party product or a fee income, right? Normally hovers between high teens to low twenties type of range on the insurance. That's the kind of right. We're quite confident that it is operating at those kind of levels. Month to month things can happen very differently, right? You know, you alluded to last two months, January, February or something like that, but we cannot look at one or two months. We have to look at a quarter. Even one quarter to another quarter is very different. Normally March month is typically a seasonal quarter for these type of products. Due to various, I think it is connected with some tax rebates and so on and so forth too. March is quite normally very robust on this.
One has to wait for the quarter to be over in terms of how the customer is thinking and doing transactions. I wouldn't make you just think about one or two months. You have to look at a total quarter. From our portfolio point of view, that is the kind of insurance performance that we have done is high teens to low twenties type of what we have normally.
Got it, Srini . March is important and we should wait for that. Fair enough. Srini , there are two, three questions with respect to fee income and how should we think about it, because there are a lot of variables that you're talking about. You're talking about revolve rate coming back in three, four quarters. There were some fee income waivers which you gave. We don't know whether they'll repeat. You're talking about retail credit growth accelerating, that will drive some processing fees. Overall, when we think about next three, four quarters, fiscal 2023, what kind of fee income growth should we expect?
See, while we know normally we don't say this is one particular outlook or something, we don't give an outlook as such, but what we have said is in terms of fees, right? Every time we come to a fee, people ask about what should be kind of a normal range of fees for us. We always say the normal range of fees is in the kind of mid to high teens is what we would say normally. That should be the normal long-term sustainable level of fees, right? That's how we think about it. And in a particular quarter, if you are in the twenties, there were certain other important things that came or kind of a customer propensity to certain products that came through.
Otherwise, the way to think about it from a modeling point of view, if you ask me, is to think about mid- to high-teens is what is sustainable in the longer term.
Okay. While we are on fees. Sri, am I audible? Your video just paused.
Hello, Sri. Am I audible?
No. We lost you for 5, 10 seconds, and then you came back. Yeah.
Okay. You can hear me now.
Just sticking on to fee income, there's a question with respect to MDRs. We don't know whether the RBI will reduce that or not. If, for example, the RBI were to reduce MDR by 25 basis points, what kind of impact that could have on fees?
Okay. See, there are two things, Sumeet, to think about on the cards MDR right now. One, MDR as such, and the second one is the interchange. Right? You can't look at only MDR. You look at MDR and interchange. MDR is something on the acquiring business. Interchange is in the issuing business. On the acquiring business MDR, we have always said we don't make money at all. It's a basis point or 2± all the time. That's it. Right? In any given quarter, depending on the mix of how it goes, a few basis points plus or minus. That's how it operates. That means it is not a standalone profitable value proposition. It doesn't.
We are in that business for a broader relationship with the customer that brings in the liability relationship, that brings in the asset relationship, and has the engagement from an overall product and the ecosystem of that merchant relationship, right? That is what we are interested in, we do business. We are the largest merchant acquirer in the country for that reason, with a little more than 48% market share. Right? With the 48% market share, we don't make money on the MDR. We don't. Now, that takes you to so if that changes, then the dynamics on various other pricing will change. That is the point I'm trying to say. Say, suppose that dynamics now changes and impacts the interchange, card issuing business interchange, right? That affects all the players in the country.
Our card issuing interchange, our issuing sales market share call it about 24%-25% or so, right? Issuing sales market share. When it impacts your interchange on the issuing side, then what does it mean, right? That's the next aspect corollary to there's nothing on MDR when it comes to interchange, what does it do? See, looking at an interchange also in isolation is not right. Why? Because when you have an interchange. Think about your own Sumeet's card that is there with the bank, right? When you spend, there is something that we earn as an interchange, as an issuer of your card, right? There is certain other costs that go with that too. You have to look at the holistic aspect of the P&L that comes from the issuing business.
What are the other type of costs that go with it? There will be some sales and promotion, there will be some interchange, there will be some franchise costs and so on. There are several elements of cost that go with it too, right? When this changes, there are enough levers to change various other things. Right. At the end of the day, it has to make economic sense. If one thing changes, there's going to be the second order, third order effect change that needs to happen to make the entire P&L work and be profitable.
Fair enough, Srini. I'll stick to revenue group for some more time. There are a couple of questions jumping. One is with respect to interior India, rural, semi-urban areas. You've accelerated your presence in these geographies quite meaningfully. There are very few banks which will match you. What we hear about these geographies is that there's a meaningful amount of demand slowdown, which some of the companies have been talking about. What have you seen and where are we in that cycle?
Okay. See, semi-urban and rural is a critical geography and is one of those fast growing and focused geography for us, right? Part of our CRB vertical is also adding more emphasis into that kind of a geography. What we see, I'll tell you, from a low credit or even from a deposit growth point of view, we are seeing more balanced growth across various geographies. So we are not seeing any softness or anything like that, right? It was impacted during the COVID, and when it got impacted, it got impacted with a lag. Because in the initial part, the semi-urban rural was oblivious, and then later on it did impact, and then it came with a lag into semi-urban rural. When it picked up, things did pick up everywhere, right?
We are not seeing. If anything, anecdotally, what we hear from our on-the-ground sales people and relationship managers is that there is more money at their disposal and they are also viewing more to come in time, right, the next short time period. Because, see, at the end of the day, this agrarian semi-urban and rural is all, think about it, is all commodities, right? Generally, the commodities prices have gone up, right? If you think about certain grains, too, kind of any kind of other products that you see, the prices have gone up. That has put more in the hands of the people in this semi-urban and rural.
In the past, and it is also expected that as this coming harvest season comes through, it is also expected to yield more in the hands of them. From our banking point of view, we did not see that.
Interesting. Srini, I had a question with respect to mortgages and when we look at your large private banks, they do a lot more on mortgages. I know, HDFC Bank doesn't originate mortgages in its own book. It does for HDFC. Is there a way in which you can participate more in the upcoming housing boom? What are your thoughts on that?
It's an excellent question and which I should have covered it in the first part that you talked about the retail itself. You're right. It is now the mortgages as such is in a very classic cycle, beautiful place where after 2014, 2015 onwards, where it has been, for various reasons hampered, from RERA regulations to demonetization to, NBFC crisis, to GST cost of production increase, to various reasons, right? Along the way, it had been hampered.
Now it has come to a kind of a situation where in fact, after the first round of COVID, that was the first product to take off and go in a grand way because all the government, central or state, everybody started to give a lot of incentives in the form of reduction in stamp duties or waivers and things like that to make the inventory clearance faster for developers. So at this time we do see that there is a big amount of housing demand which has not been fulfilled. The inventory is coming down. The developers have become stronger. So we see that cycle classically taking off beautifully, right? We are participating in that.
You will see that in our brand system, where hitherto, for various reasons, it was not a great deal of focus. We have ensured that we are having a balanced approach to all the products, and that includes mortgages as a critical product for our customers, right? We have a very low penetration in our base. 68 million customers, we have very low penetration. We wanted to take it up in a big way. We are moving in the direction to get our people trained, to get our people to have the right kind of engagement.
Our credit and analytics is supporting our relationship management, our managers to have the right conversation with the customers, both from a participating in the new mortgage as well as any balance transfers. On both sides, we are focused to bring that book, and we like that book. The time seems to be great for that.
No, I can't agree more. With respect to margins, Srini, and you talked about RBI rate hike and, you know, it didn't happen in March quarter. You alluded that your expectation is more like June, so maybe even next quarter will not have a rate hike for bulk of it. When would margins really pick up for HDFC Bank in that backdrop, and can that pressure margins downwards, the delay in rate hike?
Oh, okay. Yeah. See, there are two, three things to think about the margins as such, right? One, the first one we think about it is the mix of the products. We have come down broadly, you know, Basel classification. If you see, about 55% retail has come to about 45% or so, round numbers, right? The wholesale is the reverse. It has happened. That is what has brought the margins down. When the margins come down, the cost also comes down, because when the retail goes down, the cost of delivery and the cost of acquisition, that also goes down. You saw the cost also coming down, right? That is how you think about from a...
I would think about our margins on a risk-adjusted basis. On a risk-adjusted basis, our margins have been a little more stable than what the overall headline margins suggest, right? Because you price for the risk all the time. That is also you think about it. If you straight go down to an ROA, for example, three years ago, ROA was give or take COVID time period, 1.9%-2.1%. Just call this time period as post-COVID, right? Although Omicron came and went, but around that time, similarly, 2.1% type of range, right? How do you get that? You get that by various mix change.
When the mix changes into more secured, highly kind of rated kind of a customer, you have a lower margin, lower cost to deliver, acquire and deliver, lower credit, and you come back to kind of returns that are robust and good, right? Which are at the historical trend, right? That kind of you maintain that trend. When the retail starts to pick up, you start to get more margin, you start to get more cost to support that, and then you get more credit that comes with it, and then that's exactly what you price for the risk, right? That's why. You see, look, think about the last quarter. The credit costs, the pure credit costs were 60 basis points or so, right?
Look at the cost to income was 37 basis points, 37% or so cost to income. It is about how we, which is the mix of the product that is there, and then it. Looking at margin in isolation is not, I don't think, right because you have to look for what do you price. That's why I allude to you have to look at the risk-adjusted margin. Then along with that you look at the cost, even after the risk-adjusted margin, and then you look at how the cost is tagged to those.
Because you know that when the mix changes more towards low margin, highly rated customers, the costs are pretty benign because you get the high ticket, costs are very low, and the cost to income is in the teens, right? If not in some product lines in single digits, cost to income. Then you see credit costs for some highly rated customers, virtually the expected credit losses are nothing, right? That is how you look at the margin in connection with the cost and in connection with the credit also. You look at the bottom line, right? Hey, what does it all turns out to return at the end of the day? What hits the shareholders from a returns point of view? Where does it stack up?
That's coming to the last aspect where you asked how long do you think it should take. See, the retail pickup is happening. That means the pace at which the mix change is happening. I would expect three, four quarters for the mix change to come back. It has to. When it gets back to, call it 2019 level of mix, right, which we have modeled. When the mix goes back to 2019 level of mix, the margin changes by 20 basis points or so, right? It operates in the mid-range of 4%-4.4% that we have operated. When you go back to 2019, it changes, gets back to the mid-range of the historical.
Srini, you made an interesting point that some of the, because your loan mix has changed to that extent, it's come off on an underlying basis. What you've done is over the last three, four quarters, you've looked to accelerate tech investments. When we look at the cost growth, it's still quite elevated. Actually, it's running above revenue. Fair to say that the acceleration in tech investments that you had to do has already happened, and FY 2023, FY 2024, there could be some moderation because the starting point is at the base.
Okay, I'll come to the tech because there were two other aspects to mention about the margin itself, right? I mentioned about one. The other aspect of the margin is also which we alluded to, not only the mix change, along with that, the kind of a card mix, right? You know, the card yields are higher than the rest of the yield. So that has to come. That is one other point I wanted to make, and where the cohorts have to build itself up and come. The third aspect of the margin, which is a minor impact, is when the rate change, because you alluded to rate change and then thereby the margin.
When the rate changes, it shouldn't typically affect the margins in a big way, but it can affect in the short term to some extent, yes, because that's a lead and lag effect, right? Even when the kind of a baseline rate changes, you get the asset pricing done first, and then you follow with the lag, the deposit pricing, and then it goes, right? That's a lead and lag effect that you can do and manage that. That is, I want to leave that thought on the margin, right? There are two, three other levers that have to play out and come. You asked about the cost, particularly focused on the technology type of cost, right?
See, we have spent a lot on technology. The cost of technology, you can think about it in three aspects, right, what it means. One is on the front-end type of technology, right? The second type of cost is on the core banking systems, robustness on the technology, right? That's the second aspect. The third aspect is on the automation and productivity, which is more internal related. One is the front end, then the back end core processes, and then the automation and analytics that is there more at the back end aspect of it, which outsiders wouldn't see that aspect coming through, right, from that technology point of view. Various technologies are in process of going through, right? Which I said that the...
On the front end, the three pillars on the customer acquisition side, the Adobe type of products, some are in, some are coming in, right? The journeys, the digital journeys that we are redefining. From the platform and products delivery point of view, right, the payments hub or the new PayZapp and things like that are in the works, imminently going to come through. Then on the relationship management pillar side, the customer experience hub, as one other example of a technology that is getting rolled out. Some phases of that are in, but more phases to come, right? Some of those technology are in and some are to come.
If you think about the enterprise factory, which is the more core banking overall, that has started with a tech partnership with a tech startup, we're co-creating certain things. That's a three-year journey. Again, several modules needs to come. Every other quarter there are milestones to deliver those. That will be ongoing over the next three years that will come, right? The third aspect of it, which is I told you about the analytics or the back-end automation, that is a continuous process that we have done and we will continue to do. If you're asking me whether we are done with the technology investments, no, we are not done. Have we spent something? Yes, we have spent something. We consistently spend something.
Now we will continue to spend on technology. That is part of. Whenever we spend on technology, there is also certain level of automation, certain level of productivity, certain level of pacing that happens to manage the overall business growth, right?
If I can simplify my question, you know, if I look at tech spend as a % of revenues, I don't need the number. Take example wherever it was three years ago, this year, last year or next year, you will see a significant jump as a % of revenues because you're accelerating that investment. What I was trying to check is that delta has played out in fiscal 2022 or in fiscal 2023, if you can give some color on that.
No, it has been.
It be both.
It has been quite robust. The overall tech spend will go up, but that doesn't mean that the tech spend is in isolation to be looked at. If some tech spend is going, there has to be certain other cost that needs to come out. Because what is technology doing?
Okay.
Technology is replacing something else, right? If I don't spend on technology, I will be spending on people, right?
Right.
I want to manage the process. Now I have a technology to manage the process. Now I'll have technology to acquire the customer in much more elegant manner that gives a better turnaround. That gives me throughput and scale, better scale it provides, right? You look at technology cost in isolation is not the complete thing to look at, right? Hey, what sort of people dependency versus technology dependency. For to look at that it is important to see, but not necessarily because it is about the total cost that you need to worry about. Technology cost will go up. Some other cost is you don't need to go up at the same pace on some other cost.
Fair enough, Srini . I've got two questions on asset quality. One is, do you see any challenges with respect to restructured loan book that was done in the second COVID wave? That's one. Okay. I'll do the second question together. I guess you'll give similar answers. Isn't the bank sending conflicting message when it says that asset quality outlook is strong but continues to make contingency provisions by keeping P&L provisioning high?
Okay. Two aspects, they're two different things, but let's take the first aspect you talked about is the restructuring and how should you think about it, right? See, the fact that there was a restructuring asked for by the customer under a program, which we liberally went ahead and implemented, because we want to be seen as helping the customers and not putting the customers onto the bureau as a problem customer. There will be some level of stress. There has been some level of stress which you have seen, right? And our...
The way we look at it is what part of it is secured and what part of it is unsecured, which I think last time I gave data in terms of slightly under 50% or something is secured and the rest unsecured. Then secured, we feel very comfortable. Unsecured, then we further mine that data to see what part of them are salaried and what not. Within that, we look at who, which of these customers have credit scores, which are quite robust and good and which are not, right? Thereby we focus our energies towards that. Whether the restructured book will have delinquency higher than the normal historical, yeah, they will be. They are aware. These people had some stress. That is why they took some restructuring, right?
Whether this is going to change the overall credit profile of the bank, we don't think so. Right? We don't. That is why we said we always feel comfortable with the overall book, right? That is how you should view it, and that's how we work with the customer to look at it on a total basis, right? And then your other aspect of the question that you said is that, hey, how should you think about the contingency provision? See, think about the contingency provision that we create. Go back to 2019. There is no sign of any COVID in 2019, right? We built the contingency provisions. So when there are opportunities and we want to make the balance sheet strong for enabling the growth, right? At that time, we did build because we wanted to.
When the economy was going down, we wanted to get out of the block first to start because without the COVID, the economy would have started to take off after touching a bottom and go, right? We wanted to be ahead of the block to grow, to keep the balance sheet strong enough for any kind of if anything were to happen on credit, we got good amount of reserves. COVID struck, right? We started to build it even before then. In other words, if you look at before September 2019, our contingency reserves were less than INR 1,000 crores. As we speak now, it is more than INR 8,000-INR 9,000 crores contingency reserves, right?
Along the way, we built and if there is an opportunity, we will build to keep the balance sheet more resilient because it allows us our front end to originate and our credit to make several experiments and so that we can get the right kind of product mix to the customers that we want to. That is how you think about reserving as something that you build the reserves to keep the balance sheet strong. If there were to be some kind of a credit decisions that you need to relook because you made some experiments, so be it, right? We learn and we move. That's the reason we build reserves.
Actually, have you noted a difference between you and your bank with respect to the accounting of cashback? Like, for example, when you reported your fee income last quarter, you said that part of the fee income was also because of waivers that you provided in the festive period. Some of the banks actually likely take that via the cost line. Have you noticed something like this? Are you aware of any accounting differential that you guys follow?
No, I think we are following generally accepted principles, Ind AS principles. I don't think there is a difference to the best of my knowledge on anything. Yeah.
That means just to be clear.
It's a very-
Just to be clear, the festive period related cashbacks that you would have offered, you would have deducted that from the fee income. Is that correct?
No, not necessarily.
The fee waiver fee paid.
No. If the bank provided a kind of a cashback. Cashback schemes come from various sources, right? One, the partner merchant can pay the cashback. We can do the cashback promotion. We can offer rewards, cashback, in lieu of cashback, we could offer rewards. There are different accounting treatments that happen for all of that. The waiver is when I originate a card loan, when I originate something, and I will charge you when you want INR 10,000 of loan, I'm going to charge you INR 1,000 and I say, "Okay, I will not charge you INR 1,000, I'll charge you INR 100.
Mm-hmm.
That is a part of the processing fee. If you look, if you go to a branch and see, they'll say, "Hey, I'm going to 50% discount on processing fees. Processing fee waived in the festive period." Right? You will see things like that, promotion, various promotion happening.
Very clear, Srini . We have five more minutes, but I've got two questions for you. They're somewhat related, so I'll read out both then. There was a media report on HDFC Bank launching digital challenger bank. Can you elaborate on that? There's a second question, which is related in a way, could you ask about their plans for Digital 2.0?
Okay. First let's take that other one that you asked about the digital bank. See, we talked about this, Sumeet, in the past in terms of partnering with a tech startup to develop a digital-only bank. See, this digital-only bank has got a few things to look at, right? You know the traditional bank that we have, you acquire, you service, you have relationship management, right? You have, and then there are several technologies that go to support all of these things. You have a back end that does various operations and service and so on and so forth. This digital-only bank is supposed to be a bank targeting certain customer segments. Call them, for lack of anything else, segments that are new age customers, right?
For lack of anything, call them new age customers who are quite comfortable using a mobile to do banking. Generally, they don't need or they don't want and they don't prefer a relationship manager. They want self-service, right? That is what this digital bank is supposed to accomplish. It is supposed to accomplish that it gives them certain vanilla products, helps them to operate on their own on a mobile. There is no back-end operations. That means it doesn't, it's not a front end. Digital banking is not a front end.
It's an end-to-end bank with zero paper, zero touch, straight when a customer opens an account, does the transaction, it goes, but it is envisaged to plug them into our credit model so that it is simply not only a savings account, it has also got other lending value propositions in it. So from an API, it plugs into our credit model, so that algorithm that we can run can be the same algorithm we run in our traditional bank, right? So that's what this digital banking is under development. We will roll that out at an appropriate time, but it is supposed to be a bank that can be something that supplements our traditional bank, right? The brick-and-mortar, the phygital bank that we have, it can supplement that. That is what is envisaged.
At some point in time, there is an outside digital-only bank that gets a license. We are an incumbent already in that play. That's all it makes us. It's a scale play, right? Where here you have 68 million customers, but with only 11-12 million customers with whom you have active relationship management. We want to scale it up to 20-30 million, right? That is why that VRM channel came into being. Then two years it has been little lukewarm. Now it is getting back on the bigger scale, on the relationship management side, right? We want to take that up. Because that's where the profit pool is. As I said, you acquire, you service, you have relationship management.
Close to two-thirds of the value for the bank comes from relationship management, active relationship management, right? That's where you make money. That's where you deepen the relationship. You have a breadth of product that you offer to the customer, you make money. We are seeing, that is why this digital bank is supposed to bring unit economics. That means you bring in customers who don't want relationship management. At the same time, you want there, you want them, then you work on unit, so you bring in some higher quantity of customers come in. The unit economics are low, but then that is where you offer on a digitized basis and get the right kind of profitability that comes through it, right? That's the kind of a dynamics.
Yes, we expect to launch that at some point in time in the next few quarters. We are at it. That's part of the digital banking. The Digital 2.0 that you talked about. See, that is Digital 2.0 is a very broad term, right? That is, we've had certain digital implementations in the past, starting from 2014, 2015, various things that we have done. Digital 2.0 is a very broad terminology to say the next generation, the next kind of application that comes in Digital 2.0, what that is, right? You can think about this digital bank as something that comes under that Digital 2.0.
The other aspects of not necessarily Digital 2.0, but the new foray, right? You can think about what I had alluded to on the first pillar, which is the customer acquisition pillar. The Adobe partnership that redefines the journey for a customer, right? For acquiring the customer, it redefines the journey. In the servicing, we want to revamp the mobile banking app. That's one. Bringing the new PayZapp, the new SmartBuy and bring in all of that and bring in some redundancy to the net banking and mobile banking and put that in the payments hub, right? To enable customers to do things in a better manner.
In partnership with a tech startup to get the latest UI, UX kind of attraction to it, right? That's something in this one. On the relationship management, the Sprinklr is one example. Similarly on the commercial banking, commercial and rural banking, small business banking, we have some CBX and some trade, et cetera, apps that are getting rolled out in that relationship management area. These are all certain things that I already mentioned in the beginning of this call of certain technologies that are coming. You can broadly think about them as the new age digital technology rollout, rather than very high-level Digital 2.0. Yeah.
Srini, by when can we see all of these products that you spoke about? Is it a one-year, two-year journey?
Several of them starting in a quarter's time, right? For example, Adobe, out of 80+ journeys that we have defined, eight or nine journeys or something is already live, right? The rest one by one will come over a period. We are not waiting for any big bang. It is day by day it is coming. If you think about the payment hub, the new PayZapp and the SmartBuy and all of those that goes into it, that is an activity perhaps a quarter away, right? That will come. The new mobile banking app, maybe couple of quarters away, that will come because we want to get to the next generation of the mobile banking app. Sprinklr, as I told you, in phases it is coming.
Some phases have come, but the bigger phases where the customer experience actually takes a greater shape, maybe a quarter to two quarters out from there. Various things that we are having. The digital banking is perhaps even more than two, three quarters away, right? That's how you think about, we are having it in various stages. They are all coming. The difference between-
Right.
The difference between the past and the present on all of this is that the IP on all of this is our IP, right? That is the very fundamental difference. IP is ours. It is co-creation, unlike the past, where you take the business requirements from various products and channels, give it to our technology, who puts the business requirement documents, takes it to a third party, kind of, think about a big tech major, right? Think about TCS, Wipro, Infosys, kind of big tech majors. Go to them to develop and then implement it with the big other tech majors like Oracle, IBM, et cetera, and then you jointly implement, right? That's historical approach. This approach is IP is ours, co-creation with tech startups using the latest technology, right? The engineering is very different and on the cloud.
These are the kind of new age things that are coming through these kind of processes.
Okay, Srinivasan Vaidyanathan, I've got 2 bullet kind of questions. Is that okay? They, these are not long questions. Do you have another 2, 3 minutes? We are running over time, so.
No, go ahead. Go ahead.
Okay. These are very pointed questions. I don't know whether you'll have the data or not. I mean, how many PIN codes across India do we currently issue cards to new-to-bank customers? How do you think of expanding reach across more PIN codes?
No, I don't. This is very proprietary in terms of our credit algorithms that define. I can tell you, customer from the northernmost to easternmost to westernmost to southernmost can apply. It is available. Our credit algorithms will decide which segment, geography segment, customer segment, income segment, salary segment and so on and so forth that they offer. When they offer, first whether they will accept and if or reject. If they accept, at what kind of a credit limit they will accept. Each one, it goes through our proprietary credit models in terms of how we decide and do this. This is a very dynamic process, right? That is part of the feedback loop of the credit analysis and the credit that feeds into underwriting and thereby into the origination.
That is a continuous loop that happens, right? In terms of monitoring and making the adjustments and the changes.
Great. Yeah, Srini, and I'll leave you with one last data question. What percentage of tech spends are being capitalized? Have you mentioned that anywhere? Can you give some color to that?
No. What part of?
What percentage of tech spends annually are being capitalized?
We've not published that data, right? We have talked about previously in terms of tech spends as a tech expenses as a percent of total expenses or tech expenses as a percent of revenue and so on and so forth. What gets capitalized is not something that we have talked about here.
No worries. Yeah, broadly, I'm done with all the questions. Thanks a lot, Srini. Thanks a lot for extending your time. Have a good evening. Happy Holi to you and all the viewers. With that, let's end this session. Thanks a lot, investors for attending this. If you have any more questions, do reach out to us. Thank you.
Thank you. Thank you all for engaging. Sumeet, I appreciate leading and getting to the questions that you did. Thank you.
My pleasure.
Have a great weekend, all of you. Happy Holi to you all.