AU Small Finance Bank Ltd
NSE:AUBANK
AU Small Finance Bank Ltd
AU Small Finance Bank Ltd. emerged on the landscape of India's financial sector, carving a niche for itself by addressing the unique needs of the underserved and unserved segments of the population. Founded initially as AU Financiers in 1996, the company began its journey as a vehicle finance provider. Over the years, the evolution and growing demand for personalized banking solutions catalyzed its transformation into a small finance bank in 2017. Embracing its new role, AU Small Finance Bank shifted its focus to offering inclusive financial services, targeting segments of the market that traditional banks often overlooked. Its comprehensive range of offerings includes savings accounts, fixed deposits, and an array of loan products such as commercial vehicle loans, MSME loans, and housing loans, tailored to meet the aspirations and requirements of India's burgeoning middle and lower-middle-class population.
AU Small Finance Bank thrives by blending its deep-rooted understanding of customer needs with technology-driven solutions. Its business model strikes a balance between maintaining robust asset quality and driving growth through its innovative banking channels. By leveraging digital platforms and a strong network of branches, the bank ensures it reaches both urban and rural customers, enabling seamless transactions and accessible banking services. The credit side of its operations—comprising small-ticket loans, primarily to individuals and small businesses—energizes its revenue stream, while interest income remains a significant portion of its earnings. Simultaneously, its strategic foray into non-interest income through fees, commissions, and insurance products illustrates a deliberate diversification path, enhancing profitability and ensuring sustainable growth in an increasingly competitive financial landscape.
Earnings Calls
In Q3 FY25, AU Small Finance Bank reported a 15% growth in total deposits year-to-date, with CASA increasing by 9.4%. However, credit costs were elevated at 1.5% of GLP, particularly impacting MFI and unsecured loans. The bank adjusted its guidance, now targeting 20% asset growth and 23%-24% for secured assets. Profit after tax declined by 7% quarter-on-quarter, but EPS rose 24% year-on-year. Management emphasized focusing on improving asset quality and controlling operational costs, aiming for a cost-to-income ratio between 57% and 58%. The bank's universal license application is in process, reflecting optimism for future growth.
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Ladies and gentlemen, good day, and welcome to the AU Small Finance Bank Q3 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Prince Tiwari, Head of Investor Relations. Thank you, and over to you, sir.
Thank you, Sagar, and good evening, everyone, and welcome to AU Small Finance Bank's Earnings Call for the third quarter of FY '25. If we haven't spoken earlier, then Happy New Year to all of you. We thank you all for joining the call today on this Friday evening. On today's call, we have our Founder, MD and CEO, Mr. Sanjay Agarwal; our Executive Director and Deputy CEO, Mr. Uttam Tibrewal; our Deputy CEO, Mr. Rajeev Yadav; and other senior members of the management to answer any questions that you may have.
We'll start today's call with a 20 to 25 minute opening remarks by Mr. Gaurav Jain, President, Finance and Strategy, highlighting the bank's performance, positioning and outlook. We will then follow it up -- we'll then follow the opening remarks with 40 to 45 minutes of Q&A for the participating analysts and investors. For the benefit of all the participants, I would humbly request each participant to restrict the number of questions to 2 so that everyone can take the call, we can take questions from everyone, and then if you have further questions you can kindly join back in the queue. If you have any data-seeking questions, you may reach out to the IR team at any point after this call, and we'll be happy to assist.
With that, I will now request Gaurav Jain, President, Finance and Strategy, to share his opening remarks. Gaurav, over to you.
Thank you, Prince. Good evening, everyone, and thank you for joining us today.
I will start with an update on the operating environment. We saw uptick in the economy at the end of Q2, continuing in the festive month of October. Post October, however, there was a slowdown in the economic activity on the ground. While there are some signs of bounce back in rural consumption and government CapEx, overall momentum remains below expectation. In the banking system, liquidity continues to remain in deficit despite the CRR cut in December '24. Additionally, persistent inflation has also kept interest rates higher for longer. The economic slowdown has affected overall credit demand, and we remain watchful in our underwriting.
Despite these economic headwinds, our bank is in a good shape overall. Let me talk about each of our businesses in detail, starting with our deposit franchise. We assess the performance of our deposit franchise in terms of the following key metrics: growth; CASA ratio, LCR; proportion of stable deposits; CD ratio; and cost of funds. Our aim is to optimize across these core metrics, keeping in view bank's overall strategy and prevailing market conditions. Our deposit franchise is scaling well and total deposits stand at INR 1,12,000 crores. This financial year, we have delivered growth of around 15% year-to-date in total deposits and 9.4% in CASA.
This growth rate is nearly twice the growth rate of total deposits in the banking system and faster than growth rate of private sector banking peers. Whilst we benefit from our smaller scale, as a new bank on the SFB platform, we have to work harder to gather deposits. On a quarter-on-quarter basis, our deposit book grew by 2.3%. However, there was an outflow of 3% in CASA, primarily due to withdrawals from certain government accounts, which were transactional in nature. Despite this, average quarterly balances of CA and SA deposits increased by 5.9% and 4.4%, respectively, on a quarter-on-quarter basis.
Our CASA ratio stands around 31%. We maintained an average LCR of 115% during the quarter, which was an increase of 3% from last quarter. Our stable deposits, which include CASA, retail term deposits and bulk noncallable deposits, stand at 80% of total deposits. And our CD ratio, excluding refinance, stands at 81%. Throughout the year, we have maintained a strong focus on securing the right mix of deposits at optimal pricing and effectively managing our cost of funds, which stands at 7.05% year-to-date and 7.06% for the quarter.
Notably, our incremental cost of funds has improved, declining from 7.7% in FY '24 to 7.4% year-to-date. However, the current market conditions are challenging, liquidity remains tight and competition for deposits continues to be intense. This week, we adjusted our savings and fixed deposit rates to market conditions, introducing 10 bps increase on our peak fixed deposit rate and widening the slabs in savings accounts offering 7.25% interest rate. Even with this increase, we expect to be at the lower end of our guided range of 7.10% to 7.15% for cost of funds for the year.
We are mindful of the ongoing pressures on liquidity, inflation, currency, GDP growth and external headwinds. If these pressures persist and lead to a delay in easing cycle, our cost of funds would be impacted in the coming quarters. Now in terms of our key initiatives around deposit franchise. Our branch banking strategy is focused around driving growth in top 20 cities, which contribute around 57% of total deposits in the country, 75% to 80% of our deposit book is from 400 urban branches, of which 60% are located in top 20 cities. Within these cities such as Delhi, Bangalore and Jaipur are doing very well, and we are working on improving productivities in cities like Mumbai, Chennai, Hyderabad and Kolkata.
We have fully integrated 100-plus urban deposit branches from Fincare in terms of people, product, process and technology. Now our efforts are focused on driving productivity, and we expect these branches to drive growth from next year onwards. Additionally, we plan to open around 70 to 80 new branches in the next year, mostly in top cities with a focus on raising deposits, and enable another 75 existing asset centers in district and tehsil headquarters to start taking deposits. In terms of our product breadth, on savings account side, we have established a strong proposition backed by cutting-edge digital channels.
We have industry-leading deposit products for various segments, which includes recently launched remittance products and comprehensive wealth and insurance distribution platform. Our wealth AUM has scaled to around INR 1,250 crores. And in our insurance business, we are partnering with most of the leading insurance companies. On current account side, we are working to create a right to win in terms of products, services and distribution. This is a tough market and results will take some time. We also did a lot of work on improving branch profitability, 44% of branches, which were in existence in December '23 were profitable in Q3.
This was driven both by higher productivity and focus on overall cost efficiency in overhead and marketing spend. Further, all the key building blocks like people, leadership, technology and customer service are in place for growing the franchise sustainably. Now moving on to our assets franchise. Our loan portfolio has reached around INR 1,09,000 crores with a growth of 13% year-to-date, which is 1.6x of the system loan growth and faster than growth of private sector and banking peers in similar period. As you know, we have 4 broad asset classes: Retail Secured Assets, Commercial Banking; Inclusive Finance, which includes MFI, SMF and FPO; and Digital Retail Unsecured, which includes credit cards and personal loans.
I will take a moment to talk about each of these businesses. Our Retail Secured Assets book, which stands at around INR 73,000 crores and forms 67% of our total loan portfolio includes wheels, mortgages and gold loan. This is our flagship franchise with a vintage of over 2 decades, and it is a unique combination of scale, growth, high yield and strong asset quality. We have a very strong right to win in this business with our deep distribution and underwriting expertise in informal segments in semi-urban and rural areas, strong operational processes and collection framework and robust people practices.
This segment is performing very well with growth of 14% year-to-date. We have a long growth runway in this segment as we expand gradually to pan-India. We will particularly benefit from increased distribution through Fincare touch points in South India. Asset quality remains broadly in line with our expectations. We are not seeing any signs of contagion with unsecured assets. December was strong from asset quality perspective as is historically the trend, and we expect asset quality to improve further in Q4.
Now let me talk about the key products within Retail Secured. First is wheels. Our wheels book is around INR 34,000 crores, which is 32% of our total GLP. It includes personal and commercial cars, SCVs, LCVs, tractors and 2-wheelers. Wheels GLP grew by 7% quarter-on-quarter and 19% year-to-date. Growth for the full year is expected to be more than 25% and remains in the top tier of peer banks and NBFCs. Book yield has increased by 25 bps over FY '24 and is north of 14% year-to-date. Asset quality also remains broadly in line with credit cost of 1.1% year-to-date annualized.
Slippages were higher in the festive period as per trend with some parts of the book such as SCVs and LCVs, which are given to small transporters impacted by market slowdown. December was strong, and we are expecting further pullback in Q4. Wheels book is present in around 570 touch points, which is only 35% of our total touch points, excluding BOBC outlets. This implies significant room to expand distribution within our existing network. By the end of FY '26, we are expecting to expand to another 250 to 300 touch points, including UP and South India.
Second product within our Retail Secured franchise is our mortgage product, which stands at around INR 36,000 crores and forms 33% of the total GLP. It includes micro business loans and home loans. These are both granular products with average ticket size of INR 12 lakhs to INR 13 lakhs and yield around 15% and 12%, respectively. There is no comparable peer operating at [Technical Difficulty] and yield in MBL. Growth remains on track with the book growing by 10% year-to-date and 4% quarter-on-quarter. Within this, MBL and home loans, respectively, grew by 8% and 16% year-to-date.
For full year, MBL is expected to grow in low teens and home loans in a range of 20% to 25%. Asset quality remains robust, and there is no major impact from the slowdown. Credit cost is 0.6% year-to-date annualized. In terms of our strategic initiatives in mortgages, we have a big opportunity to expand our distribution. We are present in around 900 touch points in MBL, which is 55% of our total touch points. In FY '26, we would expand our presence by another 130 to 150 touch points. In home loans, we are present in around 600 touch points and the business tends to follow MBL with a lag.
We are also fully integrating Fincare's mortgage business, which was started 6 to 7 years back. Teams are already integrated and integration of product processes and technology would finish by March end. This significantly accelerates AU's entry into key southern markets of Karnataka, Tamil Nadu, Telangana and Andhra. The third product within Retail Secured Assets is gold, which has a GLP of around INR 2,000 crores and forms 2% of the total loan portfolio. Expertise in this business comes from Fincare, which has done a good job in building distribution franchise and processes.
Gold portfolio grew by 29% year-to-date and yields around 16%. We believe the latest RBI guidelines on gold loan create a level playing field for banks to compete against NBFCs. We remain compliant with the guidelines and believe there is an opportunity to build and scale our gold franchise. We are working on our strategy, and we'll update the market in the next 1 to 2 quarters. The second key asset segment is Commercial Banking, which is 21% of the total loan portfolio and includes 5 businesses: business banking, agri banking, NBFC, real estate and transaction banking.
We started lending to NBFC and real estate businesses 11 years ago and business banking and agri banking around 7 to 8 years back. Our competition is mainly with other private sector banks. We have developed a full product suite and tech capability, including the AD-I business, which we started earlier this year. Growth and asset quality remain on track with some cyclical challenges in agri commodity-linked businesses. Total GLP [Technical Difficulty] grew 22% year-to-date and 6.4% quarter-on-quarter and is expected to grow north of 30% for the full year.
Credit cost for 9 months was 46 bps annualized. The Commercial Banking businesses are important from liability franchise perspective as well and generated around INR 11,000 crores of deposits. We plan to move this business to Mumbai over the next 1 to 2 years, which will provide an opportunity to stitch this business even more closely with our deposit franchise and other asset businesses. We are expanding our distribution in Fincare deposit branches. This year, we have started business in a few locations of Andhra, Telangana, Tamil Nadu and Karnataka, and plan to expand deeper in Southern states and other existing geographies within our overall distribution network next year.
Further, we have created dedicated teams for specific sectors such as renewable energy and infrastructure. We believe there is a large opportunity to grow in these segments. Our AD-I business is gaining traction. This is an important business for cross-sell, current account flows and export import. ForEx flows in this quarter increased by more than 50% quarter-on-quarter and achieved a run rate of greater than INR 2,000 crores. These includes flows from export imports, NR and retail remittances. With most of the products being already live, we will continue to scale this business.
The third asset book is our Inclusive Finance book for bottom of pyramid customers, which includes MFI and lending to small marginal farmers and FPOs. This book is key for fulfilling our financial inclusion charter and meeting our PSL obligations in SMF and agri. Total book is around INR 7,400 crores, which is around 7% of total GLP. MFI is the biggest product in this segment with GLP of INR 7,150 crores. We have a strong MFI franchise with conservative underwriting policies and strong operational processes. We have one of the lowest average exposure in the industry at INR 25,000 per customer.
Our book is well diversified across more than 60,000 villages. Top 3 districts contribute around 6% and all remaining districts are less than 1.5%. No state has more than 13% concentration. MFI industry continues to face the challenge of customer indebtedness, which has resulted in elevated slippages, lower disbursements and high credit costs. However, we believe that the long-term fundamentals of the industry remain sound, and we are cautiously optimistic of a gradual turnaround. We expect MFIN guidelines to improve overall this -- industry discipline and with tighter underwriting being prevalent in the industry for the last few months, customer indebtedness should gradually reduce as well.
Additionally, we have taken some corrective actions in terms of strengthening our collection efforts and increasing disbursements under the CGFMU guarantee scheme with 60% of Q3 disbursement covered in CGFMU. We expect this to increase to 70% to 75% in Q4. This will help reduce both risk weight and future credit costs. In terms of our financial performance in this segment, MFI GLP declined by 10% year-to-date and 6% quarter-on-quarter, in line with the industry. Credit cost was 5.4% for 9 months annualized. GNPA stands at 4.1% and SMA pool is around 4.4% at the end of Q3.
There are some signs of collection efficiency having bottomed out with marginal improvement in Q3 versus Q2. December month saw some improvement in both collection efficiency and disbursement versus November, and we expect the improvement to continue in Q4. Slippages are expected to stay elevated in Q4 as well, and credit costs will remain elevated for the next 2, 3 quarters due to lower collection efficiency in the earlier quarters. We are keeping a close watch and we'll provide a further update in next quarter's call.
The fourth asset segment is Retail Digital Unsecured, which includes our credit card and personal loans business. Total GLP is around INR 4,000 crores, which is 4% of the total portfolio and credit cost on this book stands at 9.2% year-to-date annualized. Personal loan GLP is around INR 1,000 crores and is primarily for our existing customers. This book is performing broadly in line with industry from an asset quality perspective.
We have tightened the underwriting criteria for asset customers, and as a result, book has degrown by 10% year-to-date. In our Credit Card business, we got a few things wrong, which included not getting digital underwriting correct, higher reliance on card for card sourcing and issuing higher credit limits. There are some industry-level challenges as well, driven by overleverage, inflation and misuse of certain merchant categories through fintech aggregators, but our performance has been worse than the industry leaders. Total outstanding book has declined by 2% year-to-date and 9% quarter-on-quarter as a result of recalibration of our business.
Getting this business right is important from a long-term perspective as it provides a hook for deposit customers and increases bank's brand. We have taken a number of corrective steps. These include strengthening credit team, tightening underwriting criteria to include documented income only and reducing credit limits both for new issuances and existing cards based on risk assessment. We have also done a detailed evaluation of existing customer base and taken appropriate preemptive actions on potentially delinquent customers. We have strengthened daily transaction monitoring to identify and restrict misusing customers and merchants and have proactively blocked certain misused categories of merchants such as rent and education.
These actions will take a couple of quarters to have an impact. We will update on the progress, including future outlook in the next 1 to 2 quarters.
Now I will update on our profitability for the quarter. Pre-provision operating profit increased by 6% quarter-on-quarter, driven by strong control on operational costs and growth in interest income. Profit after tax was down 7% quarter-on-quarter at INR 528 crores due to higher credit costs in MFI. EPS for 9 months is up 24% and book value per share is up 23% year-over-year. We achieved an ROA of 1.6% year-to-date and 1.5% for Q3. Net interest margin declined by 23 bps from 6.1% in Q2 to 5.9% in Q3.
This was driven by higher mix of investment book on average during the quarter, which had an impact of 10 bps, adverse loan mix because of lower MFI and higher cost of funds, which had an impact of 9 bps and interest reversal on NPAs, which had an impact of 4 bps. Other income was in line with Q2 after adjusting for lower treasury gains. Core fee income continues to be robust with contributions from assets, banking fee, third-party distribution as well as credit cards and AD-I businesses.
Insurance distribution income in this quarter saw some impact due to changes in IRDA regulations around revenue recognition on general insurance and surrender value in life insurance. We continue to focus on managing our OpEx, which declined by 3% from Q2. Cost-to-income ratio was 54% in Q3 and 57% year-to-date. The saving on OpEx has been achieved through merger synergies, control over manpower and overhead costs and tech-led efficiency gains. Expenses in next quarter would be higher as per seasonal trends, and we expect to finish the year at cost-to-income ratio of 57% to 58%.
Credit cost was elevated and came in at 1.5% of GLP for 9 months annualized. As mentioned earlier, this was primarily driven by higher credit costs in MFI and credit cards. Overall, our strong performance in OpEx and sustained performance in other income was offset by underperformance in asset quality. In terms of outlook for the next quarter, credit cost will stay elevated, driven by unsecured, but we expect to be within striking range of our ROA guidance of 1.6%. Overall, GLP growth is expected to be around 20% with secured assets growing around 23% to 24% and continued degrowth in MFI and credit cards portfolio.
Finally, regarding our universal bank license application. We are in touch with the regulators on progress of our application. As you would be aware, the Reserve Bank of India has recently announced setting up of a standing external advisory committee, which will evaluate applications for universal banks. Whilst we don't have clarity on timing, this is a welcome step and should speed up the process of evaluation of our application. To conclude, as we have mentioned earlier, it takes about 10 years for a bank to settle fully.
We are now successfully completing 8 years, and the bank is shaping up well across all key areas of product, distribution, operations and technology, people and governance. Our brand is improving. Both customers and peers are noticing us on the street, and we continue to focus on strengthening our foundations and executing well to create a sustainable forever bank.
With this, I will hand it back to Prince for Q&A.
Thank you, Gaurav. Sagar, we can now open for Q&A.
[Operator Instructions] Our first question comes from Kunal Shah from Citigroup.
Particularly on the MFI side as well as PL and credit card, where we are in terms of the cycle? And you indicated in terms of say, improving collection efficiency. But at the same point in time, we have almost like 4.4% in SMA as well as 17% of loans wherein there are more than 3 lenders. So even during the transitioning that could have an impact. So what is the -- maybe the extent of -- if you can just help in terms of understanding what could be the extent of the pain that has to be further recognized and how you have beefed up the collections out there?
Kunal, Sanjay this side. We have Rajeev and of course, Mayank on this call, so they can elaborate further. But my take on MFI is just that this is not an event risk. This is more about overleverage and maybe irrational lending to that sector. Not much has been arrested in last 2 quarters. That's my personal understanding and personal belief. We already have gone to the level of what now 5.4% credit cost in our balance sheet. And the way we have handled it in terms of overall, we just want to take one more quarter to really have the full color on it.
But I think we are expecting our credit cost overall yearly basis, we are north of 6%, it might touch [ 7%, too ]. That is why we have commented that our overall credit cost of the year would be in the range of 1.55%, 1.6%, right? But I think you have to give us one more quarter because it's just a 7% of our book. So we are not heavy loaded there. And there are green shoots in terms of overall approach like the guidelines from MFIN, the way the customer are responding, the H2 is better than H1.
And those segment itself is getting some money through various things. The activity has been started. We are focusing more on collection than on disbursement. So -- and of course, it's an important book for us because it gives us SMF, which is the obligatory to do lending on us. So I would only say that the quarter 2 -- quarter 4 has some maybe heat going on. But next year, you have to give us one more quarter, then only we'll have the clarity. And same thing is in credit card. Not much has been arrested there, too. The entire [ credit ] team has come on the subject. We have also not building up credit card on digital [ mode ] anymore.
We are doing underwriting basis now physical applications or physical data. We have stopped lot many payment system available online, which actually people don't use money for the merchandise or for services. They were more about cash out. We have reduced the credit line there. So I think this quarter, in my opinion, will be peak there. And then you will see us coming back next year on this subject. But overall, if you see, if you move away from this 10% of book, the 90% book is well in control where the whole strength of organization is there for so many years, be it secured assets or the commercial assets.
People were expecting that there would be some pain or there should be some kind of contagion effect, but that has not seen. Quarter 3 has become more stronger than the H1. And I believe that overall, the 90% of assets by the end of the March would be much better in entire look and shape. And this -- both the books should be also good enough for next year.
But Rajeev, you want to add-on on this subject? Okay. Mayank, do you want to add on something on this, the pain, and [ anything ]? Okay.
So just to add what Sanjay-ji has said, this is Mayank. I manage credit card. So what we have done is we have not only containing the existing portfolio, but we have worked a lot on our underwriting capabilities on the new acquisition. So both the things simultaneously, we are working out. And wherever the digital capabilities were not enough to manage the underwriting this thing. So we have contained them and tightening our credit underwriting criteria.
So I think another 1 or 2 quarters will help us to give a better picture on it. But yes, things will -- should come under control after the tightening controls.
Sure. And in terms of the numbers, so as you indicated, 6% credit cost for the full year, so that clearly suggests 8% to 10% in MFI continuing. Same way on credit card, if we look at it like still being more than 10-odd percent for this quarter, so would that run rate also be still there, maybe getting forward? So are we like yes to...
So this quarter, yes. This quarter, yes.
Okay. In 4Q also, this will continue?
Yes. That's why we said that overall, we'll be touching around 1.55%, 1.6% overall credit cost because we believe that the other asset classes will perform better than the quarter 3.
The next question comes from Renish from ICICI.
As there is no response from the line of current participant, we'll move on to the next question.
Our next question comes from Rohan Mandora from Equirus Securities.
I just want to understand what's the provision that we are currently carrying on the MFI, SMA book? That's one.
And second, the OpEx control that we are seeing on account of merger synergies, how should one think on that for FY '26? And related question was that we have given a slide wherein we are talking about the addition of touch points across products, across geographies in next year. So how should one look at the interplay between OpEx on these 2 things?
So I think your question is around the Fincare integration, it's going on perfectly well. As we stated in our presentation that from 1st January, the entire MBL/AHL, which is affordable housing and gold loan has come under the one umbrella of secured retail assets. So the North, South, East, West has been fully integrated. So -- and the integration plan is in place. Rajeev is looking now Tech and of course, the entire MFI business. And of course, by this year-end, this calendar year-end, we'll be integrating in terms of our Tech also.
So that is there in terms of integration, not much operational efficiency has come in because now the leadership has been aligned with the verticalization so there would be -- there was so many leadership at Bangalore under Fincare unit, which has been now aligned with the entire verticalization of AU. So we are saving lot much cost there. And so I would say by this quarter end, we won't be having a much cost based because of this 2-unit existence, entire cost will be aligned with the bigger umbrella of AU.
So that operational efficiency will be achieved in next year, next financial year. In terms of the distribution, Fincare had an amazing 1,200 kind of touch point to operate for their microfinance business. Out of the INR 1,200 crores (sic) [ 1,200 ], the 800 branches were used for microfinance. In that 70% were around tehsil headquarters, 20% were around districts. And tehsil headquarter actually gives you a lot much opportunity to build deposit in those markets where we were not in. So we want to use the entire 800 branches of microfinance to really build the other product line and also the deposit franchise.
So in that, close to maybe 80 to 90 branches will actually experiment this year. So I think the full integration will be on because of the availability of the distribution in that sense, that is there. The other question was around the...
SMA. So Rohan, Prince here. On the MFI book or any book for that matter, on the SMA, we only have standard provision. On the MFI book, specifically, we had created a INR 17 crore contingency. So that continues. We haven't utilized it. Yes. And just a last point on what Sanjay-ji added for the -- and to your question, on this entire product expansion into existing geographies that you referred to, we have given on Slide 22, these are all existing infrastructure. So as of yet, we are not planning to add any newer infrastructure in these positions -- in these places.
Probably there will be some cost in terms of people and manpower and systems, but no infra cost is expected. We have also articulated that we are going to open 60 to 70 newer branches. That's where the OpEx will come in. But that's the regular BAU business. [ I hope that answers the... ]
Sure. Yes. Just on the synergy piece, see, if I look at the quarterly run rate in the first 3 quarters, we have been holding around that INR 14.7 billion, INR 14.3 billion kind of a run rate. And we have been gaining some benefit. So just into next year, what kind of a cost escalation will we see on the core business? Or how should we look at with the synergy benefits, how should that move into FY '26? That's what I was trying to understand on the OpEx part.
Cost to income.
Cost [Foreign Language] OpEx [Foreign Language].
No. So I think cost to income is -- overall for 9 months is around 57.7%. So for quarter 4 or entire year, I'm expecting to be north of 58%, but of course, lesser than 60% because the quarter 4 will have more expense because we'll have a more business and everything. So this is not a standard number which we have given you for quarter 3. But the idea is to really look for a lesser than a 55% cost to income in next 2 years. So let's go through this quarter, figure out our realistic cost to income, which will be around 58%, 59%.
And then, of course, look for some kind of, I would say, effort or the room available for us. But definitely, the focus has come back strongly on working on an operational efficiency. We are using lot much digital. We are using lot much productivity now. We don't want to hire people for the sake of hiring. The whole expansion has been put with a purpose. So I think you will see us a lot much calibrated, organized in terms of our cost to income. And we keep [ headwinds ] around because -- but there's a lot much variability.
So it's difficult to predict, but the approach is this that our cost to income has to go around 55% in the next 2 years. And it has to be best-effort basis because there are a lot many things which we couldn't control as we move forward. But a lot more sincerity has come in. I can assure you about that only.
The next question comes from the line of Sameer Bhise from JM Financial.
I have a couple of questions. I mean, I understand we are banking on the secured side of the book to kind of do well incrementally as well. But if I see there is some minor changes on asset quality there sequentially on a growing book. So how confident are we that 4Q could actually be better? While I understand it is seasonal, but just wanted some confidence around that. And then I'll come back with a follow-up question.
No. I think I just want to give one assurance to the history that secured retail asset, we are doing from last now close to 2 decades, and we have seen the cycles. We have gone through every type of challenges. This year is no different about it. You know about it that we were actually hoping that our country will grow by north of 7%, but we might grow only by 6%. So we are not astute in every sense, right? It is a relativeness. And the pain is there into that kind of segment where we actually lend because this is more of an informal segment, touch and feel, we back ourselves, we back our credit team, we back our operation efficiency, back our collection team.
So there are certain things which might go here and there. But overall, it is a secured book, build on productive assets, small ticket, but variously priced. So I think I would say that we are fairly confident that this will remain our strongest point in terms of our entire asset classes, and we should not go wrong there. And we neither have gone this year, too. If you see our data in terms of comparison with the competitors, you will find us far, far better there.
So I think I would only say you that this looks very promising. And this has -- December remained very strong month in terms of everything. I would say the collection efficiency for the particular December month has surprised us a lot. And I hope that, that will continue for this quarter, too. And we have also want to build more expansion in this business so that the growth, the yield, the ROA and of course, with a strong asset quality, which is the hallmark of us over the years. So remain there, remain there.
That's helpful. Just wanted to get a sense because it's quite a fluid situation in the segment that we operate.
No, I don't think so. I don't think so. This is a fluid situation. Honestly, and again, I want to repeat that 90% of our asset class remain very strong because I'm again saying that we are not absolute. We are relative, right? But market also has not gone so bad. We expect that quarter 3, quarter 4 as a GDP also will recover, right? So if you recover, then you will see a lot, much better performance of us in this books. And these are secured books.
Rohan, if I -- Sameer, sorry, if I can add. If you go back to our last quarter commentary, I think we had mentioned at that time as well that typically, first half is relatively not so great for retail secured assets.
Second half, October, November, January, festive seasons, you see slippages. And then December onwards, December, Jan, Feb, March, DJFM, as we call it, you start seeing the better performance recoveries, resolutions, right? And economic momentum also supports that. So if I follow the same theory and I look at the numbers internally, the same thing has played out. October, November, we did see some higher slippages, and that's what you are seeing.
But by December, as Sanjay-ji said, across be it collections, be it your credit costs, be it your slippages, across all the secured retail asset buckets, we have started seeing a decent jump. right? And so that gives us hope that historical DJFM will play out in Jan, Feb, March as well.
Precisely, that's why I asked that it sticks to the playbook. Secondly, on OpEx. Now obviously, if we enter this kind of an economic environment, you would want to invest more on collections. How are we positioned there, especially in some of the core categories? Are you investing more on that? And how does that kind of drive overall OpEx numbers? I reckon Sanjay-ji you just mentioned that this year would be upwards of 58%. So just wanted to -- if you could sharpen a bit on that front.
Sameer, my friend, if you see our last year data, we were around 63%, 64% and what our endurance is -- this year is that if you want to be in the range of 58%, 59%, it will be a super achievement because in spite of such headwinds in terms of the deposits, in terms of unsecured book, we already invested a lot in our every aspect. I don't think that by putting an extra 100 people for collections, we'll have even a needle's shift in our book because we already become a large balance sheet.
We have a large budget for our expense. So -- but the idea is not about not putting money on the right purpose, right? We will always put the money on the right purpose and right cost because that's the way business should be. But idea is to really be very cognizant of the other facts that we should not just unnecessarily build for the future, right? When things are not clear at this point of time. So I don't think that we want to be -- it should be lesser than what we have done this year. So the endurance is that next year, our cost to income should be lesser than maybe 1% or 2% of this year, right? So that we can achieve the ultimate goal of 55% in near term.
The next question comes from the line of Madhuchanda Dey from MC Pro.
I have 2 questions. So the first question is a little long term. See, you have had an excellent track record with what you understand best, which is secured assets. So with Fincare, you got the MFI principally, and that met with the sectoral headwinds. And then yourself admitted that your experience with credit card, the way you have done the business has not been that great. So going forward, will it make you recalibrate your strategy with respect to lending? You will kind of stick to that what you understand best, which is secured.
And in that context, how would you like to revise or give a road map of your aspired ROA of 2%?
No, no, great -- good question. So I would say that when I started my career in lending, I started with wheels, right? Over the period, we got to know how the -- about the lending around mortgages, then we build on the commercial banking business, and we build on the branch banking distribution, right? So it's never been so easy, honestly. And I won't say that it was an honest confession that we might would have made some mistake in building up the credit card, but the environment was also not so good, right? Because everything was given through digital only.
Everything -- everybody was really backing on the credit scorecard, right? And we were not knowing that people can misuse the credit card online through some -- I don't know the word, but sorry, yes, because we never -- I never believe, honestly, that people can take cash out so easily, which we all know that is a risk, right? So -- but we have taken the course correction. And I strongly believe that credit card still is one of the most important payment method, and we need to correct it. We can't go away with that. And -- but it's a curve we are going through. And I still want to back my team and learn from these mistakes.
This is not that large mistakes, maybe INR 100 crores here and there. But this is the way the bank should give the cost or the learning cost comes in. So I still believe that if we really want to be a good bank, we need to learn about unsecured lending and of course, unsecured products. which we'll keep on doing it, keep on doing it. But I think this learning will give us lot much, I would say, the assurance that we should not do mistakes like -- which is very evident. So that's about credit card and unsecured piece. As we always remain very strong in terms of our commenting that microfinance business is very important for our whole inclusive kind of framework.
And they give us a lot of SMF. In this INR 7,000 crores also, INR 4,000 crores is the SMF, which helps us to build our 18% obligation, right? And we have also seen that, that last 2 quarters, we want to build now MFI through the other secured measures like there is an MFIN guidelines. There is credit guarantee available on this book. We are actually now building up around 50% incremental book under that umbrella, right? So there is no challenge around risk weight on that book. So I think -- and it's a cyclic business, we understand. If you take my number, right? We would have expected that this book should have given us a 4% ROA this year.
They might be giving us a 1% or 1.5% ROA this year instead of that. So it's fine, right? They are not giving us a net loss in that basis on a yearly done. So I think we -- again, we have to learn about it. It's a big balance sheet. Every big bank has to do their SMF obligation. We have a growth aspiration. We will need to learn it, master it and then, of course, build it for the future. So the long-term strategy won't be so dramatically different. We always have said to you that it will be a cap on our unsecured exposure. When we acquired it, we said that it will be a cap of 10%. As of now, it's 7%.
Overall, the cap of unsecured lending is 15%, is around 11%. We want to stick to that. Of course, for some time, it may go below that, the whole guided number. But I believe next year onwards, you will be looking this book in a way differently. That's my say.
And sorry, on your guidance of the ROA, when do you see that...
Of course. So ROA, of course, again, we have the aspiration because that's the gold class, in my opinion, in the banking system. But we are new in the banking system. We want to be in that bracket as soon as possible. But you know about that we are, again, living in a very relative world. If India is around 6.4% this year. And with this kind of tight liquidity, this kind of inflation, there is no room we are expecting of rate cut. So one of things which need to come down to make us 2% ROA bank, it has to be the cost of money.
It has to be lesser than maybe 50 bps from here, what we are actually doing it. We know that asset, we can grow, we can manage our asset quality. I think 10% book should not give us so much of headache going forward. So I mean if you ask me, at the moment we start seeing the interest rate cut and our cost of money getting to a right level, you will see us reaching 2% ROA.
I have another question, if you may allow. This is not your bank specific. So this is my -- this is -- I mean, I am picking your expertise on this. Like every other player in the industry, whoever who was lending to MFI, they are fast withdrawing from that market, right? So how do you see this crisis ending? And we are getting kind of confusing guidance. Someone is saying, wait for 1 more quarter, someone is saying wait for 2 more quarters, someone is saying 3 more quarters. What is the basis of saying that wait for 2 more quarters. What is that is likely to change in the ground for you to say that this is like the peak of the crisis from here on...
I understand. You want my comment or do you want Rajeev's comment?
I want your house comments basically.
Okay. So let me try and then Rajeev, you supplement if I miss something. So for me, this business has been only we are 1 year old. And I like this space to be very precise because it allow a bank to do their -- the PSL obligation, and this is the last mile customer on the ground, and we need to do that customer also to really fulfill the entire banking dharma, right? And what I have seen this year is that it is more of an executive-driven challenge than a customer-driven or a market-driven challenge.
If you lend irrationally without understanding customer, then this will happen, right? This will happen even in secured assets, right? But secured assets, you always back on the assets so that you can cover up your any kind of mislending and whatever, right? But this market does not allow you that. But I think lot much has gone in last 2 quarters, lot much discussion has happened. Irrational lending has been completely stopped. Customers know about it that if they don't repay it, they won't get the money. And this time, industry has come very seriously. That is why the 10% reduction is there in the overall asset base in this market.
Government also do not want to disturb this market so much because this is there where the entire space for inclusive banking is there, right? So we need to be there because we are not heavily, heavily on the microfinance book for our asset building. If any institution, which is heavily dependent on the microfinance building as their asset, then they might be looking to withdraw or reduce their exposure. We are already at 7%, right? So I think if you as one of the small component in the overall scheme of things, the bank or institution can manage. This is, again, one of the temporary challenge, which will need to be addressed once the overleveraged customer goes away.
Like, for example, in our case, 55% customer have the zero exposure, right? It was -- we were the only lender in that segment with that customer at the time of disbursement, right? And the new one, right? And then 27% customer, we are the second lenders, right? It is good to be in that bracket, right? So I think industry will become mature, the customer will become mature. And this book gives you 4% to 5% ROA when the things are good, right? And in a bad term, it gives you a 0% or a minus ROA, right?
So you have to really balance your view that this book might give you sustainable basis 3% ROA, provide every year above 3% ROA and build the cushion so that in case of the eventualities, you can use that buffer for your maintenance, right? So if you do all these things, a well-diversified book in terms of your overall build buffers in the good times, be rational in terms of lending, build around the guardrails of MFIN, build the discipline around lending and the entire culture of the MFI business has to be there. I believe you can handle with maybe 5% to 8% kind of book in any balance sheet.
Rajeev, do you want to add? Because Rajeev has handled it for the last 12 years. It's good to hear it from him.
Yes. So just for the benefit of everyone, and you asked a very specific question on this 2 quarter versus 3 quarter and why should we expect more optimism going forward. Fundamentally, this is coming from experience of having seen demon as a cycle, COVID, 2 waves of cycle. Fundamentally, the product is a 2-year product.
And once some problem comes into the product, be it an external event or be it an overleverage event like this, there is a certain segment of customers which are over leveraged, and that's where the flow is coming from over the last 6 months, or 9 months now. And that's what is -- that's why we are seeing the credit cost that we are seeing in the P&L at this point of time. So there are 2 or 3 things which happen naturally in the industry. One, in a matter of 2 or 3 quarters, the difficulty of the problem starts disappearing. Two, the industry comes together and build some things, and this has happened earlier also and this is happening right now.
And fundamentally, all the players in the industry stick to those guidelines and then try and correct the problem, whichever was causing the problem. So in a larger context, we have seen it by vast experience, a typical problem, the harder part of the problem last for 6 months on an operating basis. Although the provisions will come in with a 4- to 6-month lag. And for AU, we provide 50% at the time of the NPA creation, and we pretty much provide -- and we provide 100% in the next 3 months, which is a 180 DPD. So the typical credit cost comes with a lag of 4 to 6 months.
And therefore, what we are experiencing at this point of time when the industry is also experiencing is a better outcome on operating efficiency starting from December. Early green shoots, I would say, were in October, but we are more confident that we derived from the December data. And by very logical nature of the product, the way we are building a new book, the way the industry is working together on this, I'm reasonably confident January, February, March will be operating-wise better, but the benefit of the credit cost will obviously be lagged with about 4 to 6 months of what we do.
So is it realistic to assume that by the second quarter of FY '26, we would again be somewhat in a much better frame as far as MFI is concerned?
Yes. I would say at an industry level, and I'm very confident of ourselves that it will be a better frame. But for going back to the precision of tweak this cycle, we'll have to see whether it takes a quarter more. But I think by Q2, we should largely be behind over leveraged credit cost problem.
The next question comes from the line of Prakhar Agarwal from Elara Capital.
Just 2, 3 questions based on the outlook that you have given. First, in terms of growth outlook that you have essentially brought down to around 20% from 25% within a quarter. And this time around, we have mentioned that 3Q will be around 23% to 25%. And essentially, looking at the mix, unsecured is only 10%.
So have we lowered our growth in secured segments as well? Or how is the math working around from 25% to 20% growth guidance cut in 1 quarter that we have done?
So Prakhar, again, because you know that by last quarter, we were all expecting that India to grow by 7.4%. Now we are expecting India to grow by 6.34%, right? At the size we are operating in, we don't want to take unnecessary risk. And our 2 books, which is credit card and MFI, everybody knows that we don't want to grow it again with the mindset of growth. We want to really want to grow that book with a mindset of rationality. So that 2 books are out of the action for this quarter.
Other than that, secured retail asset is growing in the range of 20% to 24%. Commercial banking is growing in the range of 30%. So that remains intact. And all put together, it's around 20% because still 20% is 2x of the industry average. So I'm very happy that, of course, it's below the -- what we have guided, but lot much has changed in the last 9 months in the entire ecosystem. So we have to respect that. So -- and of course, if we even grow by 24%, our deposit because why we want to grow more than what the asset require. And we want to keep our CD ratio around 85% or maybe in the range of 80%, right?
So that is why we also want to really manage the cost of money by not going that kind of deposits. So again, it's a balance, but very happy to lower our guidance so that in this tough time, we don't get much hiccups later on.
Okay. Just 2 more things on this. Just a follow-up on this as well. So the other guidance that we have said is and funding cost, which wherein we have said that it will now be around 7.10% to 7.15%. What has changed in the quarter in our favor to have seen these sort of benefits because the system seems to be struggling in managing that funding cost, and we are essentially going out and saying that we have lowered our guidance for funding costs. What exactly has played out in our favor?
No, no. So if you see our cost of money for last quarter is around 7.05%. And we were actually expecting that cost around 7.2%, 7.25% in the beginning of the year. But we really played our franchise there. And as I told you that entire sticking up the product range, the distribution range, the focus on deposit franchise has been there so strong that in spite of this growing ourselves in 15% on a YTD basis, we have not gone above the mark. We have seen no tighter positioning in quarter 4.
That is why we have increased our bucket in the saving account, and we also have inched up our FD rate by 10 bps. So we are expecting that our cost of money should be in the range of 7.7%, 7.8%, not really 7.11% and 7.12%. But I think the focus has remained so strong, Prakhar, over the year on the deposit franchise that -- and we really want to build it more sharp and more effectively so that in the longer run, the entire game changer would be our cost of money. That's my belief. And so we are really focused on our cost of money. Every paisa is being watched out. Every person is being watched out. Every product has been being watched out so that we remain effective there.
So that is why I think I would say that this year has given us a lot of confidence that we can grow our deposits and that too on our cost level.
Got it. Just one last question. We earlier gave a slide wherein we mentioned in last quarter guidance for March '27. We seem to have not given this, this time. Has those guidelines still remains or we have chosen to withdraw that as we speak? And lastly, on this deposit, we seem to have also not given deposit growth guidance for this time for FY '25, which probably we gave last time. So just last 2 bits on these 2.
No, no. FY '25, we are saying 23%, 24% deposit growth, 20% asset growth. We are very clear that we are -- where we are heading for March '25. We have already given you the guidance about growth, the expected OpEx, the expected credit cost. So I think March '25 largely we have given you, but it's difficult to predict next year because, again, lot much variable. And we have also have taken the cognizance that we are not absolute. We are relative. So on this side, where we -- our balance sheet would be 1.5%, 1.6%, whatever happens to country will happen to us, right?
So let's see how the entire interest rate cycle move from here, how the credit cycle of unsecured business behaves for the next 2 quarters at least. So then only we can provide the longer guidance. But I can only assure you that the way we are building our bank in terms of the entire verticalization, be it branch banking, be it secured assets, be it commercial banking, our digital framework, AD-I license, even the credit cards, even the MFI, we are top of everything, right? And we are watching every book, every step so closely that in next 2 years, what we are saying that it takes 10 years to really build a bank, you will see us a very formidable institution in place.
Prakhar, if I can just add to your point on the slide. So see, March '27 strategy is something which is out there, which we had presented in March -- 18th of March last year, and we continue to be guided by that. I think what we had given in September is the progress around that, and we'll keep updating you every half year on how we are progressing.
But I think the biggest thing that Sanjay-ji articulated and which we probably would like to articulate on this call as well is when we had put that guidance out, the overall outlook on the economy was very different compared to where we are. And given that there has been a complete slowdown or a very clear slowdown in the economy, you obviously have to adjust and focus on prioritizing asset quality over growth. So I think that's what is playing out. But we'll again come back to you in March because that will be the next 6 months, and we'll update you where we are.
The next question comes from the line of Pranuj Shah from JPMorgan.
So 2 questions. One is we have clearly seen MFI growth overall slow down and for good reason. And general feedback from the industry players is that even in FY '26, at least even if the asset quality recovers, growth at an industry level is likely to remain slow. So if we overlay that on your in general, assuming a 25% overall growth in FY '26, MFI continues to taper off. So does that impact your PSL objectives for '25 and '26 also?
And a subsequent question to that, will that impact your overall cost ratios also because some of the efficiencies, like you said, you had with the Fincare merchant in FY '25, those are unlikely to be present in FY '26, then plus you will also have branch expansion over there.
So just something from the OpEx perspective, trying to tie up the 1%-odd cost-to-income reduction that you're expecting for FY '26?
Yes. So again, I think very detailed kind of expectation on this call from us. But let me figure out like I would say the whole integration is in place, and the Fincare was running their own head office based out of Bangalore. They had their own IT system. They had their own control functions. All has been integrated largely in this year. Maybe by next half year, we'll be doing entirely done. So there would be a lot much savings on the scale basis because the business has come to us.
We have fully integrated their branches, Branch Banking branches to us, fully integrated now their -- the entire Fincare unit of lending except microfinance. So I think synergy has been now there. The size has been there. The markets are there. So we are -- if we would have done on a stand-alone basis, this expansion would have required a lot of CapEx, a lot of time to do it, but we have ready hand with us now. So once we integrate with the entire umbrella, one umbrella, then these things start coming day 1, right? So that's the way we want to see that picture.
In terms of SMF, we have a microfinance book. We do have the agri banking book. We do have the SMF lending, then we do have the FPO lending. All put together by the support of the government guarantees also, we don't expect that we should have the SMF deficit. And we have to -- we should not do that, right? But in case it is there, there can be a cost there. But it's difficult to predict as of now because it's a long way to go.
You're talking about next 5 quarters, right? We have to do that kind of decision in next March. So I think it's a long ball for us to play. And in terms of what the other question? So that's why I'm saying you that there is nothing -- so we don't want to do much kind of OpEx based on our expectation that we need to build this book or we need to build this branch, all those things. Everything is now BAU. We want to really build more our digitally efficiency. We're really working on our digital labor, right? We want to introduce the digital labor internally so that we don't depend on a human effort other than depend more digital effort, right?
So I think a small, small thing, but the hope is just that we might be -- we should be lesser than cost to income what we'll do this year so that we remain on the path to become a 55% cost to income in next 2 to 3 years.
Understood, Sanjay, sir that was very helpful. And second question, Rajeev, sir, just on the MFI book. You have mentioned non-overdue collection efficiency of 98.5% as of the third quarter. Would it be possible to disclose how much this was as of December end? This is the non-overdue part. And even on the flow forward rates in the MFI book from SMA to NPA, are you seeing an improvement there also in December?
Yes. So the December number inched up to 98.7%, and that was the second best number in the calendar year H2. So it was -- and we can see that it's a stable outcome, and we should work forward on that number. On the SMA books also, because of our strong staffing now in the recovery vertical, which we have done over the last 6 months, we have increased our headcount from 600 that we had on the recovery vertical as of June. We have reached a number of about 1,500 and not hired, trained and stabilized team.
So because of that, our efficiencies coming from the SMA book coming from the NPA books has also started seeing improvements. So fundamentally, improvements on both sides and the December number was about 98.7%.
The next question comes from the line of Ritika Dua from Bandhan.
Sir, just one question. In your opening remarks, there was a comment about Gold Loan business wherein you were saying that the change in regulation by RBI would help you...
Ritika, you -- your audio is not very clear. Can you just...
I'm so sorry. I'm just saying that on the -- in your opening remarks, you made a reference on the Gold Loan business and how will you go faster there because of a regulatory change. Could you just elaborate on that? That's the only question I have.
Gold loan business. So Ritika, there was 2, 3 items in the gold loan circular came through RBI in the month of somewhere in October. One was your BC model have to be revamped as per the new RBI guidelines. like they said, the business has to be done only through branches. BC have to come your branch and customer have to come your branch, storing and everything, valuation to be done in the branch. So that model has been shifted from that BC model to on branch model. The customer is now coming to your branches.
And the second part that came in the circular was that the renewal which were happening in the industry will now move to the -- customer has to repay the whole loan and then only the new loan will be given to the customer. Renewal has been completely stopped in the industry. So that came in the RBI circular 3 months back, which we have...
So further -- Ritika, so of course, Deepak has given you a little bit, but my understanding is this that first, the LTV of a gold has been now standardized, whether be it a bank or be it NBFC we can't give above 75% throughout the loan tenure. And there is -- if there is no renewal, then loan generally has only 1 year or maybe 18-month period. Now of course, NBFCs were operating in a different tenet. Banks were different, but we do not have any risk weight as a bank because we are doing funding against gold. And the practice of those guidelines has been now stringent, right? By the action of the RBI. So I think nobody still take the chance.
We have the 2 advantage as a bank. One, we have the cost of money. Second, we have a storage facility. And customers generally have more belief in banks, where the bank lack is the delivery time of a loan, right? Because where the NBFC has made their expert because they have a very separate gold shop and all those things. So we are also thinking about it that how we can master ourselves now when we -- there's a level playing field available now, right? And we have the advantage of cost, we have advantage of risk weight and we have the advantage of brand.
And so I think now it's a level playing field. And I think many banks would be doing this now in my opinion. But being with Fincare, Fincare is doing this business for the last 4 to 5 years. So they have actually expertise in terms of delivery in maybe half in our time, half in hour kind of things. So we want to really replicate that to many of our centers, right? So we have a distribution, we have expertise, the level playing field. We have certain advantage like I already commented about no risk weight and of course, the cost of money. So that should allow us to build a decent franchise there.
But we are working on it. We are working on it. A lot thing has to be done to really come out with the final print.
Great. Sir, just one clarification on the same. So when you say that for the industry, and I'm assuming whatever the circular is it's applicable now for banks and NBFCs combined?
Yes, yes.
Okay. Great. And sir, secondly, when the rollovers have to stop, I don't have an exact percentage, what was the percentage which was getting rolled over, but I'm assuming it will be majority. So now does the customer...
50% loan of gold loan was getting rollover by the existing lender.
So sir, now customer say today, I have a repayment due today. So I'll come and pay my -- the bullet today. So then is it like now the -- there should be a cooling period of..
Somebody has to -- either the customer has to pay or somebody has to take over.
Okay. But for the same lender to repay -- to again give the loan to the borrower, I repay you today. And then is there a cooling period and then I'm eligible to get the...
No, no I think that's too technical. But largely, once you are dealing on a scale, it doesn't happen like this that somebody would have bridged the repayment. And again, the company can come back because you know that nowadays, how regulatory is. So in a split also, you also have to comply.
The next question comes from the line of Shailesh Kanani from Centrum Broking.
Sir, just wanted to understand our strategy for CGFMU cover. We are increasing the percentage over there, the cover. So where we -- what is the strategy, how high we are going to go because it will entail some cost as well, right? And have we factored in that?
Yes, Yogesh will answer this.
Shailesh, so we know that our microfinance loan are eligible for this guarantee cover. We were doing for some of our micro business loan, unsecured micro business loan, and we were getting that guarantee. And these guarantees are very seamless. We are getting money. So basis that experience now from this financial year, we have covered our microfinance loan. So first quarter, it was lesser. And now maybe going forward, maybe around 90% portfolio of microfinance will be covered in this guarantee program.
Yes, cost is there, but if we see the overall benefit of coverage versus the cost, right? It is much, much beneficial. And then, of course, there is no provisioning requirement if we cover under guarantee program. So -- and then we see the working of these guarantee organizations, right? So there is a lot of awareness and they also want to help, right? To reach the real financing to these people.
To add-on, Shailesh, to Yogesh. So what I -- my personal understanding is this that government really want to help lot much borrowers in this space, be it the microfinance, FPO, SMF lending, MUDRA loans, all those things. And we, as a bank, are there for a distribution, right? So I think a lot much efficiency has been built in entire guarantee scheme from the COVID time. And I think there is a realization in the government that by giving a guarantee does not mean that there will be too many default because as a private sector, we do lot much due diligence before we lend the money, right?
So it's a combination of the private and the public partnership in terms of creating that atmosphere where we lend it carefully. In case customer goes bad, the government comes and help us. So -- and I think there is lot much efficiency has been built in that whole credit guarantee system where we don't have to fight with the government because there is ample fund available, and there is an allocation through budget, right? And they also have a target so that the real lending can happen, right? And recently, we saw the budget giving you that a subsidy on the affordable housing space, right?
And there are lot many state schemes nowadays, right? So we, as a banker are beneficial, in my opinion, where we need to understand those schemes, really try to implement in our through distribution system and see how customers get benefit. And in case of any default, we can actually rely on this guarantee so that we really remain secured. So we, as a bank has taken this as a very seriousness because this is the way the India is, right? Something will be taken away from us and something will be given to us, right? So we need to understand both things equally and then build on, right?
So we are serious, but it won't be a large book, right? As of now also is around not more than 4% book is covered under this, right? So we want to remain there, but not that much also that entire thing has been based on the government guarantees.
So just a follow-up, means as you have highlighted in the past and today as well that Fincare acquisition would kind of strengthen the SMF portfolio. And currently, I think we are going towards at least we highlighted that we might even take 90% CGFMU cover for the MFI business. But as I understand, the CGFMU cover is specifically for non-agri businesses.
So can you clarify how these 2 aspects would align and contribute, means I am very confused over there.
Shailesh, it's covered, SMF is also covered. We have taken the clarification. And just to elaborate more, like if you take a guarantee, guarantee commission can be paid by customer to the agency. We can lower our rate because it's a coverage on our default, and we can take our service charge and there's no risk weight. So if you see the industry was suffering from the higher rate kind of narrative, then we were suffering from what type of risk weight would be there on the MFI book and then how much charges we charge from that book, that all been addressed by one stroke of the guarantee offered by government, right?
So we can lower our rates, we can charge judicially, and there won't be any risk weight because of the government guarantee.
So basically, in nutshell, even the agri business is covered. That is what I wanted to understand.
Yes, yes, yes.
Okay. Fair enough. Sir, just last question from my side. Sir, on the wheels front, there has been some...
Shailesh, sir, may we request you return to the question queue [ for further questions ]...
This call has become more general-knowledge call, right?
No problem, thank you.
The next question comes from [ Piran ] from CLSA.
Congrats on the quarter. Just one question I had regarding this MFI industry rule from 4 lenders per borrower to 3, which is coming from 1st April. Has the industry proactively started with 3? Or are there first...
So we have started. Brother we have started, we can't comment on the industry. We have started.
Okay. Okay. Fair enough. And when you say that December was better than October and November, this you're talking only about collection efficiency on standard loans?
Sorry?
Yes. That's correct, yes.
When you said that December was better than November, you were referring to the collection efficiency on non-overdue loan?
Yes. So this is Rajeev. So it was better on the SMA bucket collection efficiency also. For MFI and also it is better on the disbursement. So pretty much when you look at all the key variables, it was a better month. And directionally, it was indicating that we should have a better outcome in quarter 4.
Got it. And this 98.7%, what would it be in a normal scenario, let's say, 1 year back or 2 years back?
So FY '24, we were about 98.4% on that metric -- 99.4% on that metric.
Okay. Okay. So you still have like [ 70 ] bps per month turning overdue more than usual.
Versus last year? Yes, that is the correct number.
We'll take the last question from the line of Nitin Aggarwal from Motilal Oswal.
Audible now?
Yes, Nitin.
Firstly, congrats to the entire team on a resilient performance in current environment. I have 2 questions. First is on the cost income outlook. If I look at a very commendable cost control, that has certainly helped like in delivering rightfully on the profitability front. So while you have given a full year outlook and -- but how should one look at the forward years? Because earlier, we were looking to do 60% cost income this year, and now that has changed to 57%, 58%. So will this cost income improvement sustain?
And will we like improve further in the coming years? Or will we like stagnate here or go up from here? So how should one look at it? That's the first question.
Nitin, that's our belief, and that's the way we want to work upon that our cost-to-income should reach 55% as soon as possible, but I can't define as soon as possible right now because there are too many variables, right? But we are not doing anything in our expectations. So we have become more in terms of reality that let's manage today because there is always a charm in bank to do new things, but we already have built so many product lines, so many verticals, and we need to get the scale in that level, right?
We want to build more secured asset class. We want to build more commercial banking. We have AD-I, we have the wealth business, we have the insurance business, we have the credit card, we have the MFI. So there is a lot much is there on the table for us. And we just want to be more focused there. Our IT has done a lot of investments. People, we have already have done well with them in the last 7 years. So now the idea is to be more effective, right? Through the monitoring, supervising, asking questions, even introducing the digital efficiency through digital labor or AI and all those things.
So that already has begun, right? So idea is to really be lower than this current year. But this current year, we can be around 58% or maybe 60%, 1% here and there. But next year, our focus should be that we should be lower than this. But still, we need to be crossing this quarter 4 hurdle and then regrew ourselves and see our growth aspiration and of course, in that relation, build your OpEx, right? But there is a focus on that particular piece. And you have seen our effort in last 9 months, and that will continue.
Right. And second question is, like we have been moving pretty close to our full year ROA guidance. However, if you look at our on-book PCR ratio has moderated over the year to now 61%. So what are your thoughts on managing this trade-off between the ROA and the PCR? And any particular level that you will wish to maintain for the bank?
So Nitin, our PCR is coming down because there is a new fresh-off loans, which is becoming an NPA. We are not carrying the legacy. If you write back the technical write-off, in our PCR calculation, we are north of 80%, right? But we have a very prudent write-off policy also that -- so that we don't hang on the bad assets on the balance sheet. So if you ask me -- and if you carefully see the internal calculation, which is not available to you, our secured asset is around 60%.
Our unsecured asset is around 80%, even our MFI business is around 67%, 68%. So it's -- in my opinion, it is well covered. And as we move more deeper and deeper, we will guide the market. But endurance is to keep around 70%, to be honest. But let's see how we want to reach to that level because there are challenging times as of now. There are not many write-offs, and we just want to clean up our balance sheet every time. So it's not a worrisome for us. It's a tactical number, which can be addressed as we move forward.
Ladies and gentlemen, I would now like to hand the conference over to the management for closing comments.
Thank you, Sagar, and thank you, everyone, for joining this call on today, Friday evening, and thanks for all your questions and your support. In case you have any further questions, you can reach out to the IR team at any point. Thank you, and look forward to seeing you again next quarter.
Thank you so much, and we didn't wish you, but very happy New Year. Thank you so much.
Thanks, Sagar. You conclude the call.
Thank you. On behalf of AU Small Finance Bank, that concludes this conference. Thank you for joining us. You may now disconnect your lines.