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

Ladies and gentlemen, good evening, and welcome to the earnings call of Equitas Small Finance Bank Limited's Financial Performance for Q4 FY '24. We have with us today Mr. P. N. Vasudevan, MD and CEO; Mr. Sridharan N., CFO; Mr. Murali Vaidyanathan, Senior President and Country Head, Branch Banking, Liabilities, Product and Wealth; Mr. Rohit Phadke, Senior President and Head Assets; Mr. Natarajan M., President and Head Treasury; Mr. Dheeraj Mohan, Head Strategy and IR. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. P.N. Vasudevan. Thank you, and over to you, sir.

Thank you. Good evening, and thank you for joining the call on what's a very busy week of results. The year has been a good year for us. We have been able to continue our investments in technology, products and paper to help us grow sustainably and create a robust banking platform. The bank has been able to navigate well during the rising interest rate cycle and kept our margins, yields, and profitability reasonably protected. With about 85% of our loan book being fixed rate loans, we had a high impact on earnings over the last few quarters. As you may have noticed, on the loan side, we took a call to defocus from lending to NBFCs as well as slowdown on low-margin products like new commercial vehicle loans. On deposits, we have increased our focus on retail TD, given the customer's propensity to move money to TD to lock in a higher rate of interest. We have also been able to pass on some of the interest rate increase to borrowers in the form of improved lending rates to ensure our margins are reasonably healthy. Parallelly, we also worked on improving the CD ratio, improving it from 103% as of March '23 to bring it down to around 87% by March '24. We had written to RBI and received a clarification that in case of co-borrowers, say, an account with borrower A, and co-borrower B, going into an NPA, then an account with B as borrower and C as co-borrower, and if we have an account with C as borrower and B as co-borrower, and an account with D as borrower, et cetera, all of them will need to be marked as NPA even if individually, these accounts are standard. We also received an advise from RBI that in case of ESOPs given to staff who are not covered under the guideline of material risk takers also, against the current practice of accounting for them by way of intrinsic value, we should account for them under the basis of fair value method using Black-Scholes model. After accounting for all of this, we were still able to deliver a decent bottom line for the quarter. Technology has been a key focus area for the bank all the while. While the LOS was rolled out for vehicle finance last year, during the fourth quarter, we were able to roll out the LOS for small business loans and home loans. Implementation of state of art CRM is underway. Our revamped mobile and Internet banking platform is also soon to be launched. We have also upgraded our core banking and other technology infrastructure. We also introduced a few innovations like Banker on Wheels, which is being piloted currently. We are confident all of these investments will help the bank in its quest to give a differentiated experience to customers. While we have been using digital effectively to enhance customer acquisition, we are also focusing on how to harness technology to bring about enhanced controls over critical processes in the bank. We have committed to a certain level of resources to give focus to these action plans. These initiatives would further add to the bank's ability to sustainably grow. In this quarter's presentation, we also try to provide some direction on what the bank's long-term strategies around technology and liabilities are. We are strongly committed to put in place key enablers to help us become more competitive in the next 3 to 5 years. Our strategy continues to be to build a well-diversified new age bank, delivering consistent returns over a long period of time and showing resilience across market cycles. We also stay committed to giving back to society through our 2 trusts: Equitas Development Initiative Trust and Equitas Healthcare Foundation. While the Equitas Gurukul Schools continue to do well and help produce good quality students from economically weaker section, our Cancer Hospital has started operations effective November '23, and that has been progressing well. We have completed over 165 surgeries in the last 3, 4 months. We also treated more than 4,000 people in these few months. So with that, I hand it over to Rohit to talk about assets.

Good evening, everybody. Advances have grown by 23% year-on-year. SBL advances have grown by 30%, micro finance by 20%, vehicle finance are 19% and affordable home loans by 60%. X bucket collection efficiencies have been stable at 99.5% in SBL and micro finance and 99.7% in home loans and 99.1% in vehicle finance. In SBL, small business loans, the merchant OD product has scaled up very well with 39,000-plus customers and advances of INR 950 crores. We intend to keep growing these volumes. Other than merchant OD, the focus in the coming years will be growing the micro LAP book. Micro finance has gone fully digital with 100% adoption of e-KYC and e-sign. We continue to maintain that the unsecured book will not exceed 20% of advances. In vehicle finance, used car advances have grown by 71% year-on-year with advances at INR 1,224 crores. The focus in the coming year will be on the growth of the used car and the used CV book. We will defocus on NCV, but we'll continue to run the product. Affordable home loan portfolio has scaled up well with advances growth of 60% year-on-year at INR 2,500 crores and a GNP of 0.5%. On digital initiatives, Newgen LOS has gone live for both small business loans and affordable housing. We have also launched a customer app called a Selfe Loan, which will serve as a one point contact for our existing and new customers. We have been able to increase disbursement yields by more than 1% from 17.43% in March '23 to 18.74% in March '24. Demand at the field level continues to be strong, and I'm hopeful of a good year ahead. Thank you, and handing it over to Murali.

Good evening, friends. Let me take you through a few of the snapshots other than the figures, which is available there for your perusal. I think this has been a very testing year, not only for us, but across the industry. I think, overall, in terms of retail focus, which we have been talking about until this point of time, building a scalable and sustainable franchise so that we can leverage over a period of time. So we are deriving 2 phases to it, what has happened and what is going to happen. We'll cover it in 2 chapters. First thing is through the year, few significant milestones, which we want to say is, this year, while TD growth has been phenomenal, we have got into the 444 days as a unique proposition. The good part is number of new-to-bank customers entering the stream. We could add close to 1.2, 1.3 lakhs of new-to-bank customers who have come in through this as an option and then migrating into savings account is one distinctive edge which we could get into these customers. Second part is our NR book has crossed INR 2,000 crores, and we are now present in 110 countries that customers across. So that's a significant thing with AD1 project being on the anvil, I think this is going to grow further. And our time zone based VRM is actually helping us to deepen further and further. Third important thing is our relationship management structure, what we have put in at this point of time is yielding good dividends because despite being a tough year, if you could see as we end the quarter 4, our growth on SA, our growth on CA, our growth on RTD, and importantly, retail mix of what we are maintaining, 72 and 28 on bulk, we could hold that. And so this is helping us to go deeper and deeper into these families. And fourth important thing is, most important thing, which I want to say is our digital book has crossed INR 1,500 crores, which we have acquired through digital and full KYC accounts. So this four is on the liability side. On the PPP side and the fee-based revenue, thanks to the insurtech, where we -- like Vasu sir was saying that we are using technology, not for only disruption, sometimes technology as a facilitator, insurtech is going to be one sort of a thing, which has helped us to garner general insurance and health insurance totally through the same platform. Now life is also integrated. As we move along, I think this will be the biggest productivity enhancer. Adding to the PPP, we have a range of AUM growth in form of mutual fund. Predominantly, we focus on SIP. We have added close to 18,000 active SIPs in the last 1 year who are now doing continuous investment through us. Third important proposition, which has helped us to build the size as by what we discussed in the last call, we are now close to 20,000 customers whom we have mentioned in the presentation also, who have ability to use and block and then it's their allotment. But the good part is now from a saver to investor, we are getting into the trader segment also. So all these 3 segments, we have a proposition. And all can be done digitally is one unique proposition that had happened. And last but not the least, as we keep expanding, now we have philosophically moving towards a situation what we have mentioned in the presentation that is moving from unit resourcing to family sourcing as 1 key vertical, which means going deeper at a family level, having a family level proposition one. Second is focusing on mass only focus as a segment through digital sourcing. And third, getting AD1 and NR as a proposition is going to be -- these 3 is going to be one of the key forefront drivers as we get into coming years because only through that, we believe that our cost of funds can be managed. And fourth and last thing is transaction banking and current account, which we'll touch. So overall, it's been a very encouraging year. Overall, I think the patronage of customers as well as employee productivity has been good, and I wish we will sustain this momentum in coming year. Thank you. I'll hand it over to Nat.

Good evening, friends. Our Q4 of FY '24 has been a relatively good quarter in the market front. On a quarter-on-quarter basis, Indian 10-year yield stand at lower and closed just above the 7% mark as U.S. rate cut expectations and the anticipation of inclusion of Indian bonds in Global Morgan Stanley Bond Index triggered a risk on rally in India bonds. However, the U.S. Fed continues to be data-driven, but ongoing geopolitics have slightly tempered expectations of earlier and faster-than-expected rate cuts. And the market is divided on the horizon of the U.S. Fed's attempt to bring inflation below the targeted level of 2%. It is a good quarter for equities globally. Dow Jones gained almost 6%. Indian equities is also continued to see a run-up, but more modest in Q4 FY '24 with gains of almost 2.8 for the frontline Nifty 50 index, which continued to rise above 20,000 levels. For the upcoming quarters, short term volatility is not ruled out as we approach national elections. Street has priced in rightly outcome of elections and barring any negative surprises, we expect both equity and bond markets to stabilize towards the second half of the quarter. Supply lines can be an issue, especially for oil if situations in Israel and Gaza worsened and result in higher inflation. Escalation by Iran continues to stoke fires. As such, geopolitics could be a slightly more pressing issue as we move ahead. Despite India's economy continuing to stabilize, consolidate and grow, considering the global nature of trade and supply chain, we can expect volatility going ahead despite a strong local economy. Hence, we view that market as cautiously optimistic. We continue to remain positive on the India growth story over the medium-term to long-term as domestic economic activity continues to be resilient and is expected to further pick up in the new financial year as governments overall spending, along with private CapEx were expected to accelerate. We will await the budget post elections for further clarity on focus areas for the new government. Thank you. And I hand it over to, Sridharan.

Good evening, everyone. Our net interest income for the quarter came at INR 786 crores as compared to INR 707 crores during the same quarter last year, reaching a growth of 11% Y-o-Y. Other income for the quarter came in at INR 222 crores as compared to INR 215 crores during the same quarter last year, reaching a growth of 3%, resulting in a net income growth of 9% year-on-year. The total operating expenditure came at INR 634 crores and remains stable with an increase of 4% sequentially. Pre-provisioning operating profit PPOP grew 4% Q-on-Q to INR 375 crores, and PPOP to assets remain stable at 3.45% for the quarter. PAT for the quarter came at INR 208 crores as against INR 190 crores during the same period last year, reaching a growth of 9% Y-o-Y. ROA and ROE for Q4 FY '24 stands at 1.91% and 14.22%, respectively. Next is on the onetime P&L impact items in Q4 FY '24. The first one, based on the bank's proactive clarification obtained from RBI pertaining to classification of loans of co-borrowers. When the primary borrower's loan account becomes an NPA, the bank also classify the co-borrower's loan as NPA. The bank has classified INR 38.45 crores worth of loans as NPAs during quarter and INR 15.17 crores has been provided as a provision on account of this classification. Second one, due to change in accounting policy as per the RBI advisory, the bank has expensed INR 29.21 crores additionally as an ESOP cost in respect of the grants issued after April 1, 2021, in respect of nonmaterial risk takers and control stock. Third one is a benefit, which is of INR 11.89 crores on account of the excess provision for gratuity and leave encashment as per the actual valuation. We estimate that our PAT, ROA and ROE adjusting for this would have come in at INR 233 crores, 2.15% and 15.93%, respectively, for the quarter. On the onetime impact, cumulative for the year, we have taken a hit of approximately INR 75 crores towards additional provisions on the employee costs on account of ESOP. The recurring cost on these items will be marginal. During Q4 FY '24, the bank has securitized and assigned advances worth of INR 584 crores pertaining to HF and DM advances. The total provision for Q4 FY '24 is at INR 107 crores, which also includes a provision of INR 15.17 crores pertaining to provision under the co-borrower accounts, which has been explained, even though they were standard on a DPD basis. GNPA improved by 8 bps Y-o-Y to 2.52% in Q4 FY '24 as compared to 2.6% in Q4 FY '23. Including the securitization book, GNPA would stand at 2.39% and NNPA improved by 2 bps Y-on-Y to 1.12% in Q4 FY '24, as compared to 1.14% in Q4 FY '23. Based on the current advances mix, the bank is maintaining healthy PCR of 56.06%, and it continues to follow stringent provisioning norms across all asset segments. On a full year basis, the bank has registered a balance sheet growth of 30%, PAT growth of 39%, ROA of 2% and ROE of 14.43%. Our net worth now stands at INR 5,969 crores with a book value at INR 19.01 per share and the earnings per share of INR 7.12. As of March 31, 2024, the total CRAR at 21.7% with a Tier 1 at 20.71% and Tier 2 at 0.99%. The Board of Directors have proposed a dividend of INR 1 per share, subject to the approval of the AGM. With this, I would like to hand over to operator, and we'll be happy to take all the questions from your end. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Shreepal Doshi from Equirus.

The first question was working with the RBI clarification impact on the P&L. So like which segment of loan book was this coming from? And just wanted an update on the Tamil Nadu flood-related impact on each of the segment for us?

Rohit here. Most of the co-borrower impact is coming from the SBL portfolio. And Tamilnadu floods impact is now more or less gone away. It's a very minor stuff, which is prevailing, which will get used. As of now, there's no future this thing. It will get evened out.

Okay. And sir, on the MFI front, like in the deck, it is mentioned that it is doing well, and we are seeing improved loyalty from the customers as well. But if you look at the GNPs for that segment has been inching up in the last 2, 3 quarters. So what explains that? Are we -- like if you can throw some light on that?

Sure, Shreepal. So in micro finance, if you look at the industry, everybody has written off a large amount of book -- I mean, some amount of book every year. We have not written off a single rupee this year. Secondly, if you look at the data, which is released by MFI association, they have given data on the PAR 90 to 180. On the PAR 90 to 180, the industry is at 1%, small finance banks are at 1.1% and Equitas is at 0.9%. Third, post-COVID, we realized that some of these customers do come back when you go to collect. And we have beefed up our collection to ensure that we go and collect that money. Otherwise, earlier, the trend was the moment 90 plus happens, the industry would simply try to write it off. But I think post COVID, we have seen that, and that is why we beefed our collection. I think the micro finance GNPA will be range bound between 3.5% to 4.5%. Does it answer your question?

Yes. So that will be the new normal for us? Or for the industry also you feel like it will be an elevated number?

Yes. For the industry also, it will be an elevated number is what I feel.

Got it. So, one last question was on the cost of fund side. So like do you feel like are we nearing to picking out on the cost of fund? And just how do you see the trajectory on the NIM side because of the cost of fund implication?

See, with regard to cost of funds, I think more or less interest rates have peaked. And as we keep on repricing another 10 to 12 bps is what we've seen as from the higher side, so which means present position plus 12 bps is what seen for this quarter or for this half year. Now this will be because of two reasons. Now it is directly related to what is going to be the rate cuts post the second quarter. So until that point of time, our maturities which were supposed to be repriced at a higher level, almost 80% to 82% is already through and incremental deposits are almost frozen as a rate for last 2, 2.5 quarters. So I think another 10 to 12 bps is what we are seeing it, this is on NIM.

On impact on NIM, so just to recap FY '24, the impacts on NIM were largely because of, one, interest rates going up. Second, enhanced liquidity in the balance sheet because of improvement in CD ratio. Today, where we are, we don't think these two are driving forces for FY '25. So NIM should largely be where it is and only have an impact of the portfolio mix changing over a period of time. So you should expect NIMs where it is right now.

I mean, there is no likelihood of portfolio mix changing. Because I think what we had guided or what we said is that we've broadly achieved our targeted mix, so is there a thought process to tweak that mix as well?

Yes. So we have, what we also said is in the medium term and in the long term, our secured to unsecured ratio will remain 18% to 20%, while micro finance as a portfolio will continue to reduce in terms of portfolio mix. So to that extent, there will be some impact on the NIM.

[Operator Instructions] The next question is from the line of Sudharshan Nachimuthu from Prosperity Wealth Management.

So my question is on your CD ratio. So you've guided to close the year with 90% CD ratio. However, we have closed with 87% as of this quarter. So what was the reason for being down to 87%, 300 more bps more than the guided range?

Yes. So we had been working towards bringing the CD ratio down over the last year. And again the plan of 98% has come down to 87%. Yes. So this year, our plan is to bring it down further to about 85% by March '25. So this 2% is something that we'll be working on over the rest of the year.

Okay, sir. And you mentioned you have securitized vehicle finance and housing finance portfolio by end of this year this quarter. However, the yield drop of around 40 bps is mainly from this [indiscernible] securitization?

Yes, given the quantum of securitization and 50 basis points of yield.

Can you explain a bit more further on it?

Yes. So yields at the portfolio level have dropped largely due to securitizations to about INR 1,700 crores of loans, and that's about 1,100-odd of vehicle finance and the rest is housing finance. So that interest income is roughly about INR 60 crores to INR 70 crores for the quarter. So that's what has led to the portfolio yield drop. We accounted as EIS in the other income. In the presentation, you will see it under other income and asset fee.

Okay, sir. Okay. And your incremental disbursement during this quarter, those yields have also dropped. So could you focus more on high-yielding products? And what was the reason for it?

Yes. So like we said, we are slowing down on loans to NBFCs and new commercial loans -- new commercial vehicle loans, which are typically lower yield loans. So that is one direction, which we have taken. We've done it for the last couple of quarters, and also going forward, we've given that as a guidance. So that should ensure that yields also at the portfolio level stay at these levels.

Okay. So your Q4 yields would be the stable yields?

That is too fine to actually look at if Q4 has stable yield. But, I think you should look at it from portfolio mix and from the guidance you've told you how products will be slowing down and what we're accelerating. So don't hold us to Q4 as a number for the full year. But I think rather try to focus on NIM, and we'll try to keep NIM stable for the year.

Okay. Understood. Coming to the next part. So what is your current outstanding write-off pool as of this financial year closing?

Sorry, can you repeat the question? Outstanding?

What is the write-off pool remaining with your bank. During the 2, 3 years, you've written off certain amount of loans, what is this yield?

No, we have not written off anything this year.

Okay, sir. And just a follow-up question on your co-borrowing classification. So you mentioned it is for a small business loan. So is it also one aspect the micro finance loans given the...

Just to correct you, this is at our customer level at the bank. So it is not specific to 1 product you do it. NPA is at the customer level at the bank. Where the NPA of INR 38 crores has come from is what we said is largely from small business loans. Like micro finance doesn't have co-applicants. Co-applicants are largely in the other books. But this norm is applicable at the bank level for all products because it is at a customer level, not at the loan level.

The next question is from the line of Rajiv Mehta from Yes Securities.

Congratulations on good performance there. So first question is what will be the share of 440-day and 880-day deposit products in the stock and in the incremental TD process?

In incremental TD process today, it is close to 60% to 65% of the incremental sourcing.

Yes, both the product?

Yes.

Okay. And just one clarification, when you report e-loan gross advances and e-loan advances, does e-loan growth advances will be including the securitized book, right?

No. Yield on advances does not include. That is on balance sheet what you've seen that trend. That's why we've added a new line, yield on gross advances.

Yes, correct. So that is what I was checking. So when I look at e-loan gross advances, which is including the securitized book that has been coming down for the past 2 quarters, whereas e-loan disbursement has materially increased. So why would this happen?

It's actually the underlying portfolio mix. Like small business loans also has a range from 14%, 15%, all the way to 20%, 24%. Same again from vehicle finance. So it's got to do with some of those mix changes. And also personally, the micro finance is now 18%. That's also dropped by 1%. It's largely linked to that.

Okay. Okay. And just last question. I see the momentum in housing and used CV disbursement, the momentum has been somewhat stagnating in recent quarters. So have we changed -- has there been any change in the approach?

No. So we have not changed focus. But the last quarter, the focus was more on increasing yields. The past 6 months, the focus was more on increasing yields. Now that the mindset of the field has changed, they've grown used to now lending at higher yields. I think we will get back the growth in UCV.

And just lastly, Dheeraj, if you can spell out the X bucket collection efficiency in MFI, SBL, vehicle finance and affordable houses?

Yes. So the X bucket collection efficiency in SBL is 99.5%. In micro finance, it's 99.5%. In vehicle finance, it's 99.1%. Yes, it is -- see, all the collection efficiency is at 1 point in time. That is the end of March, 31st March, for the month of March.

Okay.) It's not for the whole quarter?

No, no, no. It's not for the whole quarter. See, X bucket is always calculated for the month as a whole. Like that month, how are you doing? What is your performance? Every month you do well, then your portfolio is good.

[Operator Instructions] The next question is from the line of Abhishek Murarka from HSBC.

So my first question is on CD ratio. And I'm just looking at the sharp drop this quarter. Of course, it was intentional. But at what level are you comfortable maintaining it? So you're looking at 85% by the end of the year. But is that a level, which you think the RBI is also going to be comfortable with? Or there's a chance that if they come back and say 80%, you can go down to 80%. So how do we think about this ratio going forward?

Yes. So we will be looking to take it down, as I mentioned earlier, also to about 85% by March '25. And I think that should be a comfortable level. Because in that 85%, we are really not including the impact of refinance. So if we include the impact of refinance, obviously, it will be even lower. Second thing is that unlike universal banks, small finance banks have a capital adequacy ratio requirement of 15%. And because of that, a small finance bank tends to have a higher level of capital contribution to the balance sheet. And so the CD ratio of universal banks and small finance banks, in that sense, are not directly comparable. So I think we believe that 85%, without including refinance, is a very good comfortable position to arrive at.

Okay. So if you include refinance, you've given that ratio in the PPT, so that also will go down by maybe 1 or 2 percentage points more, not anything more than that?

That's right. That's right.

Okay. And then in that case, incrementally, I think deposits and loans can grow in stead, right? Loan growth does not have to lag deposit growth by a large amount?

Except the additional SLR requirements.

Okay. So what kind of loan growth are we looking at? Are we -- because 20%, I guess, is partly also because of the securitization that you did in the quarter. So if I look at the gross advances, 23%, are you looking at mid-20s as a run rate where you want to be?

Yes. I think our portfolio growth, advances growth should be on a gross basis, should be around 25%. That should be our focus.

Okay. And finally, just deposits. So now again, you don't need a 40% kind of deposit growth. There's a lot of bulk that you've classified that 38% bulk TD. So that should ideally run off, which would be maybe a little higher cost. So is that something we should expect, that the mix should move more towards retail TD and less towards bulk?

No, in that bulk, there are 2 segments. One is institution as a segment, financial institutions as a segment and individuals. So if you see our book, it is 72% retail and 28% is from institutions. So depending upon the situation, bulk is dependency on the market rates and what is the requirement at the bank level. We will keep calibrating it. So as of today, out of INR 36,000 crores, INR 35,000 crores, INR 7,500 to INR 8,000 is what bulk is all about. And predominantly as is noncallable and 1 year. So we will wait and see how retail picks up a trajectory. Today, we are at 72%. If sustains 72% to 75%, 78%, what you say is right.

The next question is from the line of Vivek Ramakrishnan from DSP Mutual Funds.

I was actually going to pick up on the deposit side in terms of concentration of deposits only. Though you might qualify it as retail, there will be a lot of HNI deposits and so on in the mix. And we've seen in the past that those are not very stable deposits. Sir, how many -- what percentage of your deposits are noncallable that provide stability? And increasingly, would you look at -- is there any way where you can increase the granular deposit growth so that there is stability in your deposit base? That's my question.

Ours is the most stable term deposit base. Basically, if you go to the presentation in the slide, less than INR 2 crores, which is categorized as retail. 62% of the book of deposit is less than INR 2 crores, okay, which means these are all those set of customers who have positioned INR 2 crores and individual average ticket size of INR 4.5 to INR 5 lakhs. That's the amount of customers who are having it. So it's fairly stable. Next comes the institution. We have close to 22%, as I said, coming from institution. Out of it, 91% is noncallable with a tenure of 1 year. So it is 1-year block and noncallable. So our concentration risk in terms of noncallable to callable, if you see into it, there is callable less than 10% is the present mix. And greater than INR 10 crores, okay. It is 30% of the book. This is a place where you have to see the noncallable, which is 90%, and it is only 30% of the total book.

Our next question is from the line of Nihar Shah from New Mark Capital.

Just a couple of questions from my side. My first question is, thank you for pointing out some of the investments that you are making into the new product segment of credit cards and personal loans and all. If I total that number, it comes up to about INR 520 crores. Can you give us an idea as to how do you think about the timing over the next 3 years of the expenses? And then how does that then play into what you think is the reasonable cost-to-income ratio outlook for the next 3 years as well? That's the first question.

Yes. So one, with investment, this slide has come because last quarter we had a discussion around this. So we thought we will give clarity on what the investments will look like from a 3-year horizon. Just to give you the nature of some of these expenses, some of them will come in the depreciation line item and some will come as the regular OpEx line item, especially given with technology. All of this is baked into our, let's say, soft guidance in terms of how cost-to-income, cost to assets will look like. What we can say is, for this year, we're seeing that cost to income will look a little sticky. And given that range between 60% to 63% is what we think we will be in the cost to income during this investment phase, and some of those investments is what we've put in the slide. We may have a few more depending on how the bank grows, like we've talking about it earlier in terms of branches, in terms of brands, et cetera -- brand building, et cetera. But these numbers, from how it should pan out from a cost to income is we should keep cost to income stable at where it is or in this range of 60% to 63% and still hopefully deliver consistent ROE.

Got it. That's great. My second question is just a little bit of a clarification on, you mentioned the INR 60 crores to INR 70 crores impact of the NIM of the securitization. Now from what I understand is that whatever the interest expense you -- on the securitized portfolio, the interest income is sort of recognized in the interest income line and then it's only the excess that is recognized in the other income. Is this INR 60 crores to INR 70 crores the total interest income that you earn on the securitized portfolio? Or is it just the incremental -- or is it the incremental piece of it?

In the case of securitization, we don't take it into the interest income. I say the excess interest, which we call AS, that is taken as another income. So the INR 60 crores to INR 70 crores, which you have mentioned is what is actually coming to us.

Okay. So that's in the total interest income that you earned on the securitized portfolio. Got it.

This is really because of the total interest of that portfolio, which is securitized, and the excess interest income comes in the other income and not part of at the net income.

Got it. Can you quantify that excess income that is coming to the other income, is it possible?

INR 22 crores will come in other income.

INR 22 crores coming for this quarter. INR 11 crores for the last quarter.

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

So if you look at the disbursement trends in this quarter Q4 on a Y-o-Y basis, there is a moderation in disbursement growth across most segments, whether it is micro finance or small business loans or vehicle finance? What is the reason for that? And how should we think about disbursement growth next year?

If add-ons have to grow at 25%, obviously, you have to grow disbursement because there is always a foreclosure component, Nidhesh. So disbursements will definitely grow across all products. We see strong demand in this season.

Any particular reason why the disbursements were weak in this quarter?

As I said, our focus was primarily on growing yields, right? Because we need to change the mindset in the field also that you need to lend higher -- at higher rates and stronger disbursements. So the focus was more on yields, not really dropping disbursements. The disbursements will continue to grow, that is a given.

Okay, sure. And from a medium-term perspective, should we expect our yields on advances to trend towards yields on disbursement? So today, there is a gap of around 170 basis points between disbursement yield and on book yield on advances. So over, let's say, a couple of years, it should -- both of these should get converged, right?

Yes. Not the entire yield on disbursement will translate to portfolio yields, but yes, you should see it pick up.

Okay. And lastly, what is the difference between yield on advances and yield on gross advances? Is the numerator the same for both of them?

No, no. Numerator is not the same. We have -- the securitized portfolio is the difference. So the denominator, the assets which are securitized will not show. And also in the numerator, that corresponding effect is given.

So in the numerator, are we including only excess interest?

No, no. Yield on advances, we have not. Yield on gross advances, we are. So I think for to bring clarity and because securitization can alter these numbers, I think we should all stick to yield on gross advances. So I think over a period of time or hopefully, from next quarter, we will stop giving yield on advances and focus on yield on gross advances. Then you won't have this disturbance, which we see due to securitization.

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

So first, just a clarification. I mean, you mentioned that our cost of funds may increase by 10 to 12 basis points, I mean, the repricing which is left. So, NIMs that we are seeing falling for next -- for the last 5 quarters, it has been falling on a quarter-on-quarter basis. So -- but we did mention that we expect NIM to remain stable at this level, fourth quarter level, in the short term, right?

Yes, yes.

In spite of this 10, 12 basis point increase in our...

Because the pressure on NIMs because of improving CD ratio would have lessened. From 100%, we've brought it down to 85%, 86%, 87%, you won't see that pressure on NIM going forward. So we're adjusting to that. This is based on our calculation.

Okay. Understood. And how much impact we see on the NIMs on the medium term, which you mentioned because it may come because of reduced MFI portfolio mix?

We can't quantify it now. So the way at least we are looking at is how do we protect the bottom line, how do we protect overall margins. These are very fine tuned for us to put it all out in the call, but these are challenges between we'll take up.

Fair enough, fair enough. And in terms of ROA, adjusted ROA was about 2.15% for this quarter. And then you did mention that our cost income will remain sticky. So how do we see the ROA for next 2 years or for FY '25 at least?

Yes. So I was also trying to point out in the presentation, we've spoken about trying to grow the small ticket, small business loan, we call micro-LAP, which are higher yielding products. So these are some of the strategies we are trying to deploy to ensure margins hold as far as complete debt. And on ROA, yes, so we're trying to build consistency in ROAs and improve ROEs as leverage picks up. That's what we are focusing on. So hopefully, we should continue to deliver this 2% ROA.

2% ROA, fair enough. And my last query is on your PCR. I think we have been quite vocal about improving our PCR ratio to 70% over the next 1 to 2 years. So how do we see that trajectory? I mean, from current 56%, how do we see that going into FY '25 and FY '26? And what would be the implication for the credit cost of your improving PCR ratio, yes?

So the PCR ratio, yes 70% remains our long-term target. And I guess, we don't have a very specified timeline plan to achieve that. But I think in a matter of over the 3-year timeframe, we should be looking towards reaching those levels. And in terms of credit cost, including the improvement in PCR over the next few years, as I mentioned, I think we should factor in our credit cost, which is our pre-COVID levels. Our pre-COVID level credit cost used to be around 1.25% on advances. More or less, our portfolio has come back to the pre-COVID now. And I guess we are fairly on a steady state basis as far as credit cost is concerned. So I think we should factor in something in the range of 1.25% on advances as credit cost.

1.2% on your -- I mean, on book or the gross advances?

1.25% on gross advances.

On gross advances. Okay. And this is in spite of your target to increase your PCR ratio rate, right?

Right, Including that.

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

Just two questions from my side. Somewhere in the opening remarks, we mentioned something about the unsecured mix gap. How are we looking at it? And what is the -- just wanted to clarify what gap we are looking at? And what is the trajectory of that gap?

I guess this is something we have been consistently mentioning over the last few quarters. We want to have our 80-20 ratio between secured and unsecured. As on date, the bank has micro finance loans, which are the only unsecured product that we have today. And I guess micro finance contributes about 18% to the loan book as of March '24. We will be introducing personal loans. In fact, personal loans are going live between April and May, this month, and next month, it will be going live. And credit card should be going live towards end of the calendar year. So these 2 products will come into that unsecured portfolio mix. And so all the 3 of them put together should continue to be within that 20% contribution.

So given that MFI is not that focus area right now, so if it hypothetically comes down, we could have a cap for PL and CC as well only?

See, micro finance will continue to be a strong offering from the bank because it not only produces a direct business, in fact, in terms of volumes and profitability, but it also enables us to cross-sell our small business loan, the lower end of the small business loan products, it enables us to cross-sell. So that is a segment that we will anyway be continuing to focus. The only thing is that micro finance as a contribution to the total advances will come down, meaning that micro finance will grow at a rate which is lower than the rest of the advance growth. And so its contribution will come down. And as that contribution comes down, that space will be filled up between personal loans and credit cards.

Got it. Sir, just one follow-up on that. Credit cards will be our own sourcing, right? You're not tying up with anyone?

Yes. See, lastly, the credit cards and personal loan, both of them for that matter. Lastly, the purpose of introducing that is for offering it to the existing customers to ensure that we are able to deepen our relationship. So a significantly large part of it will be anyway cross-sold to the existing customers. And whatever NTB customers that we acquire will be acquired directly by us. We are not really planning to go through aggregators or through websites or through anybody like that.

Got it. And lastly, sir, how are you thinking on the TD rates? I think we have not changed post August 2023. And given that now we are at a healthy rate of growth and we have a decent CD ratio, what are you thinking on the TD rate side?

See the TD interest rates -- you're talking about interest rates, right?

Correct, correct.

See, the TD interest rate will be, to some extent, a factor of what's happening in market, right? So currently, if you see the peak difference in interest rates between our TD rates and some of the large banks in the country, that peak difference is about 1.25%. [indiscernible] interest rate is 8.5, the highest interest rate of some of the largest banks in the country in 0.25%. So the peak difference is 0.25%. So if the market also moves, we are most likely to move along with the market. And over time, I think we have mentioned in our presentation, liability 2.0 strategy. So we have -- that's something that's been rolled out by Murali and his team. And over the next 3, 4 years, that will be a key focus of execution for the liability team. And as that strategy progresses -- that strategy is nothing but basically building a deeper, stronger relationship with deposit customers and account holders by way of cross-selling and ensuring that they are having many more touch points with the bank and not just 1 or 2 touch points. So as that strategy progresses and as we feel more and more comfortable and confident in terms of the customer being associated with the bank on a longer-term basis, we will start looking at the interest rate structures.

The next question is from the line of Pallavi Deshpande from Sameeksha Capital.

I wanted to understand on the other income, even excluding the ARC, which you have given Slide 19. What would be the trajectory going ahead? We've seen a decline in Q4 versus last year's Q4?

Yes. So one is -- what will reduce in other income? No, are you asking the trajectory of other income?

As one is the reason and then going on the trajectory. So Q4 over Q4 even excluding the income from sale to ARC, which you've highlighted in that slide.

So EIS income is sitting there, the INR 20-odd crores. That is sitting in Q4. That is the bump. And going forward -- see there are multiple drivers for other income. There's liability fee income. There's asset disbursement link fee income. So all of those are drivers, and they've been growing at 30%, 40%. So you should continue to see that as the bank grows. The only exception from here was that the EIS or excess interest spread is being shown in other income.

Okay. Secondly would be on micro finance. I think you mentioned about this, the cross-sell opportunity that it offers you. So that earlier guidance in terms of reducing it to 15%, does it stand? Or where are we on that?

So that stands. Rohit?

So yes, as just now, Vasu sir explained that, we -- the micro finance portfolio offers a wealth of cross-sell opportunities. And the biggest cross-sell opportunity that micro finance offers is the micro LAP product. The micro LAP product is small ticket size, the customer is the same, and it's a secured product. So we will definitely be focusing on the micro LAP product. And since these customers in the second cycle, third cycle, fourth cycle has paid us very well, it is a phenomenal opportunity. So despite the fact that micro finance percent unsecured piece might see a slight decrease, the same customer base, the securities will [indiscernible] for the bank.

So this micro LAP will be classified under which -- not under micro finance then?

No, no. It will be classified as a secured product as a micro LAP product under SBL.

Right. And just lastly on the NBFC side, we've seen a sharper, I think, 0 disbursements kind of scenario. So what is the outlook next year in terms of lending to that sector? Are we done with the sector, basically?

Yes. So we had started lending to NBFCs at a point in time when we were sitting on a fairly high level of capital adequacy. And the interest rate structure was such that it was making a profitable bottom line sense to the bank. Today, what's happening is that on both fronts, it's not making sense, interest rate structures are more in a different way. And so to that extent, lending to the NBFCs at least for us is not very profitable, and that's one factor. Second is that, our own high capital adequacy, which used to be in the past has been fairly leveraged through growth over the last 2 or 3 years. And today, our capital adequacy has come down all the way about 21.7%. And internally, we do have a target that we would really not like to see the capital adequacy going below maybe 18%, 19%. So somewhere along the way, we will see pricing equity so that it doesn't really go below 20% or 19%. To that extent, at 21.7%, we are not having such a high level of capital adequacy that we want to distribute that capital to low-yielding products. So we have to keep looking at the allocation of capital. So given all this, we believe that for the next 1 year, we won't be really focusing on NBFCs and we should see that running further down as we go by.

Sir, you mentioned that being a lower-yielding product, that's where I was coming from. I thought it's from the higher-yielding side, and that is -- yes, I mean, the capital adequacy...

NBFCs doesn't give us high yield. It does give us only a low yield. But it made sense at a point in time when the interest rates were at different level and capital adequacy was very high. Today, both of them have changed, so it doesn't make sense for us. And lending to NBFC is not a strategic part of our business, however. For example, the other one that they mentioned that we have gone a little slow is the new commercial vehicle lending. Because currently, the yield on that is the lowest amongst all our loan products. So we have slowed down on that. But that's not something like NBFC will exit. Because that's part of our key strategic focus for the long term. So we will continue to be in the new commercial vehicle lending phase. Only thing is we'll moderate the growth at a time, and then we'll speeden it up when the situation changes. Whereas NBFC is never our strategic product, so it's just a kind of an opportunistic product that we were trying to make some return when it was available. And today, it's not available. So we have no problem working out of that.

The next question is from the line of Anurag Mantry from Oxbow.

Just one clarification on the other income. So the liability and distribution income on Slide 35 is the one which has seen a big jumps off this quarter. Just wanted to confirm if that [indiscernible] taken is coming here or in sales?

It's insurance, mutual fund and broking.

Got it. So the liability and distribution income is like the INR 60 crores is a more sustainable number? Or there is a bit of a seasonality given 4Q because even though...

Quarter 4 peaks, quarter 4 peaks. And all the other quarter -- normally quarter 4 for any fee-based activity is 35% to 40% of the income. So stable state will be 25% lesser.

Well, ladies and gentlemen, we would take that as the last question for today. I would now like to hand the conference over to Mr. P. N. Vasudevan for his closing comments.

Yes. So thank you. Thank you so much for all of you for dialing in and peppering us with a lot of questions, enabling us to learn in the process and improving our own ability to focus on the right direction for the bank. Thank you so much. Wishing you all the very best and be in touch. Bye-bye.

Thank you. On behalf of Equitas Small Finance Bank Limited, we conclude today's conference. Thank you for joining us. You may now disconnect your lines.