RBL Bank Limited (RBLBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to RBL Bank Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. R. Subramaniakumar, Managing Director and CEO of RBL Bank. Thank you, and over to you, Mr. Kumar.

Thanks, ma'am. Good evening, ladies and gentlemen, and thank you for joining us for a discussion on RBL Bank's financial results for the second quarter financial year 2024. I'm always -- as always, joined on this call by Mr. Rajeev Ahuja; Jaideep Iyer; and our CFO; and other members of our management team, who, along with me, will address any questions that you have. I'm happy to report that this quarter has been a continuation of our path of improving the financial performance and as a result, we are on track to build a predictable and stable balance sheet. We continue to track well to our guidance on return ratios, asset quality, credit costs and operating performance. We continue to see good growth opportunities in our chosen segments, broadly helped by largely moderate risk environment, enabling us to pursue a calibrated growth path and generate an improving financial outcome. That said, we have taken some steps to proactively create buffers, which we will speak on shortly. Now before we get into the operating performance details, I want to briefly discuss the changes, improvements made in this quarter and the positive impact on balance sheet. You would have seen the details in our investor presentation, starting Slide #5. We have taken these steps to strengthen the balance sheet and provide a transparent, a comparable data of all business segments, which is a better reflection of our operating business model in our financial disclosures. I will take a few minutes to explain the same. Firstly, you will recall that we have in the past spoken of creating a contingent provision in our credit card and microfinance business segment over next year or 2. Our bank has significant portfolio in credit cards and microfinance, which together account for approximately 35% of the total advances of the bank. These two business segments also contribute significantly to the profitability of the bank. In years past, both these businesses have been elevated levels of stress due to external events, which has resulted in higher slippages and consequently higher-than-average cycle credit cost. In this quarter, the bank saw a write-back of tax provision of the earlier years of INR 223 crore, which is a direct PAT benefit of INR 223 crores, and hence, a benefit of INR 298 crore pretax. Rather than show this write-back as a one-time increase in PAT, we have prudently decided to use this for creating a contingent provision of 1% base level amounting to INR 252 crores on both the credit card and microfinance portfolio. Going forward as well, as an ongoing practice, we will continue to maintain 1% on the incremental book of credit cards and microfinance. We believe that this is a good first step in building buffers in our balance sheet for these two key businesses. We will look to increase the contingent provisioning further. This provision also will help us in significantly minimizing impact on ECL on this portfolio as and when banks transition to the ECL framework. For a sake of clarity, I would want to reiterate that, we are doing this as a prudent measure and not because of any underlying asset quality issue that we are anticipating. Secondly, in our credit card segment, as a policy, we provide 70% at 90 plus and provide fully at 180 days. We are now modifying our proving policies to provide 70% at 90 plus as was earlier and now provide fully at 120 days. The impact of this change was INR 48 crores. This, again, is a step to be more prudent in our higher credit card segments -- higher credit cost statements. So in summary, we had a write-back of tax provision of INR 298 crores, of which INR 252 crores was used to create a contingency provision and INR 48 crores was the impact of a policy change in the credit cards. You will see the details of this in Slides 10 and 23 in our investor presentation, and we can address any questions on these changes in the Q&A. And lastly, I think this quarter, the bank has reclassed the charges paid to our business correspondence. The business correspondence are largely used in our microfinance business, with the largest being our 100% subsidiary, RBL Finserve Limited. Historically, the bank used net BC charges against the interest income line, with the reason that the BCs are paid from the interest income earned on the portfolio. In this quarter, we have taken the decision to reclass this to the expense line for improved and comparable presentation. As a result, we are moving charges paid to BCs to the operating expenses line and consequently, interest income and on expenses increased to the same extent. There is no change in operating profit, PBT, PAT, ROA, ROE because of this reclass. However, both NII and OpEx increased by the same amount. I just repeat, there is no change in the operating profit, PBT, PAT, ROA, ROE because of this reclass, only NII and OpEx increased by the same amount. We have done this change for two reasons. Number one, better presentation of the financials as this gives a clearer picture on what is earned across the book. And two, this is in line with the industry practice. For full transparency and change, we have also shared the financials of last 6 quarters, both before and after this reclass on Slide 6 to 9, both on the stand-alone and the consolidated level. Now on to our business performance for the quarter. Firstly, on growth. I'm happy to report that we have grown our advances in Q2 at 21% Y-o-Y and 4% sequentially, in line with our growth guidance. As per our business plan, retail advances have again grown at a faster pace with a growth of 35% Y-o-Y and 8% sequentially. Wholesale advances grew 7% Y-o-Y. Within wholesale, commercial banking has grown 17% Y-o-Y and 11% sequentially. We have been able to improve the momentum in retail businesses and the retail disbursals. Our disbursals across all our retail businesses other than the card was approximately INR 4,300 crore this quarter as compared to INR 4,100 crore the previous quarter and INR 2,500 crore in the same quarter last year. Microfinance disbursals were at INR 1,985 crore this quarter. Housing saw a disbursal of approximately INR 800-plus crore. And the tractors, which we call it as RVF, of INR 270 crore in the last quarter. LAP, loan against property, has picked up well and saw disbursals of approximately INR 700-plus crore this quarter, in the quarter which is Q2. These products are growing at a higher rate than the existing retail product, albeit off a smaller base. In cards, we saw an issuance of 5.9 lakh this quarter. In a nutshell, we continue to see broad-based retail growth this quarter as well. Our retail asset book has exhibited a strong growth of approximately 35% over the last few quarters, and we expect to maintain a 5% to 8% sequential growth each quarter. Our newest retail business will grow at a faster rate off a lower base. We have seen a 190% Y-o-Y growth in the disbursement in our home and secured business loan book and have done significantly better in terms of yields on these businesses. The branches and the direct sales today account for almost 20% of our disbursals and we would want to take this close to 50% by the end of this fiscal year. This has been an important focus area as it has: One, reduced the cost of acquisition; two, improved the engagement with our liability base; and three, aiding new liability customer acquisitions. All these parameters show that there is improving momentum at the ground level to drive cross-sell, and we are increasingly confident of upping this space. We have started generating leads in our microfinance segment for tractor loans and hope to start the pilot of lead generation for small business loan and housing loans from these segments by Q4. We are looking to -- looking over a time to leverage the 1,200 BC points that we have in addition to 500-plus branches. We are also in the final stages of launching a digital savings account for our valued credit card customers. And we have already launched a digital term deposit account, which will be used to onboard a broad section of customers from credit card, microfinance and retail products. On rural vehicle finance, we today have an approximately 4% to 5% of the market share in the areas where we operate, and we continue to expand to the newer states. We expect to do better in RVF, disbursals in H2 of the current financial year. This segment is growing 100% plus Y-o-Y off a low base. On other vehicles business, we have started disbursals of two-wheelers and used car loans and these will start seeing meaningful traction in Q4. On deposits we saw a 13% Y-o-Y growth in overall deposits and a 5% sequential growth. We, however, as planned, saw a 23% growth Y-o-Y and 8% sequentially in deposits below INR 2 crores, which now forms 43.9% of the total deposits. Our expectation is to increase this proportion in the coming quarters as we aim to get this closer to 50% in the coming quarters. This is led by increased product penetration amongst new and the existing loan customers by cross-selling of liability accounts in addition to new customer acquiring. The process of tapping the existing asset customers for their savings, current accounts has already picked up pace with specific targets allotted to the branch and other teams. Growing granular deposits continued to be the key focus for the bank, with the objective of having a diversified liability franchise and also have a large number of customers to whom we can offer a multitude of asset products, which we now have. This also allows the bank to grow the customer franchise as the bank is now enabled on multiple asset products to fulfill the customers' borrowing needs. CASA deposit grew 12% Y-o-Y and 1% sequentially. CASA ratio was at 35.7%. On asset quality, we have further improved on all asset quality parameters. Our GNPA and NNPA are lower Q-o-Q at 3.12% and 0.78% respectively versus 3.22% and 1.00%, respectively, last quarter end. Our provisioning coverage ratio is also up sequentially at 75.6% versus 69.6% last quarter. We had a total slippage of INR 541 crore this quarter as against INR 555 crore last quarter. Recoveries and upgrades was INR 166 crore. Our net slippages were therefore at INR 375 crore as against INR 289 crore last quarter. We also had a total recovery of INR 144 crores from written-off accounts. Of the slippages, INR 15 crore pertain to the slippages from wholesale and the recoveries of INR 8 crores so that the net slippages in the wholesale was INR 7 crore only. In microfinance, our slippages were INR 60 crores. Recoveries and upgrades was INR 16 crore, and our net slippages were at INR 44 crores. In cards, we had a slippage of INR 334 crores and the recoveries and upgrades of INR 43 crores with the net slippages being at INR 291 crore. Our gross slippages in other retail was INR 131 crore. However, net slippages in retail were INR 33 crores because of upgrades and recoveries. Our net restructured advances stood at 0.89 percentage, down from 1.05 percentage in Q1 FY '24. Provisions. We took a total provision on advances, which is NPA, restructured, contingent and standard asset provisioning of INR 766 crores in this quarter. The split out up of this provision on -- of this provision in NPA was INR 464 crores. The contingent provision on credit cards and microfinance was INR 252 crores and INR 48 crores was towards credit card provisioning as per the change in our provisioning policy, which I just spoke earlier, that is providing 100% at 120 DPD as against 180 DPD. There was a release of INR 14 crores on restructured advances. The standard asset provision taken during the current quarter was INR 16 crore. We had recoveries from written-off accounts of totaling INR 144 crore. Net provision on advances, therefore, was at INR 622 crores as against INR 260 crores in the last quarter. The credit cost for the quarter were 47 bps as compared to 39 bps in the last quarter on a like-for-like basis. The contingent provision and the additional provision in the --in cards owing to change in the policy adds another 43 bps to quarter's credit cost. So in total, the credit cost was 90 bps. We continue to remain confident of maintaining our credit cost guidance of between 1.5% to 2% this fiscal. On profitability. Q2 saw a sustenance of improving the financial performance resulting in our profit after tax at a consolidated level, including our subsidiaries, increasing 77% Y-o-Y and 4% sequentially to INR 331 crore. The bank on a stand-alone basis saw a PAT increasing 46% Y-o-Y and 2% sequentially to INR 294 crore from INR 288 crore last quarter. ROAs were 1% this quarter, up 23 bps from the same quarter last year. We continue to work towards improving this performance in the coming quarters. Our NII was up 22% Y-o-Y and 5% sequentially at INR 1,302 crores before the reclass and 26% up Y-o-Y and 4% sequentially at INR 1,475 crores post the reclass. Other income was INR 704 crores this quarter, higher by 21% Y-o-Y and 3% sequentially. Core fee income grew 25% to INR 678 crore. Our total income was up 22% Y-o-Y and 4% sequentially at INR 2,006 crore before reclass and up 24% Y-o-Y and 3% sequentially at INR 2,179 crores post the reclass. Our NIMs this quarter was up 35 bps Y-o-Y and 5 bps sequentially at 4.89% before the reclass and 53 bps Y-o-Y and 2 bps sequentially at 5.54% post the reclass. Our OpEx was up 12% Y-o-Y and down 1% sequentially at INR 1,276 crore before the reclass and up 16% and down 1% sequentially at INR 1,448 crore post the reclass. Our cost-to-income ratio was 63.6% this quarter against 66.5% in Q1 FY '24 before the reclass and the same stood at 66.5% as against 69.3% in Q1 FY '24 post the reclass. So effectively, we have seen a decrease of 300 bps in cost-to-income ratio sequentially. While we have been able to maintain our cost base to almost the same level as the previous quarter, we expect to see some lead-lag in terms of cost and corresponding income increases, given the expected higher business volumes in the second half of current financial year. We saw a healthy increase in PPOP this quarter at INR 731 crores, up 43% Y-o-Y and 13% sequentially. No impact because of reclass. Consequently, profit after tax was INR 294 crores for the quarter, which is 46% higher Y-o-Y and 2% higher sequentially. Lastly, on capital. Our total capital was 17.07% and our CET1 ratio was 15.15% as at September end as against 16.8% and 15.05% as at the last quarter end. In summary, we continue to see steady and improving profitability and remain on track for ROA guidance for this year. We are confident that our profitability guidance will be achieved for the full year. We should see a steady growth in advances in the range of 20%, with retail leading the way. At the same time, the granular deposit growth will be significantly higher than the 18% to 20% deposit as we aim to get closer to 50% share of the small ticket deposits in the coming quarters. Our execution focus remains on scaling up the new retail asset products, and we are very excited with the opportunity that we see. Rural vehicle finance is a great example of us having achieved a 4% to 5% market share in the geographies where we operate in less than 2 years' time. And the microfinance clocking 2% market share. As mentioned in earlier calls, we see a huge opportunity to cross-sell, given our large customer base across liabilities, cards and MFI. Several new products like home loan, auto loan, two-wheeler loans, business loans, MSME and gold loans are a natural fit for our large customer base. Lastly, we continue to see a stability in the management team. With the progress we have made in the last year or so, the morale and the excitement that I can see in the 20,000-plus team gives me immense satisfaction and confidence on the way forward. With this, we will open the session for question and answer. Thank you.

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

Yes. So firstly, just wanted to get a sense that despite the...

I'm sorry to interrupt sir, your audio is not clear. We would request you to use your handset, please.

Yes, I mean I'm using a handset only, is it clear now?

Sir, please continue.

Yes. So I was just saying that despite creating this 1% contingency buffer, we are still at almost like we are continuing with the credit cost guidance. So would we have missed it if this buffer was not created?

Can you repeat that Kunal? Yes.

What is the question? Can you repeat that, 1% of contingent provision, what was the next part of the question?

No, I'm just saying that if we have not created this contingency buffer, have we missed out this credit cost guidance?

Credit card guidance remains at 1.5% to 2%, what we said earlier, it remains, either with or without whatever it is. It is going to be same.

No, no, no. The 1.5% to 2% credit cost guidance that we have given excludes the contingent buffer that we have done this time.

No, no. So the only thing was that given that we have already created the buffer now on credit card, on MFI, the comfort on managing the credit costs should have been relatively better and at least we would have seen some downward revision in the guidance as well. And suppose if this was not created, then ideally, would the credit cost could have been better over the next 2 -- higher over next 2 years?

This contingency was created in the standard assets, and we are maintaining the credit costs at the same level. If you see that, it was 39 and it is 47 bps is what we have seen in this quarter. And we will be able to maintain the same level of collection efficiency and underwriting efficiency. And we will not slip much beyond than what we have been projecting it.

Kunal, just to clarify, this 1% contingency buffer is not expected to be utilized for our normal credit cost.

Yes.

We will...

Okay. Perfect. So just wanted to get that. So this is not going to be utilized at all and we will keep on building up this buffer?

Absolutely, yes.

Yes, yes, yes.

Okay. Okay. And secondly, in terms of this entire reclassification, so if we look at the quantum and just see as a proportion of disbursements, this seems to be quite on the higher side when we look at the classification. So not able to gauge in terms of how we should overall look at the BC cost vis-à-vis either the loan book or the over disbursements. Because if we assume like, say, INR 4,300-odd crores of disbursement and the BC cost, which is getting adjusted for last several quarters, the quantum is quite high. And the second question is how much of this goes to the subsidiary? And how much this is outside of the subsidiary?

So Kunal, first of all, this is not to be compared with the entire INR 4,000 crores of retail deposit -- the retail disbursements that we have written. This is substantially related to the microfinance business. And 90% or so of our business in microfinance is originated through the subsidiary.

Yes. No, so the way to look at it is, if it's like, say, INR 2,000 crores of MFI disbursements, okay, and 90% of that may be on INR 1,800-odd crores. And if we look at the...

No, no. Kunal, just a second, sorry. While -- it is actually not dependent on disbursement, it depends on the AUM because the subsidiary also manages services, collects, so it's not an origination fee. It is a payout based on the underlying AUM.

Okay. Okay. So if we have to look at it, so broadly, maybe doesn't it seem to be relatively on the higher side, even if we compare on maybe even on an AUM basis, that still seems to be quite high. Like say, if I assume like overall AUM to be INR 6,800-odd crores, this is almost on a quarterly run rate, 2.2-odd percent of the AUM.

Correct. It will be in the 7.5% to 8% range. You're absolutely right.

Okay. So it will be somewhere around 8% annualized kind of a number?

Correct.

Okay. And these entire...

That is roughly the standard industry payout for microfinance BCs across most of the banks, give or take 0.5% here and there.

Okay. Okay. And this goes to the subsidiary entirely because there doesn't seem to be much change in the reclassification when we look at the consolidated earnings, it's hardly like INR 20-odd crore in consolidated differential in terms of interest income, but major is coming through the subsidiaries only.

Correct.

Correct.

Absolutely.

Okay. Okay. So it's only pertaining to MFI, nothing beyond that? No other product segment beyond that?

Correct.

The next question is from the line of Mona Khetan from Dolat Capital.

I have two questions. So firstly, on the OpEx, if you look at the operating costs, they have been declining in the last two quarters and the growth is at about 12% year-on-year. So I mean, could we expect that OpEx will grow at a run rate lower than the rest of the business growth?

Yes, so I mean I think we will be comfortable in saying that on a medium-term basis, not on every single quarter basis.

Okay. Okay. And I mean, so any guidance on the cost-to-income ratios or the cost-to-assets ratio?

See, we said at the beginning of the year, that cost-to-income ratio, we will be making an attempt to reduce it by 2% to 3%, right, over what it was in the earlier. Now already we have just come -- nearly 300 bps we have reduced it. Going forward, we may reduce by another 1% or 1.5% than what it is.

Generally, you should see a lower cost-to-income trend.

Got it. Got it. And secondly, on the cost of funds, so when do you expect it to peak and just some color on the peak cost of deposits that we keep for yourself?

So ceteris paribus we are very much close to having done the repricing, maybe another few basis points left. But we will -- given the asset mix change and the way repricing is happening on the asset side, we would expect margins to marginally inch up from here further. We already have added around 5 to 6 basis points this quarter. We had also guided that margins were bottomed out last quarter. And I think we should continue to improve from here on further.

The next question is from the line of Sandeep Joshi from Unifi Capital.

Sir, my question is just continuation to Kunal's question on the BC cost we pay to the subsidiary. So sir, I see that our RBL subsidiary is already earning PAT of about INR 30 crores to INR 35 crores on a quarterly basis, and I assume this trajectory is going to continue. So since the subsidiary doesn't require capital, are we planning to revisit the BC charges, which are being paid to the subsidiary?

We will take a call on that in general. I don't think there is any specific plan right now. But yes, I mean, those -- because it's a 100% subsidiary, it's not a big deal either way.

Okay. And how do we claw back the profits over here?

So RFL has gone through a little bit of a pain 2 years back because of COVID. So ultimately, when the profits are good, the only way to claw back will be through dividends.

Okay. Understood. And sir, just a hypothetical question over here. So we are giving some guidance on ROA improvement, okay? So while giving this guidance, are we budgeting any change in the BC charges we pay to the subsidiary?

I don't think that's going to be a material impact either way.

The next question is from the line of Shubhranshu Mishra from PhillipCapital. Mr. Mishra, I have unmuted your line, kindly proceed with your question. As the current participant is not answering, we'll move on to the next question, which is from the line of Shailesh Kanani from Centrum Broking.

Congratulations, sir, on very good set of numbers. Just I had just a couple of questions. In our guidance, we have talked about retail mix to be in the range of 60% to 65%, right? And already we have seen a good improvement in the first half, where the retail mix has gone up to around nearly 58%. So are we revisiting that guidance? How do we see that?

See, we are on track as far as our guidance is concerned today around 60% to 65%, and we feel that at this moment of time, we will continue to maintain our 60% to 65% guidance. And we are confident of achieving it. Maybe we will revisit after we -- we have 2 quarters.

Yes, see also I mean just to add...

So -- yes.

Sir, just to add I think within wholesale, you will see that commercial banking has grown quite materially. So that's a pivot in that business that's happening where we want to grow more commercial, more mid-market, given the pricing structures and the opportunity that a bank like us has. And as that pivot matures, we would again possibly see that the wholesale growth overall that we are seeing today can come back. So it can't -- we can't be very precise about this.

I was just wondering that if there's an upward bias to that number, given that we have 2.5 years to reach to FY '23. That is the reason I wanted to understand. Okay. Second, on this reclassification of BC charges, I think most of the points are cleared. I just wanted to understand, on a consol basis, if I see numbers, it's not a very material impact, I mean. Is that understanding right?

So the subsidiary made approximately INR 30 crores of PAT this quarter. So you can get materiality on that basis.

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

Sir, just two questions. One is, what do you think will be a normalized LCR in a stable state of operations? The second is essentially on this credit card slide that you've disclosed, fair to say that at least in the industry, there is some level of increase in early delinquency?

Yes. So the first one is normalized credit -- normalized LCR should be in the 120% to 125% range, sometimes we do go up depending on liquidities and flows, but that should be a normalized range. Bikram, you want to take the question on industry delinquency vis-à-vis us?

So we have a slide in the investor presentation, which though comparison is about a quarter back, the industry comparison vis-à-vis us comes with a little bit of a lag. But there is nothing which is out of pattern or alarming or even to point out as of now.

Okay. I was just looking at this 30-day plus which you have disclosed, and that just seems to be showing an increase, but you think that is seasonal or...?

Yes. I mean I think you can conclude on -- because this is data as of June, you can't conclude on 1 or 2 months of trends.

Okay, okay. Got it, sir. And just one last question, sir. On this deposit piece again, how much of your total deposits will be branched backed in there?

So we -- I think a better metric honestly, is that we disclose that below INR 2 crores deposits is now running at about 43%, 44% for us, which is the granular deposits. Branch contribution actually will be higher because branches also do businesses which are in the INR 2 crore to INR 10 crores range. So that should be closer to 50%, 55%.

So that total will be 85% to 90% branch contribution?

No, no, no. I'm saying including this, the total will be in that 50%, 60%.

The range of 55%, 60%.

The next question is from the line of Abhishek M from HSBC.

So my first question is on this slide on the credit cards, again, Slide 35. In which cohorts is the industry relatively worse off compared to you? So where is this stress higher in the industry and you've been a better job of maybe customer selection and servicing? If you can shed some light on that.

Yes. Bikram, you can respond.

So see, cohort-wise comparison is not here in the slide or we have compared, but this is an aggregated of -- aggregated selection of the cohorts and in which we are range bound and doing slightly better than the industry. I think the answer is that the comparison at a cohort level, we haven't done with the industry. So we will not be able to exactly say that which cohort for industry is worse off than us.

But Abhishek, in general, we have seen the extremely lower end of limit/ticket sizes being slightly higher stress than general.

Yes. I mean the general guidance on what we have gathered from the industry is that low-limit PLs and low-limit cards have been causing stress. We largely do not operate in that space. When I was saying -- what I understood out of cohort was the origination vintage and not the credit limit vintage.

No. So I understand that you've definitely been doing a better job of customer selection. My question is more on -- okay, let me put it this way, are you seeing more stress in the industry in, let's say, self-employed or in certain like Tier 3 cities, Tier 2 cities? What segment of the industry are you seeing more stress in? And over the last, let's say, 6 months, is it a more generalized stress across the book for the industry? Or there are any specific parts where you'll see the stress going up?

As Jaideep has pointed out, large stress which has been seen in last or...

Only the lower ticket.

[ Group orders ] -- yes, are largely neither in the tier -- town tier category or customer profession category. They were largely into those fringe low-limit zones and low-limit cards, which have been given. So the players who are expanded in the fringe credit segments have seen stress. Otherwise, the core prime market is holding on credit performance.

Okay. I just thought that would not have led to the whole industry worm going up that much if it's all in the fringes. But anyway, it's okay. I'll take it off-line. Just one very quick question on MFI as well. So there, your disbursements in the last 3 quarters have been coming off where industry delinquency trends are all better Q-o-Q if I look at your last 3 updates -- presentations. So why are we slowing down there?

See, as far as MFI is concerned, it is not slowing down. If you have seen that, we are in the range of around INR 2,000 crores per quarter. And the only quarter where there is a difference is that in respect of the Q4. Normally, the Q4 is a little higher one. This INR 2,100 crores, INR 2,000 crores is a conscious branches because it is the number of branches where we just keep moving up and down. So the trend is not going down. It will be catch up with what we have been doing it. So this is the general one, maybe INR 200 crores, INR 300 crores only differentiation was the Q4. Don't take Q4 as a benchmark, take other INR 2,000 crores as a average numbers in which we'll operate.

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

Great set of results, sir. Sir, first, you have talked about the ROA guidance of 1.4%, 1.5% by FY '26. Can you just walk us through how you basically plan to achieve that kind of an ROA from about 1% that we're clocking right now?

Anand, I would request you to get into that presentation our second-line team made on retail deep dive. There, there is a special one where we have -- we have -- just segment-wise, we have just said that how we would reach that 1.3% and 1.4% by '26, thereafter how will we take off. That's a very longer one. I request you to get into that and then observe. Otherwise, you can take a little more details.

Yes. I mean I think summary-wise, while it's a long answer, but in summary, what we are saying is that we are investing today in our liability franchise and our new product franchise and retail assets, which are today consuming capital. As we -- as they get to scale, they will start reducing losses, and that is how the delta will happen.

So basically, you also expect the margins to expand from current levels or you believe that the margins are largely...

Yes. Okay. Yes, on a DuPont basis, we will see expansion in margins, steady fee income -- sorry, steady fee to assets. Marginal reduction in cost to assets and marginal increase in provisioning to assets. So the delta will come primarily from margins and a little bit on costs.

And for margins, you believe it's going to be mainly by managing the cost of funds, right? Because I think in terms of yields, you're already high in terms of the unsecured loans?

No, I guess the -- we are also getting into products which are giving us yields in the 10% to 16%, 10% to 14% range. So those will be additive to margins even though they are secured loans. So it will be a combination of mix of advances and some -- ceteris paribus some cost of funds reduction.

Okay. And I believe the RBI's AFS audit would have started for this year and believe some preliminary report would have come. On two counts, is there any observation from RBI in terms of the recognition of provisioning policy for the bank? And secondly, we also have this RBI nominee on the Board who's retiring on December 16. So any communication on that front? Anything that basically you can talk about?

Nominee Director has been appointed with a fixed term. We know the term where it stops. As regarding this audit, it is a continuous process. Where we will audit every year and the people will be working on that. There's nothing special about it. And this is something which is a continuous process.

Having said that, Kunal, given the way we manage, I don't think we are expecting not only this inspection, last inspection, the inspection before that and the next time inspection that we will have a provisioning divergence.

Because I was just wondering that this provisioning that we have started making, the contingent buffer, it's a very good step. But the timing is primarily because of the noise that we are hearing on the unsecured loans front. Or what was the reason basically to start this...?

No, Kunal, the timing is because of the tax bonanza that we got.

Yes.

Timing is because of the tax bonanza.

Yes, the one time tax...

See, we've always wanted to do this. It's always difficult to start because we can manage the flow, but it is difficult to create the provision on the large stock, right? So when we got an opportunity, we have taken it. It's got nothing to do with the -- any such assets in the book.

And any target like this 1% should go to 4% to 5% because there are like a lot of microfinance players that are talking about making 5-odd percent provision from the MFI book, so anything on that front in terms of target that where we want to take it?

So first, you appreciate the point that this we wanted to start it from Q4 over a period of 1 or 2 years, which we have just upfronted it because of this amount. Whenever there is such a windfall comes, we will tell you about whether it can go up to 1% or 2%. Today, we have finalized at 1%, incrementally 1% will continue quarter-on-quarter.

Sure, sir. That's...

On incremental growth.

[Operator Instructions] We'll take the next question from the line of Jai Mundhra from ICICI Securities.

Sir, on your margins, right, so this quarter, if we see there is a very favorable loan mix. Within wholesale, we have grown commercial, and there is almost a negligible growth in the large corporate. Within retail, we have grown the high-yielding book, credit card and MFI and still the margin expansion on whichever basis is only 3 to 5 basis point. So how do you see that progression, even if such favorable loan mix may not reoccur?

See, if you look at our plan of action for the growth, we always said that we will be growing the commercial in the range of around 15% to 17% on an ongoing basis. So that is going to continue. The second, we also said that we will be growing that mid-range products of the retail which is giving an average yield, as you have been telling it year-on-year, around 14% will continue to grow. If you look at the growth for this quarter, credit card grew by 27%, and our MFI grew by 78%. It will not grow at the same rate in future because the base is increasing from 4,000 TAM of 8,000. So it will grow around 25% on average. And in between the other multiple products, which we launched, which will give an average mid-yield of around 14%, we'll grow by 30%, 35%. We have already said that. The new products will grow at least 30% contribution the end of the year. So we are confident that the current margin can be maintained with this particular one. And it will always inch forward because as far as the cost is concerned as most of them repricing has taken place, there may be a very small addition to that in next 2 quarters. So we are confident that it's not only maintaining it to move up by a couple of bps.

Yes. And Jai, just to add, I think the increase in margin is coming on the back of a 14 basis points increase in cost of deposits and 18 bps increase in cost of funds, which is a function of where the interest rates are and how the repricing happens on deposits.

Got it. So in the same way, sir, I mean, the deposit growth is slightly much slower than the 20% that we envisaged. So as you ramp up the deposit growth, which will be necessitated as you continue to grow your asset mix, do you see a case for a pressure on the cost of deposit also because for mobilizing these deposits, you may have to -- you may not be able to lower the card rates, et cetera. So do you see that for us because -- which is a growing bank, do you see more pressure on cost of deposit, even if the systemic deposit may not be -- may start to cool off?

So Jai, we've actually already said that a bunch of a -- a large part of the repricing is done and I think there's only a tail left in terms of what we're seeing. Also, given our distribution franchise across wholesale and branches and the kind of growth we are seeing in retail deposits, I think for us to get 18% to 20% deposit growth, it doesn't look likely that we need to be doing something different from what our peers are doing. So yes, I think I would say that because we have calibrated our advances growth in that 20% range, 20% to 22%, it is well within our distribution franchise on the liabilities between branch and wholesale to be able to get to that run rate quite comfortably.

And lastly, on the OpEx, right? So I mean, in your -- March when we had unveiled FY '26 vision, I thought that the OpEx cost would be slightly front-loaded in the initial quarters as you would start investing in the processes, product, et cetera. But so far in the last 2 quarters, the OpEx growth has been actually much muted. Any thoughts around there? I mean on the OpEx, I mean, why is it low so -- why is it on the lower side? And you had mentioned that it may not be ideally it can go up, but any thoughts there?

See, the current, whatever that particular scale you are seeing in retail, all the investments have taken place much before what we are talking. This is printed in last 2 quarters of the last year. That is H2 of last year and H1 of the last year is predominantly however all our investment in technology and branches and other things. Going forward, that's why we said, we are going to invest in more branches, maybe around another 50 branches will be opened. And the line which we are expanding from the current states wherever we have, and we are expanding the geography for loans, there will be further investment. That's why we said that there will be a little extra investment in H2 if suppose we expand. See, we have invested in certain capacity. Once the capacity is utilized, we'll start investing in expanding the capacity parallelly. Now today, you are not seeing much because our investment is being leveraged now. So once that leverage reaches a certain threshold, this fresh investment will happen. And now also the investment is currently happening in respect of expanding our branches as well as the manpower and the resources. So it will be gradually improving [ and increasing ].

Thank you. Ladies and gentlemen, we now conclude the Q&A session. If you have any further questions, please contact RBL Bank Limited via e-mail at [email protected]. The e-mail ID is [email protected]. On behalf of RBL Bank Limited, we thank you for joining us. You may now disconnect your lines. Thank you.