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Ujjivan Small Finance Bank Ltd
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Ladies and gentlemen, good day, and welcome to Ujjivan Small Finance Bank Limited Q1 FY '24 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Rikin Shah from IIFL Securities Limited. Thank you, and over to you, sir.
Thank you, Salin. Good evening, everyone, and thanks for joining the call. We have with us the management team of Ujjivan Small Finance Bank to discuss the business strategy and outlook for the 1Q results.
The management team is represented by Mr. Ittira Davis, MD and CEO; Ms. Carol Furtado, Chief Business Officer; Mr. Martin PS, Chief Operating Officer; Mr. Ashish Goel, Chief Credit Officer; Mr. M.D. Ramesh Murthy, Chief Financial Officer; Mr. Vibhas Chandra, Head, Micro Banking; and Mr. Deepak Khetan, Head, Financial Planning and Strategy IR.
With this, I'll pass on the call to Mr. Ittira Davis. Over to you, sir.
Thank you, Mr. Shah. Good evening, and welcome to our first quarter earnings call.
I am delighted to share with you our first quarter performance. Despite Q1 generally being a slow quarter, our performance has been robust. Building on the strong base of financial year '23, our pre-profit -- our pre-provision operating profit and PAT have reached new highs of INR 458 crores and INR 324 crores, respectively, which is 52% and 60% higher than Q1 of the last year, respectively. Even against Q4 FY '23, it is 12% and 5% higher, respectively.
Our return on assets at 3.8% is again something that puts us ahead of our peers and that has been the trend for the last few quarters. Some of it is due to lower credit cost, but even our PPOP ROA at 5.4% is quite remarkable. We posted a return on equity of 30%, which also means that the business is self-funding itself, leading to an improvement in CRAR from 25.8% to 26.7%.
Now starting with the business numbers, we disbursed INR 5,284 crores, up 22% year-on-year. While the demand continues to be there, disbursements from Micro Banking was sequentially low due to Q1 being historically a weak quarter. We expect the disbursements to pick up again by the second half of the fiscal year.
We acquired about 2.6 lakhs new customers this quarter in Micro Banking. As our new branches move towards maturity, we will see more traction in Micro Banking business, especially in the new customer acquisition. Among the secured products, Affordable Housing, which is now more than INR 3,650 crores, continued to show strong disbursements with INR 418 crores in the first quarter as against INR 288 crores in the first quarter of the last year. The business is slowly moving to our first full [indiscernible] to improved operating efficiency.
We have already opened 4 hubs in our [indiscernible] and Jaipur. More will be commissioned over the next few quarters. As these hubs gain business momentum, it will further propel our growth.
I'm really sorry to interrupt. Well, sir, there is a lot of disturbance from your end right now due to which you are not audible. Please just readjust the microphone where it displays that would be great.
Yes, is it better now?
Yes, sir. That has made some difference. Thank you.
I'll just go through the business numbers again in case it was not very clear. Starting with the business numbers, we disbursed INR 5,284 crores, up 22% year-on-year. While the demand continues to be there, disbursement for Micro Banking was sequentially low due to Q1 being a historically weak quarter. We expect the disbursements to pick up again by the second half of the fiscal year.
We acquired about 2.6 lakhs new customers this quarter in Micro Banking. As our new branches move towards maturity, we will see more traction in Micro Banking business, especially in new customer acquisition. Among the secured products, Affordable Housing, which is now more than INR 3,650 crores, continued to show strong disbursements, with INR 418 crores in the first quarter against just INR 288 crores in the first quarter of the previous year, that's FY '23.
Business is slowly moving [indiscernible] to improved operating efficiency. We have already opened 4 hubs in 0[indiscernible] and Jaipur. More will be commissioned over the next few quarters. As these hubs gain business momentum, it will further propel our growth.
The FIG disbursed INR 320 crores, up 113% year-on-year. MSME continues to be in transition. We have a few more technology-related changes to be introduced before we ramp up the business, which will be much like what we went through during the housing transformation. So once that is ready, we are ready to launch.
So we also launched a very formal [ lab ] product in Q1 and more across our [ network ] line. The business should start to come towards the end of this fiscal.
Vehicle finance and gold loan should also [indiscernible] contribute in the second half of the year. Our gross loan book now crossed INR 25,000 crores as of June 30 was INR 25,326 crores, up 30% year-on-year and 5% quarter-on-quarter.
Turning to our life business. Our deposits grew 45% year-on-year and 4% quarter-on-quarter to INR 26,660 crores. We continue to see movements of customer deposits towards term deposits this quarter, which is in line with the industry trend.
Our retail term deposits grew 71% year-on-year to INR 10,970 crores, while CASA grew 27% year-on-year to INR 6,556 crores.
Our cost of funds has continued to rise this quarter, in line with the industry. Despite pressure from cost of funds side, we were able to expand our NIMs this quarter. This was a result of consciously reducing excess liquidity which was driving a negative carry and pulling down NIMs and benefiting from the yield expansion of an effect of book repricing, which we took last year. Last year, it took -- we had 2 repricings on the microfinance book, one in September and the other in March this year. [Technical Difficulty]
Sorry to interrupt you again. Apologies. Sir, there is a lot of disturbance from your line. Just let me quickly get your reconnected.
Ladies and gentlemen, the management line is now connected. Sir, you may proceed.
I'll just go back a few sentences to our gross loan book. Our gross loan book has now crossed INR 25,000 crores. And on June 30, it was INR 25,326 crores, which is a growth of 30% year-on-year and 5% quarter-on-quarter.
Talking about our liabilities, our deposits grew 45% year-on-year and 4% quarter-on-quarter to INR 26,660 crores.
We continue to see some movement of CASA deposits towards term deposits this quarter which is in line with the industry trend.
Our retail term deposits grew 71% year-on-year to INR 10,970 crores, while CASA grew 27% year-on-year to INR 6,556 crores.
Our cost of funds has continued to rise this quarter in line with the industry. Despite pressure from the cost of fund side, we were able to expand our NIMs this quarter. This was a result of consciously reducing the excess liquidity, which was driving negative carry and pulling down our NIMs and benefiting also from the yield expansion as an effect of our book repricing post the hike we took last year. Last year, we took 2 hikes on the microfinance front, one in September and one in March this year. The full effect of that is being felt in this quarter and beyond. So our net interest income was up 32% year-on-year and 7% quarter-on-quarter, driven by gross loan book growth and yield expansion.
Coming to credit and collections. Our asset quality remains steady with the GNP of 2.4% versus 2.6% sequentially, while our NNPA continues to remain negligible at 0.06%. Slippages remain under control with Q1 slippages at INR 103 crores and upgrade and recoveries at INR 77 crores. Restructured book now is at INR 182 crores with June '23 collection efficiency at 102%.
While the NPA collection has started to move down towards normalization, bad debt recovery remained strong this quarter. We recovered INR 35 crores. As we have already mentioned, our bad debt recoveries should be significant even in financial year '24, although it would be lower than what we recovered in financial year '23.
During the quarter, our branch expansion continued with 32 new branches added. 14 of these were in the East, 8 in the North, 6 in the South and 4 in the West. This quarter -- and that takes the total to 661 as of the 30th of June. We will now be adding 70-odd branches for the rest of this year.
We are in the final stages of testing our digital fixed deposit offering, which will provide seamless experience to our customers and help us to serve beyond brick-and-mortar.
Now an update on the merger with our promoter, Ujjivan Financial Services. The hearing of our application with the NCLT was completed on June 28, and we expect to receive the order soon entailing directions for scheduling the meetings of stakeholders and other directions as the NCLT may deem fit.
On my succession plan, as I've been mentioning, the Board is working on identifying the right candidates. The Board is committed to identify the potential candidate with strong business orientation and a connect with the ground and dedication towards building a mass market bank. Both internal and external candidates are being considered. And much before the due date, the transition will be completed.
As you -- as many of you will have noticed, we have launched our nationwide brand campaign a few days ago, earlier this week. This campaign is prominent step towards establishing Ujjivan as a mass market bank. Previously, we had not invested much on ATL brand campaigns, but moving ahead, we will continue to invest in brand building, which will provide our branches more awareness and help us build trust across our customer base. Recent returns will push our retail liabilities further.
To conclude, I would add that business momentum remains strong, reassuring our confidence towards the guidance that we shared at the beginning of this financial year. Thank you.
[Operator Instructions] The first question comes from the line of [ Nitesh ] from Investec.
2, 3 questions. Firstly, in the MSME segment, we have seen some deterioration in asset quality and growth slowing down. We are reorienting that business. Can you speak about the strategy in which segment we will be operating in? What are your targeted yields and profitability in that MSME -- MSE book going forward?
Could you please repeat that question?
So I'm asking about the strategy in the MSE book given that we have seen growth trend down where we have been cautious and we are reorienting that business. So what is the strategy going forward? What segment -- customer segment, yields, ticket size we will be focusing on?
This is Carol Furtado. As we have been talking about the transition that has been taking place in our MSME segment, we have been talking about our customers under various categories. One is the semiformal lab. The other one is the formal lab. We are also getting into the working capital facilities, supply chain and digital MSME lending.
Semiformal lab, the target is semiformal, micro and small enterprises who are transitioning from the unorganized and the informal business model to the organized and formal business setup. Here the offering would range from INR 15 lakhs to INR 1.5 crores and the tenure up to 12 years. We have already launched this product since May, and this product seems to be on a growth path.
The formal lab is where we would be focusing on formal, micro and small and medium enterprises who are operational as an organized formal business setup. Here, we are in -- proposing to offer a loan size of around INR 25 lakh to around INR 5 crores with a tenure up to 15 years. This would be set up in select locations to grow the NAV portfolio.
The third line will be the working capital facilities, again, where the target is format, micro, small and medium enterprises. This is to fulfill their business banking needs. And we will be offering a variety of products here, fund-based and nonfund-based facilities. Here again, the ticket size would be around INR 15 lakhs to around INR 10 crores. Supply chain is again there, which is being worked on to meet the cash flow-based short-term funding requirements of our customers. And we also would be having digital MSME lending, which we will grow through our fintech partnerships.
And yes, we have been operational since May in the semiformal lab segment, and we are investing heavily to build infrastructure and internal capabilities to strongly address the other 4 business lines in the MSME vertical. And that is the reason why the transition has taken some time to operationalize. And we have made significant process in designing the strategy, and we will be showing the progressive outcomes in the coming quarters. And the full extent of the investment would be visible in the span of the next 2, 3 financial years.
Sure. And is it reasonable to expect that the needs in this portfolio will be as you said 12%, given that we are largely operating in formal segment and higher ticket sizes?
Yes. The blended rate would be around 12%, 13%.
Sure. And the data keeping question on the customer acquisition in the microfinance group and digital loan side. What is the count of customers that we are -- have been acquired in this quarter? And what is the active customer base on both microfinance group and individual as of June '23.
Yes. As far as customer acquisition is concerned, we have acquired 2.6 lakh new customers this quarter. And what was your second question?
I wanted a…
[indiscernible] what is [indiscernible] growth of 40 lakhs?
Yes. So I mean I wanted a breakup in group and individual, if that is possible.
Okay. For the quarter or the entire Micro Banking customer base?
As of June '23, what is the active customer base on microfinance group...
Yes. So, in Micro Banking, we have 40 lakh borrower fees. Out of 40 lakhs, 36.5 lakh customers are group loans and 3.5 lakh customers are individual loans.
[Operator Instructions] The next question comes from the line of Shailesh Kanani from Centrum Broking.
Congratulations on excellent performance during the quarter. Sir, my first question is with respect to our individual lending book. We are seeing very good traction on that front. Can you share some commentary aspect with respect to the book and the customer book and given that it's a high ticket size loan how -- what actions we are taking, what kind of customers we are seeing.
This loan is something which is old businesses in Ujjivan. We started this business in '20, long back, as we realized there is a good potential of customers upgradation from GL to IL. Our current average ticket size is close to INR 1.3 lakhs in IL where the customer graduates after 2 to 3 cycles.
And we see a huge potential here because a large number of customers actually do it [indiscernible] graduate after -- try to graduate after 2 to 3 cycles. And there is a gap there microfinance sales and then there are other players also are into formal financing. But these customers don't get financed anybody.
We have started this. We have close to 3.5 lakh customers at this point in time and we want to grow this business as we see great potential going forward.
Largely customers are divided into 3 categories. We have business loans. We also have agri and allied business in IL. And a good amount of customers also take home improvement loans. And they are basic 3 categories of loans that we offer.
Okay. That's good. Sir, second question is with respect to yields on Affordable Housing segment. They seem to be a little on the lower side. So can you just highlight about that? And is there any scope of improvement in that segment?
Yes. The yield for the Affordable Home segment is around 13%, which is excluding the [indiscernible] business, and it has been in this line on year around 12.9%, 13% odd. Now we don't understand what do you mean that it is on a lower price.
Yes. Just considering that won't be steady in formal segment, I also view that the yields might improve on that front. So just wanted to know your view on that.
As we move more towards the Tier 2 and 3 towns and beyond that, yes, there would be a little improvement that might happen. Our yield on disbursement is around 13.2%. So for salaries, the yield is around 11% to 12% and for any formal self-employed and all is around 14%.
The next question comes from the line of Manish Ostwal from Nirmal Bang Securities Private Limited.
Yes, sir. I have a question on your comments in the press release where you mentioned that we remain confident of our sub 100 basis point credit cost for FY '24. Given your collection trends in the business and so this guidance need to -- don't you think you need to revise downward or still you think there is a risk which may play out?
So thank you. This is Ashish. So in the first quarter, we have actually had much lower than the [ low ] credit cost, you could say about 10 bps on the overall book. We have given a guidance of about 1%, but our book is maturing and will be maturing -- will continue to mature during the course of the year.
So there could be slightly higher credit cost in the third quarter and fourth quarter, which we are factoring in when we give a guidance of about 1%. But we've always maintained that will be lower than 1%. So that is -- we maintain that. We will continue to see a lower credit cost during this quarter -- quarter-on-quarter this year and it should sum up less than 1% for the year.
Yes. And secondly, in one of the slides where we have mentioned the collection efficiency in segment-wise. So I was seeing MSME, the collection efficiency is quite a stagnant and the second is the other segment. So what are the efforts we are making to improve the collection trend in these 2 categories?
So in MSME, our -- what you see here on the slide is billed in the month and collected in the month, but there is also a good amount of additional collection, which we do, which is collected in the next month. So overall, if you see the collection efficiency, including the overdues, it has been maintained at 98.5% throughout the quarter.
What you see here in this slide is 88, 87, 88 which is the collection for the month, but there is also overdue collection which we do month-on-month. So this is also a result of stabilized cases in bucket 1 and 2.
And Manish, if you see the additional collection, that also is quite [indiscernible]. That's what Ashish was referring to. Also, one more thing, the collection efficiency, 88%, 87% is including the GNPA/PAR portfolio that we have. And given that MSME current GNPA numbers are high, this number seems to be a little lower. However, as he mentioned, the NDA bucket collection is quite good. And even from the PAR SMA-01 2 and your NPA collections are quite good, which are happening. So if you add up the total collection, that will seem to be a very good collection that is coming in.
The next question comes from the line of Renish from ICICI.
Congrats on the good set of numbers. Sir, just 2 questions. So one is on the liability side. So if we refer to the new customer acquisition in the quarter, actually, that has gone up from 335,000 to 341,000. And when we look at the average account balance it is -- that also remained sort of flattish sequentially. And despite that, our balances have sort of contracted by 4%. So what actioned this, sir?
Renish, SA balances, if you see, it's an industry phenomena that the SA balance at CASA is going down for almost all the banks who have reported their results so far. As you see for Ujjivan, a little longish period, you will actually see that the CASA has grown quite handsomely. So we would say that this is more or less in line with the industry, a little better off with the industry. And with the new in the facilities that we are providing new products that we are coming up with and the retail -- the brand campaign that we have launched, these balances will improve going forward in the coming quarters.
Got it. And secondly, on the ROE side, sir, so last 4, 5 quarters, given the very low provisioning requirement plus the strong even growth, so now on a steady state basis, once the credit costs normalize as you guys are allocating that second half, we'll see a slightly higher grade cost. So on a steady state basis, what kind of ROA this business can generate?
Renish, on the ROA side, we had mentioned that for this year, we will definitely see a 3% plus ROA. We maintain that guidance on that. We have mentioned that the ROE for this year will be 22% plus; we maintain that guidance. There might be a little upswing to that depending upon the market conditions. But right now, we do not want to change any guidance.
Not for this year, I'm saying on a strategic basis, once some of the operating parameters normalize, especially credit cost. So in that scenario, does the -- let's say, the current business mix should generate the 2.5% ROA on sustainable basis? Or how one should look at it?
Definitely, we can do that and maybe more than that. We can definitely do that.
The next question comes from the line of Sukriti Jiwarajka from Laburnum Capital.
I just want to follow up a little bit on the asset quality of the MSME book, like you just mentioned both the GNPA and the PAR numbers are quite high. And the thing is that they've been quite sticky and quite high for a few quarters now. What is causing the stress, which pockets, which sectors? Maybe some light on why these numbers continue to be so high, even the PAR numbers? And what is the path to bringing this down.
So there are 2, 3 reasons that I would want to list down. One, our book has not grown. So therefore, the percentages are looking high. But if you look at the absolute numbers, the absolute numbers have been stable and move a little up or down quarter-on-quarter. But the denominator effect has impacted the percentages.
In terms of slippages, the slippages have been under control. The NPA number in absolute number has been under control. And our bucket x efficiency has been [Technical Difficulty] meeting indicators.
Yes. In terms of geography, you mentioned that which geographies are causing this, there is a little bit of NPA investing done, which is slightly elevated as compared to the rest of the regions.
Got it. Got it. And a similar question for MSI. If you are seeing any early pockets of early warning signals or any early pockets of stress because looking at every MFI, every MFI is guiding to 30% growth over a very high base and a lot of banks are looking to eventually get into this space. So as a conservative lender, are there any signals of customer overleverage or something that is coming up in our radar?
One of our -- one of the advantages we carry is our book is right across 25 states. So that makes us less vulnerable to geographic spaces. So -- and we also have a statewide cap. Most of our 5 bigger states are also capped in the range of 15%, and there are 3 states which are above 10%. Every other state is between 5% to 10%.
In terms of high-growth sales, our market share is in the range of 3% to 4% all across every state. So there is no specific area where we have any high concentration on the book.
In terms of growth, we've been maintaining around 6% [indiscernible] MOB. I'm sorry, 30 plus in 18 -- 18 MOB book, which we've been monitoring for the last 24 months consistently post COVID. And this has remained steady for us.
One more thing that gives us confidence is our nondelinquent book, which is bucket 0, that is -- that has been consistent above 99.8% for the last 18 months.
So we've not seen any specific areas in which there are any stresses building up?
Got it. No, I understand that you have very well diversified your book, and that is not even the question. It is really on a macro level, if anything is coming up, whether it affects you or not in pockets, in areas in geographies?
If there is a change in -- there are certain areas, certain times which are very optical in nature, like the floods, or if there is any other natural calamity, those are the kind of things which do affect us. So we had a marginal dip, for example, in certain regions in North. But those get recovered over the next 6 months or so because these are again 15-to the 20-day phenomena.
The next question comes from the line of Pritesh Bumb from DAM Capital.
Just 2 questions. One is a clarity really. Usually, as a percentage of loans, 43% comes from new loans acquired. Is this a phenomenon that the existing loans are migrating to IL? Or we actually have a rise in terms of new fresh loans?
So both things are happening. Our GL customers are also migrating to IL as well as new customers are also getting added. So we, for example, said that we added about 2.6 lakh new customers in this quarter. This is in addition to about 9.6 lakh new customers we had added in the last full year. The net addition last year was about 6.5 lakh. So yes, new customer acquisition, which we opened last year was a strategy, and we are also opening new branches. So that also gives a slightly increase in our [MG] numbers. So it's a combination of all these factors.
And that is the reason our ticket size also has gone down, is it?
Yes. The last year, you may remember about 5 quarters back, our ticket size had gone up -- 6 quarters back because we were doing largely repeat loans, and we were very conscious about doing new customer acquisition. Because we didn't know what was the impact of COVID and how long it would last. But last year, when we started our NPA strategy again, we started seeing as the new customer percentage has gone up, the average ticket size has gone down.
Sure. And which geographies these new customers are coming from? You can give some more color on that?
All geographies. These are across branches. We have added team members across branches. And therefore, there is no skew in any state.
Got it. Second question was the off-roll employees of collections are going down steadily. At what level will steady that number? And is that the reason why the other OpEx quarter-on-quarter was down?
So the way we are looking at it is our cost of collections, it remains in the range of about 20% with our off-roll staff. There are 2 factors here. One is the entire book, which was affected by COVID is now 700 bpd and above. So obviously, the collections will slow down over a period of time. And therefore, as the collections have slowed down, we have proportionately brought down our team size. The metric that we have followed is about 20% cost of collections. As the numbers keep going down, the team can be suitably downsized.
And the second reason is also that our NPA book has not grown. In fact, there has been a steady reduction of accounts in the NPA and the written off pool. Last year, we reduced more than 1 lakh accounts from NPA plus write-offs. So that has also contributed to a reduction in the off-roll team strength.
And your query on whether that has led to the OpEx reduction versus Q4? No, that is not clearly the primary reason for reduction versus Q4. Q4 business numbers disbursements were much higher versus Q1. That is the reason why the numbers are lower.
So that means it will all be business as usual, yes.
Yes, it's a business as usual.
Next question comes from the line of Himanshu Taluja from Aditya Birla Mutual Funds.
Congratulations for a good quarter. Just 1 question, sir, has been asked on my end. Most of the questions have been answered. Sir, last year, you have made a -- you have strengthened your collections team. And as a result, we have seen a very strong better recoveries as well. And given we have seen the momentum to continue FY '24, sir, last year, I think you have made a good collections, better recovery from the early deliquency year.
Now given that current NPA pool would be in a more harder bucket, so what sort of recoveries that you think that you can probably achieve in FY '24? Anything? And do you need a similar collection workforce in this year as well, which you now, probably which you have added the last year?
Himanshu, this is something that Mr. Davis touched in his opening remark also that FY '24 also bad debt recovery would continue to be very handsome, however, may be a little lower than what we did in FY '23. FY '23, we did around INR 135-odd crores. This year, it will be a little lower than that. Whether it will be INR 100 crores, INR 120 crores or INR 90 crores, I cannot comment on that number right now, but it should be in that range at least. That is what we believe. In terms of collection team side, as Ashish has already mentioned in the last query, the pool -- the hard bucket pool where collection -- difficult collection is there, that pool size is shrinking as we move forward. So which is why the collection team size, slowly, you will see the off-roll will shrink as we move along. But the on-roll team will stay. That is a strategy that we'll have, and off-roll will continue to shrink.
Sure, sir, sure. Sir, second is just 2 more data [ keeping ] questions. What sort of the PSL income that you have made last year and what you have recognized in this quarter? And generally, which quarters generally you used a higher pre-sale income?
This quarter is INR 26 crores roughly. Last quarter, PSL income -- last year, PSL income, let me check, was around INR 140 crores. Let's just check. I'll just give you the exact number. What was last year, full year PSL income. We generally -- PSL income you'll see coming in the first quarter and the fourth quarter. However, I'll also -- yes, full year was INR 28 crores. Last year, full year was INR 28 crores.
I will also mention that when you look at PSL income, do you also look at the kind of IBPC that we are doing? Because that also gives a similar benefit to the book in terms of lower cost of fund. So last year, on an average, we were having around, say, INR 1,500 crores of IBPC. This year already, I think the IBPC number is a little higher than that, and we'll continue at this number, this rate for the full year, around INR 2,000-odd crores. So that additional benefit is also there this year?
Sure, sir, sure. And just last question, sir, within the MFI, any sort of a target that you have between the individual and the group do you have or how one should look at the growth between the 2?
Yes. Obviously, we want to grow much faster than yield because we have a captive customer base of over 40 lakh in GL, where a lot of customers want to graduate to IL. So we will see IL growing much faster than GL in this [ funds ] also and will continue a trend from the last financial year. And for that, we have also extended our IL team, and we have increased the number of feet on the street for IL in branches.
The next question comes from the line of Ashlesh Sonje from Kotak Securities.
Congratulations on the good quarter. Just 1 question on the OpEx for us. If I look at the cost-to-assets ratio, that has been steadily coming down over the past few years. And given that we are in a period where we are reporting very strong return ratios, how do we look at the cost ratio going ahead in terms of the investment that we -- if we plan to make in the franchise?
Ashlesh, we have mentioned both for the cost-to-income ratio and cost to -- operating-cost-to-average-asset-ratio. For this year, they will be more or less stagnant. So right now, we do not change the guidance. We may see a positive swing there, but right now, we'll maintain the guidance number. We'll see if we want to change the guidance when we come next time to meet The Street. But right now, we do not want to make any changes there.
Okay. And if I go over the 3 years, FY '25, '26, any...
Over next 3 years, yes, definitely, these numbers will come down slowly, maybe around cost-to-income ratio, maybe around by 300, 350 basis points every year, it may come down.
The next question comes from the line of Manan Tijoriwala from ICICI Prudential Asset Management.
I have a couple of questions. So first on the group loans context. What is the average ticket size that we have now in the first, second, third cycles?
The question is what is our average ticket price in group loan in first, second and third cycle. Right?
Yes.
So our average ticket size in the first loan is close to between INR 40,000 to INR 42,000. And in repeat loans, in the second cycle, it is close to INR 50,000. And third cycle onwards, the average ticket size is close to INR 60,000.
Okay. Okay.
And how soon can we refinance the customer to a second or a subsequent cycle? And what is the tenure of the loans generally?
So the maximum tenure that we allow to our customers in group loan is 3 years, and our average tenure is close to 22 to 23 months. And we allow our customers to take loan -- repeat loans only after completion of 70% of their EMI.
70% of the EMI. Okay, okay. Understood. And how much of the loan book is now on the 3 years, sir?
3 years -- yes. Yes, the 3-year standard loan is close to 20% to 22% of our entire portfolio at this point of time.
Okay. Okay. Understood. And sir, on the individual loans, are these all our MFI customers? Or are we sourcing from the market as well?
So we have open market tuition strategy as well. And we have kind of restarted our open market acquisition as we have stabilized after the effect of pandemic. And before that also, we were acquiring open-market customers, but these customers are largely referred by our internal customers, microfinance customers only. At this point in time, our open-market customer attrition is close to 5% to 6% of whatever we acquire in [ real ] lending. But this number will also slightly go up in the financial year as we go ahead.
Mr. Manan, may we request you that you return to the question queue for follow-up questions as there are several participants waiting for their turn?
The next question comes from the line of Manuj Oberoi from YES Securities.
Congratulations on strong numbers. So this [ Rajiv ] here. Just 1 question. And that is, when I look at your 1-plus and GNPLs in Affordable Housing portfolio --
Manuj, are you there?
Yes, can you hear me?
Sorry, we're not able to hear you.
Now? Now is it better?
Still, you are not audible. You are not audible.
Can you hear me now? Hello? Hello, am I audible?
Hello?
Yes. Hi.
[indiscernible]
Mr. Manuj, could you please fall back to the queue? We shall move to the next questioner.
The next question comes from the line of Amit Jain from Axis Capital.
Operator, can we reconnect the call management line?
Yes, for sure, that can be done. Just allow me a moment while I reconnect the call for the management.
Kevin, can you reconnect us?
Yes, I'm doing so.
Ladies and gentlemen, the management line has been connected back again. Mr. Amit Jain, you shall proceed with your question.
Can you hear me?
Yes, we can.
Sir, I had a question on margins. So given that now that rates have stabilized, and do we see that the cost of funds could increase further from current levels? And similarly on loan free pricing? Is it largely done or do we happen to have some bandwidth to further increase loan prices?
First off, on your cost of fund query. So cost of fund may go up from here as well because repricing of the old FDs may happen. So to some extent, we believe cost of fund has not yet peaked. Maybe we are around 2 quarters, maybe 2 quarters at least away when we see the interest rate cycles also peaking out or starting to see sliding down. So to that extent, we'll keep that as an open-ended answer.
On the repricing side, there's a lot of movement left. We took 2 rate hikes last year, one was in September, 50 basis points on [ land in the book ] and one was in March, 50 basis points again on 1st of March. Of the existing book, 30% book is on the March pricing, 30% book is on the September pricing and 40% book is before that. So on that 40% book, 100 basis point repricing has to happen. On that 30% book, 50 basis point repricing is yet to happen. So there's a lot of room left on the MB book repricing to happen.
So in that case, we still maintain a guidance of around 9% then for this year. Is that a fair assumption?
Yes, we remain very confident that we'll be able to hold on to the NIMs.
And sir, second question is on the employee base. So around -- you have added around 2,500 employees over the last 6 months. So mostly, I think these would be feet on street. Is that right?
That's right.
And any particular geographies where we are adding employees or is it all across?
See, employee addition to a large extent is happening because of the new branches that are coming. This quarter, we had opened around 32 branches in Q1. And in Q4 also, there was a lot of branches that opened. Last year, we did around 52 and most of the branch openings were back ended. So they were -- these branches were opened and the employees were hired for the new branches.
Going ahead, 9 months, we will be opening around 70 branches. To that extent, some employee hiring will be happening. Whatever branches they are opening this second quarter, to some extent, some hiring has already happened. Apart from this, the hiring is happening, maybe we have introduced RM modules for our branch banking. So there, there is some bit of a hiring happening. Some bit of a hiring is happening on our secured books where we are growing the business, for example. Housing is going very well there, some ground-level team has been added. And MSC, as the new products come, there will be a little bit of a hiring happening. So those will be additional hiring apart from the branch.
35% of whatever hiring is happening is in the front-level staff that is happening.
The next question comes from the line of Manuj Oberoi from YES Securities.
This is [ Rajiv ] here. Congratulations on very strong performance. So my question is on Affordable Housing book. So as I see your 1-plus annual GNPA in your Affordable Housing book look slightly higher than peers when I compare them with peers operating with similar ticket size entities. Any specific reason for that?
The PAR and the GNPA for us has been consistently coming down. If you compare the pre-COVID book and the post-COVID book, then [ Rajiv ], our post-COVID book performance is significantly better than the peers. And the 30-plus number which we can look at, we are better than all the affordable housing players there. NPA in fact, for the last 22 months source book is in the range of 0.1% and 30-plus is in the range of 0.5%. So the new book has done very well. The old book -- and the new book is about 65% of the overall book.
The old book is where the NPAs are and that is about 2.4% if we look at the overall book. And almost 30% to 35% of that is in the stage of sale of assets or reposition of assets. So that gives us confidence that this number will further go down because the efforts on legal that we had started almost 18 months back have given us a lot of results. So a good percentage of that has been taken -- the bank has taken the property, is now in the process of auctioning. A good number of cases are in the process of getting the enforcement of security happening there.
Old book is also getting cured at a very fast pace. Last year, same time, I think we were in the range of 4.5%. And now we are in the range 2.4%. And the [ actual ] amount also has gone down by about INR 60 crores.
Yes. Got it. So there is some remark that the micro lab also in this book. So what percentage of this Affordable Housing book as we see in micro lab and is it a focused product and what are the areas?
Rajiv, the micro lab product is a very focused product for us. The idea is that wherever the large ticket size individual loan is there in Micro Banking and we see that the family is able to support that bigger ticket size, we'll migrate them to micro lab. However, in the current book, the amount of micro lab is just around INR 40 crores.
Okay. Okay. And this is this case in [indiscernible]?
NNPE, yes. Refund yield is around 19%, 19.5% in that book.
The next question comes from the line of Deepak Poddar from Sapphire Capital.
Sir, just I wanted to understand, I mean, in terms of brand, I think you mentioned that we will be continuing the brand investment in first quarter, right? So what was the quantum that we did in this first quarter? And how do we see that going ahead?
Because we won't be able to share exact expenses of the brand campaign. The brand campaign went live on 24th of July. So to that extent, whatever the production cost and all was there, that was taken in the first quarter. The overall cost will come in first quarter and second quarter.
It is a 5-week plus brand campaign, 8-week plus, 8-week brand campaign is there. And the overall cost will come in both the quarters. First quarter is loaded with that and, to some extent, it will be there in the second quarter as well.
Okay. Okay. So ideally, in the first half, only that this cost will come, right, not in the second half?
Yes. Well, a lot of it has already come in the first quarter, and the balance will come in the second quarter.
Okay. Okay. Fair enough. I understood. And sir, just a clarification in terms of, I think, this reverse merger. I think we had a last update as on 28th June, right, as you mentioned in your press release. So how soon we are expecting it to get through?
Deepak, it's a legal matter. We won't be able to give time line on when do we hear from the court. Right now, what we can say is within this year, we believe that the matter would be wrapped up.
Within this calendar year?
Yes.
Okay. Okay. Understood. And sir, in terms of reverse merger, our share outstanding will decline by about 1.5% to 2%, right, post the merger?
Will be 0%. There will be no promoter.
No, sir. Well, 1,925 million shares would be our revised share outstanding post the reverse merger?
Yes. Post the reverse merger, roughly around 3 crore odd shares will be canceled, net cancellations.
Yes. That's correct. That's correct.
The next question comes from the line of [ Prabal ] from Ambit.
Management, am I audible?
Yes, [ Prabal ], but a little soft. Can you be a little louder?
Is this better?
A little better.
So my first question is on deposits. So congrats on the performance here. So as we are growing our deposit base, how are we ensuring that we also bring in customer engagement so that some portion of this new deposit operation over a period of time becomes sticky with us and also less rate translating with us?
So on the deposit base, a lot of work is being done to increase the visibility and the awareness of our brand and Deepak also mentioned and Mr. Davis has also mentioned about the brand campaign that we are doing. So we hope to garner a lot of retail deposits through this campaign. We have also put in a lot of specific customer segment-wide programs which will help us in growing our deposit base.
We are also categorizing our customers into -- we've characterized our branches into various categories, and we have also introduced the relationship management fees in place. So we have a strategy for new customer acquisitions as well as for the existing customer acquisitions.
Like I mentioned, the segment-wide programs for high net worth customers, for senior citizens, for retailers, for [ tasks ], for women, for youth. This is the way in which we will be growing our deposit base with a specific attention to each customer segment and also designing products that are required for that particular segment. So the strategy is new and existing deepening our relationship and of course, through the brand channel. We have also introduced the digital channel, the digital trip deposits has been recently launched. And that is an area, too, that we will be looking at.
Our service quality is another area for our customers. The customer service area is another asset that we are strongly working on. We have the phone banking team to attend to customers for any of their requests. That's a channel that has been significantly upgraded, and we are able to do a lot of service requests through this channel. So some…
Actually, my question was not on accruing new deposits, but more on how do we make sure that these new deposits become more sticky and stay with us even when we reduce the interest rate.
Yes. So through all this, the customer service programs that we have, the multichannel approach, the relationship management team, this is going to help us and segmenting our customers with programs like the various programs and using analytics, we will be able to define our requirements for each of these customer segments and grow the -- and a lot of cross-sell is going to come into the picture. So with all this, we will be able to deepen our relationship with the customer.
Okay. Okay. I'll take this off line. My next question is on -- so sir, can you tell us how is microfinance individual underwriting different from a group underwriting in terms of what are the different processes in both the systems?
So group loan. The singular loan underwriting is very, very different from how we do group loan. Group loan is a classical [ grade ] model that it happens the way it happens for the industry. But as far as when customers try to graduate from group loan to individual loan, we have separate feet on the street from business side who is supposed to acquire customers and onboard customers.
And then we have independent credit team, right, from feet on the street to the chief grade officers. We have independent credit team who analyzes customers based on their family level income. And this practice, we are following for the last, say, 13, 14 years, which is now managed by RBI and this is something which is done [indiscernible] individually and loan is underwritten by the grade officers.
Apart from that, we use a lot of data analytics to understand with customers and graduates. We have a lot of data, internal data as well as real live data as well for the customers. We use this data to underwrite customers better, so that we can graduate all eligible customers from GL to IL. So IL is a different vertical where different people are there, both in business and credit. And apart from that, we use data to an analyze customer better.
And just a last question. So what are the top 3 states -- since we have a diversified portfolio across geographies, what are the top 3 states where you are seeing better-than-expected traction? And maybe if you can also highlight the bottom 3 states where you are still watchful in terms of growth?
You are talking about IL or overall microfinance?
Overall microfinance.
So our top 3 states is Tamiladu, Kanataka and West Bengal. We are -- obviously, we have a more number of branches. We started from here in the region. And as far as the bottom 3 assets, we don't have bottom 3 in terms of growth, we have number of branches with different states, but at this point of time, I would say that Assam is something where the industry is facing into and we are also very cautious and we are doing -- we have changed our strategy in the state of Assam.
Apart from that, we don't see any state where we see growth, which is very low at this point in time. Overall growth is at par with the average growth of the microfinance business.
Last question comes from the line of [ Preet Nagarsheth ] from Wealth Finvisor.
So I wanted to better understand the upgrades, the recoveries and the written off numbers that you posted on the presentation. I think you mentioned that the write-back was -- the bad debt recovery was what, about INR 35 crores for this quarter?
Yes, INR 35 crores.
So how is the 77 and 60 coming? Could you just explain that?
[ Preet ], that 77 is the NPA recovery and upgrade. That is in addition to the INR 35 crore of bad debt recovery. That INR 35 crores is bad debt recovery, something that has been written off the book. This 77 is upgrades and recoveries of -- from the NPA book, which is still there on the book.
And this INR 60 crore is fresh write-off during this quarter, INR 52 crores is technical write-off and around INR 7-odd crores is other write-offs.
So is it a write-off or a write-back?
Write off.
Okay. Because if you see the math then, because you're starting NPA, when you have the slippages and then you are adding back the recoveries…
No. So the math says you have a starting NPA of INR 631 and there is a slippage of 103, then you have upgrades. So you reduce that INR 77 crores, then you have write-offs, so you reduce that INR 60 crores and the ending or the closing NPA is INR 597 crores.
Got you. So how much of this can we expect to continue for the next quarters? Could it be a similar range?
Are you asking for NPA guidance?
That's correct.
So we are at around 2.4%, and we would be ending the year by around, say, 2% odd number?
Okay. So [ third ] quarter should be around 2%. Okay.
The other thing I wanted to understand was that should we expect a dip in disbursement for the second quarter given the flat situation that's ongoing in various parts of the country?
The flood situation has not really impacted so much on the business. So it's a temporary phenomenon and a few days, a few districts. So right now, we do not want to say that it will impact the overall performance of the quarter. Neither on the collection side nor on the business side will both be impact.
Got you. And the last question is, can you shed some light on the [indiscernible] color of the contract and will you win business on the ground or give you a right to win vis-à-vis see all the other competitors out there?
I didn't get your query. Can you repeat?
Basically the Hello Ujjivan advert you have out there. Right?
So the question is around Hello Ujjivan, how it will help us and customers?
That's correct. How is it helping you competition, vis-à-vis competition, right? Because one of the lines...
Yes. Yes. So yes, Hello Ujjivan, we mentioned in the last call also that this is something which we have developed especially for microfinance and rural customers as we realize that the original application, our customers are not able to use because they can't read and this particularly is where the customer can talk to the application and do their banking transactions.
At the same time, we see this as an opportunity where this kind of channel can be used by our customers in various activities, including onboarding repeat loans for our customers on this application.
Today, we have about over 3 lakh customers who have already downloaded and with that, that is exciting news that customers are liking the application. Soon, we'll also have -- repayment is already there and customers, a lot of customers are repaying through this application, which also reduces a lot of cost because your cost of transaction becomes 0. But at the same time, as we onboard repeat loans on this application, once the customer is onboarded in Ujjivan for loans, the repeat loans, top-up loans and other services which customers want around loan can be serviced through mobile application.
This can be a game changer, and we are working on -- we're working very hard on building this application to ensure that all services, future services when customer is onboarded can be offered through this application, including repeat top-up, PD, reliability [indiscernible], we are trying to onboard through this application.
So yes, this is something which customers are liking at this point of time. A lot of customers have installed. But at the same time, we are seeing a lot of new features being added in Hello Ujjivan going forward in this financial year.
The next question comes from the line of Sanjay Pandit from 1729 Capital.
[indiscernible]
Sanjay, look here, you are not audible. Sanjay, can you be a little louder?
Yes, you hear me now? Can you hear me now?
Yes, better.
Can you hear me?
Yes. Better.
Can you hear me? Okay. I'll just go ahead. Okay. So my question is, for those holding Ujjivan Financial Services, the holding company going into the reverse merger, does the ratio pretty much stand as is? And if so, would there be some kind of cash distribution prior to the reverse merger? And regardless of that, what kind of sort of per share book value accretion can Ujjivan Small Finance Bank expect to have concurrent with the reverse merger by virtue of, I guess, some cash coming into the bank?
Sanjay, book value accretion would be INR 2 or maybe a little more. There is roughly around INR 180 crores of cash that UFSL currently has. So that will come to the bank, plus INR 200 crore of preference shares are there, which will get canceled. So that will also come to the bank. So a total of INR 380 crores as is, which is there, and plus whatever the bank has proposed as dividend, if that gets approved tomorrow. That will also come to USFL.
So that amount will come to USFL. And depending upon if whether UFSL distributes that money in form of dividend or not or whatever is the amount basis that we still believe at least INR 380-odd crores is there, which will come to the bank, which means roughly INR 2 book value accretion would be there for bank. There would be no cash distribution to UFSL shareholder as part of the reverse merger.
Due to time constraints, that was the final question. I now hand the conference over to the management for closing comments.
Well, I thank you all for joining us in this session. It's been wonderful to take your questions and answer them. If there are any questions that remain unanswered, please contact Deepak or Madhusudan at our offices here in Bangalore, and we'll be happy to respond to you.
I'd like to take this opportunity to thank Mr. Shah, IIFL for their coordination and hosting of this call and to Chorus for their logistics. Thank you very much.
On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.