RBL Bank Limited (RBLBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to RBL Bank Limited Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Rajeev Ahuja, Interim Managing Director and CEO of RBL Bank. Thank you, and over to you, Mr. Ahuja.

Thank you, ma'am. Good evening, ladies and gentlemen, and thank you for joining us for a discussion on RBL Bank's financial results for the third quarter of financial year '22. First of all, I hope you and your families have been safe and in good health. As always, I'm joined on this call by other members of our management team, who, along with me, will address any questions that you might have. On the business front, quarter 3, as expected, has been better, given the improving activity indicators and environment post the severe second wave we saw in Q1 and its spillover impact in Q2. Briefly, advances momentum is now firmly on a positive trajectory. We have seen sequential growth and expect this to continue in the coming quarters as well. Asset quality position continues to improve. Slippages and recoveries have continued to trend lower quarter-on-quarter, and we expect this trend to be lower in Q4 as well. Profitability has therefore been seen a sharp increase, and we expect to improve this further in the coming quarters. While there were some challenges on the deposit front in the last week of December, we have seen stability return very quickly and are now, in fact, tracking deposit position at higher than December levels. We continue to remain well capitalized with sufficient liquidity buffers. And today, we opened our 500th bank branch. Our long-term focus on expansion of our distribution franchise via branches and BC points and technology-driven services will continue to be the focal driver of our investments in the coming years. Now briefly talking about our results for the quarter. First, asset quality and related provisioning. Our GNPA and NNPA as of the quarter end were 4.84% and 1.85% respectively, trending lower quarter-on-quarter from 5.40% and 2.14% respectively. In our previous calls, we have spoken of slippages peaking in Q2 with progress towards normalization beginning from Q3. I'm happy to report that gross slippages this quarter were much lower at INR 766 crores as against INR 1,217 crores in the second quarter of financial '22. Adjusted for recoveries and upgrades, net slippages this quarter were INR 313 crores as against INR 747 crores last quarter. Of the slippages in this quarter, INR 252 crores was in micro finance, INR 248 crores was in credit cards and INR 148 crores in rest of retail. Slippages in wholesale were INR 117 crores. However, of this, an account of INR 85 crores slipped and upgraded within the quarter for technical reasons. To give some more color, the trend in cards has now normalized to pre-pandemic levels. In micro finance, while slippages were lower this quarter than the previous quarters, it is still higher than normal trends. We are, however, seeing incremental flows into slippages slow, and expect slippages to be lower the next quarter of Q4 onwards. Lastly, I want to specifically address concerns that still remain about our wholesale book. Over the last 2 years, we have continuously improved the quality of the book granularity, et cetera, by focusing on derisking and debulking and by adding new names, which have a much better credit profile. The book has held up well through the pandemic, and we have seen negligible slippages over the last many quarters. Provisions. We took total provisions on advances, which is NPA restructured and standard assets of INR 480 crores in this quarter as against INR 694 crores last quarter. Adjusted for recoveries from written-off accounts, net provision or advances was INR 403 crores in this quarter, largely in cards and micro finance, INR 244 crores in cards and INR 82 crores in micro finance. In addition, we continue to hold the COVID provision of INR 134 crores, same as last quarter for the micro finance book. Our gross restructured book has also reduced quarter-on-quarter to INR 1,998 crores from INR 2,120 crores on account of customer repayments. PCR is now 62.9% as against 61.7% last quarter end. A few points about the operating performance. Overall, advances grew 3% year-on-year and 4% sequentially. Retail advances declined 6% year-on-year and were flat sequentially, whereas wholesale advances grew 16% year-on-year and 8% sequentially. We'll talk a little bit more about the retail advances when Harjeet picks up the thread. In terms of outlook, in Wholesale Banking, activity levels have been improving over the last few months, and we are increasingly seeing traction in credit growth and related areas of trade ForEx, cash management, et cetera. In fact, this quarter, we onboarded 86 new clients in this segment. In Retail, momentum in new card issuances has been strong this quarter, and we expect this to continue in the coming quarters too. We added approximately 6 lakh cards in the quarter. This is between 80% and 100% higher than our normalized acquisition rate. Obviously, Q2 was very subdued because of the ban on Mastercard. In micro finance, as the stress abates, we have started increasing our disbursal momentum, specifically in geographies where we see collection efficiencies being close to pre-COVID levels. As a result, retail wholesale advanced mix stood at approximately 53 to 47. Our year-on-year total revenue was up 10% at INR 1,630 crores. Year-on-year, NII grew 11% and 10% sequentially to INR 1,010 crores with more normalized interest reversals in this quarter. NIM for the quarter were 4.34%, 28 basis points higher sequentially and 15 basis points higher than Q3 of last financial year. We expect this to sustain and then improve over the next few quarters. It is also important to note that we have also prudently not been recognizing interest income on the restructured book. So while that is a drag of approximately 10 basis points, growth in earning assets has more than offset that. Year-on-year, other income was up 8% at INR 620 crores, and core fee income grew 24% year-on-year and 17% sequentially to INR 594 crores. Year-on-year and sequentially, fee income from our retail businesses grew 19% to INR 509 crores. Retail fee income to core fees was 86% this quarter. Our OpEx increased to INR 1,000 crores this quarter, an increase of INR 183 crores from the previous quarter. The increase in OpEx was driven by the credit card business on account of new card issuances this quarter. As I mentioned, we have pretty much close to doubled our normal issuances. And the spend reward related expenses this quarter was one of the best spend quarters we've had in the history of our cards business. Also, the first 2 quarters were unnaturally lower because activity levels in cards was very subdued. So the increase because of card was almost 3/4 of the total cost increase. In addition, we had normal cost increases on account of branches, people, technology added over the last several months. I'll have more to talk about this towards the closing of the speech. As a result, our PPOP this quarter was at INR 631 crores. Due to lower provisions, our profit after tax was INR 156 crores for the quarter versus INR 31 crores for Q2. Now on to our deposits. Summarizing the quarter, year-on-year trends were healthy with total deposits growing 10%, CASA deposits growing 21% and retail and small business deposits growing 14%. CASA ratio was 34.4%. Retail and small business deposit ratio was 37.9% as at December 31, 2021. The focus and importance of retail deposits is now perhaps greater, and we will continue to keep investing and increasing our digital and physical footprint and brand. If you recall, in the second half of 2021 and the first 6 months of this financial year, our retail deposits have grown dramatically, almost of every INR 100 of deposits we added, INR 80 came from retail LCR. We hope we'll get back to that trajectory in the months to come. As I mentioned, we have today reached 500 bank branches, an increase of 96 branches from the December of 2020. We plan to add another 80 to 100 branches over the next year, primarily deepening our presence in key existing urban and metro markets. We also had 1,424 BC branches at the end of the quarter. Our liquidity levels continue to remain high with average LCR at 146% for the quarter. Our cost of deposits decreased to 4.76% in Q3, lower by 95 basis points year-on-year and 25 basis points sequentially. We expect deposit costs in Q4 may see a small uptick given that rates have now begin to move up, but it should be within the same ballpark. Lastly, on capital adequacy. Our [ CapAd ] ratio as at 31st December was 16.6% with a CET1 of 15.8%, an increase of 30 basis points sequentially. With that, I will now hand over to Harjeet to talk to you -- to talk you through some details on the retail businesses for this quarter.

Thank you, Rajeev, and a very good evening to all. I will outline for you our quarter 3 FY '22 experience and how we are seeing things in Retail as we move forward from here. Let me talk about advances and disbursals. As mentioned, advances in Retail declined 6% year-on-year and was flat sequentially. However, we saw year-on-year growth in advances and cards of about 8%; home loans, about 172%; and tractor loans about 250%, though off a small base. On the other hand, we saw a decline in micro banking advances by 28% due to our cautionary stand on market -- on the market and business loans also declined by around 20%, where the unsecured books were being run off and only secured loans are being done. Disbursals which started again from September onwards across all business segments picked up momentum in the third quarter and should see further pickup this quarter. How are we seeing things today? Markets, both urban and rural are not seeing any material restrictions on account of lockdowns. The third wave doesn't seem to have made much of an impact as of date. Resolution rates continue to be better than pre-COVID levels across all buckets and in all business segments. Collection efficiency has seen a sharp improvement in micro finance. Overall collection efficiencies in the non-NPA book have improved from 83% in June to 94% in September to around 97% in December. Even in January, we are seeing a slightly better collection efficiency than December despite the third wave. The book originated in FY '21 and therefore not subjected to any moratorium is running at collection efficiencies of around 99% and gives us the confidence that the delinquencies are now restricted largely to the pre-COVID book. The new book accounts for 64% of our total micro banking advances, and this proportion is increasing every month. If I look at the non-NPA book, then the new book proportion is around 75%. Slippages. As mentioned earlier, in overall retail, The slippages in Q3 saw a sharp reduction of around 45% over previous quarter and were at INR 648 crores versus INR 1,170 crores in quarter 2 FY '22. This is the second consecutive quarter of reductions. Further recoveries and upgrades were much higher, resulting in a reduction of around 47% in net slippage post write-offs. Net slippages were at INR 388 crores in Q3 versus INR 733 crores in Q2. As mentioned earlier, the card slippages are moving to normalized levels and were INR 248 crores in Q3 versus INR 520 crores in Q2. We expect Q4 to be slightly lower than this. We saw a similar trend in other retail loans, where slippages were INR 140 crores in Q3 versus INR 245 crores in Q2. In micro banking, as indicated, we are seeing lower gross slippages sequentially in Q3 at INR 252 crores versus Q2, INR 375 crores, though still higher than normal. We expect quarter 4 slippages to be much lower than Q3. And as I said earlier, collection efficiencies have shown significant improvement, and we are seeing these customers stabilize in their existing delinquency buckets. As indicated previously, recoveries happened towards the end of the loan tenure as these customers do not catch up usually on their missed EMIs and hence don't generally get upgraded or normalized. Restructuring book in retail reduced from INR 1,721 crores in Q2 to INR 1,607 crores in Q3, primarily due to repayments. Now let me talk about the business momentum. In credit cards, quarter 3 saw a significant increase in card issuance over pre-COVID levels. We issued almost around 6 lakh cards, our highest ever in a quarter. Retail spends in credit cards also continued to show robust growth, and Q3 has seen a growth of 32% year-on-year and 17% quarter-on-quarter. Q3 total spends were around INR 12,115 crores, again the highest ever. However, we had seen a marginal slowdown in spends of around 2% to 3% in January on account of the current COVID wave, but the last few days have seen the revival happen again. Now let me talk about our micro banking segment. We've started scaling up on disbursals in micro banking since the beginning of October, given collection efficiencies on the new book today is around 99%. However, disbursals are still measured and based on our micro assessment of districts and branches and collection thresholds. Once we see off the elections late February/early March, we should significantly ramp up our disbursals in this business. We've also deployed an application scorecard in the micro finance business, which is able to differentiate between resilient and vulnerable segments. While it does bring down our approval rates incrementally by about 8% to 10%, we're hopeful that the PD, Probability of Default, on this portfolio will be much lower in times of stress. Business traction in secured loans has also started to pick up and should see a bump up in disbursals in quarter 4 FY '22. As mentioned earlier, we have moved to a much safer segment here as well. So while yields may be lower, this portfolio will be much more resilient in stress times than before. Our new businesses of home loans and tractor loans continue to grow along with the investment in infrastructure and distribution. While these portfolios will start becoming meaningful in FY '24, it is an important focus area for the bank towards building a secured book. I would now like to hand over back to Rajeev for his concluding remarks.

Thank you, Harjeet. So to summarize, we remain on track to the goals that we've spoken of in the past. On slippages and NPA, in Q3 FY '22, slippages, while not fully normalized were much lower Q-on-Q, and we expect slippages to trend lower in the coming quarters. GNPAs are trending down and this will continue. With PCR increasing, our net NPA should also trend lower from the current levels. Our PCR is 63% and will want to go above 65% in Q4. Growth. Growth traction has been good, and we expect this to continue. Focus will be primarily on growing the retail book. As you've heard from Harjeet, some of it has started, and some of it is now happening. Deposits have now stabilized, and we expect to continue to grow, especially the granular retail from here on. Cost of deposits has been lower this quarter, but we think given the turn in the interest rate cycle, rates have obviously bottomed out. Operating performance. NIMs have seen improvement this quarter, and we expect this to be stable for a couple of quarters before trending up. I did want to share a few closing comments on our general business approach, investments, expenses and capital allocation. Some of these we mentioned in our commentary of May 5, 2021, but for a variety of reasons, COVID and others, some of these we will not be able to elaborate. Point one. We will continue strengthening our balance sheet structure in terms of building greater deposit granularity, a little more diversified and secured retail asset mix, eventually a more predictable cost of credit and improving provision coverage. Therefore, do expect our investments in branches, which is going to drive deposits of roughly 80 to 100 every year. Growth of retail assets and related risk management people and technology costs to be front-loaded over the next few quarters. You all have seen the bump up in our OpEx for this quarter, which is largely cards and then retail and branches related. The free cash flow generation from a particular quarter's investment in our experience, especially in cards, commences to maximum 3 quarters later. So we should expect this lead and lag to persist for some time. Our tech and partnership-driven businesses are expected to be an important part of our business going forward. And our internal project, Project Abacus, which is our neo-bank will be a cornerstone of this approach. Finally, we must also recognize that COVID has accelerated the behavioral changes across many segments of financial services. We, as a midsized bank, must do a few things differently. As we speak, we are undertaking a deeper dive into a long-term capital allocation, sources of sustained economic return, manner of doing our businesses and reassessing the capabilities that might need further investments. We'll hopefully share more detailed inputs with you sometime in Q2 post the results for the full financial -- Q2 of this calendar year post the full financial results. With this, we will now take questions. Thank you.

[Operator Instructions] The first question is from the line of Kunal Shah from ICICI Securities.

Firstly, maybe post this event, maybe if you can just highlight in terms of how this will be a behavior of the deposits post December and when, say, the Additional Director has come on board, any product side changes to strategy that is being evaluated in terms of the overall exposure towards MFI, credit card and that as a proportion of the overall balance sheet. Is there -- anywhere in the discussion?

So Kunal, 2 questions. On deposits, as I mentioned, that we did see an outflow the very next day for perhaps 2, 3 days. We recovered that. And as I mentioned that today, our deposits stand higher than they were from the December levels even before the event. And I think that is now pretty much firmly in our control and will continue. Also, as I mentioned in my speech that you've seen the retail LCR journey, retail growth, which has continued between, I would say, June or September '20 and September '21, that will come back on track in the next few weeks and months. On the second point, on whether this event has any implication or any conversation on our business model. I think pretty much what I've described to you in my speech as well as Harjeet, these were things we'd outlined in May, August and October. I don't think we are saying anything different. Obviously, given COVID 2 and the challenges around some of the businesses, especially in micro finance and small business, we've kept a fairly conservative profile till recently. And I think we will very, in a calibrated manner, bring it back to its normalized growth rate. We are in no major hurry to do it, okay? So we're very careful. Cards obviously has come back far stronger. And wholesale banking, as you know, has had a much, much stronger last 3, 4 months. So I don't think anything major, which is different from what we've shared in the last 2 commentaries of May and August -- sorry, May, August and October.

Sure. And secondly, in terms of OpEx, so now OpEx is almost similar to our NII, okay? And so what is the trajectory which we can expect? No doubt you highlighted 3/4 of that is more towards the card, be it in terms of either the acquisition or the spend. But maybe when we overall look at it, it seems to be higher. And as you said, there will be further investments which will be required. So how should we look at the overall cost-to-income, cost-to-assets going forward?

See, Kunal, I'll let Jaideep respond a little bit. But see, cost-to-assets for us is a little different given that we have a fairly decent-sized card portfolio and card cost-to-assets are very different dynamics than in general. I'd say that where we are today, it will be plus/minus this for the next 3 to 4 quarters. I did say that there is a lag lead of 2 to 3 quarters. A large part of the OpEx increase is actually on cards, and that's something we can control if we want to. But clearly, we want to build a base. And given the improvement in the environment, we want to be able to leverage that. I think the reference to the sudden jump between Q2 and Q3 is obviously part of it is because we didn't have a lot of activity in Q2. There was also a catch-up on many areas. But clearly, outside of cards, the major items of spending will be branches, people. Technology refreshes are very critical, including digital, InfoSec, risk and compliance, all these costs, as you know, are investments we'll have to do, which has been happening across the industry. So my sense is for the next 2, 3 quarters, we will be in the same cost/income ballpark. Jaideep, is that fair?

Yes. See, Kunal, I think on cost-to-income, we also have a challenge of interest-bearing asset growth, which has been muted for various reasons. So once we start seeing retail asset growth across all segments, we will get that fillip on income, which can have some salutary effect on cost-to-income, but costs on absolute should be growing at a reasonable pace, largely in line with -- I mean, a good part of that will be for cards, yes.

Sure. Okay. And does it in any way maybe leads to change in terms of the guidance which we had given for 1% ROA? Because while this quarter was also quite normalized, we had seen it getting towards 60-odd basis points. But because of cost, I think it's getting a bit lower. So any revision on that because of for the higher cost structure?

Yes. So Kunal, I think, look, we are in the ballpark. I mean, it's too early for me to give you a definitive answer, we're in the ballpark. I will also say that for the next couple of quarters, the heavy lifting will be by provisions to compensate for the significant investments we're doing in all our businesses. And I think, as Jaideep was saying, our earnings assets have started moving up, okay? And that has to see a material growth for us to be able to -- the NII particularly and obviously, related retail fee income will grow commensurately. So I think we are very clear that given the change in the environment, given the, I would say, neutral to benign risk environment, which is emerging, at least in few segments, we don't want to, I would say, micro manage these investments we need to do, which will hopefully help us from an overall base as well as scale and market competitiveness. So I think we will continue doing this. So do expect a 60% plus/minus cost income and the drivers I've given you clearly are higher costs, lower provisions and then eventually incomes catch up with a little lag.

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

Just wanted to check in case post the event in December, are there any resignations at a middle management level or any relocation of position?

Rohan, nothing so far. And I don't think we -- look, we have a bench which goes very deep and that bench has been around with us for years. So I don't think there's anything which we will see as any gaps emerging. Obviously, there are at least 1 or 2 areas which are industry-wide issues on technology, risk and compliance. I don't think we are unique there. But nothing which is specific to this event is impacting us and unlikely to impact us going forward, too.

Sir, next one on the credit card business. If you can share what was the origination mix of new cards in 3Q in terms of Bajaj versus other channels?

Yes. I'll have Harjeet just talk about it.

Yes, new cards is about 72 -- so in our last quarter, new cards would be trending more towards 70%, 75% Bajaj. And this was a little higher than what we used to do earlier. And that is primarily because there was one channel which we [ shut ], which is the DSA channel. And that is now getting made up by some of our other co-brands, which have now started kicking up, and therefore, those volumes are now going up. So you should see us get back to about 60%, 65% Bajaj and the rest others maybe in another quarter or so.

Sure. What was the mix of spend coming from, say, premium cards and what was the blended interchange for the quarter?

We don't have a concept called a premium card because today, all cards issued are either platinum or world. So I mean, technically, they're all on premium platform, but if I was to talk about the blended interchange, which we get, round about 1.2% to 1.25%.

Okay. Despite they being relatively premium cards, we are getting a lower interchange than some of our competitors?

Yes. No. So you have to keep in mind that I don't think our interchange are lower than competition. Please keep in mind what has happened is that there are some categories of spends, which have taken -- which have increased substantially, especially in the online space, around utilities, around rent payment, et cetera, which is where our interchanges are lower. And that is why not only for us but for the industry, the overall interchange has come down.

Sure, sir. And sir, just lastly, what was the total technology-linked OpEx as a percentage of total OpEx, ballpark -- what is your trend, in general?

Yes. I think, Rohan, this will be 10% to 12%. I mean I'm talking all people, depreciation, AMCs all put together.

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

What exactly has changed in the last 1 quarter that the guidance on cost has changed sharply?

Amit, we actually did not give any guidance on costs when we spoke in October. I think all I was saying was that our Q2 was far depressed because -- sorry, our Q2 was depressed because for almost, I would say, barring 15 days of that month, we were not issuing cards and cards is a large part of our OpEx. Plus, there has been obviously catch up on branch expenditure, some of the branches have come back -- come into from capital WIP to expenses. Technology, people; we have been hiring people. So a big jump, as I mentioned in my commentary that 3/4 of the increase are because of card issuance, our card issuance is between 80% to 100% over our normal issuance, Amit. And rewards and spend-related things which also come into because the activity levels in this quarter have been the highest for us, including the industry. So those have been the real drivers of OpEx increase.

Yes. That point is taking that this quarter was kind of one-off, but are you suggesting that going forward also, 60% for the next 2, 3 quarters would be the [ run rate ]?

Yes. Yes. So we are seeing, Amit, that the card issuance will continue, which, like I said, is something which we will not slow down. And there will be more branch expansion. There'll be more technology, risk, compliance, people. A large part is cards and which is I was saying very clearly that the free cash flow from that investment is a 2 to 3 quarter lag, but the others will also happen. So we will be in the 60% ballpark for a few quarters before we start seeing the operating cash flows come back in terms of the investments we are doing.

Is there any change in terms of partnership with Bajaj, which has led to this higher growth in cards?

No, Amit, I think it's more environment. And also, actually, we didn't do much in the Q2. I think this is not something specific to Bajaj. But I think in general, you've seen the industry also ramp up quite significantly and so have we. Obviously, we have been kind of preparing our technology and issuance and all related infrastructure. My sense is Q4 should also be, Harjeet, in the same ballpark.

It will again be about 5.5 lakh cards plus/minus.

And even in the December call, the 1% guidance or kind of said that Q4 -- Q4 was maintained, are we still kind of committing to that? And -- or are we changing that? And what is the likely ROA target for [indiscernible]?

Yes. So Amit, we are in the same ballpark like I was mentioning to Kunal that a lot of the heavy lifting on PAT will be by provisions, some by core fee, but NII will be trailing because the asset -- earning asset book will keep rising. And therefore, that's more the next year's phenomenon. And OpEx will be around these levels plus/minus. I think FY '23, a little early for us. Like I said, I have given a few thoughts and shared with you. Hopefully, after our full year results, we'll come back and do a deeper dive with you all on a medium-term plan on business segments, capital allocation, economic return, how will we do business? I think we owe it to you all to tell you what we'll do and what we'll do differently and what we will sustain. So maybe if we can just kind of wait for that, I think it's important that we use this opportunity to do, I would say, a reset but more a lot of clarifications and link the investments to the economic return and franchise creation more predictably for you.

And on capital, in the last call in December, you'd guided that for the next few quarters, at least you don't use capital while there was a new story, I don't know how, who it was about talks with some private equity [ guys ]. So I just want to understand, are you looking at some [ suspense ] issue or anything of that sort?

No, no. Amit, nothing whatsoever. We are fairly okay on capital. I think we'll wait for a few quarters. Let's also get our medium-term plan in front of you guys and explain to you the logic of that. And then it will still take us a few more quarters after that to raise any -- to think of raising any equity. Let's see. I think we'll take it as it comes, but nothing so far.

Amit, that story, also carried our denial.

Yes, the story carried our denial, but obviously, it was kind of in our pages somewhere.

[indiscernible]. And final question, what is happening on the MD appointment front? What are the time lines, if you could just talk about that?

So Amit, I can only say that the Board is targeting to do this in an expeditious manner. And that's all I can say and that's all I know. Beyond that, I will not be able to comment, but I know it's on a reasonably expeditious track.

The next question is from the line of Rishikesh Oza from Robo Capital.

Sir, what would be our loan book growth for next 2 years? And what would be our secured and unsecured mix going ahead then?

Rishikesh, I think it's a little early for me to make a comment. All I will tell you, and we've given you some segment-wise status. So wholesale has grown nicely this quarter, and we see a lot of opportunity. Cards has grown well. Micro finance, obviously, we have been conservative, and now we are looking to grow. And even there, we will be very conservative until this period of Feb, March on elections is over. Small business segments, we are coming back, plus we have 2 new segments in tractors and home finance, which albeit on a small base, but they will continue growing at a faster clip. Now where does this all add up? Over a 3-year period, I'm sure we'll grow at industry plus levels, but I don't think we can sit here today and give you a very specific percentage or a range guidance. I think what I'll only say is that all our vectors, in general, are in a good shape to grow. Some are growing, some are about to grow. And if we find that the environment is conducive, risk taking is being rewarded, we will grow. And then we'll come back to you, hopefully, when we declare our full year results with a lot more clarity, just post that on what is the long-term plan on balance sheet business, areas which we will develop, areas which we will stay static in.

Okay. That will do. And sir, my second question, since you have said that you'll be focusing on less provisions. So our provisions, half of that what we will do in FY '22. That still stands, right?

Yes. So Rishi, all I said was that our provisioning costs are trending down as we had indicated in October. You've seen that for the December quarter. We're likely to see that for the Jan quarter. We had guided actually 50% to 60% slippages in H2, cost of credit versus H1. I think we are in the same ballpark. I'm today, if you ask me, and wave 3 is happening, happened, and we've not seen any change in our collection and recovery trajectory. I think on a normalized basis, we should continue seeing provisions normalize. I'd say that this Q4 will normalize further, and then we'll see how things go based on our business model, on a normal basis, what's the predictable cost of credit range, and we will share that with you when we meet next.

The next question is from the line of Anand Dama from Emkay Global. Sir, I'm sorry, but your audio is very feeble. May I request you to please speak a bit louder?

Can you [indiscernible] give some details on the recent deposit numbers? And then most importantly, the saving deposit number because we would have raised some bond deposits during the month, and that would have led to higher deposit numbers [indiscernible]?

Yes. So Anand, I think aggregate deposits are higher than December 24. Obviously, we suffered in the last week of December, and you saw our retail LCR go down. You saw our CASA go down. And obviously, some of the impact was on savings. That has come back. And I think, in general, the recovery rate in retail has started improving fairly sharply. I mean that's usually, I would say -- and a lot of our retail is not the over-the-counter retail. It's really the technology or channel-based retail. And when they have to move, then they come back? And none of them has actually -- they still leave a lot of money, but it's not as much as they used to. But that has started coming back about 10 days back, and I think that on a daily basis, we are recovering that. I don't think I can sit here and say that's all done and dusted and I think it will take us 4 to 6 weeks to get that back on trajectory. This is pretty much what happened, Anand, between March '20 and June '20 when we had that other -- that event for the market. I think we started seeing a fairly good recovery in retail towards third week of May onwards and by September, I think our overall retail LCR has started moving up very smartly. I think the same trajectory will happen, perhaps a little faster now. So -- but we'll have to just wait until March when we give you more color on the mix of deposits and where we are on retail LCR.

So as we speak, we are still down versus the December number, is it correct?

No, no, no. We are higher than December number, December...

No, no. In terms of retail deposits?

Yes, yes. Last week of December, if you notice, we -- when we gave you the retail LCR, it had dropped quite a lot, almost, what, 2%, 3%. So we are higher. But can I say that all is under control, and we are back, no. But on a day-to-day basis, the recovery is very smart. And that's the behavior of the retail folks. Like I said, our retail is mainly channel and technology-determined retail, not the over-the-counter small retail. So I think that is already coming back. And I think by the end of this quarter, we should be that what we were and much more, hopefully.

And your December 24 number also, the deposit number that you have given, there also, we have already seen a rundown happening just before the event had unfolded. So was it more systemic? Was it more related to us? What was the...

No, no, no. I think versus September, what happens towards the quarter end, you have typically ramp up on deposits by corporates, lot of the NBFCs come. There is a lot of current account buildup, which happens. So typically, when we've seen our deposit numbers, they stay within, I would say, 2% to 3% of the previous quarter end and then trend up. And that's what you've seen. I mean -- and I can say that for the last several quarters, our retail LCR was growing. We said that of every INR 100, we were raising INR 80 was at retail LCR. So that was a normalized thing. I don't think there was anything unique for us in that quarter or because it's been a normal phenomenon. And Jaideep, sorry, you...

Yes. So Anand, one more peculiarity, we had run down our CDs. So the CD issuance happened towards the end of the quarter. So that would have been a normal situation.

Yes.

Sure. And can you provide some outlook on the micro finance business in terms of asset quality, by when it should normalize? And would you like to [ accelerate ] your PCR somewhere owning about 60% to 63%. It is better that with these kind of events happening, we should be somewhere close to about 70-odd percent to [ comfort ] investors. And also that we build good provision buffers, in case we have some shoppers post-management change. I think we can absorb that.

Yes. So let me answer the last question, Anand. Clearly, we made a call in -- for starting June to raise our PCR and I think we will continue doing it. I did also make a comment specifically towards the end of my conversation that we will continue building on PCR. I think just perhaps we'll -- when we speak again in May, June, we will give you a lot more guidance on that and a lot more comfort as to where we want to ultimately be. And that will be embedded as a cost of doing business for us. So I'm very clear that some businesses -- and again, not related to the recent events, some businesses by nature have to be conservatively kind of provision. And we've had a fairly conservative provisioning policy on cards and micro finance. Obviously, COVID 2 was a very, very significant event for micro finance. And while we are seeing things get better, we are still cautious in terms of growth. Harjeet, do you want to talk about micro finance business from a medium-term perspective?

Yes. So I think your question was around how do we see the portfolio quality going forward? Slippages, as I said, while quarter 3 was much below the quarter 2 numbers, they are still high. We expect a reasonable reduction in quarter 4 as well. But I think in micro finance, what we are seeing is that the customers are stabilizing in their delinquency buckets where they are and they don't typically move so they don't move backwards. So to some extent, we will run with elevated delinquency buckets, still these loans run off. And that is why you will see somewhere where normalization, I will not be able to come back and say that most of the customers have normalized. Because in cards like business, you will see most of the customers would either normalize and the balance would slip into NPA. Whereas in micro finance, they just hold where they are and keep paying their installments. So that is where we are. Therefore, we are -- as of now, we are doing much better than our forecast in terms of how many customers would slip into NPAs, et cetera. But I think it is still a 2, 3 quarter piece by which time the old book would have run off completely. And that's when you will see the new book coming down with much better either delinquency buckets as well as the NPA numbers.

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

Just a few questions. First on the asset quality line. In continuation to Alan's question. See, last 2 quarters, we did about -- your micro finance slippages is down from 450 to about 250 and again to about 250 this quarter. And you're saying this number will come down. You've also kind of indicated that the credit card book, which has also fallen by half as compared to the previous quarter will come down you don't seem to have any issues on the corporate side. What is the incremental challenge that you're seeing today in your portfolio? Or, let's say, next quarter or probably a couple of quarters from now?

Mahesh, the micro finance, while you're right, we came down to 250 from 375 in quarter 2. It is still high. And even if when we come down next quarter, it is still high from a stable micro finance expected slippages whereas cards, we are in the region of about 230 to 240, which is what our normal slippages are. Here, they are still elevated. So that is one particular piece which we need to tackle as we go along. And then apart from this, I don't see any major slippages coming from any other business segment. I mean, more or less, they are there.

Yes. So Mahesh, I think, the...

Sorry, I'll just add one thing, yes. See the only one place where we still have a fair amount of concern is that business banking book where you have approximately INR 1,200 crores, which is currently restructured.

Yes.

Anything coming from there?

No. So as of now, no, but the only comfort which we are getting there is that it is a fairly well secured book. So we did restructuring predominantly only in LAP. And that is the only comfort, which is coming in, but we'll have to see as it goes. So if that -- the piece which we are seeing is that the business activity levels have started back again. And hence, the comfort is there that these customers will pay. But we'll have to see that as we go along. So yes, from your point of view, you are right. That is something which we have not seen in today's slippages but we will watch that closely.

And Mahesh, I think, on restructure and retail also, we are seeing the repayments happening. So wherever repayments have happened or people are even bunching up and giving multiple EMIs together. So we've seen a reduction in restructured book. So one is quite hopeful.

And this wholesale restructured book is also finance? Is that...

Yes, there are only 3, 4 names there. So -- and 2 big names are in the retail group, which is in the news. One of them, which is more in the news, we've already taken some proactive provisioning.

Okay. Perfect. Second is that on this -- on the NPL line, again, what is it that you are writing off so aggressive, consistently, you're doing about 1% write-off rate in the last few quarters now. These are extension cards?

Yes, Mahesh. Card, the policy itself is to write off after 180 days. So naturally high slippages will result in 180 days later, those things getting written off. Recovery, of course, continue, but it gets written off. So that would be one large part. And then we will -- as and when the unsecured retail and microfinance finishes 100% provisioning or it ages by a year, that gets written off as well.

Second question is on -- so again, as is on cards. See, we are already in a period where the cost is going quite sharply. What is the rationale to now ramp up a card, you were doing about INR 3 lakhs to INR 4 lakhs per card per quarter. We've ramped it up to INR 6 lakhs today, and you're kind of indicating that you would want to continue at this stage. At this point of time, we are not too sure as to what drives this because from our side, we are trying to see if we can get the ROEs up, you can get the stability of the balance sheet here. Why do we need to ramp up the card origination at this point of time?

Yes. So -- Mahesh, cards, typically, we are seeing a market environment which is extremely conducive today to ramp up cards. You see 2, 3 things are happening in the market. One, there is a general propensity for customers to start taking cards and that too in the smaller markets, which is where our growth is coming from. So that is one. Our -- second is our co-brand with Zomato started picking up now. That's where the second growth lever is coming. Third is that we are seeing customers which are not leveraged too much. As a result of which you are seeing spend grow, but you aren't seeing revolve behaviors, et cetera, grow either. So it's all indicating to a very benign credit risk environment, which makes a lot of sense for us to, therefore, ramp up the cards business. And hopefully, in the next financial year itself, reap the rewards in terms of a fairly good ROA, which this business will be able to generate. It's just that in the short term for about a couple of quarters, you will see a little lopsided cost increase, but you will very soon start seeing the revenues kick in as well. So that's where it is coming. You will see a higher -- much higher ROA coming from the cards business next year, and that is the reason why this is being done.

Also Mahesh, sorry, Rajeev here. I think we were -- we also said that in the unsecured businesses, we have almost now have exited the other unsecured businesses. Micro finance will be around 8-odd percent of our portfolio. And cards is where we are focused on because we get the scale, it's technology-driven, and it's also -- the payback period is far better. So we have cautiously only focused on this and micro finance, as Abhijit said, we are being a little cautious. So the other unsecured businesses are trending down. They're getting paid off. They're getting provided. So that's the conscious call we've taken.

Rajeev, just the challenge what we have, I think, if you see the line of questioning from most of us today has been that we've been caught by surprise on the OpEx line. And the challenge with your card business is that you get into the card issue with the card today, it's going to be loss-making at least for the next 3 or 4 quarters. The question which most of us are asking is, why do you need to take this decision of ramping up today, why can't it wait for a year? We're just kind of going in that direction with this question. That's the only point which I'm trying to...

Yes. No, no, Mahesh, you're right. Look, I think, it's also a question of -- and we have also given you a lot more flavor on the risk wheel we are running on the cards in the presentation. So it's a fair comment that we could have actually taken a lot out of the expenses line and kept the card issuers between 3 and 4. I think for the next couple of quarters, we consciously said it makes sense to increase our base so that overall ROA trajectory when the market is recovering, this becomes -- and then we have to balance that out with what other unsecured businesses we wish to pursue or not. So I think that's just the balancing side. And to be honest, because September quarter was very low and so was in some manner June, you have seen a ramp-up now and you will see a ramp up for at least 2 more quarters before it normalizes. I think we have the luxury of not doing it. Let me be honest. We have the luxury or the choice of not growing so fast. I think what we've said is that given the, I would say, risk structure we are working with on the card category of customers as well as the co-brands we have, it made sense to ramp up for the next 2, 3 quarters and then kind of see how it turns out. So this is not something which is easily controllable by us. But obviously, we could not give you this guidance in September, October because we had just barely started issuance that time. And we've seen, obviously, a lot of ramp up, which is why we want to be -- we want to call it out and say that this is something we'll probably do for at least a couple of quarters before we decide what should be the trajectory thereon.

Okay. Perfect. And sorry, just one clarification. Has it -- has RBI or, Rajeev, has RBI reached out to you on the MBR? In fact...

No, Mahesh. No, nothing on that. Yes.

And do you have any opinion about it? So what is -- what are your backup plan in case there is a reduction here?

No, Mahesh. I mean, typically, people will look at the usual in terms of reducing reward cost or tweaking with the interest rate or the interest rate period. I mean those are the 3 levers which typically a card issuer will have in their hands if it needs to cover up something if it comes up. But otherwise, no, as of now, nothing.

The next question is from the line of Nilanjan Karfa from Nomura.

A question directly on the costs again. I mean if you look at broadly what you are guiding, it looks like for next 3, 4 quarters, we will spend anywhere close to INR 450 crores, INR 500 crores additional given how the run rate is. It's a little huge amount of cost. Any -- if you can sort of split for us, this looks to be more towards the retail, but still, I want to hear it from you, let's say, the mix between retail and wholesale, how this cost will go. Separately for each of these, do you want to classify what goes into the product versus the centralized cost? So is it like you are trying to ramp up the front-end part or, let's say, the back-end compliance databases? So anything on that line will be so useful.

So Nilanjan, I think, we did talk about the Q3 over Q2, and we gave actually some specific percentages almost 3/4 of the increase. And please understand Q2 was very subdued because the activity levels have dropped dramatically. But even if you -- otherwise, there is a ramp-up. And 3/4 of the ramp-up relates to fresh card issuance, rewards, spends, et cetera. The balance is branches, technology, and that will be more continued BAU. And some of that, obviously, is a -- I don't think it's centralized cost, but it's cost for building the franchise. And in some manner, we are indicating that we'll do a little bit extra over the next 3, 4 quarters. And then we'll see the payoffs. I think I cannot today give you a thing of what's the kind of the centralized costs versus the front-end cost. Outside of cards is very -- cards is easy. The others are in the nature of fixed cost, which have a -- some of them actually don't have a payback because they are your support and infrastructure and technology. And the others are more, I would say, franchise creation branches, deposits, getting more customers in cross-sell. And there's usually a payback period. I think in our historical thing, if we take a cohort of metro, metro urban branches, I think, between 28 to 32 months, Surinder, is what our payback is. And we try to densify our existing places. So again -- and that's part of the growth of our franchise because we have to continue building customer acquisition, cross-sell deposits and third-party services through that means, along with digital. I don't think just digital will help.

Sure. And I'm hoping none of these is coming as a directive from an RBI. I mean, obviously, you don't...

No, no, no. Whatsoever. I can assure you. There's been no directive. We -- please go back to a commentary of May, August and October, we've given you great clarity on where are we spending money. Obviously, this quarter was a card bump up, which we had called out. But we did tell you where we are spending money from a franchise creation, retail assets tractors, homes, branches, technology. I think all of those line items or business items are pretty much what we are doing. And nothing -- we also want more granularity of deposits. I mean -- and if we have to grow our balance sheet by X percent every year, we need to continue building our granular deposits and customer base for cross-sell. So that goes without saying.

The next question is from the line of Krishnan ASV from HDFC Securities.

So my question was to do a little bit on what -- what has been your conversation with the regulators since December. Are there any desired outcomes that the regulator has indicated. Are there certain milestones that you need to get to? Could you just give us some color qualitatively on what those [indiscernible] are about?

Krishnan, nothing other than what we have been sharing with you on our own. So I don't think, as I mentioned, there's nothing which has been a directive on investing where business model, putting more branches, et cetera. I don't think there's been any conversation, and I can tell you this because I'm sitting on these meetings whatsoever. And I think the whole focus is exactly what I was telling Nilanjan. Pretty much we are tracking to what we told you 3 quarters ago when we published our March end results, what will we focus on and then continue talking to you about that. I don't think there's any change in that trajectory as far as we are concerned and as far as our board conversations are concerned.

Okay. Great. Just the other bit, and this probably carries on from the last couple of queries that you have heard as well. This has more to do with the fact that you are anticipating certain outcomes from the kind of spends that you're making on cards today, right?

Yes.

What will trigger you to either move less aggressive? I mean you must have certain kind of desired outcome in there as well, right? So what will it take for you to slow down on this?

So let me say, I think, we -- outside the risk categorization, risk metrics, which we have tightened significantly over the last 3, 4 quarters. And that's something, again, we've shared in some level of detail in our PPTs. I think we will watch the usage patterns and the spend patterns and the ratio of transactors to EMI to revolve. I mean that has been fairly steady over the last 6 to 8 quarters. I think those things -- in fact, we do have almost a cohort-based unit economics of our card issuance for each core brand on a monthly basis, and we track what's the incremental and what -- how long does it take to start getting free cash flow and what's the payback period. Actually, Krishnan, if you ignore the base of cards because that sometimes on an aggregate, if you look at annually, it does distort the ratios. But if I were to even look at normalizing for COVID, obviously, COVID did take a big bite in terms of drop in spends, drop in interest earnings as well as, obviously, provisioning. We have a fairly good handle on what is the metrics we should watch before we start dialing it down outside of risk, which is really my primary thing. And I don't have the data to do a comparison with the only card issuer, which does disclose its cost income and others. I don't think we can do a benchmark right now. But those are the things we do. Abhijit, is there anything else you want to share with...

Okay. So I just wanted to add a flavor there. I mean given what you have shared in your disclosures, especially Slide 44, it does seem that there is one category that dominates most of your retail spends today, it's nearly 80%, and it's been that way sticky for a while now, and we are in that kind of environment, right? So I just wanted to understand, given your spending ahead of time, is there a certain mix that you're looking to get to in terms of spend mix? And if that doesn't come -- are you going to dial down?

No. So please understand, when we are talking about spends, our -- typically, our spends would be more daily in nature. The regular small ticket users -- when I say small ticket, I mean, for card small ticket is about INR 3,000, INR 5,000 type. That is the card base and that is the only reason why our spends have been sticky, and our spend per card has been running at those metrics. We've not seen any deterioration in those spends. In fact, the last 3 quarters, we've only seen spends grow. So I don't think there is any red flag which we are seeing from big type of customers in terms of their spending patterns and where they are spending or the revenue which they're giving. I think the very reason is we've always had this -- that we had to get into the smaller markets, especially with 2 large co-brand partners, which have reach in these smaller markets because that is where we get customers where the leverage is low, the competition is low, and therefore, our ability to be able to get them on board is much better. COVID did provide a dent in that post which Mastercard ban slowed us down, and that is what we are now opening up again. The risk metrics in all this are much stringent than what we used to have pre-COVID. And you will see that in our 6 MOB numbers as we move along quarter-on-quarter. You will see that they will be far lower than before, and that is the benign environment, which I was talking about with Mahesh when I said that we are today seeing it that the riskiness in this portfolio as well as the new customers we're getting is far lower.

And is it safe to assume that this has nothing to do with any of the co-branded partners having their own demand in terms of how much you need to accelerate?

No, not really. In fact, if you are referring towards our largest co-brand partner, I mean, they have another tank. So it's not that we have to do something because they want to do. It can be done with the second partner as well. It's just that genuinely, we believe that there is a market out there which we need to do. We have lost out over the -- I would want you to maybe track our card issuances during the COVID period, and you will find that we had cut down on our card issuances worse even compared to competitors, the larger issuers significantly during that period. So we had cut down that back. And now when we see that the environment is right, we are ramping it up again.

The next question is from the line of Roshan Chutkey from ICICI Prudential Mutual Fund.

Firstly, on the Christmas weekend, you had indicated that the unsecured portion will come off going forward and -- in terms of guidance, right? And now we have the new guidance in terms of credit card book going to be ramped up significantly. Where is the disconnect in a month's time? And we are talking about third quarter here, which was -- in fact we did that call at the back end of December.

No. So actually, there is no disconnect. Like I mentioned that, in fact, if you go back to our October commentary is exactly what I reiterated that our chosen unsecured segments is largely cards. Microfinance, we have come off. In fact, our peak of micro finance was 12% of our total portfolio, maybe several quarters back. Today, it's about 8-ish percent. We have run down our unsecured MSME and unsecured bill businesses -- I mean almost paying down now or written off. So we did say this in October, which is what I reiterated perhaps in a summary fashion in December, and this is what I'm -- we are reiterating again today that cards is our preferred way of engaging on these unsecured business and secondarily, micro finance. And even micro finance, we will be -- we have been cautious. We will remain cautious at least for a while. And I don't think we'll ramp up to what we used to do 6, 7 quarters ago. And that's why we'll do. I don't think there's any change. If I remember, we have said we will cap our cards at 25% and micro finance at 10%, I think, we are well within that, and I think we will probably remain well within that.

Okay. And the other question I have is regarding the Slide #40. Just curious why is the market share on that Slide #40, as of November end.

Yes, because I think the industry data we don't get as of December.

This is RBI data so it comes with a lag.

Okay. Of course. Understood. Okay. And the retail deposit, just wanted to get this clarified, the retail deposits moved from December end, right? And you said it was about INR 27,000 crores as of December end, right, from a slide of about 11%, if I'm not wrong, 31% going down to 27%. Now, how is that moved up because not clear to me. Is it better than -- higher than the Christmas period, retail deposits?

Yes, it's higher than 27%, clearly. And I was, I think, telling Anand that or somebody before that or Nilanjan that the recovery in retail has already started. And I think we -- on a net basis, we are -- we turned positive 7, 10 days back. And I was also making a reference to the 2020 period that by the middle of the quarter or towards the last month of the quarter, we had started recovering our position. So I'm hopeful that by the end of March, we would have recovered more on our retail deposit.

Okay. And one last question, if I may. You have an annualized runoff of about 32% approximately on number of cards [indiscernible] within a quarter's period. I mean, 3.1 million going to 3.4 million, right? I mean [indiscernible] 0.6 million cards that you have issued, isn't that number very, very high?

No. So a couple of things happened. So one is that if -- as you -- in your cards portfolio, you have, as the portfolio starts getting aged, you have some customers who stop spending. So any customers, which remains inactive for a year, we close the account and therefore, that goes off from our CIF numbers. So that's one. That's the large runoff which happens. And the second runoff, which happens is and especially severe in this last 1 year has been the write-off and the flow through. So these are the 2 areas in which typically card attrition happens. But we have a policy of removing cards from CIF if they remain inactive. We don't carry them beyond a year.

What proportion of this 0.3 million that you have said -- the runoff that you have seen, how much of it is because of inactivity?

I wouldn't have that number right now with me.

Okay. But approximately...

So can we connect separately and maybe I'll number out and give it to you.

The next question, we take that as the last question for today, from the line of Nitin Aggarwal from Motilal Oswal Securities.

Congratulations on a strong performance after a ton of events. My question is, again, on the card business, like our sourcing from Tier 2 and 3 cities has been increasing, and it stood at almost 37%. And the proportion of our carded customers has also declined. So any change in strategy that we have implemented to drive this growth?

Yes. So as we move to the Tier 2, Tier 3, naturally, your carded segment will start coming off a little. There are obviously mitigating factors which we've put in place in terms of our thresholds of acceptable early delinquencies in terms of 3 MOB and 6 MOB, which are there. And the underwriting practices in these Tier 2, Tier 3 are slightly different than what we typically do in larger markets. So that's broadly where it is. But yes, as we move into the smaller segments, you will find customers which are first time getting carded, which are coming in. Yes, but they're not new to credit. I mean that's important to note.

Right, right. And secondly, can we say that the revolver mix has bottomed out with December being higher than November? And how do you see this trending ahead? And also, when you talk about higher RoE in this quarter with the lack of few quarters, do you see yourself reaching back to the earlier revolver mix that existed pre-COVID levels?

Yes. So 2 things. One, I think the revolver rate will somewhere settle. Today it is about 21-odd percent. I think it will be in the 21% to 23% range for the next year. That's where it will settle. We are seeing categories of spends from customers which are not revolving. So to that extent, that is a phenomenon which we have seen. At the same time, I think the ROAs which you are talking about, I think next year should be slightly better than the pre-COVID run rate in terms of ROAs.

Okay. Even with the lower revolver rate.

Yes. Nitin, that will be second half given that we are -- as we discussed, we're ramping up, but second half, I think you should see the [ turn ] in the month.

Sure. And lastly, just one observation. Like our RWA to total assets has increased almost 180 basis points this quarter, even like the mix of secured loans with wholesale has grown faster. So how comfortable we are with this and any threshold that you would like to...

Yes. Jaideep, do you want to?

So Nitin, sequentially, it is flat. Are you talking about year-on-year?

I'm talking about the ratio of RWA to total of assets, it's not the absolute number.

Yes, yes. So that is, again, a function of possibly not carrying as much excess investments in [ GSX ] et cetera. So it is not a function -- so if we look at, let's say, RWA loans, I don't think that would have materially changed, RWA loans to loans.

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

Thank you, everyone. Thanks, the moderator.

Thank you.