Cholamandalam Investment and Finance Company Limited (511243) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Cholamandalam Investment and Finance Company Limited Q2 FY '21 Earnings Conference Call hosted by Kotak Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nischint Chawathe from Kotak Securities Limited. Thank you, and over to you, sir.

Hello, everyone. Welcome to the earnings conference call of Cholamandalam Investment and Finance Company Limited to discuss the 2Q FY '21 performance of Chola and share industry and business updates. We have with us today Mr. Arun Alagappan, Managing Director; Mr. Arul Selvan, Executive Vice President and CFO; Mr. Ravindra Kundu, Executive Director; Mr. Shaji Varghese, President, Housing Finance; and Mr. Suresh Kumar as Senior Vice President and Business Head, LAP and SME. I would now like to hand over the call to Arun for his opening comments.

Thank you. Thank you, Nischint. A very good morning to everyone. I take pleasure in presenting to you the Q2 performance of the company for the financial year FY '21. At the beginning of the financial year FY '21, the moratorium and a generic slowdown in economic activity post-COVID-19 were causes of uncertainties in the banking sector. As you might recollect, Chola had outlined the broad strokes of its strategies to mitigate risks from these uncertainties when we last met. The quarter gone by, Q1 FY '21, was one where the company needed to walk the talk and implement the near-term strategies that were laid out in the beginning of the year. I'm happy to convey that we have successfully managed to do so during the quarter gone by. One of the imperatives as we ended Q2 was to have a high focus on collection efforts. While the broader economy is still recovering, we have witnessed a better-than-expected collections in Q2 FY '21, with the trend seeming to be on a positive trajectory during the current month as well. In Q3, we expect to reach pre-COVID field collection numbers. We have seen a significant uptick in disbursements as well over the past couple of months, despite being very prudent on the credit quality front. The pent-up demand and the festive season economic activities are expected to help sustain and further improve the prospects in the coming months for Vehicle Finance, LAP and Home Loan businesses. Sustaining the benefits of cost reduction efforts initiated in Q1 and a favorable cost of borrowing has helped in improving the company's overall profitability as well. On the provisioning front, we have maintained a 1:1 ratio on a normal versus COVID provisions on the books as of September '20, in line with best practices and continuing with the strategy to be abundantly cautious. On the company's Q2 and H1 FY '21 performances, key items from the company's financial performance in the quarter and financial year is as follows. Profit after tax were at INR 432 crore for the Q2 FY '21 as against INR 307 crore in Q2 FY '20, registering a growth of 41%. PAT for H1 FY '21 were at INR 863 crore as against INR 621 crore in H1 FY '20, registering a growth of 39%. Interest income was at INR 2,319 crore for Q2 FY '21 as against INR 2,009 crore for Q2 FY '20, registering growth of 15%. Ratio of cost of funds to average assets saw a reduction as well and was at 6.9% for Q2 FY '21 as against 7.7% in Q2 FY '20. Overall, NIM improved from 6.7% in Q2 of FY '20 to 7.3% in Q2 of FY '21. Thanks to several cost reduction measures undertaken post the COVID impact, the company was able to improve its efficiencies, and as a result, has reduced its operating expenses to average assets ratio to 2.06% for Q2 FY '21 against last quarter 2.16% in Q1 FY '21. PBT-ROA for Q2 FY '21 was at 3.4% and for the half year, it was at 3.5% as against 3.4% in the half year of FY '20. ROE for the half -- H1 FY '21 was at 20% as against 19.2% in H1 FY '20. Aggregate disbursements in Q2 FY '21 were at INR 6,457 crore as against INR 7,381 crore in Q2 FY '20, which is a decline of 13%. Disbursements in H1 FY '21 were at INR 10,046 crore as against INR 15,954 crore in H1 FY '20, registering a decline of 37% year-on-year. The drop was primarily due to the lockdown on account of COVID-19. Assets under management grew by 16% year-on-year to INR 74,471 crore at the end of Q2 FY '21 as compared to INR 64,409 crore in Q2 FY '20. Asset quality, as on September '20 for Stage 3 assets has stood at 2.75%, with adequate provision coverage at 42.65% as against 3.18% in H1 of FY '20 with a provision coverage ratio of 34.43%. Stage 3 assets have improved from 3.8% in March '20 to 2.75% in September '20. Apart from the provision coverage mentioned above, additional provision of INR 585 crores created towards Stage 1 and Stage 2 to cover any contingencies arising out of the COVID-19 pandemic fallout has been done. Total provision currently carried against the overall book is 2.64% against a normal pre-COVID level of 1.75%. The Honorable Supreme Court has directed that the accounts, which were not in NPA as of 31st August 2020, shall not be declared as NPA till further orders. Accordingly, the company has not classified any new accounts as NPA after 31st August 2020. However, if the company had classified new accounts as NPA, then the Gross Stage 3 and Net Stage 3 would have been 2.98% and 1.7%, respectively. Pursuant to the moratorium getting over in August '20, the company has over 95% of the moratorium customers started repaying their installments till date. Coming to Vehicle Finance, following other key pointers from the performance of Vehicle Finance business in Q2 FY '21. The assets under management of our Vehicle Finance business grew from -- grew by 12% to INR 49,264 crores in Q2 FY '21 compared to INR 43,901 crore in Q2 FY '20. Vehicle Finance business has clocked a volume of INR 4,781 crore for Q2 FY '21 as against INR 5,796 crore in Q2 FY '20. Disbursements in H1 FY '21 were at INR 8,012 crore as against INR 12,736 crore in H1 FY '20, reporting a decline of 37% year-on-year. The Vehicle Finance PBT was at INR 359 crore in Q2 FY '21 as against INR 318 crore in Q2 FY '20, registering a growth of 13%. PBT in H1 FY '21 was at INR 798 crore as against INR 637 crore in the previous year, registering a growth of 25%. On the Loan Against Property business, AUM for the LAP business managed to grow by 10% year-on-year from INR 12,612 crore in Q2 FY '20 to INR 13,866 crore in Q2 FY '21. Disbursements in Q2 FY '20 was at INR 1,052 crore as against INR 1,064 crore in Q2 FY '20. The disbursements in H1 FY '21 were at INR 1,171 crore as against INR 2,165 crore in H1 FY '20, registering a decline of 46% year-on-year. The LAP PBT was at INR 65 crore in Q1 FY '21 as against INR 88 crore in FY '20, registering a decline of 26%. PBT in H1 FY '21 was at INR 152 crore as against INR 172 crore in H1 FY '20, which is a decline of 12%. The decline is purely due to additional provision created of INR 10 crore and INR 31 crore in Q1 and Q2 of FY '21, respectively, which otherwise would be 9% growth and 12% growth over Q2 and H1 in previous year. Moving on to the Home Loans business. The AUM for the Home Loans business managed to grow by 40% year-on-year from INR 2,591 crore in Q2 FY '20 to INR 3,630 crore in Q2 FY '21. Disbursements for Q2 FY '21 was at INR 381 crore against INR 414 crore in Q2 FY '20. The disbursements in H1 FY '21 were at INR 571 crore as against INR 834 crore in H1 FY '20, registering a decline of 32% year-on-year. The PBT was at INR 29 crore in Q2 FY '21 as against INR 20 crore in Q2 FY '20, registering a growth of 47%. PBT in H1 FY '21 was at INR 57 crore as against INR 32 crore in H1 FY '20, registering a growth of 76%. The capital adequacy ratio of the company, as on 30th September 2020, was at 19.5% as against a regulatory requirement of 15%. On the liquidity position, the company continues to hold a strong liquidity position, with INR 6,802 crore as cash balance as of September '20, with a total liquidity position of INR 9,797 crore, including undrawn sanction lines. The ALM is comfortable with no negative cumulative mismatches across all-time buckets. I would like to thank you all for listening patiently. My colleagues and I would now be happy to answer your queries.

[Operator Instructions] The first question is from the line of Darpin Shah from HDFC Securities.

Sir, my first question is, how should we look at restructuring now because only 5% of the borrowers have not paid any EMI? So any guidance or expectations from your side, how should we look at the restructuring, both in the Vehicle Finance and the LAP portfolio?

Can I -- Arun, can I go ahead?

Yes, yes, yes. Please go ahead.

Yes, so restructuring will be done in a very minimal way. What we are looking at is as against moratorium, restructuring will be given to customers who have a longer issue of rebounding in the cash flows. So for example, bus operators or school bus operators or employee bus operators and such similar category of customers only will be considered for restructuring. Right now, we have identified less than 1% of the portfolio to pay restructuring. However, we will still be evaluating. There may be a slightly higher requirement in the LAP portfolio, where MSME customers are still a longer impact of the because of restricted hours of operations, et cetera. So -- but in our view, overall, it cannot -- it won't be going beyond 5% of the overall book, the restructured accounts.

So overall, 5% in this 1%, which you mentioned was largely towards vehicle financing?

Yes, and as of today, it is less than 1%. But we may entertain some customers who may come up, and then we are also evaluating the requirement. I'm telling the outer limit as the 5%, but certainly, we won't be even going there as well.

Okay. Fair enough. And secondly, on provisioning, that now that our coverage issues a little much healthier, we have created additional provisioning of INR 800 crores as well. So -- and do we expect normalizing provisions from next quarter onwards or we'll continue to make additional provisions to be on a -- to cushion the balance sheet over the longer run?

The view we are taking is next quarter will be a little early to take a call about reversing the provisions. But by end of March or end of -- in the coming years, certainly, we will relook at carrying the COVID-related provisions. But most part of the macro provision, we may carry because we would like to have some cushion buildup. So there's 2 parts to the -- the management overlay part, we may carry continuously.

No, sir, I was asking, will you further increase the macro-related provisioning or [indiscernible]?

That will be dependent on the need, Darpin. I don't think at this juncture, we can say about that.

The next question is from the line of Dhaval Gada from DSP Investment Managers.

Congratulations on good operating performance. I had 3 questions. First is, sir, if you could comment a little bit around the potential increase that you've seen in the Stage 2 asset, through the third quarter? And broadly, what kind of number should we be expecting in this bucket, given the fact that we have the last 10 days of collection in Vehicle Finance is much higher, so maybe the Stage 2 clarity will emerge this week next week? So just some comments as to what kind of number should we prepare. So that is the first question. The second question is related to market share in the Vehicle Finance business. Could you comment a little bit around how our market share would have moved in the first half of the year across major products? And the sustainability and the momentum, how do you see that going into the next -- second half as well as the next year? The third question is related to provisioning. So you followed the template, which you've given us since March, and you've been consistently following that. Do you -- based on the current collection data that you're seeing, do you see a need -- and I'm saying, including October, do you see a need to make any additional provisioning overlay or any other additional provisioning or based on where the template is today and the answer that is coming from template, you're broadly okay? So those are 3 questions.

I will answer the last question, and I will leave Ravi to answer the market share. Maybe I'll also touch upon the first question on the Stage 2. Frankly, what will happen is end of Q3, even if something moves into Stage 2, it will already would move to Stage 3 out of the moratorium pending. So we will -- I think it will be only a temporary sales because the -- between the 3 months, it will cross over into Stage 3 something is continuing to be on the default. On the last question, as of September, yes, this provision is more than adequate in our view. We have conservatively built it. As we move on, we will see whether we have to reverse it or we need to provide it in were dive some higher levels of lockdown and does it relapse, et cetera, happens. But for that circumstances, I don't see this provision being -- there is a need to enhance this further. Ravi, can you respond on the market share, please?

Sure, sure, sure. So as far as the market share is concerned, as I mentioned that in the past also, some of the products, which we are not focusing more and the other reason deliberate call has been taken, especially in the big ticket size of heavy Commercial Vehicle [indiscernible] and then big ticket size of construction equipment. So there, we lost our market share deliberately. But at the overall level, if you see that Commercial Vehicle, we are actually slightly better than the last year. And we would like to continue to do this with the help of the product mix and also would like to make the customer segment and also the geography. And therefore, we are confident that the market share, what we are at this point in time, and also at the last year time, almost at the same level, it has not gone up significantly. And the other product line like 2-wheel or 3-wheeler, we are slowly improving every year, and that journey is on. And we do it like that only. We don't increase our market significantly in 1-year time, and it is a continuous process. So there also, we have maintained. So as of now, our market share for each and every product line, as commercial vehicle, passenger vehicle or 2-wheeler or 3-wheeler, is at almost same level, slightly higher than the last year, and we will continue to do so.

Understood, sir. And just one data keeping question. If you could provide the loans -- from the first half disbursement for Vehicle Finance as well as home equity, what would be the disbursement to existing customers? If you could provide that data, that would be useful. Yes, those were [indiscernible]

See, first half divestment of the existing customer has gone down significantly because the customer -- 75%, 76% customers were in the -- taken the moratorium. However, in the LAP business, after the introduction of GCL, we have given some GCL. Those -- if you consider that, then, yes, a little bit disbursement has been done to the existing customer on account of the GCL. Otherwise, the normal trend of the financing to existing customer or overall disbursement to the extent of 25% to 30% used to be coming from the existing customer has come down during the first half because the number of customers were in the moratorium, and we have not given them. However, that data, if you consider GCL only for the month of September, is slightly improved.

The next question is from the line of Chirag Sureka from DSP Mutual Fund.

Congratulations on a good set of numbers and excellent treasury management. My questions had to do with the Home Loan business. In particular, you've highlighted both risks that you have made additional provisions and this. On the other hand, you're seeing business transfers had also happened. How do you see this business going forward, given the fact that you are in Tier 2, Tier 3 cities, where the income streams can not be as stable in terms of salaries within a self-employed mix? Sir, if you could give a little more flavor on your Home Loan business, that will be useful.

Okay. Arul, may I take this call?

Yes, please.

Okay. This is Shaji Varghese. Since we identified PBT for Home Loan is the semiformal income growth that approached 2, 3 for our sites, as you rightly said, the customers who we serve today are more -- those who are into retail in consumption-led businesses, is less impacted because of the largest trend on in a bit, now happen in various sectors. And the type of transactions we are predominantly focusing are self-construction and induce-driven and also ready property. So we are expecting a reasonable demand to continue displaced because even while there is an uncertainty, many of the families have feeling of that security. They will always look at how does this important better. So we are expecting a decent demand continued and to be a little better than the past. We have now reached out almost 9 states and 167 branches. We have an internal capacity of around INR 200 crores to reach in a month. Currently, the peak we have reached is fully around INR 138 crores, INR 140 crores. We are hoping between Q3 and Q4, somewhere we should reach out in this capacity.

Okay. Just one follow-up question. Given the fact that you have banks that are very aggressive on home loans, especially for public sector banks, do you expect business transfer of good customers happen and leaving you with some amount of adverse selection or you don't see that trend at all?

Look, see, the balance transfer is part and partial of this trade because in a floating rate there is exit barrier. That's where the ability to serve that certain segments and also to understand well in advance, the customer is looking for a balance answer. We have internally set out the retention theme at the office where at the stage where our any of our existing customers, when they look out for a transfer early stage, even while Credit Bureau is triggered, we are able to reach out to them sickly and engage with them. And even if there is a bit of pricing consideration to be done, we are able to retain. So to that extent, we are hoping we should be able to manage the attrition. When it comes to whether we will have to go down in the segment quality, we don't think so because the segment which we serve averages around INR 15 lakhs of loans with a reasonably good equity, even if there is a competition from the bank, which is always there, we are hoping that we should be able to kind of get the numbers to the capacity we have built. So we don't expect the current competition back to us because the segment which these banks do and these was slightly different. So to get our volume, there is no reason for us to go into a segment below where we currently serve. And the average ticket is currently, we serve around INR 14 lakhs, with an LTV of around 60%, predominantly in the end-use-driven market. So there will be a large opportunity in such a large market in India. So we don't expect this to hit our volume at this point in time, both in terms of acquisition, there will be but we will be able to contain it. We are aware of it. We have the need for capacity build for that, and we should be able to kind of continue with our volume.

[Operator Instructions] The next question is from the line of Kunal Shah from ICICI Securities.

Congratulations for a good set of numbers. So firstly, in terms of the margin. So what are the vectors that have moved up margins significantly? And is it anything in terms of the spreads on the securitized portfolio, which would have helped in terms of margins? And was this margin expansion the reason to create some further buffer? Because last time, we clearly highlighted that there is not much of a need, and trends have been better than what we have been expecting. So then what was the reason to create the buffer actually?

See, the margin movement is because of the change in the product mix. As you know, we have been progressively moving into higher-yielding products over the few quarters. And the burden on the Heavy Commission Vehicle, which was pulling down the -- which was a larger part of our portfolio has been also running down. So this has resulted in an improvement in the margins. Also the fact that in an absolute value because of the moratorium, the -- this has not run down. Those disbursement has been lower, where our asset growth has been -- asset growth are in the range of 16%, primarily because much of the asset has not run off. So this is the reason why the income is more and, of course, the margin is also higher. The reason why we did is, actually, we took the feedback from all of you that you all worried whether our provision is adequate, and so we created additional provision. Yes, we see that the provisioning is more than adequate from our angle. However, as a conservative measure and taking the views of many of the participants, we said, okay, we'll create some more additional provision. It is not because I have more interest income provision, and our progress don't fluctuate like that.

Yes. Sir, in terms of the margin sustainability, how sustainable would this be once we see the collections? So now collections are already 95%. So how should we see the sustainability of margins? And any -- maybe on the off-balance sheet, was there any other income which would have boosted margins during the quarter or there was no element at all of balance sheet?

No, there are no off-balance sheet items, as you can see, we did not do any assignment or any other deals that may be current quarter. Of course, there is one small benefit that accrues on the old assignment cases because of the MCLR movement, you -- whatever you would have you will get this small bump up because of the change in MCLR only for those deals where the MCLR have changed. But I don't...

But was that high in terms of the number, the change in MCLR spreads?

But I don't think that will be a big game changer.

Okay. So that maybe in terms of the INR 200 crores delta, that is not a bigger one within that? Okay.

The next question is from the line of Roshan Chutkey from ICICI Prudential Mutual Fund.

If you can talk a little bit about how the collection efficiency trends are shaping up in the month -- for the month of October, particularly the only 1 EMI paying set of customers?

Ravi, you want to?

Yes, yes, yes. No, see, collection efficiency against the billing is actually 87% -- was 87% in September, which is actually lower than normal collection efficiency of 100%, 105%, we do it like last year, September, we did 108%, which has come down to 87%. However, in the month of October, we are expecting that this will go up to 105% again. And only one month, it is actually at this level. That is because the -- most of the billing in our case is getting skewed towards the month-end. So we have a different, different billing cycle, first, fifth, 10th, 15th, 20th, 25th, 28th cycles. And 60% of the cases are getting billed during the 20th, 25th and 28th cycle. And as you know that we have a lot of customers who are actually on the NPDC mode because of the Commercial Vehicle, so we have to go and collect. So those customers, normally, they pay within 10 to 15 days' time during the due dates and they keep is as a nondelinquent customers. So therefore, majority of the building is getting booked in the month end, and therefore, the collection efficiency will go up to 105% to 108 -- 110% in the month of October. Till August, during the moratorium period, like May, June, July, August, our collection efficiency against the billing used to be higher than 100% because the moratorium was there and we were collecting more than those customers also who were in moratorium, so that is the same. In terms of cumulative collection efficiency, even in the month of September, we have done 60% as against the 64% of the September 2019, so at the cumulative efficiency front because the overdue has come down during September by collecting the dues from those customers who are in moratorium or overdue have come down, the data has come down as on 31st August, so therefore, we did a better election in terms of September. And cumulative collection also in the month of October is likely to go up further.

Sir, how are the pre-freight payments...

Freight rate?

How are they pending to your customers?

Freight rates have gone up because the diesel prices have also gone up.

Yes, and utilization levels?

Yes, utilization levels are actually fluctuating. It is actually in a different, different market and different, different scene, wherever, like the harvesting is happening now. And it is a agricultural belt like rice bowl. Take the example of some of the market where the production is very good this time. So there, the capacity utilization has improved significantly during the October second half. And it is likely to improve further in the month of November when the government will start buying the paddy from the farmer. So we are mainly, our heavy commercial vehicle customers are mainly into the agricultural bed pad town. So there, the capacity utilizations are between 60% to 80%, and that depends on if the market is having an agriculture goods transportation, building material transportation, cement transportation, iron ore transportation put together, then their capacity utilization has gone up to 80%. And some of the market, it is purely depending on agriculture and allied goods. There, it has actually gone up to 60%, 65% and likely to further move in the month of November. But the trend is very good because post-September, the rains have come down, and then Southwest Manson has also gone -- completed. So therefore, we are expecting that in the month of November, the freight availability and capacity utilization, post harvesting season will significantly improve, and that is going to benefit our customers.

[Operator Instructions] The next question is from the line of Antariksha Banerjee from ICICI Prudential Asset Management.

My question is actually on the Home Loan -- sorry, home equity portfolio. So if I see the disbursements, it's actually quite healthy that you've done this quarter, it's almost equal to the run rate of last year. You've done some INR 1,000 crore. So my question is, is there any component of the credit guarantee scheme that is helping these disbursements? And if so, what are the those? And how comfortable do you feel about growing the home equity portfolio from here on? And which segments are showing promising time?

Yes. This is Ravi again. So definitely, during the Q2, we have got the benefit on account of the GCL, and that has actually given us a benefit in terms of overall disbursement growth. As per the concern, basically as per the rules have been set, that either it has to be maximum up to 14% or the yield, which is basically customer has taken in the past. So in the case of LAP, it is actually lower. It is difficult to take up to that level. So we are trying to do it in the same level. And in some customers, the customers are very good, excellent customer. They are slightly given the benefit also.

So this run rate after the credit guarantee scheme, I mean, whatever the scene details are done or is this an aberration?

No. So now from the month of November, when the policy is lower, we have to get back to the normal disbursement with a normal rule. And that is what is basically going to be challenging because the market has not opened up completely 100%, and we are expecting that the overall market will actually take another one month or maybe 2 months post-Diwali, where it will come back to the normalcy, and we will try to do the same disbursement. That is what we...

Sir, can you tell us how much was the disbursement related to the credit guarantee? You have that on you?

No. I don't have the number. Yes, we can give it to you guys a new one. Yes, so later, we will provide you with that.

Sure, sir. And the collection of simply home equity was same as Vehicle Finance or better?

Come again?

Sir, collection efficiency, was it the same in home equity and Vehicle Finance or one was better than the other?

In terms of the collection efficiency, LAP is actually more than the Vehicle Finance. Even in Home Loan also, it is slightly better because there case, their billing is happening on fifth of every month, so they have the 1 cycle. So they got the...

So October, you would have had an idea about what has happened?

Yes, that's what I'm saying. So for the month of September...

Sir, it is 90% -- Ravi, it is 90% collection efficiency on LAP. And on the ACGL loan, it is INR 390 crores.

INR 390 crores and 90%. Okay.

Yes, slightly better.

The next question is from the line of Piran Engineer from Motilal Oswal Financial Services.

Congrats on a very strong set of numbers. I kind of want to go back to the provisioning question. So we have standard asset provisioning of about [ 150 ], [ 160]. And also, the customers who haven't paid us at all is about 5%. I'm guessing, even out of those who have paid us maybe another 2%, 3% might be stressed. So if we say that 7%, 8% of your book might have some problems, do you foresee that the standard asset provisioning of 1.5% should actually be improved to maybe 2.5%, 3% over the next maybe 2, 3 quarters?

Piran, I think you should leave that decision to us. Like it is always -- views can be taken -- we are doing it at a much granular level, at an agreement level evaluation, and it is audited. And we have done it, and we have seen that our provisions have always been substantially better than what we need. Just to take a view that it should it be better, it is getting -- the view you can take where it can be better. There is no end to this.

Okay. That's a fair point. And sir, just over the last 6 months in the post-COVID period, what sort of changes have we made in our underwriting metrics, both in vehicle and in LAP? If you could just give us some examples of how you tighten the screw subject, if at all?

This is Ravi Kundu again. As far as the underwriting procedure is concerned, we have -- there are 2 different ways to handle it. One is that the traditional way of cutting down the LTV and increasing the documentation. But in the contemporary way, we need to look into the product and geography, where those products and geography, even more granular at an OEM level and also the make model and variance level. And with respect to the customer category with respect to the geography, which is favorable in terms of probability of default. So we have been practicing this business decision model for quite some time, and we are using that very, very efficiently to find out which market, which product, which OEM, which make model with respect new and used are favorable in terms of the probably to and we can actually calculate the expected credit loss before going to the market. So define that first and then go to the market and then consider the macros also, for example, just to give you the example. In the current scenario, we know that the heavy commercial vehicle or the ICV or the big ticket side, construction equipments are not earning. So in that segment, we may not do anything. We expect the customer is good and bad. We have to be away from that product. And then we apply the BDM. So we have a twofold decision making. One is the upfront, which we call it, that before going to the market, we know what we need to do and what is my MUV level strategy. And second is that underwriting model also aligned with that. And during this period, during the lockdown period, we have calibrated our underwriting engine to reduce our rate, and that has also improved further. So with that business decision-making model and underwriting model, we are able to do better decision in the uncertainty what we are going through, and that is improving our portfolio quality in terms of reduction of our La default and non And as on 31st August, again, moratorium was actually there, we have achieved lowest Stage 2 and Stage 3, and that is, again, continued now also, and we will try our level best to do best collection in the field to ensure that our portfolios are better. So underwriting business in model and robust collection mechanism put together are basically driving our portfolio quality.

[Operator Instructions] The next question is from the line of Nidhesh Jain from Investec Capital.

Just one clarification on freight guarantee scheme. The disbursement that we have done is corresponding to what percentage of portfolio? And we have done that in only in home equity segment, right?

No, we have done for Vehicle Finance. But as of September, we have done only -- mostly, we have done into the LAP. And Vehicle Finance, we have done it, which is going to come in the Q3. So INR 400 crores, whatever disbursement we have done as against the, say, INR 1,000 crores, so -- of Q2. So that is 40% of the overall disbursement in the LAP has gone in the traded guarantee. As far as the Vehicle Finance is concerned, we have not done much, very insignificant number. But in the month of October, the numbers are better.

What percentage of our portfolio on which we have given this disbursement? What percentage of our existing customers disbursed these loans?

So that is on the INR 12,000 crore portfolio, right? On that, you go INR 400 crores. Yes. In Vehicle Finance, it was only INR 15 crores.

Only thing is that INR 400 crores is a 20% of the eligible customer [indiscernible]. So then you need to multiply that. So INR 2,000 crores out of INR 12,000 crore.

The next question is from the line of Sunil Kothari from Unique Asset Management.

Sir, my question is a little bit larger outlook. Your presentation and Slide #15, which gives financial steps not for 10 years. I'm trying to understand is our asset under management during this last 10-year and 5-year, then net income and pre-provisioning operating profit, those numbers during last 3, 4 -- particularly, if we remove even '19, '20 also, we are a little bit slowing down in terms of all this growth. So just your observation and your experience, how do you see this changing? What is the learning FROM this? And second point is on Mr. Arun's statement as an MD about technologies usage and its benefit. So a little bit qualitative, somewhat ahead you see, what type of investment and benefits you are seeing because of technology and digitization? Just 2 larger things, if you can talk about that.

I'll talk on digitization a bit, and then I'll let Arul talk on the numbers. Basically, on the digitization bit, we have spent a lot of our efforts to look at building out a new kind of a digital data center, which is going to give a lot of predictive analytics to the teams on the field. And that is -- a lot of work has been done. And we've got a, I mean, huge analytics team now that is working to build this so that when you look at it on a long-term basis, we feel that data is going to become -- I mean, data already was being looked at. But the way we trying to look at data and things like that, we thought we'll follow moderate and more like a lot of other companies, large companies like Bajaj and all have done and worked a lot with data, that's something that we are building out. So once that goes live, and you see that -- and even currently, that is feeling a lot of the system, and a lot of our predictive analysis is being done there. And so even the field is getting as to what they need to do, which accounts they need to go after, which accounts that may go delinquent. So we can quickly address those kind of things. And even on the sales front, we've got things happening in terms of both the LAP as well as the home loans business moving on to the newer tools, which we have introduced in the digital front. Earlier, there's people. Now all of them are tab-based. Tabs were used in the vehicle finance business. Now we've also got them to go in and use all the new fintechs that have come in and are giving data for better decision-making are being used in both other businesses as well. So that's something that we are working on, and that hopefully will help us going forward. Arul, do you want to take that?

Yes. I'm not sure what you mean by the last 5 years, it has come down, our performance has come down.

Compared to, sir, our last first 10-year -- I understand it's a larger base. But just broadly or any thought process on this?

Please allow me to answer. If you can't take the 10-year number because the base is small, as you rightly pointed out, and the last 5 years, the measure these go by is the return on asset. If you see the rate on asset, it has been consistent at the 3.7x -- 3.7% on the assets. Only in FY '20, it dropped a bit to 2.7%, primarily because we provided the COVID provision at the end of the year. And if you add back the COVID provision, it would again be at the same 3.7% level. The growth has been good. You can't -- I mean, I would request you not to consider the 10-year basis -- given the 10-year basis, we went sustaining 10 years of CAGR across in a shorter tenure. We have to factor in multiple issues. During the last 5 years, the NNPA recognition norms have been changed .the market has gone down [indiscernible] cycle. And if the last year within FY '20 had pulled it down because of the COVID. So we need to factor in these things to draw conclusions from. So if you could maybe later connect with me, I can give you more granular data on how we have been performing across all the parameters.

The next question is from the line of Umang Shah from HSBC Securities.

Congratulations for a good quarter. I just have 1 question on OpEx, given the fact that first half, we have really kind of tightly controlled it, but now that the business volumes are kind of fully normalizing, how should we look at OpEx going forward from here on? And what would be like a more steady pay cost-to-income ratio?

Yes. The OpEx will marginally go up, you're right because one end, we will have to -- once we start disbursing at higher volumes, the sourcing cost and then the related election cost and the infrastructure cost will go up. But however, a lot of efforts have been done to have sustained reduction across various other -- various OpEx spend. So these things are more permanent in nature. I would say that what we are right now talking at 2.1% of the assets, it can hover between 2.1% to 2.3%, 2.4%. But I think we used to be in the range of around 3% plus on that OpEx ratio. I think those periods have come up, and we will be significantly lesser than those numbers.

Sure. And just 1 last one. Given the fact that clearly, we are now very well positioned both on liquidity, capital and clear the asset quality picture is also getting much more clearer, what sort of growth are we looking in the second half? So what sort of AUM growth should -- are you expecting in FY '21?

See, normally, we don't give any forward-looking statement. I would rather say the first half, the AUM growth is more also because of the moratorium users being on the book. I spoke about it in the initial part of this session. So you will see this maybe at the similar levels of growth or maybe even slightly lower. But I think in absolute value, it will so sustain.

The next question is from the line of Udit Kariwala from AMBIT Capital.

Sir, I joined in a little late. So please excuse me if this is a repetition. Just wanted to get some sense around the operating performance and the increase in the NII for this quarter?

So if you see across the board, whether it is on the cost of funds, NIM, expense ratios, and even on the loan losses, but for the additional provision, we have been -- we have shown improvements, both quarter-on-quarter as well as last year versus current year. I think the numbers are there. If you want more details, please connect with me on the more detailed version, and of course, the press release is also there, which gives you more granular data. So we had created an incremental provision of around INR 250 crores to have an additional buffer in case any further expected losses crop up. So -- but for this -- or in spite of this, we have shown growth both on profits before tax as well as in all our ratios, whether it is return on assets or return on equity, et cetera. I'll stop here. And if you have any specific point on the operations you want to understand, I can respond or we can take it off-line.

Sir, we can take it off-line, sir.

The next question is from the line of Bhavik Dave from Nippon India.

Just one question from my end. I think you spoke briefly about the predictive analysis and technology spend that you are doing. If you could just throw some more light on how this is helping us either and like being more efficient on the throughput side or reducing cost or getting our risk management better because we've always been the better end of the asset quality? How do we intend to use technology for risk management? And if you could just give us a little bit more flavor on this predictive that you have?

So this is used across the board to measure customers' performance, to measure cash flows, to measure the delinquency ratios, et cetera. It is not like -- and the risk team actually is the one which uses this quite abundantly, and they will -- they are the prime user of this particular features, which we have built into. So there's a large analytics team and the risk team work together on this to advise the businesses as well as other functions, improving treasury, et cetera to take advance warning or advanced corrective measures.

Sure. And how much is the investment that you're doing in this technology? And how many people are there as a team? How are you building this?

I think there's some interruption.

Sorry. What I wanted to understand is how many people and teams we have? How do -- how much do we spend on a yearly basis on building these predicted models or the team on the digital front? How do we think about it, like how -- what is the investments that we are putting in and how many people are there in the team?

No, no. Those are very confidential information. We would not like to say.

The next question is from the line of Sanjay Shah from KSA Securities.

Congrats for good set of numbers. So my -- sir, I would like to know that we have done -- created a very good presence in rural economy, and especially, our focus is on tire 3 plus tonnes. So -- hence the semi-urban is also growing equally, very good and what the data shows, there's a huge opportunity lying that side. So have you -- do we have any directional thought process on that side? Can you share with us, please?

Ravi?

Ravi here. Yes. So as you mentioned rightly that we have 1,100 branches, and the majority of the branches are in the rural market. Rural means, this is semi-urban and rural all put together Tier 2, Tier 3, Tier 4 town. See, we have presence in Tier 1 also. But our majority of the businesses are happening in Tier 2, Tier 3, Tier 4 town. That is because of the -- our presence in the middle of the parameter with respect to Vehicle Finance, LAP and Home Loan. Now Vehicle Finance has completely gone into the middle of the parameter, all 1,100 branches, where in the LAP and Home Loan, they are progressing. So out of 1,100 branches, LAP has reached to 250 branches. And Home Loan is also following. They have also gone closer to 200 branches. So as we move further as far as the LAP is concerned and Home Loan is concerned, our penetration in the rural market with respect to all the product will improve further. That's one. Second is that at a product level, if you take the vehicle finnance, we have been doing middle of the private customer like light commercial vehicle or used vehicle or 2-wheeler or tractor or entry-level car customer, as you rightly mentioned that, because the rural demand, because of the semi-urban demand picking up, the customers are inclined towards purchasing these products, what we are focusing more. And that segment, we have been doing very well because we had a very good collection that is what is also supporting. But we need to create a proper model, business decision model in order to plan where to go and how to do disbursement with respect to product and customer and then increase it. So this is a continuous process, and we are doing it slowly, and we have done it always slowly. Like, for example, we took 10 years to reach to the level of disbursement, what we do in tracked today. So directionally, what we are doing is that we are going -- getting more penetrated towards the rural and semi urban, but it will take time.

The next question is from the line of Rikin Shah from Crédit Suisse.

Sir, given that even moratorium has ended, I wanted to understand how the roll forward metrics are moving because that becomes more relevant versus the NRRB that we used to defer earlier?

Yes. So NRRB is basically now coming to the level of September level -- February level. So if you're asking that, what has been the NRRB of July, August, obviously, July, August NRRB was higher than the February because we were collecting customers from those who are actually having moratorium and having the dues. So those customers were continuously coming down from 1 EMI due to [indiscernible] EMI due. And that's the reason we have achieved the lowest Stage 2 as on 31st August. Now September is the full month. And as I mentioned that our majority of the customers are interested the Vehicle Finance, especially, 60% customer. Their dues are from 28 to 25 to 28 days. So therefore, majority of the customer will pay in the month of October. And that is a NRRB is slightly lower, but it is not much lower. For example, I'm just giving you the data points of bucket 1 to 2, NRRB for the month of February was 11%. And this is purely moratorium customer I'm talking about. All those moratorium customer in the month of February was 11%. In the month of July and August, it went up to 25%, NRRB. That pro forma improved. Wherein in the month of September, it is at 6% level. Why 6% level because as I mentioned in the collection efficiency term also, our collection efficiency in the month of September has been 87% as against the last year September of 108%. So in the month of October, we are likely to achieve 110%. That increase from 87% to 110% is going to increase the NRRB in the month of October. Getting my point?

Yes, yes. But I was also asking about the role forward.

Mr. Shah. So sorry to interrupt, but for any follow-up request, you are to rejoin the queue, please.

Yes, one last question he's asking. So roll forward. So roll forward in the case of it is actually for the 1 to 2 bucket was 6%. In the September, it is actually 7%.

The next question is from the line of Aditya from Citigroup.

Just on the growth, disbursements are obviously strong given the circumstances, but they could have ramped up through the course of the quarter. So could you give us a sense of the disbursement growth in September and in October so far, is that in general?

September disbursement is actually aligned whatever we have shown the disbursement like in the Q2 to Q2 our disbursement has been last year to this year, Q2 has been down by 13%. So for the month of September is the trend is same. Not much. So for July, August, September, we have done the similar way of disbursement. Slightly in the LAP, it has gone up in the month of September due to the GCL. Otherwise, if you take the 6,000 odd disbursement, whatever we have done in Q2, it is equally distributed in the last 3 months. So September to September or Q2 to Q2, the disbursement trend is the same, that is minus 13%. And as far as the H1 is concerned, we are down by 37%. Now moving towards the second half, October, November, December, January, February, October last year was a big month because Diwali and Dasara, 2 festival were there. As against that, this month, October is actually Dasara and November is going to Diwali. So therefore, October month disbursement will be lower than last year, October. And November month disbursement will be likely to go up, that is what is my expectation. But we have to see what is in reality coming. But if you take the last year number, H2, because of the BS IV to BS VI transition, because of the lockdown imposed in March month, the disbursement were down in Q4 and Q3. In fact, our Q4 disbursement has been achieved in Q2 itself now. So therefore, in the second half, our disbursement will be higher than the last year second half, obviously. And for the industry, also, it will be better.

The next question is from the line of Aswin Kumar Balasubramanian from HSBC Asset Management.

On the Slide #25, you've given this table that giving this moratorium months and the number of EMIs paid. So just had one query there. If I look at that table where the moratorium month is 1 or 2 months, where are the number of customers paying more than let's say, 2 or 3 EMI kind of sharp drops, whereas if the moratorium month is 4 -- I mean, 3 or 4, then you see an increased average kind of seems counted in Q2, right? Because if the -- if they've opted out of the moratorium it wouldn't...

I'll explain...

Yes. Go ahead.

So these are customers who are not having monthly EMIs. These are customers who have quarterly EMIs. So the 1-month moratorium customers are those who are having who might have paid in March, and so during the subsequent moratorium period, they had only 1 month EMI coming up, which they would have already. That is the one sent of customers in this 1 and 2. And the 2-month are those who availed 2 quarterly EMIs in the -- during the moratorium period. Also, there are set of customers whose EMIs have got over, and their last EMI would have been -- it would have been 1 or 2 EMIs, which are in the last leg of the period and then they avail the moratorium. And that is the factor. So only the monthly EMI and consistently increasing numbers are in the 3-plus months.

Okay. Okay. Got it. And if I can add 1 more question or -- this Supreme court benefit, which you've taken on the gross Stage 3, that is about 0.2%, 0.3%. Now this would be the stage 2 number as of June, which I mean would have otherwise slipped. I mean, so you had about INR 1,600 crore at that point of time in Stage 2.

Yes. It would have been in Stage 2 at that point in time, and it still remains in Stage 2 in the current presentation also because they have not moved it up. And we have given you the details of what it would have been if we had moved also.

So that means...

Ashwin, so sorry to interrupt, but for any follow-up request, you should rejoin the queue, please. The next question is from the line of Rahul Bhangadia from Lucky Investment Managers.

My questions have been answered, sir.

The next question is from the line of Ashwani Agarwala from Baroda Mutual Fund.

I just wanted to know whether in this quarter, we disbursed about INR 65 billion. I mean, for the last quarter, it was INR 36 billion. So I think INR 65 billion would contain a lot of pent-up demand on the first quarter. So how do we see this reburnt number going forward?

It is not like disbursement. See, in the first quarter, the last 2 months because of...

Yes, right.

Ravi, sorry. You...

Yes. So -- no, actually, what he's saying is right. Arul, what you're saying is right. See, the disbursement, what we have done starting from May 15 till now is that same rate, you can say that, for example, in Vehicle Finance, we have been doing close to INR 1,500 crore per month. And that is July, August, September, even in the month of June, and half of that we have made. So the April, May, June disbursement, which is Q1 INR 3,588 crore and which is going up to INR 6,457 crore, it is because of the 1.5 more months, we have got benefited in the Q2. And there's no pent-up demand for. The demand has to be there, when only you can sell the customer vehicle as and when the -- every month, there is some reason for that, the demand will be there. And it cannot be there for many months. Otherwise, we'll have to have more disbursement in a particular month. It is actually -- it is related to the month like festival month, you will have a normal disbursement going up in the month of October and November, but then December will go down. Then January, February, March, Q4 will be always high, like, that it happens. So therefore, we are expecting that in the coming months disbursement will be better than what we have done so far.

The next question is from the line of Bharat Shah from ASK Investment Managers. Seems like we lost the connection for Mr. Bharat Shah. As there are no further questions, I now hand the conference over to Mr. Nischint Chawathe from Kotak Securities Limited. Thank you, and over to you, sir.

Thank you, everybody, for joining us in this call today. And thanks to the management also alongside for providing us answers towards the caller queue.

Thank you. Ladies and gentlemen, on behalf of Kotak Securities Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.