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Indusind Bank Ltd
Earnings Call Analysis
Q2-2024 Analysis
Indusind Bank Ltd
In a year that can only be described as dynamic, the company has displayed robust performance, with particular emphasis on the consumer banking business and digital platforms. The turnover segment saw an impressive 52% increase year-on-year, illustrating the resilient growth trajectory even in a changing financial landscape. The commitment to pushing the envelope in specialized verticals such as real estate, health care, and education is evident from improved ratings and healthily managed exposures.
The MSME book recorded a substantial 23% year-on-year growth, signaling the company's potential to tap into the underpenetrated sector. Riding this wave, the consumer banking business surged by 31% year-on-year. This was facilitated through the digital lending platform Indus Easy Credit and strengthened by the launch of INDIE, a digital banking app, which has witnessed an encouraging response with 1.8 million downloads. The innovative model is not just about growth; it also targets breakeven within 18 months per client—a testament to the wise investment and long-term customer relationship strategy.
Net interest income is a key performance parameter and it grew by 18% year-on-year. The net interest margin remained stable at 4.29%, showcasing the company's capacity to absorb fluctuations and maintain profitability amidst market volatility. Additionally, other income increased by 13% year-on-year, complemented by a 17% year-on-year increase in total revenue, according to company financials, paving the way for sustained investment in human capital and digital initiatives.
The deposits grew by 14% year-on-year, with the share of retail deposits improving substantially to 43.7%. Savings and current account deposits witnessed moderate growth, resulting in a CASA ratio of 39.3%. This indicates a steady build-up of granular deposits, a prudent strategy for maintaining a healthy and dependable funding source.
The company has been proactive in managing its asset quality, with retail net slippage receding to INR 865 crores from the previous quarter. The restructured book exhibited a significant decrease, reflecting the strategic upgrades and recoveries made. Additionally, the bank has conscientiously made additional provisions, further fortifying its position against potential future risks.
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Ladies and gentlemen, good day and welcome to IndusInd Bank Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumant Kathpalia, Managing Director and CEO, IndusInd Bank. Thank you, and over to you, sir.
Good evening, and thank you for joining this call. Let me start with some macro commentaries and then go into bank-specific details. Indian economy saw strong activity growth during quarter 2, even as the global economic environment remained challenging with many adverse developments. Domestic drivers of private consumption and investments, both public and private, has been driving this momentum. A stable macroeconomic environment, relatively strong growth prospects, improving external sector fundamentals, along with deepening of market liquidity, are helping to attract more and stable class capital flows into India.
Going forward, outlook for growth remains reasonably strong during quarter 3. The festival season demand is already driving a pickup in consumption as visible and solid sales of cars and 2-wheelers in September. Inflation is expected to ease during the quarter, helped by proactive supply measures announced by the government. Consumer and business remain optimistic, especially on growth and income prospects. Central government spending on CapEx and support to states will continue to drive investment activity.
Continuing to quarter specific developments, loan growth momentum, our loan growth continues to be strong at 21% year-on-year and 5% quarter-on-quarter. We saw strong momentum in Retail segment, growing 25% year-on-year and 6% quarter-on-quarter. The retail growth was driven by healthy disbursements in our vehicle and microfinance businesses and maintaining traction in other consumer products. Our corporate book too grew by 18%, driven by small corporates. Healthy retail deposit accretion. We maintain our growth trajectory on the retail deposit mobilization in spite of the competitive intensity.
Share of Retail Deposits as per LCR improved to 43.7% driven by 21% year-on-year and 4% growth in retail deposits. Overall, we achieved total deposit growth of 14% year-on-year and 4% quarter-on-quarter, driven by granular retail growth.
Traction on new initiatives. We launched our digital banking offer INDIE during the quarter. The offering was well received by the customer, and we already have over 1.8 million downloads and 400,000 customers. We are continuously adding new features and investing in marketing efforts to scale this further.
Our earlier investments of affluent and NRI also did well growing 8% and 7% quarter-on-quarter, respectively. Loan book under merchant acquiring business via Bharat Financial grew 16% quarter-on-quarter to INR 4,904 crores. Retail asset quality improvement. Our retail net slippages reduced from INR 1,059 crores to INR 865 crores quarter-on-quarter, while corporate slippages increased due to 1 account slipping into NPA. The restructured book reduced by INR 274 crores to 0.54% from 0.66% quarter-on-quarter.
Our net NPA is at 0.57% with a Provision Coverage Ratio stable at 71%. Our contingent provisions are at INR 1,520 crores, with total loan-related provisions at 118% of gross NPAs. Our credit cost has reduced to 123 basis points from 132 basis points quarter-on-quarter.
Steady profitability metrics. Our net interest margins remained steady at 4.29%. Client fee income grew by 13% year-on-year, driven by continued retail momentum. We invested in digital launches, marketing spend as well as physical infrastructure, resulting in OpEx growth of 6% quarter-on-quarter. Our PPOP margin to loan, thus, for the quarter was at 5.2% versus 5.5% quarter-on-quarter. Overall, our profit after tax grew by 4% quarter-on-quarter and 22% year-on-year to INR 2,202 crores. Our return on assets was at 1.9% and return on equity was at 15.33% for quarter 2. Our capital adequacy remains healthy with CET1 of 16.33% and overall CRAR at 18.21%.
Now coming to individual businesses, vehicle finance. Our vehicle finance business continued to show healthy growth trajectory, with loan book growing by 5% quarter-on-quarter and 22% year-on-year. The disbursements also grew by 7% quarter-on-quarter and 20% year-on-year. The commercial vehicles, cars, utility vehicles, 3-wheelers, saw sequential growth of 5% and above. The loan growth was slower in tractors, 2-wheelers and construction equipment.
The diversification initiative, which has been playing out well in the vehicle finance. Our light commercial vehicles, cars, utility vehicles, construction equipment portfolios have crossed the INR 10,000 crore loan book mark with various tractors is almost there. This reflects a well-diversified portfolio, reducing cyclicality in this business.
Light commercial vehicles has been a success story since we carved out as a dedicated unit. Our LCV market share has now crossed 10% from sub-5% a few years back, and we are, in fact, the #1 financial at 1 of the leading OEMs last month. The gross slippages in vehicle improved from 0.77% to 0.64% quarter-on-quarter. The restructured book in vehicle finance also reduced to INR 910 crores from INR 1,182 crores quarter-on-quarter.
The collection efficiency of these customers remain comfortable with bulk of the reduction happening through upgrades and recoveries. As mentioned in the previous calls, first half of the year is seasonally weak in terms of disbursements and asset quality, and portfolio improved as we progressed in the financial year. This played out in quarter 2, and we expect to maintain the trends in the rest of the year.
Bharat Financial Inclusion Limited. Loan book originated through Bharat Financial stands at INR 39,275 crores, reflecting a year-on-year growth of 22% and sequential growth of 8%. Active loan price increased to INR 90 lakhs, reflecting a year-on-year growth of 15%, up from INR 78 lakhs a year ago. Sequentially, the loan clients increased by 7% over the previous quarter at 84 lakhs. The share of non-MFI book improved to 13% as against 9% a year ago.
Microfinance. Our microfinance business gathered momentum with a 7% quarter-on-quarter growth driven by consistent member addition. Year-on-year loan growth too improved to 16%. We crossed disbursements of INR 10,022 crores, growing at 24% year-on-year and 43% quarter-on-quarter, driven by healthy new member additions of 910,000 during the quarter. Portfolio quality too improved with net slippage reducing to INR 182 crores from INR 311 crores quarter-on-quarter. MFI standard book net collection efficiency for quarter 2 was at 99.1%. The 30 to 90 DPD book amounting to 1.94% against 2.36% last quarter ago. We have changed a chart in investor presentation earlier depicting average ticket size per loan to average loan per customer. We believe the customer total indebtedness level is a better metric to track, hence the change.
Bharat Super Shop, the merchant acquiring business. Bharat Super Shop continued to scale up, reaching a loan book of INR 4,904 crores, with an 83% year-on-year and 16% quarter-on-quarter growth. Disbursement during the quarter amounted to INR 2,195 crores. The number of loan clients stood at 700,000 as of September '23. The standard booked net collection efficiency from this client base stood at 99.1%. Bharat Money Store the kirana shop model. We have around 117,000 active Bharat Money Stores, providing banking at the doorstep in remote areas. Liability book sourced from customer service through Bharat Financial increased by 50% year-on-year to reach INR 2,485 crores through 1.58 crores accounts, which have also registered an increase of 25% year-on-year and 9% quarter-on-quarter, driven by improvement in new account opening. Overall, Bharat Financial has showed a strong growth momentum during the quarter, along with the improvement in net slippages. While we are watchful about the rural macro trends, the pent-up demand and our investment in the distribution should aid us maintaining the growth momentum.
Global diamond and jewelry business. The global economic challenge continued to impact the diamond demand. This reflects in reducing working capital requirements of our customers. The portfolio has consequently seen a de-growth of 10% quarter-on-quarter. The asset quality continues to be pristine with no SMA-1, SMA-2 or restructured accounts. There have been some media reports on delinquency in unorganized or lab grown diamond manufacturers. The bank does not have any exposures to these troubled customers.
Corporate Bank. Our corporate bank book maintained healthy growth trajectory of 18% year-on-year and 3% quarter-on-quarter growth. The overall growth continues to be led by small corporates growing at 8% quarter-on-quarter and 50% year-on-year. Within small corporates, our focus strategy on corporates with less than INR 500 crore turnover segment has been bearing results, growing 52% year-on-year.
Growth across large and mid-corporate was 2% quarter-on-quarter and 14% year-on-year, in line with our expectations. Specialized verticals outside the Diamond business constitute 29% of the corporate book. These includes real estate, financial services, food and agri, education, health care. The exposure under specialized verticals is well managed, well basis sector-specific strategy. The segment continued to show a healthy risk-adjusted returns and growth profile. The portion of A and above rated customers has improved to 77% versus 72% year-on-year, with weighted average rating improving to 2.57 from 2.65 year-on-year.
As external interest rates have stabilized from the last quarter, our yields have been stable at last quarter levels. The gross slippages in the corporate book was at INR 214 crores for the quarter. This included 1 account of INR 169 crores from last quarter SMA slipping into NPA. Overall, we continue to progress on the granularization of the corporate franchise to small business and diversification. The asset quality too, given the nature of the business, shows some volatility in some quarters. Overall, we are comfortable with the asset quality trends in the corporate.
Other retail assets. Consumer Banking business continued to show robust momentum, growing 31% year-on-year and 8% quarter-on-quarter. We believe MSME as a sector offers significant opportunity. The sector remains underpenetrated owing to challenges in the sector in terms of access to credit, structured credit information available pertaining to MSME enterprise.
Our MSME book under business banking is at INR 15,364 crores, which grew 4% quarter-on-quarter and 23% year-on-year. Business momentum was strong and our new acquisition continued to accelerate, which are now almost 50% higher than the pre-COVID level. Majority of the MSME new acquisition are granular from less than INR 2 crores segment, that is small business banking segment. The segment also predominantly leverages our digital lending platform Indus Easy Credit, accounting for around 95% of the new onboarding. Our digital stack is enabled to get the sanction within a single day backed by Bureau banking and GST backed data for the small business operations segments and sanctions are delivered in less than 24 hours for 90% of the applications.
We are scaling up a home loan pilot with the book crossing INR 1,000 crore mark during the quarter to INR 1,005 crores as of September 23. On unsecured side, the credit card growth was -- the credit card growth was driven by new card acquisitions and highest ever quarterly expense. Credit card spends were at INR 22,061 crores, driven by 7% quarter-on-quarter. Our expense market share has improved to 4.7% as per latest available RBI data. Overall, consumer assets remain the fastest-growing segment within the overall portfolio, we are watchful on the unsecured growth given the rapid industry growth and macro trends.
We are thus focusing on a balanced growth between secured as well as unsecured growth with constant vigilance on the early delinquency trends.
Now coming to liabilities. Our deposits grew at 14% year-on-year and 4% quarter-on-quarter. The growth was driven by granular acquisition with retail deposits as per LCR growing by 21% year-on-year and 4% quarter-on-quarter. The share of retail deposits improved to 43.7% versus 41.2% year-on-year. Our savings account deposits showed growth of 3% quarter-on-quarter, whereas current account grew 1% quarter-on-quarter, resulting in a CASA ratio of 39.3%.
We launched Grande a new variant of the savings account, which carries a strong customer proposition, contributing meaningfully to the SAR growth over the last couple of quarters. Our both new initiatives of affluent and NRI showed robust growth during the quarter. Affluent segment grew by 24% year-on-year to INR 47,900 crores during the quarter. Affluent aim was also up at INR 73,900 crores, showing a growth of 17% year-on-year. Our NRI deposits grew by 41% year-on-year and 7% quarter-on-quarter at INR 40,000 crores.
Our market share in nonresident segment has further improved to 3.3% as of last available data. The contribution of certificate of deposits remains low at 3% of deposits. Our borrowings were down to 11% quarter-on-quarter. The borrowings continue to be oriented towards long-term source of funds.
We had healthy liquidity position during the quarter with an average LCR of -- at 117% and average surplus liquidity at INR 37,000 crores for the quarter. The bank has taken a significant step towards improving the overall brand as well as deposit product awareness through comprehensive media presence. The bank has partnered with international credit council -- Cricket Council for a series of marquee tournaments over the next couple of years. We believe these tournaments should improve our brand awareness and customer acquisition momentum going forward.
Overall, we've maintained healthy growth momentum in the retail deposit mobilization, notwithstanding the competitive as well as liquidity conditions in the industry. Our 3-pronged approach of investing in traditional digital and new initiative have played out well, and we aim to maintain this momentum going forward as well.
Digital traction. Bank launched INDIE, an innovative personalized digital banking app with several industry firsts. INDIE aims to bring the best of both worlds together, the trust of a bank and experience of a new age fin-tech. It reflects a shift from product-centric to a customer-centric way of thinking. The app was digitally launched a couple of months ago, and we have already have 1.8 million installed base and approximately 4 lakh customers, and the TV campaigns have just started with the ICC World Cup.
It is a learn model and not a burn model, and we are targeting a breakeven period of less than 18 months per client.
During the quarter, the bank saw robust growth across its digital platforms and applications. The engagement vectors are looking up on the back of data and analytics-driven engagement powered by market capability that the bank invested over a couple of years. Indus Mobile registered monthly active user base growth of 30% year-on-year. 74% of service requests are processed digitally compared to 69% last year.
UPI transaction from Indus Mobile are up 71% year-on-year. Transactions per active client are up 20% year-on-year. Merchant app Indus Merchant Solutions more than doubled the monthly active base Y-o-Y. We continue to transform existing lines of business, leveraging digital capabilities and digital unassisted model continued to show robust growth. More than 95% of business and deposits and retail loans is digital and digital unassisted model is growing rapidly.
Now coming to the financial performance for the quarter. Net interest income grew by 18% year-on-year and 4% quarter-on-quarter, with net interest margin at 4.29% remained steady quarter-on-quarter and improving Y-o-Y versus 4.24%. The net interest margin has been a keenly discussed topic over the last few quarters. We have consistently communicated that our balance sheet construct and the growth dynamics are able to withstand NIM volatility.
While the interest rate cycle seems to have elongated, we continue to believe that the bank has enough levers to absorb any increase in cost of deposits with an ambition of 4.2% to 4.3% net interest margin. These dynamics played out during the last quarter as well. While our cost of deposit increased by 23 basis points, the lower borrowing costs and effective asset side management resulted in steady net interest margins during the quarter.
Our other income grew by 13% year-on-year and 3% quarter-on-quarter. Core client fees, excluding trading fees, grew by 13% year-on-year. Our noncore fee income was INR 162 crores during the quarter. Share of retail fees remained healthy at 74%. Our total revenue for the quarter was at INR 7,359 crores, with a 17% year-on-year growth. The OpEx growth of 6% quarter-on-quarter was driven by continued investment in women capital, digital launches and marketing initiatives. We've added 3,500 employees during the quarter and 7,600 employees in the last 6 months.
The operating profit for the quarter was at INR 3,909 crores, growing 10% year-on-year. On the asset quality and the provisioning front, our provision for the quarter continued the downward trend at INR 973 crores. The annualized provision to loans is now at 123 basis points versus 175 basis points year-on-year and 132 basis points quarter-on-quarter. The credit costs have now come down to our PC-6 expected range.
Our retail net slippages reduced to INR 865 crores versus INR 1,059 crores in the previous quarter, while our corporate slippages increased due to 1 new NPA as mentioned earlier. The restructured book has reduced by INR 274 crores during the quarter from 0.66% to 0.454% quarter-on-quarter, and the bulk of reduction was due to upgrades and recoveries. The net security receipts have further reduced to 39 basis points from 44 basis points in the previous quarter. The bank made additional provisions of INR 146 crores towards the SR book during the quarter.
Overall, the GNPA for the bank was at 1.93% and net NPA was stable at 0.57%. We have maintained provision coverage ratio at 71%. Our contingent provision, excluding specific provisions of INR 1,520 crores. The slippages on the restructured book in the last 6 quarters were at INR 2,407 crores. We have utilized contingent provisions of INR 1,808 crores during the same period. Total loan-related provisions are at 2.3% of the loan book or 118% of the gross NPAs.
Our SMA and SMA book was at 6 basis points and 20 basis points, respectively. Profit after tax for the quarter was at INR 2,202 crores and growing at 4% quarter-on-quarter and 22% year-on-year. Our CRAR, including profits remained healthy at 18.21%, return on asset is at 1.90% and return on equity at 15.33% for quarter 2.
Overall, we continue our progress on our Planning Cycle-6 strategy with outcomes clearly in line with our ambitions. The liability granularization continues its appeal. The initiative to see further support from the launch of digital offering as well as marketing campaigns. Improving share of retail deposits as per LCR remains cornerstone of our strategy as we move towards 45% to 50% in PC-6. Quarter 2 loan growth of 21% was driven by retail segments, which grew a robust 25% year-on-year.
The second half of the year is seasonally better for the vehicle and microfinance business, and this should help sustain the growth momentum in coming quarters as well. Retail asset quality continues to improve while corporate remains range-bound over the course of the year. The annualized credit costs are down to 123 basis points, and we aim to close the year between 110 to 130 basis points. Retail loan growth and balance sheet optimization provides comfort on the net interest margin trajectory.
The retail growth also augurs well from the cost to income perspective, which should trend downwards with retail revenues kicking in. Overall, we remain comfortable on all our profitability metrics. Our new initiatives are tracking well on their business plan, and we should see support from the new investment in digital distribution and marketing over the coming quarters. With this, we can open the floor for Q&A.
[Operator Instructions] The first question is from the line of Nitin Aggarwal from Motilal Oswal.
Congrats on a good quarter. Few questions, right. First is on the CD ratio. We have seen like a good increase in CD ratio past 1 year. And LCR also we have deployed a fair bit of liquidity this quarter. So how much excess liquidity do we now have on the balance sheet? And do you think that going forward liability accretion will limit the loan growth as we continue to guide for over 20% loan growth?
I think, first of all, we have INR 37,000 crores of excess cash in our balance sheet, and that's reflected in the cash liquidity, and that's reflected in our balance sheet. Having said that, I think we will -- I don't think our growth ambitions will go down. I think what is more important is, I think we have to get our liability growth faster. And I think we are working on all the dimensions to make sure that our liability growth happens.
What we've said of our growth ambitions of 18% to 23%, and we are on the right-hand side of the growth, we will continue to maintain that growth, and we believe that the second half of the year is better than the first half of the year.
Right. Sure. And the other question is on the yields, like this quarter, the corporate banking yield has come off a bit. And the CFD book is also, the rise in yield is well controlled, while indicated that it is indicating the stable pricing and no repo action in the recent period. But what proportion of the corporate loan book is linked to MCLR? And should we not expect any further uptick in the corporate yields going forward?
So as you know, corporate book is almost entirely floating rate. 2/3 of the book is MCLR-linked, balance 1/3 is roughly external benchmark and linked book. And those benchmarks are -- depending on the market rates, those benchmarks will change, and that goes into our loan book. So it all depends on how the market benchmarks are and basically that you will see corporate yields changing.
The other thing which you have to always remember in corporate, as we grow our small businesses, and I think as the mix of the business has changed over a period of time, you will see that the yields will start getting because the smaller corporates do come at a little bit higher yield than the large corporates.
Right. And -- but given that how the deposit cost is inching up like this quarter, there is a 23-basis-point rise in the cost of deposits. And if I were to adjust for current accounts, this implies that our cost of deposits is almost close to 7.4%. So how much more like uptick are we looking at in terms of deposit repricing? And what is the incremental cost of deposit?
So to answer this question, I think the maximum differential which will happen is 10 to 20 basis points in the cost of deposits over the next 2 quarters, but I don't see more than that as an uptick on the cost of deposits as we go.
And lastly, just 1 observation, Sumant. On the -- we have started disclosing the average loan outstanding in MFI. Why is this number higher than the average ticket size, like which we used to disclose until now?
Yes. Because there are -- for the customer, we do give multiple loans at any point of time, and that's where the loan can be higher.
So see, Nitin, what happens is we used to work on a sanctioned limit basis. So there could be a customer where you sanction INR 40,000 loan. Now the customer has an option to either withdraw entire INR 40,000 or take INR 30,000 now INR 10,000 later. But what was happening was operationally working on those lower ticket size loans was becoming operationally cumbersome. So we have reduced or stopped people opting for less than INR 15,000 of loans. So more and more people will move towards now whatever is the sanction limit. And that's where we attract the customer. So whatever is the customer's total loans outstanding, that's what matters, whether you have taken in 1 tranche or 2 tranche that doesn't matter and that may not be the right way to look at also.
So thinking of that, we have changed the disclosure to show the, at a customer level, what is the total indebtedness level for that customer.
Next question is from the line of Abhishek from HSBC.
So 1 question on slippages. Now retail slippages are down to 12.50% and approximately somewhere close to 3.5% of opening loans. Do you think there's still scope to improve? Or are we at the bottom here?
I think you will see more improvement on the retail slippages on the CFD book. So that's -- because the second half of the year is better on the vehicle finance book. So you can see -- hope for some improvement there. I think on the micro finance book, there is still a scope of improvement. So we will see slippages coming down as we move forward on the retail side of the book.
And Sumant, on the overall slippages, I believe the guidance was around INR 1,200 crores, INR 1,250 crores or so.
Correct.
Whereas we are hitting INR 1,450-odd crores this quarter, maybe 1 account here and there, but we have to account for those one-offs as well. So again, do we stick to INR 1,250 crores going forward? Or do you think now we are at a more representative run rate?
I think we should see INR 1,200 crores to INR 1,300 that is our base case. And I think this was an unfortunate slippage, which happened. We just took the slippage because it was in the SMA for past 2 to 3 quarters, so it was better to take that. And I don't think there are any such things which can come in, and we will see retail flows improving, I think we can stick to INR 1,200 to INR 1,300 crores accounting for any corporate slippage of INR 5o crores to INR 100 crores, if it happens.
Got it. And just 1 question on deposit growth again. So if we just look at the last 5, 6 quarters, on a Q-o-Q basis, the deposit growth has lagged credit growth. And fine, we had some extra liquidity, which we were deploying in that period. Now with this excess liquidity also normalizing, we will need to accelerate deposit growth, right? So will pricing have to be 1 important strategy because we've had our deposit rates, I mean, lower than -- or rather are spread over other banks is historically very low now. Do you think you need to increase that spread and incentivize more flows?
No, I don't think so. I think we are able to attract deposits up. I think we are doing multiple things. So the digital capability, expansion of brand distribution and the product launches, which we are doing in the branches, plus the marketing efforts which we are doing, I should -- should be able to pull up the liabilities. I cannot say that everything will come in CASA. I think there is no -- if we want to open the tap in term deposits, we're able to get the term deposits immediately. So I can tell you, I think we will start seeing the deposit growth coming back. And I think we are working towards getting the deposit growth back because, I think, yes, you're absolutely right that this quarter, we used the excess liquidity gap to maintain the margins, and you will see the excess of the deposit growth coming back in the next 2 quarters.
Got it. Got it. Just 1 quick question. The entire corporate slippage was owing to that 1 account?
No, INR 168 crores was owing to 1, then there was small -- a one INR 10 crore account, one INR 8 crore account of payment.
Next question is from the line of Kunal Shah from Citigroup.
So firstly, with respect to -- in terms of the cost of funds, the increase has hardly been like 9-odd basis points compared to 23 bps rise in cost of deposits. So maybe in terms of this repricing and repayment of the borrowing, high-cost borrowing, is it largely done? Or should we see the benefit in the coming quarters as well?
Yes. So I think a couple of things here. I think the borrowing is always an option available to the bank, and we've seen how it plays out in terms of longer-term financing with cheaper rates as well. I think that's a thing that we continue to assess and keep on doing. In terms of the cost of borrowing, yes, so the idea is that if my borrowing numbers are going to be lower and my deposits are going to increase and the cost of deposit is going to be higher, you'll have a higher cost of funds that's as simple as that, right?
So as a result, you will see a small higher cost of funds because we've decided that our basic aim is to focus on our deposits, to maintain that I think some other colleagues get asked about the CD ratio as well earlier. Yes. So I think CD ratio being 1 of the measures that we take in terms of our advances to deposit book, that needs to be maintained at a particular level. And in order to do that, yes, our deposit growth will be higher than the borrowing growth. And as a result, it will impact our cost of funds.
Obviously, as I said, it's much, much lower than the cost of deposits. And as a result, I think there was another question that had come earlier that with current account my deposit growth is at 7.30% or whatever it is, will I reprice my asset book. I think the way to look at it is you've got to look at the cost of funds because that is the sort of funds available to the organization rather than just the deposit base. So that would be my take on this.
Sure. And secondly, in terms of the credit cost and utilization of the buffer, so maybe we were highlighting that we would be building up the buffer as well towards the maybe transitioning to Ind As. But again, we saw almost like 180 bps kind of utilization this quarter. So would that start to happen from Q3 onwards in terms of the further buildup and still comfortable with 1.1% to 1.3% credit cost?
Yes. So you will see that we will start building up the buffers. So you will see it in the second half of the year. I cannot commit quarter 3 or quarter 4, but in the second half of the year, you will see the buffer. Like what we've committed, I think we remain committed to building up the buffers. And I think you will not see us utilizing any more of the contingent provisions as we go forward.
Okay. So utilization is largely done now?
Done. We will not utilize anything. We said that last time also. So I must be open to it, but we had to because of the restructure, but I think we've now seen our restructured book, and we are very comfortable with that.
So this utilization was from restructured, what you were highlighting INR 1,800-odd crores? So was this INR 180 crores...
Yes. So we told that the total restructure flows over the last 6 quarters was about INR 2,434 crores, and we utilized about INR 1,800-odd crores of that book.
Yes. So INR 180 crores was from restructured?
Yes.
This quarter. Okay. And secondly, in terms of the employee cost. So last time also we highlighted that there would be employee incentives, additions and annual incentives were there, which led to a higher OpEx, but we are seeing the trend continuing almost like further 11% net-net increase on a quarter-on-quarter basis. So any one-off out there in the employee side?
I think this was the incentive payouts that we pay out. So there was an incentive payouts, which were done. We added for the sales performance so that was one cost which came in. 3,500 employees got added. Last -- we had also added about 7,500 employees over the last 6 months. And that base effect also of the cost had come in. Now what you will see is stabilization of the employee cost as we move forward.
Next question is from the line of Suresh Ganapathy from Macquarie Group.
Sumant, I have a question on contingent provisions because if you are saying you want to make INR 300 crores contingent provisions this year and make 1.3% credit cost, including that, then why did you dip into INR 500 crores of contingent provision in first half. You did INR 500 crores and then you make INR 300 in second half. So this not a coherent strategy I feel. So just wanted to get a clarity on this. How are you looking at it. Are we still maintaining that you will be between 1.1 to 1.3, inclusive of the INR 300 crores contingent provisions that you want to make this year?
Yes, I will be very comfortable between 1.1 to 1.3. And you see what happened. The first half of the year is a real troubled year for the vehicle finance and the micro finance unit. That's where the flows happened. And I've made a statement that the gross flows should see a reducing trend in the quarter 3 and quarter 4. And as a consequence, I'll get the capability to create the cost or the buffer positions, and I will be able to get the contingent provision between 110 to 130.
Okay. Now the thing is about slippages, right? So see your slippage is up this quarter, you had some corporate numbers, so you had INR 1,400 crores of slippages. And last quarter was a somewhat similar number. So you see this number trending down, you're saying in the second half, right?
I will see that coming down, and I still continue to maintain that we will be INR 4,800 crores to INR 5,100 crores. That's what the numbers we've been giving to the market. And we continue to believe that we will be within that range. And you will see the retail slippages coming off very strongly.
That means your second half numbers only INR 2,200 crores because you are guiding for INR 5,000 crores, right? And you've already done INR 2,800 crores for the first half.
Correct.
Yes. Okay. Now just 1 last question, again on slippages. See, I mean, the economy has been fantastic, and you are seeing such great outcomes even in public sector banks, what explains the 3.5% annualized run rate on your retail book? This looks so higher. If I look at the individual segment this quarter, and the reported NPL numbers, all the unsecured loans have created a problem in retail. I've seen personal loans going up, MFI loans going up and card NPLs going up. Can you give some clarity what's happening on the unsecured loan NPLs?
So you're absolutely right. I think if you look at our unsecured, the merchant acquiring business, which we have created in Bharat Financial, does have a 2.5% to 3% credit cost and the flow is around 4%. That's one of the businesses, and we are growing that business, but that yield is also at 28%. So merchant acquiring business has that, and it's an unsecured business to a large extent. Though this is guaranteed by the government, but they're unsecured business.
The second is the card business, where we've seen a little bit of slippage in this quarter, which is a little higher than what it was projected to be. So that's another business where our credit cost is touching about 3% to 3.5% against what we had thought it will be at 2.8% to 2.9%. So that's something which has come up 60 basis points. And our gross flows in the PL business has moved up by about 5 basis points this quarter.
Suresh, also just to clarify, like you know that, but GNPA also is a function of write-offs, et cetera. If you see the gross slippage, every segment has seen a Q-o-Q improvement be it vehicle, MFI, or other retail also. So the GNPA depends on how much you write-off in which quarters. Gross slippage wise, we have seen the improvement as well as net slippage in the secured and unsecured both.
Next question is from the line of Saurabh Kumar from JPMorgan.
Just 2 questions. One is on your NRI deposits. I mean is there an impact from higher rates globally? And the second is what's the outstanding amount of your security receipt book and the provision against that?
Yes. So NRI, of course, it gets benefited or impacted depending on how the currency rates are between INR and respective currency, and also the interest rates that are there. But that all you'd have to take it, and we are -- currency-wise we are fully hedged. We don't carry any risk at all in the book. In terms of the security receipts, we had reduced security receipts from 0.34% to 0.26%.
0.44% to 0.34%.
0.44% to 0.34%.
Okay. And what's your outstanding amount of NRI deposits right now?
INR 40,000 crores.
0.39 is the security receipts outstanding as on net, 0.39%.
Next question is from the line of Rahul Jain from Goldman Sachs.
I had 3 questions. Number one, to start with, how much excess liquidity we would be carrying on the balance sheet now?
INR 37,000 crores.
Okay. And that you think can be deployed all of it in lending or you'll keep some part of it on the books as liquidity?
We are comfortable with keeping some excess liquidity around INR 20,000 crores. We've always said that. So we will keep that, our minimum threshold of INR 20,000 crores in our books.
Okay. And in terms of LCR, what would that imply?
So we are at currently 117% LCR as what we've disclosed, and we will always be...
115% to 125%.
115% to 125% is what we want to be on LCR.
So INR 20,000 crores excess liquidity, you will be at -- in that range of 115% to 120%?
Yes.
I mean, again, INR 20,000 crores is a number that you are just taking. I mean, so idea is that -- at the end of the day, LCR has other components to it in terms of what constitutes your LCR, right? I mean HQLA and then outflows or the type of deposits that you have with the financial institution, nonfinancial institutions, corporate, noncorporate, tasks, whatever it is.
So I think that may not be the right measure to take, but yes, it gives you an indication of LCR. I think another good measure to reflect is on your stable funding book is your NSFR which I think is an important measure to know how stable is your funding over a period of time for your asset book. I think that is a big measure.
In terms of excess liquidity, while the threshold is INR 20,000 crores, that we are going to keep, but I really believe that we are not going to go down to that level. I mean because at the end of the day, it's about utilizing that liquidity in a manner, which is most conducive. So if you think that my liquidity is laying in cash only, it is not. It's lying in treasury bills or very short-dated government securities where I don't have risk, and I can get repo it back whenever I want to raise that temporary liquidity should the need arise.
Thanks for the elaborative answer. Actually, the reason I was asking is because the competition on deposit is, of course, heating up for us, the LDR has gone up, the deposit growth therefore, will start becoming critical at some stage. And I was just trying to see how much buffer we've got on that side that we can deploy and maintain our growth rates. So that was the reason I was asking that. All right. Second question is on retail slippages. Well, of course, it has come down. 3.6%, 3.7%-odd, it still appears to be on the higher side, no? What should be the right run rate in the cycle on the retail side, Sumant?
So we've always said that -- see, you have to look -- go by segment. So MFI will always be around -- slippages will be around 350 basis points. The credit cost will be around 250 to 300 basis points. That's what we will stabilize at. On the vehicle side, 2% of gross slippages and 100 basis points of credit cost will be what we will stabilize at. On the retail side, it will be 300 basis points of gross slippages and 200 basis points of credit cost. That's how we will stabilize it.
So if you look at it, you have to look at it in totality that we have recovery, these upgrades, and that's how we will stabilize it at this point. And overall, the gross slippages should stabilize between 2.75% to 3% in the book and -- in the retail book, and that's what our credit cost will be around 110 to 120 basis points.
And when do we see that number, Sumant, this year or by end of this year or next year?
You will see it in the second half. I can assure you this much.
Okay. The third question is, again, coming back to the corporate slippages, right? So it's a standard book and then you've got restructured, which is a very small amount. You said SMA, so what SMA and what is the nature of this slippage, INR 168 crores that one account that you called out? Can you give some more color on SMA-1 and SMA-2 towards the pool of that book in corporate?
So the overall SMA-1 and SMA-2 is -- SMA-1 and 2 is 0.26% of our overall book. SMA-1 is 0.06%, SMA 2 is 1.2%. This was one account of INR 165 crores, which was booked in somewhere 2017, '18, which slipped, we have very adequate collateral against that account, and we should see the recovery sooner than later on this account.
Okay. And anybody -- sector or this is an idiosyncratic case and you don't expect this to be repeated?
I can't say whether corporate slippages will come or not. We don't see anything, which is a burning issue right now on corporate is what I can comment on.
Because the economic environment seems to be pretty robust. So I was really surprised to see this number. That's why I'm asking you this question.
This is 1 account which was always in SMA-2 for a one-off, which is always there for the last 3 years. And it was not coming out of SMA-2.
Fair enough. The last bit is, I think somebody else has asked this question earlier about the unsecured bid. You talked about the merchant financing portfolio, but what about the consumer loans like credit cards and personal loans. How comfortable are you in this environment given that clearly, the cycle seems to be peaking?
Rahul, I fully agree with you. And I think it will not cross 5% of our loan book. This is what we have said, and we will continue to believe in that. We are not growing the asset book or the card business or a PL business as a strategy of ours. We had 2% market share -- 2.1% market share on number of cars -- 2.2%, I think today on the number of cars, and we are about 1%, 1.5% on the PL book.
And overall, this is 5% of our books. We are not growing that fast. So please understand while the businesses have grown, look at what our outstanding are. We are only INR 50,000 crores in the overall loan book, so we have not grown these businesses at that fast level. And I don't think because of the Bharat Financials, our unsecured exposures will go for a toss if we do that. So we are not growing that business.
Understood. And then since we are on that and maybe the last question, the RBI also sounded quite cautious. So are you seeing anything, which is -- which we should be aware of as a fraternity on the unsecured side?
If you look at TransUnion data or any other data, I think the PL flows have not increased. So there is no such thing on the PDL. In the STPL cases, where the ticket sizes are less than INR 50,000 or INR 70,000 we are seeing some stress but not in the other tickets. On the credit card also, I think there is a 30-plus flow of about 25 basis points, but not -- nothing to be perturbed as of now.
Next question is from the line of Piran Engineer from CLSA.
Firstly, I just wanted to reconfirm 2/3 of the corporate book is MCLR linked or EBLR linked.
Sorry, it's 2/3 is the EBLR, 1/3 is MCLR.
Got it. Got it. Okay. Secondly, if you can just talk about your credit card partnership with Poonawalla, what's really in it for you?
I think it's just a partnership where we have a good relationship with Poonawalla. And I think we are doing a co-brand to get some clients, and hopefully, those clients will convert into asset customers or liability customers for us. The risk on the balance sheet is very, very low. I can tell you this much.
So it's their customers and you are going to provide credit cards to them?
Yes.
And so what -- can you give us some color on the cohort? What exactly are you looking for out there? Because I'm -- I would have expected you all to have a better customer set than them?
No, I agree with you. But please understand the portfolio will not be more than INR 200 crores or INR 250 crores over a period of 3 years. That's what we are looking for. Our criteria are our own credit underwriting criteria. So the selection of their customer base will not even get -- a lot of these clients will get rejected as a consequence. But sometimes you have to do these businesses, so we have to do them.
Okay. Okay. Fair enough. And just lastly, I'm curious to know, you mentioned about your LCV market share improvement over the last few years. Just wanted to get a sense of what you all did to drive that improvement? And at the same time, who lost market share, really? Was it the captive financials or...
So before the different segment, which we created, we were very focused that we wanted to diversify from the MHCV exposure and reduce our exposures and diversify the book in the vehicle finance segment. That's #1. So it was over. We also saw that this segment was occupied by NBFCs in a large way. And I think the leading -- 1 of the leading NBFCs had a very large market share of 11% to 12% at that point of time. We thought it was an opportunity because we had the distribution and the capability and the dealer network to get into this market. I have Sriram who runs our vehicle finance.
Sriram here, like the main NBFC, which has lost the market share is Tata Motors Finance. They have lost quite a bit in Tata products and then we have cornered some market share from Chola in other products.
Next question is from the line of Rikin Shah from India Infoline.
Just have 1 question now on the OpEx, particularly. So with the investments on the human capital side, branch additions, digital capability buildup as well as marketing, how do you envisage the cost-to-income ratio to improve by 3, 4 percentage points in the next couple of years?
So first of all, in a retail business and to invest in a retail business, I think the costs are upfront while the operating leverage comes over a period of time. We have invested in new lines of business like merchant acquiring, NRI, affluent, mortgage business, affordable housing. So we've invested and digital. I think all these operating leverage, this is still subscale businesses. I think the businesses will start playing out in the next 2 to 3 quarters, you should start seeing some improvement in our cost-to-income ratio. I think our cost-to-income ratio will go to 45% to 46% before it comes to 41% to 43%. That is where, by year 3, we believe our right cost-to-income ratio will be 41% to 43% for a bank of our size.
So the OpEx will continue to be elevated, but the income will kind of kick in and which will drive the moderation. Is that the correct understanding?
So let me put it in another way. I think if the digital businesses play out, the OpEx will moderate. In the initial stages of buildup of the digital businesses, the OpEx is elevated. But over a period of time, I think as you fine tune your digital businesses and your capabilities, the cost of acquisition of an account goes down dramatically.
So for example, in a credit card, when we started the digital business, we were about INR 6,000 per card acquisition. Now we are at INR 1,800, and we should get down to about INR 1,000. That's where the real advantage of a digital business comes into place. In an account acquisition mode, I think, right now, we've invested in the business. I think we are doing a lot of campaigns and understanding what quality of client is coming in, what is not coming in. So you will have some cost. It builds up over 6 to 9 months, you will see the fine-tuning of that portfolio happening and as all our campaigns happening and as this plays out.
Now let's go to other lines of businesses. If you created a mortgage business I think in the initial phases, mortgage business don't create any result, they are 100% efficiency business in the initial phases of the business. As you grow and keep your book above INR 7,000 -- INR 5,000 crores to INR 7,000 crores, the operating leverage comes into play in a mortgage business. Today, the operating leverage in the mortgage business is negative. It's a negative carry on them. So I'm fine with it. But as long as it supports my liabilities, and it grows and because it's an annuity-based business, so that's something.
So we have invested in new initiatives, new branches. And as long as those play out over a period of time, I think you will start seeing the revenue growth happening. Of course, the cost of the -- increase in cost will not be to the extent what you are seeing right now. So increase in cost will be moderated to be less than the revenues. So the negative cut on what we were seeing in the revenue growth at 17% to 18% and cost growth at 25%, you will see revenue growth at 20% and cost growth at 10% to 11%. That's how it will happen. The negative carry will go away.
Ladies and gentlemen, we will take that as a last question. I now hand the conference over to Mr. Sumant Kathpalia for closing comments.
So thank you for participating in the investor call. As usual, Indrajit and me are available for any clarifications or further discussion, which we want to have. Thank you, and God bless.
Thank you. On behalf of IndusInd Bank Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.