City Union Bank Limited (CUB) Earnings Call Transcript & Summary

Welcome to 1Q FY '22 Earnings Call of City Union Bank. On this call, we have Dr. N. Kamakodi, MD and CEO of the bank; and Mr. V. Ramesh, the CFO. Thank you, sir, for the opportunity of hosting you on this call. I would now like to hand over the call to Dr. N. Kamakodi, sir, for his opening comments, post which we can open the floor for questions. Over to you, sir.

Thank you, Mr. Ajit Kumar. Good evening, everyone. Hearty welcome to all of you for this con call to discuss the financial results for the quarter ended 30th June 2021 of City Union Bank. Hope all of you and your family members are safe and following COVID safety norms of masking, social distancing, vaccination, and all. The Board approved the unaudited results today, and I hope you all have the copies of results and the presentations. As conveyed earlier, we are having our Annual General Meeting on 19th August 2021, and we invite you all to participate online and provide your support. We shared with you all the following expectations for financial year '21, '22 during our last con call on 20th May 2021, when we discussed the annual results. Our outlook for the financial year 2021 -- I mean, financial year 2021, '22, we shared as follows: the credit growth for the year to be at mid- to high single digit if the economic mix environment and the COVID second wave behaves like last year. Overall, slippages to closing advances to be slightly below the tough financial year 2021. The slippages may be more front-loaded with increased slippages in Q1 and Q2 financial year 2022. Recoveries to be impacted because of the lockdown, nonfunctioning of government registration department and also nonfunctioning of the courts and courts are showing more sympathy towards defaulters rather than the banks. The gross and net NPA rally at 2020 shares lower than financial year '21, with a few quarterly spikes. Return on assets to reach a level of 1.3% towards the second half of financial year 2022, '23. And despite the COVID second wave, the performance during the current period is almost in tune with the expectations we already shared with you during the last con call. The highlights of the quarterly performances are as follows: deposits recorded a growth of 9% to reach INR 44,606 crores from INR 41,026 crores. Credit grew by 5% to INR 36,395 crores from INR 34,536 crores. Thus, business grew by 7% and presently stands at INR 81,001 crores. CASA deposits recorded a growth of 22%, outsmarting the overall deposit growth to INR 12,299 crores from INR 10,098 crores. And hence, the percentage of CASA deposits improve to 28% in Q1 financial year '22 against the 25% in the Q1 financial year '21. The growth in the operating profit for the financial year -- Q1 financial year '22 versus Q1 financial year '21 was 8%. And in absolute terms, it stood at INR 383 crores against INR 356 crores in the last year first quarter. Net profit for the first quarter improved by 12% to INR 173 crores from first quarter -- in first quarter financial year '22 against INR 154 crore in the first quarter financial year '21. Return on assets at 1.29% for the first quarter current financial year against 1.15% for the whole year of financial year 2021. And it is well on track for getting the ROA back to 1.5% trajectory in the next year as anticipated earlier. The credit growth achieved in the, let's say, on 30 June 2021 vis-à-vis 30th June '20 is -- was 5% year-on-year basis. The growth came mainly from gold loan and non-agri gold loan, which has, in fact, doubled. We shall push the growth but only when the environment becomes conducive for other normal advances. We expect that there will not be any third wave. At the same time, we are cautious on that. We had a slippage of INR 482 crore in the financial year -- first quarter financial year '22. And slippages were front-loaded in tune with our expectations as on 29 -- 28th May 2021. We feel it should be moderating going forward. And we still expect overall slippages for financial year 2022 will be, let's say, flattish or less than whatever we saw in financial year 2021. The recovery for the current quarter Q1 financial year '22 was at INR 101 crores, comparison of INR 82 crores in live account and INR 19 crores from the technical written-off accounts, as compared to the recovery during fourth quarter financial year '21 was INR 110 crores, INR 26 crores in live and INR 34 crore in -- technically written-off. So the lockdown because of the second wave also played some spoil sports. Courts are slowly coming back to the normal functioning. We expect recoveries to improve in the second half. And that's why we expect that gross and net NPA to be better during the year-end, which once again is mainly because of our expectations on improvement in the legal procedure and recovery during -- towards the second half of the current financial year. The gross and net NPA stands at 5.59% and 3.49%, respectively, against 5.11% and 2.97% in the financial year 2021. As said during our earlier con calls, we expect that the gross and net NPA should be shared better for the financial -- 31st March 2021, once again, considering the reduction in the, let's say, addition in the second half and also improvement of the recoveries because of the improvement in the core 2 processes, particularly in taking possession and selling the properties through surface action. During the financial year 2021, we had restructured about INR 990 crores (sic) [ INR 12,319 crores ] of MSME accounts and about INR 595 crores of non-MSME through COVID resolution framework. Apart from the above prayer to COVID, we had restructured an amount of INR 242 crores under MSME and INR 22 crores under non-MSME. Thus, the percentage restructured accounts outstanding as on 31st of March 2021 stood at INR 1,849 crores, comprising of about 5% to closing advances. After the -- originally, it was as if the restructuring window are getting closed with the December and the final -- the processes should have been completed by the 31st of March. But because of the second wave on 5th May 2021, we extended the restructuring deadline up to September '21 and also raised the threshold limit of restructuring to INR 50 crores from INR 25 crores. Based on our prior experience, we are encouraging our eligible cases to use the -- this -- the dispensation, considering the future uncertainties, mainly from the COVID third wave or whatever it is. So we are in engagement with the customers and, let's say, in -- through the active engagement, we are trying to encourage wherever. The customer even has some iota of uncertainty or whatever it is. During Q1 financial year '22, we had restructured an amount of INR 83 crores towards MSME and about INR 103 crores towards, let's say, non-MSME through COVID resolution framework 2.0. As on 30th June 2021, the total restructured accounts outstanding is about INR 1,984 crores up INR 84 crores. Considering the uncertainty of third wave, I said earlier, we are following up with the eligible customers and encourage them to use the regulatory dispensation. Though the -- I mean, we are not, let's say, getting -- seeing so much interest yet, we expect there could be another 1% to 1.25% depending upon the interest of the customers before the restructuring -- since in the earlier, let's say, bad cycle and all. Our experience in using the RBI dispensation has really helped us. And another thing, what you have to remember is that these facilities are available only for those accounts which did not have, let's say, SMA 2 or SMA 1 on 29th of February 2020, depending upon their MSME...

Ladies and gentlemen, requesting you all to please stay on line. We are just trying to reconnect the management back to the conference. [Technical Difficulty] Over to you, sir.

Sorry about that. The line got disconnected. Just to continue from where we left. Considering the uncertainties of COVID third wave, we are following up with the eligible customers. We had a reasonably good experiences in the previous regulatory dispensation. When we could, let's say -- through this restructuring, we could save many accounts who could go through the difficult places and all. The uncertainties of the COVID wave are there, but we are taking all the steps to give the support to the regulatory dispensation which is available at this point of time. Just to give you an idea of that, about INR 1,900-odd crore restructured, about INR 400 crores, which of -- advances which we restructured during the earlier part of the last year, we had given them, let's say, 6 months of, let's say, moratorium and the repayment to start after the 6-month and all considering whatever situation prevailing at that point of time. Under our experience with that INR 400 crores, which had started, the repayment is reasonably good. The slippage from that is very miniscule and almost all of them -- most of them are doing a good job and started repayment and all. Like that, we -- like say, though, there will be some elevated stress, we don't expect stress to be significantly higher in that because the -- even the eligibility criteria for restructuring takes care that those accounts which are getting restructured are, by and large, let's say, reasonably performing on 29th of February 2020, which is pre-COVID cutoff date. So we don't feel, like say, any surprise about that. And we feel this should really help them going forward, and this is what we have been maintaining right from the beginning. We always maintain that this is the time -- because of the uncertainties, it is the time to, let's say, help the customers to the extent possible. And that is for that they are being consistently, let's say, paying premium interest rate to us compared to the other banks and all, that's why we feel this is the way we have to handle this. So regarding the SME position, our SMA 2 position on 30th of June stood at 3.16% and which was about 2% or 1.99% on 31st March 2021 and which is much below our usual pre-COVID band of 5% to 6%. The -- and we had even period, let's say, a few quarters, which we had shared with you all, that we had, let's say, a couple of years when the level used to be at 12% also. So things are now currently -- SMA 2 position currently stabilizing at about, let's say, 3% to 3.25%. It is also not very bad, considering the situation at this particular point of time. The cost-to-income ratio for the first quarter stood at 40.46% compared to 41.45% for the year as a whole in financial year 2021. We had good opportunities to make profit in the treasury operations last year, and that opportunity may not be available this year. The quantum of other income to be booked this year will be determined by the collection of technically written-off accounts, which will once again be determined by the, let's say, core 2 functioning, which we expect to, like say, a pick up only in the second half. So in between, the cost-to-income ratio may inch up. So because of that overall factor, that could be, let's say, some incremental cost-to-income ratio. But let's say, we are waiting for the other income to balance from the recovery of technically written-off accounts. The net interest margin for the current quarter stands at 3.86%. If you had a chance to look into our last 15 to 16 quarters, till 2 years back, we always, let's say, used to be in the range of about 3.4% to 3.75% net interest margin. The net interest margin used to expand when the interest rate cycle goes up and they contract when the interest rate cycle goes down. But in the -- just the earlier cycle, even though the interest rate cycle started falling down, the margins did not contract because there was supply side constraint, particularly when most of the public sector banks are under the PCA framework and there were supply side issues on credit. But now, let's say, the liquidity, let's say, is currently over-flooded in the market. And the credit deposit ratio has also come down to around 80% to 82% bucket. And that's why, let's say, we are anticipating that for the current financial year net interest margin will remain in the range of 3.75% to 4%. The -- we are -- currently, if you have seen both our cost of deposits and yield on advances have almost -- yield on funds have almost come down equally in a parallel way. But because of the reduced CD ratio, there is some amount of -- moderation of a few basis points in terms of net interest margin, but this is what we expect between 3.75% to 4% for the current financial year. During the financial year 2020, we kept the profit at ROA of 1%. And over and above that, we made, I mean, COVID provision. And for our financial year 2021, we declared a net profit with ROA of 1.15%. So we, in fact, shared with you all that we should be reaching the level of 1.5% ROA in the second half of financial year '22, '23. I think we are on track to the, like say, on whatever we promised earlier. And we also, let's say, received questions from a few analysts like you could have, let's say, revised -- I mean, reverse the entire surplus COVID provision and put it for the NPA and reduce -- increase your coverage ratio and things like that. All these things are basically -- everything is in the open domain. So these decisions we take, depending upon the, let's say, factors that are prevailing at this point of time. So I think we will be completing that entire surplus COVID provision in the second quarter. And after that, the slippages should also reduce and the recoveries from the existing NPA should also increase so that we should be seeing things coming down. And so we have kept some cushion for the next quarter per se. Our capital adequacy ratio currently stands at 19.58%, of which Tier 1 itself is about 18.5% for the 30th of June 2021. It has improved mainly because, let's say, a lot of gold loan and all. The other -- the incremental loans mainly had 0% risk weight because of the regulatory gauge line. We are adequately capitalized, and we don't foresee any capital requirement at the current year or maybe next year also. But as a practice, we are always keeping the, let's say, shareholders' permission with an enabling resolution passed in every year AGM. So that depending upon the prevailing conditions or any regulatory requirement or anything, if at all we need, we can always go for equity raising. So right from 2013 onwards, we are getting this shareholders' approval, but we have not been using it for the past 7, 8 years. Following that practice, this year also in AGM, we are asking for the shareholders' approval, which will -- we don't expect to use that, but it's as a matter of abundant caution, we are always keeping that regulatory permission on hand. So to sum up, almost like -- things are progressing well and almost in tune with the expectations, whatever we shared with you in the earlier con call on 28th May 2021. We hope there won't be any, let's say, third COVID wave. At the same time, we are keeping all the, let's say, precautions, whatever that is needed, because that amount of uncertainty is always there. The impact of a COVID wave, I mean, the -- just to give you a broader thing, starting from the 1st of March '20 to currently in the past 16 months or so, we almost had a 20% of our team members got infected by COVID, and we had about 4 to 5 casualties in this period because of that. But the overall, the -- even though the infection rate and the mortality rates were higher this time, both the confidence level at the customer side and also at our side, things are, let's say, much better compared to whatever we had during the COVID 1. At the same time, there are uncertainties about the COVID third wave is getting discussed again and again. But hopefully, let us hope for the best, but at the same time, prepare ourselves both mentally and whatever way possible. So gross and net NPA for the year-end will be, let's say, lower at the same time. As said, there could be a spike indeed, I mean, front-loaded during the first half. So overall, on all parameters, including ROA and everything, the things are very much on the, let's say, going smoothly on the expected line. This is what I, let's say, I wanted to discuss with you all to start with. Now we can go for Q&A.

[Operator Instructions] The first question is from the line of Mona Khetan from Dolat Capital.

I have 2 questions. Firstly, on the restructured book, you've already mentioned 5.5% of book. Could there be more in pipeline in terms of the restructuring? And -- yes.

See, basically, we had always been very liberal with the giving regulatory forbearance to the people. We actively engage with them, engage with our customers, and we encourage them to use that. As of now, let's say, I don't have anything, but I feel that could -- since the restructuring window is opened and expected, my gut feeling says we may be having about maybe 1% to 1.5% to 1.25% going forward, additional restructuring, if at all it comes to.

Okay. Sorry. I didn't get that. 1% to 1.5% additional?

1% to 1.5% in the quarter.

Okay. Got it. And on the SMA group, you mentioned this stands at about in the range of 3%, 3.25%, much lower than what we have seen at pre-COVID. Could this be partly driven by the higher forbearance in terms of both ECLGS or restructuring that we have seen? And once things normalize, maybe 2 years down the line, could this number be back to 6% or so given the kind of segment you are in?

See, the -- that should be the, let's say, a logical thing to expect. But one thing which we are able -- I mean, clearly, seeing is that many of the, let's say, the portion of the customers who typically used to have that, what you call, pay only after the 70th day or 80th day under the question, I mean, in this business per se, particularly the SME, never got themselves reconciled with the daily overdue or daily arrears. They are typically used to keep our accounts order only during the quarter end. That used to be the practice always. But when that, let's say, after the COVID restructuring and other things were not permitted for the customers who are on SMA 2 on or SMA 1 on 28th February 2020, I think people are now reconciling to this fact and the concept of, let's say, daily collection and keeping the account and order. That discipline is definitely improving the system. So my gut feeling is that, let's say, even when the system normalizes. Now also you have to understand everyone is paying their interest, which is also an indication that there is sufficient cash flow. And we feel, when things stabilize in future, the -- let's say, the SMA portion should be lower than whatever we saw during the pre-COVID period, mainly because the increased discipline which we are seeing at the -- even at this strata of the business because of, let's say, second forbearance and all, they have been told that they cannot avail because they did not maintain their account up to date on 28 -- on or before 28th February 2020.

Sure. Got it. Finally, I missed some of your early comments. So just to check on your ROA guidance, you had earlier said that ROA should normalize by the second half of fiscal year FY '23. So do you continue to maintain that? Or could that be deferred because of what we have seen in the last couple of months?

No. We are not deferring. And we -- I just said multiple times that we are on track. You can also see the ROA improving now. And we are on track to have our ROA touching, let's say, 1.5% in the second half of financial year '22, '23 as given earlier. Hopefully, there is no third wave, which derails the things.

[Operator Instructions] The next question is from the line of Jai Mundhra from B&K Securities. .

I have a couple of questions. So first, sir, in terms of collection efficiency, right, so Tamil Nadu probably had slightly higher, stricter mobility restrictions as compared to rest of India. So if you can highlight that -- how things have been maybe in the month of July as compared to June in terms of collection efficiency?

In fact, on -- in fact, the things started getting relaxed after the 30th of June. In fact, the 30th of June was more when -- June is the month where you had stricter months per se. The SMA 2 numbers which we have given itself will be an indicator to you on how things are -- things have improved. In fact, when I let's say, attended the con call on 4th -- I mean, fourth quarter last year on 28th May, even I was on my last day of quarantine and we had infections at a higher rate at that point of time, and it's improving.

Yes. So sir, if you can highlight what was your collection efficiency really for the month of...

The collection efficiency is a measure which is normally looked into when the post-dated checks and the term loan collections happen. Since our thing is mostly on the CC account and, let's say, only 1/3 exposure to the term loan, we give you that SMA 2 figure.

Right. Okay. Because earlier we were sharing, so I was just checking.

No, no. There was -- we never share this collection efficiency kindly remember. Because only we shared what proportion of the advances had paid up to what month of that due.

Right. So changing, sir, if you have maybe the...

Yes, that's the same thing. The SMA 2 number itself will be an indication for you.

That's right. And sir would there be -- because as you said, from July onwards, so from July maybe 1st onwards, things have started to improve. Is there a, let's say, a marked improvement from June level? I mean, this 3.3% to 3.5% number, that would be June number, right?

Yes. See, the issue is, let's say, the band you have seen from 1.99% to 3.2%, which is hardly a movement of, let's say, less than 2% in a span of 3 months. So it's -- basically, you look at the big picture and move forward.

Right. And sir, in terms of your new -- so let's say, if you want to look at your -- if you divide your customers into 2 portions, one is those who are already dealing payments. So let's say, they are in SMA 0, 1, 2. And hence, gearing, you want them not to shift the bucket. And there is a new another set of customers which are -- which are 0 DPD and standard. And so are you seeing that at least the new customers are not getting into delinquent bucket? And there may be some customers who are already delinquent, they may be finding it difficult to get out of the delinquent bucket?

No. As far as -- it doesn't normally happen that way. What we typically see is that, say, about 90% of them will be current. About, let's say, you had the 3% to 3.5% whatever we discuss in SMA 2, which will boil down to another 4%, 5% percentage in the SMA 1. So -- and you will be having maybe 10% of the people moving to the -- let's say, they will be in SMA 2 in the month of June and suddenly coming back to the normal in July and all. These sort of things you normally see here. It's not that everyone stays in the same bucket.

Right. Okay. And sir, the reason why am asking...

I have given you, let's say, a clear indication of what is going to be your annual slippage. So with it, you will be in a position to make your own calculations.

Right. So if I were to just back calculate that, we know first quarter has been reasonably heavy, so it looks like, barring maybe 2Q, things will become very, very normal in terms of slippages, right? So there has to be a reason that at least the problem at this point of time maybe is only SMA 1, 2. Is that the way or...

No. The issue is -- as you rightly said, you had tighter norms during the month of, let's say, from the May end to June. You will -- once things -- now things are absolutely, let's say, to a greater extent, you don't have anything, and things are coming back to the normalcy. You have, as I told earlier, you have a few sectors like the public transport, like omni buses and things like that or your hotels and tourism-related items and all, these sectors have not come out of the circuit. They are not yet fully operational. And some of them, like say, are -- they have reduced their outstanding, basically, their noncore assets. And I'd like to say some are asking for the restructuring or already got restructured. All these people are in, like say, they will be in distressed category until things normalize. Apart from that, other sectors of like, say, the whatever 5%, 6% which are moving from one segment to another segment, they are like, let's say, depending upon the, let's say, [indiscernible] done some amount of disruptions in the cash flow will be there. But this time, in most of the manufacturing, let's say, because the, let's say, the migrant workers and all did not go home and -- And at many places and all, the manufacturing were allowed to function with -- the activity did not become 0 for some time, let's say, unlike what happened in the last time. So there are a few segments which were affected -- continue to get affected from the first wave and a few segments which got affected in the first wave but are doing reasonably better this time.

Right. Understood, sir. And the next question is on ROA trajectory. So as of now, we are around 1.29%. And this quarter, as you said, slippages have been front-loaded. Next quarter also, you are indicating there could be elevated slippages and then it should taper. But in the next quarter, you are going to write back whatever is the residual provisioning. So I mean I'm saying from 1.3% ROA, why would there be so much time before you reach 1.5% for the next 4 -- I mean you are saying that from 5 quarters, hence, we will reach to 1.5%. So why -- I mean, why will not things normalize quicker?

See, it's not the 5 quarter. It is 4 quarters, okay? Even if you take it in your way, man, improving ROA by 5 basis points quarter-by-quarter is not an easy job. I want to make it very clear. If increasing that is like just shifting gear in the car, every bank should be having 1.3% ROA by now. You have to do tougher [ decisions ] to take ROA by, let's say, every basis point above 1. You agree with me or not?

No, no. I agree, sir. Understood.

It's not just pulling down -- pulling your Excel spreadsheet.

Right. Okay. And sir, just on MSME restructured, right, so RBI regulation says, if they pay 20%, then you can reverse half of the provisions. But that tagging of an account as restructured, when will it become a standard-standard, I mean, without restructuring tag? Or that will remain until the entire tenure gets over?

No. Basically, let's say, 2 years, if they had performed as per the restructuring terms, they will be losing the tag, but there is what you call another tag on that. Even after that, if in any time in future, let's say, until that -- those accounts are totally closed -- say, for example, after 5 years, that particular account slips into NPA. The provisioning nuance will be completely changed, and they will be considered as NPA. I mean, from the debt of restructuring. And so the incremental provisioning you have to make as per that aging.

Understood. But the untagging will only happen if they -- until the loan gets over, right?

No. 2 years from the debt of restructuring, you can normally -- I mean, all the other things can be done, like they will not be disclosed as restructuring in the regulatory filing and things like that.

Okay. So if you have given 1-year moratorium, then after that 1-year moratorium window, if they perform for 2 years, then they will be untagged?

Yes. And you can let say, reverse that surplus, what you call standard asset provision, whatever you are making on the restructuring after the 2 years of functioning.

[Operator Instructions] The next question is from the line of Akshay Ashok from Dalal & Broacha.

Congrats on a good set of numbers. I just wanted to know the reason why your provisioning has gone down on a Q-o-Q basis. Is it because of more restructuring? What is the reason? Because I see the number, and it has gone down on a Q-on-Q basis around sequentially around 29% provisions have come down on a Q-o-Q basis. What is the main reason for this?

See, the -- basically, we had taken about INR 83 crores from the, what you call, whatever we kept to -- for COVID. So this provision was made in the last year itself, and that's why it looks lower for you. P&L impact is taken already.

Okay, okay. So we are seeing situation improving, so? That's why you reduced it?

Yes, sort of.

[Operator Instructions] The next question is from the line of Prabal Gandhi from Antique Limited.

Am I audible?

Absolutely, absolutely. Please go ahead.

Sir, on the cost of deposits or cost of fund, how much low can it go from here?

See, it's very difficult to completely predict per se. We could clearly see about a 10 basis point reduction between the fourth quarter and this quarter. And we don't expect any major interest rate reduction going forward as it has been clearly told. And looks like you have reached what you call almost the bottom of the rate cycle as given by the Monetary Policy Committee today. Because of the lag effect, you may have the best to have maybe another 15, 20 basis point going forward, which will be the what you'll call -- but the most point in this, this cycle. I'll already -- whatever we are seeing is the historical low in our -- on cost of deposit front in our history.

So these 15 basis points will be on the basis of repricing not on the deposit cut that we can use from the...

Exactly, exactly, exactly.

And sir, how much was the interest reversal for the current quarter?

INR 20 crores.

INR 20 crores. Sir, so even if I adjust for that, our yield on advances has dropped from around 10.4%, quite sharply.

Yes, yes. Yes, in fact, I have told you both cost of funds and yield on funds are parallelly coming down for the last 4 to 5 quarters.

But any specific reason why the yield on advances -- is it because of the repricing? Or are we disbursing on...

No. The entire growth has come from the gold loan. Which is being given at, say, 8.59% and things like that.

Okay. Sir, on the -- from the ECLGS portfolio, around 5%, 6% of our book is on the ECLGS. So are we seeing any signs of stress build up here?

No, it's nothing unusual to it. That's what I told you the -- it's -- we don't -- in fact, I was discussing with you all during the, let's say, I think last quarter, I think last quarter only result. We have started seeing at the overall exposure of the accounts, which are, let's say, which have taken ECLGS, showing reduction in the overall outstanding. And the -- in fact, the total exposure on 31st of March 2021 was about INR 2,960 crores, and there is about INR 10 crore reduction in that portfolio as a whole. It's -- in fact, somebody asked, like say, how they will get normalized and all, we told we will be taking that as a part of working capital assessment when we assess the next year working capital requirement and things like that. So that requirement has by and large gone.

From June onwards, the repayment would have to start?

Yes.

So are we seeing any slippages from there or any stress?

No. There is no undue slippage from this portfolio or whatever it is.

Got it. Because sir, one of the peers recently reported that around 2% of the ECLGS book for slippage. So that is why I was asking.

See, already the overall book slippage itself in the last year was about 3%. So the 2%, 3% slippage from this, let's say, portfolio and all, need not be looked at some additional [ maturity ].

And sir, just a technical question. So in case there is a stress on the ECLGS portfolio. How much is guaranteed by the government? And how will that mechanism work in case these are NPA based?

75% is the guarantee given by the, let's say -- I mean, they have given 100% -- 75% payment -- I mean, how is that mechanism works is, whenever we disburse a loan on ECLGS scheme, the entire data has to be given in the portal. So with all the detail, the portal takes up the data. Suppose, for example, I -- we declare 1 particular account as NPA. We once again upload that in that portal. 75% of the, let's say, portion of the ECLGS portion is immediately credited to our account. And the balance, 25%, after all the recovery efforts are completed.

Okay. So the additional -- so suppose there is INR 10 crore of outstanding and we give INR 2 crore of ECLGS. So 75% of INR 2 crores will be credited to us and balance will be credited as the recoveries happen.

Exactly, exactly.

Okay. Perfect. And sir, just last question. How much core buffer are we holding?

Currently, about INR 55 crores to INR 60 crores is the additional provision we have.

And this is excluding the restructuring provision.

Yes.

The next question is from the line of Srinath V. from Bellwether Capital.

Just wanted to find out the gold loan, non-agri gold loan book numbers have been really encouraging even after the RBI reduced LTV for the product back to pre-COVID levels. Just want to understand what is driving this book. Is it a liability cross-sell? Or is it largely brand sourcing? And given that it's such a granular product, how are we sourcing this kind of volume of customers, sir?

See, this has been our breadwinner, let's say, a decade up to probably maybe late '90s or so. When we started getting into the SME and the other, let's say, larger loans, as I told you earlier, let's say, we always keep the, let's say, active gold loan whenever we don't have anything else to do in our rural, semi-urban and select urban branches per se. So since we have not yet fully preceded the growth pedal across other branches, almost all the branches -- like say, the fundamental thing, what you need to make your -- the branch marketing effort is that -- the communication at the, let's say, location in particular, town or village or catchment area, that you are giving your gold loan. And you will be, let's say, leaving the fellow or anybody coming for gold loan in 10 minutes or 15 minutes or whatever it is. So once you make that thing, automatically, let's say, basically, the -- it is a competition to the money lenders and probably some cooperative societies and maybe at some places, even the gold loan NBFCs.

Got it, sir. And the ROA of this product, you had historically said that it's a touch below what the bank normally makes. But given the current yield situations, has that kind of improved, sir? What -- very qualitatively, how are the ROAs in gold loans as we see it currently?

See, the average yield for agri and the non-agri will be about, say, 9%, which is a very decent return at that point of time, particularly with the very low NPA at this point of time. And when we don't have confidence to do any SME credit or anything because of the prevailing situation here, this is the best you can expect at this point of time.

The next question is from the line of Dhaval Gada from DSP Mutual Fund.

Sir, I just wanted to check again on this ECLGS.

Mr. Gada, I'm sorry to interrupt, but your audio is not very audible, sir. Requesting you to please speak a bit louder.

Is it better now?

Please go ahead, sir. That's fine.

Yes. Okay. Sir, just following up on that ECLGS question, you mentioned that the stress is about 2%, 3%. If I just see the number last quarter, we had close to INR 2,000 crores disbursement. So which means about INR 10,000 crores would be the total loan exposure. And if I calculate about 2%, that turns out to about INR 200 crores, INR 200 crores to INR 300 crores, depending on the ratio. Is the understanding correct that in the last 2, 3 quarters, we would have seen INR 200 crores, INR 300 crores slippage from ECLGS?

No, no, no. Not exactly. See, the, let's say, many of the -- I mean ECLGS loss, let's say, some of them, the repayment may itself start for this particular portion if they are not restructured only on the, like say, after 1 year or 2 years, depending upon which category of ECLGS they are getting into. At the same time, if they are not restructured, their regular term loan repayment will continue. So we have to look into all these aspects and make a call like to what extent there is a delay in the repayment and delay in this stress. So you will be having, let's say, a few, let's say, set of accounts which have got ECLGS. That exposure comes to, as told, it comes to about INR 1,900-odd crores and all. So out of which about INR 500 crores, let's say, had both restructuring and also the, what you call ECLGS scheme. And about INR 400 crores of the overall INR 1,900-odd crores, let's say, there are multiple classification with which it will be very difficult to have split this into this. So let us understand it this way. If you want to have the overall understanding of the stress, the -- let's say, your SMA 2 numbers, which was a 2.99%, we said about 3-odd percentage at this particular point of time. So depending upon when the repayment starts, most of them will have the other, let's say, term loans already having their own repayment schedule running and all. Taking into consideration, we will be in a position to give this. So we have taken all these behavioral pattern in our, let's say, expectations. The only thing is that we have not factored in too much of, let's say, the COVID third wave to impact overall thing. We said only we are conveying our overall slippage for the current year will be a share lower than whatever we saw last year, and it will be front-loaded and will get normalized in the second half. So that basically captures all the questions, whatever you've asked me now.

Understood, sir. Sir, and just going forward, since you gave an ROA guidance for second half of next year, directionally -- from the third quarter directionally and more into FY '23, should we expect the normalized slippage run rate, which used to be earlier INR 200-odd crore per quarter kind of level to come back? Or it would be still elevated? The reason I ask this is -- and the previous question as well is because ECLGS the real impact will be visible from the third quarter of this year when principal repayment will start. So that's where my question is.

Yes. Please understand only the principal repayment of the ECLGS portion starts after 1 year or 2 years, depending upon the case. If they are not restructured, the other term loan repayment things, they continue as such. You understand what I'm trying to say.

Right. Yes, yes.

And the ECLGS portion is hardly about 10% to 20% of their overall borrowing under the repayment schedule of the ECLGS portion is basically very miniscule compared to that overall repayment schedule. But to answer your first question on like say, how do we expect? Our prayers and our expectation is almost similar to whatever you said at the beginning. So that from the third and fourth quarter, things should -- slippage would normalize.

Understood, understood, sir. Perfect. And sir, just one last question...

Don't think that it is driven by the, let's say, repayment of the ECLGS and all.

Got it. Clear. Sir, just one final point on the credit growth. You talked about as you get more comfortable, you will start opening up -- just -- and then given the fact that Tamil Nadu is still not fully opened up. It's still under a part lockdown. When do you see the bank being ready to accelerate on this front? Would it be end of the year, somewhere start of next year? Because the reason I ask again, is pre-pandemic as well, there was some growth slowdown that was visible. And then we've seen last 1, 1.5 years in a similar trajectory. So just directionally, when do you see growth coming back?

See, last year, let's say, towards the end of the third quarter and the fourth quarter, things almost came to as if, let's say, the activity level came back to normalcy as if there was no tomorrow. Over 90% of the borrowers and all, they could record even shared more turnover in financial year 2021 compared to whatever they recorded in the financial year '19, '20, despite having COVID lockdown in the first 3, 4 months of the financial year 2021. So like that, we are, let's say, keeping our eyes and ears open to the, let's say, grassroot level. So if we see things stabilizing and also the risk of further COVID wave and resultant lockdowns get eliminated and all, we will ascertain whether we should be in a position to shift to the, let's say, year. We will get a clarity post-Diwali.

The next question is from the line of Krishnan ASV from HDFC Securities.

Yes, I just wanted to understand what has the bank been able to do which has helped raise the sharp productivity at the branches so sharply in the last 3, 4 quarters. Because for a very long time, the sharp productivity at a branch was roughly in the INR 8 crore to INR 10 crore range. Now suddenly, it has shot up. And for 3 sustained quarters, it's gone nearly to the INR 12 crores, INR 13 crores. So I just wanted to understand, especially at a time where we had a pandemic going, so there is no way that a branch officials can go out and seek deposits. So what has actually changed? Is it the open-architecture initiatives? Or is there something else that has happened at a branch level which has allowed you to source so much better?

See, it is a combination of factors. After we opened our video KYC and the automatic opening of account, the average balance which we see in the, let's say, video KYC opened accounts are a share higher than the accounts which are normally getting opened in the branches. This is one point. Another point basically is when our overall growth, let's say, the -- even when the capacity of the SA portion growth remains constant, when the overall credit growth reduces, our deposit growth reduces, which makes us to reduce our term deposit portion, which is also indirectly helping to see the percentages are increasing further.

No. So I was actually asking about the absolute point being a branch be able to..

The 15% to 20% is something which normally happens and that has continued to happen. Another 2%, 3% extra growth is happening because of the video KYC and things like that.

Got it. Just based your comments on credit costs, so if you could just -- if you don't mind, if you could just repeat what you mentioned around credit costs and how long before they begin to normalize.

So I have -- even in the last quarter and this quarter, I am not giving any, let's say, guidance on the credit cost per se. What I have given is that here as a whole, the total incremental slippages will be, let's say, better than whatever -- slightly better than whatever we saw in the last financial year and it will be front-loaded. On the recovery portion, the core and all have not -- have just come back to the normalcy, and we are not yet seeing the results. So we expect a better recovery in the second half of the current financial year resulting in gross and net NPA at the year-end that will be shared, I mean, almost flat -- a share better than whatever we saw during financial year 2021. The other mathematical calculation is left to you.

The next question is from the line of Nilanjan Karfa from Nomura.

I just wanted to follow up on Dhaval's question earlier, and that was related to the ECLGS customer versus the non-ECLGS customer. Could you highlight -- I mean, I understand the customers in ECLGS would be from a divergent sector. But still, as an aggregate, do you see higher credit limit utilization for ECLGS customer or lower compared to the non-ECLGS customer? And at a certain point, I'm assuming there will be a certain tipping point. I mean if they are utilizing higher, it might mean that they are actually -- the credit profile is weaker. So any color on those lines, if you can highlight, sir?

Brother, I see that this way, say. For example, you have given 10% to 20% [ ESB ], incremental ECLGS that was given, let's say, that is being given, which typically is about the normal enhancement in a normal span of time about, let's say, 1, 2, what you call 1.5 years of, let's say, a normal increment, which a normal customer will get during, let's say, normal period. So we typically use to observe that in the incremental working capital adjustment, depending upon these thing. And I also remember saying this in the last, I think, con call only. When I compared between -- let's say, to please understand, particularly on ECLGS 2, 3 things. Only those accounts which were healthy on 28th of February 2020 are eligible for ECLGS. If the stress was even before the pre-COVID, they don't have any, let's say, eligibility for the ECLGS scheme. So about the 20% or 10% depending upon the thing it was given. And I, in fact, specifically told, ECLGS customers who utilized about even 50% of that total ECLGS who took it, they had at aggregate level at -- let's say, at customer-ready level, they had lower exposure on 31st of March 2021 compared to 31st of March 2020, even though they had utilized ECLGS. So ECLGS was mainly utilized for, like say, to take care of the temporary cash flow mismatches and liquidity at that point of time. It was needed at the point of time. Customers get it at a lower rate and it is also guaranteed by the government. So the customer is happy that he's getting at a lower interest rate, and banks are happy that they are getting further portion the government guarantee. So basically, even other point of -- I don't have the figure for 30th of June because I did this exercise and discussed only on with the 31st of March figure, despite having [indiscernible] to call ECLGS scheme. The customers having about 50% of the exposure on those customers who took the ECLGS scheme. The total outstanding at the customer level -- that ECLGS scheme was, like say, still outstanding, but they reduced their working capital. And the year-end figure was lower than the previous years despite they taking ECLGS.

Okay. So sir, extending it further, would it therefore have a trend of -- growth itself will be divergent. Do you expect the ECLGS customers to take lesser working capital loans going forward?

No. Yes, yes. I'll explain to you. Like, say, when we assess that, say, for example, somebody has got, say, INR 10 crore of working capital limit. He was given, let's say, INR 2 crore of ECLGS, 20% of that. So the working capital, let's say, when we calculate for the next year, so we will -- let's say, if our estimated working capital limit is INR 11 crore. And here INR 12 crore, we will not give any [ announcement ]. We will -- and the following year, out of that INR 2 crore ECLGS scheme say, suppose we met our repaid INR 50 lakhs or INR 1 crore, depending upon this repayment of tenure. So we will add that in the existing working capital, what we have given, so that it will get normalized over the next 1, 1.5 years. It will not just like that continue as an additional thing going forward.

Okay, okay. And sir, if I can chase that, you basically mentioned INR 500 crore is like an overlap of ECLGS and restructure, right?

Yes.

So square that INR 500 crore is like INR 2,500 crores exposure of you?

No, no, no. INR 500 crores, I'm talking is the INR 500 crore exposure, which -- INR 500 crore is the total outstanding. Don't confuse.

Okay, okay, okay. So basically, out of that INR 2,000 crores restructured, you have INR 500 crores, which is also is ECLGS portfolio, yes?

That is correct, yes.

So INR 100 crores is like in ECLGS. And therefore, INR 500 crores is the exposure?

Exactly, exactly. Yes. Good that you asked the question. Like I took it for granted and explained it. If you multiply into 5 times, then that calculation will go ahead of us. I can't sleep.

That was the problem. Thanks for clarifying.

We take the next question from the line of Sri Karthik from Investec Capital.

I have a couple of questions. So from a growth perspective, the MSME sector has been struggling for almost 5, 6 years now since demand. So do you think, generally, as we normalize and get back to regular ways, a 15%, 20% growth from the MSME sector can be quite sustainable from here on? That is one. Second is, if you could give some qualitative comments in terms of asset quality performance between manufacturing units and service units, especially larger educational institutes, restaurants, et cetera, which have probably had a tougher, tougher time? So these 2 are the questions.

So your first of 2 question is on sustainability of MSME? And the second question is on the service sector and the manufacturing?

Yes, sir.

Sri, the MSME sector from the demonetization time onwards, let's say, it apparently looked, let's say, it is going through some amount of stress and all. It is going through a period of reorganization. Those set of MSMEs who are just thriving on the taxes [indiscernible] they are facing the music now and they are getting eliminated. So this process will continue for -- I mean, the COVID also added to the woe. So once these, let's say, MSMEs who were, let's say, who were managing the show only with the [indiscernible] once they get wiped up, the system will come back to the normalcy. And I don't know, about 6, 7 years back, I mean, -- in one of the con call, I suggest that, I mean, probably -- we had probably from up to financial years, say, from 2003 to 2013 or 2004 to 2014, for about 10 years, the credit growth was almost, say, 3x as the GDP growth. And you also had higher inflation. And let's say, the sector growth rate, let's say, for what you call, 17%, 18% and all were quite normal for a few years in that period. But going forward, at that point of time, there were, let's say, discussions that the banking sector growth rate together itself will get into single digits for, let's say, multiple reasons. One, lower inflation is setting in. Number two, the corporate will be driven to bond market because of your -- whatever, let's say, you call -- what do you call the, compliance costs, like say, so many conditions on the bank borrowing going forward and all. And the third factor was that the capital availability for public sector banks are getting lower, and that's why their contribution will start lowering, which will be an opportunity for the private sector banks. Overall, seeing we may not be seeing once again that 20% growth, 18% growth and all are going to be very tough. So overall growth, like I said, will come to the single digits. And probably, we should be stabilizing somewhere between 10% to 15%. And also, let's say, getting our ROE above 15%. So that the retained earning itself will take care of the, let's say, capital requirements, which -- I'm talking about, let's say, today -- or not today or tomorrow or day after tomorrow. I'm talking for a period of, like say, 10 years down the line or whatever it is. That -- during that period, definitely, the growth from these extra will be sustainable, but it will not be 20%, 25% as you are expecting. This is on your first question. On second question, yes, currently, the service sector is more affected compared to the manufacturing sector, be it your hotels, be it your restaurants, be it your tourism, be it passenger car transport, be it your education. All these sectors have not yet come back to the normalcy. It will take a few more quarters to see them back on track.

Will there cumulative exposure to such services sectors, which are impacted, of course?

Yes. I told it comes to about, let's say, 6% to 7% we discussed about a couple of quarters back, that the hotel, the restaurants, and the school and the bus stand port and things like that, which have not come back to the normalcy, about 5% to 6%.

So within our restructured book, is it fair to assume that a large majority of it is constituted by the services sector?

Definitely, this majority may not be large majority, to a greater extent, it will be there in that segment. Remember, all of them had, let's say, perfect, let's say, business model, perfect cash flow, and perfect repayment up to 29th February 2020. And let's say, wherever we are confident about the promoter, let's say, we have to support them until things come back to normalcy.

Sure, sir. So simply back calculating these two, looks like 40%, 50% of this book seems to be restructured.

Yes. I mean, rather I can say this way...

Requesting participants to please stay on line. We are just trying to reconnect the management back to the conference. [Technical Difficulty] We have the management reconnected. Over to you, sir. We have the question from Sri Karthik.

Yes, you are correct in your estimate.

The next question is from the line of Gaurav Jani from Centrum Broking.

Just one question on the recoveries front. What steps are we taking to sort of ensure that in case of further restrictions or lockdowns the standard portfolio at least pays off on time and recoveries don't get hampered so that implemented -- business could be much lower? That's it.

See, we are in, let's say, our branch managers and executives are in close touch with the borrower by borrower. So the branch managers are, let's say, estimating both from the arrears list and also with the discussion on each and every borrower, let's say, whether he has any issues, whether its cash flow is sustainable. If at all he has any problem, whether it is temporary or permanent, what about the track record of that person, whether he is fully trustworthy or not. So if the problems are temporary, we go for the restructuring. If the problems are permanent, we are encouraging and we are in -- let's say, engaging with the borrower to sell their other collaterals and reduce the outstanding and all so that the existing business will be, let's say, sustainable to take care of the requirement and all. The major thing what we are doing is to impress upon the borrower to reduce the outstanding in tune with the business opportunities, which is happening to a greater extent and particularly the COVID wave has given a lot of sense to the otherwise eternally optimistic businessman. So they are also, let's say, discussing with that to ensure the outstanding is reduced and brought back to the sustainable level by selling their collaterals.

The next question is from the line of Kashyap Jhaveri from Emkay Investment.

Yes. Just one data point I wanted. Have you disclosed the number of interest income reversals for the quarter?

Somebody asked that, and I'm told it is INR 20 crore. It is nothing -- but you are INR 480 crores 1 quarter interest.

The next question is from the line of Jai Mundhra from B&K Securities.

Sir, 2 things. One, I mean you just mentioned about this ECLGS study that you did that at the period end in March 2021, the balance at customer ID level was lower. And can you tell the amount, sir? Because it looks like it would be interesting to understand that the ECLGS outstanding is around INR 1,950 crores from INR 1,960 crores as of last quarter. But what is the absolute amount at customer level?

See the -- even between 31st of March 2021 and 30th of June 2021, at aggregate level, the overall outstanding is INR 10 crores less. So I don't have that sheet. I think if you -- that whatever I told about that -- I remember somebody asked this question and I told it's about to say, I -- from my memory, I don't have the sheet with me. But from my memory, let's say, for example, totally, you have about, say, INR 2,000 crore worth of, let's say, exposure of the, what you call [Foreign Language] -- let's say, the ECLGS loan was given about, let's say, INR 2,000 crores, about INR 19,000-odd crores, the total outstanding of that person is about, let's say, total is about INR 10,000 crores. The 20% of that is your INR 2,000 crores. In that, you are overall, for about INR 5,000-odd crore exposure, the overall outstanding on our BP ID's on 31st of March 2021 was lower than that was March 2020.

Right. That I understood. I just wanted to check, does it actually correlate to 5x or this is a slightly different number? I mean is the outstanding 5x of disbursement or there could be a very different number?

No, no, no. See, this is basically the, let's say, outstanding of the borrowers who received the ECLGS.

Right. So INR 1,950 crores is the ECLGS disbursement, right?

Yes.

And you said, at March end the total...

The total outstanding of that person, we say, INR 2,000 crore on 31st of March 2020, which was pre-COVID -- I mean, pre-ECLGS time period. You get what -- you get me?

Yes.

For the same borrower, let's say, 50% of the borrower on 31st of March 2021, even though they had received for, let's say, ECLGS, their final outstanding at customer ID was lower.

Correct, correct. No, no. So I just wanted to understand that ratio, if it is 5x or -- it looks like it could be more than 5x, right? Because he has other facility also. Even though he has repaid...

Basically, it is the aggregated number. Some customers would have paid more. Some customers would have paid less. I'm only -- I looked into those customers whose outstanding was lower.

Understood. Right -- and -- okay, sir, anyway. And the second thing is, sir, on the gold loan, so you have seen 100% growth. And there has been an LTV change. But going forward, do you think -- what kind of a gold loan book can grow, sir, I mean, approximately?

It's the same. This year, we also anticipate about INR 2,500 crore to -- INR 2,000 crore to INR 2,500 crore incremental disbursement.

Okay. So even on that -- okay, INR 2,000 crore to INR 2,500 crores. Okay. And the last question, sir, on your entire loan book of SME, so if you were to bifurcate between B2B customers and B2C customers, just a ballpark range, I mean, how much of your SME customer would be -- would fit into B2B segment, wherein they would be part of a larger value chain? And how much could be B2C customer-facing kind of a thing?

See, you can see that the entire retail trade comes in that segment. But coming to the, let's say, manufacturing side of the MSME, 75% of them will be B2B, approximately my guestimate.

Yes. So entire trader, both retail and wholesale?

No, no. Wholesale will be B2B. Retail will be B2C. On manufacturing side, maximum will be to B2B.

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

Yes. Thank you all for attending this conference, particularly, I think I have tried to answer your questions as much as possible because I now understand we take certain things for granted, but it is being understood in a different way, and that's why the discussions come anyway. The -- all the data points and any more discussion you want to have, you can always get in touch with us. The contact point given is Mr. Jayaraman, whose contact details are in the presentation. Once again, just to sum up, things are almost on track on whatever we discussed during the, let's say, fourth quarter earlier con call. Hopefully, let's say, we expect -- I mean we -- on one side, the uncertainty of the COVID third wave is there, but we hope and pray the impact should not be bad because the vaccination and all have improved and things like that. That is one uncertainty still it is there before everyone in the world. Hopefully, with God's grace things will get better. I once again request all of you to follow the COVID-appropriate behavior like masking, washing hands, not getting into the crowd, vaccination and things like this. And once again, we are always available for answering your queries. And as I told, the Annual General Body Meeting is scheduled on 19th August. I request all of you, if possible, join through the online mode. Once again, thank you all for the opportunity and thanks to AMBIT and Kumar for organizing this con call.