Fino Payments Bank Ltd
NSE:FINOPB
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
253
456.6
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Fino Payments Bank Ltd
Earnings Call Analysis
Summary
Q2-2024
The company experienced a year-on-year growth of 43%, with total throughput surpassing INR 86,600 crores. Digital throughput skyrocketed by 120%, now constituting 27% of total throughput. Revenue and profitability showcased significant improvement, with a 19.3% increase in revenue to INR 706.9 crores, enhanced EBITDA margins from 9.1% to 12.3%, and a 60% hike in PAT to INR 38.2 crores for H1 FY24. The digital segment, particularly UPI, is showing high margins of 48%-50% and contributing to healthy 18% of digital throughput. The company's foundation in infrastructure is set for monetizing these advances while keeping costs under control, targeting PAT to grow at 2 to 2.25 times that of revenue growth.
You don't have any saved screeners yet
Ladies and gentlemen, good day, and welcome to Fino Payments Bank Q2 FY '24 Earnings Conference Call hosted by Go India Advisors.
[Operator Instructions]
Please note that this conference is being recorded. I now hand the conference over to Mrs. Sheetal Khanduja from Go India Advisors. Thank you, and over to you, ma'am.
Thank you, Aishya. Good afternoon, everyone, and welcome to Fino Payments Bank earnings call to discuss the Q2 and H1 FY '24 results. We have on the call with us today, Mr. Rishi Gupta, Managing Director; Chief Executive Officer; Mr. Ketan Merchant, Chief Financial Officer; and Mr. Anup Agarwal, Head Investor Relations.
We must remind you that the discussion on today's call may include certain forward-looking statements and must be, therefore, viewed in conjunction with the risks that the company faces. I now request Mr. Rishi Gupta to take us through the company's business outlook and financial highlights, subsequent to which we will open the floor for Q&A. Thank you, and over to you, sir.
Thank you, Sheetal. Good afternoon, ladies and gentlemen. Thank you for joining us today for the Fino Payments Bank Quarter 2 FY '24 Earnings Call.
We have been consistently doing well quarter after quarter, and this quarter embarks another milestone of our business volumes. We're happy to share that we are going as per our strategy and priorities. Before we get into business and financial update, let me quickly update you on the strategic aspect of our business. Our TAM strategy which is transaction, acquisition and monetization is making good progress and is aligning with our long-term goals.
For those who may not be familiar, allow me to provide a brief explanation of our TAM strategy. Transaction phase is the first phase, we have built -- through which we have built a large distribution network of merchants, totaling 15.1 lakh merchants as of September 2023. We are on plan to achieve 2 million merchants by FY '26.
We have successfully executed this space and crossed the total throughput of INR 86,000 crores in quarter 2 compared to INR 60,000 crores in quarter 2 last year. Our geographical presence of merchants, branches and touch points across the country with North and East contributing to 67% of the total distribution.
We will continue to deepen our merchant density and enhanced coverage in West and South, ensuring last mile reach. This forms a strong foundation for the SFB in the future.
Acquisition phase. We are presently in the acquisition phase where we are actively broadening our presence in both physical as well as digital space. We have been maintaining our acquisition spree of more than 2.5 lakh new customers every month.
Our renewal income has grown by 95% on a year-on-year basis. This continues to significantly strengthen our foundation for the annuity income. As the acquisition becomes stronger, some of the revenues from transaction income, which is largely offers customers have started to gradually shift to acquisition revenue or ON US customer.
Monetization, focus and impetus of transaction and acquisition phase with increased UPI penetration enables higher customer stickiness contributing to higher annuity income on a year-on-year basis and future opportunities across that. This will come to play more as an SFB. Digital Fino 2.0. We have been actively growing our digital presence. As I've said in the last presentation as well, leading to increased penetration.
During the quarter, we opened more than 50,000 savings account digitally through our Fino Pay app. Our digital banking segment continues to exhibit robust growth with digital throughput reaching INR 23,000 crores in quarter 2 FY '24, representing an impressive 120% year-on-year growth.
In quarter 2 FY '24, FinoPay, which is our digital app downloads, as we experienced a 67% -- 167% increase on a year-on-year basis, totaling to 12.6 lakhs. We continue to contribute more than 1.25% of the total transaction volume in the UPI ecosystem outperforming many established banks, thanks to the government and regulatory initiatives around Digital India Stack.
At Fino, we are driving one of our biggest changes of going digital. This behavioral change from cash to digital is irreversible, and it's catching up across all stratas of society as well as present across the nation that is both in rural as well as urban. Fino is also moving in similar direction with more and more customers becoming digitally savvy. Out of our total customer base of 9 million customers, roughly 3.6 million or 40% of our customers are actively using digital service, and this number is only going faster.
NPCI statistics showed that the share ratio of cash withdrawal, which is ATM, MicroATM, AePS, and UPI was 45 to 55 in quarter 1 FY '23 and now has become 33 to 67, that is nearly 2/3 of the transactions are now on the UPI platform. Our cash withdrawal business moved from 64% in quarter 1 FY '23 to 34% FY '24 of the overall transaction throughput, much in line with what is happening in the ecosystem, UPI adaptability is growing faster. It's growing at a faster pace than anticipated. Fino is also building products around digital ecosystem, both on the B2B as well as on the B2C.
Quarterly performance. Now let me update on the business aspect. Our quarterly revenue demonstrated a substantial 18.2% increase on a year-to-year basis, amounting to INR 358.6 crores over the half year period, we observed a 19.3% year-on-year growth in revenue, much in line with the 20% target as a guidance of growth on a year-on-year basis.
PAT for the quarter registered a robust 42% on a year-on-year growth. Over the half year, it is even more impressive with 60% growth. Our growth in high-margin products encompassing CASA and CMS now represents 30% of the total revenue in quarter 2 FY '24, marking an increase from 26% a year ago. Our own revenue share increased from 65% in quarter 2 '24 to 69% in quarter 2 '24, which means 65% in quarter 1 '24 to 69% in quarter of 2, '24, leading to a net revenue margin expansion of 140 bps.
Fino's volumes have grown 40% on a year-on-year basis in quarter 2, '24 from INR 10,500 crores to INR 15,000 crores on account of new partnerships and incremental volumes of existing partners. Our transaction business has been moderately impacted in H1 '24 with ecosystem challenges, specifically on AePS front, however, we believe the same would phase out in H2 '24.
Regulators, banks and other fintechs have established controls to ensure all potential risks are mitigated. We are continuously investing in technology for enhancing the capacity for incremental volumes and building new product capabilities in digital space.
We are revamping our technology stack by making the core banking platform much lighter and faster. This means we are moving out some of the functionalities to outside the core. We have already started the journey of changing our core banking partner over the next 15, 18 years, so as to be technology ready for the future.
Consequent to our Board approval in July '23, we are actively preparing for submitting our application for the SFB and are also exploring avenues of corporate restructuring, as we mentioned in the last meeting. In the broader perspective, fostering digital penetration, along with profitability remains a pivotal role in a strategic road map. We remain steadfast in our commitment to delivering superior performance and enhancing shareholder value.
With that, I'd like to hand over to Ketan Merchant, our CFO, who will run us through the financial results. Over to you, Ketan.
Thank you, Rishi. Good afternoon, ladies and gentlemen, and thank you for joining us today once again on our earnings call. I'm delighted to announce that we built a consistent trajectory of profitable quarters. We have continuously achieved strong performance and present quarter is no exception. It marks another resilient and profitable period.
As Rishi mentioned, our performance in this quarter reaffirms our commitment to attaining our future goals particularly emphasizing a 20% year-on-year growth, which we've committed earlier. During the quarter, we further deepened our distribution network with around 68,000 new merchants onboarded in the quarter. This, coupled with digital penetration allowed us to improve accessibility and engagement for our customers.
Moving towards financial performance. For Q2 FY '24, our total revenue stood at INR 358.6 crores, up by 18.2%. Net revenue margin expanded by 140 bps to 33%. This is in line with our intended objective of focus on growth of high-margin products and has a direct impact on our bottom line to the extent of INR 4.5 crores. Our EBITDA margins have increased to 12.9% in Q2 FY '24 from 10.1% in Q2 FY '23. EBITDA has grown by 51% Y-o-Y to INR 46.2 crores in Q2 '24. Our PAT increased by 41.5% on a year-on-year basis to INR 19.5 crores.
During the quarter, our total throughput exceeded INR 86,600 crores, marking a substantial 43% year-on-year growth. Furthermore, as Rishi mentioned, our digital throughput experienced an impressive 120% year-on-year increase, reaching INR 23,000-plus crores and now represents 27% of throughput. These strong performance indicators lay a robust foundation for the future cross-selling opportunities, allowing us to capitalize on our existing base and expanding other services.
Just a quick recall of our H1 numbers. Our total revenue stood at INR 706.9 crores, a 19.3% year-on-year growth. Our EBITDA margins have increased to 12.3% in H1 from 9.1% in the previous year H1. EBITDA has grown by 60.3% Y-o-Y to INR 86.7 crores. Our PAT increased by 60% to a number of INR 38.2 crores. This is for H1 '24.
Moving on to the segmental business performance. Our revenues from CASA, savings in current accounts have increased by 38% year-on-year reaching to INR 75.2 crores. This growth is mainly driven by a significant surge in our renewal income, which has increased by 95% on a year-on-year basis and now stands at INR 30.3 crores for the quarter. The notable rise in our account subscription and renewal rate indicates the loyalty of our customers and underscores our status as a preferred bank.
This is the cornerstone of our planned ambition of SFB. In our Q4 '23 earnings call, we had stated that we will deepen our customer base in South and here I am with some statistics. We are happy to share that in a highly populated Karnataka and Tamil Nadu our customer base has increased by 129% and 92%, respectively, for the half year period.
We've also seen expansion in number of customers actively engaging with our digital services. Out of the total customer base of 9 million, 3.6 million or 40% are digitally active customers. We are consistently adding more than 2.5 lakh new customers every month, and more than 50% of these new customers are digitally active. This ongoing trend is expected to contribute to robust growth in deposit and as we expand our customer base.
Our average deposits grew by 53% on a Y-o-Y basis for the further quarter. The other key product which we essentially have is CMS, which is our driver and a high-margin product. Revenue from CMS stood at INR 33.5 crores, up by 38% in Q2. In H1 FY '24, the revenue saw an increase of 54%. On a Y-o-Y basis, throughput in CMS surged by 40% to INR 14,685 crores. It showed an impressive growth of 55% Y-o-Y for the half year period.
Out of the total throughput, NBFC and MFI sector contributed 65% in quarter 2 as compared to 92% when we started off the business in quarter 2 of FY '22. With an established diversified network of 189 partners, our strategic emphasis has been laid on partner diversification, resulting in a sustainable CMS growth.
We have strong presence across 14 states where in average monthly throughput is over INR 100 crores in Q2 FY '24. This number was at 12 states in Q2 FY '23. Here again, emphasis on diversification of geography as well as industries for CMS. Overall, CASA and CMS continue to be our high-margin products, delivering better than our expectations.
These business are poised for significant growth result in margin expansion and boosting the profitability of the company. As Rishi mentioned, the pace of UPI uptake is faster than anticipated, and we are uniquely placed to ride the UPI wave in our target segment.
Just to elaborate, in our endeavor to make customers more digitally savvy, there is continued effort to convert a micro ATM and AePS customers into a CASA customer and that is yielding results as evident in our digital growth, which we earlier mentioned is 120% on a quarter-by-quarter basis for the year.
While transaction business remittance and cash withdrawal business are witnessing some amount of system challenges, customer's funnel, which is the hook, which we use for enhancing our high-margin product is maintained, and that is evident from our transaction volumes.
Our Payment Services segment in B2B space, which are equally high margins, specifically on the UPI paying product is contributing 18% of the digital throughput in Q2 '24.
To conclude, I want to emphasize that we are successfully progressing through the acquisition phase, building strong foundation in infrastructure for monetization phase. In all of this, we continue to maintain our cost at reasonable levels, so that PAT growth continues to be 2 to 2.25x of our revenue growth. This is our stated objective, which we had maintained and we are working around the same.
With this, I'll just hand over the session for any questions.
[Operator Instructions]
The first question is from the line of Mr. Ashish from Infinity Alternatives.
Congratulations for a good set of numbers. A couple of things. One is we saw digital revenues kind of coming in at INR 18-odd crores for the quarter. What is the kind of gross margin on this product because I can't see that on the next slide.
Yes, Ashish, is that the one or...
The second one was in relation to the CapEx. If I look at in the 6 months, we've invested INR 50-odd crores in CapEx. Is that something which is -- which you expect to remain at elevated levels going forward? Or what's your outlook around that?
Okay. Let me take the first one first. You are right. As we've been saying it offline and Rishi and myself alluded a bit in terms of our statement as well that on the digital side we've been building our stack coming out. The margin out here, digital comprises of the payment services, the UPI pay in, which I alluded towards. And that's contributed to around 20% in addition to the retail UPI thing which we are doing.
There, as we mentioned it, our margin is equally high. We are looking at around 48% to 50% kind of a margin coming out in these products, which we've set. Having said that, I think it's the beginning, Rishi earlier mentioned that it's the beginning of our digital journey, and we will continue to do that.
Second question on yours comes on the CapEx side. Here I just go back to our statement earlier as well at the beginning of the year or the quarter 4 that we will continue to invest into technology and digital. The genesis of our capital was also to make this kind of stack.
If you ask me the question, how does the outlook look in terms of the CapEx, we will continue to invest over the next 3, 4, 5 quarters in terms of technology and digital. The impact of that coming in the P&L if that is what you were alluding towards. In the stated objective, which we have mentioned, which I just concluded my statement with that a 20% growth in top line and a 2.25x kind of a growth of that revenue -- coming in the bottom line, that already factors some of these CapEx, which is essentially coming and the testimony of digital starting to give this yield result is also a 0.2, I reckon. So that's where we essentially stand.
Sure. And the other question was in relation to SFB. When do you think you can -- on the SFB and the M&A, what are the time lines looking like on both of those?
On the SFB, more or less our application is ready, we are doing the final touches on that. So in the next 1 month or so, we should be able to file it with the regulator. On the SFB, we are looking for -- on the merger, we are looking forward to the guidance from our holding company Fino Paytech because they are waiting for some internal approvals to happen only then they will formally write to us for going ahead with the merger.
The next question is from the line of Ms. Shreya Shivani from CLSA India Private Limited.
I have two questions. First, it's not related to the business, but something that came in the media article about some employees undertaking certain fraudulent activities. So can you help us understand that better? And what are the steps you have taken to control such issues that could happen in an organization.
My second question is on the cross-sell products. So you had mentioned in the last couple of quarters that pilot -- cross-selling of loans are at the pilot stage for the merchants, et cetera. So if you can give us any update of how are the pilot programs going? What kind of experiences are you building in? And what kind of demand is coming in, that would be useful.
Thank you, Shreya. So let me first come to the first question. So you're right, there was an article and that actually came and we reported to the stock exchange. After that the article came. So there were some unauthorized actions and representations made by some alleged staffs as such.
We also believe there is some contributing negligence or possibility of collision on part of the certain complainants, which has led to some abnormalities and nonregulation to the regular process of a bank. So that's the broad thing which is there. This complaint came to us in the month of May, June, post that we had appointed KPMG on our own as management suo moto to look at the complaints independently both at the field level, largely this was field-related complaint.
Post that, we have also filed some police complaint and taken actions against some of our employees, which we found were not doing as per the stated process and in the right ethics of the bank. Until now, we have not received any legal case or legal complaint or any law enforcement agencies have been informed by the complainants against the bank.
The bank has not benefited or lost any amount on account of this. So prima facie based on this, there is no liability or impact on the bank as such, except for the -- some of the employees and some of these things which have come up in the media and the reputation, which got impacted on account of that. We will also like to reiterate that this has nothing to do with customer accounts. So that's why money which continues to be safe and secure, and we continue to work on our plans.
Post this investigation and everything else, we have further strengthened some of the processes, some of our employees' policies and knowledge nuggets, and everything else, so that this kind of thing doesn't happen in the future. So the company has taken all requisite answer -- requisite steps which are required when such kind of event happens. And I think we are in control of this situation, which is there. And as I mentioned, there is no legal liability, which has come on Fino, and there's been no case still now on us. So that's broadly on the first question.
The second question on the cross-sell product per se. So when we look at the cross-sell, lending is obviously one of the products which we would look at referring to, but one thing which is coming on our way from taking it to the market is the FLDG expectation because we were talking to some of the NBFC partners that without FLDG because payments bank cannot issue FLDG as such.
This matter was in grey area till the time RBI came out with that 5% FLDG regulation. So post that, we have seen most of the NBFC players are now insisting of a 5% FLDG. So to that extent, we are not in a position to provide because at the payments bank level, we can't provide any FLDG.
So because of which we are feeling constrained on account of that, while we see there is inherent demand from our merchants and customers for lending opportunities. But because of the drying up of lines, specifically because of the FLDG issue, we have not made substantial progress as far as lending is concerned.
But otherwise, when it comes to payments ecosystem or UPI ecosystem, I think there has been -- as I just mentioned in the previous question earlier, maybe 5% of our revenue now is coming from digital. So we believe, at least on that part, we are doing quite well. And we believe that, that business will continue to grow as we go forward.
Got it. So the cross-sell on the lending part, specifically, it is still something which remains restricted for you, right? Because of this. did I read that right?
Yes, you are right because of the FLDG constraint. That, I think, will come over as we move into an SFB mode.
[Operator Instructions]
The next question is from the line of Mr. Harsh Shah from Reliance General Insurance.
Congratulations team on the good numbers. So one of the questions which I wanted to understand is that how is UPI impacting our profitability. So we have moved in-house. So what are the economies we can see here.
Good question, actually. Some of it was captured in my opening remarks also, and I had spoken about this in the last presentation because when people look at the UPIs, you only look at 1 angle of UPI, which is that UPI is a 0 MDR product. But I think the life has moved beyond that. Obviously, if you can charge a small amount on UPI, it can lead to a substantial profitability for us and many other players in the market, specifically the banks, so to say.
But let me talk about our UPI strategy and maybe sometime if you plan to come to our office, we'll be more than happy to take you through our entire digital stack and the digital offering. But from a high level, I would say, see, as I mentioned, nearly 40% of our customers have become digitally active.
We did 37 crores of transactions on the UPI and it contributes to 1.25% of the overall throughput in the country. So as I mentioned also in my remarks is that India is moving digital, and UPI is driving that digital wave in a way. So usage of cash is coming down, and it is coming down at a faster pace than one would have anticipated 3, 4 years back. So this is inevitable. This is irreversible that UPI wave can be curtailed or any other thing can happen on the UPI side.
Further, the government is also putting a lot of other rails on the UPI stack. So for us, what does it mean? One is, obviously, if the MDR comes, it is going to substantially improve our profitability. But having said that, UPI also becomes the mainstay for our CASA customers. Higher transaction on the UPI platform or our UPI active customer gives us a higher volume of business. It also leads to higher renewal income. It also has a higher balances.
So from a UPI active customer, we see the transaction volumes are higher, the balances are higher and the renewal rates are higher. That's on the B2C side. On the B2B side, as I mentioned earlier or Ketan mentioned that we have started to provide UPI rails for pay-in products. Pay-in products are largely products where the merchants have to be paid.
So in that process, we are seeing a huge growth coming. So both on the B2C side as well as on the B2B side, UPI is substantially helping us to build our CASA base and to improve our profitability. Further, it can improve with the MDR. But having said that, I think this is something which we have to do. And we think this will drive the Fino from a physical to digital and will help us in taking a higher substantial number of accounts in the future as well.
One more thing on it. So what all products can we plan on a UPI stack? And are there any pipelines -- launch pipeline there?
So on the UPI stack, we have the normal UPI payment products, which are there. We are also starting -- we also started to open UPI stack, we have started to provide to our partners as well. We have also started to do UPI paying. Over and above that, we are looking at providing credit on UPI.
We are also looking at UPI LITE. So whatever is there in the UPI ecosystem, including UPI Collect. So all those functionalities will actually be -- most of it will be ready by March '24. With more functionality, we expect the volumes to further go up on the UPI side and also making our customers become active. In fact, 1 product like UPI LITE actually enables transactions of less than INR 2,000 without the PIN, without the OTP. So it makes life simple for our set of customers.
[Operator Instructions]
The next question is from the line of Mr. Ravi Mehta from Deep Financial Consultants Private Limited.
Just extending the previous discussion this -- the entire UPI stack and the whole host of services that you can provide. Is it again more of a hook to keep your customers engaged and hence more renewals or it's a moneymaking proposition? Is it accretive to earnings? Some color on that?
So on the B2C side -- so on the B2B side, there is obviously a charge, which we make to the B2B partner and through them, we make money. On the B2C side, on the B2C side, there are 2 propositions. One is the P2P and the other is the P2M. P2M is now constitutes nearly 55% to 60% of the overall transaction volume. On the P2M side, while there is no charge currently, but there is a MeitY charge which we receive from Ministry of IT. And so that is over and above. That's the charge which we receive on the P2M side. It may not be -- it may not cover the full cost, but there is still some recovery which we do.
On the customer side, this is a default option you have to give. It's like providing an Internet account to a customer or an app to our customer, you have to provide UPI, UPI is a default option now for every customer. If you don't have a UPI, probably you will not even open an account.
So it is from that point of view that the UPI becomes critical to open an account. I will not say that because of UPI, the balances are higher, I will say we have accounts because we have UPI.
Sure. Sure. And one thing was mentioned in the annual report that you're working on hauling the core. So that every transaction doesn't hit the core. So is it more like you're trying to create a wallet kind of structure where you enjoy a 0 interest float? Or if you can...
No, no, no. A very good question. I'm glad that you asked that question because that's one of our substantials, that's 1 of our projects, which we are monitoring at by level, and it is something which is very dear to my heart also. And this is something which is very important. I, in fact, covered that in my opening remarks also, but I'll reiterate. See, the world has changed in the last 7 -- maybe 5 to 7 years, where the volume of transactions were largely going through all core banking platform because the transaction volume in a bank account of our customers were not that many.
Now with all the digital play coming in, UPI becoming one of the mainstay, you would -- on an average, we are seeing 40 transactions on UPI platform for our customers on a monthly basis. So if that volume of transactions actually start hitting my core platform on a daily basis, which will further lead to some kind of slowness in the system or some latency would come in. And because for every transaction, there are a lot of engines which have to run in parallel, specifically when it comes to core banking platform.
So a lot of -- we are relatively a new bank compared to some of the older banks. But this is a challenge which is faced across all banking ecosystem around the world. For bigger banks and old generation banks, it becomes more difficult to move them -- move some of the functionalities outside the core because of the legacy which they carry.
In our case, fortunately, for us, we had built a lot of things already outside the core in part of our Phase I. As part of our Phase II, which we are now implementing in a way getting ready for 2030 plus. We are now moving a lot of functionalities, which are still in the core banking platform outside the core and making the core very lighter and it can then result in faster turnaround also. So not only that we are looking at hauling the core, but we're also in the process of changing our core banking partner as such. And the work has already started. We are more than 6 months to 9 months into the process.
We are hoping that in the next 15 to 18 months, we should be not only looking at a new banking partner, but also hauling the core, which means that the entire control will come into us. I'll just give you one more example. In March of 2023, we actually moved our UPI, which until that point of time like many other banks, UPI, which was with a third-party service provider. And we were at the, in a way, not to say, but just in a way at the mercy of that third-party service provider to give us the right kind of products and manage our growth.
Post that, we have seen in the last 7 months, 8 months of our switch moving away from a third party tool and in our control, and we have -- now in-house, we have the switch in our in-house facilities. We have developed it as well as we manage it. So we are seeing a substantial growth, I would say, more than double growth we have seen in the last 7 months, with near 0 technical declines and very, very low or limited -- very little latency or maybe 0 latency as such, so -- and plus products.
So going forward, technology will play a very important part in any bank because the entire ecosystem is becoming this digitally savvy and banks who don't invest in technology today will face a problem when we get into the future of the country because it around 20 crore people are using UPI today, 5 years from now, you will see 50 crore people using UPI. And that volume if it starts coming and hitting your core banking or your existing technology platforms, you can imagine the amount of bloodbath, which will be there on the banking systems. So good that we have started this about 6 to 9 months back.
So when we see CapEx spends of close to INR 50 crores in first half, it is towards these initiatives or something else?
So this is a mix of multiple initiatives, one is capacity also. So our volumes, as you see, 50% growth in capacity has happened. So we have to continuously look at capacity increase. A lot of investments actually goes into securities, cybersecurity and other features also, software. The cost itself of technology solutions started to move up. And plus, also it looks at some part of hauling the core is also included in this. The core banking platform migration and everything is still not factored into this that will come in the future months more as a CapEx. Probably Ketan can talk a bit on that. Ketan?
Thank you, Rishi. Just to answer your question, the question which Ashish asked and you were alluding towards the INR 50 crore CapEx, that is largely on account of technology and digital. Rishi rightly bifurcated it off. We are also increasing our capacity. The growth, which we've seen INR 1.6 lakh crores of throughput, which is essentially coming and that is also essentially growing.
So we are building the technology and digital stack into this. We also in-housed the UPI switch. And just to corroborate, since we are talking about the benefits of the HVC besides the agility, the UPI switch, essentially ended up giving at that point of time, INR 4.5 crores to INR 5 crores of bottom line impact coming as well to us. So we will continue to put a perspective.
In regards to specific point of Rishi in terms of the core banking, we started the project and like any other change in core banking, it is a massive project which will go up to 18 months as well as Rishi said. From a business model perspective, I come back to the earlier conversation as well. The business model, which we envisage and which we have stated for the 20% growth and 2.25x of the profitability of that growth factors, the depreciation coming on account of this in the years to come. As we speak this year, this year, there might be a minimal to no impact coming essentially on account of anything on the core banking. As and when the project progresses over next 3,4 quarters, the depreciation line on account of core banking will also be impacted, but it will be in line with the model which we have made.
[Operator Instructions]
The next question is from the line of Mr. Divyansh Gupta from Latent Advisors LLP.
So one question, a follow-up on the tech expense. So is the tech expense also being incurred for the SFB development because what I understand RBI process, there is a principle approval then a final approval after which you can go live, there is the CSA audit and other things. So is the tech expense and tech efforts that are being taken right now are also to prepare ourselves for the SFB, which might be, let's say, 2 years down the line because the application takes time and other stuff or this is just purely for the payment bank optimizations.
So yes and no, I would say. So while we -- this technology expense or the core banking expense doesn't include the platform for underwriting our loan management system or loan originating system, that will come over and above once we have the in principle approval from the regulator. But having said that, still, what we are building today will become more and more relevant as we move into an SFB because all of the core and the fact that a lot of things we are building is outside the core banking platform, which gives us the ability tomorrow in the line as a SFB, we'll be able to build a lot of things outside as well.
So whatever we are doing now will definitely help us, no doubt, it's largely for the payments bank, will definitely us on the SFB side whereas specific platforms on LOS, LMS will come at the subsequent date.
Got it. Understood. Understood. One data keeping question. I was going through the annual report. And in the operating expenses, there is this other expenditure, which is about 75% of the overall expenditure. Can you just throw some light what are these expenses incurred on? And what are the biggest categories? And how much do they contribute to the overall expenses?
Yes, Harsh -- sorry, Divyansh, RBI prescribes a particular format in which the Schedule 16 of the annual accounts, so it should be given in operating expenses. Now what happens is for a typical lending institution, the key expense essentially becomes an interest expense and NII becomes the key driver. For us, if you see in our income as well, other income constitutes 90%. And similarly, other expenses is nothing. If you see our presentation, Slide 13, we call it as a product cost.
So product cost is nothing the way our business model works. We don't operate through fixed costs. We operate through variable cost, which is where the merchant and the entire ecosystem comes. In simple terms, distribution cost, which we end up giving to our agents who are variablized and linked to the sales, we call it as product cost and becomes a part of the major expenses. And that is where we again say that around 70% plus of our OpEx base is variable in nature and is connected to this. In simple terms, product cost and the distribution cost.
Got it. So let's [Foreign Language] if our other income is around, let's say, INR 100, then out of that INR 100, INR 70 will be the OpEx cost or the product cost, and that INR 70 is more or less captured in that other expenses.
Yes. To be very precise, this time, as I mentioned in one of my statements, this time, I think the net margin which we see is around 33%. So given by your example, 167 and 33. And from 33, then we come to the OpEx and depreciation and so on and so forth. And that's how we come to a number of around INR 19.5 crores for the quarter.
And therefore as --but you are saying something...
Not applying the traditional banks P&L format to this, but this is a prescribed format by RBI. So in that annual report, it is there.
In Slide 13, we showed it in a simplified form, the way I mentioned.
I understand that RBI format. So then as digital adoption increases, product cost will also come down because you will have lesser incentives to give to the distributor. Is that a fair statement?
Yes, I think it's a good point, which you are saying. The product cost depends upon the kind of margin, which we have set. In our statement, we essentially said that CASA and CMS and also the digital B2B business. If typically my business or product margin, which is 54% in CASA and around 40% in CMS and around 40-odd percent, 48-odd percent in the new product, which we just said, the more these products become the pie of revenue, the product cost, I mean the net revenue will keep on increasing. And obviously, one point, which is there is our operating leverage. I just want to reiterate that operating leverage of maintaining the leaner cost will continue to be our USP and we will function on a lean cost to income ratio. And here, the cost to income ratio, I refer is the operating cost other than product cost to the total revenue.
Got it. Understood. And just one last question, and [Foreign Language] it is more futuristic when let's say you become an SFB. Do you see CMS being at risk because banks might not be comfortable in another competing bank handling their CMS because right now, you are not competing for the -- like an NBFC or an MFI, you are not competing for the same set of customers. But does it become a challenge in the future? Or is it just a cash movement service and it doesn't matter.
So it's a good question. I don't see there is going to be a challenge. If I look at the consequence of our CMS of around 55%, 60% comes from the NBFC, MFI portfolio, and the rest comes from other industries, the e-commerce, the logistics, CRA. So that part will not get impacted at all. The other on the NBFC and MFI, largely, these are agents who come and deposit money at our centers. So customers coming and depositing money will be a small portion than the agents who collect from the customers and give it to us. And if I see most of the banks are already providing them the same services. So NBFC's, MFI's are already using other banks also.
So for them to use us, will not be a challenge. And then SFB, we may see more banks coming to us from a CMS also as such. But I don't see it to be a challenge at this stage at all. Absolutely not.
Got it. Because my understanding was usually the MFI loan officer will go and collect and then he will go and deposit in a bank. But now you're saying an agent or a customer walks in...
Rather depositing in the bank, they come in and deposit as a merchant. So bank is only working from 10:00 in the morning till 02:00 p.m. So only 4 hours they have. And during their morning hours and everything, they are themselves collecting money from the merchant, from the customers. So by the time they collect money, it's already afternoon and then to go to a bank to deposit, it becomes more cumbersome and specifically over the weekends, also where do they go and deposit. So that is where we provide them a very good alternative.
How should I say, banks have become another -- bank has become an alternative to what we know is providing as far as NBFC, MFI is concerned for depositing cash.
Understood. And just 1 more question, if I may ask. Can I go ahead?
Yes, yes, please.
Yes. So on the last call, there were some discussions on CMS and collections and one was having a view that it's a similar service. But being from the industry, and having done that, I know that when you are managing cash and a customer coming and giving to you versus collections for your overdue accounts is a different process altogether, right?
Yes, yes.
So have we given a thought of -- because last time when it was in discussion, it was that there won't be any additional hiring at the branches for collections. Has there have been a relook at this or we are still confident that we won't need to hire more people for overdue collections, normal correction, I understand, but now overdue collection is the question that I have.
So your point is valid. So when we look at from an ecosystem point of view, largely if we look at the large institutions or the NBFCs or even the fintech companies, they don't have any physical presence. We have physical presence across the country. So there can be multiple modes in which these collections -- overdue collections can be looked at. One is the merchant themselves who source the loan can become an agency to collect overdue collections as part of his collection percentage or efficiency percentage, or over and above also from an incentive point of view.
Secondly, we also have about roughly 2,000 employees over there on the ground, we can use that network also to help us collect the money. And also just to reiterate it's not like we are -- as an SFB we are going to open up all the geographies at the same point of time. We are also going to phase it and open up in geographies where we are much stronger and then we go deeper into that geographies and parallel geographies.
So over and above that, I think there are a lot of collection agencies also who have come up in the last few years as such. So we believe we can manage the collections pretty well. Having said that, when the rubber will hit the road that is only when we can see. Definitely, your point is very valid, and we'll put that as part of our strategy -- it's already part of our strategic thinking, but you have a very valid point.
[Operator Instructions]
Next question is from the line of Mr. Mayur, an Individual Investor.
Congratulations on the good set of numbers. Actually, my question was regarding when we onboard merchant, what due diligence we perform? And my second question is what is the merchant attrition rate?
Okay. Mayur, just take your first question. For us, a merchant is like a customer. So whatever KYC norms which we follow typically for a customer and which is mandated by RBI we attempt to follow all of those, which are there for the merchant. See at the end of it, our model is such that he earns and we earn and he handles the control function or he handles -- he's a representative for the bank out there.
So in simple terms, whatever the KYC norms which are essentially there and maybe even more, we just go and see his capacity, how well he's equipped to service our eventual customers that's what we essentially try and do that.
There are various checks which happen on the field and also happen off the field from the back end as well in terms of onboarding a merchant.
Okay. And my second question was regarding merchant attrition rate. And what happens to the customers, which are the merchant serving which got off from your platform?
So it's a very good question, and it actually puts a perspective to the entire business model. See lot of times in last 3 years, I have been asked this question that does the merchant have exclusivity with you, okay? I should just reiterate it off that no merchant in this entire business has an exclusivity with you, okay? A merchant typically will have 2 to 3 kind of handles which are essentially there.
Now in such a scenario, What difference it makes, okay? Just to give you a number, approximately 50-odd percent of our merchant base is active, and that's what we attempt to leverage. Why would merchants be more active on us as compared to other players is 2 reasons out here is, one is we are a bank. A bank following a model of BC is something -- or which generates a lot more confidence in terms of -- as compared to the other fintech players, which we essentially do it off.
The biggest incentive why a merchant would be active is the amount of products which he can sell through us as compared to other fintech players. For other fintech players, he can largely do a remittance or a MicroATM, AePS. For us, the CASA or the account opening is also a moat which he essentially adds. Just to reiterate the 50% sort of active merchant which we have and merchant is as good as a customer and moat for us.
Okay. So why I'm asking this question is actually when actually 40% of our customers are digital savvy, but the rest 60% treat the merchant or the shop of merchant as a branch. So when this merchant cut off from your system, so how we handle those customers. How we provide better services to them, what they know is the merchant, but if merchant cut off from our platform, then how we provide services to them if they are not digitally savvy and specifically, we don't have a physical branch presence in those areas.
Good question, Mayur. Just to again give an answer, just to put a perspective, the 40% of our own merchants -- I mean, 40% of our own customers are active on digital. However, we need to look at the galaxy wherein how do we get these customers, our own customers. During the statement, I think I just mentioned a point that the footfalls. We have approximately 2.5 crores odd footfall coming on to our merchant points.
Mind well, these are not our banking customers. These are the customers who come essentially for -- who are other bank customers and perform all of these transactions. So when all of these transaction comes, our merchant who is growing -- maybe in the last quarter, we had some 68,000 merchants growing. Those guys will attempt to convert an off-line or offers customer to our customer and then we will attempt to give this kind of a perspective, and this kind of a service to him.
Our merchant will facilitate and we incentivize the merchant to take the customer to the digital as well. Here, we are not talking about a typical urban customer. We are talking about a customer who is nonurban. And for him, the digitalization journey is in the relative nascent stage or we are the ones who are triggering that digitalization journey for him.
And one another question, if I can ask, is regarding our CASA and CMS segment is growing very well at the rate of 35% to 40% CAGR and rest 50% to 60% of our product portfolio is stagnated in growth. So once our CASA and CMS portfolio takes bigger chunk of our revenue, so isn't our top line growth will be more than 20%.
Well, I do not want to comment about how the top line growth will go beyond the stated objective, which we are looking at. One thing which I can definitely say with CASA and CMS, and this I answered in one of the earlier question as well, that the CASA and CMS growth definitely enhances the margin, which I said was 33% in terms of -- after deducting the product cost.
So that -- any high-yielding product, if it continues, will definitely result in a higher profitability coming as well. In terms of other aspects where specifically CASA can help us, going back to Rishi's point on the SFB vision, which he mentioned as well, once you are owning the customer a lot more things can be essentially done with the customer as well. So that's where our acquisition phase is going through.
In the interest of time, that would be the last question. I would now like to hand over the conference to the management for closing comments.
Thank you for participating in the conversation today. As I mentioned earlier, the company is actively focusing on the TAM strategy where we are looking at transaction as a hook and then building up the acquisition platform. Fino 2.0, which is largely around digital is also progressing well. We expect that more products and more B2B lines of businesses will come as we move forward into our journey. We have spent quite a bit on the technology -- we have spent quite a bit of time today on the technology part, explaining how technology is important and how it is to be built up for the future. And I think that is something we will continue to strive and be on top of it. Our SFB aspiration is very much there, and we are building our internal things around that. Our application is more or less in the final stages, we should be able to file in the next month or so. So those are from our side, and we look forward continuing support from all our investors and analysts. Thank you very much.
Thank you, everyone.
Thank you, sir. On behalf of Go India Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.