Equitas Small Finance Bank Ltd

NSE:EQUITASBNK

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good evening, and welcome to the earnings call of Equitas Small Finance Bank Limited financial performance for Q2 FY '25. We have with us today Mr. P. N. Vasudevan, MD and CEO; Mr. Sridharan N., CFO, Mr. Murali Vaidyanathan, Senior President and Country Head, Branch Banking, Liabilities, Product and Wealth; Mr. Rohit Phadke, Senior President and Head Assets; Mr. Natarajan M., President and Head Treasury; and Mr. Dheeraj Mohan, Head, Strategy and IR.

[Operator Instructions] Please note that this conference is being recorded. I'd now like to hand the conference over to Mr. P. N. Vasudevan. Thank you, and over to you, sir.

[Pathangi Vasudevan, executive]

Good evening to all of you, and thank you for logging in today. The first 6 months of the financial has been quite turbulent as we witnessed deterioration in the microfinance portfolio at an industry level. Before we discuss in detail about how the portfolio has behaved and steps the bank has taken to ensure we get back on track quickly, I would like to highlight a few good things which have happened during the year.

Our strategy on the liability side is taking shape well. We continue to see strong growth in retail deposits. The overall momentum in mobilizing deposit has been quite healthy during the quarter. About 74% of our deposits are retail, and incrementally, we are seeing this holding up.

During the first quarter, we had changed the slab for savings bank interest rate. In the first week of October, we have done 1 more picking of the slab for savings account rates and also reduced the peak interest rate for retail TD from 8.5% to 8.25%.

While the cost of savings accounts has come down by about 13 basis points in the second quarter compared to the first quarter, the impact of TD interest rate reduction may be visible over the next few quarters. Investments in products like personal loans, credit cards and ForEx services have largely gone as per plan. Some of these products are being piloted, and we aim to see it getting rolled out for our existing customers by end of this financial year.

Our investments in technology infrastructure like [ CRM ], Super app and the customer app for borrowers have also progressed very well. This year, our treasury desk has contributed well so far and have actively participated across asset classes taking advantage of the opportunity that the market has been giving us.

The cost of funds of the bank has largely remained stable and within anticipated levels. Talking about our asset business, our flagship product, small business loan, continues to perform quite well. Our strategy to focus on Micro LAP has started to show results. As you can see, the disbursements in Micro LAP is picking up.

The overall disbursement in small business loans has also remained robust, and we hope to see a good second half for this product. Similarly, we are seeing affordable housing segment and used car loans growing well, while new commercial vehicle loans remain subdued as per our plans.

Vehicle Finance, which showed some weakness in the first quarter, is recovering, and we are confident the second half of the year will be even better. The disbursements in used commercial vehicle and used car loans have been the highest during the second quarter.

During the quarter, the team in Vehicle Finance has increased our focus on recoveries and improving collections across all the buckets. In October, for example, our X-bucket collection efficiency in vehicles has moved up to 97.1%, which is in the comfort zone. And traditionally, the second half of the year has been stronger for vehicle financing, both in terms of collections and disbursements.

The realignment of our loans to healthier yields has helped us keep our yield on advance stable despite the fall in microfinance as a proportion to overall advance during the year. Now coming to the stress we are seeing in microfinance. The situation continues to be a concern as fresh slippage and flow from SMA-0, 1 and 2 continues to be elevated. We have been working with our customers to see how best we can be of help to them to overcome the present stress.

One of the new norms being introduced rewards customers by way of reduction in interest rates for loyalty and better repayment behavior. Similar measures for center attendance and group behavior are also being extended.

Structurally, we have strengthened the branches with the dedicated teams to improve customer engagements, collections and DPD resolutions. These initiatives we expect will help improve resolution percentage of various DPD buckets.

We need to see slippage and NPA reduced the half to bring microfinance portfolio to a stable level. We see some of the positive trends further strengthening in October. Disbursements in October crossed the INR 1,900 crores, which is after a gap of 6 months.

Expected collections in Vehicle Finance has improved, while in microfinance, October saw stability in X-bucket collections.

Lastly on provisions, we have made extra provisions of about INR 146 crores in microfinance during the quarter. Out of INR 146 crores, about INR 100 crores is in the form of stress sector provision, which translates to about 50% of 31 to 90 DPD in microfinance.

This is a buffer provision and is over and above the PCR. The balance INR 46 crores was done by strengthening the IRAC norms for microfinance NPA book. We now provide 100% for loans above 180 DPD in microfinance.

Our intention is to try and upfront some of the provisions proactively and take the credit cost pain upfront. To sum up, deposit growth is comfortable, FD rates are moderating. We'll wait and see the results of our latest rate reduction in FD.

Treasury is doing well. Disbursements are picking up quite well. Vehicle Finance collections has improved in October and should see a good second half. The credit cost of our non-microfinance portfolio, which is 84% of our total advance is at 1.04% for the first half, which is very comfortable and could see further improvements in the second half.

Microfinance stress is likely to remain for possibly another 2 quarters given that the stress started about 3 quarters back, and it's a 2-year loan product. As mentioned last quarter, we are not providing guidance on credit cost and growth for the year, so please do bear with us.

Our journey of building a robust and scalable bank is on track, supported by focus on secured loans, a declining percentage contribution of microfinance, high asset quality and a strong liability franchise enabling us to reduce the cost of funds difference with other banks over a period of time.

Thanking you once again for dialing in. I now hand over to Sridhar.

[Sridharan Nanuiyer, executive]

Good evening to everyone. I shall quickly give an overview of our financial performance for the quarter. Most of this already covered in our presentation.

Our net interest income and other income for the quarter was INR 802 crores and INR 229 crores, respectively. Treasury income and asset fee income majorly contributes to other income -- other income segment with Y-o-Y increase of 156% and 37%, respectively, resulting in net income of INR 1,031 crores with Y-o-Y of 11%.

Our yield on advances adjusting for securitization and other off-book items remained flat on Y-on-Y basis despite a drop in microfinance mix. The yield on disbursement remained at 17.83% and was under pressure due to slowdown in microfinance.

Microfinance disbursement stood at 20% during Q2 FY '25 vis-à-vis 28% in Q2 FY '24. On the cost side, operating expenditure came at INR 1,682 crores, clocking a growth of 14% over last year. Over the last quarter -- over the last 2 quarters, we have been tightening our nonemployee-related costs, which is visible in our cost, that is flat on a Q-on-Q basis.

Cost to income increased to 66.09% vis-à-vis 64.37% of last year. PPOP grew 6% year-on-year to INR 350 crores, and PPOP to assets remain stable at 2.94% for the quarter. With the disbursement picking up, we should see these ratios to improve. Credit cost for the quarter came in at INR 330 crores.

As explained by Vasu, as a prudent measure, we have provided INR 146 crores of provision towards microfinance. The bank carried a total GNP of INR 1,023 crores and NPA provision of INR 693 crores. Our PCR now stands at 67.71%, up from 57.72% in the previous quarter last year. PCR for individual product segments are given in the PPT for a granular view. As of September 30, 2024, the total CRAR stood at 19.36%, and we expect to raise a tier bond -- Tier 2 bond soon.

Thank you. Over to Murali.

[Murali Vaidyanathan, executive]

Good evening. Thanks for joining this call. I just want to give some key thematic insights than the absolute numbers. I think current account as a proposition, which is highly invested and more focused by the institution has started giving some good yields.

If you see, we have grown by 66% year-on-year. That's a very healthy sign, which brings us into the new segment of SENP as well as businessmen community. And we have doing a few things right there, actually focusing on the last leg of supply chain and also using -- acquiring as a tool -- as an objective to get that aspect right.

Next part is our savings account. Our continued focus on affluent as a segment is helping us in 2 fronts: one is to grow the Elite as a book, which is now getting into close to 50%, 55% of our book as well as sourcing. So our relationship management structure from virtual to real is actually facilitating the real progress there.

Second is one of our 4 pillars is family banking. We are happy to share that close to 30,000 families are now banking with us at the affluent space. So I think that's one natural progression which is happening.

And fourth important thing is RTD as a mix, for example, retail deposits today is close to 79% of our book. In that, 444 Days rules rose, 55% of my RTD comes from there. So retail focus and retail is helping us to granularize and we have close to 70,000, 80,000 new-to-bank customers who have been onboarded through this product.

Now with this family bank as well as Elite proposition, one good thing that has happened is MF AUM has grown by close to 70% year-on-year and I think, 22% quarter-on-quarter. And that's one good trajectory. This is predominantly built through SAP as a route.

And ASBA as a proposition is helping good trajectory in terms of savings account as well as qualified family coming in. NR is another thing. We have crossed 140 countries. We have customers now across close to 15,000, 16,000 good customers where we are coming in.

Now with AD1 coming up, our remittance as well as FCNR should facilitate, which we should go live very soon, maybe in quarter 4. So overall, things are challenging, but I think our team at the front end as well as products, which we are differentiating and the relationship management structure overall is paying it off.

So I'll hand it over now to Mr. Rohit Phadke to give the insights on assets.

[Rohit Phadke, executive]

Good evening, everybody. Advances at INR 36,053 crores grew by 15% year-on-year and 3% quarter-on-quarter. Advances for SBL were at INR 14,678 crores, grew by 28% year-on-year and 7% quarter-on-quarter. X-bucket efficiency, collection efficiency was at 98.8%.

Micro LAP has been growing very well, and the focus on Micro LAP has been seeing increasing disbursements month-on-month. The merchant overdraft book grew to INR 1,222 crores with 46,827 customers.

In the second quarter, INR 350 crores of loans were disbursed through our newly launched Selfe Loan App. Vehicle Finance in the CV segment grew by 14% year-on-year and 15% quarter-on-quarter. The Vehicle Finance advances stand at INR 8,877 crores.

Used cars have grown by 53% year-on-year and 12% quarter-on-quarter. Used CV business grew by 14% year-on-year and 7% quarter-on-quarter. The new CV disbursements degrew by 36% and advances grew merely 2%. The focus in vehicle finance is to grow the used CV and the used car book and defocus on the new CV segment.

The affordable housing finance book continues to grow well. Advances grew by 23% year-on-year. The MSE portfolio is at INR 1,366 crores, and which has grown by 32% year-on-year and 12% quarter-on-quarter. The MF book degrew by 4% year-on-year and 6% quarter-on-quarter.

We are making efforts to ensure that delinquencies come back to normal. Generally, the second half of the financial year is stronger than the first half, and I'm quite confident that we should be able to do well in the coming quarters.

Thank you. Handing over to Nataraj, please.

[Natarajan Muthusubramanian, executive]

Good evening. From the treasury side, quarter FY '25 has been good on the market front. Our view on Indian bonds was that once the Fed started cutting benchmark rates, India yields also would rally, although with a lag and in smaller measure.

This played out in the quarter gone by. U.S. yields by 60 basis points quarter-on-quarter on the back of U.S. Fed cutting benchmark rates by 50 basis points in its September meeting, while the Indian 10-year yields rallied by 23 basis points and closed around 675. Indian bonds continue to see good buying on the back of inclusion in global Morgan Stanley Bond Index and the expectation of eventual withdrawal of accommodation stance from RBI.

With U.S. Fed paving the way for further cut but a smaller doses in the near future, as evidenced by the decision to cut rates by 25 basis points in their last-night meeting, we feel there is room for Indian yields to soften once inflation and crude stay within comfortable levels.

On the equity side. Indian equities are quite volatile for better part of the quarter, but ultimately closed higher as market participants continue to react favorably to sustained economic activity.

China's decision to announce stimulus measures to boost their local currency -- local economy led to flight of capital from India to China with the heavy selling by FIIs. FIIs continue to remain net sellers in Indian equity markets for several weeks now on anticipation of announcement of follow-through measures from China.

Globally, the geopolitics continue to be an issue as escalations continue in Ukraine and the Middle East. Despite India's economy continuing to stabilize, consolidate and growth, considering the global nature of trade and supply chain, we can expect bouts of volatility going ahead despite a strong local economy.

Hence, our view on the market is cautiously optimistic in the near term. We continue to remain positive on the India growth story over the medium to long term as domestic economic activity continues to be resilient.

Now we are open to questions.

[Operator]

[Operator Instructions] We have the first question from the line of Renish from ICICI.

[Renish Bhuva, analyst]

Congrats on a good set of numbers. Sir, I have 2 questions, one on this Slide #24 on the SMA book, right? So when we look at the SMA-0 and 1 for MFI and SMA-0 and 1 for bank, for a bank the SMA pool is still significantly higher than the MFI book, which essentially means that apart from MFI, there are other asset product is also going through some stress. So can you please throw some light, like say, SMA-0 which is at 4% and SMA-1 at around 2.7%, which products are sort of driving this higher SMA, please?

[Sridharan Nanuiyer, executive]

Renish, can you just repeat the question?

[Renish Bhuva, analyst]

Yes, yes. Sure, sure, sir. So sir, if you look at the SMA buckets for MFI and banks separately, it is very clear that your SMA-0 and 1 for bank is actually higher than SMA-0 and 1 in MFI, which essentially means that apart from MFI, there are other product segments as well which are going through some sort of stress. Could you highlight which all products are going through some stress apart from MFI?

[Pathangi Vasudevan, executive]

Yes, yes. So basically, the SMA book for other products such as vehicles or SBL, they will have some SMA book, but the resolution percentage in those are quite high. Typically, the resolution percentage for, let's say, SMA-0, 1 and 2 in vehicles or small business loan, typically, will be in the range of around 85% to 90%.

And that is why even though you will have some SMA book, but the ultimate slippage doesn't really happen because the resolutions tend to be very high. Whereas in microfinance, the resolution percentage in the buckets are actually much lower.

And that is why we have created this extra buffer for the SMA book of microfinance and not for the others. Because for the others, it is normal, it's actually quite normal and standard situation. Whereas in microfinance, this level of SMA was not there in the past. And the resolution percentage being lower, that's where we thought we should create the buffer provision.

[Renish Bhuva, analyst]

Got it, sir, But even if you look at on a stand-alone basis, right, the SMA-0 and 1 for Q2 is actually highest in last 4, 5 quarters. So of course, I do understand the redemption rates are higher, but what is leading to this elevated stress?

[Pathangi Vasudevan, executive]

You mean to say that 4.13%, which is the one you're referring to?

[Renish Bhuva, analyst]

Yes, 4.13% and 2.7%, both. Both the number are highest in the last 6 quarters -- 7 quarters.

[Pathangi Vasudevan, executive]

4.17%. Right. Yes. I mean, see, that's the whole point, because largely, the Vehicle book had some stress in the first quarter, and this improved in the second quarter, but still it is not completely normal. October, of course, I think we have mentioned in my opening comments also, that October slippage was -- I mean, the October X-bucket was the best in the last few months. .

And the second quarter -- second half of the year, typically Vehicle should see a much better performance. So the 4.13% is a combination of the microfinance as well as the vehicle finance. But the concern in those cases are not much because our resolution percentage, as I mentioned, is very strong. So the concerns are generally not that much.

[Operator]

[Operator Instructions] We have the next question from the line of Vatsal Shah from Knightstone Capital..

[Vatsal Shah, analyst]

So a similar question. So you said that the resolution numbers are 80% to 90% for the bank SMA level. So can we expect that like 20% of that flows into NPA? Is that understanding correct?

[Pathangi Vasudevan, executive]

Yes. I mean, so if even in the third bucket, that is SMA-2 bucket, if we have a resolution in a month, let's say, in a given month, resolution is, say, 85%, 15% will flow into NPA. But what also happens is that there will be some resolution of the previous NPA accounts. So at the end of the month or end of the quarter, the net NPA increase would be the net of what flows into NPA and what gets resolved from the opening NPA. So that is the net NPA that we'll end up having.

[Vatsal Shah, analyst]

Got it. And for MFI, this will be like what percentage, the flows from SMA bucket into the NPA pool?

[Pathangi Vasudevan, executive]

So the -- for microfinance, in our SMA-2 bucket, the typical resolution is in the range of around 40% to 45%, which means nearly half of them flow into NPA. And there will be, of course, some resolution of the opening NPA which helps to net it off and bring it down. But the resolution itself is only in those ranges. Whereas, for other secured loan products, as I mentioned, it's typically around 85% to 90%.

[Vatsal Shah, analyst]

Got it. And the last question is on cost to income. So you like -- the cost to income as you have mentioned in previous quarters as well is likely to even elevated for the next 2 to 3 years. But like when -- what do you expect over the longer term, like 5 years like where it will stabilize according to you?

[Pathangi Vasudevan, executive]

So 2 things on that. We have been saying that our cost will be higher because we continue to remain as a very developing and evolving bank. So there's certain level of investment that needs to keep happening in products, people and technology. So to that extent, from an overall perspective, yes, there will be some improvement -- increase in the cost, but if you see the first quarter to second quarter on Page #14, if you see, employee cost has gone up from INR 375 crores to INR 402 crores between first and second quarter.

However, if you see the operating -- other expenses, INR 243 crores to INR 245 crores, so consciously, what we are trying to do is try and see how do we control our operating costs, other expenses to the extent that is possible. We are trying to see how do we control that cost.

And some effort was put in, in the last quarter, and we have seen kind of a flat other expenses. And that's one area where we are trying to see how do we keep our cost as much as possible down. While employee costs will go up because we are putting more people on the field whether it is in terms of sales or collections that number of staff will go up. So to that extent employee expense may go up.

And the other expense, we are trying to see how best to control it. And whether it is in terms of controlling costs or trying to avoid any expense that is possible to avoid. So there is that effort which is going in. That is from an immediate perspective.

But your question from a longer-term perspective, if you ask me, I think we have mentioned in the past also that the next 2, 3 years will be an area where there will be some level of investment, be it because we are introducing 3 new products, which is our personal loan, credit cards and AD1 products. And so we have been expanding on those new products.

There will be some little bit more of expenses on that for the next few quarters, after which they should stabilize. So I think from a longer-term perspective, you should see our cost to income actually may be declining after a period of maybe 3 years.

[Operator]

[Operator Instructions] We have the next question on the line of Darshan Deora from Indvest Capital Group.

[Darshan Deora, analyst]

Can you throw some light on the MSE product? I see that disbursements have grown in that particular loan product. So historically, our asset quality has not been so great in that product. I just want to get some insight.

[Pathangi Vasudevan, executive]

Yes. So that has grown. During this quarter, it's shown a good amount of improvement. In terms of asset quality, in terms of GNPA, there is an increase in the GNPA from -- it's now gone to 9.35% from 7-point-something in the first quarter.

That was largely because there was 1 account of around INR 30 crores, which slipped into NPA in the second quarter. But that account has actually got upgraded to standard in the third quarter. So that should come back. By end of this quarter, that NPA should come back.

But otherwise, there is some old NPA accounts, which are there in that MSE book which is causing that elevated NPA. But otherwise, the book is performing quite well. And so we are able to see that there is no credit card -- there's no credit quality concern in the MSE book, which is being created over the last maybe 2, 3 years.

[Darshan Deora, analyst]

Got it. Got it. In terms of microfinance, what is going to be our strategy going forward? I mean we have brought it down from 18% to 16%. Once credit cards, personal loans gets launched, where do you see the microfinance loan mix moving to?

[Pathangi Vasudevan, executive]

In terms of microfinance, as we have been saying, it will keep coming down over a period of time as a percentage contribution to the total portfolio and personal loan and credit cards, which are also unsecured loans as they start filling up.

Overall, we have a policy, internal policy that our total unsecured book should not exceed 20%. So at any point in time, all the 3 products should put together should not exceed 20%, and they should be within that 20% contribution.

However, microfinance, in the beginning of the year, we had some plans in terms of disbursement in microfinance and disbursement in the other products. However, during the year, the disbursement in microfinance has been lower than whatever we had budgeted given the fact that we are seeing some level of stress.

So obviously, the disbursement has slowed down in view of that. So the planned reduction in microfinance percentage contribution, that we had a plan, it might change because of the current scenario. But otherwise, from a little bit medium-term perspective, if you look at it, I think in a 3- to 4-year time frame, microfinance should be in single digits, while personal loan and credit card should fill up the balance.

[Darshan Deora, analyst]

And just in terms of the credit card strategy, I think in the past, you have alluded to the fact that it's probably going to be more of a hook for the liability customers that specifically a very -- like a focused product on the asset side. Is that a fair understanding?

[Pathangi Vasudevan, executive]

Yes, absolutely. One is it's a hook product for the liability customer. The other is that it is also a product which will be cross-sold for our affordable housing and small business loan customers. I think we mentioned this also some time back, if I remember right, where we give a loan of, let's say, INR 5 lakh or INR 10 lakh to a borrower secured against their house property, then we will also try to give them a credit card with, let's say, a limit of INR 50,000 to such customers, where the LTV comfort still remains very high, and that credit card outstanding will actually be a secured outstanding because we do have a security from the customer for another product.

And -- so that security will kind of run for the credit card also. So for the asset customers, principally focused on small business and affordable housing customer, we will offer credit cards, which will be kind of a secured product. While for liability customers, we'll offer it both as a secured card against deposit because there will be customers who we'll offer a credit card are secured against deposits. And then stand-alone credit cards offered to customers who fit certain profiles.

[Darshan Deora, analyst]

Got it. So the latter would be catering more to the Elite customers, I'm assuming, right, the Elite banking customers?

[Pathangi Vasudevan, executive]

Absolutely. Yes. And Elite, if you've seen in our presentations also, the Elite base has been continuously going up. We have been able to add a good number of customers on a quarterly basis to our Elite portfolio. And the deepening on the Elite account also continues to be quite strong, and that is potentially the segment to which we should aim to cross-sell.

[Darshan Deora, analyst]

Got it. And just 1 last question regarding the credit cards. Given that credit cards usually from a -- just from a breakeven point of view, what's the math there? Like in terms of like number of cards required to breakeven on that product? Have you all done those numbers? And are you all comfortable with the model that you want to built?

[Pathangi Vasudevan, executive]

Yes. So for us, the acquiring cost is something that we are trying to see that it's kept to the minimum because a significant part of our sales should be to existing customers. So we are really expecting our acquiring costs to be at a minimum, while the real cost will be not even the technology.

The technology part of it actually is not that big a cost on an ongoing basis. There is some initial investment on the system. But otherwise, the ongoing cost on technology is actually not that much. The ongoing cost will be principally contributed by the schemes and rewards programs, which will be rolled out.

But acquiring costs, because we don't plan to acquire through channels, DSAs, et cetera, in any significant volumes. And so that we don't expect it to be high. Because of this, we will not be able to give a specific number at which we should be able to breakeven.

But typically, we hear that in the industry, 1 million cards is where you probably start breaking even. I think we will breakeven probably at anything like, let's say, maybe 1/3 or 1/4 of that, is where we will tend to start breaking even, principally because our acquiring costs should be low.

[Operator]

We have the next question from the line of Chetan Gindodia from PGIM Mutual Fund.

[Chetan Gindodia, analyst]

Sir, firstly, I wanted to understand a little bit about the microfinance book. So would it be possible for you to disclose what percentage of our microfinance book would have more than 3 borrowers?

[Pathangi Vasudevan, executive]

Yes. We have lots of data on that. Hold on. Four lenders is 14.5%. So 9% of our borrowers have an exposure of more than INR 2 lakh borrowing, total borrowing. I can give you INR 1.5 lakh exposure also -- one second. They're just taking that out -- so 12% of the customers have an exposure of INR 1.5 lakh. And INR 2 lakhs is 9%. And 14% is having 4 loans and above. Below INR 1 lakh exposure is 60% -- sorry, 65, below INR 1 lakh is 65% in terms of number and in terms of cost is 60%.

So that is where we are saying -- that's where -- actually there is a good point that you are raising. This is where we are saying that we expect somewhere in the third and fourth quarter, the stress should kind of start seeing some decline because there's a core set of customers. In our case, for example, it is 81% of the customers have less than INR 1.5 lakh borrowing.

And -- so 81% of the book, we should really not see much of -- no stress in the future also. It's the balance of 20% or 19% of the customers who have more than INR 1.5 lakhs, where some of them will see -- will show some signs of stress, but many of them would be already stressed or are going through the stress right now.

So in the next 1, 2 months or 3 months or 4 months, some of them who are really not going to be able to come up properly in their thing, will probably slip into NPA, while the rest will kind of recover and come back. So that's why we feel that maybe in 2 quarters from today, we should see this stress probably behind us.

[Chetan Gindodia, analyst]

Okay. Got it. Got it, sir. Sir, still from -- just from an underwriting perspective, it seems like just 20% of borrowers being a little on the overleverage side, seems a bit high, seems like in line with industry, but seems a bit high. So is it that...

[Pathangi Vasudevan, executive]

That 20% is INR 1.5 lakh and above, okay? Industry doesn't count INR 1.5 lakh. The industry counts INR 2 lakh and above. If you look at INR 2 lakh and above, it is 8% in our case. So 2 lakh and above is 8%, whereas the remaining 12% is INR 1.5 lakh to INR 2 lakh.

So that the industry doesn't count that because what happens is at the industry level, we have SRO. And the SRO, the guideline is that we should not be -- more than 4 lending should not happen. And we should not give a loan which is put together more than INR 2 lakh. So the INR 2 lakh is kept as the kind of barrier at the industry level through the SRO resolution.

So industry talks of overborrowing at INR 2 lakh and above. And at INR 2 lakh above, we're at 8%. Whereas INR 1,50,000 to INR 2 lakh is 12%, which is not counted by the industry as a stress at all. But we take it as a focus area for us because from this area, also people might slip into NPA, so we put extra focus and extra effort to be in touch with this set of customers also.

[Chetan Gindodia, analyst]

Okay. Got it, sir. And sir, lastly, so incrementally, if I see this quarter, our disbursement on microfinance and micro loans is total nearly INR 950 crores. So what are the safeguards that we are placing on the incremental disbursements on this side?

[Pathangi Vasudevan, executive]

So of course, there are 2 things: one is that as per the SRO guidelines, we don't lend if we are not the fourth lender or less, we don't lend. Second thing is that if the total borrowing is more than INR 2 lakhs, that also we don't.

So that guardrail of the MFIN is something that we have put in place. But second and very important thing is that our own data shows that the behavior of the portfolio for second, third, fourth and fifth cycle borrowers is better than the new coming -- new first-time customer.

And so the focus is to try and restrict our lending as much as possible to existing borrowers. For example, in the month of October, 87% of all our disbursements was to existing customers. So these are the few things that we are doing on the disbursement to try and ensure that the new disbursements remain healthy.

[Operator]

We have the next from the line of Shailesh Kanani from Centrum Broking.

[Shailesh Kanani, analyst]

Sir, a couple of questions from my side. On the MFI side, have we changed any provisioning policy? And if you can highlight any other product as well which we have changed? And secondly, once we are out of this MFI cycle and as we introduce new products, so in 3-year to 5-year basis, what do you think our business should generate on a stable cross-cycle basis ROA? If you can throw some light on that as well?

[Pathangi Vasudevan, executive]

Okay. In microfinance in the second quarter, there are 2 things we did on provisioning. One is that we increased the IRAC provisioning norms for NPA accounts in microfinance. From -- earlier, we used to have 90 to 180 days was at 50%; 180 to 360 day was at 75%; above 360 days was 100%. This was a position as of June.

What we did is that 100% provision from 360 days, we reduced it to 180 days. So at 180 days, we -- in the second quarter, at 180 days-plus, we make a 100% provision against what was 50% earlier -- sorry, against 75% earlier.

The second thing is that in the 90 to 180, it was a flat 50%. Against that, 150 to 180, we increased it to 75%. So these are the 2 changes we did in provisioning and microfinance NPA, which accounted for INR 45 crores of extra provision for the quarter. This is one.

The second extra provision that we did in microfinance in the second quarter is we created a buffer provision on standard assets of microfinance for about INR 100 crores. This INR 100 crores translates to approximately 50% of our SMA-1 and 2 book of microfinance.

So this is the buffer provision that we created in the second quarter. These are the 2 things that we created. Now coming to your next question in terms of on a little bit medium to longer-term basis, like 3 year-plus what could potentially be the ROA for the bank?

If the credit cost normalizes at some point in time, last year, if you remember, for -- continuously for about 5 quarters, our ROA was in the range of 2% when our credit cost was normal. So that's the model. So as and when our credit costs should normalize, we should be able to look at that kind of returns.

[Shailesh Kanani, analyst]

Sir, the reason I was asking that as we have these newer products coming in, they would obviously take time to mature with personal lending and credit cards. So I just wanted to get some sense. Should we expect on steady-state basis lower ROA in that case?

[Dheeraj Mohan, executive]

Yes. This is Dheeraj here. On ROAs and ROEs from a guidance perspective, we thought we'll stay away from it currently. Let things improve, let credit cards normalize -- credit costs normalize, then we'll see where we are in terms of ROAs.

And you're right, as newer products come in, it will have an impact on ROAs. But like Vasu explained, we are not investing heavily on new-to-bank customers through these products. It's largely to improve stickiness.

So you'll bear with us for some time until we get credit cost normalized and then we'll see where ROAs are. Or we would leave it to your imagination. You've seen all the line items in terms of NIMs and cost to income and credit cost, and we'll see how the bank progresses on it.

[Shailesh Kanani, analyst]

Okay. Just last question from my side on MFI. In our opening remarks, sir mentioned that October has been a little improvement. So can you share some numbers and any reasons, per se, for this improvement in terms of collection efficiency or in general, what we are seeing on the ground? And if some data points on the state is also available, that would be helpful.

[Pathangi Vasudevan, executive]

See, we don't want to get into too many details of October, but I'll just give you 1 ballpark figure, which is our X-bucket collection efficiency. X-bucket collection efficiency was seeing some level of deterioration over the last 3, 4, 5 months.

But in the month of October, at least that level of deterioration had stopped. So I'm not saying that it's actually gone, improving further. But at least the level of deterioration has stopped in the month of October, which is the first good sign that we saw in the book and maybe partly contributed by some of the most risk customers are already moving to NPA earlier and also the kind of initiatives that have been rolled out by the bank, including improving -- increasing the number of people available on the field to deal with the customers and spend time with the customers.

So that's the thing that we saw. And -- so that when -- X-bucket does become a crucial factor because if that's where you control the flow and then the rest of the bucket, you have a little easier life after that. So that's what I was really referring to.

[Operator]

We have the next question from the line of Pallavi Deshpande from Sameeksha Capital.

[Pallavi Deshpande, analyst]

Just wanted to understand what is the level of attendance you see at these center meetings now? And what was it earlier in Q1?

[Pathangi Vasudevan, executive]

Yes. The center meeting, long back when we started microfinance way back some 18, 20 years back, the attendance used to be anywhere in the range of 90%. That is the best attendance that we used to have a long, long time back.

Subsequently, after that AP crisis and demonetization, the attendance did come down, but it settled down at around -- anywhere around 65% to 70%. COVID, of course, is the one which is the biggest disruptor in microfinance because during COVID for nearly 1.5 years-or-so, we told the customers not to come for the meeting, and we told them that to hand over the money to the leader and we'll go and collect it from her.

So for more than 1.5 years, we ourselves told the customers don't come for meetings. That, I think, was the biggest disruptor because even during demon, we never told them don't come for the meeting. We kept telling them come for the meeting, even if you don't want to pay, no problem, just come for the meeting.

But in COVID, we actually actively told them not to come, and for too long a period of time and that became a habit. And so post-COVID, the center meeting attendance really dropped. It's somewhere in the range of 45%, 50% today.

[Pallavi Deshpande, analyst]

Right. So sir, can you say that some part of this whole problem is coming from here. Until this improves, we won't see this sector improve?

[Pathangi Vasudevan, executive]

Yes, yes. Of course. See, attendance is a big indicator of the cohesiveness of the group. And if the attendance percentage is low, then naturally, the cohesiveness also reduces, which is not good for the lenders. So that's why we are rolling out some interest rate discount scheme for customers when they come for the next cycle, which will be based on their attendance as much as on the repayment. It also includes attendance as a parameter. So if somebody has a higher level of attendance, she will get a lower rate of interest in the next cycle.

[Operator]

We have the next question from the line of Ashlesh Sonje from Kotak Securities.

[Ashlesh Sonje, analyst]

Sir, a couple of questions from my side. Firstly, there is 1 slide where you have shown the Par book in microfinance for Equitas versus the industry. If you look at the Par 61 to 90 book, that has been consistently higher for Equitas versus the industry at least in the data points where you have shown it. How do we -- what do we understand from this data, sir? How do we attribute this difference?

[Pathangi Vasudevan, executive]

Yes, that is true. I mean, it's data. So that's true. And if you see also -- another slide, I don't think -- I don't know whether we have put it here. The Par data of the player -- type of players, SFB, banks, NBFC, MFIs and others NBFCs. I don't know whether we have put it here. We have not put it here, I think.

But that's another data available. In that if you see, the SFBs have a higher level of DPD as a type of lender compared to, let's say, the banks or the NBFC, MFIs. So I mean, if you ask me to guess why I can give you a couple of reasons. But there are some reason because of which SFB as a lending type has a higher level of DPD compared to other type of lenders. So that is why if you see the industry versus Equitas, ours is higher than the industry, fundamentally flowing out of the fact that SFB itself has a type of lender has a higher DPD.

[Ashlesh Sonje, analyst]

Sir, but on the same slide, you have shown SFD versus Equitas as well. There, if you look at the 61 to 90, that number has been higher for Equitas over there as well.

[Pathangi Vasudevan, executive]

Yes. So we are talking of, let's say, Par 60 to 90...

[Ashlesh Sonje, analyst]

For Equitas and the SFB industry, which is on the same slide. The second chart from left.

[Pathangi Vasudevan, executive]

Yes, 1.19% to 1.27%, is that right? .

[Ashlesh Sonje, analyst]

Correct. Yes. And the trend also for the past 2 quarters.

[Pathangi Vasudevan, executive]

Yes -- no, no. You see the first bucket, that is 31 to 60 bucket, if you see, SFBs are at 1.13%. This is as of June '24, and Equitas is at 1.05%. So if you see the 31 to 60, they are slightly lower than the SFB industry.

Then if you go on to the 61 to 90, we are at 1.27% and the SFB industry is at 1.19%, so we are slightly on the higher side. Now if you move on to 91 to 180, we're at 1.37% and SFB is at 1.43%. So in 2 out of the 3 buckets, we are actually lower than the industry -- SFB industry, while on one, we are slightly higher than the SFB industry. So that it is how it is. But the differences are not much. So there's not much to read into this.

[Ashlesh Sonje, analyst]

Understood, sir. Sir, secondly, you gave a data point that the 4-lender portfolio is about 14.5%. Just want to understand this, this is 4 or more other lenders, right, apart from Equitas?

[Pathangi Vasudevan, executive]

That's right.

[Ashlesh Sonje, analyst]

Understood. And this is the borrower account or the proportion of the portfolio lying with these borrowers?

[Pathangi Vasudevan, executive]

That's a borrower account.

[Ashlesh Sonje, analyst]

Understood, sir. Sir, and just lastly, if I look at the non-MFI portfolio, the slippages there have increased Q-o-Q. So just wanted to understand from you qualitatively what is the reason for higher delinquencies? And whether this is coming predominantly from the Vehicles portfolio or there is some increase for the SBL portfolio as well?

[Pathangi Vasudevan, executive]

The SBL is under normal levels. So Vehicles, there was an elevated gross slippage and which also led to a higher level of credit cost for vehicles in the second quarter, but it's still within an acceptable level. But in terms of the MSE, I mentioned that there was 1 account of INR 30-odd crores which slipped into NPA in the second quarter. So anyway, that's come back to standard now in the third quarter, but that was there in the month of September.

But if you see the credit costs, we have given a slide, a separate sheet somewhere in the beginning of the presentation, I'll give you the page number -- I think that is Page 7, if you look at it, we have given a half yearly credit cost summary for the bank.

If you look at that, the rest of the portfolio, which is 84% of the book, the credit cost for the half year is 1.04%, which is quite comfortable. I mean, we don't really have an issue with that level of credit cost at our -- given our kind of lending.

It's really the microfinance, which is a 10%, of course, which includes all those onetime provisions, et cetera, et cetera. But whatever be that, it is at 10%. And overall, for the bank, it becomes 2.59%. So if you look at this sheet, fundamentally, what it represents is that at the bank level, at the 84% of the portfolio level, we are very comfortable in terms of our credit costs. And going forward, it should actually improve because second half is always better than the first half from a collection and disbursement perspective.

So we should actually see an improvement on this for the rest of the year. And this microfinance is the one which, of course, causes the stress and has caused the stress in the first half. And that's where we have put in 2 things: one is we have put in extra efforts in terms of our products and people on the field, et cetera, to meet the customers and work with the customers. Second thing is we have done some upfronting of the provision so that we are trying to upfront the potential pain in the third and fourth quarter to try and reduce the impact of MFI credit cost for the rest of the year. That's what we have done in the MFI. But rest of the bank, we are quite well placed.

[Operator]

We have the next question on the line of Ronak Chheda from Awriga.

[Ronak Chheda, analyst]

My first question is on small business loans. So with the growth continues to be strong in this segment. So just wanted to get your sense on how are we capacitated in terms of branch network? And what are our plans for the next 2 to 3 years to sustain this level of growth in SBL segment?

[Pathangi Vasudevan, executive]

Yes. So small business loan, of course, is our flagship product, it's now 41% of our total book -- and touchwood, the credit quality, et cetera, is good from all parameters. And so that is -- that will continue to be the torchbearer for the bank.

In terms of capacitizing it for further growth in the future, we have been adding both the sales and collections team in that business over the last few months, and we have been increasing the disbursement per branch. We currently operate roughly out of 400-odd branches, I think 415-or-so branches.

And now at our current level, we have a per branch disbursement, monthly disbursement of around INR 1.6 crores. This was, of course, lower sometime back, we have been adding more feet on street into the branches and increasing the per branch productivity and there's a plan to further improve that number of people per branch and the INR 1.6 crores ideally should keep moving up going forward, which will help in terms of improving the volumes from the existing branches. That's one thing.

Second thing is that in the last 2 years, we have added approximately about 60-odd branches where we offer small business loans. Next year, we again plan to add -- I mean, I don't know the correct number today, but somewhere in the range of 40, 50 branches is something that we should be adding which will help improve the reach and distribution for the -- for all the products, including small business loans.

So I think we are fairly on track in terms of capacitizing the bank to support the improved volumes from not just small business loan, but the other products also.

[Ronak Chheda, analyst]

Got it. Sir, my second question is on slippages in the MFI book. You said the slippages, fresh slippages continue to -- continue in the MFI book. So how should we think of Q3 and Q4. So will the slippages peak in Q3? Or this is more a 6-month thing where we could see the peak slippages coming in Q4 for the MFI book per se?

[Pathangi Vasudevan, executive]

See, I don't think I'm in a position to tell you whether the peak is behind us at this point in time. I'm really not in a position to tell you that just now. The X-bucket efficiency that we have, that is people who are not having an overdue, but who slip into an overdue in a given month, that X-bucket efficiency is currently around 98%.

Now that needs to move to 99%. So it has to move up by like 1%. And that 1% will make a lot of difference from a potential further slippage and credit cost into the future. So that's where a lot of efforts are going in both from us internally as well as from the industry in terms of an improved lending discipline to try and not have over-leveraged borrowers.

So I think that the whole thing is hinging on how much we are able to improve the X-bucket efficiency. And the more we are able to improve, the less will be the potential pain into the future. But right now, I'm not in a position to tell you whether we have seen the peak behind us, and third and fourth quarter will be normal.

I'm not in a position to tell you that because we still need to wait and watch for some more time and see the effect of whatever we are trying to do in the field. So we believe that we may have to be prepared for some level of pain even during the third and fourth quarter. And probably somewhere during the fourth quarter, I have a feeling that we should start seeing some abatement in the pain because the transactions sort of run through 5 or 6 quarters by then, and it's a 2-year product.

So most of the potential delinquent customers should have fallen delinquent during this period. And hopefully, the newer loans, which are given in the last 2, 3 quarters should not be causing as much pain. So that's why we believe that fourth quarter is possibly a time period by which we should see some level of abatement and maybe the first quarter of next year could be reasonably normal. But this is conjecture only. I'm not saying that this is something I'm sure about. This is something I'm hoping, and we'll have to just wait and watch and see how the trend happens.

[Operator]

We have the next question from the line of Pritesh Bumb from DAM Capital.

[Pritesh Bumb, analyst]

Just a couple of questions. First, if you can mention how much will be our Tamil Nadu exposure in MFI?

[Pathangi Vasudevan, executive]

57%. Yes, 57%.

[Pritesh Bumb, analyst]

Of the MFI portfolio, 57% is Tamil Nadu?

[Pathangi Vasudevan, executive]

That's right. Is that so?

[Unknown Executive]

Yes, sir.

[Pathangi Vasudevan, executive]

Yes. That's right.

[Pritesh Bumb, analyst]

Okay. Sir, second, just wanted to check of the INR 143 crores provision, which we took INR 43 crores is on the existing NPA which has fallen, right, the slippages which has come in? And there you have enhanced them?

[Pathangi Vasudevan, executive]

That's right.

[Pritesh Bumb, analyst]

And the INR 100 crores is type of a contingency provision for the future years -- for future quarter, basically?

[Pathangi Vasudevan, executive]

That's right. Absolutely.

[Pritesh Bumb, analyst]

So if you exclude the INR 100 crores, which you will -- you may utilize in next few quarters, how much can we see a credit cost perspective only on the overall basis because you gave a color of the non-MFI book? But can you just give a little bit color that how much requirement will be there for a provision perspective in next quarters?

[Pathangi Vasudevan, executive]

Okay. I'm not giving you a guidance, but I'm giving you some mathematics. If you look at the non-microfinance book at 1%, let's say, that 1.04% is a potential credit cost for the 84% of the book -- and microfinance, this 10% credit cost includes all this onetime provision and all that.

If you remove that, it will be about 6.5%-or-so. If you remove the INR 100 crore, the credit cost of microfinance from 10% would be approximately around 6.75%. But that's actually a very elevated credit cost. It's not a normal at all. So if your credit cost starts normalizing, even if not at the pre-COVID level, but even within the current scenario, if it reasonably normalizes, and let us say, that we end up with a credit cost of anywhere around, say, 4% to 5% in microfinance, then if you multiply that with 16% of the book, then you are talking of 4% of 16% would be 0.6%, right? 0.6%.

So then you have a 1% credit cost for the rest of the book and a 0.6% credit cost for microfinance. So then you're really looking at a 1.6% credit cost for the bank as a whole, if the credit cost of microfinance can come down to, say, 4%. So that's a little bit of math.

[Pritesh Bumb, analyst]

So this math is in for next year? Basically, I just wanted to check because we've given annualized credit cost of 10%, will we see like a 6%, 7% of credit cost for the full year because then the second half gets much better because your commentary was that you wanted to safeguard a bit of the next 2 quarters' credit cost?

[Pathangi Vasudevan, executive]

That's right. Absolutely.

[Pritesh Bumb, analyst]

Got it. And another clarification needed on the MSME book, sir. You mentioned some one-off NPAs happened. That's why the GNPA is up, is it? 7% to 9.35% if you look at the segmental GNPA?

[Pathangi Vasudevan, executive]

That's right, yes.

[Pritesh Bumb, analyst]

That is the one-off there, right?

[Pathangi Vasudevan, executive]

That's right.

[Pritesh Bumb, analyst]

But the SBL book also, we've seen some inch up. Is that -- I just wanted to check in terms of customer profile. Is the customer profile still the same as an MFI and that the same stress is at the SBL as well, the overleveraging front or even in terms of cash flow, do you feel that, that is a little bit spread out in the SBL as well? Though it is a secured business, but do you see that stress there as well?

[Pathangi Vasudevan, executive]

See, we would have given you our MLAP GNPA. Have we given MLAP GNPA? No. Okay, so if you look at the overall SBL GNPA, it's at 2.19% in September -- 2.03% in June, 2.19% in September. So there's an inch up on the GNPA. But I think that's normal, and it should be within that range only. There is no one-off or there is nothing specific about that.

So it will be moving within that narrow range. And in terms of the profile of the borrowers for small finance -- I mean, small business loans, the bottom end of small business loan, which is what we call as MLAP, micro loan against property, where the loan size is typically up to INR 7 lakh. Now there will be some amount of overlap with the top end of the microfinance customers. But minus the MLAP, the overlap within MFI customer to a small business loan, that overlap will be very nominal. Whereas, it will be much more in the MLAP segment.

And the MLAP segment, while the overall SBL is at 2.19%, within that MLAP will be definitely at a higher level of NPA, but then since it is secured, generally, the ultimate credit cost is generally very low.

[Operator]

That was the last question. I would now like to hand the conference over to Mr. P. N. Vasudevan for closing comments.

[Pathangi Vasudevan, executive]

Yes. Thank you. Thank you all for dialing in and listening and asking us all kind of queries. Happy to be of service to you. To kind of sum up, at a bank level, what I have mentioned in my opening comments also, 84% of the book remains quite strong, and quite healthy and we should see potentially a further improvement in the quality over the second half, which is always traditionally the stronger half.

Microfinance, okay, we'll have to take it with a -- in our stride. And we'll have to just take it in our stride and go along with it and see what best we can do to minimize its impact. On the deposit side, we are doing quite well. Treasury is doing quite well. And our technology initiatives are coming up well. Our new products are very close to launch. Some of them are already gone on a pilot launch.

And so I think overall, as a bank, many things have fallen into place. And we should see the effect of all of this going forward. And microfinance is something that anyway, we have been at it for 17, 18 years now, so we do know what that business is all about. And let's see how best we are able to manage and keep its impact as low as possible. So that's it from our side.

Thank you so much, and wish you all very best. Thank you. Bye-bye.

[Operator]

Thank you. On behalf of Equitas Small Finance Bank Limited, we conclude this conference. Thank you for joining us. You may now disconnect your lines.