Ujjivan Small Finance Bank Limited (UJJIVANSFB) Q2 FY23 Earnings Concall Transcript

Ujjivan Small Finance Bank Limited (NSE:UJJIVANSFB) Q2 FY23 Earnings Concall dated Nov. 07, 2022

Corporate Participants:

Ittira Davis — Managing Director and Chief Executive Officer

Mocherla Durga Ramesh Murthy — Chief Financial Officer

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Carol Furtado — Chief Business Officer

Ashish Goel — Chief Credit Officer

Analysts:

Arash Arethna — Analyst

Renish Bhuva — ICICI Securities — Analyst

Shreepal Doshi — Equirus — Analyst

Harsh Shah — Dimensional Securities — Analyst

Deepak Poddar — Sapphire Capital — Analyst

Abhishek Murarka — HSBC — Analyst

Ashlesh Sonje — Kotak Securities — Analyst

Sharaj Singh — Laburnum Capital — Analyst

Raj Shome — Shome Partnership — Analyst

Pritesh Bumb — DAM Capital Advisors — Analyst

Yash Dantewadia — Dante Equity — Analyst

Darpin Shah — Haitong India — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Ujjivan Small Finance Bank 2Q FY23 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. Arash Arethna from IIFL Securities Limited. Thank you, and over to you, sir.

Arash Arethna — Analyst

Yes. Thank you, Bhavin. Welcome to participants for the Ujjivan Small Finance Bank 2Q FY23 earnings call. From the management side, we have Mr. Ittira Davis, MD and CEO; Ms. Carol Furtado, Chief Business Officer; Mr. M.D. Ramesh Murthy, Chief Financial Officer; Mr. Martin P.S., Chief Operating Officer; Mr. Ashish Goel, Chief Credit Officer; Mr. Vibhas Chandra, Head of MicroBanking; and Mr. Deepak Khetan, Head of Financial Planning, Strategy and Investor Relations.

I’d now like to hand over the call to the management for their opening remarks and then we can move to Q&A. Thank you, and over to you.

Ittira Davis — Managing Director and Chief Executive Officer

Thank you, Arash. Good evening, everyone, and welcome to our Q2 financial year ’23 earnings call. We began this financial year with a great quarter witnessing an all-round performance along with improved profitability. Q2 further built on that good performance. Our disbursements continue to track the INR4,000 crore-plus mark, which has now become a new normal.

Our gross advances are up 8%, against June ’22 and 44% against September ’21. This is in line with our guidance of 30% growth for the financial year. As we have mentioned in our last earnings call, Q2 has delivered strong deposit growth INR1,947 crore of incremental deposits, marking a 11% growth against the previous quarter and 45% growth versus September ’21. Most of this growth came from retail, which is now 61% of total deposits.

On the liquidity front, we also continue to tap alternate channels like IBPC, securitization and term loans. We also raised sub debt and fresh equity this quarter, taking our CRAR to 26.7%. On the asset quality side, sustained collection efficiency and normalized slippages coupled with strong recoveries continued to drive lower PAR and NPAs.

We maintain our narration on credit cost that with sustained collections and improving credit parameters, provisions will be sub 1% this fiscal, which is below normal. This would be supplemented by strong recoveries. As of September ’22, our NNPA is just at INR8 crores or 0.04%. Also, our SMA book, as well as restructured book have shrunk further indicating the reduced stress.

I would also like to highlight that as of 30th September ’22, our total provision on books are at INR1,126 crore, of which INR115 crores standard provision; INR762 crore account level NPA provision; and INR250 crore floating provision. The entire floating provision of INR250 crore created in June ’21 continues to be there on our books and can be utilized for making specific provisions in extraordinary circumstances with prior approval of the Reserve Bank of India.

Only INR160 crores is utilized for NNPA/PCR calculation, INR30 crore towards Tier 2 capital and the balance INR60 crore has been grouped, as part of other provisions without utilizing the same towards Tier 2 capital. This amount continues to be earmarked for utilization for NNPA or PCR, as and when needed. The outcome of all this put together is the highest ever quarterly profit, PPoP of INR385 crore and PAT of INR294 crore. Credit cost is negative this quarter, as I mentioned that while slippages have come under control, recoveries continued to be strong.

Also, I would like to clarify that as per regulatory guidelines, we have revised the treatment of bad debt recovery. Since Q2 financial year ’22, we have netting it off from credit cost. However, this quarter onwards, we have restated the earlier treatment, which is showing bad debt recovery as part of other income. This leads to increase in income and PoP on the one side and credit cost on the other. But PBT and PAT remains the same. Prior period items have been restated for your reference.

With the recent equity raise, we have complied with the SEBI requirement for minimum public shareholding, following, which the Boards — both the Boards have approved a revised scheme of amalgamation with our promoter Ujjivan Financial Services. The same has been submitted to exchanges and the Reserve Bank of India. We are in process to get the requisite regulatory approvals post, which we can approach the NCLT. The entire process may take around 12 months.

The outlook now for the rest of the year. As promised on last call, we now looking at growing our platform further. We have added 15 branches this quarter and would add a similar number in the second half of the year. We are keeping our branch strategy a bit dynamic to complement our growing digital presence.

I’m extremely delighted to mention that we have launched a mobile banking app, which is first of its kind to target customers, who are not tech savvy. It is called Hello Ujjivan, and is based on voice and video in vernacular languages, we have it in eight languages. The same is now available for customers to download and use. We would be encouraging our semi-literate customers to use this app and increase penetration of digital banking. This will have multiple benefits in the long run.

We continue to invest in technology and other digital platforms to grow our business, volumes, assets and liabilities both services, improve processes, and overall reach our customers.

I would like to reiterate that our focus this year is to consolidate our businesses and make them profitable and invest in new avenues for growth. We maintain our 30% gross advances growth guidance with deposits growing a little faster. While cost of fund is increasing, our focus is to grow CASA to reduce the rate of increase of the cost of funds.

Also, time-to-time we’d like to evaluate and pass on the increased cost of funds as and when it is possible to do so. For example, we took some rate hikes in September 2022 on our asset book. We are monitoring our operating costs very closely and aim to bring in efficiencies through process improvement and productivity enhancement. This is a continuing process.

We look to hold our cost to income ratio comfortably below 60% for the financial year ’23. H1 cost to income ratio is at 55%. Also, we had earlier guided for a 2.3% return on assets, which we said is a conservative guidance. However, our first half performance, we are confident of a comfortably higher ROA.

The second half would be a bit different than the first half because of a couple of items, PSL income might be a bit lower and opex might be a little higher, as we invest in branding and also expand our branch network. NIMs, we believe would be around 9.5% for the year.

Overall, the second half of the year would be similar to the first half in terms of overall profitability. As we discussed earlier, the risk to this guidance is the inflationary pressure that’s brewing in the economy and the result in rate hike movements. Also we would be monitoring the global geopolitical scenario, overall I see financial year ’23, as a strong comeback year for Ujjivan, which would create a platform — a solid platform for the next growth cycle.

I’d like to stop here and request the operator to begin the Q&A. Thank you.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Renish from ICICI. Kindly proceed. Hello, Renish, can you hear us?

Renish Bhuva — ICICI Securities — Analyst

Hello, am I audible?

Operator

Yes, you’re audible now, sir.

Renish Bhuva — ICICI Securities — Analyst

Yeah. Hi, sir. Congrats on a great set of numbers. So sir, my question is on ROA guidance, so if we look at the first half ’23 ROA, it is already at around 4% and when we are guiding at 2.3% for the full year, it suggests that the second half profitability will be much lower, though you have mentioned about the investment towards infrastructure and the brand building, but why we are expecting half ROA in second half?

Mocherla Durga Ramesh Murthy — Chief Financial Officer

Renish, we didn’t — Mr. David just said that we would — are expecting much higher than what we guided. So we guided a conservative ROA of 2.3% earlier and now we’re saying that our full year ROA for this year would be much higher. He also mentioned that second half would be more or less similar to the first half on the overall profit number or profitability basis.

Renish Bhuva — ICICI Securities — Analyst

Okay. Got it.

Mocherla Durga Ramesh Murthy — Chief Financial Officer

We are nowhere saying that second half would be poor than first half.

Renish Bhuva — ICICI Securities — Analyst

Got it. So would you like to revise your ROA guidance to 4%, I mean, that is what the projector suggest?

Mocherla Durga Ramesh Murthy — Chief Financial Officer

We would stop here and not give a number of ROA.

Ittira Davis — Managing Director and Chief Executive Officer

We have given you profit guidance because we said second half will be similar to first half.

Renish Bhuva — ICICI Securities — Analyst

Got it. Got it, sir. And sir, secondly, on the growth guidance, so of course, I mean, AUM growth will be 30%, but would you like to highlight also the key growth drivers amongst the broader segments?

Ittira Davis — Managing Director and Chief Executive Officer

Yeah. The growth, our overall business is growing and that will continue to grow because our disbursements are north of INR4,000 crores quarter-on-quarter. So that our OSP will continue to build on that basis on that disbursement basis. So the yield from that portfolio will be substantially higher with each passing quarter. So that will be the basic growth drivers.

In addition to that, we have in this first — this quarter we had some PSL income and some other income coming in. But the other most important thing is our recoveries, our NPA recoveries and our collections, so that we expect to continue to be good for the rest of the year. But perhaps not as good as the second quarter or the first quarter, but still at good levels, not very good, but good.

Renish Bhuva — ICICI Securities — Analyst

Okay. Got it.

Mocherla Durga Ramesh Murthy — Chief Financial Officer

Renish, for first half bad debt recovery was roughly INR56 crores.

Renish Bhuva — ICICI Securities — Analyst

Correct. Correct.

Mocherla Durga Ramesh Murthy — Chief Financial Officer

So that is the thing what Mr. Davis is saying, it might not be INR56 crores, but it will be a very good number because it’s a number, which generally tend to slow down, as the NPAs are old or the write-off accounts gets older and older. Though so far, we have not seen that flattish kind of a growth coming — number coming in.

On the PSL side, we have booked a good amount of PSL in the first half, 9.2% [Phonetic] or 9.3% [Phonetic] in the first quarter and INR14 crores-plus this quarter. So we don’t expect a very big number in the second half. So these are the two number, which we do not expect to be coming in the second half. But overall, given that the business volumes have increased, the P&L size has increased, we do not see the overall P&L to be very different compared to what the first half P&L numbers are.

Renish Bhuva — ICICI Securities — Analyst

Yeah. So, Deepak, in fact, my question was around the AUM mix impact. So what I was trying to get a sense is that the 70-30 [Phonetic] mix, which we have — which has been actually static from last three quarters, four quarters. So how should one look at it?

Mocherla Durga Ramesh Murthy — Chief Financial Officer

So Renish, this — the next two quarters are not going to see any significant change in the current mix that we have because as we’ve said in the previous two calls also that micro finance for us has seen a very good demand from the market, and therefore, the disbursements have continued to be very good. And the secured products obviously take a little longer to build a book. Therefore, the mix is not going to be significantly different in the next two quarters, as compared to the last two quarters.

Renish Bhuva — ICICI Securities — Analyst

Got it, sir. That’s it, sir. Thank you very much.

Mocherla Durga Ramesh Murthy — Chief Financial Officer

Thank you, Renish.

Operator

Thank you. The next question is from the line of Shreepal Doshi from Equirus. Kindly proceed?

Shreepal Doshi — Equirus — Analyst

Hi, sir. Thank you, and congrats on great sort of numbers. Sir, firstly, I wanted to understand — yeah, sir. Sir wanted to understand and get some sense on what was the slippages, recovery and upgrades during the quarter?

Ittira Davis — Managing Director and Chief Executive Officer

This in terms of value.

Shreepal Doshi — Equirus — Analyst

NPA.

Ittira Davis — Managing Director and Chief Executive Officer

Yeah. The slippages was about INR75 crores and the upgrade was INR146 crores. In terms of percentage, it was 0.4% and 0.7%.

Shreepal Doshi — Equirus — Analyst

Okay. So the upgrades you’re saying overall reduction was INR146 crores. But if you could say what would like — okay, what was other like recoveries should be?

Ittira Davis — Managing Director and Chief Executive Officer

So overall, we look at recoveries and upgrades, as a single unit. The last three quarters, I would want to say that our slippages have come down from 1.2% to 0.8% to 0.4%, and the upgrades have remained — always higher than the slippages. We’ve seen a net reduction in all the three consecutive quarters.

Shreepal Doshi — Equirus — Analyst

Got it. Sir with respect to the reverse build up [Phonetic] aspect, so I heard that it will take another 12 months to sort of fructify?

Ittira Davis — Managing Director and Chief Executive Officer

Yeah. The — see, overall timelines because we have to get clearances from RBI and from the stock exchanges, following which we will go through the NCLT. So how long it takes with each of these [Technical Issues] stage because we have submitted all these papers to RBI and to the stock exchanges last month. So from last month, you can say 12 months is a conservative estimate. We also mentioned in the last call that we expect it to be completed by September of next year, is the indication that we have.

Shreepal Doshi — Equirus — Analyst

Got it. Sir the last question was on credit cost side, so you said it will be like for FY23 it will be less than 1%. So I expect second half to have relatively higher as compared to first half on the credit cost side. So is it because there will be some write-offs that would [Indecipherable] from the restructured pool, which is having an collection efficiency of close to 80% — 88%?

Ittira Davis — Managing Director and Chief Executive Officer

So on the credit cost, there are two factors that I would want to highlight. One, our SMA pool, which is now about 1.7%. So as a result of that our incremental slippages, as I was saying the trend has been downward and last quarter we had about 0.4%. So therefore, this trend we expect to continue because our restructured assets, which we — I would want to give you some numbers, we had restructured MicroBanking portfolio of about INR944 crores and we have collected almost INR600 odd crores out of it. The book that we currently have is — I’ll just give you exact number.

Yeah. So the INR224 crore is the book that we currently have, of which INR110 crores is NPA and fully provided. So we don’t see too much of a risk in terms of the restructured portfolio. The credit cost would happen from the existing NPA moving to higher buckets because slippages are coming down. Existing, we have some NPAs, which we move to higher buckets and that’s where the — we expect the credit cost to come from.

Shreepal Doshi — Equirus — Analyst

Got it, sir. So just one sense, I think the last three quarters, our disbursements have been pretty strong. So how is the new book performed in terms of asset quality? And what is the steady state sort of business, as usual credit cost that we are looking at from say FY24 onwards?

Ittira Davis — Managing Director and Chief Executive Officer

So in terms of new book, we continue to have a 99.5% to 99.7% collection efficiency. On MicroBanking, which is our largest portfolio about 85% of our book is new book, which was disbursed in the last four quarters. And therefore, the portfolio quality is quite stable there 99.7% to 99.8% is the collection efficiency.

Old book, which is about 7% of book, which was — which is more than two years old, that has slippages and that account for whatever slippages we have. In terms of credit cost, we will continue our — we continue to see 100 bps to 150 bps in a normalized year.

Shreepal Doshi — Equirus — Analyst

Got it. Got it, sir. Thank you very much, and good luck for the next quarters.

Operator

Thank you. [Operator Instructions] The next question is from the line of Harsh Shah from Dimensional Securities. Kindly proceed.

Harsh Shah — Dimensional Securities — Analyst

Good afternoon, sir. My first question is pertaining to the AUM mix. Since you are entering a very high interest rate regime, so is it a conscious decision on our part to maintain the MFI book at higher level because earlier we were guiding of 60% kind of contribution from MFI and 40% from non-MFI. So is that the thought process behind keeping the MFI book at a higher level because currently we are at around 70%.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Harsh, it is not a factor of the interest rate scenario in the market. We have been mentioning over last couple of calls that given the micro finance industry is coming off from a very bad two years, there is a very high growth demand or credit demand, which is there, and that is interim, while the other businesses start delivering very high volumes in terms — because anyway the micro finance portfolio for us is big. So it will take time for other businesses to start delivering in that absolute amount. So there is no such thought process on the interest rate cycle.

Ittira Davis — Managing Director and Chief Executive Officer

We are still committed in the longer term in the next three years to five years to balance that portfolio, as we have indicated in previous calls. So that strategy remains intact.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

The focus is on growing the secured book also.

Harsh Shah — Dimensional Securities — Analyst

Okay. Fair enough. And second question pertains to the kind of AUM growth we are seeing, we are guiding 30% then probably even after that we will be higher double digit. So what is the strategy on the liability side? How do we plan to catch up in terms of liquidity to maintain to sustain that kind of growth? And when we tap the external borrowing market, so what would be your incremental borrowing cost on that side?

Carol Furtado — Chief Business Officer

So I’ll take the first question. We have not changed our strategy. We are going very strong on retail granular growth and the same thing of having our customer segmented into various categories like the high net worth, senior citizens and having specific programs for that is still under traction, and we are going ahead with that.

We are also opening branches. One of the advantages that we have is on the interest rate and we are taking a lot of — we are getting good deposits from these customers across the segments. Our customer service and technology is also helping us do that.

We are also working on a very strong branding for Ujjivan and that is going to help us in accelerating deposit growth, and the focus is also a lot more now increasingly on the digital.

Harsh Shah — Dimensional Securities — Analyst

Okay. And then incremental cost of borrowing?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

The incremental cost of borrowing right now what we would probably be looking at is not really a normal bank loan or term loan or something, probably we can look at our refinance facility or something. So that may not be very expensive, would be more or less where the current cost is there, for the current cost of borrowings are there. We would not be very different from that. So we will get to know the final number when we get the facility, but would not be very different.

Harsh Shah — Dimensional Securities — Analyst

Okay. Sure. Thank you so much.

Operator

Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Kindly proceed.

Deepak Poddar — Sapphire Capital — Analyst

Hello.

Ittira Davis — Managing Director and Chief Executive Officer

Hi. Yeah.

Deepak Poddar — Sapphire Capital — Analyst

Yeah. Thank you very much, sir, for the opportunity. Sir first of all I wanted to understand on the accounting adjustment you mentioned that the bad debt recovery is accounted in other income, so basically, other income, and then the provision is kind of nullifying each other, right? So the PBT and PAT remain same, right?

Mocherla Durga Ramesh Murthy — Chief Financial Officer

Let me answer. This is Ramesh Murthy here. If you recall there was a master direction given by RBI in November — in August 2021, which again they reverted to the original position in November 2021. So all what we are trying to have done here is that we have regrouped this as per confirming to the RBI master direction, as always, which is why the recoveries from bad debts previously written-off have been added to other income.

Deepak Poddar — Sapphire Capital — Analyst

Okay. So just wanted to understand, now the going forward other income because we are seeing a lot of variability, right, from INR90 crores [Phonetic], INR100 crores [Phonetic], it has jumped up to INR150 crores, this quarter. So going forward, if I have to — I mean, understand what should be the right range for other income? I mean, so some understanding on that if you can provide?

Ittira Davis — Managing Director and Chief Executive Officer

Ranges we cannot predict because that depends on the recovery, which we get. So — and Deepak has already mentioned that whatever we were having on the PSLC income, we have taken and we don’t expect that to be at the same level in the next half.

Deepak Poddar — Sapphire Capital — Analyst

So sir, so this INR145 crores will reduce, right? Ideally that recovery amount that has come this quarter will not come again in third quarter, fourth quarter?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Deepak, I can say that there is no one-off on this other income. The only thing is what I have already mentioned that the bad debt recovery depends on what kind of pool you have for bad debt recovery. As we move forward that pool will continue to shrink. So last quarter we had INR30 crores, this quarter we have around INR26 crores. So it is not too much of a difference, but there’s still some difference. And PSLC income is basis your book that you have. So we have booked around INR25 crore of PSLC income in the first half. Second half, we will have some income, but we cannot say how much it will be there and which quarter it will be there.

Deepak Poddar — Sapphire Capital — Analyst

Fair enough. I got a hang of it. Yeah. Understood.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Rest in other income, there is nothing else, which is one-off. So these two item also will be there, but the quantum maybe up and down depending upon the quarter and the overall business. That’s it.

Deepak Poddar — Sapphire Capital — Analyst

Fair enough. Understood. Fair enough. And my second question regarding your cost-to-income. I think you did highlight that you expect that to increase driven by branding exercise and infrastructure building, right. So I think it was about 53% this quarter and overall, we’re expecting below 60% for the entire year, right?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Yeah. So this quarter, it is 52% and for the first half it is 55%. What we’re saying is, again, we have taken a little bit of conservatism in the overall guidance that like we have been saying. So overall, we are saying that comfortably below 60%, we will be there. And Mr. Davis has already mentioned that second half would be more or less similar to first half. So we do not see that 55% or 56% kind of a first half number, as a challenge.

Deepak Poddar — Sapphire Capital — Analyst

Understood. Fair enough. I understood. Yeah. That’s it from my side, sir. All the very best. Thank you so much.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

One thing that we need to also see is the rate cycle, as the rates move up the overall size of the P&L moves up, with the income moving up, but the absolute opex does not move with the rate cycle, so that helps in this…

Deepak Poddar — Sapphire Capital — Analyst

Correct. So sir, the base effect you will get basically.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Yeah.

Deepak Poddar — Sapphire Capital — Analyst

Fair enough. Yeah. Thank you so much.

Operator

Thank you. The next question is from the line of Abhishek Murarka from HSBC. Kindly proceed.

Abhishek Murarka — HSBC — Analyst

Hi, everyone. Good evening and congratulations for the quarter. So my question is on opex. Now, when I look at your growth of 30% plus, that’s on the retail liability side, you’re having to work with on granular deposits. On the other hand, you have not really added a lot of branches and your employees have actually, number of employees actually come down in the last two quarters, three quarters. So how long can this sustain, as in how much capacity is there in the system to sustain growth before you have to add branches and employees more aggressively?

Ittira Davis — Managing Director and Chief Executive Officer

I think in our opening remarks we said the branch expansion is going to take place — to continue. In the second half, we will add a few more branches, but next year we’ll be going back to more normal branch growth plan. And obviously, with that staffing will also grow. So those numbers will begin to look up. And yes, it will answer your question with that growth we’ll be able to add to the granular growth of deposits.

Carol Furtado — Chief Business Officer

And we’ll work on the productivity also. I mean, we’ve been working very hard towards getting our productivity levels up and — in a lot of our business verticals, it will surpass the industry standards.

Abhishek Murarka — HSBC — Analyst

Of course. So because your branch count hasn’t really gone up much in the last since 2020 because of all the pandemic related issues in between, what would be a normalized branch addition? Let’s say, to support a 30% growth, what kind of normalized branch and employee addition, would you expect?

Ashish Goel — Chief Credit Officer

So we said because we also have a digital strategy. So what we had earlier is not a guidance for going forward. But I would say that this year we are adding about 40, 45 branches this financial year. Next year, it could be a little bit more, could be towards the 75, 100 mark. But the numbers will keep shifting based on how our digital strategy presents itself because we believe that very core to our [Technical Issues] digital strategy and that is a cost contained strategy. So that is very important. So as that opens up and is successful, we will slow down the branch growth, but if that is not producing the deposit that we require, we will continue the branch expansion.

Abhishek Murarka — HSBC — Analyst

Yeah. So sir, what I’m trying to gauge here is, is sub 60% a normalized cost-to-income level? So this year, I understand. But next year, a more normalized cost-to-income, would it be sub-60% or around 60%? How do we think about it?

Ashish Goel — Chief Credit Officer

Abhishek, it would be probably much below 60%.

Abhishek Murarka — HSBC — Analyst

Okay. Perfect. My second question is on credit cost. So I understand this year, again, sub 1%, but I believe you mentioned 100 bps to 150 bps normalized credit cost, was that only for MFI? Or was that for, let’s say going forward?

Ashish Goel — Chief Credit Officer

So we were mentioning 100 bps to 150 bps for the bank as a whole.

Abhishek Murarka — HSBC — Analyst

For the bank as a whole. Okay. So in case your book doesn’t require additional credit cost, would you still make that or would you maybe this year you won’t, but next year onwards it gets back to 100 bps, 150 bps?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

I didn’t get the question, Abhishek. Abhishek this year we have not — when Ashish said 100 bps, 150 bps, that was a normalized…

Abhishek Murarka — HSBC — Analyst

For next year.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Yeah. Well, not for this year.

Abhishek Murarka — HSBC — Analyst

No, no. Let me ask. So two edge, if it is normalized would — second half also run at 100 bps, 150 bps or this sort of kicks in next year in FY24?

Ashish Goel — Chief Credit Officer

This is for next year. This year is a very exceptional year because we’ve done provision in first quarters and second quarters of last year and we are getting good recoveries this year. And therefore, you would have seen the bad debt recovery, as well as the credit cost being very minimal in the first two quarters. We expect that this trend for the next two quarters will remain. However, next year onwards, those recoveries may not happen. So we will probably see a 100 bps to 150 bps year-on-year for as a normalized cost.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

And Abhishek, also for this year, our PCR currently is almost at 99% with an NNPA [Phonetic] of just INR8 crores and INR90 crores of floating provision is not being used to calculate this PCR. INR30 crore of that INR90 crore is in Tier 2 capital calculation and INR60 crore is being put under other provisions, which can be anytime moved back to NPA provision if required.

So this year actually, like Ashish has been mentioning calls after calls, this year would be a little below normal kind of a credit cost. Second half, we’ll see how the things move if required, we probably, it doesn’t look like anything, but we understand what you are coming from, whether we’ll still go ahead and make some provision. We haven’t taken that call yet, if additional provisions, just to be on a safer side is required.

Ashish Goel — Chief Credit Officer

But we’ll continue to have about 1% as floating provision that I think is sufficient for us to take care of any extraordinary circumstances.

Abhishek Murarka — HSBC — Analyst

Sure, sure. Thanks. Thanks so much. That’s useful, and congratulations again for the quarter and all the best.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Thanks, Abhishek.

Operator

Thank you. The next question is from the line of Ashlesh Sonje from Kotak Securities. Kindly proceed.

Ashlesh Sonje — Kotak Securities — Analyst

Hi, team. Thanks for the opportunity. A few questions…

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Hi, Ashesh…

Operator

Excuse me, sir. We are not able to hear you, Ashlesh.

Ashlesh Sonje — Kotak Securities — Analyst

Is this better?

Operator

No, sir. Would you be using your handset.

Ashlesh Sonje — Kotak Securities — Analyst

Is this better?

Ittira Davis — Managing Director and Chief Executive Officer

Yes.

Ashlesh Sonje — Kotak Securities — Analyst

Hello. Yeah. So a few questions on the individual loan book that book has grown at a robust pace this quarter, disbursements almost doubled Y-o-Y and up 35% Q-o-Q. So can you talk about what proportion of these IL customers would have graduated from our group loan product?

Mocherla Durga Ramesh Murthy — Chief Financial Officer

Yes, yes. So yeah, ILs have been [Indecipherable] one of the products in micro banking, which is [Indecipherable]. And with all this the rule of the entire micro finance game changing with the RBI policy coming, IL has become even more important that we are focusing on IL. It is largely GL to IL graduation close to 90% and remaining 10% come from the open market.

Ashlesh Sonje — Kotak Securities — Analyst

Okay. So roughly 10% would be new to bank. And what proportion of IL customers would you say be new to credit, I guess?

Mocherla Durga Ramesh Murthy — Chief Financial Officer

For credit negligible, no.

Ashlesh Sonje — Kotak Securities — Analyst

Okay. Understood. Sir and second question, again on IL. So what would be your qualifying criteria for graduating customers from the group loan product to the individual loan product?

Mocherla Durga Ramesh Murthy — Chief Financial Officer

We see the customer repayment behavior in the group lending and also the repayment capacity of the customers. We also look at the data, which is available in the market, around the customers, their MFI’s and bank as well, to assess customer repayment capability. And based on that, we’ll graduate customers into — from GL to IL.

Ashlesh Sonje — Kotak Securities — Analyst

Sir more specifically, would you have any thresholds on experience with that customer as in [Speech Overlap].

Mocherla Durga Ramesh Murthy — Chief Financial Officer

Yeah. We normally graduate customers after two years.

Ashlesh Sonje — Kotak Securities — Analyst

Sorry any qualifying criteria on number of EMIs that he has paid with us so far.

Mocherla Durga Ramesh Murthy — Chief Financial Officer

Yes, yes. So there are [Phonetic] credit card area, but on an average, the customers are graduated to IL after 24 year life [Phonetic] minimum.

Ashlesh Sonje — Kotak Securities — Analyst

Okay. Understood sir. Fine, sir. Those are the question from my side.

Operator

Thank you. The next question is from the line of Sharaj Singh from Laburnum Capital. Kindly proceed.

Sharaj Singh — Laburnum Capital — Analyst

Hello sir, good evening, sir. Sir my question is on the rate hike pass on. Are we looking to pass on any rate hikes to our customers? And do we see any push back here?

Ittira Davis — Managing Director and Chief Executive Officer

Yeah. On the asset side we have done a rate hike in September, a 50 basis points on the MicroBanking book. On the housing loan and the MSEs, there is fixed to floating conversion that we have from time to time. So those kick in also during this period. So on that basis the higher interest rates on the book are brought in. And if necessary we will look at the way in which the rates are moving and look at further increases, if required.

Sharaj Singh — Laburnum Capital — Analyst

Sir actually, I want to understand like given the segment and the customers we deal with, how much of rate hike can the customers actually bear? Is there some threshold we have?

Carol Furtado — Chief Business Officer

In the MFI segment.

Sharaj Singh — Laburnum Capital — Analyst

Yeah. In the MFI segment. And… We have not received any push back from the customers as of now and we are quite competitive there, so we are not looking at a very — I mean, we’re not looking at a rate hike in the immediate future.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

And there are players, who have much higher than us on the rate side, so that is not really something, which is a much challenge here. It’s more of a TAT and service, and how you deal with the customer, which brings the customer back to you and the loyalty of the customer, rather than the interest rate because these are small tenor, small ticket size loans. So the EMI amount change is not something that pinches the customers pocket much, rather customer believes or would prefer RMs or ROs, who serve them much better.

Carol Furtado — Chief Business Officer

It’s mainly the customer connect and how we service the customers that matters most to them.

Sharaj Singh — Laburnum Capital — Analyst

Okay. And so on the deposit side, how do we look at the rate hikes and how much have we passed on so far and how do we look at it in the current quarter — the coming quarters?

Carol Furtado — Chief Business Officer

So we recently did a rate hike, and we are yet to see the results of that. We did one I think sometime in September also. And I mean, in August, we did a rate hike and we got a good traction there. Recently we did another, and we are yet to see the numbers coming through.

Sharaj Singh — Laburnum Capital — Analyst

Can you quantify that, please?

Ittira Davis — Managing Director and Chief Executive Officer

Sorry. Come again.

Carol Furtado — Chief Business Officer

Sorry.

Sharaj Singh — Laburnum Capital — Analyst

Can you quantify the rate hike that we’ve taken in Q1 and Q2 together so far?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

We’ll come back to you on the exact amount. But we can tell you that among our peers, we are not like we have the highest rate or something. We are in line with the peers.

Sharaj Singh — Laburnum Capital — Analyst

Okay. Okay. One last question. You mentioned that it could be — looking at in the borrowing mix, we’re looking at some change with term loans coming in. Could you explain like, when can, I mean, is there — when can we look at the term loan expanding in the mix?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

So we mentioned that we’re also looking for some refinance facility. What happened is during COVID, we allowed our refinance facilities to dry down because we were sitting on very huge pile of cash, as disbursements were not happening. And after COVID once we have now got back into action and the business has started to perform, now we are looking at expanding, going back and taking those refinance facility. So that is something that we are looking at. Wouldn’t be able to comment on the timing and all of that.

Ittira Davis — Managing Director and Chief Executive Officer

It wasn’t term loans.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Yeah. We didn’t mentioned term loan. We said in the Q2, we have already taken it.

Sharaj Singh — Laburnum Capital — Analyst

Okay. Thank you.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

And that was a small facility not a big one.

Sharaj Singh — Laburnum Capital — Analyst

Yeah. Okay. Thank you so much and congratulations.

Operator

Thank you.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Thank you.

Operator

The next question is from the line of Raj Shome [Phonetic] from Shome Partnership [Phonetic]. Kindly proceed.

Raj Shome — Shome Partnership — Analyst

Yeah. Hi. Good evening. Am I audible?

Ittira Davis — Managing Director and Chief Executive Officer

Yeah. It’s good.

Raj Shome — Shome Partnership — Analyst

Yeah. Hi, sir. So sir, it’s a question, like, I see that first — first is like a clarification. Did you just say that your deposit growth would be higher than 30% [Phonetic] loan book growth for this fiscal?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Yeah. We did say that our deposits will grow faster than 30% [Phonetic] loan book.

Raj Shome — Shome Partnership — Analyst

Okay. Now the question is this, like, when I listen to the con calls of the other banks. It’s clearly a fact like there is a war on deposits on getting deposits, but when I listen to you and listen to the presentation, I didn’t get that feel. So what is it, for example, like I know it can be a little bit of a base effect as well, but can you just give some more color, as to why like it’s very simpler for Ujjivan to get the deposits, whereas let’s say for the other banks it’s becoming difficult. So if you can just throw some color on this, sir?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Raj, thank you for pointing it out, but I would say it’s not simpler for Ujjivan, there is a lot of hard work and strategy that has gone behind it and a lot of good execution that our teams on the ground has been doing, Couple of things, which I think Carol ma’am already mentioned to one of the question earlier is that one, we have not done much of branding yet, which we are now doing, which Mr. Davis also covered in his opening remarks. There’s a lot of focus on digital, which is not taking shape in a good form. One is the Hello Ujjivan app, which was launched.

There was on the branding side, I would say that we did a good campaign on 15th of August, and the results of that was very good. It was a tactical campaign that we did on the Independence Day, where lot of hard work put on, while the PM’s speech was there. And we’ve got very good feedback on that and we have very good customer connect from that. We believe there would be lot of future tactical campaigns that we’ll do. So one that would be there. Branch expansion like Mr. Davis have been mentioning that would be there, a lot of training of the ground staff is being there, a lot of focus on the service quality is being there.

So while the service quality is already good, there is a lot of improvement that we have been doing.

Carol Furtado — Chief Business Officer

Technology.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

There’s a lot of investment in technology side, which is there. Our renewal rate on FDs are improving, our business from our existing customer now that we have a good base of customers on the liability side that is helping us, that ticket size is increasing. So all these things put together for us is helping us and giving us that confidence that the growth in the liability would be much faster than what the growth in the FX would be.

Raj Shome — Shome Partnership — Analyst

Okay, sir. Okay, that’s very elaborate and a great answer. So that’s it from me, and thank you so much for the opportunity. Thank you so much.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Thank you.

Carol Furtado — Chief Business Officer

Thank you.

Operator

Thank you. The next question is from the line of Pritesh Bumb from DAM Capital Advisors. Kindly proceed.

Pritesh Bumb — DAM Capital Advisors — Analyst

Hi, good evening. Congratulations on a good set of numbers. Just two questions from my side. I see the average ticket size has dropped on the MFI book. So are we now started to do incremental lending to new to bank customers and on the lower cycle customers, which we I think during the COVID we had more into higher cycle customers.

Ittira Davis — Managing Director and Chief Executive Officer

Yes. You’re absolutely right. Last year we were focusing on repeat customers Q3 and Q4, the ticket sizes had indeed gone up because repeat customers are almost 90% to 92% of our overall disbursement. In Q1 and Q2, we have added about 4 lakh new customers, new to bank customers. And as you know, new to bank is in the range of 40,000 [Phonetic] to 45,000, just further [Phonetic] in the range of about 65,000 [Phonetic]. So that has brought down the ticket size. Currently, we are in the range of 54,000.

Pritesh Bumb — DAM Capital Advisors — Analyst

Right. So incrementally do we see or we get comfortable to — continue to reduce the ticket size?

Ashish Goel — Chief Credit Officer

So it will be an outcome of the ratio of new to bank and repeat loan customers. We expect that the ratio that we currently have about 30 to 70 [Phonetic], 30 [Phonetic] new and 70 [Phonetic] repeat will continue in the next two quarters.

Pritesh Bumb — DAM Capital Advisors — Analyst

And a follow-up to that, basically the new cycle customers will be relatively higher rates is what we can assume compared to a older cycle customer, is that fair understanding?

Ashish Goel — Chief Credit Officer

No. There is no differentiation in terms of lending rates. So the rates are uniform, that rate is uniform.

Pritesh Bumb — DAM Capital Advisors — Analyst

Okay. And last question was when we look at the share of mix between stage of our MFI book, where are we growing incrementally, because I would assume Tamil Nadu and Karnataka is almost at the upper range of your mix, right. So incrementally, which states we are growing in the MFI book?

Mocherla Durga Ramesh Murthy — Chief Financial Officer

So see, our strategy from day one was to diversify in the larger states, where we work and we work almost everywhere in the country except few states. And our share of MicroBanking portfolio is not more than 15%, close to 15% in states. So we have ensured that.

At this point in time, as you see that as we mentioned in the last two earnings calls also, that initially after pandemic ended, we were focusing on our existing customer, as we were not able to serve many customers during pandemic and that is why the percentage of repeat loans are very high and that is why our ticket sizes were on the higher side in the previous quarter. As we have been able to serve the repeat customers, we are moved to new customer acquisition, and that has led to the ticket size going down. But at the same time, if you see the growth it is almost similar not very different.

Yeah, there are some states, where we see that overall industry level [Indecipherable] is very high. But at the same time, our portfolio in these states are limited to 15%. And at the same time, there are states, which have behaved much better during the pandemic, like the Eastern part of the country, Bihar, UP, Rajasthan, Gujarat etc., where we have branches and also not as saturated relatively new and we’re seeing more growth there. At the same time we all know that Assam, the industry is pessimistic and there, we are not growing at this point of time.

Second, in terms of ticket size, though the ticket size has gone down, but at the same time, we have a IL product program, where our ticket size on the higher side. And with the renewed focus, we will be servicing GL to IL conversion more and we will be seeing IL percentage going up quarter-on-quarter going forward.

Pritesh Bumb — DAM Capital Advisors — Analyst

Sure. Thank you for answering. All the best for the future.

Operator

Thank you. Ladies and gentlemen, the management would be taking last three questions. The next question is from the line of Yash Dantewadia from Dante Equity. Kindly proceed.

Yash Dantewadia — Dante Equity — Analyst

Hello. Hi. Sir, my first question is regarding your branch growth plans, which areas, are you targeting, is it urban, semi-urban or rural?

Carol Furtado — Chief Business Officer

So in the branch growth plan, we are looking at both semi-urban and also Tier 2, Tier 3 cities are our focus areas and a few in the urban. And as a regulatory compliance, we need to also have 25% of our branches in unbanked rural areas and that is something that we will also be growing.

Yash Dantewadia — Dante Equity — Analyst

Also as we move towards normalized profitability, what I mean by normalized profitability is as we’ve already discussed in length minus your additional collection and minus — and normalized provision, sorry, addition of normalized provisions. If these — are these factors that you kept in mind while saying that we are expecting the same profitability to carry on in the second half?

Ittira Davis — Managing Director and Chief Executive Officer

Yash, we didn’t understand the question. Can you please repeat?

Yash Dantewadia — Dante Equity — Analyst

Yeah. I’ll repeat it. As we are moving towards normalized provisions right, this time the provisions were in minus because of collections. So when we move towards additional provisions, normalized provisions is what I mean. And then your other income becomes normalized when your additional collection stop. Is that what you meant when you said that we will have similar profitability in first half and second half?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

So what we said that bad debt recovery in the first half is good and there has been a good amount of write-off that has been done in FY21, ’22 and first half of FY23. Of that roughly what we have collected in the last six quarters is a little over INR100 crores. So we would have written-off INR1,000 crores-odd plus and we have recovered INR100 crore-odd or little more than that. INR900 crore of that is still available from which we can cover.

So based on how this book perform, the recovery will continue to be there. What we mentioned is it’s a kind of a cautious call that we are giving that this number may, may not track the same trend. So there might be a little up and down depending upon the quarter and the economy and all that.

On the provision side, I think Ashish has mentioned that the recoveries or the slippages are now more or less — slippages are more or less normal and recoveries given there’s a sustained collections are there and there is a strong collection effort, which we continue to put, I think we have put in a very good slide there, where we put in how the collection team has been moving since last 10, 12 quarters. So if you see that, that also gives a kind of trend how the collection effort has been put. So with that, we believe that the collections would be good and there would not be much of slippage going ahead.

Yash Dantewadia — Dante Equity — Analyst

Could you also tell me, how your cashless — cashless collections have gone from 16% to 22%? What is the process behind this?

Mocherla Durga Ramesh Murthy — Chief Financial Officer

Cashless collection for us is, there are two parts, one is a direct, direct digital, where the customer deposits through GPay or some other digital means, where we are not involved through our manpower or any of form and the money comes directly to our account.

And there is another mean, where they come and deposit in our collection centers, where we have a tie-up with the payment banks or some other fintech or where are — and that, these two put together is 22%. This another way, where the CRO deposits the money into these fintech partners or the payment bank, which is another 35% or plus more of that.

Ittira Davis — Managing Director and Chief Executive Officer

So digital repayment is something that customers not used only to micro banking and one good thing that has happened out of the lockdown and pandemic is that both us and customers have learned to pay digitally and during the pandemic only we [Indecipherable] ourselves on all the headcount, including all the wallet, UPI etc., to give option to the customer, who pay digitally as center meeting and movement was not possible. And we saw that customers responded and slowly our repayment through the digital media are increasing. We have just launched, Hello Ujjivan app for the micro finance segment. And with the help of this app, we are looking at increasing digital repayment quarter-on-quarter.

Yash Dantewadia — Dante Equity — Analyst

Okay. Also this INR250 crore floating provision that we’ve kept it’s written in the presentation that this is kept for extraordinary circumstances, right? So what kind of extraordinary circumstances are you’ve been expecting in the future? Is it something like inflation or something else other than inflation?

Ashish Goel — Chief Credit Officer

So extraordinary circumstances is anything, which is not in the normal course of business, like we had a pandemic about two years back.

Yash Dantewadia — Dante Equity — Analyst

Yeah. So how long are you planning to carry this forward?

Ashish Goel — Chief Credit Officer

This is 1% of our overall book, which we plan to carry for some time till the time we see that there is no, probably no use for it. So we want to carry it at least for the next two quarters. And then based on whether we decide and RBI permits us, we will then take a decision on retaining it or withdrawing it.

Yash Dantewadia — Dante Equity — Analyst

Also, when you recently raised money at 21 — around INR21 per share, you sold mostly to institutions. Can I know what was the subscription on the book? How much is it subscribed by the book?

Ashish Goel — Chief Credit Officer

Sorry, we cannot mention that, as that’s not a public information. What I can say that there was a very strong demand from different kind of institutions including insurance, mutual fund and a lot of larger FIIs also. But beyond that, we cannot mention anything.

Yash Dantewadia — Dante Equity — Analyst

Thank you. Thank you so much for your time. Have a nice day.

Operator

Thank you. The next question is from the line of Darpin Shah from Haitong India. Kindly proceed.

Darpin Shah — Haitong India — Analyst

Yeah. Hi, thanks for the opportunity. So again on this loan loss provisions, in case, in FY24, also we see superior production efficiency of 99.5% plus and we don’t require any additional provisions. Will it be fair to assume that?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Darpin, I’m sorry. Darpin, Deepak here. I’m sorry to interrupt, can you be little more clearer? I — we can’t hear you properly.

Darpin Shah — Haitong India — Analyst

Sorry, is this better now?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Yeah.

Darpin Shah — Haitong India — Analyst

Okay. Sorry about it. So my question was, assuming in FY24, we will see a superior performance in terms of collection efficiency, 99.5% plus. So for our provisions then, will we create additional standard asset provision and create cushions for future or will we, let it flow through in ROAs?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

So Darpin, taking — hiking standard asset provision really doesn’t help in the long-term because let us say that there is an extraordinary circumstance like the pandemic when the NPAs went up to 10%, we continue to carry standard asset provision for the balance 90%, so that may not be a preferred strategy for us.

Darpin Shah — Haitong India — Analyst

No. But keep on adding this provisions won’t it help in the longer run, not only for MFI, but for other segments as well when we grow faster than the other businesses?

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

We’ll have to evaluate and create some kind of a counter-cyclical or a contingency provision if that is something that we have to think about. As of now, we are carrying about 1% of our book as floating provision. But whether another contingency provision or something else is also required to be done is something that we haven’t evaluated as yet.

Darpin Shah — Haitong India — Analyst

Okay. Great. That answers my question. Thanks a lot and all the best.

Deepak Khetan — Head of Financial Planning, Strategy and Investor Relations

Thank you, Darpin.

Operator

Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for closing comments.

Ittira Davis — Managing Director and Chief Executive Officer

Well, thank you very much for all those, who’ve participated and joined us in this conference, and also to IIFL for hosting it. Thank you, and we look forward to seeing you at the next conference.

Operator

[Operator Closing Remarks]