IDFC First Bank Limited (539437) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the IDFC First Bank Q1 FY '22 Earnings Conference Call, hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kunal Shah from ICICI Securities Limited. Thank you, and over to you, sir.

Thank you, Faizan, and good evening, everyone present on the call. This is Kunal Shah from ICICI Securities. Today, we have with us Mr. V. Vaidyanathan, Managing Director and CEO; Mr. Sudhanshu Jain, CFO and Head, Corporate Center; and Mr. Saptarshi Bapari, Head, Investor Relations from IDFC First Bank to discuss their Q1 FY '22 earnings. Over to you, sir.

Okay. Good evening, everybody. It's just a great pleasure for me to speak to all of you today. I haven't had analyst conference calls for like 10 years in a row. In Capital First, we started that at 2010, and it got the name of Capital First in 2012. And 8 years went by, we were giving out our quarterly results and then we spoke to television channels and that was it. After the merger of the bank in 2018 to today, again, we've not had any conference call. So for me, let me just say at least after 10 years, it's a reentry into this process. I hope I can do justice to your expectations. Now with regard to our bank, I think we came into being in a new avatar of IDFC First Bank in December of 2018. And at that point of time, we made certain very specific guidance as what we will achieve in 5 years. The key thing was that, at that point of time, Capital First was something like about INR 27,000 crores, INR 28,000 crores of loan book, INR 30,000 crores of AUM. IDFC Bank was about like INR 75-odd-thousand crores of loan book. And together, it's coming to about INR 1,00,000-odd-thousand crores (sic) [ INR 1,00,000-odd crores. ] And at that point of time, our bank had -- naturally, we were just a startup bank; 2 years ago, we had got our license. So really, we did not have much of deposits. We really didn't have a really good picture about how the P&L of the merged entity would roll out to be. I mean, we had a plan, we had a thought when we did the merger, but -- and as all of us know, in life, as we turn out -- as it turns out in the next 4 or 5 years, there could all be lots of variance within our plans and thoughts and all that already factored for. So we didn't have much of a -- but we had a reasonable picture. So we gave a 5-year picture with the limited visibility we had. And that 5-year picture, I'm happy to say that we are broadly on course on every one of the parameters that we set out at that point of time. And I'm happy to say also that we haven't wavered one bit from the original direction we set for ourselves. Along the way, we never got excited saying, "Oh my God, I want to do insurance, so let me do mutual fund, let me start doing corporate banking again in a big way, let me start doing infrastructure, it's very profitable." So we haven't moved this way or that way. We made a plan, we announced it to all of you, and we stuck to it. And let me just say that the guidances we gave at that point of time were broadly on 5 parameters with the limited visibility we had. Number one, we said that on the -- we recognized that the key issue the bank had at that point of time was the fact that on the liabilities side, we had, let me say, about INR 5,200 crores of CASA deposits. And on the lending side, we had close to like INR 103,000 crores or INR 104,000 crores. And including other liabilities, probably even bigger. And therefore, including -- on the liabilities side, I'm saying it was even bigger than -- it was like INR 1,40,000 -- INR 1,50,000 crores. So this is very, very low CASA percentage. And the key call we took at that point of time was that we don't want to grow the loan book. We have to first get the liabilities in order. I've been in banking circles long enough to know that the key issue that can really put a bank under risk is really not the asset side the liabilities side is probably even more important than anything. So the first 2 years, I think, in a very single-minded focused way we focused on the liabilities side. But coming back to the guidance front, we gave a CASA guidance that they will be 30% in 5 years. We've gone past that number now. Second thing is that we've said that we'll give -- we'll put out close to about 800 to 900 branches in 5 years. It was just a number that we thought could be right. It -- there was no science to it. And we've come to -- close to about 600 branches now. We've given 2025 for 800, 900 branches. I think it should not be difficult if we want to put that many branches at all because along the way after figuring out digital is becoming a big play and all that. Then the third thing that along the way we figured out that -- the customer deposits -- we just don't want customer deposits because -- let me again go back in time, it's important, we had close to about, say, INR 30,000-odd crores of corporate deposits, about INR 28,000 crores of certificates of deposits. All of you know that with -- both of these can be brittle if taken in very high measure. And that's when we said we've got to pay down these deposits before a crisis strikes, not after suddenly there's a liquidity problem. So one of the things we came up with was that we want the top 20 depositors' concentration to come down dramatically because we just don't want to be behold as the top 20 depositors' bank who might just call and ask for the money. So at that point of time, at merger, we had 40% as the top 20 depositors -- 40% of our deposits came from 20 depositors. So at least in a strategic sense, we saw this as a big issue. And then we said that we got to bring this down. So we gave a guidance that we want to bring this down to 5% in '24, '25. I'm really happy to say that we've come up to 9% already. And really at 9%, we feel very, very safe. And of course, in due course, we'll take it out to 5%. The other thing was the certificate of deposit. We gave some guidance on that front. We said that our certificate of deposit in March was INR 28,000 crores, not in December; December is INR 22,000 crores. So we said INR 28,000 crores, we had to bring it down. Now we are hovering around maybe INR 5,000 crores to INR 6,000 crores. Frankly, we're comfortable even at INR 10,000 crores. We just -- and it's pretty inexpensive. The reason we're not taking it is not because of any reason, just because we don't have the need for it. But anyway, it's already come down. The first is that along the way, we introduced one more requirement in terms of guidance, that is in terms of average liquidity ratio because, again, what does a bank is not anything else, it's basically liquidity and diversification, or lack of it. So therefore, the average liquidity ratio, we say we want to be greater than 110%. But really, right now, we are running upwards of 166% last quarter. Then the next set of guidance we gave -- so all that I described to you was on the liabilities side. Now I move over to the asset side. On the asset side, at merger, our retail book was INR 36,236 crores. And we had guided that we will take this to INR 1,00,000 crores in 5 years. Frankly, we have to say we're on track because it's only June of '21, it's just like 2.5 years and we already touched INR 72,766 crores. So a INR 1,00,000 crores is just a hop, skip and jump. It's not even -- we should count it as achievable practically -- for all practical purposes. Then the next thing we set for ourselves was a goal, as retail -- as a percentage of total assets because we really feel that our capabilities clearly are on the retail side in a very significant sense, one, because on the net worth point of view, maybe the big banks, like the big 4 have net worth of maybe INR 1,50,000 crores or INR 2 lakh crore or INR 2.5 lakh crore and with our net worth of INR 17,000 crores, INR 18,000 crores, INR 20,000 crores, we really didn't -- could not believe or we could not -- we did not fancy ourself being any serious players in the corporate banking side, with a relatively, let's say, mid-sized bank's net worth. And it wouldn't have been very smart to go head up against them or try to take them on in terms of pricing and things like that. So that is not -- we didn't call that our strength. We said that we will do it in an opportunistic way, but really, it is not a big game for us. So we said that, okay, but on the -- a focus on the retail side, so actually INR 20,000 crores is really a lot of capital and we could really achieve big things. The second thing, of course, is very, very diversified. I've personally done this for like close to about 25, 28 years and I just find that with all my experience I just find that you'll have an odd cycle here or there, but in the longer run, these are end -- net-net, these are end of the day, individuals are borrowing. Individuals bother about the credit bureau. Individuals -- they don't have a cover or a shell of a company, which can have some limited liability and they cannot -- they don't have escape -- those escape routes. They have the personal -- in terms of the size of the relationship, the -- it's always -- I mean, the strength of the relationship with the individual customer is much stronger. So for many reasons, we wanted to do retail. So therefore, we set as a target of about 30 -- at that time, it was 35%, at merger, premerger stand-alone bank was some 13-odd percent. Because of the merger with Capital First, which was like 90% retail, the blend-blend became 35%. And then we said we'll be 70% in 5 years, but we already touched 68% as we speak today, including the PSL book and -- the PSL buyout book. So you can treat this as, as good as on track. The [ good ] thing is we said is on the wholesale side, we said we want to bring ourself down below INR 40,000 crores because I don't fancy ourself, like I said, being a very large corporate banker. So I mean, we'll be still be relevant to the customers we want to serve, but in the size and proportion as relevant to our net worth. So our target at that point of time, we said was less than INR 40,000 crores. I'm happy to say we're already at INR 32,000 crores. Then on the wholesale side, we also said that our top 10 borrowers as a percentage of total funded assets, we wanted it to be -- at that time was 12.8%, really to give 13% of our -- if top 10 borrowers are going to have 13%, 14% of our funded assets, it doesn't feel very comfortable. So we wanted to bring it down below 5%. We already reached 5.8%. We gave certain guidances on gross and net NPA. We said that our wish list is to keep a gross NPA around 2% to 2.5%, net NPAs 1% to 1.2%. As of now, as we speak, the gross NPA is 4.61% and net is 2.32%, but really 2024, '25 is a long way away. I have no doubt in our mind that we will get to the numbers of 2% gross and 1% net we talked about. Then the next thing was -- so all the stuff, the second set of stuff I talked about was all about assets. The third set of sets we talked about is earnings. Now again, we were at a merger situation, the earnings on Capital First, yield on the book was close to about 16.5%. Cost of funds was something like about 9-ish-odd percent or maybe a little less than that. And we had net worth, so all put together, we were making a NIM of like 8%, 8.5%, 9%. And we were making a return on equity of about 15%. But 15% was on stock. But if you go to the last page of the presentation, if you got an opportunity to flip -- go through the presentation, basically, quarter-on-quarter-on-quarter for close to about 5 years at a stretch, our return on equity was growing on the whole book, which means that the incremental return on equity we were getting, not -- the return on equity was 15%, which by itself was not bad, but the incremental return on equity we were getting every quarter on our book was upwards of like 18% to 20%, which means the incremental capital consumed and the incremental profit we were making out of that incremental capital. So we were frankly very, very happy that, look, if Capital First had been a stand-alone entity and theoretically, if it had got a bank license or something, then you would just keep pressing the same lever again and again and keep pushing yourself towards that sort of a ROE, and that would have been a kind of a desired ROE where we feel that it's an annuity institution by itself and you can raise some capital from time to time, but it really don't have it depend on it. So that was the broad plan. But anyway, that was on one side. On the other side of the equation, on IDFC Bank side, the -- it was a good institution, and I'm quite proud that this is the institution we merged with and all things good in terms of brand and the governance and all that. But on the earnings front, I think it was a bit challenged because it was infrastructure DFI. And DFI, by definition, actually borrows at high rates. For example, it's like some 8.5%, 8.75% was common to borrow. And there's the infrastructure loans to it. Infrastructure -- if it is good infrastructure, it gets repriced itself downwards quickly, but a difficult asset, it stays on your books forever, nobody buys it from you. And then setup cost of a new bank, which was incurred by the bank. So there were these set of challenges that the bank had at that point of time because it is also a new bank, setting up, setup costs and all that. So blend-blend, the -- there's a slight summary inside, but there's a blend-blend of the half year merged pro forma financials of the 2 institutions shown somewhere, but it wasn't very pretty on merger. It was kind of negative. Then the -- so -- and from that situation, we said, okay, what does the story look like? So from that situation, we gave a pretty clear guidance that we will touch 15% in 5 years. I'm not -- I know most of you are quite concerned or maybe are concerned about our return on equity because the numbers in terms of earnings have not kept pace in terms of the preprovisioning operating profit. But of course, there are -- so we've seen in the context that we started from. But still, I think you may have a concern and talk to me about it today. But at that point of time with the limited visibility, we gave guidance of 15%. I'm happy to say that broadly, we are very much on track on that. And later in the time if we get an opportunity, we'll describe to you how. So this is it basically. These were the 5 or 6 -- not 5, actually. To be very precise, there are about maybe 15-odd guidances that was given, but they belong to 4 categories which is liabilities, assets, earnings, diversification, and of course, a fifth one, which we haven't talked about, which is important, is capital. The truth is that we did not give any specific guidance on capital, maybe it didn't occur to us at that point of time. I can't speculate. But basically, when we look ahead from here on, we can make some very specific guidances on the capital front also. Right now, our capital is INR 20,170 crores. Our capital adequacy is 15.56% as we speak. The guidance we'd like to give, of course, is that our capital adequacy will not go below 13%, that would be our broad guidance and wish the way we run our bank. And therefore, if you see that our capital is dipping below that level, you can know that we're coming to the market for capital. So this is the broad stuff -- you can think about like the guidance given now, not then. But we can tack it from here for the rest of the 3 years that are left into 2025. So that is a very quick brief I'd like to give you about what has progressed during the last few years, let me say, 2.5 years. And really, in 2.5 years, I really think we've come really hell of a long way. I really don't think that anybody really guessed that we'll get to 50% CASA in 2.5 years, that too for a large bank to get there. So we are -- that's how we are playing our cards. We're very straight about how we do our business. In fact, you may recall that the first 4 -- 6 quarters -- 5 quarters after the merger, not 1, not 2, 5 full straight quarters, every quarter, we discovered a problem. One quarter is Dewan Housing, another quarter is Reliance Capital, another quarter it is a telecom company, another quarter it was DTA, which got reworked and another quarter it was an infrastructure company. But really -- and I tell you, it's not an easy job for any CEO to come out there and say, look, okay, this quarter, we didn't -- we made a loss. It's just not a pleasant thing to do at all. But no matter what the pressure was, we just looked straight into the eye, straight into the camera and said this is what the numbers are. It's -- most of it, I guess, came from [ legacy, ] but that's not the point here. So we do play straight and we want to play straight going forward also. And I think it has given us a lot of confidence in the way we do our business. The way we look at our incremental economics, I really personally don't get so rattled about what the current economics of any institution are. I didn't get rattled even on Capital First when it was loss-making for 3 years even after I had touched it. So basically, I always look at incremental earnings. It's very important because end of the day, the incremental earnings become the book when you grow it faster than the rest of the book. So incremental earnings for our bank, we feel are pretty strong. We have -- our incremental cost of funds is now coming down below 5. Our lending on the retail side is pretty strong. We will talk about it. And incremental return on equity is, according to me, really very good. So when that incremental becomes the book, then you know that this bank has headed for a really good, let me say, into a good space. So I'd like to really -- with that very quick brief, I'd like to stop here. And I'd like to open it up for any discussion. Thank you, friends, and nice to speak to all of you. I got with me Sudhanshu. Sudhanshu is the CFO and the Head, Corporate Center for the bank. And I got Saptarshi, who many of you may have interacted with. He is the Head of Investor Relations with us. Sudhanshu, why don't you say hello?

Yes. Good evening, everyone. Thank you for joining this call. It's a pleasure taking this call and having this conversation with all of you. Saptarshi?

Yes. Thanks, everyone, for joining. We look forward to your questions.

[Operator Instructions] The first question is from the line of Pritesh from Prabhudas Lilladher.

Sir, I had a couple of questions. First is I wanted to ask what will be our average SA rate now? If you can give the same for last year and last quarter as well, if you can share that number?

You mean interest rate?

Yes. I mean, the interest rate is obviously there on the website, but the average rate -- SA rate for us right now will be what on the book?

Yes, about, let me say, 4.8%.

4.8%? And...

4.7%, 4.8%.

And the same for last quarter will be?

We reduced rates by about 100 basis points last quarter. So think about like 5.8%.

Fair enough. Can you also give a breakup of CA and SA if possible?

Yes, we can.

I can take it later from Saptarshi maybe.

No, no. No problem. Sudhanshu, what's the CASA number right now in absolute terms? 65 or...

CASA ratio is...

Not ratio, CASA in absolute terms.

Yes, CA and SA breakup, sir, actually. I have CASA.

Sorry, you're asking about CASA deposit?

No, I have the CASA deposit. The breakup of -- between CA and SA, current account and savings account...

[ SA ] is about INR 6,000-odd crores.

INR 6,000 crores is the SA?

Yes.

Okay. And sir, just as a strategy, I just wanted to ask, in the presentation, I could see the corporate book is growing. We've seen some of the segments growing by about 20% year-on-year or quarter-on-quarter, there is some growth. What is the strategy there now? I mean, we've reduced -- we've been reducing exposure there. Now from here, you see that at least the non-infra wholesale book growing or you see still -- you feel it is cautious. You made some comments on it, but can you just little bit give -- how you think about it?

See, on the corporate side, like I said, corporate banking belongs to someone who really has very low cost of funds straightforward. And the big banks like ICICI, HDFC, Axis, they are naturals into it because they pay 3% up to INR 50 lakhs and 3.5% above that. So they really sit on very low CASA rate -- I mean, cost of funds. And then large corporate really asks for really fine prices. So it kind of naturally belongs to the, let me say, the big folks. So as far as we are concerned, we like corporate banking. We -- but like I said, in proportion to our net worth, a; and secondly, with regard to our ability to get a reasonable risk reward, we really are very sensitive, very sensitive not to have a blowup of corporate banking on our hands. Now I can tell you I'm very sensitive about that. It's -- so it would be a very fair estimate if you were to think that there would be -- I mean, let me just say that we're very careful about it. And therefore, we do, do corporate loans, but where we feel that fundamentally there is a good risk available, good risk meaning that where we feel comfortable with the risk and is coming at a reasonable price. We don't want to be priced out of the market, but at a price that is appropriate to our cost of funds. So that's one thing. Secondly, by the way, in corporate banking, we are also pretty strong in -- we have really fantastic corporate banking solutions in terms of technology. We are good in cash management solutions. We provide fantastic trade facilities across the country. And because we are a universal bank, we get fee income from ForEx, the transaction banking fees. There are -- we like the business for its wholesomeness. But like I said, we want to do it in the proportion to our size and net worth. And the last comment on corporate banking, to give a specific guidance on how the book will evolve, our -- given a choice, we'd like to maintain the book. We don't want to run it down any further. That's not our wish list. So if you tell us that would you like to keep it INR 35,000 crores, INR 37,000 crores for a while, yes, of course, we like to keep it. This is not a [indiscernible] book like infrastructure book is. We like it. And we like the team and we like everything. If you're not able to do it, you can think of it like more -- like a lack of -- our inability to spot a deal which meets our risk reward and net worth criteria. But we'll probably keep it there.

Last question. I just wanted a number on slippages, if you can provide that as well. Slippages for the quarter.

Sudhanshu?

Yes, yes, yes. Slippages for the quarter was about INR 2,800 crores. This included one large lumpy exposure on a closed account where the slippage was INR 850-odd crores. This account was already part of our identified standard list. And unfortunately, it has slipped into NPA during the current quarter. We see payments happening on this account, but a bit delayed. We expect a recovery to happen on this account in due course. On the retail front, out of this INR 2,800 crores, the slippages was about INR 1,800-odd crores. At the same time, we had recoveries and upgrades during the quarter, which was roughly about 1/3 of this number. And so net slippages is about 1.5%, 1.6% in retail.

The next question is from the line of [ Rohit Jain ] from Tara Capital Partners.

Sir, am I audible?

Very much, [ Rohit. ]

Just one question on asset quality. I see that your retail gross NPA and net NPA actually came down sequentially. Now in a quarter where the best of NBFCs like Bajaj Finance, Chola, everybody reported a decent sequential jump and so did the best of banks, I'm just a bit intrigued as to how our retail -- our NPA in the retail segments are coming down sequentially. So can you please throw some light there?

Basically, you see provisions and write-off, they go off the balance sheet. So that's how this comes down. In reality, we've had provisions to take to the P&L. Basically, the provision doesn't go off, but write-off goes off the balance sheet. So we had write-offs to take this quarter.

So can you please help us understand how to the tune -- how much were the write-offs?

Sudhanshu?

Yes. Write-offs on retail was about INR 1,400 crores during the quarter.

Okay. So basically, we had slippages of about INR 1,800 crores, recoveries of about INR 600 crores and write-offs of about INR 1,400 crores in the retail segment?

Yes, that's correct.

And another related question on retail is, I know we haven't done too much of a restructuring as yet, but is there anything in the pipeline? So what's the outlook there? And b, do we envision any further write-offs in the coming quarters?

On your restructuring, so we have disclosed that numbers in the press release that we have restructured outstanding standard pool of 1.8% on retail. And so -- and this was about 0.9% in the previous quarter. So incremental is about 1% during the quarter.

Okay. And is there anything more in the pipeline?

Not significant restructuring we expect in Q2.

And as far as the first question on write-offs are concerned, the best way to assess the quality of our portfolio, I guess of any portfolio for that matter, is to see 3 numbers together, the gross NPA, the net NPA and the provisions, because all of you're seasoned bankers, so -- seasoned people, you'd know that if a bank were to take provisions to that extent, the net NPA comes down. So having a low-end gross or net is not a measure of success. It is the measure of success, what provisions we take. So our guidance is -- for this year is as follows. We think that -- our estimates are that credit loss, including the write-off that has happened in the first quarter, the credit loss for this financial year, we are targeting at 2.5%. And if -- and for our kind of healthy yields, we have, frankly, 2.5% will be quite comfortable. I must tell you that even pre-merger with the bank, Capital First always had close to about 2.75% of credit losses. And the yields, as long as the yields were commensurate and this 2.75% was consistent, life was fine. So as of now, for this financial year, we're targeting 2.5%. For next financial year, we are guiding for 2%. So if we can get that number, then at gross and net NPA or whatever you're seeing, I think it's a pretty comfortable number.

Okay. And one last question on NIMs. Given that you have already released your savings account rates and the rates market-wise have sort of bottomed out, do we expect NIMs to keep inching up from here? Or is the 5.5% level where we think we are comfortable from a risk reward metrics?

It will broadly be here, but it could still inch up from here because basically the incremental economics of the bank are earning us greater than -- more NIM than 5.5% at least on the retail side. Basically retail, the incremental lending -- borrowing rates are like -- something like under 5%, and the incremental lending rate are currently upwards of 14%. So we are getting incremental of -- it's pretty strong, you can do the math for yourself. So therefore -- but this is the story on the retail side; the wholesale, of course, doesn't give this kind of NIMs. But blend-blend, it could still inch up here.

[Operator Instructions] The next question is from the line of Prakhar Agarwal from Edelweiss.

A few questions from my side. First, can you help me understand where this INR 1,800 crores slippages in retail coming from? Which segment are we seeing this sort of numbers. So if I analyze that number, probably 10% of run rate on slippages on retail, that is quite a lot. So where is this segment -- which segment of retail is this coming from?

We have seen 3 segments actually, which have contributed more to this. One is the wheels segment, basically vehicles. And let me say, our 2-wheeler business had more slippages. Second was the commercial vehicle business, the used car business, basically the vehicles category of stuff. And second was the JLG business, which is the micro finance book that we have in our rural areas.

Okay. And when I look at write-offs, INR 1,400 crores is a significant number. What is the thought process behind writing these assets off? And which segment is the INR 1,400 crore coming from, predominantly JLG business or wheels and JLG combined?

All put together. And even on the other businesses, which are supposedly secured businesses, we've had slippages. But whether it's -- frankly for that matter all the wheels are secured only. And in due course you do -- see, I think in due course, of course, we're hoping to collect the money. I think one very, very important thing, I think all of us should kind of note is as follows. How do we take provisions? Our provisions are very formula based. We say, look, at 90 DPD, we've got to take so much percentage; at 120, we take off so much and we -- at 180, we take -- 120, 150 and so on and so forth, there's a provision policy. Now this is a quarter when throughout, let me say, April and May, country was in lockdown. Collectors could not go, customers were doing no business and they were not earning income. So at that point of time, when that situation occurs, then the whole portfolio, I mean not the whole, but except the people who cleared their checks, the people who returned their checks, that set of portfolio tends to slide 1 bucket forward, a bucket meaning a stage, which 0 to 30, 30 to 60, I'm calling each one of them as a bucket. So it moves one bucket forward. When that happens, we have a formula. We -- and then we take it through the P&L. Now this is a pretty straightforward approach. And that's one of the reasons you see that -- you see that our provisions are high. But I want to point one very important thing to you. Just because the customer has moved over to 90 DPD and we have to take say 33% provision, does not mean the customer is not -- I mean doesn't mean we're going to really lose 33%, no. It's just that the customers moved their bucket. Now the customer also had a COVID problem, just like we had a COVID problem. So when the business recovers, customer will pay, and that money will come back. That is the reason we are guiding for this year -- if you see the INR 1,400 crores by itself looks like a large number. But see the guidance we're giving for the full year. It's only 2.5% of average book. Why? Because these customers who go into the bucket continue to pay subsequent to sitting in the bucket. So we are definitely believing that these customers that -- for whom we are taking charge off to the P&L on a conservative basis today, a lot of them will pay in due course.

Sure, sir. That I understand. That's why I'm saying what is the rationale for write-off. If you're so confident that they will be repaying, what was the rationale of writing it off at the first place?

No, it's a very good question. Again, write-off is a formula for us. We have a defined formula that we write-off something, let's say -- let me pick a date, say, 360 days or 240 days, there are different products depending on ticket size, et cetera, have a different formula. So it's a formula. The formula doesn't distinguish you had a problem because of COVID or because of where a customer is -- because of COVID or because of any reason the customer couldn't pay, whatever the reason is. Formula is a formula is formula. We just take it to the P&L, that's the end of the matter. But the important thing to note during the COVID situation is that customers are delayed, but they will pay. If somebody is moved to say, fourth bucket. Fourth bucket is 90 to 120. We take 50%. But customer will stay in that bucket, will continue to pay us maybe for 3 months, 5 months, 7 months, or they will pay 2 EMIs and come back to 31 to 60. Some of them will pay 2 EMIs and come down to being 0 to 30. So this is an accounting item. And for now, taken in a pretty straightforward manner, customer will still pay, and we will recover this back to the P&L, and it is very possible that what we charge off to the P&L today, will come back to us, say, 2 quarters, 3 quarters, 4 quarters from now. Remember, there's a real customer sitting out there. There's a real customer. There is a bureau. There is a rule of law. There are -- the customer has dues payable to us. The customer's -- the moment the customer's cash flow comes, the customer will pay us. So this COVID-related provisions and COVID-related delinquency has to be treated a bit different than what was going on in pre-COVID times.

Okay. Sir, just a couple of more questions. First, on your stressed book that we have highlighted. Now when I look at your stressed book, the 3 assets, which is, one wind power and one logistic company and third one is solar project. There is no movement at all in these sort of projects. And in 2 of them, we are only carrying -- in solar project, we are not carrying any provision. And on wind power, we're only carrying 25% provision. So why is there first no repayments in there? And are we comfortable with this sort of provisioning given the fact that there is no repayment at all?

No. As you speak, we're going to pull out the piece of paper so that we can have -- give you more straight answers, just give me 10 seconds. Are you referring to the stressed list that we put out over and above the NPA?

Yes, stress list that we put out. So I was just comparing your last quarter number and this quarter number, and there was no movement in the exposure for these 3 assets. And within these 3, we are not -- for 2 of them, we are not carrying any...

Yes. Now if you see the stressed asset page, we haven't named the client, but we've kind of described the -- given some clues or given some names -- given some description. Now without getting the specific name because maybe Sudhanshu can help with that specific question, let me just say that overall, if you see, this number is INR 1,371 crores. And against INR 1,371 crores, that is the -- just for the benefit of others who are hearing the program, let me explain the question to them, otherwise, they'll be confused. One is an NPA-NPA. That is what we've disclosed, we have taken our provisions and all that. Over and above what is disclosed as NPO (sic) [ NPA ] as a bank, we -- as given in Page 100, I think, in the report, we also have -- not 100, sorry, in Page 48, we also define the entities which is on our books where we see stress, where we have taken provision that is not yet NPA. So that's what the gentleman here is referring to. So let me say that on that front, our outstanding exposure is INR 1,371 crores. Our provision is already INR 915 crores. So that's like only INR 400 crores uncovered on an exposure of INR 1,371 crore. We feel overall pretty good about that. Now let me just add one more input and then that will tell you the direction we are headed. In March of 2019, our identified stressed assets i.e., over and above declared NPA, identified stressed asset was INR 4,138 crores. See the direction. Today that number is only INR 1,371 crores. And at that time, the provision was INR 957 crores on INR 4,000 crores, that has a provision cover of 23%. Today, on INR 1,371 crores, you have provision of INR 915 crores. So the short point is that notwithstanding the specific account you flagged because we've got to think -- understand the account is a little better. But overall, let me say that whatever is outstanding, it is well provided.

No, sir. The only point in asking this question was that even if there is a timing difference and a couple of these projects wherein we have not provided to an extent of 67% looks good from an overall perspective. But when I look at 2, 3 assets wherein there have not been any repayments, the coverage over there is essentially next to nothing. So there could be a quarter or so wherein if this...

Okay. No, as we speak -- no, we got the question. As we speak -- are you referring to the account where we have shown outstanding exposure of INR 251 crores?

No. So wind power, which is showing an outstanding of INR 157 crores, and solar project, which is showing an outstanding of INR 83 crores. Now if I look at provisions, wind power has 25% provision and solar project has nothing in sort of PCR that we have created for that particular...

So short answer is that for this one, on the solar project, though we have put it in the stressed list because the group is stressed, the fact is that projects are performing well and we are -- they are servicing the debt regularly. The sponsor is undergoing a resolution process of put it as a stress. But as we are concerned, we're getting paid on that INR 83 crores. Similarly, on the wind power, INR 157 crores you're talking about, this account servicing was earlier delayed, but now it is showing improved financials. They are servicing debt from cash flow of the project. So if this was truly a stressed account where they were not servicing the cash flow and they were troubled and all that, we'd have probably taken more provision, but it's not so. They're paying us. And it's [ 157 plus 83. ] Yes.

Mr. Agarwal, may we request that you return to the question queue for follow-up questions. The next question is from the line of Seshadri Sen from Alchemy Capital.

Three questions I had. First is on asset quality. The road project, which has become an NPA, you -- if I get it right, I think you had an 18% coverage on that according to your last quarter's presentation. Was there any incremental provisioning on it when it slipped into NPAs?

No, we did not take any incremental provisions.

So the INR 1,800 crores provisioning was largely on your retail book because of COVID. Is that -- is my broad understanding right? Or...

No, no, no. We also -- this includes some advanced COVID -- advanced provisions we've taken for possible delinquencies...

Understood. Understood. So that's about INR 300 crores.

Yes, yes. So it's not -- all of it is not retail. But to the earlier question on the INR 874 crore or INR 854 crore account, you can see that, that is now displaying as NPA. Let me just tell you what that account is so you'll get some comfort. Frankly, we feel that we will get -- there will not be any material loss on it as of today. That INR 850 crores is showing as NPA. Technically, it is an NPA, it is an NPA. But that account for the last many years, like ever since the merger happened and even prior to premerger days, this account has always been delayed between -- as an SME 2. And this is a operating road toll project in Mumbai, and they have cash flow and they have been servicing like for 2.5 years now. So therefore, we believe that even if it is NPA, so be it, it's a timing issue. I mean not so be it, of course, I wish it not happen. But the fact is that this money will come back to us. So this is academically an NPA, technically an NPA, but eventually, when we wake up many -- few years from now, all this money will come back because there's a real cash flow for the project.

And you had an 18% provisioning on that going into the first -- the end of the fourth quarter?

Nothing to worry. Eventually, the money will come back and...

Understood. And the large telecom exposure that you have, is that something that could leave you guided for 2.5%. So if something that happened to that, I presume then that is a risk beyond the 2.5% or that you're expecting this year?

Which one?

The Vodafone?

The telecom company. Yes, that telecom company, we didn't refer to as 2.5 because this 2.5 we're referring to normal course of business. So if you take the total provisions we take last year, and then you divide with the last year's average book, and then you take total provisions we're expecting to take this year, we've already taken INR 1,800-odd crores, and then we're planning to -- our own internal guess is probably somewhere like about INR 2,900 crores to INR 3,000 crores is the total provision for this year, which means that, let me just say this 18 is, let me say -- we've already taken a substantial portion in the first quarter. So -- but if you take the number and divide by this year's average book, you will get that number at 2.5%. Next year, our expected -- based on how our book is behaving or indicators are showing, we take that and then you divide that by next year's average book, we believe that next year will come to 2% or so, or maybe a little below that. So our broad philosophy is that we've taken quite a few hits in our life in the last 2 years. It's not the first one. We've taken Dewan, Reliance Capital, there was a large infrastructure, you name it. There was this unfortunate incident of that case in Bangalore. We have powered through with our core model. It is very important to think about it like that, that you have some issues in the side, you deal with the issue that they go away in time. They become small objects in the rear mirror. But the core incremental business model is very important. And if we can grow the bank from here on 20% year-on-year-on-year and then get the incremental economics the way I'm saying on the retail side, then it solves -- I mean it -- according to us, it will become -- turn out to be a terrific bank.

I appreciate that, and I appreciate that you recognize everything upfront rather than kick the can down the road. Switching track, I saw that your CASA in absolute amounts quarter-on-quarter has been -- has not grown. Is that an impact of your cut in your savings bank rates? And do you think that's a short-term thing? And over a little bit of time, your customer base will get accustomed to this lower rate? Has there been a flight when you initially cut rates. Just some color on how your CASA base responded to your cuts and would that slow down your growth over the rest of the year? Or you think it will come back later?

No, it's a good question and relevant to the situation. Now we -- we frankly have a fantastic [indiscernible] liability side. And I do think that customers stay with us and stick with us for our service. We have a very genuine approach towards this customer first. We are like insanely [ fetished ] about that. We are -- and all that has actually helped us grow our -- and of course, on a very attractive interest rate we paid, all that combined to grow our CASA, I think quite fast over the last 3 years. Now we -- when we started the year -- when we started the quarter, we just had a lot of cash and all of that cash was lying earning us pretty low rates in reverse repo and all that. So we actually took a call that even if some deposit comes off as a result of this rate cut, it's probably a good thing in the short run because we wanted, not short run, but we wanted some amount of deposits to flow out because that kind of liquidity -- excess liquidity was bothering us. So we planned it well, and that's -- so this was very much factored for. So our belief is that -- factored for meaning it has not come down by the way, it's still grown from INR 45,000 crores to INR 46,000 crores. It's like -- it's still up, but marginally up. Now going forward -- so the short point is it doesn't bother us because it was planned. Now going forward, we feel this will start growing again. Maybe in the next quarter, again, we don't need very much because we still have just too much of cash, which is deployed at very low rates. And therefore, even if it grows marginally next -- in the quarter, i.e., July, August, September, we're quite happy with that. But after that, this machine will grow again, there's no doubt. I mean, it will grow enough to feed our asset needs.

Your growth aspirations.

Yes.

And if I could squeeze in a third question on costs and -- your cost. I don't know how you look at costs, whether it's cost-to-income, cost to assets or just simple [ OpEx growth. ] I know you invest in technology in a very big way. So if you can give some color as to both in FY '22 and 2 to 3 years out, how your costs will shape up because that said, if your cost to income is much higher than your peers, which is in part an opportunity as well, but it would be useful to understand how you think about it both in the short and the medium term.

No, cost is important. The way we think about it is the cost-to-income ratio actually to give you a simple answer. And as far as cost is concerned, cost to -- our cost is concerned, it is basically, as you can well imagine, our bank started just maybe 5 years ago, and it's been just 2 years since the merger. So if you start at the INR 5,000 crores CASA and you're staring at a liability base of, I told you earlier, like INR 150,000-odd crores, I mean if you are the CEO of a bank, I don't know what you'll do. You'll really run for the door and just quickly get the money in. So our strategy is very simple. At that point of time we said expense or no expense, just go and put the branches here and now, get the money in and retire the bulk deposits like here and out. This was the broad thinking. So we in the first 2 years, we went and set out -- we put out our 350-odd branches, something like that. So 350-odd branches, and they're all costing us money. Of course, we also invest in technology, it cost us money. And any new startup bank, any new startup bank I'd imagine, starts first with expenses and income comes in due course. So actually, let me say, any business for that matter. So we -- so our expenses are kind of loaded because -- front-loaded because of the -- we had to put out the branches and all that. And in due course, as the branches will become profitable, this cost to income will start looking better. And that's why when we're guiding for -- when we gave a 5-year plan, we said we'll come -- bring it down to 55-odd-percent. I think it will happen.

A quick clarification as to your cost structures. Because your loan book is also high yielding, I have found that some of this -- that also becomes high variable cost business. So when your growth is very high, you see a slight pressure on your cost, when your growth slows down, you get some benefit. Has that also played out? Or in your context, your branch costs are so high that, that really doesn't matter?

No, no, you're bang on it. It absolutely plays out. Because you see if -- imagine you're doing a business like say 2-wheeler financing. Well, these are all very expensive businesses because you've got this salesperson out there, you pay some commission to the dealer. These are all -- this all come with their own variable expenses as well. So you're right, it's both. We can't -- it's not only branches, even the way our lending side has grown. You might have seen the numbers, at merger, we were just INR 36,000 crores of loan book, today we're INR 73,000 crores. Imagine in terms of disbursals, probably doubled since the time we merged. So all that, you pay the DSA, you pay the market, you have more variable costs now. But the point is that so you have the variable cost of setting up the -- not setting, even running or growing a lending business, it happens. It's also cost of branch. All that is bunched together when it comes right now in the last 2 years. But the fact is that as we look ahead, let me say, 1 year, 2 year, 3 years from now, the same cost structure tends to get leveraged on a much larger base. And let me make an example, if there's a branch that we set up and today the running cost of the branch is, let me make it up, say, INR 3 crores a year, and suppose the deposit to the branch is say INR 50 crores, then your OpEx is INR 3 crores and INR 50 crores. Now tomorrow if the same INR 50 crores becomes INR 200 crores because just the passage of time and more customers come and all, but the cost doesn't go from 3 to 3:3 or maybe marginally more. So that's how the operating expenses play out. The last thing why our cost to income ratio will come down, actually second last is that -- let me say that suppose this is the head office where I'm right now sitting and talking to you, the cost is a cost is a cost, whether the balance sheet has INR 1 lakh crores or INR 2 lakh crores or INR 3 lakh crores, the cost is the same cost. So there are certain fixed costs that gets leveraged over a much larger book. So you will see the percentage growing. And I called it second last because the last item is still on digitization because we are doing our significant efforts on digitizing the bank and removing all the useless processes that come with making things [indiscernible] doing imaging and doing all that stuff, so which helps cut costs as well.

Mr. Sen may we request that you return to the question queue for follow-up questions. The next question is from the line of Anand Bhavnani from White Oak Capital.

Sir, just first to confirm the number, if I heard it well. Of the CASA, 6,000 is SA and then 40,000 would be CA, is that what I heard?

Other way round, other way round.

Yes. Okay. Fine. So 40,000 is SA and 6,000 is CA. Fine. And sir, in terms of capital adequacy, you mentioned in opening remarks, you have [Technical Difficulty] to keep it above 13, you're currently 15. So it seems like mathematically, you would need to raise money. So any guidance? I presume by the end of the financial year, you would be in the market. Is that the right expectation?

No. Maybe 18, 24 months, maybe 18 months. We haven't -- it doesn't look like we'll have that much need for capital that soon because we have still a lot of headroom [ to raise Tier 2 ] if we really wanted to. I can't say wanted to, we got to watch out the price and all that, but we can. And also, there is headroom yet.

Sure. Sure. And sir, in terms of retailizing the book, given the experience during the 2 years of COVID, how do you see the relative proportion of different segments, the JLG, vehicles and home loans. Going forward, how would you want this breakup to trend? And if you can give us some sense, maybe 2, 3 years out, how would you want the subsegments of retail to be in various proportions?

See, the way we think about it is that there are a certain set of businesses where we have very natural advantages and a good 10-year track record and scale and all that. So -- and let me say, our natural capabilities. Those businesses are, let me say, 2-wheeler financing, consumer durable financing, let me say, loan against property, even affordable home loan, business loans and so on and so forth. So these kind of businesses we have -- it's a pattern of 10 years have gone by, by our side. And we know that if you do the business, at least at our kind of underwriting we were doing in Capital First, we knew that it was predictively giving us 2.75% as credit loss, give or take a little bit here and there. So because you play in those waters, you have those kind of losses. It just goes as part of that trade. And you had the yields to support it and as long as this 2.75 was a stable number, we were always happy. You'll end at 16, you have OpEx of say 6%. You have credit loss of say 2.7% or 3%, then you have ROA of 3-odd percent, and you have -- you multiply 7x and you make an 18 ROE. So that is how that gets played. Now -- and of course, I've got to add fees. You've got to add that. Now as we become a bank, what we have started doing is there is a subtle change in our strategy. The core model and the intellectual property we built on those businesses, that continues. I mean, we have developed it for 10 years, we're not going to let go just because of being a bank. But what we have started doing is that we have started playing more in the safer segments, like the traditionally safer segment like the prime home loans. So in the prime home loans, for example, now because our cost of funds have come down so much, we are also right out there in the prime home loan market lending at 6.9%. So in this segment, the credit loss -- they don't give much yield, but they don't have much credit loss at all. In fact, I'd say that hardly anything at all. So therefore, the blend-blend of this book, which was giving 2.75% credit loss in Capital First, more because of the fact that we are more price competitive, we are playing the safer part of the respective businesses we do, our blended credit loss should now come down to 2%. I hope that explains to you why we believe 2 will come down to 2, and it is not just a number we are giving as a guidance without thinking through. We thought it through. We've done our mathematics. We've done our analytics. We've done a flow analysis. We've seen the check bounce data. We've seen our vintage analysis. So we have enough data points to quadrangulate and come to the conclusion that we are comfortably headed to below 2% in credit loss, in fact, below, I should say.

And sir, is the implicit then assumption here is that we will no longer ever be going back to the [Technical Difficulty] saving rate that we are in -- from here on, like that's [indiscernible] so our saving rates will incrementally either be [indiscernible] in terms of the desire to [Technical Difficulty] no longer at the cost of the rates, right?

See, I don't think any leader will ever try to box himself in a position that they will never do this or never do that. They will always play to the occasion, depending on the merit of the ball, we play our shots. But directionally, if you ask me, which is the way I'd like to take the bank to, yes, the chances are that we'll not like to go there.

The next question is from the line of [ Rohit Jain ] from Tara Capital Partners.

Just wanted to get back to the write-off discussion that we had earlier in the call. Now I understand you said that you're confident that you'll recover the money eventually. And at the same time, you said that the write-offs happen in a formulate manner when, let's say, somebody is 240 or 300 days past due. So my question is that the COVID second wave maybe impacted someone for 60 days, but a customer who had already been delinquent for about 200 days, what difference does it make? I mean so the fact that you have taken a write-off, it's not something that automatically, we can assume that it will come back because the customer was even if we leave aside COVID wave 2, anyways delinquent for about 200 days, which is a long time.

Absolutely, no doubt, we're not saying every customer is going to pay you back. But we are talking of the timing issue. The customers who are always traditionally good customers for 3 years or 2 years they've been paying you, suddenly just because of COVID they moved to bucket 30 to 60 or 60 to 90, or 90 to 120, they'll pay. Customers who're already sitting on maybe 180 DPD and moved to now 210, well, there's a pretty low chance that customer will pay.

No, no. So let me clarify. I was not talking about the other [ GNP ] I was talking about the discussion on the write-offs. And the customers who are getting written off are not sitting in the 30, 60, 90 days past due bucket. They are, as you said, sitting in this 200, 240 days past due bucket. So those are -- so I'm specifically talking about that write-off of INR 1,500-odd crores that you have taken. I mean, from where I see it, the chances of recovering anything from them should be absolutely remote because they were even before the COVID times completely, let's say, their track record was not satisfactory at all.

No, it's a good question. The thing is that both -- first of all, our write-off policy is more conservative. If you see a provisioning ratio, it's 50%. And it's not today. If you go back in time, like any time for 10 years -- there's some disturbance in somebody's line. Nonspeakers can go on mute, it'll be great. So if you think of our provisional ratios have always been like 50%, 55% because the gross was always 2 and net was always 1. Now what does that mean? Basically, it means that our write-off policy has been conservative for extended periods of time. And the earnings in the business was strong enough to make a neat return on equity. That's a broad thinking. Now here also for our -- right now, our -- both our provisioning policy as well as write-off policy is quite conservative. So it's not that these customers are all sitting at 360 DPD or 400 DPD, many of these customers are even earlier buckets. Second thing is that when we talk of charge-off, I just want to make one thing very -- I want to make -- I want to simplify it to you -- for you. If you think of -- when I say that we expect 2.5% of the average book to be charged off to the P&L, what else they could mean? It means that, that portion of the portfolio we have has slipped to 90-plus or 120-plus or 150, it slipped into those respective buckets, and we have taken provisions of that amount. It's the provisions effectively that hits the P&L. And that, as a divided by average book becomes. So our provisions, let me just say, starts very early. So therefore, to correlate the whole thing, the write-off is not correct. Think correlated to provision. And the provisions start early. Our own experience is, by the way, not just in the COVID, we believe COVID money that they're providing today, a portion of it will come back. And I can't say good portion. To be fair to my responsibilities, I can't say -- I would like to edit it to say that a reasonable proportion. But let me just step back from COVID. Even before COVID, continuously what we charge off, a portion of that keeps coming back. Our experience has been typically about 1% to 1.5% of the written-off pool keeps coming back every month even in normal days.

No. So Mr. Vaidyanathan what I wanted to ask is, this quarter, the credit cost was INR 1,800 crores. And when you say that for the overall year, it's going to be around INR 2,900-odd crores, now surely that does not include write-offs because I mean, if you include write-offs, I mean that would itself become INR 3,200 crores and write-offs anyways...

No, no, no. It Includes write-off.

So I mean -- no, no, I'm not getting it. So the provision of INR 1,800 crores that we had, it includes INR 1,400 crore in write-off, so the net incremental provision except for the accounts written off is only INR 400 crores in this quarter?

Yes. So Rohit, I'll answer that. So write-off is generally followed by a provisioning first, right? So when there is a 100% provisioning done on an account, then it goes into a write-off mode after certain specified days, right? So -- and when you write-off an account, it gets charged to P&L and at the same time your provision gets released because there is no incremental impact in the subsequent quarter. So -- and...

Rohit, I think we're really confusing a lot of -- 200-odd people on a simple -- a very simple concept. And just to -- you can check, but I'll just keep it simple because I don't want to confuse everybody at the same time. Let me just keep it -- give you a very simple answer. When a customer goes to, say, 90 DPD, and supposing the provisioning policy of that customer base is at 25%. So that 25% at that DPD is taken to the provisioning line. Similarly, when the same customer goes to say 120 or 150 or 180, there is a certain provision policy, we take it to the P&L, that's our formula, end of matter. So that is what hits the P&L. Now out of that money, subsequent to it being provided, maybe a few months from then, it comes for write-off. So write-off comes from the provisioning pool. So don't double count it, and I fear it will confuse everybody. So just leave it at that. If you have any specific doubt you can check, but I have explained to the best I could in the quickest sort of way. So think of it...

I'll take it offline.

Yes, take it. So think of it like a provision divided by average book is what we call -- in a simple sort of way I can say, it's the provision divided by the average book is what is the credit loss. Think about like that.

Provision plus write-off.

Yes, Provision plus write-off.

So if I can just make a last point. As you said that the written off is only on account that are 100% provided, which means that the INR 1,800 crores incremental that we are providing...

Rohit, can we save everybody's life on this 1 technical item. Hard to solve it on phone. But basically...

Last question is a strategic question more on the strategy of growing in retail. What I wanted to understand is a lot of banks are incrementally focusing on retail. We have a lot of fintechs who are targeting spaces which were earlier targeted by NBFCs, and a lot of NBFCs themselves are trying to become fintech. So in the backdrop of all this, I mean, I just want to understand what is the consumer base that lets us still remain so attractive? How far do you think we have headroom to grow our retail book in a manner, which is going to keep our yields where they are. So just wanted to understand strategically where do you see retail heading given the -- or let's say, on sort of fintech and also the fact that some of these bigger banks are now focusing on the retail segment.

See, first of all, we are also a reasonably, let me say, digital company, we work ahead. Secondly, let me just say that the businesses we're building are like can go on and on beyond my life and your life, it's never going to end. This is as of now, for us, our own -- the feeling is that for us to grow at 25% year-on-year-on-year-on-year like for a long time, it's not a problem at all. Basically, there are 2 big games being played out in India. One is the extent of formalization of the economy is happening. The people who were not borrowing from the formal market are now coming to the formal market and taking from the market. And secondly, there are a set of people who don't take credit at all are also coming and taking credit because of they're coming of age or they're coming to the working pool or whatever. So this is -- this game is not going to stop. So we don't -- at least for our bank, I can put that to rest. I think we can grow at 25% like really for a long time. You think of a really good bank like an ICICI Bank or HDFC Bank, or think of any other good bank in India. And look at them, they are like INR 5 lakh crores is ICICI Bank's retail book or a little more than that, and they're still growing at 20%. You look at SBI, maybe INR 30 lakh crores, still growing. So -- I mean we are only -- I mean from any standard, INR 70,000 crores is nothing. It is just the start of the game.

Fair enough. And this growth, I'm assuming, is purely, let's say, driven by your own games and not so dependent on GDP growth? Or is there also an element of 25% being contingent on growth being around, let's say, 7% or something like that?

No, it depends on how big you are. If you're really India's largest bank with some -- that sort of market share of having a -- that size of a book, then you'll say, look, I depend on economy. But when you're coming on a really small book, I call INR 70,000 crores really small, by the way. It's nothing. So when you're coming off this book, for you to grow at 25%, 30% is nothing. You see the large NBFC in India, which is probably INR 1.5 lakh crores, they are also growing. So it depends on the size. We're still very small. For us growth is not the issue. Our bigger thing to watch out for is to make sure that our credit quality is consistent. We've had a long track record of having very stable asset quality of gross NPA of 2% and net NPA 1%, it's like 10 years. It is our wish to hold that again back except when the COVID wave goes through to bring it back to 2 and 1 and sustaining that for like ever and ever. That would be a wish. The credit quality is the criteria to watch out for. The second thing is to -- for us to watch out for in this game is to keep our unit -- operating cost economics in a way that it continuously generates return on equity of, let me say, high teens, like 18, 20-ish and -- actually on the retail side, lending side. So those kind of things and, of course -- those kind of things. But really, growth is not the issue for us.

The next question is from the line of Anand Dama from Emkay Global.

Sir, on your retail portfolio. So when we really look at our retail portfolio at this point of time, it seems to be a little on the higher risk side as well as it is giving us good margins as well. I understand that basically, we are getting some benefit on the cost of fund side. So how do you see the portfolio mix changing going forward in terms of products going forward? We have already launched cards, and we are also doing PL, but not in a big way as such at this point of time. So how will this really portfolio of product mix will look like over the next 2 to 3 years? If you can just talk about that, that will be great, particularly now that we have the experience of COVID as well.

See, the way we think about it that our big growth area will definitely be home loan. And see, home loans, even before we were a bank, we were very good at affordable housing at pretty good -- pretty low NPA. Just because affordable, it doesn't mean it's high NPA and all that. It's not true. We are pretty low NPA, low gross, low net, not much credit loss, et cetera, affordable. So that was what we were doing. But now the moment we started entered into the prime home loan market, we are finding fantastic response, really that has made us very, very happy. So our core home loan will continue to grow. The other businesses, of course, if you ask us to pick which would be the fastest growing, I'd say, yes, home loan would be the fastest growing. Second fastest growing probably will be our SME loans and -- SME meaning business installment loans, maybe loan against property, these kind of loans. Our rural business is a big growth area. We are, again, I must say, we are really small. We are -- probably just about 13% of our book -- of our INR 75,000 crore book is rural, and imagine the size of rural. So rural is going to be a big area for us. We are short of PSL and we hope to grow rural to meet our PSL requirements. Short of PSL meaning we're buying PSL in the market. We are not self-sufficient. So to that extent, we will grow rural -- sorry, that should grow a little bit faster than our rest of the book. Our credit card book, of course, is a newly launched book, so it could grow. So these are a few business that could grow ahead of the rest. And of course, the rest of the business will continue to grow. Let's say, mixed mix sense will be more home loan and home loan buyers.

But will the home loan be somewhere about 30%, 40% of our book?

Yes, eventually in the long run, definitely, I think we'll become a 40% home loan bank in the long run. That's because home loan has a tendency -- let me say, mortgages, if you want to be more safer than that, home loan and LAP, et cetera, put together. But comfortably, will be 40% and maybe 60% would be others. Because I think the key thing about dynamic about mortgage is that it tends to stay on your books for long because they're tenure loan and others have a pretty short runoff. So you got to run -- work harder and harder to grow the other books and mortgage tends to just grow linearly.

Yes, sure. And sir, in that case, basically, there will be a trade-off in terms of margins because now we have the peak margin that we are seeing at this point of time. So where do you think these margins will actually settle in next 2 to 3 years?

No, it is a double -- it's a trade-off both sides actually. So definitely, you're right, in a margin sense it's a trade-off where you have a lesser margin in home, but you also have operating cost. You see the other business that we run, that is 2-wheelers and consumer durables and credit cards and all the other business, they tend to, of course, give you good yield, but the operating cost of the business is like pretty high, 6% to 8%, depending on the business we're in. Home loan OpEx could be very low. Look at HDFC's home loan book when it's fully evolved, cost to income of 17%, can you beat that? So you have a benefit, of course, in terms of a negative trade-off as far as yield is concerned, but there's a positive trade of in OpEx to average book.

Okay, sure. Yes. Sir, secondly, in terms of your retail portfolio, you do give basically the new-to-bank customers and those kind of data. So is it possible for you to give more qualitative and granular details in terms of your retail customers, be it customer scores as such. Because every -- I think all of us basically we have concern about the portfolio that we bring on our book, particularly on the retail front and we are seeing higher write-offs coming through. So if you can give some comfort in terms of the customers that we have at this point of time, what kind of portfolio that we have actually built over the past 2 to 3 years, how it is going to really look like going forward? That would be very helpful.

Okay. If that's helpful, I'll give you a readymade answer because the slide is in front of me. So let me just put it like that. Let me take you directionally where we're headed. Now think Capital First is born, let me say, in 2010 or '12 and think that your borrowing cost is 14%. And what do you do to lend -- to make a living? What do you do? You lead at 24%. Who will borrow at 24% from you?

Yes, certainly, it would be risky customer.

Exactly. So at that point of time, when we took -- when we started the business at that point of time, in fact, remember, we're starting from INR 94 crore book. So obviously, we were lending to everybody -- almost everybody we were lending to were probably people who did not have any bureau score. And that's where we learnt our trade, let me say, by playing in those waters. Now as the cost of funds kept coming down to 12, 11 and so on, we started the ability to play in the safer segment, I mean, safer compared to -- everything is relative. So safer compared to what it was in 2010, '11, '12, '13. And then we started lending -- about 25% of our book was new to credit. That is around 2017, '18 or so. I mean, approximately, maybe a year here and there. In January to June 2019, 17% of our book was new to credit. In June to December '19, 16% of our customers have moved to book. In January '21 to June '21, 10% of our customers is new to credit. So if you see the trend line, you can see -- clearly see that as our cost of funds are getting better and we can be more competitive, we are doing more -- we're taking lesser of new-to-credit customers. And anyway, as a bank, I'd say that it's expected of us to be a little more banking license as a sacred thing. And we've got to -- it feels more comfortable moving to safer and safer credits. But directionally, you could see where the number's headed from the 20s to the 10. The second thing if that gives you -- helps you color in that is the number of customers whose bureau score is greater than 700. So even as recently as Jan '19 to June '19, 61% of our customers had a bureau score of greater than 700 and 39% had a bureau score of less than 700. And by the way, even that is a good portfolio priced for itself. It's not that it's a bad portfolio. It's just that the economics I described to you how that worked. When we're talking in Jan to June '21, as in the latest 6 months that have gone by, 83% of our customers is now greater than 700 score. This is -- I'm talking all urban by the way. So 61% to 83% in 2 years. So you can see that we are moving -- as our cost of funds are getting better, we are moving to safer credit. That doesn't mean we -- our economics of ROE goes away. It's just that our cost of funds have come down, yield is lower, credit cost is lesser, it's just the way it is. But it -- I hope that gives you color about what we are doing.

Yes. Yes, certainly. But then basically, if there's basically customers who are there even existing to credit, if we are lending somewhere above 90% [indiscernible] credit, but if these customers are of a weak profile, then certainly, the tendency of them to turn into defaulters is very high, right? So if you can put out some data in presentation and which can be tracked, I think, over a period of time, that would be very, very helpful.

No, no, it's already there by the way. In Page #12, we already described the numbers. What I've told you right now, it's already there in Page 12.

[ From the scores ] if you can. So the way you basically put out the score is, 700 and above, that kind of data can be captured that would be great.

No, no, I'm saying it's there. If you see the Page 12, you'll find it. The 61% to 83% customers having score greater than 700, it's there in the data. So -- and we'll present the data going forward also. The short point is that our -- as the years are rolling by, we are, of course, becoming a little more if you were to put it so, if that's an appropriate word, we're getting a little more conservative. I'd say it's a good thing for the bank in the longer run. But that doesn't mean we want to let go of our capabilities built over 10 years, but we want to do it in moderation.

Sure. And sir, lastly, if you can help us in terms of we had this recently the holdco and the subsidiary can be merged. So any update on that front, how you're going to take it forward?

So basically, if your question is, are we -- with regard to the holdco and the RBI planning to come out and -- if that's the question, there is absolutely no discussion at this point of time.

Even at the holdco level?

No.

Thank you. Ladies and gentlemen, due to time constraint, we will take that as the last question. I would now like to hand the conference over to Mr. Kunal Shah for closing comments.

Thanks, Mr. Vaidyanathan and the entire senior management team of IDFC First Bank for such a comprehensive and exhaustive explanation to all the questions on results as well as strategy. And thanks all the participants for being there on the call. Thank you, everyone.

Thank you. It was nice speaking to all of you.

Thanks everyone, have a good weekend.

Yes. Have a nice weekend. Yes.

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