RBL Bank Limited (RBLBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the RBL Bank Limited Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Vishwavir Ahuja, Managing Director and CEO of RBL Bank. Thank you, and over to you, Mr. Ahuja.

Yes. Thank you. Good evening, ladies and gentlemen, and thank you for joining us for a discussion on RBL Bank's financial results for Q2 FY '21. I'm joined on this call by my other colleagues of our management team, who, along with me, will address any questions that you will have later on. The last quarter has seen an improvement in the business momentum across all our segments. The macro indicators have also been showing an upswing. We still face business disruptions due to the ongoing pandemic situation. But on the whole, the situation on the ground is far better than what we saw in Q1. I want to take a moment here to thank all our employees who have displayed resilience and adaptability in these trying times, and because of whom, we've been able to continue servicing our customers and also see business growth. Our distribution network continues to be fully operational, while following all precautionary measures as per the guidelines. However, despite the sharp uptick we have seen in certain segments, the overall economic recovery, we would believe, is still some time away. And as a bank, therefore, we continue to be cautious. Balance sheet protection, capital conservation and risk mitigation continues to be of paramount importance as has been the case with us over the last few quarters. However, given the encouraging trends on high-frequency indicators and being well positioned on liquidity and capital, we have taken the opportunity to cautiously grow in our chosen areas of focus. Now let me talk briefly on the performance for the quarter. We've had another satisfactory quarter from a profitability perspective and also use the opportunity to prudently add to our COVID-related provisioning in addition to regular credit provisions. Our non-wholesale businesses grew 23% year-on-year and 7% sequentially. Because of continued moderation on wholesale advances -- because of continued moderation on wholesale advances, as per plan, overall advances were marginally lower, 4% year-on-year and declined 1% sequentially from the previous quarter. We expect to see wholesale advances starting to grow from Q3 onwards. Retail wholesale advances mix stood at approximately 57:43. Our total deposits grew 4% sequentially to INR 64,506 crores. Deposit traction has remained strong this quarter. Similarly, our liquidity position continues to be strong, with our liquidity coverage ratio averaging 171% for the quarter. We are seeing the benefits of our rate cuts on both term and savings deposits. And as a result, cost of deposits has reduced 28 basis points quarter-on-quarter to just below 6%, a 10-year low for us. CASA deposits growth was also strong, 21% year-on-year and 8% sequentially. CASA percentage was at 31.1% in Q2 FY '21 as against 26.5% same time last year. And it's also sequentially better. Y-on-Y this quarter, revenue growth was 6%, NII growth was 7% and other income growth was 3%. This quarter, we derecognized interest and fee income on potential slippages that may happen by Q3 FY '21. On a normalized basis, we are now at a firm NII run rate of INR 1,000 crores plus on a quarterly basis, which we will start realizing from Q4 onwards. As a result of this proactive derecognition of NII, NIMs came down to 4.34% for the quarter. The impact was about 50 basis points because of this derecognition. In other words, if we back off that, NIMs were around 4.85% and steady. Our pre-provision operating profit growth was also very healthy. It came out at INR 720 crores, up 12% year-on-year and 4% sequentially. As a result of the above and after taking necessary provisions, profit after tax for the quarter was INR 144 crores. Now on asset quality, a little more color. Slippages this quarter were INR 145 crores. If the Supreme Court circular were not in effect, slippages would have been higher by another INR 90 crores. However, despite that, we have -- despite not having to report that, we have still taken NPA equivalent provisioning on this amount. Our GNPA and NNPA were at 3.34% and 1.38%, respectively, at the end of the quarter, both sequentially lower. PCR, including write-offs, was at 74.8% as against 70.5% at the end of the last quarter. As you know, PCR has been consistently increased over the last several quarters and was increased -- and has been increased now by 11% only in the last 6 months. We have made a COVID-related provisioning this quarter of INR 310 crores, which is about 58 basis points of advances. This will take our total COVID-related provisioning to INR 664 crores, which is 121 basis points on our advances. We do believe that this level is now adequate and healthy. In terms of credit provisioning indication for FY '21, as a quantum, it would remain within the same ballpark range of -- as last year, give or take 5%. In other words, despite all challenges, it is consistent with our previous guidance. On our capital position. We have ended the quarter with a capital adequacy ratio at 16.5% with a CET1 of 15.1%. As you may know, we now have approval as of yesterday from RBI to go ahead with the capital raise of our INR 1,566 crores, which is pending approval because of one large shareholder wanting to be above 5%, which is Barings Asia, which is coming in with a check of INR 1,000 crores at 9.5% stake. So -- and the total capital raise of INR 1,566 crores, that approval has finally come. And we should be, therefore, completing this capital raise over the next few days, maybe 10 or 12 days. Including this, our capital adequacy ratio for the quarter would be 18.7%, with a CET1 of 17.4%. Before I come back and talk to you some more, I'm going to hand over to Harjeet, who will take you through the retail businesses perspective.

Thank you, sir, and good evening, ladies and gentlemen. I will now give you the highlights for the quarter and the operating rhythm amongst our different businesses in the non-wholesale segment. In our micro banking business, we've almost reached business as usual with all our branches now being open and customer engagement as per expectations. We had seen restriction on movement during the last quarter in semi-urban and rural areas as the infection had spread deeper. Some states obviously had more restrictions than others, though things since mid-September are much better now. In our business loan segment, we've seen that most of the MSME business in the market have resumed operations, but the business activity levels range anywhere between 40% to 60%, depending on the type of business and the geography. The government assistance through emergency credit guarantee loans has been a success, and we've disbursed around INR 450 crores as a bank, a little under 80% of what we expected to disburse. This also results in some derisking of the portfolio as it has given much needed working capital to these businesses, trying to get back to normalcy. In the individual segment, we have seen some confidence restored and spends and demands have increased. In our credit card segment, in June, we had reported a moratorium of 22% by value and 11% of customers. When we exited August '20, this number had come down to 16% by value across 9% customers. Since then, there have been more customers who paid, and only 9.4% of the portfolio was overdue by end September and now stands at 8.6%. We are seeing a monthly reduction of 10% to 12% on this pool, which is likely to continue through quarter 3. If I were to break up the pool to understand the risk better, 54% of the 9.4% pool have not paid since April or May. This is roughly 5% of our portfolio. Most of our credit losses will come from here. The size of this pool is within expectation. In addition, only 0.4% of the portfolio is 90-plus DPD by 30th September. We are, therefore, now more confident of restricting the credit cost on the portfolio to what we had guided to about 9% to 10% on account of the pandemic. That is a little under 2x the average credit cost. We're quite pleased to say that despite morat extension till August 31 and a relatively slower-than-expected return to normalcy, we have been able to stick to the loss forecast that we had on this portfolio in May. Let me now give you some texture on customer spends. We have consistently seen pickup in spends from May onwards. And in September, the spends were equal to March '20 levels. On a year-on-year basis, they were 5% higher. Further, the spend per active card has crossed pre-COVID levels, clearly indicating that more and more customer spends are moving to the card despite categories like travel and hotels being muted. However, on the other hand, the active percentage of cards is still below pre-COVID levels at 45% but it is an improvement over what we shared in June. Majority of this fall in active rate is on account of our risk calls on these customers, but there are still a portion of customers who stopped spending on the card. Our endeavor is to stimulate their spends with attractive offers, especially in this festival season. Let me now talk about new business origination. We started new business in a very cautious manner and are growing this every month as more clarity in terms of environment as well as customer risk data is available. In micro banking, we are now disbursing around 85% of our BAU run rates. We are also seeing regular collections happen. There are pockets in states like West Bengal, Assam, Punjab and Maharashtra where collections are a little challenged, both on account of sluggish economic activity and mobility. We have observed a few external influences on customer prompting them not to pay, but it is still in very few pockets and not a trend. In credit cards, we issued close to 100,000 cards in September. We should be at our pre-COVID run rate by December and then grow from there. However, business loans are still a little slow at about 65% of BAU volumes. The recovery here will take slightly longer and is a function of businesses being able to recover fully in terms of sales. Needless to say, our credit filters continue to remain extremely conservative, and we are looking at every client in terms of their current cash flows, repayment on their existing dues across financials, especially during moratorium, and a degree of certainty in terms of future business. Let me now refer to business performance in quarter 2 FY '21. As explained earlier, advances for the non-wholesale business grew 23% year-on-year, with retail lending growing at 22% year-on-year and our DB&FI at 26% year-on-year. As mentioned earlier, new business originations were started in a measured manner and are now gaining momentum. As a result of this, on a sequential basis, the overall advances grew by 7.3% quarter-on-quarter. The half 1 FY '21 yields on the overall non-wholesale book increased 60 basis points year-on-year to 16.3%, largely driven by the mix change. Fee income was up 67% sequentially over quarter 1 FY '21. In credit cards, the total portfolio now stands at 2.8 million cards, a slight increase over previous quarter. Our new card issuance is gaining momentum, as mentioned earlier. We launched 2 new credit cards in September. The first is a proprietary card called YOUnique, where a customer can build their own card by adding features which are relevant to them from a menu. And all this is done digitally. We also introduced the Edition Card, a co-brand card with Zomato. The initial reads are positive with both cards being received extremely well in the market. We expect these to contribute significantly to our new card additions in the coming quarters. As indicated earlier, our spends in September were at par with March. This is an encouraging sign. Our spends per card have moved up now to about INR 9,100 per month versus INR 7,450 per month in June '20. The active rate of our card customers has also moved up from 39% in June to 45% in September. Spend per active card is now higher than pre-COVID levels at a little over INR 20,000 per month. I'll now talk a little bit about collection efficiencies. In September, the EMI bounce rate for our business loans or MSME loans was higher at around 1.5x pre-COVID levels. While this was much lower than what we witnessed in April at the start of the moratorium, but still reflects slow recovery for this segment. Our collection efficiency was 93% of pre-COVID levels in September and improving every month, and we expect it to reach pre-COVID levels by Jan. In cards, we have seen collection efficiencies at 94% of pre-COVID levels. In addition, we are also seeing healthy pre-COVID recovery rates on our written off pools. In our micro banking business, the focus continues to be in collections, even as we started new disbursals. As mentioned earlier in our last call, we had extended the full 6-month moratorium to these customers. As of today, only 6.7% of the customers have not paid us any installments since April. Rest 93.3% have resumed payment. To sum up, we are seeing that the portfolio performance and business metrics are broadly in line with our model scenario built out earlier, and we are confident of coming within our business forecasts. As mentioned last time, we will continue to keep an eye on the pandemic and its fallouts. But are now more confident of getting to BAU growth levels in a couple of months. I will now hand over to Mr. Vishwavir Ahuja for his concluding remarks.

Thanks, Harjeet. I would want to take a few minutes now to briefly summarize how we see our key businesses over the next few quarters. On our wholesale business, we remain cautious and continue to focus on adding better quality names and keeping granularity in our portfolio. If you have seen the rating profile of our -- in our presentation deck, you will find that the borrowers rated A- or better are now 75.1% of our rated portfolio, and this reflects a consistent improvement over the last several quarters. We've also had success in reducing exposures in the BBB and below rated portfolio as well. Even as the book has seen moderation in this quarter, we have added 60 new client relationships in the last quarter across product segments of cash management services, digital banking, advances and liabilities. The focus is on much -- is much higher now on digital solutions, enabling us to get sticky current account business along with transactional and off-balance sheet opportunities. We are already seeing a pickup in this activity in Q2 and expect it to ramp-up in the coming quarters. On our non-wholesale businesses, specifically on credit cards and micro finance, we are seeing good business momentum and believe this will continue. These are businesses we like. And as I've said in the past, we will continue to grow and build them to be amongst the industry leaders. So even in probably the most challenging year with elevated credit costs for these businesses, they will continue to be reasonably profitable, and we should see them rebound to pre-COVID return metrics as things return to normalcy. In a way, coming out of this extreme stress test for these businesses with respectable outcomes will further give us confidence to accelerate these businesses and gain market share over the next few years. On our liabilities business, momentum continues to be strong. We see consistently handsome growth in granular retail deposit accretion, and this trend will only improve over the next several months. We continue to invest both in physical and digital infrastructure. We have this time in our presentation, also given you a flavor of the digital payments business, which we expect to grow at a rapid pace given differentiated capabilities and offerings that we have. We've also seeded a couple of new initiatives like affordable housing, which should grow at a reasonable size and scale over the next few years, and it dovetails very well into our existing businesses in semi-urban and rural markets. Overall, therefore, we are well placed, both on capital, retail liability traction and asset quality outlook to grow over the next few quarters. I will stop here, and we'll now open up the call for questions and answers.

[Operator Instructions] The first question is from the line of Nitin Aggarwal from Motilal Oswal.

I have 2 questions. One is regarding the collection efficiency in MFI. Now we have said that 6.7% have not paid. So what is the, say, latest running figure on collection efficiency without including any areas? And if you can give some state-wise color in this business? And likewise, on the card side wherein you have reported 94% collection efficiencies, is this like -- including some past dues because we have written like 9.4% book was in moratorium as in September. And so what's it -- how do we reconcile these 2 numbers?

Yes. So let me talk about the micro finance. Micro finance, as I said, when I gave you the number of 6.7%, I gave you the current number, which is as we speak. This was -- so at -- in September, and this was around 91%, as we speak is about 93.3%, and therefore, it's improving every month as more and more markets open. As I said, there were some issues, which we were seeing in Assam, West Bengal, and we are quite confident that as West Bengal opens up in terms of its train travel, et cetera. This should further improve. So barring this, I think micro finance, there is not much which we are seeing in terms of any concentrated issues in areas. There are a few markets in Punjab, specifically last month, whereas there has been some trouble which is now being dealt with and some markets in Maharashtra. Otherwise, micro finance is behaving okay. On the card side, there are 2 things. So one is the collection efficiency -- yes. And this -- the micro finance, as you would notice, is pretty much the similar commentary you'll hear from the others as well. On the card side, there are 2 parameters I gave you. One was the collection efficiency, which was indexed to 100% pre-COVID, which I said was 94%. But I think the more important piece which we wanted to share with you was what is the pool, which could give us trouble or where our losses will come from. And that is what I said that if most of the losses were to come from the morat exit pool, which was 9.4% as of September end, that roughly about another 80 basis points has come down as we speak. And therefore, that continues to come down as we are talking. Within this, about half of this pool is what is not paid since April and May and is, therefore, the sticky pool, which will, therefore, give us losses. So if you look at this dynamic and then compare it to our forecast of about 9% to 10%, you will see that we will be well within that forecast.

Okay. And -- but what are the typical reasons for customers not clearing their card dues? Were those spends more on daily needs, utilities, cash withdrawals or was it discretionary spending, so just to assess the intent of these customers. And do you find a difference in the CIBIL score of these delinquent customers versus the rest of the portfolio?

Yes. So if you really look at it, the -- even if you look at our spend chart and you look at pre-COVID spend mix, almost about 78% of our spend mix is towards daily expenses. And therefore, it's not as if these customers typically have spent more on buying something which is discretionary or something else and therefore not able to pay. I think it's a function of the availability of money. On the salaried side, some of them have got delayed salaries, salaries not paid and some have lost jobs. On the self-employed side, there are stresses on businesses opening. And therefore, that is what is resulting in their not being in a position to pay. So that's pretty much what it is. And the reason why you're seeing slowly, slowly this pool come down is just because with every passing month, I think the economic condition in the environment does improve, and therefore, that gives them that a little bit of time. So that's predominantly what I could ascribe the reason to.

Okay. And the other question that I have is on the BBB portfolio. We have seen a fair bit of rating upgrades in that portfolio. So any color assistance there on that [indiscernible] such good update is very like good to see.

No, I get that question. See, this is something we've been working on now for a year plus. I mean, ever since our first episode of a few stressed accounts, which came sometime in August, September last year, I think there has been a consistent and a concerted effort, and we've been reporting that actively every now and again that we will reduce concentration, debulk, granularize, improve rating profile and even reduce exposures, even if we have to, for the sake of restoring a very healthy asset quality in the wholesale book so that we are derisked in the future. And even getting into COVID, some of that effort that already happened, the heavy lifting had already happened as far as this is concerned. So I think getting into COVID and the COVID impact on the wholesale portfolio on RBL Bank was significantly muted because of the efforts that had already been put into effect in terms of a new risk paradigm, a lot of other checks and controls. So all of that effort has already started several months before COVID hit. So honestly speaking, the COVID impact on wholesale book, therefore, has been rather insignificant, if I may put it that way. And it has brought us to a point where we can now be confidently able to show you these kind of numbers. So this was work in progress. Simple answer is that. And some of this execution was going on, on the ground. And the effects are there to see. Our Slide 18 shows September '19, June '20 and September '20, you will see consistent and unidirectional improvement on all the -- sort of in terms of the asset quality profile and the rating profile of the portfolio. So it is work done now. And I think we are at a point where we can feel sort of -- we're going to sit back and relax about the wholesale book. And not that we are going to take any chances or be complacent. Our philosophy is not changing in terms of caution. But the fact of the matter is, this is the result of all the efforts that have been going on.

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

Thanks for the improved disclosures. I have a couple of questions. First, on this capital infusion from Barings. If you can specify if they would have any Board seat and if there is any lock-in? And would this also mean any potential change in the existing management team?

Okay. So the very simple answer is that for the sake of everybody's consumption, first, let me say that they are coming in with a 9.5% stake at a check size of INR 1,000 crores, which is part of -- and there are 3 other investors, ICICI Pru and 2 other existing investors, Gaja Capital and CDC, Commonwealth Development Corporation. Between the 3 of them, they're putting in INR 566 crores. So that's the composition of the capital raise. And because we were awaiting this approval for their above 5%, which has now come yesterday, so now we will execute and close this in quick time. Now to answer the question, no Board seat, no lock-in, no condition.

It is 1 year.

No, no. That 1-year lock-in is applicable to all because it's a preferential issue. But there is no specific, if I may say, restriction or condition associated with the Barings Asia investment. And obviously, therefore, no impact on Board or management.

Sure. And sir, in terms of -- you have provided a lot more detail on the credit card and MFI book. But just to understand it clear, that -- for MFI, I mean, let us say, 6.4% or 6.7% number. Would this be -- I mean would this be the outer limit of stress in MFI? And how much of this would be covered by FLDGs that you already may have?

Yes. So this will be customers who've not started paying. Broadly, yes, this should be the outer limit. And FLDG, if I was to factor in, then it will come down to around 4-odd percent. This number of 6.7% or whatever.

And sir, similarly, in wholesale book, now you have given that there is an improvement on Q-o-Q basis from BB and below book. But that number at INR 3,400 crores, how should we see this book? I mean what would be your expectation of this book getting restructured or remaining as it is or maybe slipping? I mean any [indiscernible] will be helpful.

Yes. Look, this question is obviously a very important question. And we have been asked this question on this BB and below every time. And it is obviously top of mind for everyone. And -- but the point that we've consistently tried to make, and now we are proving it. The proof of the pudding is there. Every time it is assumed and presumed that this will only slip downwards. And we've been saying that -- in that category of SME names, this is the nature of the beast. Yes, they are either low BBB or BB, BB+ type of profile customers. And it's not that they slip even in area. Some part of that obviously slips. But now history and data is proving over the last several quarters that maybe 15%, 20% slip downwards, 15%, 20% move upwards and the remaining stay where they are. This has been now proven again and again and again and again. This time, we put down some data to prove our point, which is what we've been saying every quarter. But I think the traction of what we say in terms of going down, in terms of acceptance, that being whatever it is, now even through a COVID period and with all the challenges in the environment, it is once again being proved. The fact that -- and so one thing we did is, first to bring down this number. We said [Foreign Language]. And even then to be able to establish decisively how much slips, how much improves, how much stays where it is. So 6.5% being the total number, you can take it that 15%, 20% tends to get upgraded, about the same amount tends to slip and the remaining stays where it is, which is why we don't think it's a big concern if you look at it holistically from that point of view.

Sure, sir. That helps. And then last 2 questions, sir. If you can provide collection efficiency at, let's say, commercial, large corporates, LAP and overall bank level? And second, if -- yes and the next question I can ask once you answer these.

So collection efficiencies on the LAP, which is when I said on the business loans portfolio, was around 93% of our pre-COVID levels.

Okay. And commercial and large corporates and overall?

There can't be collection efficiency for large corporates. Now the morat is out, everybody is normally paying as if it was pre-COVID. There is no differential outcome there.

On the wholesale book, you will be guided by your standard gross NPA, net NPA provisioning, which is -- that is where that thing is reflected.

And the credit cost guidance.

And the credit cost guidance for the year, I mean, for the business.

Right, sir. And the last question, sir, is, I mean, just to confirm, you said that you are maintaining your credit cost guidance what you had given 3 months back, roughly around, let's say, what was the same as FY '20. Would this include now restructuring, a? And is there any, let us say, positive or negative surprise? Maybe credit card, you have mentioned that it is broadly panning out the way you had thought. But any positive or negative surprise either in the others businesses?

So I'll answer your question very quickly and very straightforward manner. The environment has panned out to be worse than what was anticipated, okay? We all know that. Despite that, as I've said earlier, for all the efforts that we've made as management, we will be able to contain our credit costs at or around last year's quantum, give or take, 5%. That is what I've said in my commentary. And I think for me and for my colleagues, that would be a great achievement as far as we are concerned. So I mean, therefore, what we are saying is, it's not just last quarter. I think we first gave an assessment going back in May and we made this statement, and we made it again, and we are making it again. And that's what we feel. Now that we are sort of coming out of the bottom and things are improving and things are now -- life is looking better and better, we are now more confident in terms of being able to make that statement because 6 months ago, it was anticipation. 3 months ago, we were in the thick of it, where we had 3 months of full lockdown. And it was according to me, a lot of guesswork by many at that time. And it was also a lot of hope. Today, I think there is a lot more certainty when we talk about that.

The next question is from the line of Manish Karwa from Axis Capital.

So my question is also on [ cards ]. So Harjeet, when you said the collection efficiency is 94%, this is 94% of, say, a normal collection efficiency of 95-odd percent that you have on [ cards ]? So is it right to assume the collection efficiency currently is around 90-odd percent?

That is correct.

Okay. And that's what you refer that you will have a credit losses of around 10% of the -- of your card portfolio?

Yes.

Okay. And all of it, the interest income that you've been earning on this unrecognized NPL, all of it has been derecognized in this quarter?

No, no, no.

So Manish, the derecognition has happened to the extent of what was accrued till September.

Okay. So is there a one-off element in that derecognition? Or it is only for this quarter that has been derecognized? I just want to model it, model the interest income.

I'll answer that question. The total impact of that is INR 80 crores, INR 90 crores this quarter, and it will be equivalent next quarter, okay? Yes, maybe a little less than next quarter, yes. So which means if I over at an NII of, say, INR 1,000 crores plus something minus this number this quarter and next quarter. Yes. Next quarter NII, there should be some NII growth. But then you have to take away this factor. From fourth quarter, all of this would have been over in Q2 and Q3. From fourth quarter, as we have said very clearly, we will be reverting to a normalized NII of INR 1,000 crores plus. Does that answer your question?

The next question is from the line of Saurabh Kumar from JPMorgan.

Sir, the way you define collection efficiency in micro finance, do you include overdues? Or this is just demand for the month?

Yes. This is demand for the month. So since this was the first month, September, where it was demanded, that demand for the month.

So overdue or any back book collection is not included, right?

No. They were all in moratorium from April onwards.

No, but in September, if somebody has paid more than 1 month. So do you include that? That's what I was asking.

See, theoretically, it will not be possible. In this particular month, it wouldn't have happened because the previous months, there were no demand. So there was no overdue from the previous month which they were paying. That's what I was trying to stress. In a normal month, I agree with you what you're saying.

Okay. Got it. Okay. Sir, And your assumption of credit cost in your NFI portfolio, fair to say it should be now around the 6% number or would you model a lower number?

No, it will be lower. So it doesn't mean that all of this will flow. This is just saying that in the first month, we've seen these many customers not pay. And therefore, this will start coming down as we move forward as would some of the customers who paid in a normal course also go delinquent. Both things will happen. And then we will have FLDGs to cover after that.

Yes. So effectively, you should restrict the loss here to something like 3% to 4%, that will be -- that's what I was trying to get to.

That's right.

Okay. And just last question, sir, the delinquency in the card portfolio, if you can just give some color where is it coming from. Is it from your open market acquisition, mostly new to credit or is it from your partner portfolio? If you can just give some color on where that 9% is concentrated?

Yes. So see, in our case, bulk of our book is open market. So you won't have existing versus open market. But let me tell you about roughly, if I look at salaried versus self-employed, about 63% is salaried and 37% is self-employed versus a portfolio of about 70% salaried.

No, you said 63% salaried.

If I look at between transactor and revolver, about 44% is transactor and about 56% is revolver.

Okay. But you said 63% is coming from the salaried piece?

That is right. Yes.

Okay. That's interesting. Okay.

Yes, yes. But 70% of your cards are also salaried.

Salaried, that's what I said. So it's like…

Better than the…

Slight tilt towards self-employed. But it's not dramatically self-employed only.

No. But sir, I mean, your average outstanding is not high. So I was just wondering why would a person want to default on the credit card or not pay on the credit card, not default but not pay because I mean -- I mean the assumption is that the CIBIL score gets impacted, and the amount is not very high, so people can always pay from their savings, but that doesn't seem to be happening there.

No. There would be -- there are customers who've seen their cash flows disrupted. And if they have an outstanding of, let's say, whatever, INR 40,000, INR 50,000, then as of now -- the environment is also in a way such that they had moratorium and are now hoping on some relief from Supreme Court or restructuring, et cetera. So there are a few customers who are not paying. I think that's -- that is to be expected. Your other question was around new to credit. We don't have new to credit. We have only about 1.5% new to credit.

The next question is from the line of Utsav Mitra from Falcon Edge.

My question is when do we expect to hit 1.6%, 1.7% ROA adjusted for tax. So if you go back to the pre pre-tax cut, a guidance of 1.5% ROA and 16%, 17% ROE if you adjust for tax, you move to 1.6%, 1.7% ROA. How far are we from that in your own estimations as you do your business planning and forecasting?

So I think we've kind of come out -- coming out of fairly complex situations over the last 18 months. First, on the corporate asset quality and then COVID. I think it's a little premature to start thinking that we have all the parameters all lined up as to what will happen. So it's a little still early for us to do that. But there's a gun in my head, I will guess that, that should be about 12 to 15 months away, at least from an exit quarterly performance perspective.

Got it. And the key movers being the credit costs will come down to a more normalized level and your OpEx would come down as well? Would those be the key movers?

Yes. I think the key movers would be, obviously, one is provisioning, which clearly comes -- will come down to the normalized levels of each product category. The overall provisioning will still be higher than pre-COVID because the mix will be skewed in favor of certain products, which run on high provisioning basis. The second driver would be clearly the mix itself with higher ROA products getting higher share of the overall advances. The third would be, we expect liquidity -- excess liquidity to come down. Today, our assets are bloated by almost 15%, which should gradually unwind over a period of time. Because they don't return anything material, but they just expand the denominator. The fourth would be funding costs. We expect there is a lot of juice on the liabilities side. We've yet not been very aggressive on cutting rates. We are wanting to kind of continue to give a flip to retail liabilities, and there is a very material traction on that basis -- on that business segment. But again, there is a lot of juice here to cut rates over the next 12 months. So funding cost normalization will also result in adding to the ROA mix. So it will be a multiple of factors.

The next question is from the line of Manish Shukla from Citigroup.

Given where we stand today, on the non-wholesale part of the business, especially retail, is there any, let's say, change of thought process in the segments that you operate and how you want to approach those? Wholesale, obviously, we've seen a big shift over the last 1 year. But for the non-wholesale piece, given the COVID experience, has your thought process changed in anyway?

No. Manish, are you talking in terms of the product mix, et cetera?

Yes, product segments where you want to grow and not grow.

No. I think we are -- as Mr. Ahuja mentioned in his call, I think if we come out of this crisis and stress test at the 2 profitable segments not consuming capital and being profitable after absorbing the kind of losses we would have gone through, I think we are quite happy with being able to grow those segments. In addition, we are also looking at -- we've been doing some work and beyond the pilot stage on introducing affordable mortgages, which will become material over the next couple of years. In terms of at least incremental acquisition or incremental growth contribution. And then we will experiment with 1 or 2 more products, which will fit in well with our semi-urban, rural focus over a period of time. So yes, there will be some new products, but broadly, it should be retail assets, cards, micro finance, mortgage, which should drive the growth.

Okay. The next question is on margins. So fourth quarter onwards, you have a favorable asset mix as well as hopefully lower drag of liquidity on the balance sheet. So what is the margin level you think you can start sustaining from fourth quarter, once you have interest reversals behind you?

I think we should be getting back to Q1 levels and then slowly improve from there.

The next question is from the line of Mohit Surana from CLSA.

My questions were answered. Thank you.

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

So I wanted to understand on the NIMs impact due to interest reversal of 50 basis points. So given the slippages that we talked about, even including Supreme Court delay deferred NPAs, the impact of reversal seems to be pretty large. So if you could explain and help understand where this INR 90 crores is coming? And you are guiding for a similar number for next quarter, what will be the reason for that?

So Rohan, we have taken estimated -- actual slippages for Q3 and taken a proactive reversal on that portfolio where interest has been accrued till September. So it's not only for the amount which was going back -- becoming 90-day DPD as at September end. It is including what expectations are there on at least the cards portfolio, which will slip in Q3 as we come out of moratorium. So we've taken interest reversal on that portfolio as well.

Right. So it's not only in the INR 235 crores, but additional portfolio outside of INR 235 crores as well?

Yes.

That we have taken interest reversal. Okay.

Where is this INR 235 crores?

[indiscernible]

Yes. Yes, yes.

No, it's all of it.

Sorry?

No, no, no. It's on across the board.

Sure, sure. Sure, sir. That's it, sir. And sir, on the card footprint, just the expected delinquency that we are talking about, obviously, one of the participant asked earlier. But within the self-sourced portfolio vis-à-vis the externally sourced portfolio in the cards, some color on how has been a delinquency mix within that or the expected delinquency mix within that?

If you look at -- see for us, a large part of our portfolio comes through our partner, which is Bajaj Finance. And if you look at the mix, it's in proportion to Bajaj Finance is slightly better, which is how their performance has always been because it's a tested portfolio, but largely around those lines.

Sure, sir.

I think what he's trying to say is that there's not much difference between the 2. But if you want to fine-tune it, the Bajaj portfolio is slightly better from a delinquency perspective. That is what one would expect. Like he said, because that's the tested portfolio and credit tested even prior to acquisition. So therefore, one would expect that.

The next question is from the line of M.B. Mahesh from Kotak Securities.

Just a few questions from my side. One, on the corporate book that you have had, of the INR 18 billion of slippages which happened about a year back, where are you in terms of recovery process with respect to those corporates? And there has been some discussions in the media of 3 large retail [Technical Difficulty]

I'm sorry to interrupt, but your audio is not audible, sir. We are unable to hear your question well.

Mahesh, your voice is breaking.

Hello?

Yes. Go ahead, Mahesh.

Can you hear now?

Better.

Yes. So the first question is on the corporate book. Of the INR 18 billion of slippages, which happened about a year back, where are you with respect to the recovery of that particular book? And also if you could some color -- are you expecting any major slippages in the next few quarters, given that there's one large exposure that company are aware of in the retail side? Just trying to understand how you feel on corporate side.

On the first part, where are we on this last year slippages, it's a little slower. Obviously, given the multiple other issues in terms of how banks are approaching resolution where there are multiple lenders involved. But over the next 2 quarters, we do expect to have some progress on a few key cases in that lot. Currently, we factored it in our assumptions and as we shared for the full year.

And your expectation of slippages on the corporate side in the near term?

See, let me answer that. I'll answer that. We have indicated previously our total credit cost guidance for the bank as a whole and again today. And we have said that 2/3 or so will come from the retail side and 1/3 or so will come from the wholesale side, okay? We are -- we continue to stick by that, whether it comes from the legacy. See, much of the legacy is already taken care of in terms of provisioning, okay? I don't think that there is going to be new provisioning required on the legacy issues that you asked about. Bulk of that provisioning is done. And to the extent that some recoveries have also happened, some more will happen. There will be an add-back for us because we have provided sufficiently for that book. And those provision numbers were reported in previous quarters. Then how much -- last year itself, that was done by March 31, 2020, and we have reported those exact numbers. So those provisions were done last year itself and done and dusted. So from there, the net effect, if any, from further recoveries will be net positive for the bank. Let's forget that now. For the year as a whole, from the normal course of business from some of the new names that may have emerged because of COVID or other factors, we have indicated for March '21, that about 1/3 of the total credit costs will come from wholesale. I think that's the way to look at it. A specific name that you are saying is included in that perspective, okay? It is not something new from the point of view our planning or forecasting or including in our guidance. And also I want to add that in that name itself, there has been massive, almost 40%, 50% reduction in exposure, that has happened in the last 3 months itself, yes. So that is indirectly reflected in the exposure reduction in the BB book that we have indicated on Slide 18 or so, okay? So I don't want to get into specifics because we don't get into specifics. But there has been much better than industry comparison improvement in that situation for RBL Bank, largely because of the very superior securities and position that we had in that situation, some of which has been monetized and recovered.

Sir, the next question to -- again, sorry, we'll have to -- I'm coming back to Harjeet on this point. When you today look at that credit card book and one of the questions we've asked your competitor as well is that why are customers not even willing to pay 5% minimum installment due and preferred [ take that ] restructuring or morat despite having lost nearly about 3, 4 months? The risk so they take seem to be far higher of -- as what the other person -- participant highlighted that they kind of get scoring against it.

Mahesh, Jaideep here before Harjeet takes that question. We were running at about 4.5% to 5% credit cost -- 5% credit cost pre-COVID. That was also basically because people did not pay 5%. So it's the nature of the beast. Sorry, Harjeet, you can elaborate.

No, no, but that's it. The answer is exactly that. That 5% is going to 9%, 10% post-COVID and everything that has happened. And that is according to me, Harjeet, correct me if I'm wrong, better than many industry comparisons, including some of the bigger names that have recently…

So Mahesh, it's difficult to -- I mean, the fact is that we always have a set of customers who finally get over leveraged and therefore are not in a position to pay and therefore will go bad. There has been this extra hit on account of COVID. And as I mentioned earlier, it's not as if it's just self-employed. Even salaried guys have got hit as well. And that's where the composition is coming from. If you dig a little deeper, you will find that the people who were, let's say, if I were to draw a risk scale of 1 to 5 and the people who are, let's say, on the higher side of 4 and 5 are the ones which will contribute more towards this than the other ones because they were, in any case, slightly riskier. And therefore, when a position like this happens, they are not in a position to do. It's not that they will just go bad on cards. They will go bad on a lot of other loans as well. But that's the way this happens.

Perfect. Useful. And my last question to -- on the question of affordable housing. I think it's a little bit too early to ask this question, but nevertheless asking it. Why launched this product today in the sense that you still are kind of in a transition mode on the existing businesses in itself? What was the rationale of -- because we are going to put in some more effort in terms of costs and businesses around making this business to be profitable. What's the rationale there?

Yes. So affordable housing was something which we had seeded last year and wanted to test out the market in a few hypotheses that we had a reason to play in this. And largely was around the fact that we had distribution existing for MSME in our semi -- in our smaller Tier 2, Tier 3 towns. And therefore, could we leverage that understanding of the market as well as the distribution to be able to do affordable housing. In the last 1 year, for whatever little INR 200 crores odd book we built by the end of last year, we found that this was a good thing to go. Now a large part of this will go towards building a little bit of extra capacity, both in terms of people and branches, but these branches are all existing within the already existing, let's say, MSME branches of about 140-odd branches which we have. So it's not as if it's a great investment. It is an investment. But I think you need to start building it and getting your investment people ready, processes going, et cetera, so that when there is clarity around the market, you are able to run much faster. In any case, the housing market has bounced back the fastest even in current times, if you really look at it. That's the only asset class, which is really doing well there. So those are some of the things. We felt that it was maybe not prudent to set up after having tested it to set our plans back by another year waiting for COVID to happen -- finish off.

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

Harjeet, I had a question on the micro finance book since you have a first loss provisions there. If you can just explain what could be the ROE profile of the micro finance book pre-COVID, if it was without first loss and with first loss? And what has changed post-COVID?

ROE is a difficult one, but I can tell you…

ROA.

ROA, we had said that it was on a less over a period loss adjusted, the ROAs typically are between 3.5-odd percent and plus that. In years when you don't have any such events, the ROAs obviously are much higher. But if you take a 5-year period, then that's the way to look at it. It just so happens that in the last 2 years, every year has been an eventful year right from [indiscernible] onwards. But yes, that's the way to look at it. Today, about 40%, 45% of our book is FLDG covered. So that gives an indication.

So 3.5% ROA over the cycle you are saying is including assuming 40% is FLD cover?

Yes.

Okay. And that has -- that in the down cycle like COVID can move to a loss? Or it is still a profitable business?

No. So as we had mentioned in the commentary as well, both cards and micro finance will be positive and decently profitable after taking the credit costs as well this year.

And on the restructuring side, what is the pipeline looking like, both in the credit card as well as the micro finance segment? And if you have a reproposal on the corporate side?

On the retail side, we haven't started restructuring. We will be doing that now. There are not too many clients who applied either. Whatever restructuring happens will happen from within the pools, which we are talking in any case.

And are you open to restructure?

Similar answer on the corporate side.

I'm sorry, sir.

Yes. Sorry. You had a question?

Are you open to restructuring?

Yes, we have put out…

Are you open to restructuring the micro finance book?

Micro finance restructuring has just been allowed. There will be a small segment, which will be offered to this. But I mean this is clearly recent. In fact, micro finance was offered the last.

Yes, it actually came as part of the FAQ.

It came as part of the FAQs.

And any update on the corporate restructuring side? How is that kind of panning out given that there have been few names floating around in the newspaper that they have requested for restructuring?

So we've also been seeing the newspapers. Formal invocation has not yet happened. It's a little too early. I think maybe over the next month or 2, we'll start seeing something.

The next question is from the line of Anand Laddha from HDFC Mutual Fund.

I just had a question. You have been -- the business has slowed down and so as the cost growth has also slowed down. So any color you wanted to give on the cost-to-income ratio going forward?

Yes. So cost-to-income ratio will be flattish. I think we will be in the 50% plus-minus range. It will have some pulls and pushes while cost efficiencies will bring this down, but business segment mix will push it up. So I think we expect this to be in this range. In Q2, specifically, we did get the benefit of some of the negotiations that we were continuing from Q1, which fortified in Q2, including for the Q1 period. So that was -- yes, including lease rental reductions, et cetera.

And please remember, as we have said previously, we continue to add branches. We continue to build our infrastructure, both physical and digital. And therefore, we are investing -- continuing to invest in the franchise. So there are costs involved. There's a lot of technology upgradation also that is going on. So there is an ongoing investment in the business franchise. So that pushes our costs. On the other side, there are lot of measures we are taking in terms of improved efficiencies and cost rationalizations, et cetera. So I think, like Jaideep said in summary, one sort of cancels out the other, and that's the way we are looking at it. We want to maintain at the current level of net, if I may say, efficiency ratios. And I think that would be a satisfactory outcome as one is concerned.

The card business is gaining scale. So would it be fair to assume even for next year also, should we see some more cost reduction for us to come from 50% level? Or it is still some time away that the cost and commission would come down below 50%?

When the card business revives, then the cost will go up.

Yes. So card business typically is more than 50% cost-to-income ratio.

Yes, yes.

Because it's a very high-income, high-cost business naturally and also depends on the level of origination that happens in a year. So as we get back to a pre-COVID level origination, that will push up costs.

Yes. Initially costs will go up for 1 or 2 years because cards business till you start to slowing down the growth rate and reach a certain minimum critical mass and scale, your costs will go up because the acquisition costs are very high. Other operating costs are very high. And it's actually a much higher than 50% cost-to-income ratio business. Except that the returns are so healthy, that it more than compensates.

And sir, lastly, on the NII side. This quarter for NII of INR 1,000 crores plus, so if I had to add interest reversal, our NII would have been almost closer to INR 1,100 crore?

No, no, no, no. It is INR 920 crores, INR 930 crores right now after the interest reversal. If you add back that INR 80 crores, INR 90 crores, it would go to INR 1,000 crores plus, that is what we were saying.

Okay. Okay. So next quarter also should be at INR 920 crores, INR 930 crores level?

Plus some growth we will see [Foreign Language].

Next question is from the line of Pranav Gupta from Aditya Birla Sun Life Insurance.

Just a couple of questions. So firstly, on the -- and that's why I just wanted a clarification. This 93.3% collection efficiency that you have mentioned is on September dues. So if a customer might have paid in June or July, even though EMIs were not due, that will not be included in the numerator of this number. Is that correct?

No. So this is -- so technically, if you look at it, there were no September dues. So the dues were in October. This is assuming that if every customer due was -- supposed to be there in September, how many customers have paid that. Part of this may have come from advanced payments in June and July as well.

Yes. So 93.3% will include advance payments, which were [indiscernible] earlier, right?

Yes. Technically, all this is advance because the due really is in October. Because March, everybody had paid.

So would you be able to give out the number of efficiency excluding these advance payments?

I think it'll be in the region of about 87-odd percent, 86%, 87%.

Okay. Fair enough. Sir, second question is on the cards business. So is it fair to assume that a large part of the -- the large part of the pro forma NPA accretion would come from the cards? Would it also include other businesses as well?

Sorry, a large part of?

So there was a -- the Supreme Court stay order, which led to less our recognition of some slippages. For a large portion of that will come from the card business? Or will it be spread across?

No, no. So as of September 30, including that, the total NPA in cards was only 0.4%. So there was no real NPA.

[indiscernible]

Yes. There was no real NPA which was getting found in September. Your NPAs will get formed only in the quarter ending December and March.

Okay. Maybe I'll take this off-line. But just my last question on the corporate side. So obviously, we have seen rejigging of the business and leading to a degrowth on a -- consistent degrowth. But going forward, you mentioned that we could start seeing some growth coming from the third quarter. Just wanted to understand what segment this growth will come from? Largely, why I'm asking this question is because we are seeing all of the large banks flex their muscle in terms of their cost of funds coming down drastically, and they're being able to lend that much lower rates than probably a year ago. So just wanted to understand what would be the key focus segments going forward on the corporate side and where a bulk of this growth will come from?

Well, I'll be -- I'll answer it this way. We don't have a hardcore wholesale growth strategy right now, okay? For all that has happened, there was a certain strategy towards everything that I described so far in terms of bringing that portfolio to a level of quality, stability, et cetera, et cetera, et cetera, whatever I have said. So -- but we don't see that going down anymore. I think it's reached a point of stability in all respects. And now there are occasional opportunities that are coming from here and there, which show -- which are -- which -- from good quality companies, public sector companies, private sector companies, et cetera. And I think because we are generally well positioned in this space. Because of our historical track record, relationships and other -- and product suite capabilities, et cetera, I think we are starting to see growth opportunities. That's where it is right now. I don't think I'm putting a decisive number to how much growth will come from this segment. It will be modest, but there will be some growth. That's all we are saying at the moment. The growth impetus is still going to come from the retail side only for the next quarter or 2.

The last question is from the line of [ Kabir Gulati from AgeWell Capital ].

Actually wanted to understand your assessment on accounts, which have taken this ECLG facility assessment in terms of would their activity levels be a bit different or lower than the other accounts, which had not taken this facility?

No. So see, there are 2 types of people who've taken this. Large proportion of people are who have started activities but are nowhere close to their normal run rate and would need this working capital to be able to sustain themselves. So that's which is there. There are few people who've taken this as an opportunistic funding capability as well because it comes at much lower interest rates. And therefore, to that extent, if they are paying off their high cost debt, then that has been seen as well. But a large proportion is from people who are, therefore, now coming out of the COVID situation and their businesses have started.

Actually nothing against this ECLG facility, but at a systemic level, maybe your assessment that had the ECLG facility not been there, then maybe the morat level for this SME segment could have been very different from what is coming out now?

So I think the morat level initially did reflect that because this scheme came in much later. But yes, I think it has been effective and it was need of the hour to be able to support this because in the absence of a credit guarantee, it was very difficult for lenders to be able to take further exposure on these segments, not knowing whether they've started, what will happen, how will they come out of it.

Thank you. We now conclude the Q&A session. If you have any further questions, please contact RBL Bank Limited via e-mail at [email protected]. I repeat, [email protected]. On behalf of RBL Bank Limited, we thank you for joining us this evening. You may disconnect your lines now. Thank you.