Capital Small Finance Bank Limited (CAPITALSFB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '25 Earnings Conference Call of Capital Small Finance Bank Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sarvjit Samra, the MD, Promoter and CEO. Thank you, and over to you, sir.

Thank you, [ Elrick ]. Good afternoon, everyone. I am Sarvjit Samra, Managing Director and CEO of Capital Small Finance Bank. Thank you all for joining Capital Small Finance Bank Limited's earnings call. We have already uploaded the results and investor deck on the exchanges. I hope everybody had the opportunity to go through the same. Joining me in the call are my colleagues, Mr. Munish Jain, who is Executive Director; Aseem Mahajan, CFO; Sahil Vijay, who heads Treasury and Investor Relations; and Bharti Babutta, who is part of Investor Relations team; and SGA, our Investor Relations advisers. Let me begin with overview on economy, along with the industry, post which Munish will provide a detailed overview on our business performance. India's economy has shown remarkable resilience and momentum in recent months, emerging as a bright spot in the global economic landscape. In the second half of 2024, GDP growth was recorded at 6.3%, supported by a robust service sector contributing 55% of economic output. Manufacturing activities also witnessed a surge, with the Purchasing Managers Index consistently above 57, indicating expansion. Exports, despite global headwinds, reached $390 billion in the first 3 quarters of financial year '24-'25, driven by sectors like electronics, pharmaceuticals and automotive components. Meanwhile, inflation moderated to 4.8% in December '24, aided by the declining food prices and effective monetary policies by the Reserve Bank of India. Credit growth in the banking sector has moderated with an expected increase of 13% to 15% in financial year '25, down from the peak of 20.9% in December '23. This slowdown is attributed to regulatory changes in retail and NBFC lending, coupled with shift towards corporate credit driven by private sector capital expenditures. The loan-to-deposit ratio reached 80.4% in first half of financial year '25, reflecting a persistent gap between deposit and credit growth. Elevated LDRs and tight financing conditions are expected to constrain loan growth, while deposit growth is projected at 12% to 13%, supported by the term deposit repricing and competitive efforts to attract CASA deposits. Despite these challenges, asset quality of the banking industry has improved significantly, with gross and net NPAs at 12 year lows of 2.6% and 0.6% -- net NPAs at 0.6%, respectively. However, unsecured retail lending, including personal loans and credit cards, have seen delinquencies, particularly among self-employed and young borrowers. Profitability in the sector which peaked in financial year '24 is likely to moderate further due to increasing credit costs and high slippages. Overall, the banking sector faces headwinds from external volatility, [ causing ] financing conditions and evolving credit dynamics. We at Capital Small Finance Bank are consistently progressing towards a promising future and have closed the Q3 of financial year '25 with a profit after tax of INR 34 crores, reflecting 18% year-on-year growth, with return on assets of 1.4% scaling from 1.3% in Q3 of financial year '24. Gross advances increased to INR 6,816 crores, registering growth of 19% year-on-year with disbursement growth of 92% with reduction in GNPA to 2.6% and NNPA to 1.3%. Our deposit continues to be retail-centric with CASA of 39.1%, and deposits have grown to INR 8,384 crores with year-on-year growth of 12% and 8% quarter-on-quarter growth. These results underscore our commitment to deliver progressive growth while remaining steadfast in our mission to sustainable banking for all. As we look forward, we are optimistic towards our growth momentum and delivering value to our stakeholders. Thank you. I'll now hand over to Munish, who will share a detailed overview of our business performance and financials.

Thank you, Mr. Samra. Good afternoon, and warm welcome to all of you. We are consistently progressing post our capital infusion, and I am pleased to share the financial highlights for Q3 FY '25. Advances during the quarter, growth is broadly in line with the bank estimate and gross advances stood at INR 6,816 crores as on end of December, represented by a growth of 19% year-on-year and 11% on a year-to-date basis. During the quarter, we reversed the historical trend of negative growth in advances during Q3 of the financial year and registering a Q-on-Q growth of 2%. We continue to be a secure lender with 99.8% secured book, with around 80% loan book collateralized with immovable property or bank FDRs. Further, we are having zero direct microfinance exposure. Fresh disbursement during the Q3 FY '25 is INR 737 crores against INR 384 crores in Q3 FY '24, with a year-on-year growth of 92%. And for the 9 months ending FY '25, for 9 month FY '25 our disbursement is INR 2,081 crores against INR 1,392 crores during the last year first 9 months, with a YTD growth of 49%. The disbursement constitutes 21% to MSME segment; 23% to mortgage segment; 19% to agriculture; 20% -- 22% to NBFC; and remaining to the consumption loans, including the loan against deposits. Our advances consisting of agriculture, 32% against 35% in Q2 FY '25 and 37% in Q3 FY '24; mortgage 27%, and the same was also 27% in the last and the corresponding quarter end; MSME increased to 21% against 20% a quarter back and a year back; Corporate public NBFC lending at 12% against 11% a quarter back; and consumption lending at static at 7% at the end of the current quarter and the same is also 7% at the end of Q2 and Q3 FY '24. Our experience being in the lending business for more than 2 decades, our primary banking approach -- visibility of client cash flow, identified niche lending segment that is the middle income group segment, our conservative LTVs -- has contributed to consistently maintain a superior asset quality in all the black swan events. Despite the present challenging macro environment, we are having a GNPA of 2.67% for Q3 FY '25 and net NPA of 1.35% against 2.97% and 1.53% at the end of December 2024. Our MSAs (sic) [ SMAs ] continue to be on collection and resolution even for the sticky loans, and we have almost zero write-offs and nil NPAs allowed during the quarter. Our slippage ratio for Q3 FY '25 stood at 1.33% against 1.9% in Q3 FY '24, with upgrade and recovery ratio of 1.2%. The same is calculated on an annualized basis. Our credit cost remained range-bound at 0.1% during Q3 FY '25, and we are maintaining a PCR of 50% plus. SMA-1 and SMA-2 calculated as a percentage to advances stood at 6% at the end of December quarter, and the same was also 6% at the end of December 2023. Moving on the liability side. The liability mix is positively skewed towards the deposit, which constituting 82.3% of the balance sheet, and 93.2% of the deposits are retail deposits and 3.5% being the borrowings, which is providing us an adequate liability expansion levers. Our deposits grew by 12% on a year-to-date basis to INR 8,384 crores at the end of December 2024, which is registering a year-on-year growth of also 12%, with maintaining a healthy CASA ratio of 39.1%. During the quarter Q3 FY '25, we grew our deposit by 8%.

Ladies and gentlemen, we have lost the line of the management. Please stay connected while I rejoin the management. Ladies and gentlemen, we have the management line connected. Sir, please proceed.

Yes. I'm just repeating the last paragraph again. Our deposit grew by 12% on a year-to-date basis to INR 8,384 crore as of December 2024, which is also Y-o-Y growth of 12%, while maintaining a healthy CASA ratio of 39.1%. During the quarter, we grew our deposit by 8%. The cost of funds for Q3 FY '25 stood at 6% against 6% a quarter back, and cost of deposit being also 5.9% as was during the last quarter. The average credit-to-deposit ratio for the bank has inched up to -- from 78.4% on December FY '24 to 81.1% in quarter 3 FY '25. We aim to take this ratio to mid- to the high 80s going ahead. Now talking about the profitability. Pre-provisional operating profit has increased to INR 47 crores against INR 39 crores in the corresponding quarter, registering a growth of 22%, and profit after tax stood at INR 34 crores against INR 29 crores in the corresponding quarter, registering a growth of 18%. Pre-provisional operating profit has increased to INR 139 crores against INR 115 crores during the first 9 months of the current year, with a growth of 21%, and net profit for the first 9 months has increased to INR 98 crores against INR 83 crores during the last year first 9 months with a growth of 17%. PAT growth is driven by 22% increase in the net interest income, 20% increase in the net total income and optimization or reduction in the cost-to-income ratio, which is 62.1% during this quarter and the same was 62.8% in December FY '24. NIM has increased to 4.3% in Q3 FY '25 against 3.9% in the corresponding quarter, and our operating margin has improved to 1.9% against 1.8% in the corresponding quarter. Noninterest income during the quarter remained at the similar level as at the end of the last year, which is 0.73% against 0.77% at the end of the previous corresponding quarter. Noninterest income, we are recognizing on cash basis. As such, certain noninterest income, specifically the P&L charges, which is valuing around 0.1%, was not forming part of the interest income, though they are related to this period for Q3 FY '25 since they are being charged on half year-end basis. Our ROTA has increased to 1.4% in Q3 FY '25 and return on average advances increased to 2.1% against 1.3% and 2%, respectively, in the corresponding quarter. Our ROE during the Q3 is 10.9% against 10.8% in the Q2 FY '25. The capital adequacy ratio is at 25.8% at the end of the Q3 FY '25 and our LCR is at 239.2%, which is giving us a legroom to further improve our CD ratio. Our branch network at the end of quarter stood at 185 branches spread over 5 states and 2 union territories. Going forward, we remain committed towards achieving our loan book growth of 20% plus in FY '25 by capitalizing on the growing MSME, mortgage segment, and coupled with expanding middle income group segment. Our focus on expansion is NIM, NII and increasing fee income will be the key drivers for our targeted ROA -- annualized ROA of 1.4%-plus for FY '25. And further, we intend to expand our ROTA going forward. The outlined strategies, initiatives, collectively positioned us for a sustained growth and amplified market presence. I'm eager to share many more positive updates with you in the coming quarter. Till then, stay safe, stay healthy. Thank you. Now I request the moderator to take up the Q&A session.

[Operator Instructions] The first question is from the line of Shailesh Kanani from Centrum Broking.

Sir, first question is with respect to -- in your opening remarks, you said that we will be working towards increasing the ROA. So can you just point out certain levers which should play out in the next few quarters or couple of years which would help us to increase our ROA?

Yes. We have identified 3 levers for our ROTA expansion. First lever being the NIM expansion, and the factors which we are considering for the NIM expansion is the expansion of our CD ratio. Our average CD ratio for the current quarter, as we discussed, is around 81.1%. We intend to expand it to mid- to the high 80s. So with this expansion, we anticipate expansion in the NIM as we move forward. As per the back of envelope calculation, if all other factors remain constant, that is, our interest spread between the cost of deposits and yield on advances remain constant, with every 100 basis point increase in the average CD ratio, so there is a benefit in the NIM by around 0.04% to 0.05%. So that is the one lever which we have identified. And we believe with the type of the liquidity coverage ratio we are having, the type of the capital adequacy ratios we are having, and we believe we have enough opportunity, we are fully prepared to expand the CD ratio as we move forward. So we have identified first lever as the NIM expansion. Second lever which we have identified for us is the noninterest income. Noninterest income, which is presently ranging anything between 0.75% to 0.9% depending upon quarter which we are, Q1 and Q2 or Q3 or Q4 being recognized on cash basis, we intend to expand this ratio by 10 basis points to 15 basis points as we move forward. And we believe there is enough opportunity to continue to expand it as we move forward in the coming years. So that is -- and the basic objective, the basic levers within this is now all the financial products have been available, and we've been having the right set of the number of accounts and the number of customers. So with that thing in sight, we believe there is enough opportunity now available to expand the noninterest income. The third lever which we have identified is the OpEx. Yes, the OpEx lever, I believe, is not going to be mature in the next 1 year. The OpEx, which is presently we talk about on the basis of the ratio to the average assets, is typically in the range of 3.05% to 3.15% or 3.2%. I believe for the next 1 year it will remain in the similar range, plus/minus 5 basis to 10 basis points. But after the 12 months from now, we believe there is a lever available in OpEx which will be helping us to expand ROTA after 1 year. So these are the 3 levers which we have identified for us and on which we are working to continue to expand our ROTA as we move forward.

So just a follow-up on that. But if I see currently this quarter as well, we have kind of seen a flattish advances growth, but the deposit growth has been higher. So on the CDR front, how does that help? And what is the growth we are targeting in terms of advances to achieve that first lever?

The thing is certainly if you look into the Q3, Q3 historically, we're always having a negative growth, being we are a SURU specialist, that's the semi-urban and rural area specialist, which have a high dependencies on the -- rural having a high dependency on agri-based acquisitions. So Q3 being a harvesting period, which is consequent resulting in not have a high demand in the advances, rather there's a good recovery pattern. So in this particular period also, we are able to grow our advance book by 2%. If I look historically, historically, in last year FY '24, we degrew in Q3 by 3%. And in FY '23 we degrew by minus 2%. So we are able to reverse that particular trend. And accordingly, our year-on-year growth for the current fiscal, now it is 19%-plus. So by the end of the March quarter, we -- as we said earlier, we intend to expand our advance growth on a year-on-year basis to 20%-plus, so which will be a good lever to expand our CD ratio. And Q3, we worked very hard on deposit accretion, and we grow our deposit by 8% on a quarter-on-quarter basis, which gives us a sufficient now the liquidity available to expand our advances as we move towards the Q4. So with that thing in sight, so I'm confident that we will be able to expand and utilize the lever 1. And this is also visible from the aspect that our average CD ratio for FY '24 was 79%, which we have improved to 80.1%. And consequently, if you look into our NIM, our NIM for FY '24 was 3.9%. And in Q3 FY '25, we are able to expand it to 4.3%. So with that thing in sight, so we -- with the historical trends and the type of the opportunity available in the segment we are, so we are confident on expanding our CD ratio as we move forward.

So sorry to harp on this. Just for CD ratio for FY '26, given that you have said 20%-plus growth on the advances spend is what we are targeting, what would the CD ratio number in your estimate for FY '26?

FY '26 at this stage, since we have just -- we are talking about 20%-plus for FY '25. For FY '26, we have not given any guidance till date. We believe our growth rate will expand in FY '26. We will give a guidance about the FY '26 growth as at the appropriate time in the first call of the year -- of that particular year. But saying all this, we intend to expand our CD ratios to mid- to the high 80s in FY '26.

Understood. And sir, my second question is with respect to geographical concentration. How do we see that predominantly, because we are in 2 states predominantly. How do we see that diversifying it in future or any plans on that?

If we talk about the concentration risk, firstly we need to look into whether we are in a mono-line business or we are in a secured business. We are purely a secured franchise with the 99.8% being the secured book. And within this, more than 80% of the portfolio we have a collateral in the shape of immovable property of the value more than the amount of the loan. So we have ring-fenced trust from that particular aspect. Secondly, if you look into the -- just despite this particular fact, we are mindful of this particular concentration aspect, and we are continually working to reduce our exposure in our home state of Punjab. Statistically, if you look into this particular number, as on March 31, 2024, the Punjab advances constituting 82.68%, which we have presently as on December end, it is 79.11%. So we were able to reduce it by around 3.5% to 4%. So going forward, as part of our expansion philosophy, as part of our branch expansion philosophy, we have taken internal strategic choice that we will be opening majority of our branches out of the state of Punjab so that we can continue to expand in the neighboring geographies also. We always internally call we want to make now Haryana our next Punjab. So we want to have a deep, thick presence in Punjab because our growth philosophy is not just present, but to be thickly present, since we are a retail franchise on both the side of the balance sheet, being in the deposit side or the advance side. So that is what our thoughts are, and we are constantly working towards this particular direction as we are moving each of the way.

So any particular number we are working for, say, not in near term, but in 3 to 5 years' time in terms of concentration? Any number we are working with or any targets we are aspiring to be?

There is no such ballpark number I'm just quoting at this point of time. But just we aspire to be a multi-diversified entity as we are moving in the future. And I believe with each passing year we will be reducing our concentration on Punjab on advances side on each of the passing year and with a reasonable good number. Just I shared with you, current first 9 months, we have already done it by 3.5% to 4%.

Yes. Just sir, last question from my side. Any aspirational ROE for us in terms of target as we see all these 3 levers what you highlighted playing out, any lever which -- any number which you would like to -- not a guidance per se, but any aspirational ROE targets that we are working towards? That would be all from my side.

Since we just raised the capital, and we are just in the very initial phase of consuming that particular capital. So that particular this point of time since we raised the capital around 9 months back, so -- and we are in the process of consuming that particular capital, and despite that particular fact, we are continuously improving ROE. And now in the quarter-to-quarter, we have an ROE of 10.9%, or I can say around 11%. So I believe -- and we are expanding it each of the quarter. If you compare our ROE for Q1 versus Q2 versus Q3, you will observe we are expanding our ROE as we are moving towards. So we intend, and I believe the type of the growth aspiration we are having and type of the -- since we are a profit earner organization and always a profit earner organization, so we are having internal accruals which is helping us to build up. So we have a sufficient capital available for next minimum 2 year-plus. And -- but our endeavor is to be hit the next capital market when we have ROEs in the mid- to the high teens. So that is our aspiration, and we are working closely towards that particular direction.

The next question is from the line of Shreepal Doshi from Equirus.

Sir, my question was on fee income side. So that is one of the focus area for us. But if you look at there is -- so during the quarter, there is a dip in fee income. So what explains that? And as a percentage of total asset, what is it that you are aspiring to sort of get to in terms of fee income?

Shreepal, just as a discussion point, there is no dip in the fee income. The fee income, which was INR 17 crores in Q3 FY '24, has been increased to INR 18.17 crores in Q3 FY '25. So just if we talk about the statistically, so the number is like this. And if I talk about now further drill down about it. The fee income, which is typically 0.73% in the current quarter, which was 0.77% in the corresponding quarter, we recognize the fee income on a cash basis. Presently the fee income, which is around 0.1% of the asset basis, which is accrued and which is related to the current quarter, is not being taken to the P&L since we are recognizing and debiting that particular fee income on a half year-end basis. So accordingly, that fee income of around 0.1% of the asset moved the year -- moved the period from the current quarter to the next quarter, so which is because of the accounting practice we follow. You will observe the same in Q1 and Q3 always, and you will find a high number of the fee income in Q2 and Q4. So if we're balancing it, you will find the different number. So that is the one point I'd like to mention. Second point I'd like to mention, the current quarter, there is around 1.5% to 2% growth in the advances. So there will be some flatness in the fee income related to the advances. And in the next quarter, that is Q4, we are anticipating a better growth in the advances, so which will be correspondingly helping us in building up this particular fee income. But if I give you the breakup of the fee income, if you look into the fee income, which is presently INR 18.17 crores, so we have identified now the 4 levers for our fee income. One is the banca lever that I call upselling the banking products. And I also like to mention that in the current period there has been some impact on account of the regulatory changes around the center guidelines in the life insurances, which has affected certain fee incomes percentile also, and that is the industry level concern, not just for us, but that's an industry level. So if I talk about the total fee income, that INR 18.17 crores, all of the fee income is a stable state fee income, which consisting of a banca income of INR 8.68 crores, which consisting of a loan-related fee income of INR 2.5 crores, which includes the operations and which includes the payment systems and the operation-related fee income of around INR 4.9 crores and ForEx and the treasury, which ForEx, that is AD-II business, regular ForEx business, is around INR 80 lakhs. So what I'm trying to demonstrate is we are working on all the sides of the fee income and getting penetrated in this. Going forward, in Q4, I'm anticipating our fee income to be in the range of 0.85% or rather 0.9% to 1% in the Q4. So that is what we are anticipating for the Q4. So fee income, we are constantly working hard, and we are optimistic. But because of some accounting level process which we are following, that there is a movement of some fee income from Q3 to Q4.

Got it. Got it. And the second question, again, something that we've been focusing on would be the CD ratio. So if I look at the average CD ratio or the reported number has sort of seen some decline on a sequential basis. So how do you see it shaping up in 4Q and over FY '26 for us? While I understand you've given the target, but how do you see it -- what levers are we sort of -- or what strategies are we deploying?

Just for the sake of application, I'm again saying that historically, Q3, we are always having a higher deposit growth, and since we believe there is enough opportunity available in SURU for the retail deposit. So accordingly, Q3, the deposit growth is 8%, and we always see that the Q3 is a bit sluggish for our advance growth, or rather we always had a negative growth. But in the current period we are able to grow it by 2%. So consequently, Q3 was -- our concentration was quite high on the deposit because of the availability of deposit and giving us a sufficient raw material for the future expansion. So that's the reason there has been a slight decline is visible accountingly, that is, 82.4% was our CD ratio in Q2 FY '25, which is reduced to 81.1%. So that is a marginal decline is visible. But now with the levers come in sight, the levers come in sight and that is available. So even if you look into the outstanding CD ratio at the end of the last quarter was 86.4% and presently outstanding CD ratio being 81.3%. So with that kind of thing in sight, so with the Q4 is always high on advances, even if you look into historical numbers, that last year also we grew by 8%, FY '23 also, we grew by 8% on quarter-on-quarter basis in Q4. So we are also optimistic about the current quarter that we already said in the beginning of the call that we intend to achieve 20%-plus loan growth in FY current period, that is FY '25. With that thing in sight, so we believe in Q4 also we will see some upswing happening in the CD ratio, which will be helping up in our Level 1 in ROE. And -- but one thing is always there. We always grow our deposit book in a calibrated way. But we also look forward that the sufficient deposits are being mobilized to support our advance growth. So with that thing in sight, we are confident that we will be able to maintain, I'm just saying the target perspective, we intend to take our CD ratio in FY '26 to FY '27 period to mid- to the high 80s on an average basis.

Got it, sir. That is helpful. Sir, just one last question, if I can squeeze in. It is like you highlighted earlier to the earlier participant that you want to be thickly present in the state of Haryana and make it the next Punjab. So in terms of product bouquet, which -- like, for example, in Punjab, we know that in agri is something that is having larger share. In Haryana, what would be that flagship product for us?

In Haryana, we are having the 2 flagship products, or rather I would say 2 buckets, which we are working hard. One is the mortgage and second is the MSME lending. We are doing the agri also in Haryana, maybe in the selective buckets. But in Haryana, our biggest concentration is on the MSME segment and the mortgage segment.

Got it, sir, got it. That is helpful, sir. Sir, good luck for the next quarter, sir.

Thank you, Shreepal.

The next question is from the line of Pritesh from DAM Capital Advisors.

Just a couple of questions. One is that the loan mix towards corporate is now 12%. Any cap we want to put on that, given that it has risen sharply in terms of percentage from last 1, 1.5 years?

Typically, Pritesh, if you look into the loans to the corporates, even though it is 12% of the portfolio, which was 11% at the end of the last quarter. So typically, there are -- we intend to keep it below 15% overall basis as we move forward. But one thing I'd just like to flag here, we are not increasing much in the account. Earlier, well before the capital infusion, we were typically lending it up to around INR 15 crores to INR 20 crores each of this particular company. And our average ticket size in this type of segment is around INR 16 crores. Now with the capital infusion, we expanded that particular exposure ceiling to INR 40 crores. Still we are conservative and don't want to lend more than INR 40 crores to a single NBFC. But we want to lend to a rightful NBFCs, and we are not increasing much of the account. So if we look into the particular numbers, you will be observing our ATS has increased from INR 16 crores, which was Q3 FY '24, to INR 22 crores. So that is to the tested customers, which we are testing with us, and we are expanding our bouquet in this. So that's the reason there may be some visibility perspective, you will find some growth. But overall, I'd just like to flag here, we are lender within this space only to those NBFCs who are secured NBFCs. Our exposure to the microfinance industry in this particular space on the overall basis is around 1% of our total portfolio. So we are very mindful that we are lending into that segment, which are lesser leveraged and which are in the line of businesses which we know well. So that is our take on this corporate lending. And accordingly, we are building up the book.

Got it. Sir, just a follow-up on that. So basically, that growth has been slightly higher. That also brings down our margins relatively given that what I see from your average yields is about 11%. But from a perspective, it will constrain your margins, which can move up from the CD ratio perspective. So any threat on that or any thoughts on that perspective?

Pritesh, just a data point...

[indiscernible] it will impact that way.

Pritesh, just a data point perspective. If we look into our yield on our advances portfolio, it is around 11.25% to 11.35% presently. And if you look into our yield on the corporate book, it is also around 11.05% to 11.15%. So we are not significantly away from what we are getting on the portfolio basis. So I'm not seeing any challenge with this portfolio buildup on our margins, since they are very nearer to each other. I can't always have a very equal nearer to very same, but are very, very nearer to the portfolio level yields. On our corporate yield basis, if you look into the presentation, Page #5, the yield on our corporate book is 11.06% as per -- as on December. And our total yield is around 11.28% or 11.3%. So they are not -- they are very nearer to each other. And so they are not posing any threat to our margin expansion with our CD ratio expansion. We are very mindful of it, and accordingly we are taking a step further.

Got it, sir. Sir, another question on asset quality. Generally, Q4, we see slippages moving up. That's the trend which we have seen in the last couple of years. Also, we see upgrades moving up in the same quarter. But with changing macro, do you see there is a threat that the upgrades may not come in and we may see some asset quality issues? Is there anything like that?

Up to now, the information available and the situation at the ground, I'm talking from the Capital Small Finance Bank perspective, we are not sensing any such problem. Even if you look into the -- statistically, our slippage ratio for the Q3 is 1.33% and our upgrade ratio is 1.2%. In the Q3, we are able to bring them very, very nearer to each other. And Q3 is always a period in which we always see some higher slippages. And Q4, we will always find some higher upgradations. So as on date situation at the ground, we are not seeing any such changes, and we are committed to maintaining the superior asset quality as we move forward.

Sir, only last question related to that is the PCR orientation. Last quarter we had done some slightly higher provision and put it into our PCR being higher, like 51%. But this quarter, since that little bit of -- though we understand there is seasonality to asset quality, but what is your orientation on PCR now from here on?

So typically, we have our internal guidance that we will not let the PCR slip below 50%. And in the event the PCR slips below 50% after application of the regulatory provision, we could go ahead and made the additional provision. And even if you look into the quarter -- current quarter end, our PCR is more than 50%. It is almost a similar number which we had of the last quarter, plus/minus a few basis points. Plus/minus a few basis points will be always happening. So we are committed to keep the PCR above 50% despite the fact all the book will be having a collateralized. And we intend to continue to maintain a stance that older NPAs shall be carrying 100% PCR, which is typically 4 year-plus book, we are creating a 4 year older book we are creating 100% PCR. So that is the stance we are continuing to maintain as we move forward as well.

Sure. Sir, just a suggestion from our side is that I think you should consider increasing your PCR in a phased manner, even though it does not orient or it does not warrant to increase such, but I think you should move it towards 60% given that the environment is very challenging and very volatile. So it will always help for investors to get confidence on that.

Pritesh, noted, and I will take up to the respective decision-making body and try to work towards this particular thing. But thanks a lot for the advice, and we appreciate the concerns.

The next question is from the line of Ashwini Agarwal from Demeter Advisors LLP.

Very encouraging set of results. Congratulations. Just a quick question. You're coming up to 1 year of listing in a couple of months and full year results out. Have you put up a dividend policy? I haven't seen one. That's why I'm asking.

So typically, we being a capital -- high capital-intensive organization, capital consuming organization, we follow a philosophy that we will be paying a dividend, but not very, very high numbers. But your advice is well taken. I'll just check with my secretarial team, that if there is some policy available, to make it in a public domain. So -- but just like to mention, we're being in a growth-oriented organization. presently in the, I will call it, a growth phase of the life. So at this stage, we want to keep -- consume the capital for the growth rather than paying it -- rather than completely distribution. But we also understand distribution is very, very critical, and we fully acknowledge that fact. So noted, I will check with my secretarial team to see what best we can do on this.

Yes. My suggestion, sir, would be -- I mean, just a suggestion, obviously it's for the Board and for the management to decide -- would be a certain percentage of net income on a consistent basis. Obviously exceptions will apply it, but if you can sort of think about it and let us know whenever you discuss it, that would be great.

We would do it absolutely, and it's a good choice, good option. We will discuss it with the respective decision-making body and keep this thing in mind, the sentiments and the cost, so all other aspects, and try to reach up to a decision on the matrix.

Because this will also help you optimize your ROE faster. And I mean, access to capital will not be an issue so long as your metrics look good. So again, just a suggestion from my side, but congratulations on pretty good numbers.

Thank you Ashwini-ji. And thanks for appreciating us.

The next question is from the line of [ Balakrishna Phagasia ] from Axanoun Investment Management.

My first question is related to the Q-o-Q jump in SMA-1 and 2 with 100 bps. So is there any indication or how do we read into it?

Typically -- Balakrishna, so typically, if we look into historically, historically always Q3 and Q1 we will find some sort of jump in the SMA-1 and SMA-2. But despite that particular jump, even if I talk about the absolute basis, we are still 6% SMA-1 and 2 put together, so which is also a very lower number. But yes, I agree there is a slight jump. It is not an indication of any particular stress building up. That is typically how the historical time lines also say, even if I look into my last year December number. My last year December number, SMA-1 and 2 were 6%, which we are able to contain it to around 5% by March. So we are also confident and very working hard to again bring it back to the similar levels because we have internal targeting it to keep it around 4.5% to 5.5%. That is the internal target we have all kept that we want to bring it -- keep it in that particular range. So it is not any early signal because if you look into the other matrices, whether you look into the collection efficiency metrics, whether you look into the GNPA metrics, whether you look into the NNPA, GNPA write-off metrics or to NNPA selloff metrics, you will sense there is no such stress building up. This is one of the mathematical change and because of the particular period. And the difference is only 1%: 5% to 6%. Optically, I said look, 5% to 6%, that is a 20% jump. But that is a behavioral, that is a thing which is happening always at the end of the Q3, if you look into our published available number. And in Q4, you will find we are able to improve it every year. And this year also, we are committed that we will be able to improve it by -- when we meet next time over the call for the Q4.

Okay. My second question is regarding there was a recent report in the news regarding the meeting of some small finance bank officials with the RBI, wherein it was suggested by the RBI to look into mergers with some bigger banks, and particularly those small finance banks who have particularly geographical concentration or stress scenario. Do we have any -- did we have any meeting or do we have any update here?

Even I've gone through the same as a part of the today's press. We -- since this is a sensitive information, but I can say we were never part of any such discussion with the regulators. We are never being part of any such discussions as we talk. And even if I look into that particular article, if I just talk about the article, the article was putting an emphasis on the lenders with the unsecured pies. And just to mention, our unsecured pie is 0.2%. I'm not talking even 2%. I'm talking about 0.2%. So that whole of the article was concentrating towards that segments with a higher unsecured pies. This is also news to me as part of the -- we came to know from the press, but we are never being part of any such discussions or any such things. We never heard it earlier even.

Last question. So how does -- so you have some Kisan credit card exposure. So how does that work? And how do you see the delinquency or DPD in those segments? And if the default occurs, how do you recover those advances?

So typically, we are being a lender in the agriculture loans, or rather KCC loans, from last 25 years. So we being a lender in this space also, as like any other product in the middle income group segment, that is a target segment of INR 5 lakhs to INR 25 lakhs, and our average ticket size being INR 12.5 lakhs in this particular segment. And our segment lending is typically to the progressive farmers and to the aided farmers in which we can confide upon on the specific geographies, in which who is cultivating ideally 3 crops in a year, but minimum 2 crops. And he is cultivating one of the crop as the MSP crop. And these particular -- all of the lending is done. This is the need-based assessment. That is after taking 2 variables, that is what is the land under cultivation and what is the cropping pattern is adopted. With these 2 variables, we assess what is his expense need and what is the debt obligation he can meet. With these 2 -- outcome of these 2, minimum of that is the credit facility which we give to that particular borrower. Additionally, we typically take collateral that is in addition to the primary security in the shape of the legal mortgage on the piece of the land, which is typically 2x, or I can say with a 50% LTV. So with our close follow-up and our strong knowledge, we being in this particular product now from 25 years, just a matter of product, I'm saying we have never sold any NPA asset from the agriculture loans and neither write-off material. Our cumulative write-off of 25 years of the overall portfolio including agri will be less than INR 1 crore. With that thing in sight, we are quite confident. And presently also, the number is available on Slide 5 of our presentation that also of the agriculture. So the things are not showing any signs of stress.

Okay. So you guys are doing a great job in the current scenario considering current environment. Good luck for the next quarter and year.

Thanks a lot. Thanks for appreciating us.

The next question is from the line of Chinmay Nema from Prescient Capital.

Sir, on the SMA piece, could you share which products have contributed to this 5% to 6% -- increase from 5% to 6% in the current quarter?

Chinmay, there is no specific product. It is across the product. As I said, it is the timing-based behavioral of the ground-level people. So the decline increase is only basically 1 basis point, or I will say 1% only of the portfolio -- within the 1% of the portfolio. And it is not skewed towards any of the product. It has a quite mixed combination both from the MSME mortgage and the consumption lending and all the products to gradually contributing. So there is no any stress as on date. We are not witnessing or we are not seeing any trend that there is any stress is building up from any of the segment. So this is almost equally spread over all the product bouquets we are having. And I'm just reiterating. This is the historically Q3 base data flow, and the increase is very minuscule. It is just a 1% increase, I am just reiterating. So yes, we are used to keeping our SMAs at the lower numbers, and we are well committed towards that.

Got it, sir. And just wanted to understand what is our provisioning policy in the SMA bucket? Because, I mean I understand it is cyclical in nature, but this doesn't reflect in the credit cost. So how should one look at that?

The provisioning in the banking industry is governed by the IRAC norms. That is the IRAC norm published by the Reserve Bank of India. And the presently provisioning policy is applicable in respect of the sub-standards and the NPA book. On the SMA being in a -- SMA bucket, these are typically called the standard loans. On the stand-alone loans, the provisioning policy as per the present regulatory framework that is dependent upon which segment it is from 0.25% to 1%, depending on the sector it is, that provisioning is made on a portfolio level basis. So which we are also following whatever is the regulatory guidance on the same and which is being followed by all the industry, even we are following the similar guidelines.

Fair enough, sir. And sir, just wanted to understand on our NBFC loans, could you share the -- typically what is the interest rate at which these NBFCs lend out further? And what is the credit rating of these NBFCs?

Say typically if I talk about, Chinmay, we are very, very selective about this NBFC lending. We are typically lending to those NBFCs who are not high leveraged. We have put our internal metrics that what should be the maximum debt/equity ratio of the target NBFC which we are lending to. We have a hurdle rate. We have hurdles. We have 4, 5 hurdles which are kept internally. One hurdle is the leverage ratio they are maintaining. Second is what is the write-off percentage which they have. The other one is the what is the minimum they should be having a minimum capital and the capacity to infuse the further capital. And fourth, more important, we typically lend to those NBFCs who are in the secured on lending activities. And if the particular NBFCs are in the multiline of business activities, we typically lend for that asset creation which is a secured asset creation. So with all this thing in sight, and we are not lending below the investment-rated NBFCs. So that is the way how which we lend in this particular piece. So typically, we look forward for the larger NBFCs, that is with the AUM of INR 300 crores-plus. So we have typically put a lot of internal learning-based checks. So over -- if you look into this particular portfolio also, you will find that our total portfolio is INR 845 crores. Out of this, these are basically lending to the -- you will find the total count will be less than 40. So we are very selective in this particular portfolio and consciously selecting in this particular piece first. So we are not a lender to the NBFCs who are [indiscernible] -- unsecured lenders. We are lender only primarily to the mortgage and MSME-based NBFCs.

Got it, sir. And just one last question. The disbursement in the current quarter is around INR 737 crores, but the quarter-on-quarter loan book growth is about INR 98 crores. Is there something to read into this?

The basically thing is that, as I shared earlier, Q3 is typically an inflow quarter since we have a 75% of the branches in the semi-urban and rural area. And in semi-urban and rural area, irrespective of the segment or class of the class, you will find these have a direct or indirect dependencies on this particular high cash flow which is coming into the market. So in this particular period you will find, even if you look at our portfolio, you may have observed that our agriculture book, despite a disbursement of out of this around -- we disbursed another INR 150-odd crores during the quarter, has been degrown from INR 2,340 crores to INR 2,199 crores. So this is a particularly in which we recover lots of things which are coming to us as part of the KCC recovery. So that's the reason I always said Q3 being a cash flow -- heavy cash flow coming in the SURU. We always capitalize in the way for deposits and growth on advances are always muted. So this period, we worked hard on disbursement heavy on MSME and mortgage, which helped us bringing out the growth also.

Understood, sir. And sir, just a request, if you could add in the gross NPA numbers on the product level in the presentation, that will be great. That's it from my side.

Gross NPA number is there in our presentation of all the comparative numbers on Slide #5 -- #7.

Sir, I'm referring to on the product level. So gross NPA for agriculture, mortgage, MSME.

We are depicting net NPA, and we are also publishing that we are not writing off anything. But still in the space demand, we will see what best we can offer in the interest of the information available. Point is noted, and we will see what best we can do on it.

[Operator Instructions] The next question is from the line of [ Ashish Shah ] from Business Match.

Congratulations on a good set of numbers. Sir, I have two questions and both slightly long term, which is 3 to 5 years out. Our bank has had a phenomenal competitive advantage in terms of CASA, which has led to this low cost of funds over a long period of time. Is that a threat to us over the next 3 to 5 years? Like what do you plan, and how do you see it sustaining?

If you look into the CASA franchise, if I talk about FY '20, we were having a CASA of 36.3%. And then if you go to the FY '21, '22 and '23, we retained it in the range of 40% to 41%. Then we see a slide as per the whole of the industry has been slided by 20%, and we also slided by around 8% to 9%. And we settled down around 38% in FY '24. Now during the current year, we kept it around 37% to 38%. That is the range we are keeping it for the CASA franchise. Now if I talk about the CASA franchise versus our overall NIM expansion or that particular aspect. Firstly, we're being a retail franchise with the target of the middle income group. If I talk about this, we have an average ticket size in the saving or the CASA account of around INR 42,000. So rather than having a chunky CASA, I'm saying we have a widespread CASA or my average ticket size is for -- as facilitating toward the middle income group segment. Our various practices like our 3G digital approach, our relationship banking approach, holistic product suite, ground level presence, that is, I can say, we call it internally carpeting approach over the -- just being present, we want to be thickly present, being part of the ecosystem, are helping us in maintaining the right matrix of the CASA. Going forward, CASA is a matrix which will be industry driven. Yes, we can perform better, and we intend to perform better than industry. Yes, we will be continue to be driven by how the industry -- how the macro environment look like. I'd just like to flag the thing. If you look into the presently, our CASA is basis the saving bank rate, which is presently we are paying the 3.5% only. It is not that we are paying some different saving out rates to attract this CASA. So it is 3.5% saving bank rate based CASA. So with that thing in sight, we are able to perform it and we are now a liability sourcer from last 25 years. And we believe we will continue to perform better than what the industry is doing. Just macro factors, if it is coming in the market, you are talking about a long vision. So that's why I'm not in a position to give you any number for that, but we are committed to perform better than what the industry will be performing. But we have built up in lots of levers internally. With the increasing CD ratio, the NIM expansion will be coming and which will be helping us to have all the levers available to continue to grow the ROTAs. The next lever, after 1.5 years the OpEx lever will come into play, which is presently 3.15% on the average asset basis. So that lever is also going to play 1, 1.5 years down the line. So with those all levers, so I believe there is a lot of new levers are available to offset any of the contingencies coming in one or another stated lever.

Okay. So that's very helpful. And sir, the second question is on leverage. Where do you see that over the next 3 to 5 years?

Typically, if you look into the present balance sheet, if you look into the present balance sheet, our advances at around INR 6,816 crores against a net on fund of INR 1,302 crores. We are typically 5x advances to the balance sheet -- to the net worth. Whereas if we look into the any of the secured lender -- I will not be in a position to compare myself with the unsecured pies -- so if you look into the any of the secured bank, you will find the balance sheet lever is typically 10x or so and the advance lever is typically 7x. So I'm treating presently at 5.2x. So I have a huge opportunity, a huge unconsumed capital, which I want to consume as we move forward, giving us enough opportunity to grow and without worrying about the capital. So that's what we see. But going forward, we are very conscious about the levers that we believe that we need to remain rightfully balanced capital, not excess capital, not under capital.

Sure, sir. That's very helpful. Sir, if I can squeeze in one last question. Sir, on Haryana, you mentioned that you intend to do mortgage, MSME, not agri. So any thoughts on that? And a related thing to Haryana, you will be also having a deposit franchisee from Haryana, correct?

Let me clarify. I said we are concentrating heavily on MSME and mortgage in Haryana, and we are doing agriculture in the selective belts of Haryana. We never said that we are not doing a green Haryana. We will be doing a green Haryana in the selective belts, where we find the customer of the agriculture customer what we look forward for. So that is what we do is Haryana. Haryana, we internally call, we want to make Haryana our next Punjab. The perspective is how deep we are there in Punjab and how we are deep in the balance sheet of the individual account -- I purposefully using the word, "balance sheet of the individual person." We want to be similar outfits in Haryana, so that that particular family is maybe having both asset liability or financial relationship with us so that we are very -- we are able to being their complete financial solution provider. So what -- how we have built up ourselves in Punjab. Now we have targeted Haryana to make us -- make it our next Punjab over the next couple of years. So that is how we look into Haryana. And we are also very conscious that we need to continue to sow seeds for the future expansion. And accordingly, say, Haryana, we are targeting for a bigger expansion. So we are already sowing our seeds in the other states where we can continue to sensitize us so that those states can become a growth driver as we move ahead. And presently we are in the 5 states and 2 union territories, and we intend to expand every year by adding 1 or 2 states.

The next question is from the line of Anant Mundra from Mytemple Capital.

Sir, just wanted to understand, so on the LCR, it has always stayed high and it continues to stay high for us. Is this because of a low CD ratio? Or is there any other reason why we have higher LCR?

Typically, presently, we are under-leveraged entities, and we are having a lower CD ratio also. So with these 2 variables -- and we have a very static stable retail deposit. So base is that we're having a high LCR. But the thing, given the LCR ratio high and plus our average CD ratio being high, we believe which is giving us a right opportunity to expand the CD ratio as we move forward. And we are doing it also historically, and we will be able to -- it will be helping us to expanding over -- to meeting our aspiration of advance growth on one side and our ROTA growth on the other side.

Okay. Got it. And what -- I mean, last quarter you had mentioned that our MFI NBFC exposure is around INR 55 crores, INR 60 crores. What is it for this quarter and Q3? And is there like -- in the corporate side, do we have any GNPAs or what would be the SMA-1/SMA-2 bucket on the corporate side?

In the corporate side, there is no additional NNPA or thing has come over the last 1.5 to 2 years. There may be some older cases which is there since we are not writing off, we are working hard to recover. There is no such change coming in that particular segment. Even SMA-1 and SMA-2 are very, very miniscule, almost negligible in that particular bucket. And if I talk about our MFI exposure, as I said earlier, our presently MFI exposure is around 1% of the total balance sheet -- of the total advances. So we are very, very mindful and almost very negligible exposure to the MFIs.

Okay. So it's about INR 68 crores, advance around INR 6,800 crores. So INR 68 crores.

It is a bit more than that. We have slightly more than that number. So we typically keep it around 1% to 1.25%. That is the total number we are having. So I mean to say not a negligible -- negligible outstanding in this and not any higher concentration or higher -- we are not skewed towards the MFIs. We are keeping it that way only. We are following a similar philosophy, Anant-ji. Secured franchise within the NBFC also we are chasing those NBFCs which are in a secured lending franchise.

Got it. And sir, one final question. Have we activated ASBA facility on the liability side for our customers?

Anant-ji, since there are certain things which are in the regulatory thing. So we are completely ready. We have in principle approval. We have everything good to go. We're just waiting for the final go-ahead from the respective regulator. And we are targeting -- we are making our best effort to get that file moved. The thing is that we understand the type of -- so I just want to say this on this particular piece. But we are in a completely ready stage. There is nothing pending to be done on Capital Bank side.

So it's pending with RBI or is it pending with SEBI?

Not with RBI, not with RBI. There is nothing pending with RBI on this.

The next question is from the line of Sonal Minhas from Prescient Cap Investment Advisors LLP.

This is Sonal, am I audible?

Yes, Sonal, you're fully audible.

Great to get reconnected, sir. I had two questions. First one was on the NNPA, net NPA for the agriculture loans. If I compare this quarter to quarter 3 FY '24, we see a trend where the net NPA is going up from 1.57% to 1.94%. If you could just give some subjective commentary on this, because the loan book is kind of pretty much constant. So what's happening here, I want to know.

Sonal, if you look into the agriculture, agriculture, our outstanding at the end of -- if you are comparing it now by September basis this, our agriculture outstanding has reduced from INR 2,340 crores to INR 2,199 crores. If I talk about the value of my NPA number in this, that is almost constant. Given the reduction in my...

No. I'm comparing to Q3 FY '24, sir.

Q3 FY '24. So if I talk about -- I was just saying -- I just heard you said 1.77%, 1.77% was the number of September.

1.57%.

Typically, if I talk about the quarter, in the current quarter, there is no increase in the GNPA in the agriculture, almost insignificant increase. The increased number is just consequent to the reduction in the base. Even if I talk about -- so the increase, there is no increase in the current quarter we witnessed in agriculture. And even if you look into the last period, so our agriculture growth, we are being a bit cautious on the agriculture growth, and now we believe there is a good opportunity will be coming, and we will accordingly look into the same. So there is no buildup of any problem here. It is the base effect which you can see is visible. But otherwise, in the current quarter, I'm reiterating. There is no incremental NPA. My outstanding NPA has not increased even more than INR 1 crore in the whole of the agriculture portfolio.

Got it, sir. So basically, nothing much to double click there.

Nothing at that.

I understand that, sir. Second question, I wanted to understand, like for agri loans, -- there are gold loans, there are agri loans. Are there agri loans which are backed by gold? And what is it that we have an exposure there? Just wanted to understand that a little bit more.

Sonal, we are not there in the agriculture gold loan, the agriculture loan against the gold. We will be having an insignificant exposure, I will say, even less than INR 10 crores. So we are not in the gold-based agri lending. We are purely productive and need-based and depending upon the land under cultivation and the cropping pattern he has adopted, as I shared earlier. So we are in that particular lending cycle, not just taking a gold and lending. So we are not in that particular product. Yes, we take gold as a collateral in the event of some eventuality, but that particular value is almost insignificant, not even 0.1% or 1% even.

Understand that, sir. And in terms of working capital loan, project finance loans, the machinery loans, the category that you have, are there some builder loans there which are bucketed under this side? Loans to builders, loans to real estate developers?

So we are not much in that particular business. Those particular business will be the -- which we have known them well, very, very -- not a very high portion; very, very negligible portion in that particular space. But if there is any such business which we have done, it will be bucketed under MSME and trading provided those gentlemen are eligible as MSME. If they are not eligible in MSME, they will be under corporate loan. So -- but there are -- but we are not much in this particular business. This is not our target segment. We are not a bigger lender to the housing -- land developers or the real estate developers. So we will be maybe having very 1 to 3 clients like this, which we know well and which have a history and a very limited values. So -- but we are not a targeted lender in the real estate developer business. That is never our preferred segment. Neither is and neither up to now even -- that is never our preferred segment. You will get a sense that our average ticket size of this case is only INR 20 lakh.

I got it. Yes, that explains finally.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for the closing comments.

Yes. Thank you, everyone, once again for joining us today. We are committed to deliver progressive growth and value to our stakeholders. Look forward to connect with you again in April for Q4 and yearly results. Thank you.

Thank you, ladies and gentlemen. On behalf of Capital Small Finance Bank Limited, that concludes this conference. You may now disconnect your lines.