Indusind Bank Ltd

NSE:INDUSINDBK

Earnings Call Analysis

IndusInd Bank shows cautious growth amid macroeconomic stability

In Q2 FY '25, IndusInd Bank reported a healthy retail deposit growth of 15% year-on-year, with retail deposits up by INR 7,700 crores. While loan growth was cautious, reflecting 13% year-on-year, secured lending segments like vehicle finance grew 10%. Net interest income rose to INR 5,347 crores, influenced by microfinance slowdown, and net interest margin adjusted to 4.08%. The bank's ROA was at 1.0%. Looking ahead, cautious optimism surrounds the microfinance sector, with anticipated recovery in disbursements and asset quality expected to improve as the festival season approaches, setting a favorable tone for future growth.

Economic Environment and Growth Prospects

In the second quarter of FY '25, IndusInd Bank experienced stable economic activity, driven by resilient domestic consumption and investment demand. The Reserve Bank of India has shifted its stance to neutral while keeping the repo rate steady, hinting at potential future reductions as inflation trends towards the 4% target. The bank is optimistic about private consumption supported by improvements in agriculture and robust urban service demand, further aided by government spending on capital expenditures.

Deposit and Loan Growth Dynamics

The bank reported a healthy growth in retail deposits, with a quarter-on-quarter increase of 4% and a year-on-year rise of 16%, adding INR 7,700 crores in this quarter alone. This led to an improved retail deposit share in the Liquidity Coverage Ratio (LCR), which rose to 44.1%. However, loan growth remained cautious, with only a 3% sequential increase and a 13% year-on-year growth, indicating the bank's strategy to prioritize secured lending amidst a challenging market. Particularly, microfinance and credit card segments saw subdued growth.

Innovations and Digital Initiatives

IndusInd Bank's digital banking platform, INDIE, has gained significant traction, with over 1.4 million accounts opened and high transaction volumes. The app is actively used, enhancing customer engagement. Additionally, affluent and NRI banking initiatives grew by 19% and 37% year-on-year, respectively, indicating successful customer acquisition in these segments.

Asset Quality and Provisioning Strategy

The bank's gross non-performing asset (GNPA) ratio stood at 2.11% and net NPA at 0.64%, maintaining a provision coverage ratio of 70%. The bank has increased its contingent provision buffer from INR 1,000 crores to INR 1,525 crores, a prudent measure in response to sectoral challenges, particularly in microfinance. The gross slippage increased to INR 222 crores quarter-on-quarter, primarily attributed to microfinance, reflecting cautious management of asset quality.

Financial Performance Insights

Profit after tax was reported at INR 1,331 crores, with an adjusted return on assets (ROA) of 1.29%. The bank expects to return to normalized ROA levels as retail growth accelerates. Additionally, net interest income (NII) grew by 5% year-on-year, although net interest margins (NIM) moderated to 4.08% due to a shift in the loan mix and sustained deposit mobilization. Looking ahead, management anticipates an increase in asset growth and profitability once market conditions stabilize.

Future Outlook and Revenue Guidance

IndusInd Bank plans to maintain a cautious but optimistic stance towards loan disbursement, particularly in the microfinance sector. As market conditions improve, especially in the second half driven by seasonal demand, the bank expects to increase disbursements, with guidance for credit costs to remain between 110 to 130 basis points for the fiscal year. The bank is also poised to enhance secured loan portfolios and maximize growth in vehicle finance and retail segments.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to IndusInd Bank Limited Q2 FY '25 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.

[Sumant Kathpalia, executive]

Good evening, and thank you for joining this call. Economic activity remained stable during quarter 2 financial year '25 as fundamental domestic growth drivers of private consumption and investment demand remained resilient. The momentum was supported by rebounding of government consumption spending and CapEx after a contraction in quarter 1.

On the policy front, RBI shifted the stance to neutral while keeping the repo rate unchanged, signaling that the rates may be reduced going forward as confidence increases on the last mile of this inflation towards the 4% target. Looking ahead, India's growth story remains intact.

Prospects of private consumption look bright on the back of improved agricultural outlook and rural demand, while sustained buoyancy in services continue to support urban demand. Investment activity would benefit from consumers and business optimism, government's continues support thrust on CapEx and healthy balance sheets of banks and corporates.

Coming to the quarter-specific development, the key highlights of the quarter are: healthy retail deposit accretion. Retail deposit mobilization picked up pace during the quarter with 4% quarter-on-quarter and 16% year-on-year growth. We incrementally added INR 7,700 crores of retail deposits and consequently, the share of retail deposits as per LCR improved to 44.1% versus 43.7% quarter-on-quarter. Overall, we maintained healthy deposit growth momentum with 15% year-on-year and 3% quarter-on-quarter growth.

Cautious loan growth trajectory. Our sequential loan growth picked up from 1% to 3% quarter-on-quarter. The Y-o-Y growth was at 13%. We have been watchful of developments in the unsecured products and have slowed down our business consistently for the last few quarters.

Last quarter too, microfinance and credit card growth has been subdued. We, however, remain comfortable and continue to grow our secured lending and corporate franchise. Vehicle finance outperformed the industry volumes. Diamond business too has resumed growth in the last 2 quarters, while other retail loans maintained steady growth.

Progress on new initiatives. Traction on our digital banking offering, INDIE remains healthy, and we now have more than 1.4 million accounts cumulatively opened on the INDIE app. Existing liability initiatives of affluent and NRI banking are scaling up well, growing at 19% and 37% year-on-year, respectively. Our home loan book crossed INR 3,000 crores and grew up by 28% quarter-on-quarter. Loan book under the merchant acquiring business grew to INR 5,790 crores, up 18% year-on-year.

Asset quality. We maintain our focus on collections during the quarter. Our net slippages increased by INR 222 crores quarter-on-quarter, largely from microfinance business. Our GNPA was at 2.11% and net NPA at 0.64% with a PCR of 70%. Our restructured book continues to run down at 0.29% compared to 0.34% quarter-on-quarter.

Strengthening of the balance sheet. During the quarter, we prioritized long-term sustainability over short-term earnings. We progressed on deposit mobilization despite slower retail asset growth, contributing partly to our NIM dilution. We also increased our contingent provision buffer from INR 1,000 crores to INR 1,525 crores during the quarter purely as a prudent pressure.

Our credit cost for the H1 outside the increase in contingent provision was at 131 basis points, close to our stated expectation of the year at 110 to 130 basis points. The ROA thus contracted to 1.0% which we believe is a transitory impact. We should get back to a steady rate ROA once we resume growth in microfinance.

Now coming to individual business. Our vehicle finance loans grew by 10% year-on-year and 1% quarter-on-quarter. Vehicle finance disbursements for the quarter were at INR 10,693 crores. Our diversification strategy is helping us in sustaining steady level of disbursements. We have been able to maintain market share in most of the vehicle categories as is evident in the industry volume versus our portfolio growth.

Disbursements/market share have been stable in our large portfolios of commercial vehicle, construction equipment and passenger cars. Our market share was lower in 2-wheelers as we consolidated our presence and in tractors as we tightened our underwriting.

The gross slippages in vehicle finance were marginally higher at 0.77% versus 0.75% quarter-on-quarter due to lower activity levels during monsoon. The restructured book in vehicle finance has also reduced to INR 309 crores from INR 470 crores quarter-on-quarter, with majority of the reduction due to upgrades and recoveries.

Looking ahead, vehicle demand is expected to gain momentum in the second half, fueled by the festival season boost, resumption of government CapEx and improved overall economic activity and relatively better weather conditions.

The first half of the year is seasonally weak in terms of disbursements and asset quality of vehicle business. The second half of the year contributes largest share of disbursement as well as recoveries. Overall, we expect to see improvements both in terms of disbursement acceleration and asset quality during the remaining part of the year.

Bharat Financial Limited. Outstanding loan book originated via Bharat Financial now stands at INR 38,513 crores, degrowing by 9% quarter-on-quarter. As mentioned earlier, we remain watchful on microfinance disbursement, prioritizing collection in light of industry-wide challenges.

However, our diversification into merchant business via Bharat Financial saw a healthy growth during the quarter. Consequently, the share of non-MFI book has improved to 15% versus 13% quarter-on-quarter. Total liabilities sourced through the Bharat Financial now stands at INR 2,376 crores, with 19 million SAP and RD accounts.

Microfinance, we continue to follow our approach of disbursements led by acquiring new customers while being cautious on customer level exposure. Our customer level indebtedness reduced 6% quarter-on-quarter, while average loan exposure per customer at INR 39,685 amongst the lowest in the industry. We expect disbursements to improve this quarter, but it may still be lower than our distribution potential as we remain watchful on the industry development.

The microfinance 30 to 90 DPD book increased by 2.1 percentage points during the quarter given the sectoral stress. Gross and net slippages in the microfinance business were at INR 398 crores and INR 355 crores for the quarter. This implies a net slippage ratio of 0.96% for the quarter.

Bharat Super Shop, the merchant acquiring business. We now have around 700,000 merchants borrowing under this program. Our merchant loan book stood at INR 5,790 crores with 18% year-on-year growth. Bharat Money Stores, the Kirana shop liability model, we have 91,000 Bharat Money Stores, providing banking at the doorstep in remote areas growing at 22% year-on-year and 4% quarter-on-quarter.

Overall, we believe the microfinance business is likely to meet -- see support from the rural recovery. Industry level cautious stance and external disturbance such as heat wave, floods, et cetera, getting behind. The sector is resilient and has bounced back after disruptions in the past. We do believe in the long-term potential and our approach of being a conservative and diversified rural play should deliver recovery ahead of the sector.

Corporate Bank. The Corporate Bank loan book grew 16% year-on-year, with growth continues to be led by granular mid and small corporates. Within corporate, large corporates grew by 14% year-on-year and mid and small corporate each grew by 18% year-on-year. The healthy growth in the mid and small corporate continues with increasing coverage focus on this segment and focus on select industry segments. Sectors which saw growth during the quarter includes petroleum, power generation, steel, et cetera.

The diamond business reported another quarter of sequential growth. The asset quality in diamond clients remained pristine with no NPA or SMA-1/SMA-2 clients. The proportion of A and above rated customers has been 79% versus 77% year-on-year with weighted average rate improving to 2.47% versus 2.57% year-on-year.

The slippages in the corporate book remains small and the gross slippages of INR 118 crores and net slippages of INR 56 crores for the quarter. Overall, we continue to progress on building corporate bank franchise focused on selective areas of competitive advantage with granular risk profile.

Other retail assets. Other retail assets continue to grow at a robust pace with 21% year-on-year and 6% quarter-on-quarter growth. Our MSME book under the business banking is now at INR 17,499 crores, growing at 14% year-on-year and 5% quarter-on-quarter.

New acquisition momentum saw uptick with 35% quarter-on-quarter growth, driven by maturing of branch operating model and new product adoptions. LAP book maintained a steady traction with 12% year-on-year growth. Our home loan product continues strong growth momentum with loan book now at INR 3,000 crores, growing at 28% quarter-on-quarter.

We recorded healthy card spend of INR 25,066 crores, growing at 4% quarter-on-quarter. Share of unsecured card NPL has been maintained prudently at 5% to 6% of the loan book. Overall, we continue to scale up our retail assets at faster pace with focus on improving diversification of loan book while increasing the retail secured mix and home loans with an MSME.

Now coming to liabilities. In spite of our cautious stance on loan growth, we maintained our deposit growth momentum during the quarter with overall deposits growing at 15% year-on-year and 3% quarter-on-quarter. Retail deposit mobilization, our key focus area, was also growing -- was also growth picking up this quarter with 16% year-on-year and 4% quarter-on-quarter growth.

We incrementally added around INR 7,700 crores of retail deposits this quarter compared to average of INR 4,400 crores for previous 2 quarters. Consequently, the share of retail deposits as per LCR improved to 44.1% versus 43.7% quarter-on-quarter. Cost of deposits increased by a modest 2 basis points quarter-on-quarter, largely due to higher [indiscernible] contribution. We continue to scale our initiatives of affluent and NRI during the quarter.

Overall, affluent segment deposits at INR 56,900 crores grew by 19% year-on-year and AUM of INR 94,000 grew by 27% year-on-year. We had another quarter of robust growth in our NRI segment with NRI deposits growing at 37% year-on-year and 10% quarter-on-quarter. During the quarter, we strengthened our affluent franchise with launch of PIONEER Private, a curated offering for HNI and Ultra HNI with over INR 30 million net relationship value.

We also rolled out our community banking program, Indus Care, for senior citizens with a few unique propositions. We are seeing healthy early acceptance of these propositions. Our reliance on bulk deposits remained low with certificates of deposits at 3.4% of our overall deposit and borrowing at 8% of total liabilities. Share of top 20 depositors reduced from 17.4% in March '24 to 16.1% in September '24.

The liquidity position remained healthy during the quarter with an average LCR of 118%, an average surplus liquidity of INR 48,500 for the quarter. Overall, we are progressing on our -- we are progressing well on our journey of strengthening liability franchise with strong emphasis on retailization of deposits.

Digital traction. Indeed, the digital banking app of the bank continued to the scale during the quarter. We have cumulatively opened 1.4 million accounts and completed 100 million transactions till date. The platform sees almost 10 million transactions per month with active clients doing more than 40 transactions each month.

The app is now also open to all IndusInd Bank CASA customers bringing a better way to bank to all IndusInd Bank customers. More than 125 million personalized nudges happen through the platform each month, leading to 2x Y-o-Y increase in average ticket size.

IndusMobile monthly active user base increased to 3.2 million with recurring payments increasing to -- by 25% year-on-year. We have launched a revamped investment platform on mobile banking and Internet banking platform, offering best-in-class personalized investment services, powerful features such as portfolio analytics, funds comparison, risk profiling, et cetera. These platforms are scalable, resilient and market stack enabled.

We went live with an account aggregator model to offer personal loans leveraging banking data. We also launched a new app for GIFT City clients during the quarter, one of the first banks in the industry to offer this GIFT City -- to offer this to GIFT City clients.

Now coming to the financial performance for the quarter. Our net interest income at INR 5,347 crores grew by 5% Y-o-Y. The NII was impacted due to reduction in loan yields and as a consequence of slowdown in micro finance, as well as continued push on deposit mobilization, resulting into lower loan-to-deposit ratio.

Our cost of deposit increased modestly by 2 basis points quarter-on-quarter, mainly due to shift towards TD with overall cost of funds declined by 1 basis point quarter-on-quarter with benefits on borrowing. As a result, net interest margin moderated to 4.08% versus 4.25% quarter-on-quarter.

Core client fees, excluding trading and other income, was at INR 2,125 crores. We had large private sector lending certificate fees in base numbers, both quarter-on-quarter and year-on-year, which is absent during the quarter.

We continue to optimize our operating expenditures. The OpEx growth further moderated to 14% year-on-year versus 20% year-on-year in previous quarter. The sequential growth too was contained at 1% quarter-on-quarter, even after factoring in the annual appraisal actions in quarter 2. The cost to income ratio, however, inched up due to slower revenue growth.

The operating profit for the quarter was INR 3,600 crores. On the asset and the provisioning front, we maintain a steadfast focus on collections during the quarter while being cautious on the unsecured loan growth.

Our gross slippage ratio was at 0.52% versus 0.49% Y-o-Y. The gross slippages of key segments -- by key segments were vehicle finance, INR 692 crores; micro finance INR 398 crores; corporate, INR 118 crores and other retail, INR 590 crores.

The restructured book reduced during the quarter to 0.29% from 0.34% quarter-on-quarter, with the bulk of the reduction due to upgrades and recoveries. The net security receipts have reduced to 31 basis points versus 39 basis points year-on-year and 32 basis points quarter-on-quarter.

Overall, the gross NPAs and the net NPAs were at 2.11% and 0.64%, respectively. Provision coverage ratio at 70% was stable quarter-on-quarter. Our SMA-1 and SMA-2 book collectively was at 33 basis points. With incremental contingent provision added this quarter, total loan-related provisions were at 2.4% of loans versus 2.2% quarter-on-quarter or 110% of the gross NPA versus 106% quarter-on-quarter.

Overall credit cost for H1 '25 outside the incremental contingent provisions were 131 basis points. We have created incremental contingent provisions of INR 525 crores during the quarter. This is purely a prudent measure taken by us for further strengthen our balance sheet, amidst the challenging operating environment.

Profit after tax for the quarter was at INR 1,331 crores. ROA at 1% declined sequentially as we prioritized long-term sustainability over short-term profitability. Profit after tax, adjusted for incremental contingent provision, was at INR 1,725 crores and adjusted ROA was at 1.29%. We expect to return to normalized ROA as retail growth accelerate.

Our capital adequacy ratios of CET1 and CRAR were at 15.21% and 16.51%, respectively. This includes the impact of 78 basis points on CET1 due to increased risk in risk weightage of microfinance loans from 75% to 125%.

Overall, to summarize the quarterly performance. We maintained a balanced approach of prioritizing growth in secured assets while being cautious on the unsecured microfinance and credit card loans. The secured loans grew by 4% quarter-on-quarter versus unsecured degrowth by 6% quarter-on-quarter. We should see retail disbursements picking up in H2 with seasonality support.

We maintained traction on deposit growth irrespective of this lower asset growth. The retail deposit mobilization was the highest in the last 3 quarters, along with only 2 basis points quarter-on-quarter increase in cost of deposits. OpEx growth was well contained at 1% quarter-on-quarter and 14% year-on-year against the mid-20s run rate last year.

Our asset quality trends have remained range bound in an otherwise turbulent operating environment. H1 credit costs outside the incremental contingent buffer was at 131 basis points, close to our stated aspiration of 110 to 130 basis points. The increase in buffer is purely a prudent measure given the operating environment, and we don't expect the full credit cost for the rest of the year to be materially outside our stated aspirations of 110 to 130 basis points.

Our profitability metrics was thus affected due to the quarter as we pushed deposit growth, even though higher yielding assets degrew along with augmenting the buffers. We believe this is a transitory impact, and we should head back to our core profitability once we resume the growth in micro finance.

With this, we can open for questions and answers.

[Operator]

[Operator Instructions] The first question is from the line of Kunal Shah from Citi.

[Kunal Shah, analyst]

Broadly to understand on the MFI part, the rundown seems to be quite stark, okay? So if you can highlight in terms of how the disbursement run rate have been in Q1 and Q2 it doesn't seem there is significant write-off out there, but 12% rundown seems quite stark and if you can even highlight the SMA-0, 1, 2 pool, particularly for the MFI. Otherwise, [Technical Difficulty] seems to be controlled at less than INR 400-odd crores.

[Sumant Kathpalia, executive]

So I think let me first talk about the disbursement. I think our disbursements were at quarter 1 at INR 8,500 crores, and quarter 2 was at INR 7,050 crores for the quarter against our average run rate of about INR 12,000 crores to INR 13,000 crores. The run rate -- as a consequence, our book ran down sequentially because the repayments are coming in, in the book. So that's the reason why the runoff has happened, okay? If you look at the 30 to 90 DPD, it's at 4% right now on the book and -- so that's where we are on the book right now.

[Kunal Shah, analyst]

Okay. So 30 to 90 DPD is just 4% but if you say like disbursement is about INR 7,000 crores.

[Sumant Kathpalia, executive]

Yes.

[Kunal Shah, analyst]

Rundown was almost INR 5,000 crores. So on INR 37,000 crores in a single quarter, does it mean like repayments are to the extent of almost like obviously, there would be maybe the repayments and the disbursements towards...

[Sumant Kathpalia, executive]

INR 9,600 crores is the repayment per quarter.

[Kunal Shah, analyst]

Okay. INR 9,600 crores worth is repayment.

[Sumant Kathpalia, executive]

Yes.

[Kunal Shah, analyst]

And generally, this run rate would be the way you highlighted disbursements used to be like 12, 13-odd thousand crores.

[Sumant Kathpalia, executive]

Yes, INR 12,000 crores to INR 13,000 crores was the disbursement.

[Kunal Shah, analyst]

Repayment run rate would be, in general, on a quarterly basis?

[Sumant Kathpalia, executive]

About INR 9,000 crores to INR 10,000 crores is the general run rate on the repayment.

[Kunal Shah, analyst]

Because that decline seems to be quite stark. So -- but write-off, what was the write-off in MFI?

[Sumant Kathpalia, executive]

What is the...

[Kunal Shah, analyst]

Write-off in MFI?

[Sumant Kathpalia, executive]

So we have written off about INR 73 crores in write-off. There is no sale to ARC also.

[Kunal Shah, analyst]

Okay. And this entire contingency buffer, how should we read this? Is it towards maybe any particular segment? It's in stress. So the other retail is relatively on the higher side. Is it towards ECL which we have been highlighting? So how should we view this buffer? Because I think maybe earlier, you have been highlighting that maybe if profitability is less, then we would use it.

[Sumant Kathpalia, executive]

I have -- I don't want to use the contingent buffer. I think this is a prudent measure which has been created to take care of any eventuality, whether it's ECL or whether if we see the credit cost pricing at a certain point much below what our expectation is. But today, I don't think there is any need to use the contingent buffer. We've just created it and set it aside.

[Kunal Shah, analyst]

Is there a reason for creating in this quarter?

[Sumant Kathpalia, executive]

Only rationale for creating of this quarter was that I think we believe that we might -- the stress in the operating environment is building up. We saw some increase in the gross loans and we said might as well take the contingency buffer write-down. So it's only fortification of the balance sheet as of now.

[Kunal Shah, analyst]

Okay. And your last data point, interest reversal number.

[Sumant Kathpalia, executive]

Sorry?

[Kunal Shah, analyst]

Interest reversal number is impacting the margins or yields?

[Sumant Kathpalia, executive]

The GNPA has gone up -- the slippage has gone up only by INR 200 crores quarter-on-quarter. So it's not like a sharp -- a large number that had changed between previous quarter and this quarter. Margin is predominantly impacted because the microfinance contribution is lower, almost 1% lower in the balance sheet, and it earns around 10%, 12% more than the average on the balance sheet and there our LDR ratio has come off versus last quarter. So those are the two primary drivers for margin compression versus the last quarter.

[Operator]

Next question is from the line of Nitin Aggarwal from Motilal Oswal.

[Nitin Aggarwal, analyst]

So a couple of questions. One is on the SMA number that you talked about 30 to 90 DPD of 4% MFI. So how has this moved on a monthly basis? And any idea as to by when do you expect this forward flow to sort of starting to reverse?

[Sumant Kathpalia, executive]

So I think we continue to watch the actual flows. And I think if the actual resolution is happening better and better, and we've seen that it's improving, I think you will see the forward growth also as a consequence, there is a floor rate basis. And I think that's where we have to see.

I think already in the month of October, we're seeing some resolution happening in the actual bucket. So I think you will start seeing over a period of time a reduction in the 30 to 90 plus, we believe that it should be less than 1%. And it will come back to that number at a certain point, maybe in quarter 3 or quarter 4.

[Nitin Aggarwal, analyst]

Okay. And the other question is on the loan growth. Now if I look at the first half, we have grown around 4%. So how should we look at this growth? Because of the like a cautious stance that we have taken in certain segments, so for the full year, how should we model the loan growth?

[Sumant Kathpalia, executive]

So we continue to be optimistic about -- cautiously optimistic about growth. We will continue to evaluate. If we see that the market is improving in the microfinance, and we see our own portfolio, seeing the center meetings and the quality of the book improving, we'll start disbursing at a faster pace, which we have not been doing. I think we'll continue to watch that space.

I think -- in vehicle finance, I think we've been ahead of the volumes, specifically in the commercial vehicles and the construction equipment and the car side, not in the tractors and the 2-wheelers. We've been a little conservative on that. But I think as we cleaned up our book on the tractors as well as the 2-wheelers, I think you will start seeing second half of the year is much better in the vehicle finance.

We also have to see what the market is. The market has also been very slow on the vehicle segment side. And I think while -- and we don't want to increase the share of used vehicles right now, specifically in the commercial vehicle side.

So I think -- I believe that we should start seeing a disbursement which is higher now. I think the normalized disbursement for our vehicle finance is around INR 10,800 crores to INR 12,000 crores. I think we are already there at INR 10,600 crores last quarter. We should move to INR 12,000 crores this quarter because being a festival, there should be a 10% or 11% jump this quarter, and you'll see the book growing as a consequence of that.

On the unsecured side, I'm very comfortable with the PL side of the book. I think on cards, we will start increasing our volumes. But I think we are -- we see that growing. On the corporate side, we are very, very comfortable with the 16% to 18% growth, and we will continue to get that growth. So I think the biggest part is the microfinance, if it comes back to what it is, I think we should be able to get back to our retail growth.

This year, obviously, I don't think we should be able to do 18% to 22%, I think given what has happened. I think we have to watch quarter-to-quarter how our growth is. I can assure you that the asset is a priority for us, and we will grow because I think our LDR at 86% is not helping our NIMs at all. So I think we need to move to 89% to 90% and we will start moving that 88% to 89%, and we will start moving that asset book back to growth in the business.

[Nitin Aggarwal, analyst]

Right. Got it. And lastly, on the contingent provisioning that you have made this quarter. So how do you plan to move like going further? Will we continue with this prudential provisioning? Or is it a one-off that we have taken in this quarter?

[Sumant Kathpalia, executive]

So you should take this as a one-off right now.

[Operator]

Next question is from the line of Jai Mundhra from ICICI Securities.

[Jai Prakash Mundhra, analyst]

Sir, on your contingent provisions, so INR 520 crores to INR 530 crores, if I look at the SMA 30 DPD of MFI at 4%, which is roughly around INR 1,300 crores, and while the slippages in MFI have been more or less, less than INR 400 crores, but the rise in SMA is very prominent in this quarter. And there is no other segments which is showing much increased stress. I mean I wanted to check, is there any other segments where you have seen a significant rise in the SMA?

[Sumant Kathpalia, executive]

Only other segment which is a little bit worrisome is cards though I told you that the cards while the delinquencies are showing a higher percentage, they have stabilized. Now the flows have stabilized. So it's not. I think we are waiting for -- so you will not see an uptick on the delinquency. You're seeing a stable flow, which is a little elevated. We are waiting for the decline stage to come in on the cards.

Otherwise, on the MFI also, we've given you that our gross flows are at around 3.5% to 4%, but the credit cost has been contained at 3% to 3.5% and that's where we continue to believe that the credit costs have been maintained at.

So I think while there is an elevated flow on the -- and the -- but I think we are collecting -- we have put a lot of resources on the field and our cost has increased on the microfinance but we are focused on the collections and our -- all our energy is on the center meetings and making sure that the collection cost -- the flows reduce in the business as of now.

[Jai Prakash Mundhra, analyst]

Great. So sir, what I was trying to understand is, is there any proportion that this contingent provisions of INR 520 crores is a certain percentage of, let us say, increased rise in the SMA book in the sense that basis your assessment and looking at the forward flow rate, how much of the 4% 30 DPD could likely flip and hence, you would have provided against that?

[Sumant Kathpalia, executive]

Contingent provision is a prudent measure. I don't intend to use it unless until it's very, very necessary. We've always said that we've kept the contingent provision as a fortification of the balance sheet. Of course, if there is -- if you ask me a question, I think most -- you streamline it.

I think most of it, out of INR 525 crores, at least INR 250 crores is kept for the microfinance business so that we are able to -- if there is any eventuality, we may use it. But today, I don't see that we will have such flows that we may have to use that eventuality as of now.

[Jai Prakash Mundhra, analyst]

Understood. And secondly, sir, on your fee income, right? So over the last few quarters, while you mentioned in your opening remarks that there was expense of PSLC this quarter but even otherwise, the fee growth has been -- I mean, has weakened quite a bit. So how should one look at the fee income, which has been much lower than the loan growth? How should one look at this trend?

[Sumant Kathpalia, executive]

So I think two, three things. Like you rightly pointed out, in quarter 1, there was a PSLC part of it, which is not available, which is around INR 283 crores, which is part of the general banking fees. So that's not there.

Our treasury fees is a bit lower right now. Our treasury fees used to be a major component of our fees which has gone down. The third fee, which has gone down is the loan processing fee because of the disbursements going down. As a consequence, the loan disbursal fee has gone down. I somehow feel that you should start seeing fees coming up in the loan processing fee as we come up.

And the fourth fee, which has actually gone down in the distribution fee, including credit card. Credit card as a business has suffered on fees because of some regulatory frameworks which have come into play, including overlimit charges or late fee or penal charges. I think all of that has impacted the fee to about INR 100 crores, INR 150 crores a year.

[Jai Prakash Mundhra, analyst]

And sir, lastly, if you can help the 30 DPD number as of June quarter? And if I -- if I'm right, we have almost 0 net NPA in MFI, right? That is the provisioning policy. Or if you can help us the net NPA or the provisioning policy and writeoff policy in the MFI book.

[Sumant Kathpalia, executive]

There is no net NPA 0 policy. There are, as you know, RBI policies as the aging of the portfolio happens. So over a period of time, we provide it fully and write it off. We don't give segment-wise net NPAs. We can give you net -- GNPAs we have given you in the disclosure, but not the net NPA.

[Jai Prakash Mundhra, analyst]

And what was the 30 DPD as of last quarter in MFI?

[Sumant Kathpalia, executive]

It was 2% -- around 2% last quarter.

[Operator]

Next question is from the line of Abhishek Murarka from HSBC.

[Abhishek Murarka, analyst]

So just discussing MFI a little further. One is, what is your provisioning and write-off policy? Is it 180 day, 240 day? When do you write it off? And how do you provision?

[Sumant Kathpalia, executive]

So we provision -- if you look at our PCR, it's 70% provisions. We provisioned 70% on the 70 day and our write-off policy is 180 days to 210 days basis on the product which we do.

[Abhishek Murarka, analyst]

Okay. So 180 to 210, in that range. Okay. The other thing is what is the recovery that you see in MFI because that is critical to like most of the parameters. So from here...

[Sumant Kathpalia, executive]

Every MFI business will only have a recovery of 7% to 15% depending on the early -- so early stages will have about 15% to 20%. One year older cases will have about 5% to 7%.

[Abhishek Murarka, analyst]

No, no. I meant what is the recovery path, not the number, but from here, how do you see, let's say, collection efficiency improving? Do you think it will happen by December? Do you think it will be February, March before disbursements pick up? So what is the path of recovery from here, let's say, for the next 2 quarters?

[Sumant Kathpalia, executive]

See, this quarter is very critical. I think we have to wait and watch and see how the disbursements take up -- pick up this quarter. This is a festival season. Always the festival -- these 2 quarters have been very good quarters for MFI historically.

Now given the stress which has appeared in this segment, we have to wait and watch and see how the MFI segment plays out given that four NBFCs have been banned from doing this business or are not adding new customers into this. So we have to wait and watch. I think there are stresses which are emerging in some parts of the country, specifically Bihar, Maharashtra, Odisha, parts of North. So I think you have to continuously wait and watch on this.

We are -- like I said earlier, we are cautiously optimistic on the micro finance. We like this business. We believe that this business has turned around once the disbursement takes place. And because you don't give disbursements to clients who are delinquent. And I think once the disbursement takes place and the funding process starts, I think you will start seeing business happening.

And I think, in my opinion, I think another month or so, you should start -- in my opinion, if everything goes well, I think within 2 months, you should start seeing the flow rates coming down in this business.

[Abhishek Murarka, analyst]

Right. And just from a credit cost perspective, you said it is around 3%, 3.5% in MFI right now. But if you see your 30 to 90, that has gone up by 2%, and a lot of that is likely to probably flow forward into 90 plus next quarter as well. So let's say, 3Q and even part of 4Q, do you think credit cost in MFI would be higher? The rest of the sector is actually seeing much more increase in credit cost. So just wanted to get a sense.

[Sumant Kathpalia, executive]

So I think we have put in our resources in the 60 to 90 bucket and trying to stabilize the flows right now. And I think 30 to 60 and 60 to 90 is a major focus area for us, where we are curing customers and getting the flow moved back. In my opinion, yes, historically, we've seen 60% to 70% flows out of this -- into the NPAs.

We think that it should be reduced to about 40% to 50%. And if we can roll back to 10% to 20% of the client, then it would -- we would have done a better job of this. So I think we are optimistic that we should be able to manage the way we've been able to do it up till now. But I think we have to see how it plays out in the market right now.

[Abhishek Murarka, analyst]

Yes. Sumant, just if you look at the way credit costs may trend for MFI and it's very highly likely that it would be higher than the 3% you were factoring in earlier. Then for your overall 1.1 to 1.3 guidance, maybe for the next couple of quarters, do you see us breaching that because it will only come back within the guidance once this MFI thing normalize.

[Sumant Kathpalia, executive]

But I also believe that the credit cost in the CFD business and in the consumer businesses could give me a relief for the MFI cost to be absorbed. So there are gives and takes. So I also feel that the consumer business as well as the vehicle finance business should give me a relief at some point of time.

[Abhishek Murarka, analyst]

Understood, understood. And second thing, Sumant, is on margins. Now this quarter, of course, 4.08% and maybe one more quarter or two more quarters of stress in MFI plus the LDR staying low. So do you think now at least for the next, again, 6 months, we are likely to see a lower range of margins, maybe 4% to 4.1% and then maybe go back to 4.2%, 4.3% like we had earlier guided next year? So is that how to think about the trajectory in margin?

[Sumant Kathpalia, executive]

See, you're asking a very specific question, and we can't answer specific questions. It all depends on whether the high-yielding book of the bank takes off. If the high-yielding book of the bank takes off, the margins will come. If you are dependent on a corporate book or a mortgage book to grow your assets, the margins will not come.

So in my opinion, I think our high-yielding books, which could have performed better is MFI book. And I think the unsecured part of the book, which has also not grown. We saw -- like I said in my commentary, we had a negative 6% growth in the unsecured part of the book. If we can moderate that to even 1% or 2%, I think the margin should stabilize at what we want it to be stabilized.

If it does not grow, and we don't see that as an opportunity, I think the margin will be where it is. So I think you have to -- in that case, we can also do another thing that I think we continuously grow our deposits to make our LDR and our realization go up. And if we feel that our asset growth is not coming at the pace, we may even slow down our deposit.

While we may grow retail, but we may slow down the asset piece, a liability piece, something and get the LDR up to 87% to 88% to manage the NIMs at this point. We had a double whammy. On one side, the high-yielding asset book went down. On the other side, we continuously grew our liabilities, and that growth actually had the LDR impacted in a big time for us.

[Operator]

Next question is from the line of Suresh Ganapathy from Macquarie Group.

[Suresh Ganapathy, analyst]

Sumant, just a qualitative assessment because, Sumant, a lot has gone wrong in the last couple of quarters. I mean, you always argue that you have lower exposure to Bihar relative to everybody else and some of the problematic states. And rightly, you always had a much lower ticket size in the MFI segment.

Personal loans also not much exposure, but still 4% slippage ratio in the overall retail segment, don't you have anticipated this or what is the behavior of the customers? Why have banks got it wrong? I mean, this industry has got it wrong. But even you have had a problem, right, could you have not got this a little bit better?

[Sumant Kathpalia, executive]

Suresh, let's take a focus on -- there are two specific parts questions, and let me answer the microfinance segment separately and the personal loans or the credit card question separately. On the microfinance segment, if you look at us, we've been able to exit. We did not have a West Bengal blowout the way other banks had. We did not have an Assam blow out.

We also, today, in the Bihar blowout, there's not so much there. We are -- we've actually reduced our exposure to Bihar to 7% of the book where other people have 15% to 20%. So we actually started exiting Bihar long time ago to that extent. So I think I've always said in a microfinance segment, 3.5% to 4% of gross flows is given, and you'll have a 2.5% to 3.25% of credit cost. It cannot run below that and I continue to maintain it.

There may be some quarters where you may have a take, but in some quarters, you will be able to manage that. I continuously believe that the strength of my book of microfinance is very, very strong. Yes, the whole industry is going through a trouble phase because the funding cycle has stopped right now. And I think once the funding cycle comes in, you will see that the quality of the book will come back.

Also, please understand, also when you look at microfinance, look at the number of clients who are exclusive to you and which are not more than one lender against you. Clients who are exclusive to me is 44% of the book. Clients who have only one other lender other than me is 27%. Another client with two lenders only is another 20%. Only 9% of my book is where three lenders or more are there. And I think...

[Suresh Ganapathy, analyst]

If someone -- let's say, this 5%, you have INR 400 crores gross out of INR 3,200 crores, on an annualized basis, that's a 5% number.

[Sumant Kathpalia, executive]

That is the market -- I'm just telling you that is the market right now. You look at other microfinance institutions, the slippages are higher right now. The market is like that because there is no funding, there is no benefits which have been given to these guys. There have been stress in the rural economy, which has come in. I think it will stabilize.

And in my opinion, you will see stability much faster than what we are anticipating. I am very bullish on the microfinance segment. And I think you will see the stability coming in very soon. Let the quarter 3 end, I think you will see a very different maybe quarter 3, quarter 4, you'll see a very different microfinance segment. And we'll be talking a different story on microfinance.

[Suresh Ganapathy, analyst]

Okay. What about other segments? Because if I closely observe your construction equipment NPAs have gone up, card NPAs have gone up, 3-wheeler NPAs have gone up. Even all other segments are contributing to stress, right?

[Sumant Kathpalia, executive]

Yes. So let's go step-by-step. If you look at the vehicle finance book, on the vehicle finance book, there are two areas where the -- so construction equipment NPA is made up of two customers. Those two customers will get reversed this quarter. Those flipped during the quarter, that is the only reason, there are just two customers. And we believe we have a pristine book in construction equipment, and we will be able to manage that. And you'll see the recovery this quarter on that.

On the -- where we have a stress is on the tractor and the 2-wheeler side, where I think, yes, we slowed down our business, and we saw the stress much earlier, and our book has been running down on that segment.

On the credit card side, I've always said that the gross NPA flows are around 7% to 8% with the credit cost of 2.8% to 3%. It has remained at that level on the business. And I think the stress is not increasing, but there is also not an improvement in the flow rate on the credit card side. So it is static. It's at least the baseline is still there. There is no increase in the -- but the flow rates continue to remain elevated and it stabilized at an elevated level right now.

[Suresh Ganapathy, analyst]

Okay. And this contingent provision has nothing got to do with an unfunded exposure to a telecom asset, right? I mean do you think it could also be earmarked to that?

[Sumant Kathpalia, executive]

Not at all. I don't think so. But I think you're right. Maybe I should look at positioning something towards it. But let me tell you, to be honest, I created the contingent provision so that I could take care of any unforeseen probability which may come in my book or take care of the ECL as and when it comes.

[Suresh Ganapathy, analyst]

Sumant, the issue is you could have done that previous quarter or quarter earlier because typically contingent provisions are made in a quarter where you believe you have some excess profitability to provide for. Would it make sense to cash the financials and make a contingent provision because that's what has happened. In a very tough quarter already, you have gone out and made contingent provisions. So maybe the timing is something which is curious to all of us, that's the only thing I thought I will...

[Sumant Kathpalia, executive]

Anybody's guess, Suresh. Would you not like me to deliver a better quarter 3 and a quarter 4 with much more simpler and a stabler return? While I would say no, no, let me make a contingency in good times, I've made it -- I know this quarter was bad. Let me do it. Yes, I will get beaten down, but at least I've fortified my balance sheet and I can move ahead. I don't have to look back.

And I think the bank should be looked at from a long-term perspective. And I think on the long-term perspective, I've changed nothing of my parameter. Yes, this year has been tough year on the growth side. But I think we will get back. And in my opinion, very soon, we will be talking a very different language in my opinion. Yes, I admit that I made a contingent provision in a tough time, but I thought I would like to not delay the good story part of the bank also.

[Operator]

Next question is from the line of Rakesh Kumar from B&K Securities.

[Rakesh Kumar, analyst]

So the first question is with respect to the MFI loan book itself. So like what we see is that like whenever the book is getting a run down, the average loan book -- average loan per borrower, that number is coming. So what kind of borrower like that we are running down?

So looking -- also looking at the active Bharat the number and the merchant loan client number, so quarter-on-quarter, that number also has changed. So if you could just help us know that what kind of customer we are not referring at this point in time in the MFI segment?

[Sumant Kathpalia, executive]

So I think we look at three areas. One is certain districts in certain states, which we are not referring. Number two, if a center has a delinquency beyond a certain threshold level, we don't consider the center at all. And that is why the disbursements are poor. It's not about the customer.

Third, I think the center because it's a JLG model, third, if we feel that there is an over leveraging on the household income and the household income has changed very frequently in the client book, we don't change irrespective whether we don't change, and if we change that the change has happened very frequently, we don't.

Fourth, if we think that the borrower has more than three borrowers, in that, we don't do the business. And fourth, if a customer has been more than 60 DPD with any one of the lenders, we don't do the business.

[Rakesh Kumar, analyst]

Understood. And secondly sir, when we are running down kind of a higher yielding book, then what is the reason that there is a risk -- there is a rise in the credit risk weight? I couldn't understand number change quarter-on-quarter.

[Sumant Kathpalia, executive]

The risk weight which has been changed is by the regulator, not by us. I think the risk...

[Rakesh Kumar, analyst]

Sequentially, sir, sequentially from June to September and looking at the book that we are running down, so there should not have been so much increase because we have running down the higher yielding book, which might attract higher risk weight.

[Sumant Kathpalia, executive]

No, no, no, you don't. The regulator has increased the risk weight on the full book of microfinance from 75 basis points to 125 basis points. That is why the capital charge has increased. Yes. So the risk weights on the capital charge on the microfinance business has increased from 75 basis points to 125 basis point. That's an impact of 78 to 80 basis points to us.

[Rakesh Kumar, analyst]

And lastly, sir, just on this vehicle loan book, where the disbursement has been coming down for the last 3 quarters and like around 70% of book CD plus CV is kind of for the system also, like if you look at the data, it's not [Technical Difficulty] and there is a very low growth. So -- and this is around 24% of book for us. So how do we foresee the growth coming from this 1/4 of the book?

[Sumant Kathpalia, executive]

So please understand, I think the growth has slowed down. We believe that the growth is coming back on this book. There is a -- so if you look at the OEMs, the OEMs are showing a 3% -- 2% to 3% growth. The growth in the sales has gone down where the data which shows is -- in my opinion, there are two or three parts to it.

One is I think where we operate in the Tier 2, 3 till Tier 5 markets, I think there is a demand which is coming back, and we are seeing that demand. Specifically, in the half 2, there is a demand, which comes back.

Number two, the used vehicle, which is less than 2 years, we are focusing on that to make sure that the demand comes back in that. Third, our diversification strategy, and we are building our book on the car loan side, on the used car loan side. And also now we are growing the tractors and the 2-wheelers after we've corrected our underwriting and the credit standards on that. So we should be able to now this quarter itself, you will see the growth coming back in this business.

[Rakesh Kumar, analyst]

So 10% of the growth, sir, that we have done Y-o-Y in the segment and opportunity [Technical Difficulty].

[Sumant Kathpalia, executive]

It is very difficult to -- like let me see the quarter 3, and I think I will be able to comment post the quarter 3 because festival season is an important season of this one.

[Operator]

Ladies and gentlemen, we'll take that as a last question. I now hand the conference over to Mr. Sumant Kathpalia for closing comments.

[Sumant Kathpalia, executive]

Thank you for participating in the call. I know this has been a tough quarter, and some of you may be not very happy with the results. I can assure you that the bank is well on track. And whatever we've done is in the best interest of the long-term for the organization. We should be back soon to where we belong. Any questions which you have, me and Indrajit will be able to answer you at your convenience. Thank you so much.

[Operator]

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