Housing Development Finance Corporation Ltd

NSE:HDFC

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to HDFC Limited Q1 FY '23 Earnings Conference Call.

[Operator Instructions]

Please note that this conference is being recorded. We have with us Vice Chairman and CEO; Mr. Keki M. Mistry; Managing Director, Ms. Renu Sud Karnad; Executive Director; Mr. V.S. Rangan; member of Executive Management and Chief Investor Relations Officer; Mr. Conrad D'Souza; and General Manager, Ms. Anjali Tarapur. I now hand the conference over to Mr. Keki M. Mistry. Thank you. And over to you, sir.

[Keki Mistry, executive]

Well, thank you very much, and good afternoon, everyone. At the outset, I would like to welcome all you to HDFC's earnings call for the first quarter of the current financial year. The Board of Directors at this meeting held earlier today approved the financial results for the quarter ended June 30, 2022, which were subjected to a limited review.

Let me start with outlining a few developments in the economy over the last 3 months, which have a bearing on the corporation. The Monetary Committee at its meeting held in May 2022 and June 2022, respectively, increased the policy report by an aggregate of 90 basis points. This was mainly on account of the uncertainty in the inflation category. As a result, there has been an uptick in interest rates. Consequent to which, we have increased deposit rates as well as rates on our loan products. As we will discuss later, the interest rate actions have had a short-term impact on both net interest income and net interest margin during the first quarter.

In July 2022, the RBI increased the limit of external commercial borrowing under the automatic crude from USD 750 million to USD 1.5 billion [ the full year ]. We are in the process of raising funds under this window of about USD 1.1 billion.

The momentum in the economy was extremely strong throughout the quarter and is reflected in pickup in individual loan disbursements and a 19% growth in the individual loan book, which is the highest growth that we have achieved in the last 32 quarters. Similarly, collection efficiency has continued to improve month-after-month, with over 99% collection efficiency on a cumulative basis during the quarter.

Over the next few minutes, I will give you a summary of the key highlights of the performance for the quarter. Let me start by quickly summarizing the progress of our business throughout the first quarter.

Our individual loan approvals for the quarter ended June 30, 2022, were higher by 60 percentage compared to the corresponding quarter in the previous year. For the quarter ended June 30, 2022, individual loan disbursements grew by 66% over the corresponding quarter in the previous year. Disbursements in quarter 1 were the highest-ever disbursements in the first quarter of any financial year and were over 60% higher than the previous best. Housing disbursements constituted 93% of individual disbursements in the first quarter of financial year '23. Growth in home loans was seen in the affordable housing segment as well as in the middle and high-income groups. 92% of new loan applications were received through the digital channel.

During the first quarter, we sold individual loans aggregating to INR 9,533 crores. The individual loans sold during the last 12 months amounted to INR 32,499 crores. These loans were all assigned to HDFC Bank pursuant to the market sharing agreement with them. Individual loan book growth on an AUM basis was 19%. If the loans amounting to INR 32,299 crores had not been sold during the preceding 12 months, then the growth in the individual loan book would have been 28%. This is the highest percentage growth in the individual loan AUM in nearly 8 years. Our individual loan book increased to INR 4,47,402 crores, a growth of 19% over the previous year. In addition to this, the individual loans sold by the corporation and outstanding as on June 30, 2022, amounted to INR 88,836 crores. HDFC continues to service these loans. Actual loans outstanding on an AUM basis amounted to INR 5,36,258 crores.

As at June 30, 2022, our nonindividual loan book grew by 8% on an AUM basis compared to the previous year. We continue to have a reasonably healthy pipeline of non-individual business over the last 12 months. We have also seen some repayments and prepayments of earlier [indiscernible] and resolution of some stressed assets. And this has resulted in a lower growth in the nonindividual segment.

We currently have a good pipeline of construction finance loans as well as in the lease rental discounting segment. And we expect nonindividual AUM growth to accelerate in the coming quarters. The overall loan book is now INR 5,81,040 crores, a growth of 16%. The total assets under management as at June 30, 2022, amounted to INR 6,71,364 crores as compared to INR 5,74,136 crores in the previous year, a growth of 17%. If the loans have been sold during the preceding 12 months, then the growth in the total loan book would have been 23%. Prepayment on retail loans on an annualized basis amounted to 10.2% of the opening loan book. This is within the normal range, which is between 10% and 12%.

The average size of individual loans for the quarter ended June 30, 2022, stood at 35.7 lakhs as compared to 33.1 lakhs in FY 2022. The contribution in value terms from the higher income group, defined as customers with an annual family income of INR 18 lakhs or more, has increased during the year to 50% from 45% during the corresponding period in the previous year.

Our thrust on affordable housing loans continued. During the quarter ended June 30, 2020, 23% of home loans approved in terms of number of customers and 10% in value terms were to customers from the economically weaker section and the lower income group. The average home loan to customers in the economically weaker segment amounted to INR 11.1 lakhs and to customers in the lower income group segment amounted to INR 19.7 lakhs.

If we break up the loan book outstanding on 30th June 2022 on an AUM basis into different categories, then individual loans constituted 79% of the total loan book, the same as compared to the previous year. Construction Finance constituted 9% of the total loan book. Lease rental discounting loans constituted 7% of the total loan book, while corporate loans constituted 5%.

If you were to look at the incremental loan book growth then for the quarter ended June 30, 2022, the entire growth is from individual loans. However, we expect the proportion of individuals to non-individual AUM to normalize in the coming quarters.

97% of the loans were sourced through distribution channels. However, this is largely through HDFC Sales, 100% subsidiary of HDFC Limited, as well as through HDFC Bank. HDFC Sales accounted for 50% of the loans sourced while HDFC Banks accounted for 30%. Third-party DSAs accounted for [indiscernible]. Thus, 83% of HDFC's individual business was sourced directly or through our associates.

The Emergency Credit Card Guarantees team was extended to mitigate the economic distress caused by the COVID pandemic. Under ECLGS 1, 2 and 3, the corporation has approved an aggregate amount of INR 217 crores. Of which, 80%, that is INR 1,764 crores, has been disbursed in June 30, 2020. Amounts disbursed under this facility are guaranteed by the federal government.

The Reserve Bank of India has committed a onetime restructuring of loans under [ resolution ] for COVID-19-related stress. As at June 30, 2022, the outstanding loans under Board OTR 1 and OTR 2 together amount to INR 4,410 crores, equivalent to 0.77% of the loan as compared to a peak of 1.4% on September 2021. 98% of the OTR loans are in the individual loan book.

The overall collection efficiency for individual loans sales continued to improve month after month and is now even better than during pre-COVID levels. The average collection efficiency for individual loans on a cumulative basis over the last quarter is over 99%.

RBI had on November 12, 2021, issued guidelines on harmonizing NPAs across the financial system. Subsequently, RBI deferred the effective date of the applicability of [ months ] to September 2022. The corporation however has continued to report NPAs for the quarter ended June 30, 2022, in accordance with the revised RBI circular of November 12, 2021.

There has been a significant improvement in asset quality over the last 12 months. To facilitate comparison on a like-for-like basis, we have compared the nonperforming assets based on the old method of computation. Since in June 2021, it was old method that was prevailing. As of June 30, 2022, calculated under these old norms, gross loan performing individual loans, 0.75%, down from 1.37% in June 2021, which is a 62 basis points reduction or a 45% improvement in percentage terms. The overall gross nonperforming loans stood at 1.61%, down from 2.24% in June of 2021. This amount [ to 3 ] basis points reduction or a 28% improvement in percentage terms.

Let me now come to the nonperforming loans calculated [indiscernible] RBI norms. As of June 30, 2022, calculated under the new norms, gross loan performing individual loans stood at 0.98%, down from 1.44% in December 2021. Similarly, gross nonperforming nonindividual loans stood at 0.44%, down from 5.04% in December 2021. December 2021 was the first quarter when we were required to report NPA under the new norms brought in by RBI. As per the new regulatory norms, the gross nonperforming loans as of June 30, 2022, stood at INR 10,288 crores, equivalent to 1.78% of the loan portfolio, down from 2.32% in December '21, which is the time when we first reported the number.

As at June 30, 2022, the corporation carried a provision of INR 13,328 crores in the balance sheet. Under index accounting norms, both asset classification and provisioning have moved from the incurred loss model to the expected credit loss model for providing for future credit losses. Based on this model, the total exposure at default of INR 5,79,988 crores is broken up as under Stage 1 constitutes 93.5%, Stage 2 is 4.4% and Stage 3, 2.1%. We have seen a 2.7 percentage point reduction in the aggregate of Stage 2 and Stage 3 assets, from 9.2% in June 2021 to 6.5% of the exposure at default as of June 2022. During the quarter, we have charged a profit and loss account with a sum of INR 514 crores loss provision.

The ECL to AB coverage we show for Stage 2 assets is 23%, and for stage 3, it's 53%. The provisions carried as a percentage of the EAD amounted to 2.30%. Annualized credit cost for quarter 1 was 33 basis points compared to 50 basis points during quarter 1 in the previous year. As stated in our earlier earnings call, as asset quality-related issues result, we should over the next few quarters be in a position to further normalize the credit costs to pre-COVID levels. This in turn a positive impact on the return on equity.

We continue to hold all our investments in HDFC Bank, HDFC Life, HDFC Asset Management, and all other subsidiary and associate company at the original cost of acquisition, which is the price we have paid whilst making those investments. These investments are not accounted for on a fair value basis. If we were to mark-to-market the listed investments as at June 30, 2022, the unrealized gain which is the difference between the market price on 30th June 2022, recurring costs would be as much as INR 2,17,223 crores.

This unrecognized gain is not part of our network, nor has it been considered in our capital adequacy calculation. Our capital adequacy ratio on June 30, 2022 stood at 21.9%. Of which, Tier 1 capital is 21.4% and Tier 2 capital at 0.5%. The capital adequacy is well above the regulatory plan. Dividend at INR 30 per equity share of [ INR 2 each ] for financial year 2022 was approved by the shareholders at the Annual General Meeting held on June 30, 2022, and has been accounted for in the first quarter.

At this stage, it is important to talk about the return on equity. Under the IndAS accounting requirements, net worth includes certain items which do not form part of Tier 1 capital under the prudential regulations. These include IndAS transition reserve, deferred tax liability on special reserve, fair value gains on investments to OCI, investments in subsidiaries and associates in excess of 10% of the net own funds, and securitization gains recognized upfront in accordance with IndAs requirement. These items aggregate to INR 19,886 crores. Hence, Tier 1 capital is INR 98,455 crores as against the reported net worth in June 2022 of INR 1,18,341 crores. A more appropriate way of calculating the return on equity would therefore be on regulated regulatory Tier 1 capital as against the conventional method of computing it on total net worth.

Annualized return on equity based on Tier 1 capital for quarter ended June 30, 2022, is 15%. As at June 30, 2022, the corporation's total borrowings amounted to INR 5,17,452 crores. Term loans, including external commercial borrowings of USD 1.6 billion equivalent and refinance from the National Housing Bank, accounted for 26% of the borrowings. Market borrowings, that is NCDs and commercial paper, accounted for 41% of the borrowings. Deposits as at the quarter end amounted to INR 1,17,823 crores and constitute 33% of the borrowings.

Further to RBI increasing the limit of external commercial borrowing under the automatic route, the corporation is in the process of raising a 3-year external commercial borrowing for home lending for affordable housing, and the facility will also align with some of the sustainable development goals. Further details will be intimated shortly, but the expected all-in cost on a fully hedged basis will be comparable with domestic borrowing rates for a similar tenor. Our immediate plan is to raise an amount of USD 1.1 billion.

I will now move to the statement of profit and loss account. The first quarter has seen a somewhat volatile interest rate environment. And therefore, some of the numbers of the current year are not very strictly comparable with the previous year.

Firstly, as mentioned earlier, net interest income and net interest margin were temporarily impacted by the mid-month increase in rates in both May and June and the transmission lag between the increase in borrowing costs and the increase in lending rates. I'll come to that in a minute.

Secondly, as a result of volatile equity markets, the gain on fair value of investments to the profit and loss account was just INR 80 crores in this quarter. And this compares to as much as INR 402 crores in the first quarter of the previous year. Thirdly, the expense ratios are higher as we incur expenses upfront from staff paying, loan processing and branching to meet the significant increase in demand for housing loans. There was also an increase in legal expenses during the quarter as we saw an increase in business as well as resolution of some stress tests. Needless to add, while these expenses have been incurred upfront, the benefit of the expenses incurred will accrue over the next few quarters.

On the positive side, it is important to note that credit costs are lower than the credit costs in the corresponding quarter in the previous year as a result of improved asset quality and higher collection efficiency. Dividend in the first quarter is higher than the first quarter of the previous year, primarily on account of dividend received from group companies. Dividend from HDFC Bank will be received in the second quarter.

Before I get to the net interest income, let me detail issues which have had an impact on the net interest income. In the first quarter of financial year 2023, we have had great actions which have had an immediate impact on borrowing costs, which in turn have not been simultaneous with the transformation of rates on the asset. Secondly, in the first quarter of the year, there was a disruption in the business activity in the economy as a result of the second wave. As a result of ample liquidity in the system during quarter 1 of last year, the overnight interest rate swap, which is the OIS rate on with some swaps are benchmarked, dealing from the reverse reporting and was lower by [ 2 ] [indiscernible] during that quarter. This led to us benefiting from the lower swap rates, which resulted in an expansion in NIM to 3.7% during the first quarter of the previous year. At that stage itself, we had categorically indicated that this level of NIM was not sustainable, this delinking connected in the latter half of last year.

Thirdly, in May 2022, RBI increased the repo rate by 40 basis points. And there was a further increase of 50 basis points in the repo rate in June 2022, making it an aggregate of 90 basis points during the quarter.

As you are aware, each individual loan has a quarterly reset mechanism and is based on the original month in which the loan is discussed. Thus, in the event of any interest rate change in the entire loan portfolio reprices over a 3-month period, that is roughly 1/3 of the portfolio reprices each month. Thus, whilst we have had an immediate impact on borrowing costs, the lending portfolio will reprice over a quarter. This transmission lag has had a material impact on NII growth for this quarter. We have passed on the increase in rates by increasing our CLRs by 90 basis points. But there was a short-term impact of NII growth during the quarter. This should be regularized over the next few months. We have seen since revised the reset norms for our incremental individual loans from a quarter to a monthly cycle to reduce the impact of transmission of rate changes. This should minimize the risk of transmission in the event of any future rate hikes for new loans. Lastly, the proportion of the retail loan book has increased to 79% over the last 2 to 3 years.

Net interest income, purely on the basis of interest without taking cognizance of the profit on sale of loans during the quarter ended June 30, 2022, amounted to INR 4,447 crores compared to INR 4,125 crores in the [indiscernible] quarter of the previous year, a growth of 8%. If we adjust for the onetime impact of the transmission lag, in passing on the rate hikes to the customers as well as the impact of the swap benefits in the previous year, the NII growth would have been 16%, which is in line with the growth on the AUM.

Net interest margin for the quarter ended June 30, 2022, stood at 3.4%. The spread of loans over the cost of borrowing for the quarter ended June 30, 2022, was 2.25%. Individual loans carried a spread of 1.91%, the nonindividual book, 3.45%. The spread on loans during the first quarter of the previous year was 2.29%. Income earned from deployment of surplus funds and cash management schemes of mutual funds and government securities was much lower at INR 39 crores as compared to INR 124 crores in the first quarter of the previous year. This was largely due to average levels invested this year in liquid funds at about INR 3,900 crores as compared to INR 15,500 crores in the corresponding period of the previous year.

With the introduction of the liquidity coverage ratio in December 2021, the corporation's liquidity is largely held in government securities. The government securities holding as of June 30, 2022, is around INR 36,000 crores. The average level of liquidity held during the quarter was INR 40,000 crores as compared to INR 38,000 crores in the first quarter of the previous year.

There was a profit of INR 184 crores on CLF investments during the first [ quarter of ] this year compared to INR 263 crores in the first quarter of last year. This year's profit was on account of the corporation's 10% stake sale in HDFC Capital Advisors. The profit on CLF investments in the first quarter of the previous year was on account of divestment of a small part of our stake in HDFC Ergo and the entire stake in Good Host Spaces, which was an associate company.

Dividend received during the quarter was INR 687 crores compared to INR 16 crores in the first quarter of last year. Dividend during the year was received predominantly from our group companies, namely HDFC Asset Management, HDFC Life, HDFC Sales and HDFC Credila. Dividend from HDFC Bank was received in July 2022 and will be accounted for in quarter 2 of the current financial year.

During the quarter ended June 30, 2022, for investments classified as fair value to profit and loss account, the net gain on fair value changes stood at only INR 8 crores, much lower as compared to INR 402 crores corresponding quarter of the previous year. This is largely on account of the volatility in the equity markets during the quarter.

Under IndAs accounting standards, the stock options granted to employees are measured at the fair value of the options on the date of grant. This fair value is accounted for as employee compensation costs over the resting period of the options. Accordingly, employee benefit expenses for the quarter includes an amount of INR 76 crores compared to INR 146 crores during the first quarter of the previous year. The current year's charge includes an amount of INR 18 crores, but then increased [indiscernible] in the first quarter.

For the quarter ended June 30, 2022, the cost-to-income ratio stood at 9.5%. The cost-to-income ratio was higher during the quarter as a result of the increased retail business over the last 6 months as well as the increase in the branch network to cope up with this higher volume. The benefit of these cost increases will be derived over the next few quarters. Increased legal costs also contributed to the increase in the cost to income ratio. We expect the cost to income ratio to remain in single digits for the year.

For the quarter ended June 30, 2020, the standalone profit before tax was INR 4,590 crores compared to INR 3,905 crores in the first quarter of the previous year, a growth of 17.5%. Tax provision during the first quarter amounted to INR 921 crores compared to INR 904 crores in the first quarter of the previous year. The tax rate for the quarter was 20.1% compared to 23.1% in the corresponding quarter of last year. The tax rate is lower than the previous year, as dividends earned from group companies is set up against dividend paid by the corporation, and hence, the dividend income is tax free. The stand-alone profit after tax for the first quarter stood at INR 3,669 crores compared to INR 3,001 crores in the first quarter of the previous year, resulting in a growth of 22.3%. Pretax return on average assets was 2.9%. Post-tax return on average assets was 2.3%.

The basic and diluted EPS, on a face value of INR 2 per share, was INR 20.2 and INR 20.1, respectively. The consolidated profit before tax for the first quarter stood at INR 6,544 crores as compared to INR 6,295 crores last year. After providing INR 970 crores of [ tax quarter ] around last year was INR 984 crores. The consolidated profit after tax for the first quarter stood at INR 5,574 crores as compared to INR 5,311 crores. The profit attributable to the corporation was INR 5,308 crores as compared to INR 5,041 crores in the corresponding quarter.

As at June 30, 2022, the corporation had 3,766 employees. Gross total assets per employee stood at INR 169 crores per employee compared to INR 164 crores in the corresponding period of the previous quarter. Annualized net profit per employee was INR 3.9 crores compared to INR 3.6 crores during the first quarter of the previous year.

Let me spend a couple of minutes to give you an update on the merger. As you are aware, on April 4, 2022, the Board of Directors of HDFC Limited and HDFC Bank approved a composite scheme of amalgamation of HDFC with HDFC Bank, subject to requisite approvals from various regulatory and statutory authorities, respective shareholders and creditors. Upon the scheme becoming effective, subsidiaries and associates of the corporation will become subsidiaries and associates of HDFC Bank. HDFC Bank will then be 100% owned by public shareholders and existing shareholders of HDFC will own 41% of HDFC Bank. Both the stock exchanges, the NSE and BSE, Pension Fund Regulatory and Development Authority and RBI have accorded no objection for the merger. The application has been made to the CCI, to the Competition Commission, and we are awaiting approvals.

HDFC's distribution network spans 695 outlets, which include 214 offices of HDFC's wholly owned distribution company, HDFC Limited. HFDC covers Additional locations through its outreach program. We continue to engage deeply with all our stakeholders on the industry. Our disclosures and reports are on our website. The business responsibility and sustainability report was [indiscernible] by SEBI, which would be a mandatory requirement from financial year [indiscernible]. On a voluntary basis, the corporation has prepared this report for financial year 2022, and the same is hosted on our website. The integrated report for the year ending March 2022 has also been released, and it was still on our website. For further information,on ESG-related queries, you may engage with our Investor Relations team, Anjali and Conrad.

During the period, the corporation's corporate social responsibility activities focused primarily on COVID-19 relief, allocation, education and livelihood. Additionally, a support for the specially abled cut across all our focus areas. CSR activities were conducted either directly or through the HDFC Product Foundation. The CRR spend during the quarter was at least INR 65 crores.

The above are some of the highlights of the results for the quarter ended June 30, 2022. Before I conclude, I would like to wish you good health and all the very best. Please stay safe.

We can now proceed to question and answer. I would request you to confine your questions to the financial results and to [indiscernible] yourself and be brief with your questions. Thank you very much.

[Operator]

[Operator Instructions]

First question is from the line of Suresh Ganapathy from Macquarie Capital.

[Suresh Ganapathy, analyst]

I just had a question on this life insurance stake increase. Now what is the logic of going up just by 1%? I understand HDFC Life just wanted INR 2,000 crores. But can you not take it to 50%? Or have you discussed with RBI that you can take it to 50%. Just some contours of the deal would be great.

[Keki Mistry, executive]

All right. So I'll tell you quickly. The HDFC Life's solvency ratio had come down to about 176% as a result of the merger with Exide Life. Consequent to that, it was necessary for them to raise additional capital. And therefore, with -- the idea was to take the solvency ratio to about 210%. And this INR 2,000 crores will take it up to 210%.

[Suresh Ganapathy, analyst]

Yes. But then -- I mean, is there any communication from the RBI? Can you hold 50%? Why can't you put another 1% and take it to 50%? Because it then really doesn't -- I mean, face your problem of asking for reduction of the stake rate -- or increase of the stake, sorry. It's a way to do that, yes.

[Keki Mistry, executive]

So Suresh, when we announced the merger, at that time, we have said that we would like our stake in the insurance company to go up to over 50%. So that we still in the detailed guidelines and what the RBI would like us to do. So if we were to do any further stake increase, it will obviously be with the knowledge and comfort of RBI. This stake sale was necessarily largely in -- as a result of the reduction in the solvency ratio of HDFC Life.

[Suresh Ganapathy, analyst]

Okay. Fine. And it doesn't require any approval from any regulatory authorities, right?

[Keki Mistry, executive]

[indiscernible] possibly IRDA. We've already sent a letter to RBI. But this is more a regulatory requirement. So it was the regulatory requirement to increase the capital and promoter stake.

[Suresh Ganapathy, analyst]

Okay. Fine. Okay. That's clear. And the second aspect is on margins. Of course, it's come down a bit because of the interest rate resets, and of course, the increase in cost that you're talking about. But now with the likely resets are going to happen over the course of next coming quarters, can you see these margins inching up from the current 3.4% levels and have a better NII growth?

[Keki Mistry, executive]

I would certainly expect the NII growth to go higher as the quarters progress. I mentioned that in my opening remarks also. The NII growth was impacted largely because of specific events which happened during the quarter. And if you adjust for the transmission time lag and the higher base in the previous year, then the actual growth in NII would have been 16%. And we have -- the Congress can give you those calculations, 16%, which is in line with the growth in the AUM. So we would certainly expect the NII numbers to normalize in the coming quarters.

[Suresh Ganapathy, analyst]

And what about the nonindividual? Yes, sorry. Yes. Go ahead.

[Keki Mistry, executive]

NII goes up, logically, even the net interest margin, should show some improvement. So it should show some increase. Historically, as you will be aware, our net interest margin in earlier years used to be in the 3.3% to 3.4% range.

[Suresh Ganapathy, analyst]

Okay. And the final question, on the nonindividual book growth. Of course, it's gone up from a 9% decline about one year ago to an 8% growth. I mean, with the pipeline and everything which is there, which you talked about, you guys are okay driving this growth, say, to double digits. Of course, not specific guidance that you're asking for. But you're confident of driving this growth even ahead of the merger?

[Keki Mistry, executive]

I would expect the growth numbers to go up. It's been a little low in this first quarter. If you actually see the absolute amount of nonindividual loans, is lower by about INR 3,000 crores compared to where we were in March. That is because of Resolution 2 cases and also because of scheduled repayments which have happened in a few cases. But yes, we have a decent pipeline. We would certainly expect this number to rise. I would say, a double-digit growth is something which is very much on the [indiscernible].

[Operator]

Next question is from the line of Mahrukh Adajania from Edelweiss Financial Service.

[Mahrukh Adajania, analyst]

My first question is, could you please quantify the disbursements during the quarter?

[Keki Mistry, executive]

The disbursements during the quarter were a little lower INR 42,000 crores.

[Vedanthachari Rangan, executive]

INR 42,000.

[Mahrukh Adajania, analyst]

Individual?

[Keki Mistry, executive]

Individuals, yes. Individuals.

[Mahrukh Adajania, analyst]

Okay. Got it. And my -- and the quantum of defects, so I heard liquidity was INR 40,000 crore, but the quantum of defects would we what?

[Keki Mistry, executive]

Defects were about INR 36,000-odd crores roughly on an average.

[Mahrukh Adajania, analyst]

Okay. Got it. And I just had a question on the merger. So basically, when the merger happened, how much of HDFC book does not qualify for a bank book?

[Keki Mistry, executive]

Not very significant at all. Most -- almost everything that we do is something the bank can also do. Then maybe just with 1 or 2 small, we do like, for example, if there is a loan in shares or something like that, then that would not qualify in the bank. But that for us is a very, very, very small amount.

[Mahrukh Adajania, analyst]

Okay. So it'll be like less than 1% to 2% of the total loans or...

[Keki Mistry, executive]

I would say it's less. Yes. I think it would be less than 1% to 2%.

[Operator]

[Operator Instructions]

Next question is from the line of Kunal Shah from ICICI Securities.

[Kunal Shah, analyst]

Now firstly, with respect to this repricing, just taking the question forward. So in terms of the rates, it's fair to assume that we would have also passed to 90-odd basis points looking at the increase which has been there.

[Keki Mistry, executive]

I mentioned that -- I mentioned that whatever has been the rate increase, the idea has been fully passed on to consumers. But the effect of those rates comes through over a period of 3 months, as you are aware, in the agreement.

[Kunal Shah, analyst]

True, true. So this -- when we have to fairly look at it in terms of the repricing, okay, because I think on the nonindividual side, we have already increased the rates earlier as well. So if I have to look on the overall pool, okay, how much would get repriced over maybe a month? And maybe you said like you have moved it to monthly reset as well to benefit, say, from this transmission. So how much of the overall book would get repriced? And would it be fair to assume that, on the borrowing side, given the way MCLR hikes have been and for -- particularly for our deposit high [indiscernible], that would be relatively lower than the rates which we have increased on the lending side.

[Keki Mistry, executive]

Well, first of all, the rates that we have increased on the lending side is equivalent to the increase between the interest rates in the system RBI. We've increased our -- we call it retail prime lending rate. We've increased that by 19 basis points. Now when a rate -- when we increase the rate, the customers rate gets repriced every 3 months. You must be aware of that. So it's not that -- supposing we reprice the loan, let's say, in the month of June, and a customer has taken a loan, let's say, in the month of -- hypothetically, in the month of May, then this loan will only get reset 3 months from May, which means that will get reset in August. So even though we would have increased the interest rates in June, this particular customer loan will get reset in August. So to answer your question, 100% of the book will get repriced over a period of 3 months. Now incrementally, going forward, for new loans, what we've done is we have reduced the period from 3 months to one month.

[Kunal Shah, analyst]

Okay. So that's only on the incremental loans. Got it. Okay. And I assume that the borrowing side increase would be relatively lower, apart from the -- maybe the bond market borrowing, but if you were to look at it on the bank borrowing and the deposits.

[Keki Mistry, executive]

See, over a period of time, interest rates have been so volatile. That for me to give you a number on where the interest rates are. It just changes literally every second or third day. Because with the Fed now raising rates by 75 basis points, as you know, our bond markets have rallied. And there has been a general belief that hikes will not be as significant as they were earlier expected. So a combination of all of this is that it's a little difficult to sort of predict where the interest rate rises would sort of end up. But yes, you are -- logically, you're right. Deposits, while we increase rates, the rate hike will almost similar or a little less than the rate increase on the lending side.

[Kunal Shah, analyst]

Okay. And on restructuring, so restructuring book still seems to be flat. So I just wanted to understand, is it like the regular because you mentioned 98% is also individual within this. So are the repayments which are coming through? But somehow, I think it was like -- last quarter also, it was 0.8. This quarter, it is 0.77. And when do we see the repayments coming through for this entire restructured loan?

[Keki Mistry, executive]

So Kunal, to make you understand, the repayments are coming every day.

[Kunal Shah, analyst]

Is that normal? [indiscernible] coming through, yes.

[Keki Mistry, executive]

So what is happening is that the 0.8 will come to a lower number as the loan gets fully paid off. So loan is not necessarily going to get fully paid off. Unless it gets prepaid, that number would not necessarily come down, even though the payments are on track. So when I talk of this 99%-plus collection efficiency on a cumulative basis, it obviously takes into account all the restructured loans.

[Kunal Shah, analyst]

Yes. No, on principal moratorium. So once that's over, you will get some payment towards the principal as well, and we should see that proportion coming down, yes?

[Vedanthachari Rangan, executive]

So yes. So Kunal, we do report it. And I think if you look at the March numbers, and I think, again, it will be there in the September results, you will see what proportion of these this portfolio has seen to NPA. But the number is very, very low. So which means money is coming as per the restructured payment plan.

[Keki Mistry, executive]

And also, the borrower is making the payment for the EMI. The borrower is paying with EMI, monthly installment, which has a principal component.

[Kunal Shah, analyst]

Yes. So that's maybe the question may be when should we actually see it coming off a bit. We shall take it off-line from Conrad as well. And a couple of data points. So one is now, where do we stand in terms of LCL?

[Keki Mistry, executive]

We are at 71%.

[Vedanthachari Rangan, executive]

71%.

[Keki Mistry, executive]

We are at 71%. The regulatory requirement however is lesser. The regulatory requirements at this point of time stands at 60%. So we are about 11% higher than what is required by regulatory.

[Kunal Shah, analyst]

And last quarter, it was 80%?

[Keki Mistry, executive]

Last quarter was...

[Vedanthachari Rangan, executive]

Yes, yes. Kunal, this percentage changes on a daily basis depending on maturities. It's a rolling 30 days. So it will never be a static number. But the average for this quarter has been 71%. On certain days, it could be 80%. The 80% which was reported would have been the report -- would have been the number as of 31st of March.

[Kunal Shah, analyst]

Got it. Okay. And any write-offs during the quarter, quantum of write-offs?

[Keki Mistry, executive]

I mean there will be some usual write-offs which should have happened. I think it's about INR 400-odd crores, which is -- normal write-offs which we've done also for -- from a prudential sort of standpoint.

[Operator]

Next question is from the line of Anand Bhagnani from Vito Capital.

[Unknown Analyst]

Two questions from my end. One is, in the opening remarks, you had given a number that about 30% of the loans were sourced from our associates. So can you give us a sense of how many distinct branches of the -- 500-odd branches that HDFC Bank has would have contributed to loan origination?

[Keki Mistry, executive]

HDFC banking accounted for 30% of the business that was done during this period. They have about [ 6,378 ] [indiscernible] branches as of March. And they will be sourcing loans from at the moment from less than 2,000 branches. I wouldn't have the exact number, but I would say it's closer to about 1,800 or something in that range.

[Unknown Analyst]

So historically, what have been the reasons that we have not used the full extent of their on-ground presence?

[Keki Mistry, executive]

Reasons which we've talked about in the past also when we talked about the merger, which you may be aware of. We had said that we would like to do loans only from locations where we have a nearby HDFC office. Because at the end of the day, the credit appraisal, the legal processes, the technical processes all have to be seen by HDFC. So that's why we did not have digital source loans from other locations. Also, in a way, we want to sort of keep some sort of limit on the amount of business that just the bank could generate.

But now after the merger is completed, there will obviously be no such requirement of time. The entire 6,500-plus branches of the bank will start sourcing housing loans for us. Also, I think HDFC Bank has put it on record that they have about 68 million customers. And out of 68 million customers, just about 8% have taken housing loan. And only 2% have taken housing loans from HDFC. So therefore, there's ability to sell to this vast pool of customers who have not taken loans.

[Unknown Analyst]

Noted. Second, sir, is accounting query. I see there is other comprehensive income. Can you give us some color on that? It's quite a sizable number.

[Keki Mistry, executive]

Rangan, you want to answer that?

[Vedanthachari Rangan, executive]

It will be largely the mark-to-market investments. So there would have been some appreciation in the value of probably from the [indiscernible] bank or something like that, which would have contributed to the higher other comprehensive.

[Unknown Analyst]

No, sir. It's negative. It's actually it's 4 69 negative.

[Vedanthachari Rangan, executive]

So it would contribute to the lower -- or other comprehensive income. This is a figure which is not in our control. This is market determined. So all our investments since -- most investments other than the investment in things like RBL bank, all our investment in [ banks ], most of our other investments are in -- are through the OCI route. So market price of shares will go up and down quarter-by-quarter. Some quarters may be higher. Some quarters may be very lower. So this is only a reflection of that. Nothing else. It's market price related.

[Keki Mistry, executive]

We will also see that there are certain investments, like [ Ken's ] and RBL band, where we take the mark-to-market gain or loss to the profit and loss account. And there, as I mentioned earlier, against a gain of -- over INR 400 crores last year's first quarter, this year's gain has been only INR 8 crores. And this is because of the ability that you see equity count. The next quarter, this number could be higher or lower. We don't know. If done the way markets have been over the last few days, if that trend continues, obviously, it will be a lot higher.

[Unknown Analyst]

Sure. And sir, in terms of preparation for merger, any color that you can give us?

[Keki Mistry, executive]

I've already updated you on the process that we'll follow. Then the approvals that -- the competition commission approval -- competition commission we apply. We hope to get the approval soon.

[Unknown Analyst]

Noted. And in terms of operations, currently, have you changed anything on round off operations?

[Keki Mistry, executive]

At the moment, nothing. We'll continue to do businesses.

[Operator]

[Operator Instructions] The next question is from the line of Nidhesh Shin from Investec.

[Unknown Analyst]

Two questions. First is, with respect to the merger, in preparation of the merger, do we plan to make any changes to our liability mix before the merger so that the transition is smoother? And if yes, what would be that be and how it will impact our cost of funds?

And secondly, on HDFC Life, sir, is there any clarity that after the merger, how the regulator will look at our stake in HDFC Life, which has been less than 50%? And are there plans to increase the stake to more than 50%, which will take away their supply overhang, which the stock may have?

[Keki Mistry, executive]

Yes. I had mentioned this in response to question, which I think Suresh Ganpati has had, that why don't we increase that stake to 50%. The reason is today, the INR 2,000 crores of capital we put into the insurance or we plan to put into the insurance company is largely a result fact that from standpoint, their solvency margin has come down. And we would like that number to go up to over 200%, closer to 210%, which is why we are putting in INR 2,000 crores. We have not yet got any confirmation from RBI, see whether we can take our stake up to 50%, but that has always been done a request.

[Unknown Analyst]

Sure. But I think you have to take a stake more than 50%, right? Probably close to 40 -- 52.

[Keki Mistry, executive]

That we request to RBI is to take it up towards 50%. We have mentioned this in the call after the purchase announcement.

[Unknown Analyst]

Sure, sure, sure. And sir, any adjustment to the liability profile before the merger?

[Keki Mistry, executive]

Very honestly, nothing significant. We are -- I mean, the mix of liabilities has broadly remained the same, whether you are looking at 31st March or you are looking at 30 of June. Broadly, there would not be much change. As I said, we are looking at this external commercial borrowing of 1.1 billion, which was not there in the last couple of years, because last 2 years, because of COVID, there was no way to access the international markets. But that has nothing to do with the merger. That's nothing to do with the merger.

[Operator]

Next question is from the line of Nischint Chawathe from Kotak Securities.

[Nischint Chawathe, analyst]

The question is on your ECL coverage on Stage 1 and Stage 2 loans. You have seen north of 1%, well of -- well above 1%. I think it's almost 3, 4 quarters now that the real estate cycle has turned around. So [indiscernible] we have much more comfort on what's happening to the asset quality or what can happen to the asset quality hereon. So when would you kind of -- the some of these provisions are probably write off, some of the loans which -- where you think that there is going to be genuine stress.

[Keki Mistry, executive]

So we -- it's something we keep reviewing all the time. But we would always like to have a provision level which is higher than what is the regulation. But having said that, as I mentioned earlier, the credit cost, which is effectively or charged to the P&L account, plus [ we will ] write-offs, has come down from about 50 basis points in the first quarter of last year on an annualized basis to about 33 basis points in the first quarter of the current year. But this 33 and 50, you must understand is annualized.

[Operator]

Next question is from the line of Adarsh from CLSA.

[Adarsh Parasrampuria, analyst]

Congrats on good numbers. Sir, this is a follow-up on that liability question. Just thinking, while the things have been static in the last few months, as you get more and more regulatory approvals in certain of the merger, would you intend to like increase the duration of some of the borrowings, given that the merged entity, the bank, would really -- even if there is a grandfathering, it just release the pressure. So I'm just trying to understand that, as you get into the merger for the next 12, 18 months, will you aim to increase duration, and that could cost money because longer-dated paper would cost more money?

[Keki Mistry, executive]

Yes. But you must also understand, Adarsh, when you raise long-term money, you swap it into short-term rate. We swap it into current rates because all our loans are floating rate loans. So whether you're doing 10-year borrowing or you are doing, theoretically, 1-year borrowing, your floating rate, the cost is not going to be very different. But yes, there would be a conscious attempt to the current see if we can increase the duration of assets as we move -- our liabilities as we move into our banking structure. But obviously, it has to be something which has to make sense.

Rangan, you're there, can you add anything? All right. Let's carry on.

[Adarsh Parasrampuria, analyst]

Yes, sir. So I understand the 4 parts you're saying. But I -- most likely, it should not affect margins in the interim period because you'll swap it?

[Keki Mistry, executive]

It was not. I mean we don't need fixed rate funding for long term. We need floating rate funding. So whilst we can extend the duration of our loan, it will not add to an increase in the foreign cost.

[Operator]

[Operator Instructions] Next question is from the line of Abhijit Tibrewal from Motilal Oswal.

[Abhijit Tibrewal, analyst]

There are just two questions, again, kind of going back to the transmission. I think that you kind of explained the transmission of higher borrowing costs by increasing when needed. So if -- from what I understood, if it is right, from the back book, I mean, individual retail loans will kind of get repriced every 3 months. But on incremental lending, you have now kind of reduced the repricing sequentially from 3 months to 1 months. So is the understanding right that...

[Keki Mistry, executive]

Let me clarify. Let me clarify this, please. I said 3 months, yes, 3 months. But it's not that every borrower loan will get repriced on any particular date. The repricing happens 3 months from the date that in the loan. So some people's loans will get repriced in May. Someone will get repriced in June. Someone will get repriced in July. And over a period of 3 months, the entire book gets repriced. And yes, now we have moved it incrementally where we will do it on a monthly basis. So this works both ways. When interest rates go up, it increases your cost. When interest rates come down, it benefits.

[Abhijit Tibrewal, analyst]

So that this -- I mean reduction from 3 months to 1 month, or it has been done only on the incremental lending, does it still kind of leave you open to the transmission lag, given that there are widening expectations of another 50 to 70 basis -- 50 to 75 basis points increase in [indiscernible] during the course of this fiscal year on the back book?

[Keki Mistry, executive]

Yes. The bulk of it has already happened. The 90 basis points rate increases happen in a very short period of time. Personally, I don't believe that you will see a similar kind of increase in the coming quarter. It would be more sort of extended, over a sort of a longer time frame. But technically, very technically speaking, you are right. Duration of housing loans is about 5 years. And if all incremental loans that would have been given from the date we have repriced, changed this rule, which is about 3 months ago, will get repriced immediately.

[Vedanthachari Rangan, executive]

Abhijit, if I may just add. This what Keki is mentioning pertains to the retail loans. As far as the wholesale loans are concerned, they do get repriced on a monthly basis.

[Keki Mistry, executive]

Sorry. I should have mentioned that.

[Abhijit Tibrewal, analyst]

I think I mean yes. That's clear. And second question that I had is, I mean, right now, I mean, where interest rates are rising, and you're increasing the lending rates. I mean is the first thing that we do is kind of try to extend the tenure of the loan, I mean, to the extent permissible, I mean maybe maximum tenure of 30 years, maximum age perhaps of 60 years for an individual. Is that the first thing that we do? Or are we kind of also increasing the EMIs?

And maybe a related question to this is, I mean, let's say, if there is another 50 to 75 basis points increase in -- I mean therefore it during the course this year, and consequently, if they are kind of passed on to an increase in your retail PLR, can you kind of lead to higher delinquencies maybe in the second half of the year?

[Keki Mistry, executive]

I can give you, based on past experience, this is not the first time that we've seen sharp increases in interest rates. We have seen sharp increases in interest rates happen 2013, was one example. And then there are many more where I can't really recall the year. What happens is whilst the housing loan on an average has a term of about 12 or 13 years, 1 3, at the time of origination, the actual duration of a housing loan is about 5 years.

So it never runs to the full 12 or 13 as is originally fixed. There are 2 reasons for that. One is all loans are amortizing loans. So the moment you get your loan, you start paying back an installment. And that installment has got a principal component. So with every passing month, the outstanding amount of the loan keeps declining. This is #1. #2 is the fact that people tend to prepay loan. I mentioned that in my opening remarks, that we had about 10.2% of our loans prepaid ahead of schedule during the course of -- 10.2% on an annualized basis, but 10.2% is the prepayments that we saw in the first quarter annualized.

Now these prepayments are not because there are full prepayments or so -- refinancing these loans, anything of that sort. The bulk of these PPMs happened because people in India continue to remain reasonably debt averse. A lot of people come ahead of time and make a part prepayment of the loan to reduce fee, term of the loan or to reduce the amount of the loan or whatever. So it's a very common practice. So in this particular instance, where we changed initially, it would be a change in the term. So it go up initially from, say, 5 years to, say, 5.5 years or whatever, whatever happens because of the 90 basis point increase.

But in every single case, every, not without exception, the loan is looked at from certain parameter. If the increase in the term is such that we are uncomfortable or if the increase in the term takes in beyond the certainty, then we will ask the customer to increase, that we will make the customers EMIs higher and getting to pay a higher amount. This is a trend which has been going on now for the last 25 years. And we've never seen any increase in years as a result of the term getting far.

[Abhijit Tibrewal, analyst]

That's useful. Just a follow-up question here. Yes, please go ahead. I mean I had a follow-up question here. So I mean if we kind of increase the tenure, this tenure can be increased without taking explicit consent of the customer, right? I mean this tenure can we extend it to keep the EMI.

[Keki Mistry, executive]

Yes. All that is built into the agreement. But case by case, we would -- if we find that there is any discomfort we have, as I said earlier, because the term has gone higher or because beyond of comfort all because of whatever reason or the age of the customer, then we would ask -- we would just automatically increase the EMI, and the customer will pay a higher amount going forward.

[Operator]

I now hand the conference over to the management for closing comments.

[Keki Mistry, executive]

So I don't really have any closing comments. I already my comments. Only thing I would say is that the NII reduction or the lower growth in NII was largely a function of the transmission lag. And as the year progresses, this transmission lag will get -- will start over producing. And we would expect the -- as I mentioned earlier, if we were to adjust for the transmission lag and we were to adjust for the higher [ ending ] in the previous year because of the reasons I mentioned, the delinking of the reverse repo, then the net interest income growth would have been 16%, which is in line with the long-term growth.

[Operator]

Thank you very much. On behalf of HDFC Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.

[Keki Mistry, executive]

Thank you. Thank you, everyone, and stay safe. Stay in good health.

[Operator]

Thank you, sir.