Equitas Small Finance Bank Limited (EQUITASBNK) Earnings Call Transcript & Summary

Good morning, all of you, for taking time out on a Saturday, and I hope to have your teams listening to other calls also. It seemed to be quite a few on a Saturday. The format of the call this time will be a little different. As I would invite Vasu, Rohit and Murali to talk about what we are seeing on the ground and how business has shaped up. This would be followed by Sridharan to give you the financial performance of the quarter. Before I hand over the call to Vasu, I will touch upon the scheme of amalgamation, which the Board approved on 26th of July. The scheme is also uploaded on the exchanges and the website. I hope you've got the time to go through it. Nevertheless, as you are aware that we've been working towards collapsing the Holdco structure as it gives shareholders direct ownership in the bank. With the scheme of amalgamation, we would achieve this in the best possible manner. We expect to complete this transaction in about 12 months, as it requires approvals from RBI, SEBI, stock exchanges, shareholders and NCLT. The swap ratio or the share exchange ratio in this scheme is 226 shares of the bank would be given to every 100 shares of the holding company. With this swap ratio, the effective discount actually narrows down to about 3.6%, which is, in our view, much lower than the capital gain tax the Holdco may have to pay if it sells down. And also it removes all ambiguity on tax, which other schemes tend to be associated with. Also with the swap ratio, the total number of shares outstanding at the bank post-merger will come down from approximately 114 crores shares to 97 crores shares. In effect, the book value per share would move up. I sincerely look forward to all your support on the scheme, as it seems to be the best possible option to unlock value for the Holdco shareholders and also reduce the liquidity risk in case of a sell-down for the bank shareholders. And as you are aware, this is something which we've been talking about to bring down the structure and ensure that this eventually unlocks value for all shareholders. Now I would like to invite Vasu to take you through the business.

Good morning to all of you. I hope you've had time to go through our quarterly performance given that there is a slew of results. Before our CFO takes you through the financial performance, I would like to spend some time on how the business is shaping up. Wave 2 was a saddening experience with the effect of the virus visible from close quarters all around. We did extend our best effort to our staff during the stress situation. But yet, we lost a few of our colleagues unfortunately. We do hope the government's initiative to vaccinate gets greater momentum and we reach herd immunity soon. As a bank, very conscious of our social obligations, we have conducted 3,799 vaccination camps jointly with local governments and helped to vaccinate about 4,45,566 people who are largely from the low-income families and rural as of 24th of July this year. Many of you may know, Equitas right from 2007 has been actively focused on social activities in a bid to improve quality of life of the less privileged. We have been able to transform the fortunes of hundreds of thousands of people through these initiatives. We recently launched the first of a series of communications connecting our customers with these initiatives. The Circle of Life was the first in line. And if any of you have not seen it, I would request you to please do so. We believe Equitas is a model institution combining strong professional business performance with deep empathy and active support of the less privileged. And I'm just told today morning that the Circle of Life video, which was available on YouTube, is recognized as one amongst the top 10 best videos for the month of June. Now moving back to business. As expected, our lending business was quite impacted due to the lockdowns, as we could neither collect nor disburse. Most of our customers turned conservative and preferred to skip EMI payments to keep cash with themselves. This meant a significant portion of our nondelinquent portfolio of March started to slip. And unlike in wave 1, there wasn't a moratorium period either. As a result, we reached out to customers and if they wanted, we were willing to offer restructuring for the loans. We anticipate to restructure a total of around INR 1,400 crores to INR 1,700 crores this year and make necessary provisions for the same, which we hope to see most of those provisions reverse in the next year. Out of this INR 1,400 crores to INR 1,700 crores, we have so far restructured around INR 900 crores. Product segment, more linked with economy like MSE finance, where we'll lend to small SMEs with a turnover of INR 10 crores to INR 25 crores has seen a sharper deterioration in asset quality, as these customers are seeing a slower bounce back. The portfolio is being closely monitored, and we anticipate a strong recovery in asset quality in the next few quarters. Historically, if you see this -- as this asset has always performed very well, and we hope to get back to that old level very soon. In addition to the traditional working capital loan to MSE, we also ramped up our lending to the treads platform, and that's actually been doing quite well also. On the liabilities front, we continue to gain market share, and some of the strategies we put in place have yielded us pretty good reserves. Murali will take you through it in more details shortly. Lastly, to help all of you connect with the dots better, post demonetization, we had communicated that we would scale down micro finance, continue diversifying our loan portfolio and focus on building a retail liability franchise as a strategy to build a stable, sustainable and scalable bank. I'm happy that we have stuck to this strategy and now we see ourselves ready for the next phase of growth. This hopefully will get complemented with the universal bank license, which we should apply for once we complete 5 years of operations. Now I would like Rohit to take you through what he's seeing on the asset side of the bank. Thank you.

Good morning, everybody. I have 3 insights to share from the field. The first insight is about lead generation. Unlike the previous period post-COVID wave 1, the lead generation in the field seems to be pretty strong. Our lead generation post -- current post Wave 2 is very strong. And this is corroborated by the data from the bureaus, where they confirmed that we have moved a few notches up the ladder. The second is about fleet capacity utilization. Fleet capacity utilization seems to be much better and is fast improving. This is reflected in improving collection efficiencies in vehicle finance. Diesel prices have increased by 26% in the first quarter and transporters have been able to pass on about 27% to 30% of the cost by way of increased freight rates. Freight rates have gone up by 7% to 10%. With the beginning of the festive season from August, we do hope that demand will -- this trend of increasing demand will continue and the transporters will be able to fully pass on the cost, improving both profitability and delinquencies. In micro finance, post-COVID wave 2, we see a sharper recovery, which is reflected in increasing overall collection efficiencies. Overall, collection efficiencies as of 27 July was at 91%, a steep increase over closing June of 67%. Post Wave 1, we had seen a different trend in the collection in the 1 to 30 and 30 to 60 buckets in the Jan to March quarter. Many customers in these buckets came forward and paid. Unfortunately, this trend was disrupted because of wave 2. We do hope that this trend will play out, thus improving efficiencies and delinquencies. TN seems to be making a very strong comeback. June was also a period of lockdown in Tamil Nadu. In TN, X bucket collection efficiency in June was just at about 64%, and that has now moved up to 98.2% in -- as of 27 July. Chennai district seems to have the strongest recovery with X bucket collection efficiency of 99%, and Erode seems to be the lowest with recovery with X bucket collection efficiency being at 96%. All other districts are in between 99% and 96%. Small business loans also be making a strong comeback with disbursements nearly coming back to March levels in this month. X bucket collection efficiencies here, too, have gone up from 96% to 98.7% as of 27 July. Overall, we are hopeful we are seeing a faster come back to normalcy then the period post-COVID wave 1. Thank you. Over to you, Murali.

Good morning, friends. Thank you for joining on a weekday. So I would like to take you through for the -- through the liability approach, what we have done. So as you're all aware, our key intent is to how do we increase the retail mix of our total portfolio, how do we get the CASA mix right and cost of funds within the optimum range of reduction. I think we are in the right direction towards that setting a good benchmark for all of us. So the critical journey here, what we are talking is how do we get the geography focus through phygital approach and demography focus for digital approach. These are the 2 critical variables through which we are doing the entire exercise. So we leverage on phygital, that is branch plus ATM plus digital processes, to get our relationship management, to get our account acquisition to take care of the engagement as a key focus. On digital side of the business, we focus on mass segments where with the demographic stuff of through our own product called Selfie through a fintech partner leveraging on absolute digital channels to get the mass acquisition right. I'm happy to share that put together, we have done what we've done last full year as in terms of number of accounts, close to 5 lakh accounts, we could -- 5.5 lakhs to be precise in the first quarter itself, which was our last year journey. That is one part. Having said that, are we getting quality, leveraging on branches, leveraging on engagement model, focusing on mass affluent and HNI through specific programs called Elite and NR actually helped us to garner what we have done, what we call it as the initial payment, IP, of what we garnered almost last year, 80% of that we get it in on the first quarter. So overall quality of customers, quantity of customers, digital leveraging through engagement for digital channels, coordinating with fintech tie-ups, which we have already experimented with a couple of fintech partners for our digital range of projects, all these 3 things have absolutely fallen in place and it has given us a good productivity. And more importantly, the engagement what we do through LMS and Empower has actually assured us that product holding of consumer at a household level has gone up beyond 2 for at least 40% of the customers. And we also have a very specific channel, we are and what we keep saying, virtual RM up to certain mapped set of customers where we earmark a map -- RM at a lower threshold value. And for NR customers, based on time zones, we keep giving these opportunities, so that nobody feels that they are letdown. So this VRM as a model is taking off. TBRM through the propensity-based campaign, which we use. So which means we identify based on their spent pattern, based on their expense pattern, based on their earning pattern, we get the engagement parameter, right? And these things have yielded if you see on the TPP part where our protection as well as overall card utilization -- in fact, we are one of the largest Visa card issuers. For the first quarter, we have been recognized and awarded a special contribution on this side by Visa, too. And I think summation of all these things, CASA, 40%; retail, 78%; and cost of funds coming down, I think mass affluent and HNI preferring us for the banking, I think the trajectory seems to be good. And this is backed by an extensive brand awareness campaign and customer-centric campaign, which we promote through the marketing, like Vasu sir rightly said, our Circle of Life, its only -- its just the beginning point. I'm sure we all will feel it and touch very soon. And actually, we are one of the banks who keep saying whatever the mobilized liabilities is actually to the deserved set of society we deploy. With that note, I hand it over to Mr. Sridharan, who will take care of financial records.

Thank you, Murali. Good morning to everyone. Our net interest income came at INR 461 crores as compared to INR 404 crores during the same quarter last year, registering a growth of 14%. Other income came at INR 104 crores as compared to INR 30 crores. Net income grew 30% and came at INR 565 crores for the quarter as compared to INR 434 crores during the same quarter last year. The total operating expenditure came at INR 400 crores as compared to INR 292 crores in the same quarter last year. Pre-provisioning operating profit, PPoP, came at INR 164 crores as compared to INR 142 crores, registering a growth of 16%. PAT for the quarter was affected due to provisions made on restructured accounts on account of COVID 1.0 and 2.0. PAT for Q1 FY '22 came at INR 12 crores as against INR 58 crores during the same quarter last year. Now moving on to asset quality, provisions and restructuring, we have restructured advances to the tune of INR 1,328 crores under COVID 1.0 and COVID 2.0 framework. This forms around 7.5% of the gross advances. Advances restructured due to COVID 1.0 stands at INR 430 crores and due to COVID 2.0 stands at INR 897 crores, of which now INR 400 crores we have done in Q1 FY '22 and INR 497 crores in July 2021. The bank carries a provision of INR 136.68 crores towards all restructured book of INR 1,328 crores, which implies a coverage of 10.3%. Coming on to GNPA. GNPA for Q1 FY '22 came at 4.58% as compared to 3.59% in Q4 FY '21 and 2.68% in Q1 FY '21. Net NPA for Q1 FY '22 came at 2.29% as compared to 1.52% in Q4 FY '21 and 1.39% in Q1 FY '21. We did see upgrades and recoveries of around 30% of opening stock of GNPA, which is an encouraging sign. The provision coverage ratio stands at 51.21%. Lastly, on the capital front, as of March 31, 2021, the total CRAR stands at 24.07%, Tier 1 of 22.06% and Tier 2 of 1.47%. With this, I would like to hand over to operator, and we will be happy to take questions from your end. Thank you.

[Operator Instructions] We have a first question from the line of Amit Khetan from Laburnum Capital.

Sir, a couple of things. First, on the billing efficiency on the vehicle finance portfolio. So this continues to be below 70%. Apart from COVID, what was the impact of the diesel price hike on our CV customer? And what kind of slippages of credit cost do you expect for this vehicle finance portfolio for the year?

Yes, Rohit will take this question.

Yes. Just -- Amit, I'll tell you. So collection efficiencies in vehicle finance have moved up as of June's closing. I don't have the exact data as of here with me now. But you said what is the credit cost that you see? See...

He's asking about collection...

Sorry?

Collection efficiency...

Let me show you.

Yes. So collection efficiency in vehicle finance has gone up from 67.35% in May '21 to 89.3% as of June. So there's a sharp increase in the collection efficiency from May to June. We expect a sharper -- a better collection efficiency in July closing. Credit cost, I will not be able to tell you anything about the future because -- but we do hope that with rising sharper collection efficiencies, we'll be able to -- and with the restructuring of the portfolio, our overall collection efficiencies will improve and the credit cost will be lower.

Sir, I was actually talking about the billing efficiency, which is still below 70%. And I also wanted to know what was the impact of the diesel price hike on the CV customer?

Sure. So billing efficiency as of May was 62.8%, which has gone up to about 69% as of June '21, right? And billing efficiency will move up in July to, I think, about 75% to 80% -- in between 75% and 80%. The diesel price hike, as I said, 26% increase in diesel prices as of the first quarter of 54% of diesel prices -- 54% is what they constitute of the total freight cost. As of now, the transporters have been able to pass on about 7% to 10%. And we do hope that with the festive season beginning in August, demand will increase and they'll be able to pass on the full diesel cost in the freight rates.

Sure. Sure. And secondly, on the SBL disbursements for the quarter was similar to what we saw last year when there was a complete lockdown. You mentioned that this has kind of recovered. Is it back to the INR 600 crores, INR 700 crores quarterly run rate that we had for the last -- for the second half of FY '21?

Can you come back again, please?

So the SBL disbursements, right, this last quarter was similar to what we saw last year when there was a complete lockdown. Now you mentioned in your opening comments that this has recovered sharply. Is this back to the July -- to the INR 600 crores to INR 700 crores quarterly run rate that we saw in the second half of FY '21?

Yes, yes. See, small business loans, pre-COVID, we used to do about INR 250 crores a month. So you can say about INR 700 crores a quarter is to be what we used to do before the lockdown started. Obviously, last year, due to lockdown, it all went down. But March quarter -- Jan to March quarter, we had small business loans coming back and doing about INR 700 crores. July quarter, I think we should come back and probably better that. July itself has been very strong. The demand -- as we have been saying consistently for a long time now, the demand for credit from this segment always is very high. The supply always continues to be very low in spite of whatever number of players who come into the market, the supply continues to be very low. So we expect -- there's no real dearth of demand as such. Its always a question of how do we reach out to them and try and do a proper cash flow credit-based -- I mean, cash flow-based credit assessment and then take the right call on credit. So that's always a challenge, the biggest challenge here. So we should see small business loans coming back. I mean it's our forte, it's our strongest product in the bouquet, and we should see that coming back. In fact, we have mentioned on Page 5 of the investor presentation also that for July itself, the small business loan expected disbursement is around INR 325 crores. And if that does happen, it will be probably one of the highest that we have ever done before.

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

So the question is on asset quality. So in FY '21, when there was a COVID 1.0, we have had slippages of around 3.5% to 4% of overall loans. In 1Q, we have -- and coming, we have done around 2.2% of the loans slipping and probably up to 10% of the loans should be -- would be restructured. Now just to understand, I mean, after this restructuring is done and maybe the 2% kind of slippages that we had, should we see a reasonably back to normal level of slippage? I would not count the, let's say, the restructured loan slipping, but the non-restructured slippages should now that be -- let's say, pretty close to normal or that would be too early to assume that?

Yes. So to answer your questions, see, it's like this, you're asking me how fast we'll go back to normal. The answer is if you look at our July collection efficiency figures that we have given, so July is really coming back in a very strong way. See if you compare a period post-COVID wave 1 and post wave 2, the recoveries in wave 2 are way faster than what happened in wave 1, both on the business front as well as on the delinquencies front. A classic case is typically micro finance suffers a lot. So if you look at micro finance, as I said, most of our portfolio is in TN and TN is a classic example of how the comeback can be. Closing June, our overall collection efficiency was just at about 67%, whereas as of July, as of 27 July, we've already moved up to about 98%. So this gives us tremendous hope. We've never seen this kind of sharp recoveries. And if you look at Tamil Nadu in specific, so it's 99% is the highest and 96% is the lowest. So I think by about October -- September, October, we should be coming back to normal. The challenge for us is, obviously, once delinquency slips, what happens in slippages, your buckets get bloated and your buckets need to come back to your nondelinquent mode, regular portfolio. So that is a challenge for us. And with the improving collection efficiencies, we are quite confident that we should be able to get back to normal by September/October.

Sorry, sir, I had missed if you have mentioned about the July collection efficiency, have you -- I mean have you mentioned the July collection efficiency product wise or this 98% is the blended number or...?

No, no. I -- see I have purposely told you about micro finance because every -- it's an unsecured portfolio and people talk about -- tend to get more scared about unsecured portfolios. And if this is happening in the unsecured portfolios, obviously, the collection efficiencies and recoveries in the secured portfolio is going to be much better. Like, for instance, the small business loans. Small business loans, our collection efficiency in July, as of 27 July, is 98.7%, the X bucket collection efficiency. Our X bucket collection efficiency in 1 to 30 bucket in Tamil Nadu is nearly 100% now. So I mean that is the level of improvement that we are seeing on the ground. But as I said that the buckets are bloated due to slippages and our challenges is to get back these customers into regular normal customers. So that will take some time, and that is why I'm saying that by September/October, we seem to be -- we will seem to be in a more better position, may be back to normal.

Okay. No, sir, what I was trying to understand is this -- up to 10% of restructuring, maybe 2% of slippages, would that largely take care of the COVID 2.0 stress? Or you expect some more because as of June, I mean for the month of May and June, the collection efficiency or the billing efficiency was around 77%-odd, right? So 23% of the customers are lagging. Of that, 10% could get restructured and 2% has already slipped. So of the rest, how confident are you? I mean I was just trying to understand the missing piece there?

So you see, we can restructure customers who have been standard as of 31st March. Now a customer who has been paying and standard as of 31st March has already crossed COVID wave 1 also. So his ability to come back, we believe, is much stronger. So I don't think other than what we have quoted the restructuring numbers, which Vasu sir has quoted, I think we will stick to that. And I don't think we will see more slippages.

He's right.

And sir, just last 2 small things. A, upon merger -- I mean, upon the scheme of amalgamation, would there be any change in the net worth of the bank or that should largely be -- there should not be any change because of the scheme? B, in the absolute value?

Yes, the holding company when it amalgamates will bring in some cash. And that is the -- what will get added to the net worth, but what will get subtracted to the network -- net worth is the total share outstanding is coming down from 114 crores to roughly 97 crores. So there, there will be a reduction in share capital. Net-net, broadly, it should remain the same.

Sure. And last thing, sir, upgrade, the number are reasonably good. And I think you have also mentioned in your opening remarks that is very encouraging. Just to understand, I mean, where are the upgrades coming from? Is it -- I mean, is there any trend because this is clearly surprising. So any thoughts there?

Yes. See, if you see the upgrade is kind of at the highest level, it's never been so in the last 4, 5 quarters. Out of INR 157 crores of upgrade, about INR 60 crores, we have put that in one of the slides also. INR 60 crores upgrade is because the NPA accounts were restructured. The balance, INR 90 crores, was actually -- or whatever crores was actually collections, and the upgrade happened through collections. And I think that's a significant event that we are seeing here. And the reason largely is because these customers who slipped into NPA during the month of April or May are not really a proper NPA profile of customers. They are actually X bucket probably in February, March, et cetera, and they must have slipped into NPA during the lockdown period. And the earliest opportunity when they started earning money is back, they must have been in a position to pay back. So our effort on collection has actually yielded a much better result, and they have been able to come back and pay it. So I think that's the reason why you see nearly about, what, if you remove INR 60 crores from INR 157 crores, so you are top of INR 95-odd-crores of upgrade through collections, which has never come in any of the last few quarters. So I think that -- the quality of the NPA account, I think, is what is different to what it traditionally is. These customers are in NPA are not necessarily the typical NPA profile borrowers.

Yes. So that probably may prove that the cash flow issue is temporarily and maybe as and when they get opportunity to earn and pay, they would do so, right?

That's right. That's right.

The next question is from the line of Abhishek Murarka from HSBC Securities.

So just a few questions. One is regarding restructuring. So I just wanted to reconfirm. Vasu, I think you said there's a INR 1,400 crores to INR 1,700 crores restructuring pipeline. And we've already restructured about INR 1,328 crores. So this is an addition or this is taking the existing restructuring into account as well?

See, we have already restructured about INR 900 crores for the current year. So you had to remove that INR 900 from this INR 1,400 crores to INR 1,700 crores indicator figure, you have to remove this INR 900 crores. The balance, which is what -- it's about INR 500 crores to INR 600 crores, INR 700 crores or INR 800 crores. That's what could get restructured over the next 3, 4 months.

Okay. Okay. Understood. And in the restructured loan, can you share the mix of which segment has been more restructuring, just trying to figure that out? And also, if any NPAs have been restructured? Or is it just standard account as I think it was mentioned earlier?

Yes, Slide 5 has exactly the details you've asked for, product segment wise and how much of NPA. Broadly INR 61 crores of NPA has got restructured and INR 400 crores have been done in Q1. And in July, we have mentioned INR 435 crores. Just look at Slide 5, it has so -- breakups.

And your second question is that now how NPA has been restructured. See, as for the framework, no, it should be standard as on 31st March. But if it has been -- if it's becoming as an NPA, in April, May, then also it can be restructured. It can be upgraded.

Okay, okay, sure. My second question is on MFI. Now, Vasu, as per your feeling about MFI throughout -- after demonetization is sort of showing up now and you've been able to escape most of the impact right now versus yours. But now from this 18%, 19% levels, are you going to look to maintain this mix? Or is it going to come off further, what is the strategy here?

See, we had earlier also mentioned, I mean, about 4 years back also, we had mentioned that our comfort level will be around 15% for the micro finance portfolio as a contributing factor weightage for the overall book. And our comfort remains at that similar level even now. So I think on a going-forward basis also, we should see micro finance touching around the 15% level, and then it should steady up from there. And because you see micro finance yields a good product. Under normal circumstances, it is a pretty comfortable product for both the lender and the borrower. It's only under extraordinary times like what's happening now or what happened in de-mon period, et cetera, it goes into a heavy kind of a downswing. But otherwise, it's a good enough product. But it has this -- the extreme -- it has this volatility associated with it. And as a bank, we don't want to be a very volatile bank in terms of asset quality, on and off kind of stuff. And let's say, 4, 5 years back itself, we are -- I mean, not 4, 5 years. In 2011, we started our journey of diversifying. And that journey has been continuing. And in 2016, '17, we did make statements of where our comfort will be in terms of percentage contribution of different products. And our comfort remains at the same level even now. So we should still try and get it down to around the 15% level. And then thereafter, our effort will be to try and hold it at that level.

Okay. Okay. Perfect. And on credit cost, what is your target for the year? This year?

Yes, Abhishek, going with what numbers we have put, we are hoping to arrest it within 2.5%. But like as Rohit said, July has been good, hopefully, all of that will give us some comfort. And lastly, I think a universal discloser or -- disclaimer is, this is not taking into account wave 3.

Sure. Sure. And just finally, any discussion on that 3-year promoter lock-in as per SEBI? Any discussion what may happen there? Or could that be a waiver? Anything that...

Abhishek, no yet. Yes, not yet. The scheme is getting put to SEBI and then we will have a discussion. And we are hoping SEBI looks at it favorably. There's already a discussion paper out by SEBI of reducing this 3-year to 1-year. And we understand that SEBI's already taken feedback from the market in June. So we'll try to use that as a reference point. But honestly, discussions haven't started yet.

The next question is from the line of Renish Hareshbhai from ICICI Securities.

Congrats on great set of numbers. So sir, just 2 questions. So one is on this restructuring piece, okay. So what is the standard restructuring sort of benefits we are giving, either in terms of the blanket moratorium of 2 years or it is only on principal or what is the tenure, et cetera? I mean if you can give some color on the restructuring pool would be helpful, sir.

Okay. So the RBI guideline says that when you restructure, you can extend the tenor by 24 months. That is the outer limit. So we are talking to the customers and extending the tenor as per these requirements. Some customers do feel that currently, the cash flow is slightly weaker, so they would like a moratorium of, say, 1 month or 2 months. So we are giving them that moratorium, but everything is limited to the extent of 24 months.

Yes. I mean so what is the average...

And any customers, we have not been -- we have not done for the entire 24 months. In some cases, it's 6 months. In some cases, it's 18 months. In some cases, it's in 12 months. So it depends on the requirement of the customer.

Got it. And this moratorium is only on principal or it is on the -- it's a complete moratorium?

No, it's on the principal, the interest he has to anyway pay.

Okay. Okay. And sir, any color on this, let's say, this restructuring pool collection in June, July? Maybe if you can give some numbers around it.

It's -- the collections of RSL pool is too early to talk about. It's only once some tenor goes up -- maybe 3, 4 months down the line or maybe 6 months down the line, we'll really be able to talk about trends in RSL collection.

Got it. Got it. And sir, just the last question on this MSE segment, okay? So now yes, the strategy has been -- we are moving to the more formal segment of sort of customers and that is what is reflecting in the ticket size as well. okay? But now when we look at the GNPL at 6% in Q1, which has been a sharp rise with having a coverage of 19%. So I'm just curious to know what went wrong suddenly under COVID 2.0, wherein the customer profile it suggests would be much better than the SBL segment. So just if you can throw some light on it, sir?

This is Ram here. The first thing is, I think the 6% is as of June. And the figure which has been indicated in terms of that restructuring has not been included as part that -- as part of the 6%. I think that's one thing I thought I'll just tell you. Then the second thing is this is a segment, as Vasu said, in the initial thing, basically, they are trader profile, manufacturing and services pan India. And I think that they have gone through some rough weather during the COVID 2. But having said it, if you look at the collection efficiency also, we are able to see that it's moving up. And we feel that out of this 6%, around the restructuring will be approximately around 50%. And the remaining, we'll be able to collect it during the current year predominantly. So -- and one key aspect, which I want to bring to your attention is that the entire thing is fully secured. And when I say it's fully secured predominantly by SORP, that is the Self Occupied Residential Property. And this segment is generally very, very conscious about the property and the house which they live in. So they normally don't sacrifice it so easily. So that's the reason, we are very confident, I don't think there will be any major impact on account of this.

Got it. Got it. So this -- let's say, this 3% incremental restructuring would be part of the estimated number on the total restructuring pool, which you are paying right now, right?

Yes, you are right.

I mean the way we have seen this, this INR 60 crores kind of upgradation from the NPA pool -- might we see the similar kind of upgradation in next quarter as well and that should be predominantly from the MSE segment?

Yes. Yes.

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

I had 3 questions. The disclosure is really appreciated. First is on the restructuring, just to be clear, including one -- restructuring 1.0 and 2.0, the maximum number outer limit that we're looking at, is INR 2,130 crores, which will be approximately 12% of the book. Is that correct understanding?

Yes, Dhaval. You are right.

Yes. Yes. Okay. Then the second part is, just could you update on the ECLGS and also on the slippage during the quarter, how they were sort of within segments, if you could give broad color or some number around that, that would be useful. And the final question was, I mean, Vasu initially talked about applying for the universal bank license at the end of fifth year. So just in terms of time line from now to, let's say, some time middle to end of next year, how should we think about the various process of the merger as well as applications. So if you could just highlight the key points within that. So that would be useful in terms of clarity. Those are the 3 points.

Okay. In terms of ECLGS, we haven't done anything under that. So that doesn't apply to us. So that takes care of your first question. In terms of the second question, basically, you're talking of the merger scheme and the universal bank application and all that, they are independent. The merger scheme will take about a year's time for various approvals to come, hopefully. So that's an independent process. As far as the universal bank license is concerned, as per RBI guidelines, we are permitted to apply to RBI for converting into universal bank at the end of -- after completing 5 years of operations. As you know, we will complete our 5 years of operation by 5th of September this year. So post that, we will be taking up this point at the Board, and the Board will have to deliberate on that. And if the Board approves, then we should be applying to RBI. And if you want to know what would be the time line that RBI might take, actually, we have really no idea because it's not happened so far. There has been no precedent so far. So we might be one of the first to apply for that. So we really don't know what's the process that we have to go through and what's the process that RBI will have to go through. We really don't know. All this clarity will emerge, I'm sure over a period of time. But anyway, once the Board approves, then we will be applying from the bank's side.

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

Question one is, sir, on the restructuring front when you have around INR 2,000-odd-crores of restructuring. How does the unwind take place? Like when does this restructuring become standard? How does that work as per the guidelines? And second question is, if you see our loan book, we've -- the last 4 quarters before the second wave hit us, in the last year, we disclosed somewhere around INR 7,000 crores to INR 8000-odd-crores. How is the performance of the book on the INR 7000 crores, INR 8,000 crores that we disbursed during FY '21 versus the historical book that we have out of the INR 17,000 crores. So there are 2 asset quality questions. And I have one more question that I'll follow up.

The first question regarding the upgrading, See, when 20% of the amount is collected in the first year and the remaining 10% in the second year, it will be upgraded to standard. [indiscernible].

Sure. And the second question?

See, there is no -- we don't see -- in the portfolio that is generated in FY '21 as compared to rest of the portfolio, we don't see any difference in the trends in their behavior. I mean, it is the same thing that we've seen earlier. We don't see any trend -- different trends.

Okay. So the bounces or the collection efficiency is the newer portfolio is also very similar to what we have seen previously because the older portfolio will have different challenges because they did not -- they were not aware of the COVID scenario and the disbursement of the underwriting you have a different versus the INR 7,000 crores, INR 8,000 crores that we lent last year and the customers are more aware of the situation before borrowing, right? So from that perspective, the newer portfolio should be behaving...

If I have to give you a deeper insight of what we learned from the field, see customers in wave 1 did not really understand the impact of lockdown, went through a lockdown. Now during the second wave, customers -- all customers have understood one thing. And that is when a long down occurs, you really never know how much time it will take for things to open up, so conserve cash. So we have had a lot of customers telling us, I have the money, but I cannot see you, I pay you once the lockdown opens up. So that's an insight from the field that we have received, which I can share with you.

Understood. And the last question is on the liability side. Very interestingly, the tie-ups that you've done with you and others you see the 5 lakh of customers that you are acquiring literally, almost 40%, 45% is coming via the newer partnerships like new. So just wanted to understand how is the customer profile here? Like what are the average balances, maybe the average age, any geographical mix? Is it heavy in some specific state, cities, any products, Like are these customers better in the sense that we're able to cross-sell them this or additional product as soon as they come on board because they are more savvy. Anything, a few insights on this would be really, really helpful?

Yes, thank you, Murali here. See, there are 2 sides to it. One is Niyo side, that is our fintech partner. Another is Selfie side, which is our own manufactured, our own distributed product. Let me give you Niyo insight first. Niyo, the focus is on demography. As I said, geography is a byproduct in a digital world. So the target audience for Niyo is anything between -- predominantly the account comes in -- between 20 to 40 years of age -- which means these are all the -- if you bucket it, these are all the new entrants into the job market. These are the students and these are that mid-management people who are working in the organization that is up to 40. On Selfie side, our target segmenting starts at 35. So the entire demography-based approach is what we are doing with one side, Niyo Equitas and another side is Selfie Equitas. But please note, there is nothing called Niyo as a product. The underlying product in either side is called Equitas savings account. So that is our core product. Second understanding is that predominantly the product comes from metro and urban locations, which means India side contributes to 80% and Bharat side gives it to 20%. In terms of balances, there are 2 buckets. One is when you open any Equitas digital account through any fintech partner, it is a half KYC account. Once you do go through the physical or a video of KYC, it becomes a full KYC account. Of the half KYC account where we manufacture themselves, the average balance is close to INR 6,500 to INR 7,000. And on the other side, [Audio Gap] INR 500. When we go and do a full KYC, when we go and convert it into a savings account, the balance on our own manufactured Selfie side shoots up to INR 28,000 and Niyo is at INR 16,000, INR 17,000. Please note Niyo also have their inherent -- what are we doing for the asset -- for their investment customers, we are leveraging our savings account platform. So they also do asset allocations with a lag of 15 days, 20 days. So it complements, for their asset allocation basis, good savings account coming in and for us, too. So it's a demography-led model, both the side India favors. ATS is building towards the normal SA balances, and the normal SA balance, which we open is at INR 78,000. You would have seen in the slide. So it's a long shot. It is 1x of what we have at the phygital mode.

Understood. Understood. And historically, when we've opened these accounts that had a digital platform, I know it's too early, but as the graduation from, like, the lower ticket price towards our INR 78,000 being good enough? And what are the products that we are able to cross sell to these customers? Are they like easier to sell a life insurance mutual fund or an asset product, which is like how does the vintage -- how out does that curve take place?

Presently, it's 3 quarters for Selfie and 1 quarter for Niyo. Let us be very clear after the account opened for the first time. So what we are focusing is cross-selling our own existing range of products in form of RD or FD. Second thing is we have now created sachet products for insurance to start with personal accident cover and health because that is far more easier than selling a life insurance through a sachet. So we have certain bucketed product, INR 99, INR 199 and INR 299 and then we push it into it. But the reality part of it, any good customer who is coming above a salary bucket of INR 10 lakhs, he migrates towards INR 75,000 plus or INR 1 lakh plus only if the physical meeting happens through a person. So our effort is to meet. So what here also we have done is based on demography and salaries, we have allocated our TV customers to the branches, where they go, do the full conversion, where we could cross-sell 3 products if the FD, RD or FD, SIP and protection. In Niyo, we are just starting the journey because, as I said, it's only a 3-month old stuff, we want to start with protection as a rule. Yes, loans are needed. We are finding our own medium how to get into consumer space through that.

The next question is from the line of Nidhesh Jain from Investec India.

Firstly, can you share SMA 1, SMA 2 numbers by the end of this quarter versus what the position was by the end of March '21?

No, Nidhesh, we don't have it now. We'll see how we can incorporate in the future presentation.

Sure, sure. And is it quite surprising to see that the asset quality in the small business loans has performed extremely well, even better than the MSE loan. So despite that customer, I believe, would be more impacted by any lockdowns. So what is the reason for that? And whatever other insights that you got that by the customers has behaved better than the other segments that we are operating in?

In the small business loans, most -- I mean 60%, 70% of our customers would be in the essential service. So that does give them a better and immediate cash flow. That is the reason why small business loans. And that's the trend that we have seen even in the last time also.

Sure. And lastly, on the liability side, what would be the interest rate strategy going forward? We have seen very strong traction in the SA front. So do we plan to lower our SA rate going forward? Or until what time we will continue with the 7% strategy?

Listen, the important part is it's not 7%. 7% is a pendant in the necklace, okay? What we have added peripheral is very critical. In terms of cost of fund, we are anyway bringing it down month-on-month by 4 bps. So if you see what is the biggest measurement is the pool of 1 lakh. The pool of 1 lakh today has grown 2x in last 9 months, which means the aspirational value towards building 7% is increasing. So just to give you some pool of 1 lakh, which used to be, say, X, we will take -- which used to be INR 300 crores, INR 350 crores is today it's at INR 800 crores in that bucket. So people are moving towards it. And 7% is getting us this point of time, HNI and program-centric customers. And it is well within the limits, what we want to. So at this point of time, we will sustain the rate and get the good customers in, and we will keep growing with them through PH and cross-sell opportunity. Because cross-sell opportunity in this 7% bucket today, if you see pool of insurance number, last year, we covered close to, say, month-on-month basis, if you see 30 -- 22,000 customers was the first quarter. This quarter, we have already out beaten that in terms of number of customers, who have consumed protection plan from us. So it's giving a lot of cross-sell opportunity, engagement opportunity, family opportunity, and it also complements our cost of funds. So it's a win-win situation. That's a NR segment, Elite segment and Wing segment is showing the trajectory.

The next question is from the line of Amit Premchandani from UTI Mutual Fund.

Just have a question on the scheme of arrangements. What would the tax implications for the different stakeholders, be it Equitas holding shareholders and Equitas Small Finance and Holdco company?

As per the income tax act, the merger happens, there is no tax impact for the shareholders of EHA.

Even the retail shareholders?

Yes. Yes. Yes. Every shareholder.

Okay. And for the number of companies, they are willing...

So for company, there is no tax.

So it's a completely 0 tax standard?

Yes.

The next question is from the line of Mayank from Franklin Templeton.

And my first question is on the relatively large pool of restructured loans on the guidance on that compared to what we are hearing from other finances. So I just want to understand that whom are we really giving the restructuring to? So are these customers that in the last 3 months have not been able to pay us? Or have we -- similar to what we did in the first COVID wave, taken a relatively lenient approach to, in some sense, giving moratoriums in this sort of environment. So I'm just trying to understand that how did you decide whom to give the restructuring to and whom not to give it to?

Yes. So this restructuring and decision of restructuring is a very granular process. We have to go and talk to each customer and depending on his needs, see we would prefer a customer not restructure his loan and pay us regularly all the installments, which are due. But suppose a customer has some kind of cash flow problems. He intends to extend its tenor, lower his EMI or needs some more time to get back, then we have offered him restructuring. As Dheeraj recent -- just now told you that INR 60 crores is the NPA pool, otherwise the rest of the customers are non-NPA. But see as per RBI, the customer has to be standard as of 31st March, which means he's a paying customer. So he's not somebody who is an intentional defaulter or does not want to pay. Those customers who were regular as of 31st March, but because of the lockdown in April, May and June, they have faced some difficulties, those are the customers whom we have talked to. And then we have decided upon restructuring their loans, which is a mutual -- I mean the customer approaches and we do agree. It is not something which we decided to enforce upon because that will not work. It's a very granular exercise. So it is absolutely customer-specific, depending on the needs of that customer.

Got it. Just a follow-up. So what I'm getting to understand is that the environment is coming back to normal fairly quickly and your upgradation numbers for this quarter was also sort of reflective of the ability of this customer segment to bounce back fairly quickly. So in such a scenario, I'm just trying to understand that ideally, maybe these customers just needed 1, 2 months of payment release and they would have been normal paying customers for that. So what was the need to give them longer moratoriums that you sort of answered previously?

So you have to understand that these customers have gone through COVID wave 1. A lot of customers at that point in time, they only put the moratorium, but they did not do any restructuring at all. Many customers at that point in time did not even take moratorium. So now when they have got hit in wave 2, I mean, the impact is a cumulative impact of wave 1 and wave 2. And that is the reason why a lot of customers do feel. And then there is always this fear of wave 3. So customers have -- this whole issue of restructuring and the customers mind is a combination of circumstances and virtual fear. So that is the best thing that I can tell you as to why these customers have come forward for restructures.

Perfect. Just one last question, sir, on growth, I just wanted to get that -- how are we thinking about growth recovery in the near to medium term? Are we likely to stay conservative given the risks of third wave? Or are you sort of looking to push up growth from here?

See, I think people like you have been following our portfolios for quite a few years now. I'm sure that you understand that the segments that we deal with, as we have mentioned earlier, if I talk of vehicle finance and small business loan, almost like in vehicle finance, about 80% of our borrowers are first-time borrowers. And in small business loans, if you just remove the gold loan, part of it, then more than 90% are the first-time borrowers. So that's the profile of our borrowers. And we have a very strong relation built with them because we take nearly about -- in vehicles, it takes about a TAT of around maybe 4 to 5 days. And small business loan, we actually take a TAT, turnaround time, of more than about 10 days to 15 days time. Because we have to spend so much of time sitting with a customer to try and understand its cash flow and all that. And that really ends up building a very strong relationship with the customer. Second thing is that in the entire small business loan, the sourcing is done through the micro finance borrowers and through the community. That's why even though we do a fairly large amount of small business loans, we have no DSAs at all. No DSAs, no middleman at all. The entire sourcing is done directly, and we don't even have to go out and source. The business comes by itself because in a low-income community or in a village or in an area, we have ended up giving certain loans and the word of mouth spreads and the rest of the people just kind of come and start making inquires. And in all the places where we operate, the fact that we are a micro finance company also, we have anywhere between 20% to 30% of that local population would be our plans. So we have a very strong relationship at the ground level in that entire community. So that is how the whole -- the strength of this model is built on that. So we are very comfortable. I mean, last year, if you remember, the same kind of question used to be asked of us. In April, we started it as much as 90% by value, 98% by clients, number of clients. 98% were under moratorium in the month of April, the first 3 months of moratorium. 98% by number and 90% by value went under moratorium. And people were quite -- obviously, eyebrows went up, and there was a feeling whether most of them may not come back at all. And we never really kind of went into overdrive on collections. So we said that we know our clients, and we have no intention or no desire to put undue pressure on these borrowers at a time when they are actually at their most sensitive situation. And we said that we'll work with them and they will come back and they will always come back. And then this question that you asked now was also asked last time, that is that when a borrower has some money and the other financials go and they are able to somehow ring the -- squeeze that money out of that customer, the customer ends up paying to those financials who squeeze them the hardest and those financials who don't squeeze them the hardest end up not getting the money. Do you feel that as a challenge for you was the another question that used to be asked of us last year. And our response then and response now, and I'm hoping that the response in the future also, will continue to remind that we are very close to our clients. We know our clients, and we have no desire or no intent of squeezing them. And this is not a 3-month game. This is not a 6-month game. This is an eternity game. And we have to be there in the communities. We have to know each other. We have to have a respect for each other, which will build a long-term credible reputation for the bank in every community that we operate in. So we have no desire to go and squeeze. If someone else is going and squeezing the borrower and taking some money out, we wish them all the best. We have no intention of following that kind of practice. And we would rather just sit with them, figure out what's happening at their end. And if they want restructuring, we'll be happy to offer. If they don't want, no problem. If they want for a 6-month extension, not a 2-year, well and good. Whatever it is that they really need is something that we will be doing. And so we will take a very -- what I say, very relationship-based decision in this and not a very short-term decision that how do I just squeeze 3 EMIs from the client. And at the end of 3 months, is my relation over with that person as well as with that community. So I think that's our approach. That's been our approach last year, this year and hopefully into the future also. And so we are very comfortable with our borrowers, and they have proved that from 98% and 90% moratorium in April. At the end of March, our collection, X bucket collection was 99-point-something and our collection efficiencies, as usual, were back to over 100%. And our NPA, which was pre-COVID 2.7% or 2.8%, it used to be a standard level of NPA had just moved to about 3.6%. And if wave 2 had not happened, probably that would have come down in June. But anyway, wave 2 has happened and there has been, again, an increase in NPA, which I'm sure over time will start coming back. So I think we are very comfortable with our clients, and we should be continuing to support them and take the same pragmatic relationship-based approach that we have taken in the past. I hope that answers your question.

Yes, sir, absolutely. Thank you for the detailed response, and it's a composite response, sir.

Yes, I took a little longer time. I know to respond to this because I think this is the most crucial differentiator. This is the essence of relationship itself. How do you run your bank? What's the profile of your bank? What's your DNA? What's your characteristic of the bank? I think that's the most important thing. Everything else is actually secondary. You have an increase in NPA, you have a better collection this month. You have a stress next month. I think that's all part of the game. It's all temporary. It keeps coming and going. But I think the DNA is the most important thing, and I think that's what we should be really clear about all the time.

The next question is from the line of Amit Nanavati from Nomura Securities.

Just I want some clarity on the restructured book and the potential restructured book that we are likely to see in the second quarter. So where we -- firstly where would be incremental restructuring comes from. I have the segments in July, but at least for the incremental INR 600 crores, INR 700 crores of restructuring that we are talking about.

Yes, so...

Hello?

Yes. Yes. Just a minute. So about INR 200 crores will come from vehicle finance, right? About INR 100 crores will come from small business loans. And MSME will be about INR 40 crores, yes.

Yes. And secondly, sir, if you can just provide some color on the restructured book and the overall restructuring 2.0. What was the bucket levels for these customers? If you can just provide some bucket mix, whether the large part of it was 60- to 90-day part paying customers or largely 40- to 60-day? That will be helpful.

Yes. So as I said earlier, it's too early to talk about the RSL portfolio as of now. We don't even have the data as of now, but...

No, not as of now. As of March when these customers were -- whether they were sitting in SMA 1, 2 in March, maybe there will be standard, but still probably be in SMA 1 or 2, right?

Yes. So most of them would be in 30 to 60 or 1 to 30, right? And as we have said earlier, the NPA was only INR 60 crores. Rest of them were in 1 to 30 and 30 to 60.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, just wanted to understand, you mentioned that by September/October, we should be coming back to normal in terms of asset quality and collection efficiency. So does that mean even the credit cost we should see a normalized from third quarter, fourth quarter in terms of maybe 1%, 1.5%?

Yes. Yes, the credit cost should normalize hopefully from third and fourth quarter, that's the intention. And also from a provisioning, we would ideally want that also to happen.

Fair enough. Understood. And then, sir, any kind of thought process that you can share on the cost-to-income side, not in the near term but maybe in the medium term side?

Yes, if we didn't have a wave 2, we were looking at bringing that down in about 18 months, as we said earlier, to close to about 50%. That was the trajectory. Now with the income going a little slow in the last 12-odd months, I think we may have to push that a bit and or do a significant catch-up, but milestones are to reach 55% and then 50%, but you'll have to factor in the impact of wave 1, wave 2.

Yes. Yes. So if I have to assume that wave 3 does not take precedents of 55% by FY '23 and would be -- that's about 18 months, would be a fair -- 18, 20 months would be a fair kind of time line?

Yes, yes, absolutely, absolutely. And good to see your optimism on wave 3. So yes, I think that's a more difficult thing to predict than our cost-to-income ratio.

Next question is from the line of Abhijeet from Kotak Securities.

First question is in terms of collections, in a normal environment when there is no COVID, what share of collections across different products, excluding MFI, happen on a cash basis as in there is no ECS or NACH supporting the collection standard?

So most of the loan -- other than micro finance, everything actually has a NACH mandate. But as you know, the segment has check bounces, and some of those EMI bounce, we really represent. And if that also fails, then we'll have to go and do field collection. So across products, and we have to here limited to small business loans and vehicle finance it's roughly about 30% is cash collections.

Okay. And just a follow-up on the vehicle side. You mentioned that the cost pass-through is only about 25%, the diesel cost pass-through. So I want to understand, are the vehicle owners still able to service the EMI, as in the freight demand and the cash flows are still good enough for them to service, sir?

See, as of now, the demand for freight -- the freight demand seems to be increasing. So -- and that is -- you combine that with collection -- increasing collection efficiencies. So I think the operator also probably sees that with increasing demand, they will be able to pass on the full diesel increased costs in the freight rate. That's the expectation. Also, you want to say this is -- the H2 is actually -- all the seasonal stuff starts from August. And hence, the seasonal stuff in sales are also higher, demand is also higher. So that is the expectation that the operator also has. As of now, we feel that with increasing collection efficiency, it is 30% being passed on in freight cost. His optimism about increasing freight rates seem to be higher in the field.

And one follow-up is, is the pain this time around as well more on the used side?

Yes. I mean in general, the auto industry seems to be very badly impacted as far as the other. That is what research reports are saying at the field level. Now that the recovery has started, we feel optimistic. Because this time -- because one difference this time is the earlier wave, the COVID has not hit the rural areas, okay? So now this time in wave 2, the rural areas were also hit. So we do see a lot of pain on the used side, too.

And just one more to sort of ask the same question in a different way. So when you look at the SMA pool, let's say, as of June or whichever is the latest numbers, can you tell us how much of that is actually getting restructured already or through the pipeline that we have, that will be a useful data point to have.

Sure. Okay. I think we are going to close with that. And just before we close, as a concluding remark, I would like to say a big thanks to all of you, not just for attending this call, but continuing to support the bank in its quest to create a very differentiated bank, which will continue to focus very largely on delivering a high professional performance and at the same time being highly socially conscious and ensuring that we marry the 2 together in a very balanced manner. So thank you so much and look forward to your continued support during these tough times and hopefully during better times going forward. Thank you so much.