Ladies and gentlemen, good day and welcome to IndusInd Bank Limited Q3 FY26 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star, then zero on your touch-tone phone. And now, in the conference, over to Mr. Rajiv Anand, Managing Director and CEO, IndusInd Bank. Thank you, and over to you, Mr. Anand.
Good evening, and thank you, everyone, for joining us today. I'm joined here by the senior management team of IndusInd Bank. I'll start with a quick overview on the macro environment and then go into bank-specific developments. The global environment remains uncertain with shifting trade policies and a possible tilt towards a multipolar world order. Amidst this backdrop, the Indian economy continues to demonstrate resilience. Demand indicators improved during the quarter, building on the festival season uptick, GST-led benefits, and better supply conditions. High-frequency data indicates that overall activity stayed firm post the festival season, though a few indicators softened on a higher base. Inflation outlook remains benign, and policy support is expected to continue towards growth acceleration. Bank credit growth improved across key sectors during this quarter, and the momentum is expected to continue, supported by policy measures and constructive macro environment.
We will now move to the key highlights of Q3 FY26 and then cover business-specific progress and financial performance. We continued our approach of right-sizing the balance sheet by shedding inefficient assets and liabilities and allocating growth capital towards areas of focus. Our average deposits degrew by 1%, driven entirely by the reduction in bulk deposits. The average retail deposits were stable Q1Q and grew, albeit modestly, on a period-end basis. As a consequence, share of retail deposits inched up from 47.2% to 47.5% from 47% Q1Q. On the asset side, disbursements were robust in the vehicle finance, retail, and granular corporate book. However, our average loan book degrew 2%, driven by continued rundown in microfinance loans and risk-reward-driven calibration in the corporate book. Slippages during the quarter have been range-bound in all businesses except microfinance loans. Slippages in the microfinance loans remained elevated as last quarter.
We have implemented stringent underwriting norms earlier this year. These norms have shown effect as incremental stress formation is reducing consistently. We continue to work towards reduction in outstanding stress book, as is evident in QoQ reduction in net NPA, net security receipts, and the restructured book. We have made considerable progress on streamlining of the organization structure and identifying the right talent to drive the bank's future growth. Since the last analyst call, we have onboarded a new Head of Wholesale Banking, Chief Human Resources Officer, Chief Data Officer, a new CEO for Beefill, Head of MSME Business, and Head of Digital, among others. There are a few more positions expected to be announced in this quarter. With this, the top leadership team will largely be in place. I'm confident that this strengthened leadership team with diverse experience is well-positioned to deliver on our strategic agenda.
We are also pleased to welcome Mr. Arijit Basu as our new chairman, bringing over four decades of leadership experience in the Indian banking industry. I also want to thank Mr. Sunil Mehta upon completion of his tenure as chairman for his steadfast leadership and unwavering support through challenging times. The financial outcome for Q3: our pre-provision operating profit at INR 2,270 crore grew 11% Q1Q, supported by improved net revenues and disciplined cost management. Provisions remain high given elevated flows in the microfinance business and write-off of accumulated NPAs. As a result, profit after tax for the quarter was at INR 128 crore. The capital adequacy remains healthy at CT1 of 15.74% and CRAR at 16.94%. I will now take you through the highlights of individual businesses: vehicle finance.
The vehicle industry and consequently our vehicle finance business saw robust momentum during the quarter on the back of GST changes announced by the government. Our vehicle disbursements at INR 12,900 crores increased by 26% QoQ. As a result, the vehicle finance loan book growth inched up by 2% QoQ compared to the muted growth over the last couple of quarters. The loan book now stands at INR 98,196 crores. We saw broad-based pickup in disbursements across vehicle categories led by MHCVs, tractors, and passenger vehicles. The gross and net slippages have shown improvement on a YoY basis for all three quarters of this year. We expect the trend to continue in Q4 as well, resulting in a full-year FY 2026 asset quality outcome, which is expected to be better than FY 2025. Looking ahead, we remain optimistic about vehicle demand supported by fiscal and monetary measures already announced.
Any further consumption-supportive or tax relief measures in the upcoming union budget will bolster this outlook. Rural and priority banking: I believe rural banking presents a large underserved opportunity, and expanding our presence here remains a key strategic opportunity. Scaling products beyond microfinance allows us to address this opportunity in a more diversified and granular manner while also supporting our PSL requirements. The Bharat Financial Inclusion Limited, Beefill, is now led by Tapobrat Chaudhuri as MD and CEO. Tapobrat is a seasoned leader with over 26 years of experience in the microfinance, retail, and rural lending businesses. As mentioned earlier, the bank has tightened the asset quality norms for microfinance loans earlier this year. We have seen an improvement in early stress indicators. We continue to monitor the collection efficiency and aim to move towards normalization in the coming months.
31 to 90 days past due was 2.4% in December 2025 versus 3.2% in September 2025. We have also gradually started increasing our microloan disbursements within our revised underwriting framework. Our microloan disbursements were INR 3,598 crore during the quarter. However, given the contractual rundowns of over INR 6,300 crore during the quarter, our microloan business degrew by 17% Q1Q to INR 17,669 crore.
Disbursements during the quarter were directed towards high-vintage, well-performing customers and centers and is currently under the process of being covered under the CGFMU credit guarantee, which will take the CGFMU cover to around 38% of the standard book as of December 2025. While early bucket stress indicators have shown improvements, our focus continues to be on a sustainable normalization rather than the near-term book growth. With reinforced underwriting, tighter controls, and new leadership at Beefill, we are committed to growing this portfolio in a calibrated and risk-aware manner.
In terms of our other rural products, we have shown a few of our rural-focused product portfolios, which have reached certain scale in our investor presentation. Our aim is to build a comprehensive suite of products tailored to the rural customer needs. Within this, we continue to scale our merchant loan book, which now stands at INR 7,338 crore, growing 16% YOY, spread over 579,000 merchant borrowers. Our affordable housing loan book at INR 2,692 crore grew 25% YOY, while the Kisan Credit and other rural loans at INR 4,267 crore remain steady Q1Q. Our consumer banking assets: these are traditional retail assets which will be the key growth driver as we build the universal banking franchise. Our home loan book continues to see strong momentum with outstanding of INR 6,114 crore, growing 94% YOY and 10% Q1Q.
Personal loans at INR 10,598 crores grew 12% YOY, and the credit card loan book at INR 10,264 degrew by 6% YOY as we remain watchful of asset quality trends. Credit card spends for the quarter were at INR 16,318 crores. We rationalized some of our spends, which were not efficient for the bank, on an overall profitability basis. The retail spends remain robust, growing 5% Q1Q. Overall consumer banking assets at INR 31,057 crores grew 18% YOY. SME banking: as you all know, India has a large and vibrant SME segment. The bank has a relatively small presence in this space. I believe this provides us a large opportunity to diversify our loan book and provide the next growth booster. We have strengthened our team in this space with Ramaswamy Gopalakrishnan joining us as head commercial banking and middle market at the bank.
Ramaswamy or Ramas is a veteran in this segment with over two decades of experience across leading foreign and private sector banks. In this role, Ramaswamy will spearhead the bank's strategy and businesses in the SME and mid-market segments with a strong focus on driving growth, deepening client relationships, and delivering innovative solutions to these critical sectors. We are reorganizing our structure to serve this segment with appropriate distribution. The portfolio currently stands at INR 43,957 crore, and there is robust scope for us to grow in the years to come. As we disclosed earlier, Ganesh Sankaran has joined us as head wholesale banking at IndusInd. Ganesh brings over three decades of experience across wholesale, retail credit, and SME, playing a pivotal role in building businesses, driving large-scale business transformations, and delivering consistent performance.
We have revised our coverage model to ensure optimal management and customer responsiveness across client segments, strengthening our position as a universal franchise and staying aligned with our strategic business objectives. Our strategy for the wholesale bank group specifically anchors around continued granularization of the franchise, expanding growth frontiers, building sustainable and cost-effective liability franchise, and a future-ready organization for superior client experience. We have started with rationalizing exposures where we don't see meaningful risk-adjusted returns even a few quarters down the road. As a consequence, our wholesale banking loans degrew by 5% Q1Q. The proportion of A and above-rated customers and the weighted average rating of the wholesale bank portfolio was at 82% and 2.54%, respectively. The asset quality remains healthy, with gross and net slippages remaining within our expected range. The gems and jewelry business to maintain robust collections with no SMA 1 or 2 customers.
Now coming to liabilities, the quantity and quality of deposits is my foremost priority, and a bulk of my attention and resources are allocated towards this. We have already made considerable progress in terms of streamlining organizational structures, strengthening the branch as a focal point, prioritizing digital delivery, and enabling frontline relationship managers. We integrated Affluent Pioneer branch operations and the entire NR segments into branch banking, creating a unified retail banking model across our deposit branches that enhances scale, unlocks synergies, and shifts us towards a more customer-centric branch-led engagement framework for a high-quality and consistent service delivery. We have multiple variants of branches through vehicle microfinance and mainstream branches with a restricted bouquet of offerings available in these branches. We are now consolidating multiple formats and making them universal branches in suitable locations. This should drive synergy for both assets and liabilities in leveraging our existing distribution.
We have also created a new senior leadership position as Chief Data Officer to effectively and efficiently use data analytics in all the decisions that we make. Balaji Narayanamurthy, in this role, will be responsible to drive the bank's data strategy, business intelligence, advanced analytics, AI initiatives, and data engineering capabilities. Our digital banking app, Indie, now has monthly active users of over 2.7 million customers, conducting 4.3 million app-led transactions in Q3 FY26. Our recently launched Indie for Business has seen monthly active user base increase by 220,000 MSME customers. Our focused efforts on enhancing efficiency in customer acquisition have started showing early results in terms of improving new-to-bank growth as well as productivity across channels. We should see this translating into revival in retail deposits in the coming quarters.
Cost of deposits for the quarter at 6.09 improved by 14 basis points Q1Q, largely driven by term deposit repricing. We reduced our dependence on bulk resources with CDs down 3% Q1Q and borrowings at INR 39,242 crore, down 13% Q1Q. We have maintained a healthy liquidity position during the quarter with average LCR at 122% and average surplus liquidity at INR 43,000 crore. I will now hand over to Viral, our CFO, to take you through the financial performance.
Thanks, Rajiv, and good evening, everyone. Similar to last quarter, we will focus on sequential trends all through my commentary. Let me now go through some of the details, starting with the balance sheet. Average advances dropped 2% sequentially from quarter two, driven by decline in wholesale banking advances and micro loan book. Average deposits dropped 1%, driven by reduction in wholesale deposits. Our retail deposits, as per LCR perspective, remained steady.
Average CD ratio improved to 83.7% versus 84.3% quarter-on-quarter. Borrowings have been brought down by 13% quarter-on-quarter. Moving on to P&L, net interest income for Q3 stood at INR 4,562 crores. Reported NIM was 3.52%, and this included a 17 basis benefit from interest on income tax refunds and a one-off interest recovery. So normalized NIM adjusting for these items was 3.35% versus 3.32% quarter-on-quarter, and that reflects improvement in cost of funds from TD repricing and liquidity optimization, which was partially offset by adverse loan mix with further degrowth in the microloans book. Core fee income has come in at INR 1,575 crores, growing 2% quarter-on-quarter, while overall non-interest income at INR 1,707 crores grew 3% quarter-on-quarter. Our operating expenses of INR 3,999 crores include INR 230 crores of one-off impact owing to provisions related to change in the labor code.
The operating profit for the quarter at INR 2,270 crores grew 11% quarter-on-quarter. Provisions and contingencies for the quarter stood at INR 2,096 crores, and we have written off loans amounting to INR 2,612 crores during this quarter. In terms of asset quality, GNPA and NNPA were at 3.56% and 1.04%, and overall PCR was maintained at 72%. Slippages, excluding microloans, continued to remain range-bound. We also added segment-wise slippages and NPA details in our investor presentation. Our SMA 1 and SMA 2 book was at 17 basis versus 26 basis quarter-on-quarter. Net security receipts declined to 9 basis versus 17 basis quarter-on-quarter, and restructured advances declined to 7 basis versus 8 basis quarter-on-quarter.
So overall, we've returned to quarterly profitability with profit after tax of INR 128 crore, and the bank continues to have healthy capital adequacy and liquidity position with the CT1 at 15.74% and CRAR of 16.94% and LCR at 122%. So with that, let me now hand it over back to Rajiv for his closing thoughts.
Thank you, Viral. To summarize, this quarter reflects progress on balance sheet strengthening, gradual pickup in core retail businesses, disciplined liability optimization, and progress on building a robust leadership team and organizational structure. Looking ahead, we are working on a three-year strategy anchored around PACE: protect the endowments, accelerate on key priorities, customer centricity, and execution excellence. Protect the endowments. I believe the bank has unique strengths in terms of vehicle finance, deep rural presence, complemented with a robust corporate franchise.
We aim to preserve this and not make changes for the sake of making changes. We will bolster these and evolve as per the operating environment, and they will remain core to the future of this bank. Accelerate key priorities. These are areas where we need to improve either of scale, efficiency, or quality of business we do. These include areas, including building a more granular, low-cost deposit base, scaling our SME and mid-market franchise, and improving stakeholder perceptions. Customer centricity. We are keeping the customer at the center of all our actions by unifying engagement across one IndusInd, driving digital adoption and elevating service quality. The ever-evolving technology will play a big role in bridging, if not surpassing, the gap with peers. Execution excellence. I believe execution rigor should differentiate the outcomes in an industry which is regulated and largely commoditized.
We are working towards building a strong execution-oriented culture, sharper performance accountability, tighter cost management, and efficient product delivery. With this, we are now open to Q&A. I must also inform you that we have revamped our investor presentation, providing much more disclosures. We will continue to refine these as we progress, and any feedback on this is most welcome. Thank you, and over to all of you.
Thank you very much. We'll now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking your question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Kunal Shah from Citigroup. Please go ahead. Kunal Shah, can I request to unmute your line and proceed with your question?
Yeah. Are you able to hear me?
Yes, I can hear you, Kunal.
Yeah, yeah. So the first question was on net NPA. It is still at 1.04%, and the slippages also appear to be sticky across the segment. So when we look at it, like say MFI, yeah, it's been at still more than INR 1,000 odd crores, but vehicle still continuing at INR 690 crores. When we look at the consumer banking, still closer to like INR 470 odd crores. So there, there is not much of an improvement on the slippage. And eventually, when we look at it on the net NPA side, we indicated that we would endeavor to bring it down to 0.45 odd percent, but it doesn't seem like there has been the increase in the provisioning coverage. So if you can share in terms of what would be the plans with respect to net NPA?
So hi, this is Viral. Let me just share some perspective on what's really happening here. So what we shared in the previous quarter is we want to make sure that we are consistent in our provisioning and write-off policies across our business segments. What you saw in the last quarter was the appropriate provisioning and write-off on the microfinance business. But as you rightly pointed out, gross slippages have been pretty much sustained even in this quarter as well. It's pretty much same elevated levels as the previous quarter. And as we keep writing off, what happens is the portion we are writing off is largely 100% provided, right? So that kind of brings down the provisioning because you write off that portion.
And then we are providing on the incremental slippages at the appropriate level of provisioning. So what you will see is the PCR being stable, and as slippages start dropping in subsequent quarters, you will see that improve. But PCR is an outcome, right? It's not like we are maintaining provisions to be at a number, but it's simply the impact of large write-offs that we are doing in a more prudent manner, which really brings down the PCR, and then you build it back up with normal provisioning. So that's kind of what's really happening here.
So any target for net NPA?
See, I think, Kunal, what the aim is to bring down the stress book through write-offs, etc., but I think we need to keep the interest of all our stakeholders in mind. Our intent is to bring down net NPA well below 1% in the 60-70 basis points vicinity over a period of time.
Got it. Got it. And in terms of this entire right-sizing of the balance sheet, both on assets as well as on the liability side, where are we in that journey? How much time would it actually take in terms of maybe the running down the bulk and maybe the low-yielding corporate book as well? And when should we start seeing the acceleration in the overall loan growth? No doubt on the retail side and some of the focus segments, the growth has still been there. But when do we start seeing the overall growth picking up?
Like I mentioned in the last quarter as well, Kunal, our intent is to grow in line with market in the year 2026-27 and be in the vicinity of 1% ROA as we get to the back end of that year.
Got it. So industry average growth by end of FY2027?
That's correct.
Okay. Thanks. That's helpful. Yeah. Thanks. Thanks and all the best. Yeah.
Thank you, Kun
al. Thank you. Next question is from the line of Jai Mundhra from ICICI Securities. Please go ahead.
Yeah. Hi, good evening. Jayakarth Rajiv. And yeah, and thanks for the improved disclosure, sir. Sir, on presentation and in your opening remarks, you also mentioned that there is some improving trends on MFI in terms of new delinquency or new stress formation. If you can provide SMA 1-2 number for MFI, that will ideally give more picture. You have given some certain disclosures, but somehow the absolute number of SMA 1-2 would be really helpful.
We have, I think we have mentioned in the opening remark, the SMA 1-2, 30-90 DPD is 2.4% against 3.2% last quarter.
Okay. Sure. Thanks, Indrajit. On the PACE strategy, right? So I mean, you mentioned that PACE would mean, I mean, the protection as well as acceleration of some businesses. Where would MFI fall into this framework? Would it be like acceleration, or would it be like protection?
I think I believe that, and I mentioned this in the last quarter as well, I think the microfinance business is a very critical business for this bank and for multiple reasons. I think it is a business that, if run well, is a very profitable one. Two, and more as important perhaps is, as the industry continues to grow, I do believe that meeting PSL, and particularly agri, and within that, the small and marginal farmer is going to become increasingly difficult.
And here is an engine that meets that requirement for us. And so therefore, both from a profitability perspective, the fact that we are able to now start to grow other products within this space, which is our Bharat Super Shop business, which I spoke about as well, and the fact that this is going to meet our critical PSL requirements makes this a very important business for us. We also recognize the fact that it is cyclical in nature. And therefore, as I said in my opening remarks as well, we are using the credit guarantee schemes, and the aim, based on 31st December disbursals, we will have coverage of approximately about 38%.
The intent is to take that to 100% and thereby eliminating the tail risk on the microfinance business. So if you're able to do that and manage the proportionality of the business somewhere between 7%-8% of the asset side, I do believe that we can build a more predictable and profitable microfinance business going forward.
Sure. That helps, Rajiv. Last question, sir. You mentioned that you have intention to grow in line with the system by FY27. But I mean, would it be fair to say that on a QOQ basis, the bank should now be on a growth track, or it could be maybe beginning from FY27? How would you put it, the overall loan growth?
I don't want to guide Q on Q, but I think I stand by what I said last quarter, that our intent is to grow in line with the industry in 26-27.
Thank you and all the best.
Thank you.
Thank you. Next question is from Rikin Shah from IIFL Capital. Please go ahead.
Hi, good evening, everyone. I had three questions. So the first one is going back to the net NPA point. So just some back-of-the-envelope calculation suggests that if we have to bring down our net NPA to 0.5%-0.6%, and given the net slippages that we have, it looks like for next three quarters, whatever PPOP we make will largely be used to just provide and bring down that net NPA.
So is it a fair assessment to say that for next few more quarters, the operating profitability will just be used to kind of bring down the net NPA? Or how would you think about it? Otherwise, it looks tough to achieve 0.5%-0.6% net NPA. So that's number one. Second, Rajiv, it's on your earlier point on the PACE strategy. While you briefly alluded to what are the segments that you want to focus on, etc., but any broad-level detailed strategy or the financial targets you would want to put it down as yet, or maybe that will happen at some point later. So that's the second one. And the third one is on the capital, right? So I know that you've mentioned in the past the capital levels are sufficient.
But first, if you could quantify what is the potential impact from the ECL whenever the transition happens from 1st April on the net worth on pro forma basis, and the fact that while the ROEs are depressed and once you start growing again, you'll be consuming capital. So what looks like as sufficient, I'm not pretty sure whether we have enough growth capital. So what would be your thoughts on capital raise and if and when that happens? So those are my three questions. Thanks.
So let me take question two and question three first. So on the PACE strategy, we will obviously have done some work, and the intent this time is to seed the idea that there is a long-term strategy that is being built out. We will obviously share more details with you in the months to come, that I assure you.
I think as far as capital is concerned, I think the issue there is really that why do I need capital at this stage? I mean, I think I would first stay focused on getting growth impulses back, particularly on the liability side, because I think we have enough engines of growth on the asset side, including some of the new engines that I spoke about, like SME, for example.
And I think that, like I said, will take us deep into 2026-2027. And so therefore, to that extent, growth capital is not something that we require. And even if we do consume at a relatively lower ROE, I think we have more than sufficient, at least for the next 12 to 18 months. What was the? I'll let Viral answer the net NPA question.
Sure.[inaudible] .
Sorry, sorry. Yeah, the ECL impact as well. Yeah, Viral will take that.
So let me answer the first question and break it into two parts. First is your point about saying entire or large chunk of PPOP go towards servicing credit provisioning. Now, that's an outcome of the level of slippages that come out, right? Now, it's true that for the past two quarters, they've been elevated, but we are seeing clear signs of that coming down in the next quarter. So as that starts dropping, you will obviously see a much lower level of credit provisioning. So that kind of answers your first question about are we going to continue eating up all our PPOP? Now, your second question about net NPA, right?
Again, we are going to be following very consistent provisioning policies, and that's something we've done from the last quarter itself, and we will continue to do that. So as the NPA starts dropping, the absolutes also start dropping, right? So that's really how that net NPA number starts coming down. So that kind of answers the first question. On ECL, I think our impact, we need to await the final guidelines on ECL, but our initial impact is between 1.5%-1.7% of the loan book. Pretax. Pretax.
So on the net NPA point, in your own assessment, when do you really think that we should be able to reach our target range? Is it like FY27, or you would want to do it a lot more gradually, maybe over until even FY28 as well?
We will evaluate every quarter, depending on how the revenues are pacing out, how the asset quality pans out in some of the large businesses. So we don't want to guide a specific target or anything. Let's see how each quarter goes, and then we will update you.
Got it. Thanks, Indrajit. Thank you, everyone.
Thank you. Next question is from line now Abhishek Murarka from HSBC. Please go ahead.
Yeah. Hi. So Rajiv, one question on growth. Now, I know you guided for FY27, but if we look at two, three years, on a more steady-state basis, what kind of growth are you aspiring to? I think the way I'm thinking about this is basically your one, which is 26-27, grow in line with market, 27-28, start to gain market share, and 28-29, start to dominate in some of the focus areas that we have built out. When you say gain market share, would you have a certain, let's say, spread to industry or something in mind, or a number maybe given the size and the re-acceleration in growth?
See, I think I don't have a number offhand. For example, some of our large businesses, for example, our vehicle finance business, we have about a 7.5%-ish market share. Our intent is to take that back to 9% as we go forward. Similarly, we will continue to gain market share on our microfinance business. As we accelerate our SME businesses in the short to medium term, I'm fairly certain that we will be able to gain market share.
But I think the key to all this is to be able to improve both the quality and quantity on the liability side. As we all know, there is a mad scramble for deposits in the banking system. So therefore, I am actually not very concerned about being able to gain market share on the asset side. I think the challenge for us will certainly be to be able to improve the quality and quantity of liabilities as we go forward.
Right. And just in terms of the microfinance slippage, I know the SMA 1 and 2 number looks actually quite good. But does it indicate that, I mean, from 4Q onwards, the slippage should come down materially? Because if you look at the rest of the industry, they are already in that phase. And I guess for you, you may be like 1 quarter off, but shouldn't be more than that. Is that a fair assumption?
It is.
Okay. Perfect. Yeah. And finally, it will help just to get some sense on a medium-term ROE aspiration. It may be three years, four years down the line, but just from a steady-state perspective, where do you think you can get to? And some sort of bridge to it, or what would be the key levers, at least going forward? Something like that would be really useful so that you can get a sort of view beyond 27.
I think it's a fair ask, which is why we decided to seed the idea of PACE with all of you. And we will share more details, which will give you color, the possibility of execution, the execution rigor that is going into all of that in due course.
Got it. Okay. Thank you and all the best.
Thank you. Next question is from Chintan Joshi from Autonomous Research. Please go ahead.
Hi. Thank you for taking my question. I also have three questions. Can I follow up on your last answer regarding the ROE bridge? Over the next 2-3 months, you're bound to talk to investors. They're bound to ask you this question. You will give some color. We will hear that feedback. It would be helpful if you will give us some idea about what that bridge looks like. What are the kind of main levers that you have? On cost of risk, we can obviously assume some amount of normalization, but where are your cost of funds going? What is your asset mix kind of going to add to that ROE bridge? So some color there, if you could seed it now as well, that would be helpful. My second question is on your slippages. You hinted to a policy change on slippages. Could you help us quantify that?
If you were on your old policy, what would that slippage number be? So we can understand the policy change, how much of that slippage is driven by that. And then my final question is, why are vehicle finance slippages running at a higher pace or being high for a while? What's driving that, and what is the road to improvement?
So on the ROE question, I think what I have been saying is that this is a three-year journey. Year one is really to start to grow in line with market with 1% ROE. And I think you can do some numbers on your own. Given some of the commentary that you have heard from us, the vehicle finance and microfinance business will continue to be a critical component for us, i.e., higher-yielding assets.
We will add the SME business and, to some degree, de-focus on the very large corporate business that we have. There is space for us to be able to grow our entire agri-franchise, including gold loans, which will help us meet some of our PSL requirements as well. I think, given where we are on cost of funds and retailization, including a renewed focus on current accounts, should benefit us from improved cost of funds in the medium term. We are already working on a fairly elaborate cost takeout. If you look at cost to assets, currently, there is a bit of a denominator effect because of the fact that assets are not growing, but there is the cost to assets continue to be elevated as well.
So there is no as I look across the ROE tree, I think there are opportunities for us to improve pretty much on each of these lines, on the NIMS, through some benefits on cost of funds. I think fee incomes both on retail and corporate, some cost takeouts, and be able to reduce credit costs as we go forward. So I think, in that sense, you can clearly see that there are opportunities. I think the question really is, how long will it take for us to execute all this? To my mind, I think it's a three-year journey at least.
That was very helpful. And the other two questions?
Sorry. Your other two questions where? While vehicle finance slippage is high, let me just ask Sriram, who heads that business, to take this, please.
Yes. Good evening. Slippage will be better than the last year. The slippage will be both on absolute terms and on percentage terms lower than last year. We are expecting 20 basis points lowering of slippage during this current year. Having said that, the entire vehicle industry, particularly MHCV, has been going through a bit of a strain because of the GST now changes. People have been taking 28% and discounting the rates to customer, which has caught them out a bit. But having said that, it is a good thing for the industry in the long run. People, all the entire industry, will be benefited by such move. And the rest of the products, we are doing much, much better than the last year.
Thank you. Thank you. And then finally, on that slippages question, the policy changes impact on the slippages?
Yeah. Let me answer that. So slippages is not policy-driven, right? That's basically IRAC norms and normal identification of NPA. So that is not policy-driven. What is driven by policy is at what point do you write off, and what is the quantum of provisioning that you need to do? Now, that change, again, that's not something we've done this quarter. You saw that last quarter where we changed or upped our provisioning maintenance on the microfinance business, and also at what point do we write off. So both those changes were made in the last quarter itself, and it's not a this quarter event. But nothing to do with slippages. That's more on write-off and provisioning.
Thank you.
Thank you.
Thank you. Next question is from Piran Engineer from CLSA India. Please go.
Yeah. Hi. And thanks for the enhanced disclosures. Just firstly, quick data or related to this?
Yeah. So again, let me try and answer that. If you look at quarter-on-quarter comparison, first point to make is we've already absorbed INR 228 crore impact simply from the labor law change where the gratuity provisioning need to be upped. So that's already built into our quarter three expenses. You're right that if you adjust for that, expenses have actually come down roughly INR 240 crore for the quarter-on-quarter.
Now, there is some amount of impact from higher expenses that we booked in quarter two, like a GST provisioning, and also we changed some of the expenses related to business activity. So some of that, that was INR 150 crore all from there. Remaining 96 crore is a real save that we've achieved through operational excellence and all the initiatives that we are trying to do. So yes, we are calibrating expenses very tightly and tracking that to bring in the OpEx efficiency. So as Rajiv said, we're going to be focusing on bringing down the OpEx percentage because we do believe there is opportunity there.
Got it. Okay. Thanks for that. Just secondly, moving on to more meaty questions. With the MFI share shrinking, I know you touched upon how it's important from a PSL perspective, but it's already down from like 9% to 6% of book in the last two quarters. And probably a year later, it might be even lower. So how are we thinking about bridging the gap? And you also mentioned your Bharat Super Shop, which is the merchant loan business. Does that also qualify for PSL?
But obviously, not agri.
So it won't be SMF, but it'll still be general category.
MSME, it'll be under MSME, it is PSL.
Okay. Whereas the MFI business was under MSME or under SMF or agri?
SMF. It's 85.
So we are losing the SMF contribution from the MFI business, but we are gaining it in the MSME. But net-net, I think SMF is the.
It's not an either/or. Okay. Sorry. I'm sorry. Why don't you finish your question?
So I mean, Rajiv, what was?
I'm losing you. SMF.
Sorry. Is it better now?
We are losing your audio. Can you come in a better reception area, please?
Yeah, I am now. Is it better now?
Much better.
Yeah. So let's talk about just SMF category then. How do we intend to bridge the gap with our share of MFI going down?
So as we've explained over the last couple of quarters, we have seen degrowth on the MFI book over the last two quarters, including this quarter. Having said that, there has been a significant increase in disbursals in this quarter, really from the middle of October-ish. And so therefore, to that extent, the full benefit of disbursals will come through in quarter four when disbursals will be higher than the repayments that we receive, and the book will start to grow from Q4 onwards. So the degrowth that you have seen, we should be able to recoup as we get into 2026, 2027, helping us fixing, one, the proportionality that you spoke about, and two, is meeting a significant component of our requirements for agri and SMF.
Okay. Okay. Fair enough. Secondly, I think, while I understand you don't want to give the drivers of the improvement in ROE, but even if I assume that slippage is in MFI half from where they are, the credit cost might improve 50 basis points or so, it's still quite a hard task to get to 1% ROE within the next five quarters. And on top of that, we want to grow at 12%-13% next year. So just trying to think about what are the risks here, really. One thing you've already identified is that ability to raise deposits at scale and at a lower cost. But I don't know. I think it seems like a stretch, or am I reading it wrong?
No, Piran, let's see how each quarter goes. As we have been saying, it's not going to be a given thing that ROE improvement will happen every quarter without doing anything. Bulk of the improvement will come from credit costs. Last quarter we had, or this quarter, quarter three, credit cost is 2.6%. Bank, as you know, has operated at 130-140 basis points when microfinance was at around 10%-11%.
So with the microfinance at a lower share, obviously, the business has to operate at a much lower credit cost. So there is a significant scope for improvement. Plus, the margin that we are delivering today, the fees that we are delivering today, they are lower than what their potential is. So there is scope across the board, but giving exact bridge right now is too early. As you can see, every week things are changing. Every quarter things are changing. So let's take one quarter at a time, and that's why we are not giving you quarter-specific guidance. Let's reach 1% first. Some of you have actually asked us other way around, saying that 1% is too low for a bank of your loan mix. So let's take one step at a time and then revisit.
But if you had to sacrifice one of the two, what would it be?
What one of the two?
The growth target, which is maintaining market share, which effectively means 12%-13% growth, or the 1% ROE?
I think for a banking business, writing growth, particularly on the corporate side, which is not profitable, is very easy to do. And so therefore, the composition of the growth is as important, and what part of that growth we are sacrificing is as important as well. Because remember that we are a relatively small player in the banking industry. And so therefore, I don't think it's an either/or in a very simplistic sense. I mean, if push comes to shove, yes, there are opportunities for us to be able to shed growth without impacting PPOP. So stuff like that, we will certainly do if required, if push comes to shove.
Got it. Got it. Okay. Yeah. That's it from my end. Thanks, and wish you all the best.
Thank you so much.
Thank you. Next question is from Parth Gupta from 360 ONE WAM. Please go ahead.
Yeah. Hi. So thanks a lot for the opportunity. What would be the drag on LCR once the new LCR norms in?
Sorry? New LCR norms?
Yeah. From 1st April on the mobile and the internet banking.
There is a small impact. It's n ot going to be a big impact because of that.
Thanks.
Thank you. Next question is from Rikin Shah from IIFL Capital. Please go ahead.
Hi. Viral, this is the question for you. You earlier mentioned that the write-off and provisioning policy were changed last quarter. Would you be able to just remind us what those changes are and what's the current write-off provisioning policy? Thanks.
So obviously, that's different across various segments of the business, as in vehicle finance, consumer, unsecured, microfinance. But I think the biggest driver for us is clearly the microfinance business. So the change we really made last quarter is the point at which we write off. So we are now writing off at 365 days post NPA. So that's one change that we made. And on provisioning, it's staggered depending on the number of months outstanding post NPA. But broadly, somewhere between 78%-80% kind of PCR on that book. So that's really the key change. On the rest, we've basically just aligned it to where the LGD kind of number where we need to be on provisioning level.
Okay. Thank you.
Thank you. Next question is from Ankit Biyani from Nomura. Please go ahead.
Yes. Hi. Thank you for the opportunity. I just wanted to ask if the RBI annual supervisory outcome has been done like it has been done for other large banks with respect to agri PSL. Has there been any impact of that?
Yeah. The RBI discussions with the bank are confidential in nature. We won't be in a position to comment on it till the discussions are conclusive. As and when required, we will make whatever announcements are there. So difficult to comment on it. We'll give any information as and when it is appropriate.
Okay. And the second question is, what would be our exposure to Adani Group?
We don't disclose company-level exposure. We had disclosed this specifically in stock exchange two years back when there were some market news. Since then, the exposure has come down a little bit.
Okay. Thank you.
Thank you very much. Ladies and gentlemen, we'll take that as a last question. I'll now hand the conference over to Mr. Rajiv Anand for closing comments.
I thank each one of you for your interest in IndusInd Bank and for being on this call. I take this opportunity to wish each one of you a very happy New Year as well. Thank you once again.
Thank you very much. On behalf of IndusInd Bank, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.