Suryoday Small Finance Bank Limited (SURYODAY) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Suryoday Small Finance Bank Q3 and 9M FY '23 Earnings Conference Call, hosted by Centrum Broking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shailesh Kanani from Centrum Broking Limited. Thank you. And over to you, sir.

Thank you, Giselle. Good morning, everyone. On behalf of Centrum Broking, I welcome you all to the 3Q and 9 months FY '23 Earnings Call of Suryoday Small Finance Bank. We have with us top management team of Suryoday, represented by MD and CEO, Mr. Baskar Babu Ramachandran; Chief Services Officer, Mr. Narayan Rao; CFO, Mr. Kanishka Chaudhary; and IR Head, Mr. Himadri Das. With this brief introduction, I hand over the floor to the management team of Suryoday. They will start with a brief overview on the results, after which we will move on to the Q&A session. Over to you, sir. Thank you.

Thank you, Shailesh. Good morning, everybody. On behalf of Suryoday Small Finance Bank, I extend a warm welcome to our Q3 and 9 months FY '23 Earnings Conference Call. I hope everyone had an opportunity to go through the presentation for the quarter and 9 months ended December 31, 2022, uploaded on the stock exchanges. The global economic outlook now seems to be getting back on track in the last few months, and inflation showing signs of a descent. However, with inflation still above the target in major economies, coupled with the volatility in the global financial markets and the continued geopolitical hostilities, there remain some uncertainties around the global economy. The Indian economy has demonstrated resilience amidst all these global volatilities. As per the Union Budget, the government has estimated a GDP growth of 6.5% for FY '24. The growth is attributed towards multiple growth drivers such as the robust GST collections, rising consumption level [ and the level ] of the rural economy. On the industry front, RBI has recently hiked the repo rate by 25 basis points, taking it from 6.25% to 6.5%. India central bank has adopted a calibrated approach while raising interest rates amidst global developments. Now coming to our operational and financial performance. We are delighted to report that the bank has delivered a steady performance during the 9-month period ended December 31, 2022, as the microfinance and connected lines of business have almost recovered back towards pre-COVID levels of growth. The bank's gross advances stand at INR 5,408.2 crores, as compared to INR 4,872.3 crores in 9 month FY '22, an increase of 11% year-on-year and a normalized growth of 19.6% including the ARC portfolio. Disbursements for the period surged by 33% to INR 3,395 crores, as compared to INR 2,547 crores in the same period last year. Along with the growth in disbursements, the bank has 21.9 lakh customers as on December '22, an increase of 18.4% over the same period last year. We are committed in delivering a monthly pre-provisioning profit of -- to approximately INR 40 crores from the month of March '23, of this financial year. On the profitability side, the bank has reported a profit of INR 38.8 crores against a loss of INR 44.9 crores during the similar period last year. I would also like to mention about the recently concluded ARC transaction. Suryoday Bank has sold its stressed loan portfolio, including written-off loans to Edelweiss ARC for the [ transformation ] amount of INR 135.1 crores. Now let me throw some light on our key operational and financial metrics as of 9 months ended December 31, 2022. On the business performance, the disbursements have grown by 33.3% during the 9-month period on a year-on-year basis, indicating strong momentum across businesses on the ground. The disbursements particularly in the microfinance stood at [ 1,873 crores ] during the 9 months period, resulting into a growth of 27.2% against the previous 9-month period. The bank has ramped up its disbursements in the micro home loan and commercial vehicles segment. Disbursement in the two-wheeler business, which commenced in Q2, is gaining traction; and we expect to scale up the book in the next financial year. The collection efficiency has been improving steadily on the back of businesses' growth and economy nearing pre-COVID levels. The overall collection efficiency stood at 110.4%. On the gross advances front, we grew by 11% to INR 5,408.2 crores on a year-on-year basis, excluding the net asset ARC portfolio of INR 417.8 crores (sic) [ INR 418.7 crores ], as of December '22. And it translates into a normalized growth of 19.6%. The inclusive finance comprises of 61.1% of asset book, while affordable home loans is at 9.8%. And the commercial vehicle loan unsecured business loans are at 6% each. As a strategy, we have been increasing our noninclusive finance portfolio gradually over the last few quarters. On the deposits and borrowings front, our total deposits witnessed a growth of 48.2% to INR 3,169 crores year-on-year. Our focus will be to grow granular retail deposits along with CASA. The borrowings at the end of December formed 26.5% of the total liabilities, majority of which were from refinancing institutions. Suryoday has a network of 571 branches, out of which 92 branches are fully liability-focused branches, while 364 branches were asset-focused branches. And the balance comprised of rural centers. On the asset quality front, the GNPA, NNPA and PCR stood at 4.2%, 2.7% and 79.2%. Delinquency in the portfolio has declined mainly due to the sale of loan portfolio to the ARC and substantially improved collection efficiency. On the earnings update. We -- the net interest income stood at INR 536.5 crores, as compared to INR 438 crores, an increase of 22.5% year-on-year. The net total income stood at INR 599.9 crores, as compared to INR 511.6 crores, an increase of 17.3% year-on-year. The net interest margin currently stands at 9.2% for Q3 FY '23. Despite rising interest rate scenario, our cost of funds reduced to 6.6% compared to 7.1% in the corresponding quarter last year. Cost-to-income, including loss on stressed assets of INR 21.5 crores, stood at 60.7%, as compared to 58.8% (sic) [ 56.8% ] during the 9-month period of FY '22. During 9 months FY '23, the company turned profitable and reported a robust profit of INR 38.8 crores, as against a loss of INR 44.9 crores on a year-on-year basis. On the capital adequacy front, we continue to remain well capitalized. Capital adequacy of our bank is currently 36.4%, as compared to 41.4% as on 9 months ended FY '22. Tier 1 comprised of 33.5% and Tier 2 comprised of 2.9%. Finally to summarize. We envisage multiple tailwinds that will enable the bank to scale up on a faster pace. We foresee 5 growth drivers which will act as the catalysts for growth in Q4 FY '23. On the asset front, the growth will be driven by rising disbursement and sustained momentum in Vikas loans. The Vikas loan portfolio book currently stands at INR 828 crores, with a PAR of 0.9%. The bank intends to focus on product diversification and bridge the gap between inclusive finance and the noninclusive finance mix and move towards a robust ratio of 50% each. Moving on to deposits. We would also like to focus on the CASA mix and raise deposits to fuel growth going ahead. Talking about asset quality, it's our endeavor to achieve net NPA of 2%, on the back of robust collections, by the end of this financial year. Lastly, at Suryoday, we believe in technological prowess and how it can be leveraged to achieve [ links ] like robust growth. The usage of multiple applications such as [ Sarathi ] and [ Jyoti ] app helps us in reducing not only turnaround time -- but improve efficiency and effectiveness substantially across both asset and liability products. We are confident on a quarter-on-quarter improved performance and -- deliver a very robust and sustainable performance in FY '24. Thank you for your support. And over to Shailesh. [ Thank you ].

[Operator Instructions] The first question is from the line of Varun Ghia from Dimensional Securities.

Sir, I have 2 questions. One is I think, the OpEx cost, the employee and operating expenses both have gone up. The number of employees have gone up, but the addition in the branches have been more or less similar, so these employees have been added in the existing areas. And what role are they added for? And even the operating expenses have jumped quite a bit. So this. And secondly, the yields have been going down consistently quarter-on-quarter despite the interest rate hikes and all. So if you can explain that too. And when do you see these yields increasing?

Thank you, Varun. Over to Kanishka.

So first, on the employee cost, you will see that we have had about a INR 13 crore increase on a quarter-on-quarter basis. That's largely explained by 2 facts. One is you would remember that, in the last quarter, we had released 7 crores of provisions and which were no longer required. So that's one of the reasons why the numbers were suppressed over last quarter. And in this quarter, we had a concerted effort to increase our feet on street and especially in the inclusive finance business. We had increased the head count there by almost 400 people, which has also resulted in an organic growth in our compensation expenses. Insofar as the other expenses are concerned, there are 3 elements to that. First is the loss on sale that we had booked on account of the ARC transaction of INR 21.5 crores. There is an increase in depreciation by 3 crores because our transformation project got completed and we capitalized it. The last is that we have had some expenses of about 1-odd crores across stationery and others, where we have had increases. Coming to your point on the yields. Our yields have dropped by about 40 bps quarter-on-quarter. One of the reason is that our mix is gradually shifting towards retail assets. About -- as things stand today, about 40% of the portfolio is retail assets, today. What it means is that, over a period of time, while there will be a bit of a compression in the yields, it will also result in the amount of loan loss provisioning that we have in a steady state. So that's what we are targeting at this particular point in time. Apart from that, I think, if you look at the interest volatility, it has been our endeavor, especially in mortgage businesses and FIG, to have floating-rate loans. [ And so far, this continue ].

So what will be the guidance on yields going -- for the full year, for FY '24?

A couple of things, Varun, will happen. One is that, as we increase the portfolio of Vikas loan, which is curated graduated individual loans, which currently we operate at around 28%; and the capacity which has got released out of the sale of these assets, which now goes purely from a servicing point of view for the collection team, the increase in portfolio which we really anticipate now in the next [ few ] months should really, well, add to at least the compensating yield of around 40 basis points by March or April of next year. So we should be back to as we were at around closer to 18.5%, 18.8%.

And the other thing to note, Varun, would be that now with -- the nonpaying GNPA portfolio having been taken off the balance sheet. And so that will also result in a bit of an increase in the yields overall.

We'll move on to the next question. That is from the line of [ Renish ] of...

Am I audible?

Yes, sir.

Yes, [ Renish ].

Yes. Sir, 2 questions from my side. So one, again, on the yield. So sir, what is the cumulative rate hike we have taken on the MFI book? Because we have seen industry across have hiked rates by anywhere between 150 to 200 basis points. And I do remember that, till last quarter, we haven't had any rate hikes on MFI book, so just wanted to know whether we have increased rates in this quarter.

[ Renish ], we have not increased the rate, but what we are kind of doing is that increasing the [ sales ] towards Vikas loan, which is a little higher price than we deal with a customer on a one-on-one basis through the standing instruction directly debiting our savings account. So as the percentage of that portfolio grows, the overall yield adjustment towards the upward side will happen. Otherwise, we did not really anticipate any increase in the microfinance portfolio, considering our cost of funds has been broadly flat, but if really required, we will increase it by 50 basis points. We're certainly not in this quarter. We'll watch. And then we'll look into -- our cost of funds goes up, then there will be a corresponding increase at least to 50 basis points on the JLG loans. And if the customers continue to operate at the same rate, which is currently at [ 28 ], that will probably move it up by 50 basis points or 75 basis points from the Q1 of next year, but however, the natural balancing will happen as the percentage of the [ customer ] portfolio which is currently around 900 crores to 1,000 crores, [ as at end of ] February, of the overall portfolio of around 3,200 crores will go to probably 1,200 crores, is what we're expecting by the end of March.

So sir, what is the yield difference between JLG and Vikas loan?

Is it 3%?

Yes, 3%.

So Vikas loan is higher by 3%.

Absolutely, yes.

Okay, okay. And sir, my second question is on the incremental book. In PPT we have mentioned that -- I mean we have split even between post-June '21 originated book and the pre-June '21 originated book, wherein it's clearly visible that the collection efficiency or, let's say, the portfolio performance is much better in the new book. So if you could just highlight, let's say, a broad 2, 3 credit filters or geography changes which we have implemented post June '21 which is leading to this kind of a portfolio performance.

Yes. [ To cover our -- Renish ], what we have done is that, in the filters in terms of graduating loans, we are more operating on a model of a -- the second cycle higher than the first cycle, third cycle higher than the second cycle. So we have introduced this RTR where we want to have a full grip in terms of the household economic status. So many times, a good repayment type record of 25,000 does not naturally mean that the repayment type record will be good for [ 35,000 and 55,000 and 65,000 ], so we have [ really stopped growing within the book ] only by increasing ticket sizes. Any increase in ticket sizes has to be accompanied by an individual credit assessment, which is possible now through this RTR. And we're also collecting some documents which clearly demonstrate the stability of the household in a particular geographical location, which is we either collect the document in terms of a gas bill, gas connection bill, which demonstrates that they have moved in and then they shifted -- and this reflects that; or -- and also in terms of any proof of their residence that they have. So any higher-ticket loan is accompanied by the assessment of the customer to handle more than 60,000. Till 60,000, while we'll go through the normal JLG process of a group assessment and -- or [ even with CPV ], as we call it, which is a quality assurance officer visiting. [ Inside the app ], which the decisioning itself is centralized, they only capture the data and based on various tools [ available to it ]. Also the new microfinance regulations gives -- in some way, has enabled us to also [ collect, help with ] the details of the household, at least of one significant earning number. So we'll have -- Equifax also will now start giving up a composite report, so we'll utilize that composite report and further strengthen it. I think that's one reason. And in some of the geographies where it has been very difficult, specifically in terms of, say, Maharashtra, we have slowed down our business and focus only in terms of customers who have passed through both COVID 1 and 2 without any delay. So we aren't really acquiring any new-to-credit customers in those difficult markets for now.

We'll move on to the next question. That is from the line of Anil Tulsiram from ContrarianValue Edge.

Yes. Sir, the first question is, both during demon and COVID, our credit costs were higher than our peers. So what are the reasons for the same? And so that's the first question.

Yes, Anil, yes. I mean the thing is that overall there is data which is available at the industry level which really talks about a [ 19% or 14% ]. So there could be no various methodologies in which each one will operate, so -- but clearly we see a credit loss of around closer to 20% on the [ March 31, 2020 ], book. And currently, as everything, the dust has settle down. What we are really looking at is in terms of we have not kind of funded any customer who are in delinquency. And to an extent, sometimes, nonfunding of a delinquent customer will take the customer to delinquency level, but that's the culture [ code ] for the organization. We didn't want to fund more, as a motivation for them to repay their previous loan, so to that extent, there could be some discrepancies, but however, I think that's a way to compare would be to the published industry data which is available in terms of both write-off as well as in terms of 90-plus; and compare the performance of any institution, including ours. So I'll leave that judgment to you, but however, what we are really now trying to do is that -- there are 5 lakh, approximately, delinquent customers who just flown through either write-off or are in deep GNP. We have put a collection force of 1,000 [ together to get ] a complete handle in terms of how much of them would really end up [indiscernible]. Our guess is that around -- close to 35% of that, by continuously pursuing and where the customers are still available, we will be able to recover. And that is a reason where we have sold our portfolio, without any other restructuring, of INR 135 crores. And we feel highly confident we'll recover more than INR 135 crores of the portfolio which we have sold, which translates to more than 30%. And currently we have -- well, the learnings of specifically the COVID 1 and 2 have been that, well, individual assessment becomes paramount in terms of increase in ticket sizes beyond a particular level, which for us currently we consider 60,000. The operating mechanism [ for our LG ] is 50,000, max 60,000, depending on the number of cycles. Post that, we'll move to individual assessment. And this what -- where it can likely help is that, even in times of turbulence or any other challenges, far more effective to reach out to the customer one on one because you don't get them influenced by influence of the group in -- by either small political disturbances or economic disturbances. And that happens on the back of assessment. And hopefully -- based on this, we are fairly confident that, if excluding any other challenges that -- well, that may really come up, we'll be able to deliver a better performance [ as a delegation on a one-on-one basis ]. On the comparison, I think probably we'll share the industry data [ one-on-one basis ].

Yes. Thanks.

Yes. Sir, the second question is what's our assessment of our strength of middle and top management. And do you think we need to strengthen it? Or you are already happy with it.

It's an ongoing exercise, Anil, but however, I think where we need to really, really strengthen now while that good times are really returning -- and that is where we tend to do some slack in terms of not putting the monitoring layers, so we have built up a very solid monitoring layer at the central office level, which we'll now take it to the regional office level, so which means even connecting up with a customer, assessment, underwriting on individual basis, the data collected will be centralized. To the extent, I think we'll be strengthening, at least around 150 to 200 people for the -- even the current existing number of branches and the centralized monitoring specifically for inclusive finance. And on the retail assets front, we are expanding our team, as we fairly got a good grip in terms of -- specifically during the last year. One of the businesses which we are very, very bullish is the 5 lakh to 10 lakh segment and the micro home loan which currently operates at around -- close to 16% to 18%, a small portfolio of around 60 crores at this point of time [ but a delinquency ] portfolio. We intend that we will -- should continue building on that, at least to an extent of around 250 crores to 300 crores end of next year. And that would really require probably adding another 150 people and where that partially will be even at the middle management level.

Okay, yes, sir. And the last question is when I compared your liability strategy with your peers, say, like Ujjivan, our strategy is totally different. Like we have very less liability branches, and we are not even expanding [ on number of ] branches very aggressively. And in the -- one of the earlier calls, you said you are happy with the double-digit wholesale borrowings also. So can you explain our liability strategy a little bit in more detail?

We have been wanting to focus only on the -- specifically on the retail segment, to start with, through the FD route; and thereafter convert [ this segment ] to CASA. Our CASA strategy is predominantly focused in terms of getting the real granular, sticky, well, mid-sized CASA, so we haven't really kind of had a strategy in terms of acquiring large-value [ SAR accounts ] because we believe that, well, specifically in terms of large-value [ SAR accounts ], the flow-through accounts almost like a cash management. So -- but however, we are clear that the minimum of our 22% is what we wanted to reach at the end of the financial year. We are lower at this point of time. We would have focus on that in terms of focusing we are focusing [ SAR ] in the 2 lakh to 5 lakh segment. So we are [ reinitiating ] that will be a focus area for the Q4 and obviously continues to do so. On the retail liabilities, we have been pretty strong, closer to around -- we were at 85%, 86%. Currently it's at 77.9%. Our intent is to really increase the 3 lakh to 15 lakh of focus in the retail asset -- retail liabilities, which is in terms of fixed deposits. And we had a pretty good traction during the last quarter, and we intend that we'll continue that even for the coming quarters. And in spite of increased rates, which we rolled out for a period of 3 weeks with a campaign, our overall cost of deposits and cost of funds remains almost flat. And probably it will marginally go up now as you kind of acquire more deposits at a little higher pricing. So that, we will continue to our strategy. However, we're adding another 50 branches, during the next financial year, of our existing asset branches, converting them into liability branches so we can have closer to 150 branches by end of FY '24. And the rollout of that will start from Q1. Q1, probably we'll have 25 branches converted. And thereafter, gradually, we will -- so we'll add approximately 50 new liability branches. Many of them are operating from our [ mid-town ], getting converted from our existing asset branches, larger-size branches. Maybe we will have to do a shifting of those locations to a little more visible locations. So that exercise is going on.

The next question is from the line of [ Sachin Shah from SS Securities ].

I have a couple of questions. First is we have acquired some 1 lakh customer in this quarter and approximately 3.4 lakh customer in 9 months. I just wanted to understand. How many customer from this would be new to credit?

I don't have an immediate data, but we have defocused on new to credit substantially...

Near 0, nearly 0.

And JLG have -- is much lesser than anyone, 5,000 customers. [ Max, it will be around ] 5,000 customers. We are focusing more in terms of NTB but not NTC in microfinance at this point of time.

Okay. And my next question will be on broader-level question. One of the largest NBFC, that is Bajaj Finance, in their latest release mention of entering the MFI space. If that may happen, how do we see the competition landscape shaping for us as an SFB focused on inclusive finance?

Markets are large, for sure, so each one will kind of [indiscernible] as well. With microfinance being a business where we'll have to have feet on street and the required infrastructure, any new competitor entering, irrespective of the size, will take time, but however, I think our intent has not been to kind of continues to grow our business only in unsecured JLG business, too large a market. For instance, when we do our retail footprint, there are -- approximately 2 lakhs of our existing customers have excellent track record in mortgages, micro mortgages, either in terms of a small home loan -- when I say small, it will be anywhere between 5 lakh to 25 lakhs. This is purely from a JLG customer segment where we have visibility only of the customer data. We don't have the visibility in terms of the household data. So this is a very large market, so we have -- the focus has been in terms of collections and getting it back on track, but starting from Q1 of next year, our endeavor will be to kind of to convert a pretty large percentage of our existing customer base into secured loan customers. When I say large, it's approximately at least 15% to 20%. And so the market [ is large, but ] once they enter and depending on what their strategies are, [ they'll do it ]. The microfinance segment, as of now -- but has not translated itself into repaying through the bank. However, our Vikas loan portfolio of 80,000 customers, where currently we have 1 lakh customers we have, the entire repayment has been [ insisted on ] through our own savings account. And if we are able to do that very successfully, then that becomes an operative account rather than only a disbursement account, which will lead to various opportunities, so we'll have to stay focused on what we have. Currently we are at only 5,500 crores. Our focus will be to how to strongly grow by 30% year-on-year rather than be a little distracted about any new entrants or any other increase to competition.

The next question is from the line of [ Manav Vijay from Deep Financial Consultants ].

Sir, first of all, if you can tell us -- so what is the loan growth that you're targeting for FY '24?

[ As we shared, Manav ], earlier, we continue to be confident. And we want to stay in the range of around 25% to 35%, so the sweet spot for us will be around a 30% strong asset growth, continuing to do on the -- as we did on the new portfolio post June '21; keep the 90-plus delinquency at less than 0.5%; and also kind of start meaningful standard asset provisioning, starting from FY '24, on the unsecured piece of the business. So 30% will be our target and the range will be 25% to 35%.

Okay. And I like the way we have ended this quarter with around 62% on the JLG side and rest on the secured asset side. So is there any target number that you have for FY '24 to end with?

The same ratio will be good because the [ 62 ] adjustment has happened out of the sale of the ARC assets of approximately [ around 430 crores ]. So there will be a fill-up which will happen. The target which we've all guided is that in FY '25 we'll be closer to 50-50 if we go to our -- we continue to maintain a very strong 60-40, which will be very good.

Okay. And in that case -- so since the secured portfolio will be growing, let's say, at a slightly faster pace -- so what is the credit cost that you guys are looking for in FY '24?

See, with -- in respect of the actual credit cost, what we are likely to do, as we kind of have been speaking and guiding, is that to have a meaningful standard asset provision for the unsecured IF business probably kind of closer to around 1.5% to 2% year-on-year, whereas the history kind of at least shows us that -- 3, 4 years of good growth with very minimal credit cost. And then some event or another, which is absolutely unpredictable, whether it is a demon or it is COVID or -- but into a next risk. It could be anything else. Or it may not even happen, but just that, if it were to happen, we would like to kind of start a standard asset provisioning and have a very robust closer to around 5% to 6%. So to that extent, if I had to guide, including making that provision would be around closer to 2%.

2% in total.

Yes, in total.

Okay. My last question to you, sir: so regarding the [ SR ] that we have received from Edelweiss of INR 135 crore. So what kind of provisioning you need to make on them in terms of, let's say, the time provisions.

So we have already discounted our results in terms of the valuation. If you note, that our net book value in the time of transfer was around 250 crores. And we discounted that further and then sold it at INR 135 crores, which closely approximates to the collection ability that we have forecasted out of the 490 crores of overall pool. For the time being, we see ourselves being able to do the collection up to that amount, so as of now, no provision is foreseen.

Okay. And sir, last question. So in quarter 2, you were guiding for around 130 crores of [ again ] provision costs in H2. Now you have done 40 crores in this quarter. Are you still sticking to that number of 130 crores?

No. Given how things have turned out, we are not looking at that kind of a number. We may possibly have -- another 50 crores to 60 crores for Q4 is what we would have in mind, basically, to be able to clean up whatever residual COVID-impacted [ growth ] that remains with us.

So [ Manav ], currently our GNPA is INR 230 crores, of which INR 60 crores is ECLGS loans. So while we'll continue to kind of capture but the repayment, hence the reimbursement have started. So while it will take them, we are fairly confident that we'll recover at least 30% -- 50% of the INR 60 crores over the next couple of months. So -- but over a period of time, that's a reimbursable one guaranteed. And of the remaining 160 -- INR 170 crores, we currently have [ a point ] of around closer to INR 80 crores. And if we are to cover even the entire balance, probably, as Kanishka guided, whether 50 crores to 60 crores is the maximum that we need to do because around 15% to 20% of the portfolio [indiscernible] is continue -- is the paying customers. So we do expect to recover [ over ] INR 160 crores, at least around closer to INR 40 crores to INR 50 crores.

Okay, okay. We are actually looking forward for you guys to do INR 40 crores of actually PPOP monthly from March onwards, sir.

Thank you, [ Manav ].

The next question is from the line of Yash Agarwal from JM Financial.

I just wanted to check. Is there any interest reversal there this quarter that you've done?

Yes. So there has been a bit of an interest reversal on account of the newly tagged NPAs. And our -- at a gross level, the new NPAs for the quarter has remained more or less the same at around 160-odd crores, which translates to about 7 crores of income reversal, which is what we would have had in the last quarter as well.

Okay, okay, got it. And so again coming back to this operating profit. And even the -- if I adjust for the provisions made on the ARC, the operating profit is down 8 or 10 -- 8% to 10% quarter-on-quarter. So in the context, what are the drivers that you see that -- right now you are doing about 80 crores, 85 crores quarterly; and guiding for about 110 crores, 120 crores quarterly from March or maybe the first quarter of next year, so what are the major drivers that you see taking it to that number? How realistic is this number that you've put across?

Yes. So that will almost entirely depend on the amount of book growth that we have. So from the 5,400 crores levels that we are here today, we want to be somewhere closer to 6,000 crores to 6,200 crores, in that particular range. And like we said, we have been fairly cautious in growing our Vikas loan book, so in this particular quarter, we would possibly have a 50-50 mix between Vikas loan and the traditional loans. So that uptick is what's going to help us increase our operating profit.

Okay. And do the costs plateau out from here? About INR 125 crore of operating expense, despite the fact that we could grow about 8% to 10% in the fourth quarter, would that plateau out here? Or is this ...

The -- in the -- yes. So we see a little bit of increase in our costs because there is some staffing still left to be done in the inclusive finance segment in terms of feet on street, but after that, I mean, we would be fairly there. So there would be some increase on employee costs, but apart from that, we would be fairly stable.

The next question is from the line of [ Sanjay Pandit from 1729 Capital ].

My question was sort of thinking longer term. Obviously there are still some provisions to be made. There's some dealing with the remnants of the effects of COVID, et cetera. If you look beyond the next 4 quarters, i.e., into FY '25 and after, what kind of sort of returns on assets and return on equity are you targeting as being sort of realistic for your business long term?

Ideally, the way in which we have built the model earlier, [ we'll kind of not want to repeat it ]; and quite a bit of -- take the learnings of the COVID. We have to [ give that back into it ]. I think it becomes extremely important that -- if the financials are delivered at a household level meaningfully, which will mean that a lot more effort, and the costs, goes in terms of assessing them first, but if we adjust it for the credit loss and the opportunities in terms of growth, it is pretty significant that the operating costs can remain flat as a percentage, meaning as an amount. And there could be a volume kicker of around approximately [ 25 to 30 ]. That would translate into an ROA of around 3% to 3.5%, but more importantly is that can it be a very sustainable -- after making a meaningful standard asset provisioning of -- 15% to 16% is what we'll be targeting for FY '24. And probably, thereafter, a steady state between -- anywhere between 16% to 18% on a consistent basis without any swings, including such years when it happens, is what we'll be targeting.

The next question is from the line of [ Anjana Shah from Shah Investments ].

Sir, a couple of questions from my end. Sir, we plan to take our Vikas loan book to INR 1,200 crores from the current, say, about INR 828 crores, so could you throw some color on this product and the bank's strategy on this product going forward?

Vikas loan is a graduated loan given to -- on an individual basis without any group guarantee. And the repayment of that is done through the existing savings account of the customer, and we do a standing instruction. Currently the clearance rate on the due date is approximately closer to 90%. The intent is really kind of keeping -- it used to be at 94%, stabilized at 90%. The intent is to really take it. What it really means is that the underlying savings account becomes an operative account for us to introduce various products, including meaningful savings and government insurance schemes like PMJJBY and PMSBY. Well, based on our own assessment, whenever we do [ death claim ] processing, unfortunately, with a customer, or a spouse in majority of the cases -- but on -- between 12,000 to 15,000 claims, we find that the penetration of even the basic insurance scheme of government is very close to 0, without any exaggeration. So such things to be built up on it, which really leads to customer stickiness. It's imperative that the dealing is not at a group level but individual level. Considering the costs of servicing at this point of time, we operate [ at around 28% ]. And the traction now currently is that we do around 40% of our monthly disbursement of around 350 crores in the Vikas loans. We will be -- the shortlisted customers are approximately around 6 lakhs based on various parameters, including their retail track record with other institutions. So currently we have 1 lakh customers. The intent is to really add closer to 1 lakh customers in the Q4, making it closer to around 2 lakh customers. So that's our strategy on that front. And we use what we call as this RTR, which captures the entire household data, and the decisioning is done on a centralized basis, for loans which are above 65,000. So given that the targeted run rate at this point of time is INR 350 crores to INR 400 crores, of the INR 1,000 crores that we'll do, we are targeting [ that we'll close on ] closer to INR 400 crores to INR 450 crores in Vikas loan for this quarter, which takes it to closer to INR 1,200 crores at the end of this financial year.

So sir, then is Vikas loan as a product only offered to existing MFI customers?

As of now, yes, but with the combined credit bureau being released by the various trade bureaus at this point of time, the intent is to do [indiscernible] even for new to bank, for customers, but not in NTC because it's purely based on the long track record of the customer across institutions. So we aim to introduce, but we'll look forward to introduce it towards close of this financial year but specifically for scale-up from Q1 -- and not even Q1, probably Q2 of the next financial year.

Sure, sir, sure. Okay, sir. And how do we see your marginal cost or overall cost of borrowing moving ahead going forward?

So if you look at our funding profile. 2/3 is deposit and about 1/3 is borrowing. We expect that, in this quarter, we may have around a 50 bps of increase in the deposit rates overall, right, which will mean that on an weighted average basis we will have around 30 basis points of increase in our cost of funds. So that's like the maximum that we are anticipating at this particular point in time.

[Operator Instructions] The next question is from the line of Anil Tulsiram from ContrarianValue Edge.

Sir, most of our products are targeted towards informal and semiformal segments, so do we have any plans to introduce products for formal customers, say credit cards, personal loan; or for MSME formal segment?

[ And the ] focus of last year and this year and probably going forward will be to stabilize our entire portfolio. We do formal segment in terms of secured business loan on the underlying business rather than only on the core strength of the property. So that business currently clocks around closer to 25 crores to 30 crores. The intent is to scale that out. As interest rates are hardening, banks become far and more competitive compared to NBFCs. We target anywhere between 30 lakhs to around 100 lakhs, 150 lakhs in that. So intent to growing that business segment, which will be more on the formal basis, including [ all returns filed ], GST. So other than that, we don't have any immediate plan, except for doing some pilots with some fintechs for the personal loans at this point of time.

Yes, yes, sir. And the last question is do we have any plans to introduce risk-based pricing in the microfinance segment, say, based on geographies or the customer vintage period?

We need to. And currently we do in the segmental base in terms of [ varying ] first cycle, second cycle, third cycle, but increasingly, depending on the credit behavior of various geographies, it will really be scientific to do risk-based pricing based on the customer profile as well as in terms of the geographies. Currently we don't -- we are not doing. And we don't have any intent to do it, say, probably in the immediate next quarter, but yes, we should really move into that.

We'll move on to the next question. That is from the line of [ Pulavarti Sikeran from Pulavarti Advisers ].

Good set of numbers. Sir, just quickly on the liquidity on the balance sheet: It's still pretty high. I remember you guiding us, saying that this liquidity will slowly ease downwards as the balance sheet grows. What's the thought process over there?

So the liquidity has been reducing over time as the funding book grows, right? We will be [ perfectly ] comfortable with having liquidity closer to around 10% of our loan book. That's the kind of number that we would be wanting to drive. I think this is one number that has been consistently reducing quarter-on-quarter as a natural organic growth of the business, so I think, by Q4, we will be there.

But you see, if we look at from September to December, the investment book is marginally increased, but cash and balances have increased by almost like 220 crores, 230 crores, so that surprised me. In September year's -- from March to September, it had fallen, but from September to December, it has been increasing. Probably it is also acting as a drag on the margins.

Yes. So that's a little bit temporary [ side ], to be honest, because we had a deposit drive to attract retail balances for 3 weeks in December. So there is a spurt because of that, but that will get taken care of in this quarter.

Got it. And just a couple of questions on the data-keeping side, if you can just help us to understand the movement of NPLs in terms of slippages and then recoveries, upgrades and write-offs this quarter.

So in this quarter, 2 things happened. So one is that, from the NPL levels of last quarter, we had around 160 crores of new NPL getting added. And from that, we have had around 70 crores of recoveries. And the rest, 430 crores, are moving out because of the ARC transaction.

So there are no write-offs this quarter.

No, no, no write-offs for this quarter.

Got it. And just one more thing in terms of recoveries plus upgrades, again just trying to understand how this trend is progressing because you guys have put in a lot of efforts in terms of investing in the people for the recoveries and upgrades: how this is progressing, how one should look at it for the next couple of quarters probably.

So the focus on collection continues. We had a combination of in-house and third-party teams working on this. Based on the kind of performance that we have seen of the third-party teams, we will do a bit of a reject. There are some part of the portfolio that we will pull back in, but over time I think the idea is that the entire portfolio that has been sold to the ARC and the written-off portfolio is something that we will be taking care of ourselves. So in one of the previous question, I talked of a little bit of further increase in head count in the inclusive finance segment. So that is what it will address.

Yes, got it, got it but just trying to understand this movement of NPAs when I just put in -- this into the numbers. Like 532 crores plus 160 crores, minus 498 crores, gets me to the closing NPA of 194 crores.

Correct. So INR 228 crores is what we have, right?

Yes.

Right. So there have been some runoffs as well, because of which we came to that number. I'll give you a quote. I mean I can separately share the quarter-wide split with you.

Got it. And last question from my side, in terms of the restructured advances. I think you guys have about 65% collection efficiency. Do you foresee a scenario where -- these restructured advances, how this will get run-off? And probably is there any scope for increase in the collection efficiency in these numbers?

[ All right ], whatever is in restructure [ where there is a moratorium coming with it, a moratorium ], quite a bit of that flowed into NPA. The current ones which we are kind of having a standard, it is behaving exactly like any other good portfolio. I'm fairly confident that the standard restructured advances on -- as on December will -- 95% will continue to be standard and will close and [ will be given from the customers again ].

Sir, just trying to understand how this restructured will move into the normal book. That means that they are still having some principal or interest moratorium. That's why they are classified as restructured.

No. They will -- once restructured, they'll continue to be classified and be showed as restructured, but there is no moratorium. All the moratoriums for us got over in the month of June. So for maximum for 3 months, if they are not paid by September or, latest, in October, they all -- those customers became NPA. So we don't have any moratorium book running at all beyond June.

Got it, sir. So I think these restructured as of now doesn't have any moratoriums, and that restructured have collection efficiency of 65%. Currently they are broadly -- as there is no overlap between restructured and NPAs, majority of this or 100% of this is standard. Is my understanding right?

Correct.

Yes. So one other thing, aside, to your previous question. So we have had around a 300 crores reduction in our NPAs. So the walk of that is 160 crores of new NPAs, 30 crores of recoveries and 430 crores of assets moving out due to the ARC transaction. So that gives you the 300 crore reduction walk.

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.

Thank you very much. As we -- one more -- in the last 3 quarters, there has been a sequential improvement. We really see a robust kind of performance by including tighter controls and monitoring systems and additional quality manpower, so we are fairly confident in terms of an asset growth of close -- ending the year with around closer to 25%. As Kanishka [indiscernible] closer to 6,000 crores to 6,200 crores and a robust growth in terms of retail liabilities. The focus continues to be on CASA. Our intent is to really move it from 15% to closer to 17% to 20% in -- by end of this financial year. We are targeting a PPOP of INR 40 crores, starting from March; and fairly on track, considering the current run rate as well as the growth in quality disbursements, so we look forward to deliver a very robust financial year in FY '24 and subsequently [indiscernible] future. Thank you very much for your continued support.

Thank you. Ladies and gentlemen, on behalf of Centrum Broking Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.