DCB Bank Limited (DCBBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to DCB Bank Limited Q3 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Murali Natrajan, Managing Director and CEO. Thank you, and over to you, sir.

Thank you. Good evening. Thank you for joining this call. We are talking from the boardroom of DCB Bank corporate office. I have our CFO, Ravi Kumar. I have R. Venkattesh, our Head of HR Operations and Technology. We have Ajit Singh, Head of Treasury and Financial Institutions. And then also, we have Praveen Kutty, who is the CEO designate, which you would have read in the announcement that we have made recently. So what I would like to do today is to get Praveen to give you a few opening remarks, and then we will open up for questions. We also have Sridhar Seshadri, our CRO. And we have the support staff of the bank assisting us today here in this meeting. So I hand over to Mr. Praveen Kutty.

Thank you, Murali. So without any further ado, I'll just take you through some of the highlights of the -- of quarter 3. We've grown our advances by 18% Y-o-Y, deposit by 19% and balance sheet by a tad under 20%. We continue our focus on growing the deposit base at a higher pace than the advances base. And during these times, we have seen that our CASA has improved by 1.09 -- CASA ratio has improved by 1.09% over the previous quarter to end at 26.13%. We had a fairly decent quarter on the fee front. Our core fee being INR 98 crores and the total fee being INR 123 crores for quarter 3. If you were to look at our provisions. GNPA has come down from 3.62% last year same quarter to 3.43%, and net NPA from 1.37% to 1.22%. This also resulted in the provision coverage increasing from 74.68% to 76.42%. Between the last quarter and this quarter, our credit cost has been flat at 0.28%. Net-net, this has resulted in 11.18% Y-o-Y growth on PAT. These are the highlights which we have on the financial performance. During the quarter, we have -- our NIM has come at 3.48%. Our outlook for the future continues to remain at 3.65% to 3.75% of NIM. We believe that there is -- the reason why the NIM is at 3.48% is because of the increasing cost of funds, which would persist for maybe a quarter more before it stabilizes. As far as the ROA is concerned, we closed the quarter at 0.86% and ROE at 11.3%. We believe that going forward, we have consistently brought down our cost to average assets. Last quarter, the cost to average was 2.63%. And we were to see the last 5 quarters because of scaling as well as because of management action, we brought down the cost to average from 2.87% 4 quarters back all the way to 2.63%, and there has been a decline every quarter over the last 5 quarters. So this is a summary of the quarter that has passed. And we could take any questions that you probably may have.

[Operator Instructions] The first question is from the line of Rohan Mandora from Equirus Securities.

Sir, this is again on the NIMs. I just wanted to get a sense from you. The NIM is currently at 3.48% and normalized guidance is around 3.65% to 3.75% and with cost of funds likely to increase. So how do we see the NIMs going back to that guided range? And what is the time period during which it can move?

So effectively, Rohan, what would happen is that the incremental cost of deposit has got 2 components to it, which is new deposits that the bank takes and the renewal of existing deposits. So considering the tenure of deposits, the deposits we have taken, let's say, 18 months back, 24 months back, have come up for renewal and that gets repriced at the current rate. So that story is reaching its ebb now. So effectively, new renewals will be renewed at marginally increased rate or similar rates. So you'll find that the cost of fund would stabilize in the -- over the next 4 to 5 months in the current environment. So once the stabilization happens, we would be back to the 3.65% to 3.75% NIM that we are -- we have been talking about.

So also, Rohan, if I may add a couple of more things. Last quarter also, I mentioned, we are consciously making a shift from home loans to loan against property. That transition is not complete. Prior to COVID, we had almost 80%, 85% of our loans in loan against property business loans and only 15% in home loans. Because of COVID and lack of opportunity, we shifted a lot of focus to home loans, remaining in the similar category. Now the transition is happening, which gives us additional thing -- additional yield. And the second point is that also we have been able to deal effectively with all the restructure moratorium, this thing. So we expect some slowdown -- further slowdown, hopefully in the NPAs and therefore, that any reversal of interest also would reduce. And the third point is, we have changed the scorecard and the frontline focus to CASA. And we believe that CASA is coming at a much lower rate for us than the term deposit. That mix change also should help us with restating our NIM back to that. Effectively, what will happen is in about 4 to 5 months, whatever volume benefit volume growth is there, that will entirely result in benefit in interest income. Right now, if you see our gross interest income is growing much higher than actually even the loan growth rate, but it is being taken away because of the drop in NIMs or basic increase in cost of fund. That -- has already started slowing down and is expected to improve after 4 to 5 months.

Sure. And sir, was there any one-off in NIMs in terms of interest reversals, what would be the component of that?

No, no, there is no one-off in all this things.

Okay. And sir, second question is that, if we look at...

Every quarter, there will be some INR 2 crores, INR 3 crores kind of adjustments happening because of any issue, but nothing material to this thing.

Sure. And like if you see the ROAs from, say, 4Q '23 to 3Q '24, a good amount of compression has been absorbed at the OpEx level. And last year, we added almost 2,000 employees in FY '23, whereas this year, 9 months, we have added 100 employees. So how should one look at for FY '25 the OpEx trajectory in terms of employee addition and whether we'll see this OpEx to average assets continue to fall into FY '25 as well?

Our target is to grow our balance sheet by 20% at a minimum year-on-year, double it in 3 to 4 years. So depending upon the productivity that we achieve, the focus area for our growth, which is AIB, tractors, gold loans, mortgages, LAP, we will continue to add resources. I have said this in the call previously also, if we had bigger headroom in cost of acquisition, we'll add 10,000 more people because we know that the business of -- the business segment that we are present in has huge opportunities. So we continue to add resources. I can't tell you the exact number of what exactly I will add. All we know is that we are pursuing very steady growth, which should result in doubling the balance sheet in -- between 3 to 4 years, and we are pretty confident about that.

Sure. And sir, lastly, on asset quality. Like if you look at the GNPAs in mortgage, AIB and SME, all 3 have seen an uptick. So any comments around here? And also, if you look at Slide 23, our SME and MSME disbursements on a quarterly run rate have fallen this year vis-a-vis say in the last year, 3Q, 4Q run rates, so just...

Yes. So Praveen will comment on the SME disbursal. But on gross NPA, all our NPA slippages are in line with our expectations because when you have a restructured book and the moratorium all billing that happens, it does take some time for customers to come back to a particular payment rhythm and cycle. So that is what we have dealt with. And I think now we are pretty confident that all our build all are falling into the rhythm. And if you see the recoveries and upgrades, we started with some 60-odd percent in quarter 1, it is now up to 79%. Last year, whole of the year, we delivered almost average 100%, right? So therefore, we don't have any -- at the moment, looking at our portfolio, we don't have any concerns. There are some seasonal issues in the agri portfolio like your tractor and KCC, which result in some NPA. And over time, it gets recovered. So we don't have any major concern on that. On disbursal, Praveen can give you his comments.

So on the SME front, there are 2 components to the SME. About a year back, last year, a large component of the disbursal of SME came from TReDS, which is a small tenure loan, which is given on invoice discounting mode. The yield which you get on that is fairly minimal, and the capital accretion on that has been -- has had an impact in terms of rating. So we have stopped doing that TReDS business altogether and diverted those particular resources to higher-yielding, lower-risk products that we have. So effectively, SME by itself is contributing to the disbursal of INR 300-odd crores, which you see in the disbursal. The INR 600 crore difference is primarily coming from TReDS. So it's a migration to higher yield, longer tenure secured deposits.

[Operator Instructions] Next question is from the line of Drashti from Thinqwise.

Any particular reason why the yield on advances has been declining since quarter 4 '23, if I see. So any one-off in this particular line item?

I just answered the question. I'm not sure you were in the call. A, there are no one-offs of any material one-offs that are there, number one. Number two, the way EBLR structure works is, EBLR increases have happened a few months ago, which was passed on to the customer. The cost of fund is catching up. We just said that the cost of fund catching up will get finished in about next maybe 3 to 5 months, which means that further increase in cost of fund should stop and the product mix that we are putting together in terms of home loans...

No, no, I'm referring to the yield on advances, not the NIMs. Since the EBLR...

Yield on advances is product mix changes happen from quarter-to-quarter, so that there is no one-off or anything in that thing.

Since 3 quarters we are seeing this on a declining trend, is why I'm asking this question.

Yes. But if you look at the this thing, the product mix also, like, for example, if you do more co-lending, which comes at a lower capital, that might have an impact on the yield, but it has much less impact on risk-weighted asset, for example, right? .

Correct. But you also mentioned that we are doing more LAPs versus mortgages. So what would be the yield essential in LAP versus mortgage portfolio?

We are aiming for 100 basis point differential between LAP and home loans. It is a journey which has restarted. We used to do a lot of LAP. It has restarted. It might take about 1 to 2 more quarters for us to reach a higher level of LAP than what we are doing today.

Correct. Okay. Okay. And my second question is, when I look at the disbursement number, our corporate banking disbursements, although not material, but since last 3 quarters, it started going up a bit. Although our outstanding corporate loans are almost stagnant. So is it that we are seeing a lot of repayments from lower yielding corporates. And so what will be the nature of this corporate disbursement, is what I'm trying to understand?

So it's a combination of short-term loans, which we use as a liquidity management tool. So you will find increasing corporate loans coming in to absorb this excess liquidity at a reasonable yield. Our go-forward position on corporate remains the same, which is that we will be seeing the -- the proportion of corporate loans to the overall book will consistently remain around where it currently is at 8% to 9% and that will continue in the future. So that's our -- that's the way the corporate book strategy is for us.

The next question is from the line of [ Prakhar Agarwal ] from Elara.

Just a couple of questions. One is in terms of co-lending, so we have reached around INR 3,800-odd crores of portfolio. What is exactly the nature of this portfolio, plus how -- where do you think that it can go in a year's time? How do you look at this portfolio?

[ Prakhar ], on co-lending, what we do is it's a mixture of -- our co-lending philosophy is based on having partnerships with originators who are either in a different segment, a different product or different geography from us. That's a core platform on which our co-lending origination works. So we do gold loan, home loan, school finance, business loans. There are multiple partnerships that we have on multiple products across different geographies. So we -- there is a selection process of getting the originators in. And then we manage the book where you'd see similar kind of growth happening on the co-lending book as well. We don't expect this co-lending book to -- as a percentage of total assets to increase from where it currently is. So if you're talking about 18% to 20% growth in the asset book, similar growth will happen on the co-lending book as well.

Okay. Sir, just as a follow-up on this and in pursuant to what large participant also asked. In terms of yield on advances and going forward, while we have one trigger wherein we are saying that LAP proportions are increasing versus mortgage. But given the fact that my co-lending will be 8% to 10% of the entire book, which is where it is. How do you see that e-loan advances moving on? What are the levers apart from slight mix shift that we have told about in terms of LAP and home loans that e-loan advances will go up?

Yes. So 53% of book is mortgages, right? And half of it is home loans, half of it is LAP, give or take one way. Moment you make changes in the product mix you will find that there is an incremental 100 basis points plus, which you would get on LAP originations over home loan originations. That process has started and that will continue in the future as well. So that's one lever on the product piece. Second portion here, obviously, is how do we ensure that the slippages are continuing to get controlled in the way it is so that a reversal of accrued interest do not happen. That's the second point out here. The third is we plan to ensure that the incremental loans that we get are of up-priced, priced right going forward, which will result in higher -- our incremental yield being reflective of higher -- high yield in advance.

And to add to that, in co-lending, right now, most of the co-lending is skewed towards gold loan, which is coming at a slightly lower rate. Now the kind of partnership that we are doing, where we are doing products which are coming at a higher rate. So even within the co-lending, product mix will change, which should help us in the improvement in yields. And this all should play out in the next 4 to 5 months is what our aim is.

Got it. Is there an FLDG arrangement with co-lending partnership?

No. It's not possible. It cannot have an FLDG arrangement on co-lending. It's equal reward sharing and risk sharing, and that's the way the policy is.

On BA and co-lending, there can't be FLDG.

Okay. Got it. And just one last question on CV if I were to just look at and what is happening around that portfolio because that is something which is still struggling for us, not able to pick up. So any thoughts on what is happening on CV side?

So CV portfolio is a declining book. We are -- we've discontinued that except for the last -- I mean pre-pandemic onwards. So March '20 onwards, that's been declining. So we're not actively increasing that book. It's mainly recovery and upgrades, which happen on that particular book.

The next question is from the line of Chintan Shah from ICICI Securities.

Yes. So sir, firstly, on the savings rates. So I think last quarter around September end we had the saving rates to around 8 percentage. And so we believe there has been some traction also seen in the CASA deposits due to that decision in the current quarter. So just any ballpark number, how would the savings costs have moved, means for Q3 versus Q2? Any impact, how much would have it increase? That also would be helpful, yes, any comments on that?

It seems like your favorite question on savings. I remember answering this question last quarter also. Anyway, I will answer it again. First of all, this 8% and all we say, it comes only in higher tickets and HNI. Second, the branch focus is on getting ticket price of -- our average ticket price, I think, is probably INR 1.5 lakh or INR 1.75 lakhs, where we pay very little interest, not the kind of interest rate that you see at the top. It is more aspirational for these customers as opposed to really getting that. Third, recently, we have introduced a product called DCB Happy which has got a unique feature, which I don't think is there in any bank called cash back on UPI transactions. And that is also attracting quite a lot of customers. And fourth, and more importantly, we have tweaked the balanced scorecard of branches to focus on CASA, retail CASA, not the HNI CASA, which is higher ticket, retail CASA. And we have a separate team also, which is focusing on retail CASA. So I don't believe that there has been any increase in cost on the -- on a quarter-to-quarter basis on our savings deposits.

Sure, sir. So sir, that means that the large part of the decline in margins of the rise in the cost of deposits can be attributed to the rise in the TD cost? That would be a fair assumption?

Yes. Absolutely. The rise in the TD cost and the repricing done by the refinance agencies like NHB or anybody, where -- since we have a huge mortgage book which gets refinanced also by NHB, they also reprice their loans.

Sure, sir. So sir, considering that the TD rates, the cost of deposit stays around the current level for the next 2 or 3 quarters, if it is so, then how do we expect margins to improve from here on? Would it be due to a rise in yields? Or due to the change in the loan mix, would that be the reason?

Yes. Yes. Because like Praveen explained, the previous deposits, most of it has got repriced. The new deposit anyway were coming at the new price. Most of the price -- repricing of the old deposit has happened. There is one more this thing. The part of the book which is still not being repriced in the mortgages -- I'm sorry, part of the book that has not been repriced yet in mortgages also will get repriced where we will get the benefit of yield.

[Operator Instructions] Next question is from the line of Krishnan ASV from HDFC Securities.

First of all, congrats Murali on an excellent stint with the DCB Bank. I know we are nearing the sunset stage there. But what you inherited versus what you're leaving behind is an -- I mean, it's been an incredible journey, right? So I mean congrats on your tenure. Congrats also to Praveen, who is now stepping into your shoes, I think these are big shoes to fill. I just wanted a flavor of -- we talk a lot about liquidity in the system. And while we are obsessed about liquidity in the financial system, I just wanted to understand how are SMEs and MSMEs coping with liquidity in the system right now? The fact that there is limited liquidity, how much of the pricing power are you able to exercise? What are these SMEs currently up to when it comes to their working capital cycles, et cetera? Could you just throw some -- could you give some color on that, please?

So Krishnan, we'll talk about the kind of straw man that the bank has is a common customer is a INR 20 lakh to INR 25 lakh loan customer. And in that particular segment, we see continued demand coming in. It's true for the -- when you speak to others in the industry also, we find that there's clear demand coming from that particular segment. Both on the business loan front and home loan front, also on the SME front, there is -- so -- and across geographies, we are seeing heightened demand for the business loan, LAP, SME customer. What is -- and the same thing has been -- you can see in terms of the GST numbers which are coming out. What we also see is that there is a -- the rejection rates across has increased. But as far as the working capital cycle of the customer -- of the self employed customers that we see. We're seeing there is -- there's a demand for those -- the consumption-led demand clearly in urban areas, which is resulting in this need for loans and overdrafts from the banking system. What we don't see, however, is there is a slowdown in terms of takeover and that's pretty much typical because the rate of interest that you see has been stable for a period of time. So one would tend to see the similar kind of demand and loan growth happening for the segment that we speak about.

Right. And so just continuing on this, if you -- I mean just wanted to understand -- I mean, it's reasonable to assume that large banks, small banks, large NBFCs, everyone through the financial system is facing this pain of tight liquidity environment. I mean it would be reasonable to assume that these SMEs are not immune to that and that kind of reflects why this demand seems a little more sticky at this point of time. Just wanted to get your thoughts on how easy or difficult has it been to exercise your pricing power given that these are core customer segments for you, where -- in which pockets is it easier, in which pockets is it now getting a little more difficult, where you believe NIMs might then come at the cost of asset quality?

So let me give you an example. I mean, this will help you understand the current situation much better. There is a -- there are -- there is a chunk of our customer base, which has -- self-employed customer base, which enjoyed the benefit of moratorium for a period of 24 months, okay? So effectively, if I'm talking about INR 20 lakh customer, you're talking about a customer who's got, let's say, INR 20,000 EMI. And if you have INR 20,000 EMI, typically you will have INR 40,000 income per month. This customer enjoyed all INR 40,000, which he or she used to generate without having to pay the EMI so long. Now when the moratorium is over, and when you have to start repaying the EMIs, the EMI is no longer INR 20,000 because there's a time value of money and the INR 20,000 would have become something like INR 25,000. What we are seeing is even NPA customers, the recovery that we see, the 79% recovery, which Murali spoke about earlier, you're seeing the ability of this customer to come back and make a higher payment even in these times post moratorium. And these are customers who have been really, really impacted by the pandemic. So what we're seeing is the resilience about this customer segment. And even in this market, they are finding ways in paying higher -- much higher obligation that than they would have otherwise paid. And you can clearly see that in this -- in the current set of customers that we have.

So let me add to that, thanks Praveen. Krishnan, thanks for your kind words. See, what I want to say is we have, on a monthly basis, 4 to 5 meetings with both deposit and loan business managers. And we take feedback from them in terms of segment, market, productivity, sales, hiring, all kinds of things. We are in a market where the average ticket size is like INR 30 lakhs, INR 40 lakhs. Majority of our competition we see in -- from the NBFC segment here, not from -- so many times, I feel that we are actually an NBFC with a banking license with all the responsibilities of a bank like PSL and so on. So we don't see any major resistance when we talk about expanding, when we talk about growing and so on. That is point number one. Point number 2 is, the income this year has been majorly impacted by the NIM compression. But as it is bottoming out, we are very clear that the discipline would be you grow the deposit and in line with your loan growth ambition. And we think that at about 18%, 20%, we don't seem to be stretching our balance sheet in any -- and you can see that we have grown our CASA as well, and we think we are reasonably confident that we'll start moving in the right direction in CASA from now on. And even if we were to assume that there is a marginal improvement in NIM from here on. But the entire benefit of volume should play out after 4, 5 months is what our projection seems to indicate.

Understood. Just one last question. I mean large -- I mean, how large within your MSME core customer segment would be a part of the larger enterprises value chain, given the kind of linkages that are now building up across the ecosystem? I just wanted to understand how many of these MSMEs are actually part of a large enterprise value chain. And hence, what I'm trying to get at is large enterprises are deleveraging and they look at every opportunity to be more efficient. And the first thing they do in a tight liquidity environment is squeeze the smaller enterprises. Is that something that you see visible on ground when you talk to your borrowers, when you talk your depositors and the SMEs?

We'll talk about the borrowers first, Krishnan. If you look at the self-employed base that we have, you can actually divide it into 3. You have a manufacturing base, you have a retail space, and you have a services space. So services and trade, service and retail accounts for the bulk of our self-employed book. So this linkage to a larger organization is fairly limited. We're talking about wedding halls, bakers typical -- whoever earns INR 5 lakh a year of income. That's the kind of base you're talking about, which is really dominated by the service trade retailer, that's the kind of network across geographies. It's a very significant portion of our -- constituent of our customer base. So the manufacturing part is fairly limited. And even there, there would be people who do value add like welding and those kind of stuff. So real linkage with a large kind of company fairly limited.

The next question is from the line of Nitin Aggarwal from Motilal Oswal.

Sir, a few questions. First is on the loan growth. So if you look at the loan segment that we report, and -- so we basically report 8 segments. Out of those 8, 4 are growing Y-o-Y and 4 are declining. So this is a very skewed growth that we have had over the years and now to deliver 20% loan growth, the growing segments need to continue growing at 50% to maintain a 20% growth on the overall portfolio. So how do you really look at the skewness of this? And by when do you envisage to have a more uniformed growth across portfolios?

So which are the segments that you are noticing as not growing, just for my understanding?

Yes. Sir, gold loans, CV, corporate banking, SME, MSME, they are collectively almost 17%, 18% of the loan book, and they are all declining.

Yes. So corporate, I have never claimed that we will grow, and we continue to be maintaining at the same level. And despite that, we grow our book by 20%. CV has already bottomed out at about INR 200 crores or something. So it is not part of the base for it to make any difference. We are growing AIB at about 28%, 30%. We are growing co-lending almost at 25%, 30%. We are growing mortgage at about 25% and further scope for improving. So I don't believe that -- and SME, MSME, we explained that the TReDS portfolio is almost bottomed out, so the organic portfolio that we have is starting to now have monthly, what it's called, disbursal and starting to show growth. We've combined it here, that is why you don't see that. So when we put it all together, for us, upwards of 20% growth in line with our deposit momentum seems to be entirely possible.

So Nitin, look at it this way. You may -- you're probably looking at the disbursal chart. If you look at the product mix chart and you can compare with Q3 with Q2 or even earlier, 53% mortgages, right, 45% retail mortgage, AIB contributing another 24%. There is 8% of gold, 8% of SME, plus you have co-lending. And these will continue to be the engines of growth for us. So what is -- what probably is not growing is less than INR 500 crore book of commercial vehicle and corporate also the growth will be proportionate to the book. So effectively, what will not grow is in the larger scheme of things, is commercial vehicle because every other construction finance is a growth area for us. SME is a growth area for us. Retail mortgage, you can see what's happening there, right? Gold loan clearly is a growth area for us. So even leaving co-lending aside, organic growth engines are multiple different products, all -- mostly are secured, but other than that, they are very heterogeneous -- sorry, very homogeneous.

Okay. Sure. And second question is on the savings deposit side. We have reported a 10%, 11% Q-on-Q growth in savings deposits, probably the highest in the last many quarters. So anything to read into this, what has really driven this strong inflow this quarter?

The savings account growth primarily is because of the new products that we have launched. We have also done a lot of technology adoption. We've increased the front line. So there are multiple ducks are aligned for this savings accounts to grow. So there is a large feet-on-street channel. There is a very effective fintech tie-up, which has resulted in pure retail small ticket savings account growth. There is a completely seamless onboarding through the Zippi platform, is helping us increase our productivity significantly. Our feet-on-street channel, we have introduced a separate vertical with the workforce working on this. Murali spoke about this UPI cash-back product called Happy, which is, again, our belief is the industry first and so far industry-only. So all the -- there are multiple things that we said we would do to grow the CASA ratio, and this is -- what you're seeing is the beginning of what we hope will be a consistent increase in the CASA ratio as we go along.

And Nitin, it is coming from -- majority of it is coming from retail growth, not bulk. Otherwise, our cost of funds will go up on savings also.

Right, right. Got it, sir. And lastly, on the mortgage GNPA, wherein we are reporting like 16%-odd sequential growth in the mortgage GNPA. So how do you really look at that? And should we expect a more moderate growth rate? So any more color here, actually?

Growth of what? The NPA?

Yes, the GNPA and the mortgage, which is running high on a Y-o-Y...

Yes. So Praveen and I do reviews of collection almost every week of all products and especially, of course, mortgage occupies bigger because that is almost 50% of our book. So most of the loans that were in moratorium, almost 80%, 90% of them who came in moratorium came out of moratorium between April and June. And the team has started working on this last December itself to make sure that they don't suffer from muscle memory and start tripping. So we did a lot of work, so that kind of helped. But yet, it takes time for customers like the reasons explained by Praveen. See, one of the challenges is that in a moratorium, a year of principal and interest would have been capitalized. And therefore, his installment will go up prior to what he was before moratorium. So those are all things that are slightly shocking for the customer to cope with initially. So all that we have dealt with. And it takes about 6 to 9 months for the pool to mature for our recoveries and upgrades to kick in, which we have demonstrated that if you see our recoveries were 73% or something. This year -- this quarter, it is about 79%. And our upgrades are usually more than recoveries that tells you the underlying quality of the portfolio and the fact that customers are able to find cash flows to repay us.

So Nitin, if you were to look at the recovery in upgrades, we were 62% in quarter 1, which has constantly gone up in quarter 2 and now in quarter 3, also now we reached 79%. So that's one part of it. And secondly, almost 2/3 of whatever recovery that we get happens through upgrade, which means that the customer stays with us, it's an income growing customer, and we also get the benefit of reversal -- the reversal of whatever reversal has been done on the interest accrual. So it's important -- so effectively, there is a resilience of this particular customer, which -- so we would rather have upgrades than recovery and that trend is clearly coming in. Leaving aside this moratorium, even during COVID, even during the pandemic, there were -- we've seen this customer behavior where once the customer comes to the billing cycle, it takes some time for the customer effectively to get into the discipline of payment. So we've gone through this cycle for the last 2 years. The last 2 chunks were in January and July and we're reasonably confident about getting recoveries and upgrades from this customer base as well.

The next question is from the line of [ Neel Mehta from Investec Capital ].

My first question is on slippages. Sir, we've seen our slippages basically being elevated over the last few quarters. Would you give a target level to which you will try to bring the slippages level down over the next couple of quarters on the medium term? That's my first question. And sir, secondly, on the NIMs, we've seen our NIMs decline over the last few quarters. And if there is a rate cut, then it is likely that they may fall even further. Would there be a level of NIM that you would say at a steady state, we'll be able to achieve going forward? These are my 2 questions.

Steady-state, we are targeting 3.65%, 3.75%. We have not changed that at all. We used to say that our credit costs will be 45 basis points, but we are actually operating on 28. We said that we will reduce -- consistently reduce our cost to average assets. We are doing that clearly. The design of EBLR is such that you get the benefit of EBLR first and then your portfolio -- your deposit portfolio keeps repricing, which is what we are experiencing. So I do believe that this should get stabilized. And even assuming that the NIM goes up only slightly slowly over the next whatever, because the cost of fund issues are getting bottomed out over the next 4, 5 months, we believe that the entire benefit of volume should start coming to us, barring any change in environment. Having said that, if there is a EBLR cut, we have savings portfolio, which we can reprice. And all the new deposits that comes in, which is substantial for a growth book like this also gets repriced. And we also have a fixed rate book, which will get a benefit of a lower rate. So there are balancing factors in it. Slippages, excluding gold, is 2.55%, right? And it was 2.69% in the previous quarter. So gold loan and some co-lending slippages, which is predominantly gold doesn't bother us too much at all because they're all absolutely secured. As long as there is no fraud sitting on the gold loan, we don't worry about -- we don't lose one single night sleep on that slippages.

Just to add on to what Murali said, see, the slippage ratio of non-gold has come down. And guess what, the NPA stock of gold has also come down from INR 42 crores to INR 32 crores.

The next question is from the line of Prabal from AMBIT Capital.

Congratulations Murali, sir. Congratulations Mr. Praveen. So my first question is on operating expenses. So last 3 quarters, we have seen the pace of growth in OpEx decelerate versus, say, what it was in last year -- last year, OpEx every quarter was growing 6 to 7 percentage points versus this year growing at 1% to 2%. Would it be fair to assume that the infrastructure that we have now, is it good enough to fund the loan growth aspirations that we are guiding for 18%, 20% for next 2 to 3 years?

Our business model is such that -- and the opportunities, we have to look at business model and the opportunity. When we look at both, we have to continuously add some level of capacity in our front line for us to grow. Of course, we are supporting it with technology, operations, automation and so on, so that the rate at which we have to add these resources is not the same as it was, let's say, 2 years ago and so on, right? So our intention is to grow our OpEx slower than our income growth. Look at our impact on NIM compression. I estimate NIM compression itself this year has robbed us off a lot of income. Despite that, we have been able to kind of deliver a reasonable set of operating profit and profit keeping many of the items in control. So that is what is the resilience of this business. So you do -- you will expect our headcount to be growing consistently because our ambition is to double our balance sheet. We need the CASA. So therefore, we have to add people to our frontline. We have to add branches, which will be at least about 25, 30. We need to -- within our existing locations, we have to go to new areas, open up new cities and so on because we see opportunities for our SME, mortgage and LAP business. So this will be a continuous expansion. But in a very methodical manner so that we continue to deliver profitable growth.

Okay. So would it be fair to say that the OpEx ratio, let's say, if it is at 2.6% today, that can -- as the productivity kicks in, that can come down by 10, 15 basis points every year?

Intention is to operate around 2.45%, 2.5%, but it may not be like linear like exactly will come down in this thing. It will be like there may be some few ups and downs, but directionally, it will move like that, and you have shown -- we have demonstrated that for you over the last few quarters.

Okay. Sir, my second question is on slippages. So while I do understand that on the gold loan side, our LGDs are virtually 0. So we don't need to be concerned there. But have you identified where -- because of what factors were these slippages higher from the co-lending side? And were we able to tweak those factors?

One second, one second. Where is it mentioned that the slippages happened on the co-lending side? There is no slippage -- there is no material slippage on the co-lending side, but...

I was referring to the slide that overall slippages were this and ex of gold slippages were these. So I was assuming that these slippages would have come from the co-lending side.

No, no, no. So let's explain this to you. So 4.63% is the slippage, overall slippage and 2.55% is the slippage, excluding gold loan. And where will slippage come from? It's fairly simple. So like we explained earlier, the very large chunk -- the large chunk of restructured mortgage book was...

No, sir. Actually my question was not on -- was on the gold slippages. Is it our core book, which is throwing these slippages? Or is it the co-lending model which is throwing these slippages?

It is similar. Because there is hardly any difference between one and the other, right? So it is slippages -- it's a common segment. And therefore, the slippages on -- core book as well as the co-lending book is similar.

See, the gold loan customer thing and probably because of the habit forming, and I'm not saying it's wrong or right. I'm just giving you how it operates. Mostly, NBFCs don't press too hard on the recoveries and collections and customers think that since the gold is with the bank, if I do delay -- because he's taking it mostly for some emergency or personal use or so on or even for some business expansion and so on, right? So the habit is that, okay, bank has got the gold even if I slip into NPA or something like that, I'll be able to retrieve it before the auction. Most of our gold loans get paid off before the auction. Very rarely we have to -- the threat of auction works, but the fact is that they pay off, right? And they pay off including some extra charges and so on and so forth. So the learning for that is, the segment is like that where there is a higher slippage and higher kind of delay in payment. So other than that, I don't see any major lesson. It's not a credit card that they pay exactly on time so that -- they don't really worry about it.

Understood. Sir, and just last question. We are growing at around 20%, and our ROEs are around 10% to 11%. Do you see a risk of higher capital consumption getting us to the market for capital raise because our Tier 1 has dropped to 13.5%?

So first of all, we have one of the most efficient risk-weighted asset consumption business model, I would argue. We consume about 53% to 55% of whatever loans we book, okay? That is point number one. Point number two, we do expect RBI to give us a favorable response on the capital infusion of $10 million by promoter and which would be quite encouraging for us. Secondly, the current profit that we have delivered so far is not included in the Tier 1 as of now, okay? It is without the current year profit and whatever else we perform in quarter 4. So given all that, we believe that we have sufficient capital to grow the book at least for the next 12 months or so. And then we will take a call on what is the capital raising plan that we should come up with.

The next question is from the line of Jai Mundhra from ICICI Securities.

Before I ask the question, I wanted to congratulate Murali, sir, for such a long and fabulous inning at DCB.

I survived all of you guys, man.

Again on taking bigger responsibility. Yes. Sir, first question is on margins, right, and the way our business model works, and we had a very broad range, right, let's say, a business model which is grown by business model, 3.65%, 3.75%. Nothing seems to be unusual in this quarter in terms of sudden movement in the rates at the system level. And we have come below that threshold, and that seems to be a negative surprise. So of course, things move in a quarter or 2, but we have breached the usual business threshold I mean, of course, there's a combination, but there was one observation that -- and despite that, in general, I think you had mentioned about the yield, but I wanted to check the loan mix thing that you had said that there's some favorable loan mix and hence it is not rising. But if I look at AIB is growing at a much faster pace. And then the core mortgage book is more or less similar. And within that, the proportion of LAP is also rising. So I'm failing to understand what suddenly happened in this quarter, which was not envisaged earlier to suggest that?

To suggest what, sorry, I didn't get that?

To suggest that the NIM may breach the usual business scale.

No. If you recall our last call as well, last quarter call as well, I have guided saying that the NIM compression is likely to continue for 1 to 2 more quarters before it starts to become better. I think I'm pretty confident that, that is the kind of guidance we had given last quarter also. Second point is, I had said right at the beginning of the -- the start of the year itself, that the NIM of some 4 points, whatever, is not real because the moment EBLR is increased, you pass it on to that customer. But the portfolio, which is your essentially the term deposit portfolio gets repriced over a time based on the competitive term deposit rates that are offered in the market. And we are probably comparable to some of the banks -- some of the banks that are also growing their book at about 20% or higher like that. Now what we are saying is that -- and the plan that we had in terms of the product mix, which is essentially moving more towards LAP versus home loan is taking time to get roots in the market because it has been almost 2 years since we have operated at about 40-60, 50-50 kind of thing. We are trying to move it to a 70-75 towards LAP, which is taking time. And there has been some slippages from mortgage. So we understand what are the various explainable reasons. I don't believe we are quarter-on-quarter, our cost of fund increase is out of line with the market. We have seen the results that have been declared. We have looked at some have increased by 10 basis points, some have in 20 and some in between. So we are in that range. And we believe that in about 3 to 5 months is where we will find the bottom of this as we see our portfolio beyond which it should -- our benefit of our volume should start to kick in. That is our answer.

And sir, in terms of mix, is there -- so incrementally, LAP is getting better, right? The pace may be different, but incrementally, that is getting better. AIB is higher yielding and it's growing. And so which...

No, not all AIB is high yielding. AIB has got a mix of products. It's got tractors. It's got KCC, which is very competitive. It's got, what's it called, MFI loans. It's got MFI -- lending to MFI institutions and it also has got some bit of mortgages and SME. So it's not all -- so the highest yielding in that would be probably tractors, which will probably come at maybe 12.5 or maybe 13, depending upon old tractor, new tractor and so on. KCC and all is very competitive. So you got to be there offering the same level of pricing as other banks. Otherwise, we'll have adverse selection.

Okay. Sir, and lastly, sir, we have had a very significant increase in the headcount, right? But similarly, I mean, the same pace is somehow not visible in disbursement or in fee on a, let's say, cumulative basis, the disbursement for the last 2, 3 quarters, even if I exclude the TReDS or the SME altogether, the growth is 10%-11%, 10%-12% kind of a number, excluding SME. And whereas the employee headcount has been much higher. So is this a good comparison to start with? Because the additions may have been happened to, let's say, CASA or some other this thing, or do you think that, that kind of a throughput should come, right, even if we were to exclude the TReDS et cetera?

So Jai, there are -- with the increase in headcount, has got an impact on deposits. It has got an impact on loans. It has got an impact on collections. So there are multiple areas in which the frontline hiring that we do has an impact. So the 19% growth in deposit, I want to just bring your attention to one thing. Our top 20 has come down from 7.05% -- 7.06%, if I remember right, to 6.75% in a tight liquidity market where people are running after bulk. How did that happen? Where does the growth come from? It comes from retail. Where does retail deposit growth come from? It comes from people with the aligned technology and the Zippi and the products which we spoke about in the earlier answer, right? Our collection efficiency on bucket 0 for -- has gone up to 98.9 for LAP and 98.7 for home loans, 98.7 and 9, right? The collection efficiency is coming in because of the incremental input that is coming there. There are people -- the third component, what you said is right, but that's a subsegment. So there has been an increase in our mortgage front line. There has been an increase in our AIB tractor, KCC frontline as well. But this 9% increase from 9,600-odd to the current employee base over a year has been across all these frontline segments.

Also, Jai, let me add some more color to, I think it's very important that what Praveen mentioned. When we crystallize all these headcount and everything, what we have come to is that an average account which comes in, and of course, all banks suffer from attrition, so we do. So it takes about 3 to 6 months for the RM on the frontline to become productive. And in the deposit side, they actually deliver, let's say, about INR 1 crores to INR 1.5 crores of retail volume per year. In a loan, depending upon the loan, they deliver anywhere from INR 2 crores to INR 4 crores depending upon the product and so on. So we add headcount such that we are able to make sure that they are all ready by April, May, June, to deliver the volume that is required for the next year. If we start hiring in April or May, it may not give us the benefit before October or November which would not be useful. That's the way we plan our headcount.

The next question is from the line of Rohan Mandora from Equirus Securities.

I just wanted to understand with respect to that RBI circular on risk weights, what was the impact for us?

I think it's about 20 basis points for us.

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

Thank you very much to all of you for attending this call. We look forward to talking to you again. Thanks for your participation.

Thank you. On behalf of DCB Bank Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.