Ujjivan Small Finance Bank Ltd
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Ujjivan Small Finance Bank Ltd
Earnings Call Analysis
Q2-2025 Analysis
Ujjivan Small Finance Bank Ltd
Ujjivan Small Finance Bank's earnings call for Q2 FY '25 highlighted a quarter of cautious growth influenced by regulatory changes and strategic adjustments. The bank recorded total disbursements of INR 5,376 crores, reflecting a 2% increase compared to the previous quarter but a 6% decline year-over-year (YoY). As a result, the loan book grew 14% YoY and 1% quarter-over-quarter (QoQ), settling at INR 30,344 crores by September 2024.
Despite the overall growth being subdued, Ujjivan has successfully fortified its secured portfolio, particularly in the affordable housing sector. Disbursements in this segment surged to INR 758 crores, marking an impressive 70% QoQ growth and a 40% YoY increase, with the total affordable housing and micro mortgages book now standing at INR 5,784 crores. The bank has capitalized on expanded group marketing strategies to penetrate more affluent markets, enhancing customer connections and retention.
The microfinance segment has faced considerable challenges, prompting Ujjivan to adopt a more cautious approach. The bank has restricted disbursements to low-credit customers and discontinued acquisitions in higher-risk regions. This shift is projected to yield a recovery by Q4 FY '25. Currently, Ujjivan's MSME business is stabilizing with a notable increase in disbursement from INR 130 crores in Q1 to INR 216 crores in Q2 FY '25, leveraging new product launches to boost volume.
The bank's asset quality is under scrutiny, especially within the microfinance portfolio, where the portfolio at risk (PAR) rose to 5.1% from 4.2%. To address burgeoning credit costs, anticipated between 2.3% to 2.5% for the full year, Ujjivan has increased its provisioning coverage ratio to maintain a robust outlook. Despite current challenges, the bank maintains a higher provision coverage ratio (PCR) of approximately 78%.
In terms of financial metrics, Ujjivan reported a net interest margin (NIM) of 9.2% for Q2, with expectations to decline slightly to between 8.6% to 8.8% for the full year. The cost-to-income ratio settled at 60%, signaling a need for ongoing efficiency improvements. The PAT for Q2 FY '25 stood at INR 233 crores, with a return on equity (ROE) at 15.7%. The bank anticipates a challenging year but is optimistic about achieving an ROE between 18% to 20% by FY '25-26, contingent upon the recovery of its microfinance operations.
Ujjivan's management emphasized the commitment to investing in technology, branch expansion, and product diversification. With recent approvals for a banking license enabling broader product offerings, potential for enhanced revenue streams appears promising. As they bolster their retail deposit strategies and expand their asset base, the focus remains on improving customer service and collection efficiencies. Overall, while hurdles exist, the bank maintains a proactive stance towards navigating these challenges and seizing opportunities for growth.
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Ladies and gentlemen, good day, and welcome to Ujjivan Small Finance Bank Q2 FY '25 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, Neha. Good evening, and a very warm welcome to Ujjivan Small Finance Bank 2Q FY '25 Results Call. To discuss the business strategy and outlook post the results, we have the entire management team of Ujjivan Small Finance Bank. The management team is represented by Mr. Sanjeev Nautiyal, MD and CEO; Ms. Carol Furtado, Executive Director; Mr. Martin P.S, Chief Operating Officer; Mr. Ashish Goel, Chief Credit Officer; Mr. Vibhas Chandra, Head, Micro Banking; and Mr. Barun Agarwal, Deputy CFO.
With that, over to you, Mr. Nautiyal for your opening remarks.
Thank you so much. Good evening, and welcome to our Q2 FY '25 earnings call. Total disbursements during the quarter were at INR 5,376 crores, slightly better than Q1 FY '25, up 2% Q-o-Q, but lower with respect to Q2 FY '24, that is down 6% Y-o-Y. This resulted into loan book growth of 14% Y-o-Y and marginal 1% Q-o-Q at INR 30,344 crores as of September 24. Q2 FY '25 has been a relatively slow quarter compared to previous ones. This was an outcome of expected reduction in business volumes due to implementation of MFIN guardrails and our heightened caution around the microfinance segment.
While growth might be visibly slow on the overall book, performance remained robust in the secured portfolio. Affordable housing business, our second largest asset vertical, disbursed INR 758 crores during the quarter, higher by 40% Y-o-Y and 70% Q-o-Q. This made the affordable housing and micro mortgages book grew to INR 5,784 crores as of September '24, adding a book of INR 585 crores versus June '24 and registering a book growth of 43% of Y-o-Y.
Systematic group marketing activities across regions penetrating deeper in select markets with better per capita income, stronger ground team, better connect with customers and diligent customer retention plan have added to improved business. Micro mortgages portfolio, a part of housing portfolio, continues to grow stronger with each quarter. This is approximately INR 400 crores book now as we speak from INR 76 crores in September '23. Customer, branch and staff referrals added an edge to the business growth. Around 60% plus of the overall disbursements in micro mortgages happened via referrals.
MSME business has now stabilized with all its products, policies and systems in place. Disbursements have picked up and will continue to see an uptrend Q-o-Q. During Q2 FY '25, MSME vertical disbursed INR 216 crores versus INR 130 crores in Q1 FY '25. This resulted in achievement of a book of INR 1,514 crores, up 5% Y-o-Y, 7% Q-o-Q, adding INR 100 crores of incremental book in H1 FY '25. To further strengthen the product suite, we have introduced Elite LAP product in addition to the base LAP offering, and this is helping in increased business volumes.
In Q2, we also launched bank guarantees and the working capital term loan variant, making our working capital offerings comprehensive and full stack. Apart from growing the book, our focus is also in managing asset quality of this portfolio. Our revised MSME strategy has resulted in a better quality, growth, mix and health of the portfolio.
Our FIG book as on September '24 was INR 2,042 crores, contributing 7% to the total asset book. This book grew by 57% Y-o-Y and 13% Q-o-Q and continues to scale as per the strategy of increasing the secured book of the bank. Vehicle finance streamlined its business process and strengthened infrastructure in the last quarter and made full use of the upgraded capabilities during Q2 FY '25 disbursing INR 82 crores, leading to a book of INR 262 crore, up 105% Y-o-Y and 20% Q-o-Q.
The team is poised well to drive higher business in the upcoming festive months by capitalizing on upgraded technological enablements, dealer tie-ups, partnerships, offering competitive rates and better utilizing cross-sell avenues.
Similarly, gold loan business has expanded well, currently being offered from 162 branches across the country and targeting to cover over 200 branches by end of next quarter. Disbursements have been rising incrementally month-on-month, and over 40% of the monthly business is coming from referrals. This has led to a book of INR 62 crores, growing over 100% Q-o-Q. Going ahead, special focus will be on process enhancements and introducing product and features to better serve our customers.
Our secured portfolio as of September '24 is 34.9% of the total book. The strong growth in the secured book has led to a faster progression towards 60%-40% unsecured-secured book mix. We anticipate that secured book will reach around 40% by end of this financial year.
Bank has always followed a risk-calibrated approach. In order to derisk the portfolio, we have diversified our product suite and continued to make steady progress by offering relevant products to our customer segment. In the last 18 months, we have introduced products like micro mortgages, gold loans, 2-wheeler loans, agri and working capital SME loans. And it's good to see that these 5 products alone now contribute 6% of the quarterly disbursements in Q2 FY '25 versus 4% in FY '25, with this portfolio growing 29% Q-o-Q and 3x Y-o-Y.
Let me now come to microfinance. As mentioned in our Q1 earnings call, the microfinance segment has seen some challenges and the situation continues to evolve for the financial year '25. [indiscernible] Basis our current understanding, we believe that business revival on a reasonable estimate will only be visible from Q4 FY '25 onwards at the earliest.
To steer through this, we have devised a prudent approach and restricted disbursements to new-to-credit entities and stopped new customer acquisition in problematic clusters of some states. We have cautiously acquired only 1.5 lakh new group loans and individual loan customers during the quarter, who had demonstrated better credit behavior. Our approach during this quarter was serving good quality repeat customers.
Additionally, we have also introduced stringent norms for new-to-bank customers with 3 existing MFI lenders, 1.5 lakhs MFI exposure for all new-to-bank sourcing. PIN code/center-wise decisioning for repeat loan and top-up loan is in place. We continue focusing on the graduation of good customers from group loans to individual loans. Around 90% of the overall individual loan book is from this migration.
Due to these factors, we will continue to see a degrowth in our group loan portfolio for this year, which will weigh down our overall portfolio growth. We have enhanced our focus on building the individual loan portfolio, which continues to show much better health and prospects. We will strive to achieve the lost ground to some extent from our individual loan segment and other businesses.
Coming to liability business. Total deposits grew on a strong retail footing to INR 34,070 crores, up 17% Y-o-Y and 5% Q-o-Q. Retail deposits at INR 24,746 crores now constitute 73% of the total deposits, having grown 32% over September '23. Our deposit strategy emphasizes on increasing the wallet share of existing customers along with quality acquisition of new customers through a mix of physical and digital reach.
Focused on providing solution-based approach continues. And accordingly, we have created the production features which are relevant for the segment, like introducing nonresident Maxima in Q2 FY '25, a variant of Maxima accounts launched last year. We also introduced Navratna family program focused towards HNI customers and their families. We are targeting relationship management to ensure that at least 3 to 4 products public services are added to each customer. This has also added to improvement in ticket sizes and stickiness of the customers.
CASA book at INR 8,832 crores now forms 25.9% of total deposit book, is up 26% Y-o-Y and 6% Q-o-Q. Value-add products are showing healthy traction. Maxima SB book stands at INR 1,323 crores, with 21,000-plus accounts as on September '24 with average ticket size of INR 6.17 lakhs.
Our strategy is to keep enhancing our offerings. In line with this, we had applied for AD-I license, and I'm happy to share that we received the RBI approval and secured the license earlier during the month. This will enable us to offer full-fledged bouquet of product services like engaging in retain foreign currency deposits, remittances, currency exchange. We shall also engage in foreign currency transactions, borrowings and in trade finance offerings. This will lead to an incremental avenue of other income aiding our P&L and also widening of our MSME product offerings.
On asset quality, as mentioned earlier, we are observing stress in the microfinance segment, due to which our PAR has increased to 5.1% in September '24 versus 4.2% in June '24. PAR 0 for our group loan portfolio has increased 5.5% in September '24 versus 4.1% in June '24. In Q2 FY '25, we have seen credit cost of INR 151 crores versus INR 110 crore in Q1 FY '25.
Due to this, we anticipate full year credit cost may now be around 2.3% to 2.5%. We are strongly monitoring our portfolio quality. GNPA/NNPA as on September '24, stands 2.5%/0.6%. Slippages for Q2 FY '25 were at INR 243 crores versus INR 192 crores in Q1 FY '25.
During Q2, slippages in microfinance book are at 0.99 percentages, while in secured book, the slippages remained steady at 0.4 percentages for the quarter, same as in Q1 FY '25. We have written off INR 140 crores during the quarter. We continue to focus on collections and have ramped up the collection team by adding over 300 personnel during the quarter, taking the count to 2,200 plus.
Bad debt recovery continues. INR 25 crores was recovered in Q2 FY '25. Our target is to collect over INR 100 crores this year.
On financials and margins, the NIM for the quarter is 9.2 percentages. Yields on the overall portfolio have declined marginally due to the growing mix of secured portfolio. We are likely to see further compression as secured book will continue to grow at a faster pace. Cost of funds for Q2 FY '25 at 7.5 percentages remains at similar levels versus last quarter, owing to a focused approach on growing retail deposits.
Operating cost for the bank is a key monitorable. Cost-to-income ratio for the quarter ended at 60%. Our objective is to keep this in control in the upcoming quarters.
PAT for the quarter was INR 233 crores. And subsequently, ROA and ROE for Q2 FY '25 is 2.2 percentages and 15.7 percentages, respectively. Similar softness in return ratios will be visible for the full financial year '25. However, we are very confident that once the microfinance business swings back into a growth trajectory, ROE of 18% to 20% is achievable for next financial year '25-'26.
Last, but not the least, I will want to highlight my key areas of focus for the coming quarters. Microfinance is the largest portfolio for the bank. We shall continue to do well in this segment once situation normalizes. Profitably expand the nonmicrofinance secured portfolio: a, we are giving heightened focus to growing the MSME book, green shoots are visible in our portfolio and we are confident that MSME book will do very well; b, scale up vehicle finance, gold loans and agri businesses; c, continue to expand our housing loan and micro mortgages portfolio.
Three, objective is to make the bank a retail deposit franchise with continued focus on growing CASA, which even we will see stronger growth in this business ahead. Four, lastly, on the other income, we will garner avenues to enhance our other income. Special focus will be on product services. Just as we added AD-I license, we also will be adding mutual fund distribution and ASBA facility during this financial year in addition to other insurance product offerings.
I end here and hand over to the moderator, Mr. Shah. Thank you. Over to you.
[Operator Instructions] The first question is from the line of Rajiv Mehta from Yes Securities.
Sir, your credit cost guidance of 2.3% to 2.5% implies, maybe further worsening of trends in Q3 and then even provisioning -- elevated provisioning continuing in Q4. So have we seen absolutely no improvement in October in terms of collection efficiencies in the account?
And if you can also give more color on the microfinance portfolio in terms of what percentage of portfolio would be borrowers having 4-plus loans and indebtedness of more than INR 2 lakh? And then what percentage of this pool is already in SMA and NPA?
Sure. Sure. So our -- in Q2, our nondelinquent portfolio, which is the regular portfolio for a collection efficiency of 99.23%. And in October, the first few days, there were holidays, but we are seeing a much better revenue collection efficiency in the month of October compared to the month of September. Of course, there are about 7 days for the month to end. But the initial trends of the first 3 weeks are much better than the month of September. So we are seeing improving collection efficiency. And we hope that in this quarter, our collection efficiency in the nondelinquent portfolio will reach back at Q1 levels.
Your second question was on -- sorry...
Yes. Yes. I'll just repeat. [indiscernible]
Yes. So we have about 7% of our borrowers in 4-plus lenders. And the slippages on that was higher than the borrowers with 1, 2 or 3 lenders. The overall slippages from there is about 4% or 5% higher than the regular ones. I'll just give you the right numbers on that.
And the second question is on, has there been any change in the write-off policy, which led to higher write-offs? And what is the reason behind reduction in Tier 1 capital in this quarter?
There has been no change in the write-off policy. However, we have written off about INR 50 crores of our Assam portfolio, which was NPA since 2019, that is about INR 50-odd crores. And that is -- we were carrying that as an NPA portfolio market now. That is one additional write-off that we have done during this quarter.
We have faced dividend during the quarter of INR 290 crores. That has resulted to a -- deep into CRAR ratio -- capital adequacy.
Sir, it was not very clear. Can you just repeat again on the Tier 1 capital [indiscernible]?
We have paid dividend during the quarter. That has resulted into a decrease in the capital adequacy...
INR 290 crores.
INR 290 crores.
That was a large number.
So the question on slippages, about 10% of our slippages comes from 4-plus lenders. So the contribution is 7% and slippages are above 10%.
The next question is from the line of Renish from ICICI Securities Limited.
Just two questions from my side. So let's say, on the individual loan side, we have been growing this book quite aggressively since past many quarters. And as you rightly said, 90% of these customers are actually migrated customer from the debt book. So what are the current trends in that book? And do you foresee asset quality sort of worsening in debt book also in the second half?
So when we were taking precautionary measures during the first and second quarters of this financial year, we also slowed down the growth of our individual loan portfolio. The group loan to individual loan migration is about 90% as rightly mentioned. So the slippages and the NPA of individual loan is much better than the group loan portfolio. So the impact has been largely on the group loan portfolio.
If we look at the September numbers, IL GNPA is below 2%, and that gives us a lot of comfort that the IL portfolio can be grown much more profitably. And therefore, we continue to focus on that portfolio.
Okay. And would it be possible to share a similar data point -- similar data point for IG and book customer as well like customers with more than 3, 4 landers recently?
In IL, these customers have mostly relationships with Ujjivan. However, we can come back to you whether our customers also have loans outside, if that is what you're referring to?
Yes, yes. Okay.
We can come back to you on that.
Sure. And sir, secondly, on this credit cost guidance, right? I mean so we have been saying that for the full year, our credit cost will remain 2.3 to 2.5. And when we look at first half trend, it is broadly 1.7, 1.8 type. So it naturally means that second half will be more elevated, maybe around 2.7, 2.8 type. And when we look at the collection numbers or even in your opening remarks, you are highlighting that October collections are better. Actually, I'm not able to connect the dots. At one end, we are seeing things are improving. And on the other hand, we are increasing the credit cost guidance?
Credit cost typically comes with a 90- to 180-day lag from the base when a customer has gone into delinquency. What we were referring to is an improved collection in the nondelinquent portfolio. However, we have seen 99.23% of nondelinquent inefficiency in Q2. When these customers get into 60, 90, 180 DPD, that is where we -- credit will start to pick up for this set of customers. So for Q2, whatever has moved into delinquency, the credit cost would be an outcome of that number.
No sir, then it is -- let's say, then this collection efficiency has no meaning, right, because it's [indiscernible] collection. So why can't we start giving ex-arrear collection as well?
Arrear collection is 99% -- sorry, ex-arrear collection is 106%, ex plus arrears.
No, I'm saying collection, excluding arrears. I think what...
Okay. You're talking about nondelinquent plus the delinquency. That is 97%.
But that includes overdue collection as well, right?
That includes overdue collections, that is right.
Yes. So I'm saying excluding overdue collection.
So you know, the way we measure our collection efficiency, and this is what we have been putting up on our deck as well, is we have nondelinquent portfolio collection efficiency, which we mentioned is 99.23%, and overall collection, which is due versus collection at 97%. The additional collection, which is -- which could be prepayments or others, that's a separate number. Including that, the number goes up to 106%.
The next question is from the line of Ashlesh Sonje from Kotak Securities Limited.
Firstly, on the MFI book, just wanted to get a sense what proportion of the overall MFI portfolio of INR 193 billion which you have, what proportion would be outside the scope of MFIN guardrails?
So we have about 7% of borrowers who have 4-plus relationships. So this translates to 93%, which have 3 and below.
Sir, but would you need to abide by those guardrails for the full 100% of your portfolio? Because some of these borrowers might have incomes, let's say, about INR 3 lakhs. So technically, they won't qualify as microfinance from a technical definition perspective, right? And you might not have to abide by the MFIN guardrails for that set of customers?
So yes. So yes, we have customers with the income -- family level income is more than INR 30,000. And yes, you are right. Technically, we don't need to abide by the MFIN guardrails, but we have -- we decided that we'll go ahead with that. Earlier also, we were using it. And after the implementation of guardrails, and our own guardrails are actually stricter than MFIN guardrails, which is implemented for both customers having less than INR 25,000 income and more than INR 25,000 income as well.
Understood, sir. Perfect. And secondly, you mentioned the slippage number for the quarter at roughly, I think, INR 190 crores, if I back calculate based on the number you have given. Firstly, is that correct? And also, can you give a corresponding number the previous quarter, the MFI slippage number?
So it was INR 193 crores for the previous quarter and INR 240 crores for this quarter.
Okay. Understood. Sir, just one clarification. You mentioned a number of 7% borrowers who are 4-plus. So that is 5 or above, right? 5 or more lenders, right?
4 above.
That includes 4 as well?
Yes, yes. It includes 4.
Okay. But the MFIN guardrails still allows 4 lenders, right? Would you have a number for borrowers...
Yes, yes. Around 7% number you are saying, it is 4 and above. This includes 4 also.
Okay. Now would you have a proportion of borrowers who are associated with 5 or more lenders because that actually would be the ineligible set of borrowers, right?
We are a little aggressive on that, and that's the reason why we count 4 and above.
So we don't have 5 and above as of Now. We've been only working with 4 and above because that is something that is the reason for us to worry. 5 and above is any out of the consideration set.
The next question is from the line of Shailesh Kanani from Centrum Broking Limited.
Sir, just one question on the miscellaneous income side. There seems to be your Q-on-Q sharp jump. And so I wanted to understand and get some color what kind of this is -- what is the reason for this jump up? And because in the comments in the PPT, it's foreclosure, late payment and other charges. So how sustainable it is, just wanted to understand that?
Yes. We have introduced new MAB charges for customers in quarter 1. That has resulted to the spike by INR 12 crores in the miscellaneous income. The quarter-on-quarter spike is INR 12 crores.
Sir, I didn't understood. Which charges you said?
MAB, minimum account balance charges.
MAB, okay.
Nonmaintenance...
Nonmaintenance of MAB charges.
Okay. Okay. So that has resulted. So it is quite sustainable, that is what you're saying?
Yes, we will continue charging customers who do not maintain their minimum balance in the account.
Obviously, because if maintenance charges were not there, and we introduced some time in last year and we gave some time. And after that, we introduced it. And charges came in. But with time, obviously, it will little go down because customers start maintaining balance. So numbers will slowly decline, but it will still be there in every quarter.
Okay. Sir, second question would be on micro mortgages. We have a decent exposure over there and that book is also ramping up. Do we -- so any overlap between 2 products, MFI and micro mortgages, what we have in our portfolio? And any issues in terms of asset quality over there?
See we've a book of INR 300 crores over the last 18 months. About 50% of this book comes from individual loan customers who graduate to micro mortgages. In this book, we have not allowed new-to-credit. In fact, new-to-credit is only 1%. Everybody else has a history -- bureau history. And the bureau cutoffs are quite high.
As of today, we see a on-time repayment of 99.5% and full month repayment of almost 100%. In fact, only 9 or 10 customers out of 8,000 customers are in delinquency. So we're maintaining this -- a very tight monitoring on this portfolio.
Okay. Sir, just last question from my side. Sir, can you just reiterate the reversed guidance if you can. Because last time, we have the guidance of growth of around 20% similar growth for deposits. And we have already revised the credit book guidance. How about ROE? If you can just share those 3 numbers?
So actually, on the business side, we are saying that our secured portfolio will grow by 40-plus percentages. Our individual loan in the microfinance book will grow by 17% for the full year. We are not penciling on the microfinance group loan growth or degrowth because we feel that it is still a little ambiguous, clarity is still not there. So we refrain from giving you a guidance on that.
And therefore, the return on equity is going to soften as you would have seen in the results that we've shown for the half year. And again, this will be subject to how bounce back we see in the group loan business. That will actually decide where we actually zero in. So on the business side, this is what we say. Credit cost, we've already said 2.3% to 2.5%. Secured book would be around 40 to 42 percentages. Hope that answers your query.
The next question is from the line of Saumil Shah from Paras Investments.
Could you -- is there any update on the universal banking license?
This matter is under active consideration. And we would -- once we do that, we would announce it and let you know about it.
Okay. So can you extend it in this quarter?
It's work in progress. This financial year seems likely.
Okay. And sir, we do have a floating provisions of INR 250 crores. So why we are not utilizing it to reduce our NPA?
The floating provision can be utilized only in extraordinary circumstances with prior approval of RBI. And therefore, when we took the floating provision, we have taken it for an event, which is unforeseen, something like a pandemic or something which disturbs the portfolio quality. We don't use it on a normal basis. Currently, we have utilized it only about PCR computation and NNPA computation. So therefore -- and we still have INR 100 crores of unutilized floating provision. We'll keep it at this level. And as and when required, we'll use it.
Okay. And this is last question from my side. So in the first half, our loan book has grown by mere 2%. So now what can we expect to close this loan book by the end of this year?
I think I just now highlighted how the book is going to pan out. Secured book overall, which is gold loan, vehicle loan, housing loan, micro mortgages, MSME and agriculture, that will grow by 40-plus percentages, more than 40% for the full year. Individual loan in the microfinance book will grow by 70% for the full year. We are not announcing anything on the group loan side in the microfinance book because we find that it is -- the situation is still very fluid and evolving. And therefore, that number we frame from zeroing in. And the other part is, as I just now suggested to you.
[Operator Instructions] The next question is from the line of Jaiprakash from L&T India.
I have 2 questions. Like you said that you have stopped business in most of the clusters where the business is impacted, and which strategy following there for collection?
So we have some branches which we call stressed branches. And in those branches, we have put restrictions on growth. And these restrictions on growth are not acquiring new customers, acquiring [indiscernible] credit customers. As and when we find that customers are showing some signs of delinquency, not giving them repeat loans, no top-ups, et cetera. So these are the kind of restrictions we have put for branches, which are showing higher signs of stress.
If I heard you right, we have not stopped business anywhere. Repeat customers, we have [indiscernible] borrowers. And at this point of time, in turbulent time also, over 80% customers are paying on time, on date. And we have good eligibility in repeat loans. So we are serving our existing customers for repeat loan and graduating them to IL.
Which states the major mega portfolio you have affected from these type of customers? Which states or which type of branches -- or which branch you are stopping business? Means, mostly affected the business, which branches?
Can you please repeat the question and clarify it?
May I know the clusters and which locations majorly impacted among the states?
Okay. This is actually done at level. So we have branches which we find, as I was saying, that these are stressed branches. And that is where we have put restrictions on new acquisitions as well as servicing customers with higher loan sizes or showing signs of stress. So this is across all states. There could be some branches in Western UP, some in Kerala, some in Gujarat, some is Tamil Nadu and some in other areas. So it's across [indiscernible].
So just to clarify, once again, we have not stopped business anywhere. We have a large number of customers in each branches. We are serving customers -- existing customers [indiscernible].
The restriction is only for the kind of customers that we do not want to onboard. Otherwise, the disbursement for -- the welcome kind of customers is still going on.
Understood. The second question is that as you told that you have some done at PIN code level to understanding the opportunity, right? So whether there is any kind of a [indiscernible] at PIN code level have been implemented?
Yes, yes. So this is something which is old practice. It is not something new that we have developed during this -- or trying to do during this turbulent time. This we are doing for years. I think starting from the demonetization period, where we -- not only during the branch opening, we understand the PIN code information to understand the credit behavior. But also, we do it periodically for all branches we are operating and the PIN codes we are operating. And based on the performance of the PIN code, we fine-tune our credit policy for each branch.
Okay. Got it. But have you done any hard calls on this hard rejection basis of PIN code or stop any PIN code sourcing? Is it like that?
Yes, no. In PIN codes, you have a good number of borrowers. But in these PIN codes, we become cautious. We stop certain products, which we feel that it is not suitable for the PIN code. Those actions we take. We don't stop business in a location because we are present there and we are serving customers there. But we take [indiscernible] decision there based on the performance of the PIN code.
The next question is from the line of Shreepal Doshi from Equirus Capital.
Sir, my first question was, which are the states where we have seen collection efficiency being relatively better? And which are the states where we are seeing the collection efficiency being lower than your average collection efficiency of 97%?
Shreepal, so like we had spoken last time also, we have the top 5 states, which is Tamil Nadu, Karnataka, Bihar, West Bengal and UP. Of the 5 states, we find that our collection efficiency is not at par in Tamil Nadu. Whereas in other states, we find that the collection efficiencies are 99.4% and above. In fact in Karnataka, this number is 99.7%. Bihar, we will continue to be in the range of 99.4% to 99.5%.
Sir, I'm sorry, but your voice was not clear. So are you saying in the top 5 states, our collection efficiency is about 97%. Is it? I'm sorry, I couldn't hear you properly?
I was talking about the collection efficiency for the regular customers, [indiscernible] customers where I was talking about Tamil Nadu being not at par, but all the other states have 99.4% to 99.7%. So this is Bihar, UP, West Bengal and Karnataka.
Got it. Got it, sir. And sir, just one aspect that I wanted to understand on the customer identification side -- related document side. So how are we -- so on that front, what all documents do we take? And what is our process there?
So we acquired customer -- 100% customers on the basis of eKYC, and that is something which is the most safest way to acquire customers and have full [indiscernible].
So we have that license already sorted?
Yes.
Okay. And sir, one last question was on margin side. So since the share of secured portfolio is inching up and the growth in that segment is -- in the second half also that will be very, very strong. Where do the margins stabilizing for the year?
So margin compression will happen because the secured business will grow at a faster pace. And softness in return ratios would be visible for the full year -- financial year '25. So the previous guidance will be missed. And therefore, in the medium term, if you say 18%, 20% ROE from next year onwards is very much under our radar. But for this year, we would not like to commit to any specific number because the microfinance book actually is a big book. And therefore, we want to be more sure on how it is going to pan out.
Got it. So okay. I mean even on margin front because of the MFI book being larger book, we are not giving a specific number. Fair understanding?
And on the NIM, would you like to say?
On the NIM, currently, I think today, we are at 9.2% for the quarter, but full year, we will be a little below 9%, hovering around 8.6% to 8.8%.
The next question is from the line of Amit Mantri from to Capital.
Can you just talk about the OpEx increase that has happened in this quarter? Or is this now the sustainable run rate on the OpEx side? Or were there some one-offs in this quarter on the OpEx side?
Yes. So the OpEx increased mainly on front of personnel expenses and the other OpEx. The personnel expenses [Technical Difficulty] FY '24 versus H1 FY '25 has increased by 31% from INR 273 crores to INR 368 crore, mainly because last year based on industry benchmarking, one of the activities, which we did is with effective 1st October '23, salary corrections was performed for our employees.
Second, there is a volume increase in terms of number of employees. We added around from September to September around 2,700 people. This was mainly towards this business, which we expect to do well from a secured business and towards the branches, which we added. Around 123 branches we added last year. So this was the main reason where people were added. Our secured portfolio continued to do well. On a quarter-on-quarter basis, we have a 12% growth in the secured portfolio, which is expected to show good results in the upcoming quarters as well.
Lastly, we have beefed up our collection team as well and has been reinforced with the additional manpower. So that was the reason for the spike in cost. On the other OpEx, the fixed cost has increased mainly because of we have added again, as I mentioned, 123 branches last year. Our fixed cost in terms of occupancy expansion towards the [indiscernible] electricity maintenance and IT and depreciation cost because of the capital investment, the costs have increased. That's the main reason for the increase. We have been closely monitoring the control aspect, and that's the focus area for the upcoming quarters as well.
So as you would see, these are all actually investments. Many initiatives were launched last year at different phases of time, but the full impact is being visible from April onwards this year. But these are all investments for growing our book, strengthening our collection or reaching out with the people in the nooks and corners of the country by opening our branches.
On a Y-o-Y basis, I understand. But even on a Q-o-Q basis, compared to Q1 of this year, the OpEx has increased by almost 10% quarter-on-quarter. So what would -- what would explain that increase?
Sorry, if you can repeat the question?
Even on a quarter-on-quarter basis, when you compare to Q1 in FY '25, the OpEx has increased 10% on a quarter-on-quarter basis. So would explain that increase?
Yes. So as I mentioned, the quarter-on-quarter increased because we have opened last year 123 new branches. So fixed cost has increased. The branches are opened during the year, over the period -- of at various point in time in last year. This year, we had a full year expense -- this quarter is the full year expense that is resulting into the -- increase in OpEx. From a personnel cost as well, there are additional hirings mainly for the secured portfolio, which we are doing and the collection team, we are beefing up the collection team. That is adding up to the cost.
In fact, on the quarter-on-quarter -- on the quarter-on-quarter, we have been having a strict control on the cost. For the unsecured portfolio, wherever there is attrition, we are looking to -- there is no -- there's degrowth in the number of utilizes.
The next question is from the line of Gautam Jain from GCJ Financials.
Can I get the credit cost separately for microfinance and other business -- the secured business?
So we have, as a practice, not been looking at separate credit costs. It's been a blended cost for us. So that's how we are doing, but if you want it, we could send it to you.
Not for the year, we are expecting 2.3% to 2.5%, if it is 2.4%. So I just want to know how much is coming from secured business. Is that less than 1% or it's between 1% to 2%?
Secured business topically, it will be less than 1% or in the thereabout region. It is the unsecured business where the credit cost would be high for the year. But yes, you can take a benchmark of about 1% for secured businesses.
Okay. And when you say you raised the credit cost guidance from 1.7% to 2.3% to 2.5%. So that means you're still expecting a lot of slippage to happen in second half. Is that correct to understand?
Yes. So all cases -- all these borrowers who have been -- who entered into delinquency in Q1 and Q2, the credit cost would only happen with a lag of 90 to 180 days because that is when they get into GNPA and they get into the provisioning buckets. So therefore, there will be -- in the second half, the impact of that would be felt. So yes, there will be a higher credit cost because delinquencies and the PAR numbers have gone up in Q1 and Q2.
Can you give us a ballpark number. Suppose, you have a INR 440 crore slippage in first half? What could be the slippage in second half around that number or it may be higher?
So we were maintaining slippages in the range of 0.5% for many quarters. This quarter, the slippage has been in the range of about 1% to 0.8%. So you could expect that the slippages would be in that range for the remaining 2 quarters.
Okay. Can I ask one more question?
Yes, please. Go ahead please.
Yes. So I just want to ask whether our secured business has breakeven in terms of profitability or still not making money?
There are different variants. It depends on how mature that business has been in the books. So yes, housing is in profit. Gold Loan and Agri and Vehicle, we have just started to do those businesses. And MSME is likely to break even by this year-end. And the other 3 have just taken off and they are a very small portion of the business. And therefore, I would say, they would still need a 12-month period to actually throw that profit coming in.
The next question is from the line of Nidhesh Jain from Investec India.
The first question is on slippages for first half. So in first half of INR 430 crores of slippages, how much is from secured and how much is from unsecured?
So about 80% of the overall slippages are from microfinance.
Sure, sir. And secondly, sir, in the microfinance group loan segment, your PAR 0 is 5.5%, which is a quite decent number if you compared with some of the other peers. How do you see this trending over Q3 and Q4? And when do you see that this number will peak out?
So the way we look at PAR basically is NDA collection efficiency. So yes, we did see the NDA collection efficiency, which is the nondelinquent collection portfolio collection efficiency dip from to 99.46% to 99.23%, as I said. But this time, in Q3 and onwards, we feel more optimistic because the guardrails have been implemented, the changes in policies and other things, customers would get adjusted to it. And therefore, the collection efficiency is likely to improve from here on. PAR would be just a derivative of that.
Sure. And are you seeing any trends because of the guardrails being implemented? And a couple of players have been asked to stop disbursement from immediate effect. Do you see any spillover of that in terms of collection behavior from the customers?
No. We -- there is little overlap in the customer base of the players that you are referring to and other customer base. In fact, it is in the 1% to 1.5% range is a rough understanding of that. So there is not too much of an overlap there. So we don't expect our customers to have a major impact due to the slowing down on closure of disbursements in other units.
Okay. And lastly, on the vehicle finance segment, which segment of vehicles we will be focusing on?
So we have about 80, 90 good dealership tie-ups where we are getting very good volumes, and there are about 300 more where we are expecting good business to come in as the months progress. The manufacturers are all the large manufacturers.
So it's clearly the 2-wheeler segment that we are focusing on.
The 2-wheeler. In 2-wheelers, we have tie-ups across manufacturers.
The next question is from the line of Aravind from Sundaram Alternates.
Lot of my questions has been already been addressed. But one thing, I understand we are a growing bank. We need to invest in the franchise, either in deposits or in technology and everything. But do we see any slowdown in expenses either in terms of branch addition or in terms of IT expenses or product related expenses. What I'm trying to get is can we expect any moderation in cost income ratio in any ways over the next few quarters?
Current year, we are not foreseeing any additional branches. We are not opening any branches. So to that extent, whatever the exercise will continue. We continue to have investments in technology. That will continue because as we upgrade, we need to -- as we get into newer and newer lines of business, we need to keep upgrading our technology systems. So that will also continue.
On the IT side, there are investments or expenses, as you may call it, will necessarily have to be done on an annual basis or the renewals of the service agreements, et cetera, all that will continue. So we are not withholding or stopping these investment activities. Cost optimization from a general sense is what every enterprise would look at. And the cost optimization, we would certainly look into. But as we said, we are hiring because we feel collection needs to be strengthened. We are not -- we are hiring for the secured book, which we are now trying to grow. So all essential expenses and investments continue to happen, and that's way we would like to end the year with.
Sure, sir. Okay. But we were talking about 100 branches -- more than 100 branches in the recent time. Again, what I understand is like, obviously, as you said, you need personnel for secured book and other services. I'm just trying to understand, would the employee addition or the branch addition would slow down at least for some time? Or will it continue at the similar pace. But as you said, the branch addition, you are not having any plans. But was is it the same case with the employee addition?
So as I would like to clarify is the branches have already been opened. They have been invested with people, process, technology and everything that a branch requires. So those expenses have started picking in. What we will have to do is to ensure that business happens and they are all becoming a profitable venture for us, and that we continue to invest in, right?
Yes, understood, sir. Okay. Yes. And do you foresee -- I understand, we are going back and we need to consistently shore up our deposit franchise, especially in retail deposits. Would we be open to like use of, let's say, if there is a rate cut or something like that to use wholesale deposits to manage margins or improve margins in a short-term manner? Or we will continue to focus on retail deposits, even if it comes under slightly higher cost?
We will continue our focus on retail deposits. We are growing our deposit base through granular retail deposits and that will continue. And our interest -- the rate of interest out there, we will -- we are closely watching the situation. Wherever required, we are reducing our interest rates, but this is something that will keep evolving, and we are focused on that to keep our cost of funds also constant.
Okay. And just one last question. I see the MSME loans have started growing reasonably well. But MSME loan when I look at the collection efficiencies actually below, even something MFI, it is close to 90% only. I'd like to understand what are the efforts being taken here to improve that collection efficiency? And why is the collection efficiency is saturated over there?
Okay. In MSME, we have 2 books. One is what we had during the pandemic and immediately after that. We recalibrated all our production policies last year. So for the last 18 months, we have been working with the recalibrated product and policy. This has worked very well for us. In fact, this is almost now 40% of the overall MSME book, and this continues to have 0 delinquency, not a single case in 1 DPD and above.
It is the old book, which had got season. Some of it got into delinquency during COVID. That is what we are now wanting to -- it's a degrowing portfolio. It's now about INR 600-odd crores. And this is something that is leading to this delinquency. So the new book is completely pristine. We are not worried about what we are -- the new product and policy, how it's responding with very, very clean portfolio now.
The old book shall continue to have lower collection efficiency because most of it is in SMA and in PAR.
The next question is from Pritesh Bumb from DAM Capital.
Just a couple of questions. One is this guidance of credit cost. This includes a desire of PCR to be about 70%, right? So that will include our PCR thought process of 70-plus percent?
Yes, Pritesh. So our PCR currently is about 78%. And if we look at the -- at the end of Q2, if you look at the unutilized floating provision, we are almost fully covered. It would -- put together, this would be about 97% PCR. So even if we see an increase in [indiscernible] the PCR will continue to be above 70%.
Sure. No. So the whole point was that we are not able to utilize the floating provisions until we ask RBI and RBI gives permission. But the incremental book is -- the slippages are coming in and that's where I think the PCR is dropping. But the credit cost, which we are guiding at, I just wanted to check that, that includes the PCR because there will be write-offs certainly because of the policy, right? So in terms of that, PCR will remain above 70%?
Yes. PCR will remain above 70%. In fact, when we compare ourselves, having 97%, 98% PCR for the last 8 quarters, 90% and above PCR for the last 8 quarters, it looks a little low, but 78% by itself as a number is a very decent PCR that we are maintaining.
Got it. The second question was I just wanted to get the thoughts on ticket size perspective. We've seen this quarter ticket size move up, and which is natural that we are limiting growth in certain pockets and new-to-credit customers are not being roped in. But then generally thinking that we are one of the highest in terms of ticket size, and basically, we've not seen ticket size coming down for a long, long time. So what is the thoughts here? Basically, how do we see that we get more conservative in terms of ticket size, especially in the GLG side?
So on the GLG side, the reason for the ticket size looking a little high is because the blending of new-to-bank customers is not happening. In this quarter, we did almost 50% of our loans as repeat loans on the group loan side. And we did not see a sizable number of new customer acquisitions, which is why our ticket size looks a little high. But if you compare ourselves with Q1, the ticket size has remained more or less the same.
Yes. So my perspective was that we are at a very high ticket size. And say, for example, some of our peers will be in the range of 28,000 to 40,000, maybe below that, but we are at about 58,000. And of course, that math, which we think about is absolutely right. But when we were growing the new ticket or the new-to-bank customers, the ticket size had not fallen and now we are seeing the ticket size getting a little bit higher. So any thoughts on that, how do we bring down the ticket size overall?
So this is a repeat of what happened around 2 years back when we were doing a lot of customer retention plans and we were servicing our existing customers. And we were very immediately after COVID that how should we go about doing new customer acquisition. We were -- the environment was not certain. We saw at that time, the ticket size has gone up. But as we opened our new-to-bank customer acquisition, the ticket size came down.
Remember, it was about 58,500 or 59,000 during that time when we used to focus on repeat. It's the same thing that we're seeing today also. As the MCA has come down, the ticket size have started to go up a little. But once we start opening MCA, the blending of new customers would happen and the average ticket size would come down. So it's a repeat of what we saw immediately post COVID.
Ladies and gentlemen, we'll take this as a last question. I now hand the conference over to the management for closing comments.
Thank you, friends, for patient hearing and for your enterprising questions, which made us think about our responses. Hope we adequately satisfied your queries. As I close this session, this very engaging session, the key highlights that I would like to conclude is that we would continue to invest growing in our secured book. We would continue to do the individual microfinance lending where we see opportunities growing. We will steadily also grow our group loan microfinance book.
On liability side, we would focus on CASA and try reducing the cost of funds. And digital and analytics is an area where we would like to invest more and focus more. And cost to income is another metric where we would like to focus.
So with these, I would like to conclude and thank you for joining us for a very engaging session with our team.
Thank you. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.