Ladies and gentlemen, good day and welcome to IndusInd Bank Limited Q2 FY 2022 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 the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sumant Kathpalia, Managing Director and CEO, IndusInd Bank. Thank you, and over to you, sir.
Good evening and thank you for joining this call. I will start with some macro commentary and then go into the bank-specific details. Economic activity is gradually improving with easing of mobility restrictions, the rising pace of vaccination crossing 1 billion mark, growing exports, favorable financial and market conditions, and increasing government capital expenditure. Consumer and business confidence on future prospects is also improving. Strong performance of the farm sector, pickup in the manufacturing activity, and now even a recovery in the contact-intensive services bodes well for the growth in the bank credit going forward. A decade in low interest rates across major segments is also expected to drive up credit demand, helped by the receding of the pandemic-related disruption, as almost 65%-70% adult population is likely to be fully vaccinated by year-end.
Key risks to the Indian macroeconomic stability and prospects are seen from adverse global developments around commodity price spikes, supply chain disruptions, and faster than anticipated tightening by major global central banks. With foreign exchange reserves at record levels, improving external balances, inflation within the target band, and the growth picking up, Indian economy can negotiate the global headwinds successfully over the coming year. Now coming back to the bank-specific commentary. We will upload this commentary on our website for ease of reference after the call in case you miss any of the comments. We have also refreshed our investor presentation with some new details. I hope you will find them useful. Coming to quarter two, during the quarter we focused on strong loan momentum. Our loan growth continues to improve every quarter, with quarter two growth at 10% year-on-year and five percent quarter-on-quarter.
We saw most of our retail product disbursements crossing pre-COVID levels. The corporate book too accelerated growth momentum. Overall, corporate grew seven percent quarter-on-quarter, while consumer grew three percent quarter-on-quarter. Maintaining deposit traction. Our deposit growth was strong at 21% year-on-year and three percent quarter-on-quarter, driven equally by CASA and term deposits. Retail deposits as per LCR were even stronger by 48% year-on-year. The deposit traction has remained healthy despite the rate cut on our savings as well as deposit rates last quarter. Our cost of deposits has thus reduced to 4.85 from 4.97 last quarter. Asset quality. We saw collections getting back to normalcy across our portfolios, barring small pockets in microfinance.
As the accessibility was impacted during Q1 , in some states and in some states in Q2 as well, and given the high touch nature of vehicle and MFI business, customer moved into NPA and came out as we collected payments. Overall, collections for September were at 98% as against 96% in June. Slippages during the quarter net of upgrades and recoveries reduced to 0.57% as against 0.90% last quarter. As a result, our credit costs have fallen by 35% quarter-on-quarter from INR 1,132 crores to INR 752 crores. We have maintained our PCR at 72% and increased our contingent provisioning to INR 3,178 crores or 1.4% of loans.
This includes prudent contingent provisioning, provisions towards the stressed telco, and we'll share further details later. With this, I believe all legacy exposures are taken care of and balance sheet is best positioned to support growth. Maintaining profitability of the franchise. Our operating profit margin remains healthy at six percent of loans. Our NII grew by 12% year-on-year ahead of the loan growth. Fee income grew by 18% year-on-year, driven by client fees, particularly in the retail segment. While operating expenses have normalized as activity levels picked up, the cost to income ratio is still better than pre-COVID levels. This ensures maintaining a healthy operating margin. Scaling up of new initiatives. We continue to scale up our new initiatives of affluent, NRI, and merchant acquiring business.
Affluent deposit base grew 48% year-on-year to INR 35,700 crore, and AUM grew 42% year-on-year to INR 61,800 crore. NRI deposit grew 31% year-on-year to INR 27,500 crore. Our merchant acquisition through Bharat Financial added 120,000 merchants during the quarter, taking total onboarded merchants to 320,000 merchants now. Of this, 175,000 customers are borrowers and loan book originated crossed 1,000 crore for the first time. Digital launches. We continue to execute our Digital 2.0 strategy, and quarter two saw new launches in terms of Indus Merchant Solutions application, Indus Easy Credit Stack for business and debit card EMI on IndusInd Bank debit card. I'll give you further details subsequently. Capital adequacy.
Our capital adequacy remains comfortable and improved to 18.06%, including H1 profits. We have received board approval for re-raising Tier Two bonds of INR 2,800 crore. This will further augment our overall capital adequacy level. Strengthening the leadership team. We have made key changes in our organizational structure over the last few months. The focus has been to strengthen our corporate franchise along with the assurance functions such as risk, compliance and audit. There have been some lateral hiring along with internal reallocations. Overall, I believe the leadership team is now all set to deliver the PC5 ambition. We will talk about the leadership team changes in the specific segments. Now, overall, coming to individual businesses. Vehicle finance. Our vehicle finance disbursements saw strong comeback during the quarter.
The disbursements for the quarter are at INR 8,600 crore, grew by 62% year-on-year and 76% quarter-on-quarter. The disbursements have also been higher than the pre-COVID September 2019 quarter. This makes it the first quarter after COVID outbreak, where disbursements have been higher than the pre-COVID level. The bank has caught up on disbursements to pre-COVID levels, whereas the industry volume is still lower, indicating continued market share gains across the products. Within the vehicle categories, disbursements picked up significantly for commercial vehicle and car. The tractors and construction equipment continued their good run throughout the pandemic period. We have been cautious on the small commercial vehicles and two-wheeler growth.
The loan book has remained stable owing to higher run down due to contractual maturity and focused collections as evident from the recoveries. The collection momentum has resulted into strong recoveries and vehicle gross NPAs have reduced quarter-on-quarter across various segments. We saw upgrades and recoveries of INR 555 crore in vehicle finance during the quarter. As highlighted earlier, we saw customers opting for restructuring to tide over the COVID-19 lockdown impact. The vehicle finance restructured book increased from INR 3,089 crore to INR 3,969 crore quarter-on-quarter. On this restructuring, around 80% comes from the contact-intensive MHCV and three-wheeler segment. The balance 20% is spread across all other vehicle category.
The restructured customers have been of acceptable credit risk pre-COVID and the portfolio is well collateralized, giving us comfort on potential delinquencies. We see freight availability improving every month, and as collections normalize, the disbursements should start reflecting in the loan book growth from this quarter. Microfinance has shown a strong growth recovery and COVID spread coming under control. We saw loan growth of 26% year-on-year and nine percent quarter-on-quarter on a weak base. Collection efficiency for the quarter was at 94.7%. We have seen acceptability improving during the quarter across most of the country, except for in Kerala and a few districts of West Bengal. Collection efficiency, excluding Kerala and West Bengal, is close to pre-COVID levels. The gross slippages during the quarter were INR 1,070 crores.
As the acceptability and collections improved, we saw customers clearing up the dues, resulting in upgrades and recoveries of INR 610 crore. The slippages, thus net of upgrades, were INR 460 crore or 1.6% of the loans. We had highlighted in the last analyst call that customers of INR 500 crore of portfolio had invoked restructuring. We saw restructuring implemented for these customers during the quarter, along with the fresh restructuring of INR 407 crore. Thus, the total restructuring as of September 2021 was at INR 907 crore. Over 55% of the restructured customers have completed at least three loan cycles with us, and over 81% completed two loan cycles. These customers have strong payment track record and we expect the majority of the restructured pool to show comfortable payment behavior.
Looking at the overall collection trends, COVID-2 spread in terms of credit cost and restructured pool is likely to be between six-eight percent for the year in my view. The expected stress is higher than the first wave due to deeper COVID spread in the rural areas and non-availability of moratorium in the second phase. We have conservatively fully provided on the gross NPAs and carrying contingent provisions to absorb the impact. The overdue buckets have also fallen by half during the last quarter, indicating the delinquency should normalize post-December quarter. We have also scaled up our non-microfinance initiatives. The merchant acquisition business grew to 320,000 merchants. The loan book crossed INR 1,000 crores for the first time from borrowing customer base of 175,000 merchants.
We have also scaled Bharat Money Stores from 75,000 to 91,000 during the quarter. These businesses will add diversified revenue streams to BFSI. Overall, we are seeing credit demand coming back into the rural economy. We have been cautious on new customer growth and acquiring them only from well-performing districts. We remain vigilant on ensuring collection efficiency maintains upward trajectory. Other retail assets. This segment contributes 15% of the overall loan book and includes secured as well as unsecured retail assets. After navigating through a rather subdued quarter one due to COVID, asset disbursements resumed growth in quarter two. Growth in disbursements for business across secured and unsecured loans. LAP and business banking disbursements are back to pre-COVID levels and expect to maintain traction in coming quarters.
We had highest ever credit card spends at INR 2,230 crore, which was up 55% year-on-year, which was highest ever monthly new card acquisition, crossing 50,000 cards in September 2021. Our credit card spends per client in September have grown 52% quarter-on-quarter and 81% year-on-year. We have launched co-branded, branded partners, card partnered with Vistara during the quarter, which has seen good customer response. Our proposition is well received by affluent customers with an average transaction size of over 2x compared to other cards. The collection from the consumer segment has stayed stable throughout the COVID second wave. Corporate Bank. The Corporate Bank continues its growth trajectory this quarter as well, with quarter-on-quarter growth of seven percent and year-on-year growth of 15% with the loan book realignment getting behind us.
This growth was driven by demand from NBFCs, roads, education and textile segments, particularly from the higher rating profile, shorter duration and granular exposures as per our revised underwriting. Average rating profile of the corporate book improved from 2.63 to 2.63 from 2.87 year-on-year, which is equivalent to A rating. Slippages from the corporate book at INR 252 crore have remained small in this quarter as well. We have also seen positive movements in a few restructured accounts and expect upgrades to happen at an appropriate time. We had in past disclosed a stressed telco of INR 995 crore of fund-based and non-funded exposure of INR 2,276 crore. As you're aware, the government has announced major relief package improving the viability of the telecom sector.
This and other developments have reduced default risk, particularly on the non-fund exposures in my view. We believe our guarantee exposures could come down in light of these developments, and well, I will update you once the clarity emerges. We have nevertheless prudently made contingent provisions to the extent of fund-based exposure. With these provisions, and our inherent strong profitability, I think the last of the legacy exposure is also behind us. We have reorganized our corporate banking franchise. Sanjeev Anand, who was responsible for mid corporates, will now head the overall corporate banking as one unit. We have also strengthened our team by lateral senior level recruitments, including Niraj Shah, who joins us as Head of Institutional and Strategic Client Group.
The investment banking as a product unit is now housed under the Deputy CEO, Arun Khurana, who is in charge of all the product units of the bank. A new head of investment banking is expected to join us next month. The corporate banking team is now well organized, has clear underwriting framework and is without any legacy exposures to worry about. I believe these positions are well positioned to participate in the corporate credit growth revival. Gems and Jewellery. Our diamond manufacturer financing unit continues to maintain its pristine asset quality with no NPA or SMA-2 or restructured loans. The loan book saw a good growth of four percent quarter-on-quarter as borrowers utilized working capital lines ahead of the festive season. We expect a stable loan growth and asset quality position in the foreseeable future. Now coming to deposits.
Retail liability mobilization remains cornerstone of our PC5 strategy. Deposits grew 21% year-on-year and by 26% year-on-year growth in current and savings account. Retail deposits as per LCR growing 48% year-on-year and 6% quarter-on-quarter. We have reduced our deposit rates across savings and term deposits last quarter, and the deposit momentum was maintained despite these rate cuts. Our cost of deposits at 4.85% saw a reduction of 12 basis points during the quarter and 120 basis points cumulatively in the six quarters I took over. Our reliance on certificate of deposits continues to remain low and has fallen quarter-on-quarter from three percent of deposits to 2.5. Our affluent business has continued strong performance. Our deposits from this segment grew 48% year-on-year to INR 35,700 crore.
Our NRI business grew 31% year-on-year to INR 27,500 crores. NRI segment saw strong CASA growth of 62% year-on-year, while term deposits grew 24%. We have also received the agency bank authorization from the RBI. As agency bank, IndusInd gets the privilege of doing collections and payments on behalf of the Government of India and state governments. We have already signed MoU with Central Board of Direct Taxes and Indirect Taxes. This will strengthen our foothold in the government business and increase stickiness of our retail and corporate customers. We have maintained an overall average LCR at 148% and we're running surplus cash balances in excess of investment of over INR 59,000 crores.
As we saw loan growth acceleration in the later part of the quarter, the average surplus liquidity is expected to come down from current quarter onwards. As a result, our reliance on borrowing is coming down every quarter and moving towards long-term sources. We have shared details in the presentation with almost all the borrowings from long-term sources. Digital traction. We continued execution of our Digital 2.0 strategy and quarter two saw new initiatives getting launched. During the quarter, we launched Indus Merchant Solutions app, IndusEasy Credit Stack for business owners, and debit card EMI on IndusInd Bank debit cards. These are in addition to the easy credit for individual loans launched in the last quarter. Indus Merchant Solutions provides small merchants and retailers a unified stack to bring all the payments, lending, and banking needs under a single umbrella.
Indus Easy Credit stack for business provides easy access to small-ticket unsecured business loans, as well as secured overdraft up to INR 2 crore in a completely digital manner. Debit card EMI is a convenient consumer financing solution at point of sale for our customers. All these initiatives are cloud-native, microservice-driven, API-based stacks, making us ready for platform banking and open banking and will give us the scalability and agility. The digital adoption and volumes continue to see growth. Digital transactions contribute 91% of our total customer transactions. Close to 4 million sales happened digitally during the quarter across retail products, showing a 50% growth on a sequential basis. The mobile app user base increased by 36% year-on-year, and mobile transactions are up 2.3 times Y-O-Y.
Bank refreshed its mobile app with cleaner interface and response time improvements, continue to get positive feedback from the users. The all new IndusInd mobile app is now rated 4.3 on the Play Store and among top 3 rated mobile banking apps now. Overall, we remain on track on digital, along with the new initiatives on individual and vehicle finance segments planned for launch in a few months. Now coming to the financial performance for the quarter. Quarter two witnessed acceleration in growth momentum with NII up by 12% year-over-year at INR 3,658 crore and operating profits at INR 3,219 crore was up by 13% year-over-year. Our PPOP over loans was maintained at 6% in a tough operating environment. Our NIM for the quarter was stable at 4.07%.
Our yields on advances came down by 9 basis points due to the mix in favor of corporate and shift towards higher rated borrowers. The cost of deposits also fell 12 basis points quarter-on-quarter, maintaining the stability of margins. Other income grew by 18% year-on-year. Client fees rebounded after a weak Q1 due to COVID. The client fees grew 24% quarter-on-quarter and 42% year-on-year, driven by strong retail fee recovery. Share of retail fee has improved from 48% to 59% quarter-on-quarter. Income from trading was at INR 332 crore for the quarter. Our cost to income inched up slightly to 41.4% as the business momentum picked up during the quarter. Overall, we are still below pre-COVID cost to income levels of around 43%. Now coming to the provisions and some asset quality indicators.
We continue to follow conservative provisioning approach. Our provisions for the quarter were at INR 1,703 crore. With strong collections and recoveries, the specific credit cost provision for the quarter reduced to INR 752 crore from INR 1,132 crore quarter-on-quarter, down by 35%. We prudently added INR 978 crore of provision towards contingent buffers, taking our surplus provisions to INR 3,178 crore or 1.4% of loans. Our GNPA has come down to 2.77% from 2.88% quarter-on-quarter, and net NPA was down to 0.80, employing a comfortable provision coverage ratio of 72%. Total loans related provision are at 3.9% of loans or 138% of gross NPA. Our SMA-1 and SMA-2 book is stable at 30 basis points and 49 basis points respectively.
Our net profit momentum continues despite the conservative provisions. Profits for the quarter were at INR 1,147 crore, growing at 13% quarter-on-quarter and 73% year-on-year. Our CRAR including profits improved to 18.06% from 17.89%. CRAR will further be augmented with planned Tier Two issues during the quarter. Overall, I think we are trending towards our PC5 ambitions. The strong disbursements in the retail segment, coupled with reinvigorated corporate franchise, provides us comfort on the continued loan growth and NII acceleration. The deposit side has been chugging along nicely with growth in retail liabilities to 41% of deposits along with reduction in cost of deposits. We have been able to maintain our strong PPOP margins at six percent of loans in one of the toughest operating environments.
We have built strong coverage on stressed exposures, including all legacy accounts. Our restructure book has been performing well and has adequate contingent provisions. Our bottoms-up conservative simulation of credit costs from restructured pool is of 20% in vehicles, 10% in corporate and secured retail, and 50% in unsecured retail, including microfinance, leaves surplus even after making 100% for tele-funded exposures. The return on assets has improved to 1.29%, and return on equity has moved into double digits for this quarter at 10.29%, and should have been in mid-teens if not for the contingent provisions. Also, as risks from the COVID and legacy exposures are diminishing every quarter, we are very well poised to show underlying growth and profitability of the organization. We are committed to our PC5 growth ambition.
With this, we can now start the question and answer session.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone 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 a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask the question. The first question is from the line of Nitin Aggarwal from Motilal Oswal Securities. Please go ahead.
Yeah. Hi. Thanks for the opportunity. The first question is, like, on the contingent provisions that we have, like, used up this quarter. Is it, like, some formula based or purely discretionary? How will the drawdown approach be from this reserve that we are building?
First of all, I think this is very thought through. On a thought through basis, and of course formula based. 100% of Vodafone, the telco provision has been provided on a funded exposure. That was what we committed, and we have done that already. That's number one. Number two, I think we've looked at our flow throughs and the collection efficiency of the restructured book. One is the regulated guidelines of what you need to do on a. We have taken excess provision based on our excess flows and to be comfortable, and taken a very conservative approach on what the flows will be. Based on that, we've taken a provision.
In addition to that, we've kept a buffer of about INR 300-400 crores, which can help us and make sure that if there's any other flow. We will continue to see this pace, and if we see that there is a acceleration or a deterioration, we will provide. Even if there's an acceleration, we'll maintain this provision because it will come in handy at some point of time.
Right. As of now, shall we take it that we don't need to provide anything more here or will we continue to make these provisions?
Actually, really speaking, we don't need to provide. Being a prudent banker, I think we may provide for it if we see there is a need for it, but I don't think we need to provide anything extra. What we may do is for the non-funded exposure of Vodafone, we may provide some amount extra and keep it aside.
Okay. Sure. Secondly, on the restructured book, like how much of this is paying currently and how much is under moratorium? What sort of slippages are likely? Are we building from this pool?
Let me answer this question in two ways. I think way. Our restructured book has been performing very well and has adequate contingent provisions. If I see the book, overall, 90% of the book is paying the installment. Where we are seeing a little bit, and you have to go by segments to see that, I think on the corporate side, in fact you will see some accounts moving out actually. You know, a large part of the account, 80% of that restructured book moving out, because I think almost a lot of this has got settled for us. On the commercial vehicle side of the book, there are two things which you need to observe. All these were nice.
Most of these clients were very good clients of the bank, majority of these clients. I think they've asked for a deferment or a smaller EMI payment because of the pandemic, and they were scared of the COVID three at that point of time. I think they are regular in their payment, and I do not believe the flows of this book will be more than we have taken a 20%, but not more than 10%. It is absolutely performing well for us as of now. On the unsecured side, which is the microfinance side, I think these are cycle two and cycle three. On a conservative basis on unsecured, we have taken a 50% through to. Actually, the collections on the microfinance has not started because they've just been approved.
On the unsecured side, I think we are seeing a 50%-60% collection efficiency on the unsecured side. On the secured retail side of the book, non-vehicle side of the book, we are seeing a 90% collection efficiency. I think that is how our provisions are and that is how we are seeing the book perform.
Sure. Thanks, Sumant. Couple of more questions. One is like, while we have added few senior management team members, are we also seeing any churn within the top management or in the mid-level management, given the rising competitive scenario in the overall banking and financial space?
There are stress specifically in the technology side or in the digital side of the place where we see stress at certain areas. We are not seeing a stress in our corporate banking, in our retail banking or in our vehicle finance unit at all. Of course, that's what we have. I must give you this confidence that the bank has adequate succession planning in place, and we make sure that when we create an organization structure, the second person in charge or multiple backups are created to make sure that the continuity of the business remains.
Sure. Lastly, if you can offer any comments on the bid that we have submitted for Citi's consumer business, like how are we looking to pursue growth in the consumer assets?
I have never accepted the fact that we've submitted a bid.
Yeah.
That's number one. Number two, I've always said, we said this is speculative, the news appearing in media, and we continue to evaluate businesses which are accretive to our customers or to our stakeholders, which is our customers, to our investors, as well as to our shareholders and to our employees.
Sure, Sumant. Thanks so much, and I wish you all the best.
Thank you. The next question is from the line of Gaurav Singhal. My apology, Sameer Bhise from JM Financial, please go ahead.
Yeah. Hi. Thank you for the opportunity. Just a quick question. This is on the microfinance piece. What is the nature of restructuring offered here? Is it like a moratorium, say, for how many months? Any details there?
I think you could have offered an extension up to 1 year to 2 years in the business, and that's what we've offered. I don't think there is a moratorium which has been offered. I think there may be some cases where we have offered a moratorium of interest-only payment, which have been offered for 6 months to the customer.
The weekly or monthly outgo, whatever it is, it goes down when we don't offer moratorium, but just extend the term, right?
Yeah, just extend the term.
Secondly, on the corporate book, we've seen a reasonable amount of growth sequentially. Any comments on pricing there?
Yeah. Pricing is very competitive in the corporate world. Please understand I'm sitting on excess liquidity, and I was putting it in the reverse repo at 3.4%. Please understand there is an opportunity to do short-term lending, working capital loans in the corporate side at 4.5%-5%. That's number one. Number two, we've got very good AAA-rated and AA-rated paper in the good public sector enterprise where we've done these businesses, and we felt very comfortable doing that businesses at that point of time. Also, we found good exposures coming in NBFCs, textile business, and we got some exposures in that, and we did some very good loans in that business.
Just breakdown of the restructured book between corporate, commercial, and retail. I could probably take it offline also, but if you can give it would be helpful.
Let me give you the restructured book. I think our restructured book as of September 2021 is INR 7,982 crores, up from INR 5,657 crores. I think our vehicle finance unit is INR 3,969 crores, which is 49.7% of the overall book. Secured retail is INR 763 crores, which is 9.6% of the book. Unsecured retail is INR 365 crores, which is 4.6% of the book, of the overall restructuring. MFI is about INR 907 crores, which is 11.4% of the total restructuring. Corporate is INR 1,978, which is 24.8% of the restructuring.
Great. Thank you so much, and all the best.
Thank you. The next question is from the line of Gaurav Singhal from B&K Securities. Please go ahead.
Hi, thanks for taking my question. You mentioned earlier in the call, I think I missed that number. What was the fund-based exposure you had to the telecom operator which you took as provision?
It's about INR 989 crores, in my opinion.
99, 990. INR 990 crores?
Yeah.
Got it. Okay, so that's the majority of your contingent provision.
Yeah.
Okay. In this press release that Vodafone had released around the time of the government package, they had mentioned that there was a lot of relief on the non-fund based side. I was just reading it. There were 80% reduction in BG requirement for license fee. I think there's no BG requirement now for these AGR dues. So how much is our BG, is our non-fund exposure today? How much will be released based on these new rules?
I think, Gaurav, I think we're still awaiting the final fine print from the DOT and Birla. In my opinion, I think we have INR 2,320 crores of BG. INR 2,276 crores of BG. I think what we've been informed is I think it will move down substantially. That's what we are waiting for. That's why we're waiting for the final details and the final print before we reduce that exposure.
Got it. If that number is close to that 80% number which was in the press-
I cannot comment till I see the final details, and we have to see the document, and we await that final details.
All right. Okay, great. Thank you. On that note, good results.
Thank you. The next question is from the line of Kunal Shah from ICICI Securities. Please go ahead.
Yeah. Congratulations for a good set of numbers. Firstly, in terms of OpEx across most of the peer banks, we had seen huge investments in OpEx this particular quarter, and wherein there was a jump on a quarter-on-quarter, year-on-year. Ours is still managed well. So how should we look at it? In fact, we are done with most of the investments over past few quarters and have prepared for the growth now without incurring too much of the OpEx or we would see a flow-through coming in the coming quarters for the higher investments we might need.
Kunal, let me answer these questions two ways. One is, have we stopped our investment cycle? The answer is no. We will continue to invest in branches till we reach 2,500 branches, and we will continue to invest in technology. The major investment which is going to come is in the individual proposition, which I think we've still not launched, and it's going to come, and I think you will see some investments coming in. I've always said that we will be in the range of 41%-43% cost to income ratio, and that is where I think a good universal bank should be. We've maintained that throughout, and that is where we are.
We may fluctuate at some point at 40%, sometime at 42%, but between 41% and 43% is what our range is on the cost-to-income ratio.
In this MFI, there is significant expansion in the branches out there or this is more to do in terms of. At one place we had seen almost like INR 1,000-odd crores kind of slippage, INR 900-odd crores kind of a restructuring. You highlighted that two states, particularly Kerala and West Bengal is giving the pain. Is it like major proportion of slippage has flown from there and other states we are seeing a lot of comfort, and that's the reason we have seen a lot of investment? There's like almost 280-odd branches which have been added on the BFIL side.
No. Don't look at it this way. I think what is added on the BFIL business correspondent side is the merchant acquiring branches. We have got into a business where we've created. As we talk today, we sit on INR 1,200 crore of merchant acquiring business, which we have created afresh, and it's a separate independent branch and a vertical which is working on this business. This is a business which runs at an efficiency of about 42% and is at a yield of 23.6%. We are very confident of this business, and this is a new line of business which we are growing under the Bharat Financial umbrella, which we are growing.
Having said that, I think on Kerala as well as West Bengal, I think we will add resources. We've added collection resources there so that the old branch managers who are more experienced and all move towards the collection because our collection efficiency in these states are hovering around 65%-70%, depending on the state which you talk about. I think it is very important. Forty-eight to fifty percent of our flows have come from this unit, from these two states.
Flow of slippages?
Yes. Absolutely.
Sure. Lastly, in terms of the overall credit cost, we have been guiding earlier as well, maybe first half is high, but that is on account of contingency. Are we now equally confident that we could settle in that range or with the improvement in the environment and looking at the way the trajectory is, are we more comfortable in terms of credit cost coming further down as most of the legacy stressful is provided for?
I think, Kunal, I feel, three things will happen. One is, you're absolutely right. I think the flows have normalized. I believe that, non-vehicle finance, vehicle finance will continue to see a moderation in the flows, which will happen, and you will see a dramatic reduction in the flow as we move along. Number two, our corporate book has never been so good before. I think, all the legacy issues are behind us and our corporate book, and if you look at the SMA-2 or the SMA-1, you will get the comfort from the book as to how the book is performing. I think on the microfinance side, I've said that our flows will be six...
Our delinquency cost of credit will be around six-eight percent, and that will have flows which will build in. I've already taken 70% of those flows. There may be 30% flows which are balance left, and we will take those flows as well as when we come up. Most of it will get covered. Yes, having said that, our guidance of 160-190 basis points remain, and I continue to say an additional 50 basis points or 60 basis points on account of the telco provision will be there. Nothing else. We will continue to maintain that guidance, and I continue to believe we will be in that. I have not taken into account the recoveries which will also start coming in now.
Sure. Yeah. Thanks. This is helpful. Yeah.
Okay.
Thanks. Thanks and all the best.
Thank you. The next question is from the line of Nilanjan Karfa from Nomura. Please go ahead.
Hi. Thanks, Sumant. A couple of questions. One a data question. If you can give the breakup of slippage in those same buckets, you know, vehicle secured, retail unsecured, MS and corporate. Sorry if I have repeated it earlier.
Oh, no problem. I'll give you the number. I think I'll give you what is the gross slippage and what is the net slippage, you know, after considering only recoveries, which is cash recoveries as well as upgrades.
Mm-hmm. Sure.
I think CFD was INR 590 crores of gross slippage and net slippage is INR 35 crores only. There was a huge recovery which happened on the vehicle finance unit.
Yes.
Secured retail is INR 432 crores and INR 273 crores of net gross slippages.
Mm-hmm.
Unsecured retail is INR 314 crore of gross and INR 249 crores of net slippage.
Okay.
MFI was INR 1,070 crores of gross slippage and INR 460 crores of gross net slippages. Corporate was 252 and 175 crores. Overall, our slippages were 2,658 and net after taking recoveries into account was 1,192.
Right. Great. Second question on the vehicle side, I mean, given that I think 90% plus of our CV book are typically SRTOs, right?
Yeah.
Any comment around, you know, the operator profitability? How are you seeing the cash flows? Have they been able to pass on the, you know, the increases on the freight? Any sort of comment on that, sir?
Yeah. First of all, I think you're absolutely right when you said that the diesel prices did affect their profitability because the diesel price did increase by 35%. Also, the freight took time to catch up, and I think there was a supply-demand issue at that point of time. Having said that, I think the things are improving and that is why the restructuring of that book is so high when you see the restructuring, because people wanted a lower EMI to pay rather than the full EMI. I have Partha who will answer this question in a little bit more detail to you. Yeah.
Yeah. Of late, diesel price increases certain amount of concern. Definitely people are reasonably stressed to pay their installments, but so far, there has not been a major issue in terms of payment of installments, which we have been getting quite regularly.
Mm-hmm.
The portfolio has been showing a considerable amount of improvement ever since the last quarter. It is likely that the portfolio would improve. Whether the business would improve or not would hinge on the diesel price as well as freight economics on freight rates.
Right.
Having said so, close to about 40% of commercial vehicles are in infrastructure segment, which is tippers segment which is used for mining as well as earthmoving segment.
Right.
Their economics has been extremely good. Therefore, I would say that there's absolutely no impact, zero impact or extremely good thing for about 40% of the vehicles and 20%-25% are contractually covered.
Okay.
Balances about 20%-25% struggles, but they keep paying.
Right. Would you believe, Partha, that by December, I mean, if things don't improve by December, then things will look tough?
Yeah. Fundamentally, what I would state is fuel price increase may not. I'm not very sure about this. The government I think will have to take some action or other, okay. It is very unlikely that it will be brought under GST regime.
Mm.
They would absorb certain amount of taxation element arising out of the diesel price.
Right.
Once it comes below 100 sentimentally, I think there will be certain amount of buoyancy, and that as of today what really has happened is the excess capacity in the market has already been more or less absorbed. There has been a growing requirement in terms of addition to the capacity. Addition to the capacity has been put in certain amount of cold storage because of operating cost increase.
Mm-hmm.
That should not affect the existing vehicles, but it will have an impact in terms of commercial vehicle sales and possibly our financing in this area.
I understand, Partha. Very helpful. A small last question. Sumant, is it possible to get a sense of that 2,300 roughly of non-funded to Vodafone specifically, how much is tied to the BGs? The spectrum.
Half. 50% to the Spectrum and 50% to the R2.
R2.
Our latest discussion shows that the spectrum, of course, the government has said even the R2 in one month's time there is something coming and we are waiting for the final details. That's why I'm not commenting on it. We have to wait for the final details.
Perfect. Thanks so much. Thank you, Sumant. Thanks, team.
Thank you. The next question is from the line of Rahul Shah from HSBC. Please go ahead.
Hello?
Rahul, you're audible.
Yeah. Thanks for taking my question. Can you share the overdue loans in the MFI book? You mentioned in your opening remarks that it has reduced by half.
If you look at the MFI collection efficiency, I said it's 94.6%. If you look at the 30+ book, it's about INR 2,000 crore. That's what it is. INR 2,200 crore, to be precise.
Including NPAs.
Huh?
Including NPAs. It includes-
Including NPAs. Sorry, including NPAs also.
Okay. And also, like more qualitative understanding. Within this book, how many customers would be like completely non-paying?
This I don't have the final details. We can have Shalabh. You can have a one-on-one call with Shalabh, who runs the MFI business, and you can have a call with him. I don't have the final details on number of clients.
Sure.
Yeah.
Thanks. Just one more housekeeping question. What would be the size of three-wheeler book? Would it be around INR 3,000 crore?
Yes, you're absolutely right.
Okay. Thank you so much.
Thank you. The next question is from the line of Rahul Jain from Goldman Sachs. Please go ahead.
Hi, Sumant and team. Good evening. This is Rahul here. Just one or two clarification on the MFI point. Sumant you said gross slippage is about INR 1,070 and the net were INR 460. The differential of INR 600 is on account of what exactly?
There were recoveries which happened as a consequence of the client, and we contacted the client. There were accessibility issues in three or four states. I think we were able to access Odisha in certain districts where we got the recoveries, and there were certain states where we were at 92%-93%, we got it to 95%. We got some recoveries as a consequence of that.
Write-offs were significant in this portfolio or manageable?
No, not so much.
Not so much. Okay.
I'll give you the exact number. We actually did a write-off of all the MFI of zero last quarter.
Interesting.
No write-off.
Got it. How do you see this MFI book, you know, panning out now, across portfolio and particularly even for West Bengal and Kerala?
When I tell you my number six-eight percent I mean, I've assumed that there will be we will remain maybe improved by 10%, but we will remain static as that. I have taken that call that we may have to take a hit and provide for it. That's where I said that there may be an additional flows which may be coming. That's why I said six-eight percent.
Mm.
of the book. There may be an additional restructuring which may happen off of 200 to 300 crore. Having said that, I must say we carry enough provisions to take care of that. That is why we are building in additional provisions. It's not that I require it's just that I and that is where I have said this is my flow and this is how the provisions will happen. I do expect, though, Rahul, that in October, November, December, where we are seeing buoyancy all over, I believe a lot of these issues may be behind us and we may be talking a different language when we talk in the month of November.
That is.
We have seen a very good pickup in the microfinance space in collections now.
Interesting. The troubled states also like Bengal, Kerala, that you talked about?
Kerala is now becoming accessible.
Mm.
Though the floods did play a little bit of a barrier. In West Bengal, I think, I think the issues were different, and I think those issues are getting addressed. It was not really accessibility issues.
Okay. Got it. The other point was on Vodafone again. You talked about that, you know, of the INR 2,276 crore of BG, you've earmarked the entire contingent provisions of 100% towards this. NBFC also you would expect to make something which you said is INR 990 crore.
I have made a provision, Rahul, on the fund-based exposure of INR 990 crore.
Oh, okay.
Number one.
Okay.
This account is absolutely standard. There is no
Got it.
Overdue on this account. On the non-funded exposure, there is a document which is going to come out, the final details, and we will act accordingly. In my opinion, a lot of these guarantees will fall off, but I don't want to commit that right now unless until I see the final details myself.
Got it. Contingent upon that, we'll take a call as to we need to earmark more provisions or not. This would not be part of your 160-190 guidance that you're giving us.
No. We have said otherwise I'll be lower on provisions. I have said if I take the Vodafone provisions to 50%-60% of the original provision, then is where I require 50-60 basis points extra.
Okay. In addition to 160-190 range you have talked about.
Yes.
Got it. Just final question in terms of business momentum. I think, you know, frankly, I mean, the bank seems to have now, you know, come out of the woods and seems to be on a stronger footing. ROAs are of course, you know, trending around 1.2, though significant improvement from the time you took over. What kind of strategy, you and your senior team, you know, are sort of, you know, working on over the next, you know, 12, 24 months? Where do you see this ROA could go to, you know, of course, provisions would fall, but do you see any improvement in spread of ROAs to also come through from the current levels, and also on the loan growth side?
Can you give us some sense, qualitative or quantitative, over the next 12, 24 months, where you wanna see the bank, you know, to be?
Rahul, we have disclosed our PC5 strategy very transparently. I continue to believe that we are going to grow 16%-18% CAGR staggered on our loan growth. Unfortunately, this year we've only grown by about 10% up till now. I think what you will see in the next 18 months, we will ramp up our loan growth and we will grow faster than the market on our domain specialization and in corporate bank, we will be ahead of the market by 200 basis points, 150 to 200 basis points. That's something. There are new lines of businesses which are acting as accelerator to our business momentum.
Those are merchant acquiring business, mortgage business, which will act as accelerator to our businesses and the non-vehicle asset business, which has been a very low line business and we will accelerate those business. I think these will accelerate the growth of this business as we move along. We also have a very clear strategy on getting into digital in the SME stack and creating a very good value proposition on the SME stack on the business. I don't see a risk to our 16%-18% CAGR growth on the PC5. Having said that, we've always said that we have a PPOP margin of six percent, and I think we've always said five percent, but I don't see any reason why we will fall below 5.5%five and a half percent at any point of time.
We've not fallen for the last five quarters below six, I can assure you this much. Having said that, if you do all our calculations, we've always said our normal credit cost should be around 120 to 150 less than 150 basis points. You do your calculations and you will see our ROA will never be less than 1.5-1.8. In fact, you may see us touching that ROA in quarter four itself.
Okay. Lastly, on the OpEx side, technology spend or, you know, customer acquisition cost, I mean, we've seen most of your peer groups, you know, have reported a sharp increase in OpEx side. Yours seems to be a bit more contained, but, you know, going forward, how do you see the spending, you know, likely to play out for your bank?
I generally feel, and as I've answered this question before, we will be in the range of 41%-43%. I think that's the fluctuation which we will have. See, please understand my microfinance business runs at an efficiency of 23%.
Mm-hmm.
Our vehicle finance unit runs at an efficiency of 34%. Our diamond business runs at an efficiency of 56% or 57%. Look at the value which I get as I'm scaling up this. Our consumer bank runs at an efficiency of 58%, and the more they get, the more they're bringing value, their actual efficiency is only improving as we talk. Our corporate banks are running at an efficiency of 35%. You will see this, and our global market runs at an efficiency of five-six percent. I think we are very efficient businesses as a business of what we created, and our focus on fees as well as on asset growth has really helped us believe that.
I think as we add new businesses into our units, the merchant acquiring business, I think, we are not talking much about it, but it will be a INR 5,000-7,000 crore business by the end of year two, and it is at a yield of 23.6%. It's credit guaranteed, and you will have a risk cost which will not be more than 80-100 basis points on this business. It is an ROA 8%-9% business which we have created. Our affluence business, it's actually a new business and giving me a INR 100 crore fee per quarter. I've got the accelerators in place.
While my cost will increase, I believe it will be range-bound between 41%-43% efficiency because my revenues will grow faster as I grow my business because I have very good accretive businesses where I have domain specializations which will give me the value.
Got it. Interesting. Thank you so much, Sumant. I wish you good luck and your team. Thank you.
Thank you. I now hand the conference over to Mr. Sumant Kathpalia for closing comments.
Thank you. Thank you for your time and patience. I just wanna tell you that I think finally you're seeing us out of the woods, and I think the growth story is back. The old IndusInd story is back, and what you had invested for and what you had waited for all this while, I think that took maybe a quarter or two extra, but you will see this group coming back in a very strong way. Thanks a lot, and for any questions which you may have, you can contact me or Indrajeet. Thanks a lot, and God bless.
Thank you very much. On behalf of IndusInd Bank Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.