Bajaj Finance Ltd (BAJFINANCE) Q2 FY22 Earnings Concall Transcript

Bajaj Finance Ltd (NSE:BAJFINANCE) Q2 FY22 Earnings Concall dated Oct. 26, 2021

Corporate Participants:

Sandeep Jain — Chief Financial Officer

Rajeev Jain — Managing Director

Kurush Irani — Group Business Head- Commercial Lending

Analysts:

Anuj Singla — Bank of America — Analyst

Aditya Jain — Citigroup — Analyst

Anup Saha — Bajaj Finance Ltd — Analyst

Abhishek Murarka — HSBC — Analyst

Dhaval Gada — DSP — Analyst

Piran Engineer — CLSA — Analyst

Umang Shah — Kotak Mutual Fund — Analyst

Vikram Subramanian — Spark Capital — Analyst

Sanket Chheda — B&K Securities India — Analyst

Subhransu Mishra — Systematix — Analyst

Kuntal Shah — Oaklane Capital — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Bajaj Limited Q2 FY 22 earnings call. This call will be recorded and the recording will be made public by the company pursuant to its obligations. Certain personal information such as your name and organization maybe asked during the call. If you do not wish for it to be disclosed, please immediately discontinue this call. As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch tone phone. I now hand the conference over to Mr Anuj Singla. Thank you, and over to you, sir.

Anuj Singla — Bank of America — Analyst

Thank you, Aman. Good evening, everyone. This is Anuj Singla from Bank of America Securities. Thank you very much for joining us for the Bajaj Finance earnings call to discuss quarter two FY ’22 results. To discuss our results, I’m pleased to welcome Mr Rajeev Jain Managing Director, Bajaj Finance Limited and other senior members of the management team. Thank you very much for giving us the opportunity to host you. I now invite Mr Rajeev Jain to introduce the management team on the call and take us through the financial highlights for the quarter, post which we will open the floor for Q&A. With that, over to you, Rajiv.

Rajeev Jain — Managing Director

Thank you Anuj. Thank you BofA team for hosting us. A very good evening to all of you. I have with me here in the room Sandeep Jain, who’s our CFO, Anup Saha, who is our Deputy CEO, Mr. Babu Rao who is our General Counsel. Fakhari Sarjan who is our CRO. Ashish Panchal, President, who runs a set of businesses. And my Chief of Staff and Kurush Irani who is our Head of Operations and runs our business transformation initiatives. I’ll be referring to the investor deck that we have uploaded in the Investors section of our website. We uploaded that at for 4.30 or so. I hope you had time to review that. Let me jump right in. I’ll take 20 minutes to just talk through the key pages in the investor deck. And then we open to questions. Let’s jump right in let’s quickly run to panel 4. if I summarize how the quarter went. I would just say that it is a quarter of strong revival. We live in famine feed times. Last quarter was the famine given the second wave. It’s a strong revival across growth. So is debt management and financial metrics in the quarter that went by. In absence of a third wave I just say that we are quite confident about the second half of the year on growth risk and financial metrics as a company.

The business transformation, which is expected to go live on 31th of October is running behind schedule, mainly to an extent because of court freeze for the festival season and due to second wave causing certain tech deliveries, so that will go live now on December 15. But I’ll provide you some texture in some of the slide as to how under the hood business is beginning to dramatically change in the way we conduct business. Go live for the, for the business for the consumer upgrade is now planned for mid-December, which is December 15.Very quickly on to numbers. AUM given at 167,000 crore, a tad below 167,000 crore. That’s a year-on-year growth of 22%. OpEx to NIM, I’ll talk about, came in at 38.1%; PAT came in at 1481 crores, a year-on-year growth of 53%; ROE not annualize at 3.8% and net NPA came in at 1.1%. I’ll be covering all these 5 points in a little bit of detail in the next 2, 3 banners. So just hold at the moment.Year-on-year, I’ve jumped on the panel 5. First of all, year-on-year numbers are not comparable due to dislocation that is caused by the pandemic. AUM, I talked about, moved from 137,000 crore to 166,000 crore. The core AUM growth, which is a strong core metric grew by 11,150 crore.

That’s the highest ever we have ever done in the last quarter. So to that extend the AUM momentum is quite good. When I cover the AUM composition, composition is pretty steady. What should not be going up, which is our auto finance business is not going up what should be going up is other lines of businesses. They’re all going up, but I’ll cover that. So in absence of a thied way, we do believe that the quarterly AUM growth for balance of the year should be quite strong. We booked 6.33 million loans in the quarter. It’s still not at a ever high level. I think ever high level was at 6.88 million in Q3 2019. So December, 2 years ago, third quarter was the highest ever at 6.88 million, if I’m not mistaken. So we still have some distance to go there, should happen in the, in the following quarters. Customer franchise, just a tad below 53 million, we acquired — the cross-sell franchise is now 29.4 million, growth of 23% Y-o-Y. The customer franchise also grew by 20%, the cross-sell franchise grew 23%, we acquired 2.5 million new customers in the quarter. In general, last quarter or this quarter. We are on track to add 7 million to 8 million customers a year from a new customer addition standpoint. Geographic footprint stood at 3,330 odd locations, 120,000 distribution points. We added 216 new locations. I’ll provide some texture as to where we are growing also in — in just 2 slides later.

Overall margin profile across businesses is holding. We used our earlier challenges in the mortgage side of the business as the pricing has come off there. We are able to protect our margin profile there as well. So, overall across businesses we are managing to protect margin profile. Still, it may not be fully visible in the P&L due to interest income reversal came in at 322 crores versus 216 crores in Q1 last year. The run rate of that number. We expect it to normalize to 180 crores from third quarter onwards. So in absence of a third probably the worst is behind us. Even on this metric as we, as we get to Q3. Cost of funds reduced to 6.77. That’s not really the run rate number. Run rate number you should view it as 7% because of the wave of IPOs that happened and we borrowed short term. This metric is little, not fully representing the real number. The real number should read it at 7%. The company also raised a reasonable amount of long-term monies in the quarter that went by. In 2 years and above, we raised 6,8000 odd crores. In that, of course tenure money we raise at 2,300 odd crores, came in a historic low rates, so it is a good quarter from a treasury standpoint. As a result of however such a large raise and bunched in end of Q3 — sorry, end of Q2, the overall liquidity position was quite strong.

We are hopeful that it should get normalized to 8,000 to 9,000 crores from — by Q4, maybe by Q3, but definitely by Q4. It depends clearly on how attractive the treasury markets look. If you’re to cover long-term, we will cover long is really our approach as management. Deposit book, too granularize liability side, continue to grow, grew by 33% Y-o-Y. In that retail is 77 wholesale is 20. Our goal is 70:30. We are doing better than that. So we are quite okay. OpEx to NIM was was higher, much higher than the normal. We exited the year at pre-COVID level at 33%. It’s a transient frame is what I would say we foresee OpEx to NIM for the quarter came in at 38%, which is a high, as I said of 9 quarters, mainly owing to debt management cost because as clients move into stage 2 and stage 3 the collection cost go up to that, but they are stable in those in bucket one. And if they are stable, so reduces the or does not deteriorate the credit profile. But the cost of collection goes up, that was one reason. Second was the salary costs that went up, we added close to 2000 employees through to support our growth stands overall as a company that’s ever high addition that you actually done in the quarter.

We expect this number to go down to 33, 34% as mainly as the debt management cost normalize by Q3 part and as overall balance sheet grows, that’s the second part, I think we should exit the year between 33 and 34%. And we should look, by the time the 3-in-One will also go live. So next year should look closer to a 30, 31% is really what our thought process would be at this point of time. Loan loss provisions, came in at 1300 crores to protect ourselves against potential third wave. We still continue to increase management overlay. We increased management overlay by 350 odd crores actually from 483 crores to 832 crores that’s virtually, a 350 odd crores addition that we did. Mainly it is not, as I cover some points in the numbers, but we just want to protect ourselves against wave three. And so it’s been done from a conservative prudent standpoint. Overall debt management efficiencies across products was better. In absence of third wave, we do now expect that loan losses will normalize to a to the adjusted for balance sheet between 700, 800 crore run rate for second half of the year and hopefully in after the third wave. That’s really where the numbers should look.

GNPA, NNPA improved sequentially, of course from 2.96 to 2.45, 1.46 to 1.1. There is a material improvement in GNPA and NNPA. If there is no third wave, we expect GNPA as I guided earlier to settle back at 1.7% to 1.8% at a GNPA level and 0.7% to 0.8% at an NNPA level. We also had forecasted in Q1 that we overall estimate the loan loss for the full year to be 4,300 crores, We’ve already taken 3,050 odd crores. We are originally left with 1250 odd crores. So if I take the previous sentence, clearly run rate will probably be a little elevated of 700 to 800 crore, depending on how the numbers, how the debt management efficiency span out in Q3, but that’s the residual number for next two quarters.

If you look at the absolute, leaving the percentage aside, there was a significant improvement sequentially GNPA from 4,700, came down to 4,100. NNPA came down from 2300 crores to 1825 odd crores. In that the secured component, 57% of our NNPA is essentially contributed by auto finance, significant marked improvement even there in terms of debt management efficiencies and mortgages. So between both of them, 78% is actually secured assets. Overall Stage 2 also dropped by virtually 1500 crores from 7400 crores to 5,950 odd crores. If you go to panel 7 quickly, some more numbers that you can see Stage 2 assets dropped from 6100 crores to 4,500 crores, which is other Stage 2 assets we have a 23 odd percent provision against it, the secured. So numbers are as you can see across there is sequentially marked reduction in all the numbers. So that’s a good sign. We just want to make sure that having suffered from a second wave we protect ourselves for for the next, at least one more quarter before we take a regularize view of loan losses and these numbers.

Overall, as a management, our view is that adjusted for balance sheet the Stage 2 Stage 3 assets, should look like 7800 to 8000 crore. That’s really when we can say that we are back to pre-COVID levels. At a design level, at this point of time that number is 10,450 odd crores. So we still have some distance of 2500 crores. We, if the current levels of debt management efficiencies and default rate that we are seeing incrementally across portfolios remain we will naturally get there at a framework level. So the worst should probably be behind us on on credit cost as we move on from here. As a result off — so despite taking a 350 crore extra conservative provision on account of management overlay the overall profit before tax came in at 2004 crore, profit after tax came in at 1481 crore, which is a growth of year-on-year and is not comparable came in at 53% higher. Capital adequacy pretty strong, 27.5%. BHFL continue to do quite well, AUM grew by 33% to 44,000 crore. BHFL also launch a new vertical, which is affordable housing finance business. It will move slowly, but that’s a start that you made to complete the product suite for BHFL as a company. BHFL capital adequacy also remained strong at 20% they delivered 100% growth year-on-year on profit after tax came in at 166 odd crores. BHFL continue to realize or annualize it securities business, acquired 109,000 odd customers. It could have been stronger, but we made some changes to the way our distribution model is organized, else we were hitting a run rate of 50,000, we have pulled back, some of it to create a more sticky origination market rather than just a number. BFSL delivered a small profit of 3 crores so that’s really on the financials.

Let me — overall, I would say, a good quarter on financials, marked improvement from where things were in Q1. As I said, so I mean to feast, the times that we live in. Let me just give you some texture on in July AGM, we talked about that how we see business to be. We’ve talked about it to investors that we see ourselves to be an omnipresent company which essentially allows customers to move existing and new customers to engage transact and we service online and offline and vice versa without friction. But it’s really the frame that we are chasing and pursuing as a company and we think creates a strong mode for us to grow in a sustainable manner for long period of time. What I thought will give you texture from here on, that’s really how we will provide updates to the Street on a quarterly basis. That panel 9, so we are a regulated business. We think as long as KYC is relevant, as long as AML is relevant geography, as long as debt management is real, geography will play as important a role and boots on the ground will play as important role than anything else. So the omnipresent frame fundamentally at the essence level also starts from geography. At a geographic level we were at 3,330 locations. As I said, 120,000 odd distribution points, expanded 216 locations. The prominent — the footprint, when we look at Pan India, we’re essentially growing in North and East at this point in time. As the GDP contribution of North and East in our overall book versus our portfolio contribution is lower. When we stack the stage GDP versus when we stack the portfolio mix, we clearly find that North and East. Its contribution to national GDP versus its contribution to our portfolio is lower, so we are growing in — in North and East lot more. It of course, it’s a risk metric to that extent, it helps reducing concentration risk and of course create new growth opportunities, because these are lot more unchartered in virgin markets.

In terms of omni channel, now let me give you texture on offline to online, online to offline. Let’s start from the top of the funnel as to how do we — however we originating customers and how do we incrementally originate customers. We originated customers mainly at the point of sale. However, in the last two years that started to change dramatically. In the quarter that went by the company acquired 372,000 new customers to fully digitally, all the way to e-mandate, CKYC at a — and so on and so forth. Quite a tad below 400,000 new customers. These 400,000 customers, in general, walk into the store have a 60 day activation of 22% to 23%, have a active of 28-29%. So they add to the point of sale business rather than we drawing from the point of sale. These are all paid cards, to the point Anoop is making to me. 50% of them pay fees as a payment gateway and buy the product. So clearly there is a huge latent need for the products and 50% pay when the — when they walk into the point of sale. The EMI store strategy is beginning to after a year of reasonable amount of effort is now beginning to yield reasonably good momentum. The EMI store visits increased from 10 million in Q4 to 30 million in Q2. We have started to stimulate or activate use this is an asset to stimulate the entire customer franchise with whom we want to do business, resulted in close to 250,000 new loans in Q2. The total SKUs that client customers are able to see or prospects are able to see is close to 30,000 SKUs. Total 25,000 merchants have now become part of and have uploaded their inventory infrastructure. This offering, eventually, I forgot to cover the EMI card. As the consumer upgrade goes live, this will make the journey lot more seamless, similar to the EMI store, this offering is already integrated with the current Experia apps, so allows customer to do a single sign on to actually get it.

The point of sale transformation fundamentally has also started to deliver reasonably good momentum for our personal loan and credit card distribution business, it’s a, we’ve been added for the last one year. It’s an integrated offline to online framework, which covers communication, call center and fulfillment right in interstate. We generated close to 400 crores of personal loans in the quarter, right at the point of sale that went by and 27,000 credit card distribution in the quarter that went by. The run rate of credit card distribution is actually higher because of the Mastercard issue. We were, we were down for 30, 35 odd says, otherwise around it is close to 40,000, 45,000 account. So it’s a — the consumer just to — just to give it — take a moment on it, existing customer walks in, we have fundamentally pre stemmed him for a set of product options based on analytics infrastructure. We communicate with him to be able to take a loan, improve our DNC rates because he is an existing customer, on one hand reduces promotional effort and delivers a lot more integrated outcome.

Point number four, CDB platform key to us delivering a consumer app upgrade has gone live. So the under the hood effort, it delivers a significant upgrade to our multi-general orchestration customer communication, call governance infrastructure and integrated multi diner framework and multi-lingual architecture. These are under the hood changes that we’re making to the business model to ensure that when the consumer app upgrade goes live it yields desirable stand for the consumers, an outcome that they like. So just to provide some texture I can go on but I picked the top 4 points to provide some update.

On consumer app upgrade, we have 13 million active customers on it. As I said delayed by 45 days because of court freeze for festival season. Normally we should have guided a little better. Probably that we said, sort of October, we should have probably said 15 of November. So, still 15th of November we — during season, we don’t make any changes. We knew Diwali is 4th of November, but should have been a little more careful and certain tech deliveries are running behind. Overall we are releasing in screens, given it’s a large infrastructure. Sprint one which essentially covers all customer service menus, payment options, Play Store, 20 engagement apps and a robust search functionality of the entire app has actually gone live on Play Store for 10% of the customers. It went live for 1% and 5% and now it’s 10%. We’ve held it there now. We’ll now wait for the season to get over till 15th November and increase coverage from 15th of November. The Sprint 2 covers business journeys end to end insurance and mutual fund marketplace and all of it will deploy between 15 November to 15 December. As I’ve articulated earlier that’s Phase 1. My satisfaction, on the consumer experience, I would say would be — would really be by April 30, when Phase II, on what we see as Phase 2, because as you build this out, we’ve identified a whole host of things that we want to do, as well to improve customer experience and journeys will happen. But it never gets done in one go. So it ought to happen in phases only.

Just on payments, we on-boarded 3.1 million wallet customers for festival season. One of the objectives of wallet was to create more integrated more seamless journeys, we’ve integrate the Wallet feature for seamless fulfillment. We do a whole host of promotion, cash backs and so on and so forth and that was the objective of having wallet or a payment tool. All our cash cashback, reimbursement processes are all integrated for the season into — through the wallet. On one hand, it will improve the cash back and reimbursement process. On the other hand it will improve stickiness and engagement. Merchant tap, that’s really our second large app ecosystem that will go live by February, that’s also probably behind by 30 days. It will enable both P2P and P2M across onboarding transaction, promotion, rewards and settlement. We will weave into it our earlier — business too and then hopefully be ready to grow that business from there on. We have applied post Board approval. We have applied for ENPG licenses and so on and so forth. So that work is on.

And we are expanding the payments team given the long-term strategic nature of the view that we’ve taken on the business. Just last two points of update, as I said it’s a omnichannel frame, the entire architecture is organized as everybody is on, on this ecosystem, which includes our EMI store connect the merchants the productivity as connects employees and distribution partners. So the new debt management services that went live across 37,000 merchants and 34,000 merchants and 9,000 employees enables the entire end to end journeys of onboarding staff agency staff. We always onboarded agencies now it onboards even agency staff, the entire cash is heating, trading communication, compliance features, dial-in integration and call recording. The entire new next-generation infrastructure went live fully. It also enables the debt management staff to service the customer on a host of service related queries can — can instantly trigger a whole host of menu options to help the customer with — with requirements.

One of the things, just the sheer what we keep telling people that as much as this business is about risk management, it’s also about debt management. The company issued 13.5 million receipts in Q2 alone. That’s the breadth and the depth of the of the effort that debt management sales. Sales one, because if a consumer is going to press a button and based on the CDP platform the lead should go to a call center or to the salesperson is as integral to the three to the omnichannel strategy has started and also go live. So we’re targeting thereby December 15 this happens by January early this would have also closed. This also enables staff to help customers with a whole host of service related queries, transitions customer from online to offline. And this is online to offline because when a client presses a button and wants a particular product based on CDB platform, it needs to drop directly to him, based on a design. So as key as the consumer-facing app ecosystem is are these as well. We are hoping, all of this fully goes live between December 15 and January so that the phase one of this gets over. And hopefully by then COVID is also over by January we can all focus on business.

That’s really on the business very quickly. I’m jumping all the way to panel 43 to give you texture on business composition. As you can see, as I said, what needs to go down is going down which is AFS, order finance down year-on-year 15%, rightfully so because the business is really struggled and it’s down 15%, its contribution also down to 6% and rest of the businesses have big debate and have grown. So, but overall, you don’t see much movement, it’s, it’s in corridor of 1 or 2%.

Provisioning coverage at panel 26 gives you the data that I talked about, GNPA at 4,000 at 2.96 in June is down to 2.45 and NNPA 1.46 is at 1.1. Still auto finance is is really where the pain is sequentially down. As you can see gross NPAs down 3.1% and net NPAs down 3%. We are forecasting this will be down to 7, 8% exiting — exiting Q4. And maybe a little better as we move on. Otherwise you see improvement sequentially, markedly actually, our sales finance business is actually down over March. Consumer B2C is just about 40 basis points ahead, rural sales finance is same, rural B2C is up, but you can see a star there. The gold loan has created some noise. We used to club it there. So adjusted for that the numbers are lower, but 1.65 also had some amount of gold loan to that extent it’s apple-for-apple conversation. SME is still some way to go. The peak should be over by November and you should see numbers go down by December.

Mortgages reasonably flat, marginal uptick between 90 basis points to 97 basis points. Similar to NNP as well. Provisioning coverage remain same, so we are quite healthy. This is the last panel probably I cover, open it up for questions. Panel 49, you see lots of numbers here. As I said, marked improvement across all versus OTR 1287 has gone to 15 — because we have offered OTR in the mortgage business, mainly to the tune of 220 odd crores, mainly mortgage. I would say probably only mortgage. That’s where the request came from normal stage 2, as you can see down 1600 odd crores, stage 3 down 600 odd crores. Provisioning well covered, we increased the provisioning coverage from 51 to 55, well prepared for wave three, if it has to happen. If it didn’t happen, we will take provisions by end of Q4.

Last panel, overall management assessment on portfolio quality, we are good. We are still watching two wheeler and three wheeler. As you can see, rest of the numbers are down two wheelers review on this panel. Two wheeler, three wheeler, logically ought to be had 85-86% Stage 1. It’s still some distance away from it. I think next 3, 4 months, we should see some movement here. Otherwise, sales finance, digital products B2C also some distance, better than where it was in March, but still has to get to 98 odd percent of current which is really where we were for 8, 10 years, we should get there by Q3 is what our assessment is.

Our next panel, professional loans, we are virtually there, B2B, we’re virtually there B2C. We have some distance to cover. I think a little more distance to cover probably will be there only by Q4. In absence of a third wave, loan against property, some distance to cover may take a little longer than even Q4. Home loans, we are really — we are mostly there should be there by Q1 next year.

That’s really the quarter in summary. Happy to take questions, if any. We will try to cover everything I thought. But happy to answer any questions.

Questions and Answers:

 

Operator

Thank you very much. [Operator Instructions] First question from the line of Aditya Jain from Citigroup. Please go ahead.

Aditya Jain — Citigroup — Analyst

Thank you. A lot of good details there. On the merchant app, if you could give us a little bit of color what will that achieve. So if we were to think of the outcomes as improvement in productivity, a higher customer acquisition rate or maybe directly generating revenue, would you put merchant app and what its objectives are going to be? And especially given the payment gateway license that you’ve applied for and received, where does the merchant app fit in?

Anup Saha — Bajaj Finance Ltd — Analyst

So as Rajeev explained; this is Anup here. As as Rajeev explained, merchant app, essentially our starting point is we have this remi business, which we are transforming to the payment business. So in our Phase 1 merchant app is essentially the categories under remi, which we do will come under that. What it does to us, the merchant app is the complete onboarding to the payments tool settlements to lifecycle management of the merchant. So the starting point is fully digital onboarding. And as we bring this in, since we spoke about a four stack payment in our payments journey, the Merchant app will enable and along with the merchant app what is coming in, is the consumers is the four stack payment, which is the PPI, UPI, EMI card and credit card supported by reward under the underlying more. So that’s what we had explained last.

So this is essentially the app merchant will use, the ecosystem of ours. And currently we have 119,000 merchant, of that remi is about more than half of it. But what we are also expanding when we said P2P and P2M because we are bringing the QR as the payment mode which is the Bajaj pay here merchant app will enable the merchant to on-board instantly and digitally. So, and as we bring the journey on QR, this will play out in terms of productivity and coverage.

Anuj Singla — Bank of America — Analyst

I’ll just add to what Anup said. So that’s the P2M part. Phase 1 we go live is P2M. Sometime I may also we go live with P2P, because at a fundamental level we have significantly higher number of boots on the ground. We are sitting in — in retail spaces. We intend to use that — those boots on the ground to significantly expand retail P2P — ecosystem. So we start with going after our merchant ecosystem which has, let’s say $80 billion to $100 billion of annual commerce, that’s one part. And then Phase II go to P2P as well. So goal will be full-fledged payments and that’s really what merchant app in two phases would cover.

The third phase, parallelly, jut to complete the point Aditya, is the full fledge acquiring them, because this is going live with QR, QR will be followed by the POS and the payment gateway business. So that is really how this will play out. And that’s the strategic call with it, we have taken that we will play all three.

Aditya Jain — Citigroup — Analyst

Got it. Thank you. On the POS transformation, so just to understand the journey. So the personal loan and credit card business is being cross sold when a customer is at the store, is that right understanding?

Rajeev Jain — Managing Director

Yes. It’s being stimulated at the point of sale. So you walk into the store. We have 30 million customers that we want to do business with you are one of the customers who is fundamentally existing customers who is pre-approved, get stimulated based on our stimulation models and risk models for APL or a credit card that we have pre stamped. Says yes, using the CDB platform we route the call in 30 minutes. We give them 30 minutes in the store and reach out to him. The — so in a way, it’s a huge optimization. It’s a huge expansion of the pool because earlier you look 45% of our customer franchise is GNC. This is embedded into the journey of the customer addresses reach out problem. And customer chooses whether he wants the product or not. But we do think this will significantly expand as we move. Anup wanted to make a point.

Anup Saha — Bajaj Finance Ltd — Analyst

And as the 3-in-1 comes in, because he is at the point-of-store, the moment the trigger comes in, even in the 3-in-1 app, he can consume the journey and go all the way till the final stage. So as of now, it is through the CDP and the real-time call back.

Rajeev Jain — Managing Director

That’s an important point Anup is making and we — I made that point — I made the point earlier that the journey will become lot more seamless as the upgrade come. Should lead to significantly high velocity in the process.

Operator

Thank you, Mr Jain would request you to join the queue for any follow-up questions, as we have several participants waiting for their turn. The next question is from the line of Abhishek Murarka from HSBC. Please go ahead.

Abhishek Murarka — HSBC — Analyst

Hi, good evening, everyone. Thanks for the extremely detailed presentations as usual. So a couple of questions, one on capex and I know you mentioned that collection costs have been higher this quarter. But one, roughly how much of the OpEx will have been driven by this jump in collection costs? And two, just an extension of that, looking at the fact that your stage two, three is still slightly higher than normal and some of the buckets that also doesn’t stay away from the normalized level. Do you think collection cost will remain high for the next few quarters and therefore back then it hits 34% —

Anup Saha — Bajaj Finance Ltd — Analyst

So Abhishek, it’s a fair question. Abhishek, to your point on collection cost or debt management cost that we talk about, the number has increased from 280 crores in the previous quarter to 520 crores in the current quarter. And it does have linkages to on balances going up as a call out in Q1. The balances were up 10% versus where they were in the quarter 4, point number one. Point number two is, as you you’ve called out very, very correctly the Stage 2 and Phase 3 are at elevated level versus where they were earlier in pre-COVID period.

So that is a second reason because until such time that we see these Stage 2, Stage 3 go back to 8,000 kind of number, which Rajeev called out and we are estimating that by end of quarter 4, we should be there. The debt management cost may remain elevated. However, I have reason to believe that the cost has peaked out. You will see it’s sliding down in quarter 3 and by quarter 4 end you should see it normalizing.

Abhishek Murarka — HSBC — Analyst

Okay. So 520 should be a peak and from there it should go back to…

Anup Saha — Bajaj Finance Ltd — Analyst

Yes, definitely the peak. We will see the number go down only from here.

Rajeev Jain — Managing Director

To simplify the conversation, the total number between Stage 2, Stage 3 is down. You look at it another way. So the exit run rate is lower by 25%. So that is one part of the conversation. And the buckets will also ease. So that is just intuitively I’m making the point.

Anup Saha — Bajaj Finance Ltd — Analyst

The other piece, I think that we’ve been talking about ever since the pandemic started, and I think the company started making higher provisioning and write-offs, etc, all of us are estimating hefty write of recoveries in times to come. The number has moved. In fact if you look at, in this quarter when the number was another 5 crores of bad debt recovery, in the current quarter the number was 213 crores of bad debt recovery. Eevn this recovery creates cost for the company. So while it is giving P&L benefit that the amount that drop in the last year getting collected and going in the income line, there is a corresponding cost that is also sitting out there.

Abhishek Murarka — HSBC — Analyst

Okay, perfect. Thanks. Secondly I was just looking at the standalone fees, I think 700 crores was what it wsa for the quarter, if you could give some granularity there or some breakup between our deep distribution fees, commission etc, that would help.

Rajeev Jain — Managing Director

So Abhishek we have discussed this in past as well. I think the fees are across various kinds of business that we do. It includes the processing fees, not the processing fees, but the value add services that we offer to the customer. It does include the EMI card that we, that we offer the customers as a proposition, it does have the distribution fee revenue pool that gets disclosed separately in the annual report as well and it also has the POS charges that is elevated because of the higher bounces that we have seen in past, as well as in the recent quarters as well.

Operator

Thank you, Mr. Murarka request you to join the queue for any follow-up. The next question is from the line of Dhaval Gada from DSP. Please go ahead.

Dhaval Gada — DSP — Analyst

Yeah, hi, thanks for the opportunity. I had two questions, one was related to the new digital EMI card customer addition that we did during the quarter 3, like 72,000. Just wanted to get some perspective from which platform this was driven? And overall the underlying question is to understand what will be required to accelerate the current customer acquisition journey from the 7 million, 8 million per annum guidance that we have? So that’s the first question.

The second question is on EMI stores. So I think about 4% of our loan booking in 2Q happened via EMI store. So just, I mean on a normalized basis sometime next year what should be the normal loan origination from the EMI stores and how does that sort of impact profitability? If you could give some color around that?

And lastly, just a clarification on the remi business, in a earlier comments. So I just wanted to understand, does the asset quality problem that we had in, in the COVID period. Does that get addressed in the new architecture? If you could just clarify that part. Yeah those are three.

Rajeev Jain — Managing Director

So, look, digitally EMI card, we have added 5 years ago. We launched it during Diwali 3 clicks and a Happy Diwali that’s the only time it was half page Times of India ad, realizing very little that it’s some way off. We’ve been added on wanting to originate client other than at point of sale. I think rapidly digitizing ecosystem at a country level and we didn’t let it go, we didn’t know — we stayed at it on one hand and the country continue to digitize on this, on the other. Infrastructures like CKYC, e-mandate, IMPS have made it possible and integrations have made it possible for you to stay at home and subscribe to or take a pre-approved life.

I think, so that’s one part. Having gained confidence, we now originated like a marketing function uses it as a product and has search engine marketing on this and through search engine optimization we originate cards. And there is a product management team, which runs this. So that’s one. It’s run rate will accelerate. The 372,000 new cards probably could look like half a million in the current quarter is very much possible. There is clearly a latent need for it. As I said, 60 day active it adds to the point of sale franchise in terms of customer walking in and 90-day active is 30%.

And remi, so that’s what will take to accelerate in a way that we just need to be added. We just went live at Flipkart. This is a pod infrastructure that we integrated with Flipkart as well. We are now. This is the first month we just went live, will probably do 10,000, 12,000 digital EMI cards on — on the Flipkart platform as well. So we will see this probably grow as we and it’s completely digital.

Second remi, remi business, wallet loans and remi business are two businesses that we wallet loans we shut. And remi business we significantly restructured because one was a credit issue another was a margin issue. The business lost 2, 3 years of earnings was a point that I made in both these, so that seemed like raw, you know, we had to restructure the business. The business side of it has got restructured, the average ticket size used to be 9500, now, it’s at 15,000. The categories have changed, we move to categories like tires, low speed bikes, coaching classes, dentistry services and so on and so forth, which gives us a much better business P&L. Lower the ticket size, as we realize a lot of the problem. So it should grow. As a merchant app goes live, this business should probably accelerate some time in the next year, but we will work only with an average ticket size of 14,000 to 15,000. We’re not going to dilute on that.

Were these the two questions you had. Or did you have another? EMI store, look, it’s a strategic call we’ve taken. Consumer is going online, we can’t remain offline. Let’s just go to 30,000 feet. We are investing in building that asset, its contribution, as we said was 250,000 accounts. it’s a — So we will keep growing this. Probably it’s possible, next time same year, it’s originating 0.5 million accounts, it will originate 0.5 million accounts. As we, as it gets warmed up, there is still a whole host of deliveries that are going live every month. We’re still some distance away even in our assessment from making the asset as good as it can be. So there is continued significant tech investments we’re making in, making the asset better. So it will grow customers choose whether he wants to work at the point of sale or he chooses to — we are stimulating increasingly on EMI.

Our earlier engagement with the customer used to be a SMS or or let’s say a BOT. Now it goes to EMI store. It just logically lifts the engagement rate of the client from being able to purchase. So it will continue to move up and it will become a reasonably strong asset for us to pursue as we grow the business. And it will add the merchant ecosystem as well, because we help bring him an asset against the large e-commerce guys.

Operator

Thank you, Mr Gada, request you to join the queue for any follow-up. Our next question is from the line of Piran Engineer from CLSA. Please go ahead.

Piran Engineer — CLSA — Analyst

Yeah, hi, our comment on the quarter. I just had a couple of questions, sir. Firstly, on slide 15 and I’ve been tracking the company for a while. Our ROA targets earlier used to be 3, 3.5% historically. This time you’re mentioning about 4, 4.5%. Just wanted to know what really has changed that gives us more confidence for 100 bps higher ROA?

My other question is regarding the e-KYC license now that NBFCs can apply. What is the real benefit apart from turnaround time. And in BNPL are we looking to move into other categories like at core travel like some of the fintech BNPL players have done?

Rajeev Jain — Managing Director

This 16 panel moved up, mainly as a result of tax rate cut. We exited Q3 or if you take the whole of, three quarters of FY 19, 20 levels, so mainly moved up as a result of tax rate.

Anup Saha — Bajaj Finance Ltd — Analyst

We should have done it earlier, I think it was a miss. We corrected it in the current quarter. As the tax rate got revise from 33%, 34% to 36%, we should have corrected it, it was a miss from us.

Rajeev Jain — Managing Director

So nothing, it’s just a mathematical point. On e-KYC, we have applied to Reserve Bank of India. I think it’s a welcome development and it will be really beneficial, helps the customer. I think that’s the first point at the point of sale, through biometric. Helps us that we don’t have to redact images and so on and so forth to improve compliance. I think it will help financial inclusion, I would say. Clearly in smaller, we are in 3,300 cities helps inclusion in a huge way, I would say.

So I think these are the three benefits that will clearly emerge. On — and we are waiting for — hoping that we can get approval and we can meet all these 3 objectives. BNPL, I don’t want to use the word BNPL since you used it. That’s what I tell investors that we were doing it for a long, long time used to call it remi. I did not want to be dramatic and — and make that point. Categories, whatever consumer is looking at, that’s really how we are, we are focused on. He was looking for tires, we got to tire ecosystem from Bridgstone to Michealin to we’re working with all to Ceat. He was looking for coaching classes, we got him that. He was looking for dentistry, we got that. So he was looking for smaller appliances, we got that. So we don’t have a fixate, sorry, he was looking for the smaller cities, we’re looking for low-speed bikes. We are now doing 3,000 to 4,000 low-speed bikes every month. So it’s consumer focus. We build out the distribution to help him get this at on no cost for a period of — the only thing that you should know that tenure is shorter. It’s only normally 4 to 6 months. So we will keep growing categories, but I just reiterate ticket size has to be 14,000 to 15,000, that’s really where you think the economics make sense.

Piran Engineer — CLSA — Analyst

Okay. Thank you, sir.

Operator

Thank you. The next question is from the line of Umang Shah from Kotak Mutual Fund. Please go ahead.

Umang Shah — Kotak Mutual Fund — Analyst

Yeah, hi, thanks for the opportunity and congratulations to the team for a good quarter. Two questions from my end. One, is there any change in terms of product pricing strategy, because if I look at our interest fees on a sequential basis, despite a UM mix remaining largely unchanged and despite 300 odd crores of interest income reversal, there is a fairly good jump in interest in terms of, is there anything that I’m missing here?

Rajeev Jain — Managing Director

There is no significant change in the pricing. I think what is being missed out is that the interest income also includes the revenue that is generated because of surplus cash that we are managing. So that’s an important metric to look at. It is not sitting in the loan book is sitting in the investment book. I think once you club together, you will see the numbers matching.

Anup Saha — Bajaj Finance Ltd — Analyst

If at all there is anything else, there is pressure on that.

Rajeev Jain — Managing Director

Yeah. So the holding margin profile, we have said Umang, but there is pressure clearly across lines of businesses.

Anup Saha — Bajaj Finance Ltd — Analyst

In fact the gross yield on the mortgage side has gone down by almost 80 basis point or 90 basis point in the last one year.

Rajeev Jain — Managing Director

No across lines of businesses, there is clear pressure because there is clear chase for growth in retail assets. We are clear in most of the lines of businesses. If you take a lifetime view on profitability of the business we would rather let go some business than to chase the assets. So we will continue to sharpen our pencil rather than dilute margin.

Umang Shah — Kotak Mutual Fund — Analyst

And my second question is, again on opex. So for the current quarter.

Rajeev Jain — Managing Director

IPO financing also had a — some role to play.

Sandeep Jain — Chief Financial Officer

In the last quarter, I think, as Rajeev wsa explaining the cost of fund of 6.77 is not a right reflection of the effective cost of fund that we have, which should be read as 7%. The corresponding revenue of that is sitting in interest income, without a corresponding balance sheet at the quarter end, so we are 3000 in the last quarter end, but we have nothing in the current quarter — in quarter end. But during the quarter, we have done a lot financing on the IPO side as well.

Rajeev Jain — Managing Director

Yeah. So I think that’s a good point.

Umang Shah — Kotak Mutual Fund — Analyst

And my second question is again on opex. So I appreciate the color given on the current quarter opex. But just wanted to understand that probably over next 2 to 3 quarters, by the time we launch or completely go live on our business transformation, will there be any lumpy spends maybe on advertising, marketing or any new planned hirings that you have, which can push up the cost at least in the near-term before we normalize to anywhere between 30, 32% cost to income run rate?

Rajeev Jain — Managing Director

Answer is no. We will continue to probably still add staffing. It may not be 2100, it may be. We just hired a large batch of engineers from various large institutions. I have 300 odd engineers at this point in time to join between Jan and June but no lumpiness. We’ve already taken into account large infrastructure spends that we are actually doing, which will get delivered and it’s baked in. We have to just wait for normalization, Umang, of the NII to play, nothing else.

Operator

Thank you. Umang, please join the queue for any follow-up. The next question is from the line of Vikram Subramanian from Spark Capital. Please go ahead.

Vikram Subramanian — Spark Capital — Analyst

Yeah, hi. Hi, sir. Thanks for taking my question. I had a couple of questions, first on the EMI card, so you had mentioned about a 60 day activation rate and a 90-day activation date, I think, 22 to 23% and so on. Could you please explain what the definition of activation rate is and what exactly it means for you as a business?

Rajeev Jain — Managing Director

Yes. Activation is you can come and take a loan.

Vikram Subramanian — Spark Capital — Analyst

Sorry, I didn’t get that.

Rajeev Jain — Managing Director

Activation is defined as, you come in — so out of 372,000, on a 60-day basis, 22% would come and take a loan. — loan, let’s say, in a 60 day active period would happen and a 90-day active would be 100,000.

Vikram Subramanian — Spark Capital — Analyst

Okay. So how do you see that going forward, is that. I mean, is this a number that we are targeting is this too low?

Rajeev Jain — Managing Director

So, two, three things. Normally, the B2B business happens in a seasonal manner. There are 2 big seasons. Q3 and Q2, we are yet to see because this started to build momentum only from this January onwards and we have picked phase in the last 4, 5 months as the — as the product went live. So we are waiting to see how the festival season plays out whether the activation rates further jump up. So — but on the other hand, I would just say, because it’s a paid product customers bought it, the activation rate intuitively and by empirical evidence ought to be higher even than this. So I think, now, I wouldn’t put a number at it, we will continue to share this number. We, of course, the product management group tracks it but we’ll share this number as we see how it moves.

Vikram Subramanian — Spark Capital — Analyst

Got it. And just to clarify, is this activation rates uniform across originated card and online originated card?

Rajeev Jain — Managing Director

No, in the POS origin — we don’t originate card. At POS, he takes a loan and then we offer them a card, it works the reverse. Here in fact that’s really the big change, right, at a design level, we are first creating a card and then a or a loan account and then a loan. There we create a loan account and then we give a card. So that’s the big change at a design level. 90% of the customers, they take a car because they see the benefit of next time onwards next time around he doesn’t have to do anything. He is fully KYC, so friction reduces dramatically. So it’s 90% there. These are 2 different, I would say pillars of originating customers is the way you should look at it.

Operator

Mr Subramanian, request you to join the queue for any follow-up. The next question is from the line of Sanket Chheda from B&K. Please go ahead.

Sanket Chheda — B&K Securities India — Analyst

Yeah, hi, my question was answered. Thanks.

Operator

Thank you. The next question is from the line of Subhransu Mishra from Systematix [Phonetic]. Please go ahead.

Subhransu Mishra — Systematix — Analyst

Hi, Rajeev. Thanks for this opportunity. First of all, I just want to thank you. I’m a flexi loan customer and it’s one of the most convenient personal loans being offered by any financial services in this country that the first thing I want to mention. Then I have couple of questions here. First, we have a legacy auto book which is still just 1 OEM, I don’t understand the reason why it should be limited for 1 OEM, why it is not being diversified? Should there be a investor demand for its diversification because that’s what we have been doing for the last decade.

Rajeev Jain — Managing Director

Subhransu, we’re not — we are unable to hear you clearly. You said 1 OEM with relation to two wheeler Subhransu.

Subhransu Mishra — Systematix — Analyst

Two wheeler and the three wheeler, but we have only limited to Bajaj Auto. That’s the first question. The second question is on customer relationship that is how do you define customer relationship value. What is that. And what are we projecting in terms of customer life cycle value? The second question and the third question was on, how many current live customers are there and how many of them have one — more than one outstanding loan, ex auto loans?

Rajeev Jain — Managing Director

So there are two, three questions. Let me — you meant two wheeler, three wheeler right, so two-wheeler, three wheeler, I mean business has gone through a reasonable stress period. And we have seen that concentration does have a role to play in this. So there are, there are, we are thinking that whether there ought to be more openness in terms of us evaluating other 2 wheeler OEs. So that’s one part of the conversation. So we’ll share some update in by January, February on what our stand is on whether we want to diversify. We will never do three wheeler. We are quite clear, we do that mainly with Bajaj Auto and we will continue to do that only with them.

On two wheeler, we do have a thought process that, whether there is an opportunity to be more diversified to reduce in events like this, pressure. So that’s one part. Second, customer relationship value we used to publish until 2 years ago, the whole products per customer for many years we published. At a design level that how many products the customer takes, our PPA model, we don’t have, fortunately any product which should produce a loss. So to that extent any any product per customer eventually adds to a customer relationship value. We don’t have any loss here, then we may have higher margin or lower margin businesses but we don’t have any loss leader. So, more products customer eventually takes, more is the relationship value growth to be at a fundamental level.

Until two years ago we used to publish that in the retail business, in the SME business and these are, that’s really what our business is, what our products per customer is. After publishing it for many years, we came to a conclusion you guys were not interested in it, so we dropped it off. We first moved into an exit and then we moved it out. Anup is looking at me, he’s been with us for 4 years, he is wondering where we used to publish it. So I think that’s, but doing more with existing customer because on a more serious note leads to lower loss, lower risk and more stickiness is the, is the heart of the company. So we’ll just keep doing more and more with those customers, 68% of the loans booked in the current quarter of 6.3 million came from existing customers. So, customer satisfaction, if anybody wants to say, I mean how many companies can talk about 68% of the customers coming from all the loans in the quarter coming from existing customers.

Subhransu Mishra — Systematix — Analyst

Well, what is the dollar value and what are we chasing here in terms of dollars value?

Rajeev Jain — Managing Director

Yeah. Dollar value fundamentally 90% of the customers would essentially be, actually it will exactly be 90% would be point to sale, 10% would be personal loans and mortgage loans and so on and so forth. On banking, to question that how many are active, today we have known two wheeler, three wheeler, the active banking is 19 million — 17.5 million, sorry. So total banking is 19 million, active banking at this point in time is 17.5 million, known two wheeler, three wheeler total banking in 19 million. So — so that’s really what the known two wheeler banking is. You could call that active right because we are banking on a monthly basis. Does that —

Operator

Thank you, Mr Mishra, request you to join the queue for any follow-ups. We have the next question is from the line of Kuntal shah from Oaklane Capital, please go ahead.

Kuntal Shah — Oaklane Capital — Analyst

Hi, Rajeev. Good evening. I have 2 questions. Can you give some flavor on the customer engagement on our new apps including merchant apps in terms of retention, engagement, drop-offs churn, all the metrics, which you must be tracking to see the users and the KPIs you track. Secondly, once our capital adequacy ratio hits around 18%, what would be the steady state opex, we can achieve at that scale, because today we are over capitalized and our AUM is not getting reflected given the size of our manpower. But at scale, what do you think would be the opex number? Would we fall within the 30% range at that level of capital adequacy?

Rajeev Jain — Managing Director

That does not change Kuntal. Our stance is clearly the consumer app ecosystem should lead to significantly better customer engagement, customer take-up rates, that’s really the purpose because we don’t have franchise problem, we have an engagement problem. And so the long-term just because we’ve had a quarterly blip of number going from third — it’s been moving right 27 to 38 and then into 33, 34. We are in transient times, I won’t look at the number. If it is 27, I won’t look at it, we talked about it, we did cuts. If it’s a 38, I wouldn’t look at it. The normalized number would be 33, 34, which is really it was pre-COVID we made significant change to our processes to lead to significant cost optimization across. The medium-term outlook or next year outlook does not change. We do think we’ll get to 30, 31% into as the normalized balance sheet growth happens. So that number is not changing. We are in transient times, will remain there for two more quarters and go back to normalcy. On app metrics, we do follow a — so two quarters from now we’ll start to share a panel on what the metrics look like. So we could have published it even now, we’ve chosen not to, as I said in the — we’ve opened Sprint one to only 10% of the customers. There is a heart framework, that framework covers — heart is an acronym. So at a design level, it’s happiness engagement, app upgrade retention, sorry activation and retention and transactions. That’s the heart metric. That’s a heart framework. We will start to publish this in the next two quarters.

Kuntal Shah — Oaklane Capital — Analyst

Rajeev, how is this heart metric different from NPA score?

Rajeev Jain — Managing Director

Kurush can address this point.

Kurush Irani — Group Business Head- Commercial Lending

Kuntal, hi. Kurush here. Kuntal, NPS is a very special one metric, which is the customers promotion, right, where he is going to refer you to a customer. Heart is a much more holistic approach wherein heart, you look at, when we talk of heart from a happiness perspective and this is something that we have leverage and benchmarks on what Google used to. So happiness would look at reviews, your ratings, what is the mix of the ratings score that’s just on the happiness side. Engagement looks at your traffic, your MAU, DAU, your app launches for users and so on. And then as we get into activation and all that’s more to do with how many are retaining on your app attention. The name is explanatory and then transactions is you defined a set of transactions, or properties on the app that you want customers to use and how — what is the usage on those specific properties within that. So as Rajeev called out, we will we will start sharing how that goes.

Rajeev Jain — Managing Director

Give us two quarters, probably as we stabilize, as we launch, as we stabilize, these are the metrics that we’re internally monitoring already, whether in the current app or on what is gone line at a 5%, 10% level, we are monitoring them. Actually that is what gives us the confidence to increase. So Sprint One to Sprint Two, as Kurush said, the happiness was — crash rate was high, we would not expand, we would not in this coverage. Crash rate is today at 0.43. So 0.3. Yeah. So crash rate is at 0.3, it gives us confidence to expand, jut go from 10 to 25 to 40 to 50 — 200.

Was that only your question, Kuntal or you had another question?

Kuntal Shah — Oaklane Capital — Analyst

Just one question. Would we be publishing GMV and all other metrics, given that –.

Rajeev Jain — Managing Director

GMV, the loans that we revoke there’s a GMV. You guys want it, we’ll publish it. We stopped publishing disbursement data. Right. That’s really what is the meaning of GMV for — from our standpoint. You guys want it, we’ll publish it, that’s okay. I mean it’s not a. But the disbursement data would never correlate but just the — so let’s say what we’re doing 58, we had a run rate pre-COVID of 54,000, 55,000 crores of annual loan volumes you were moving just in B2B, business B2B. Where we’re moving? Answer is yes. And can we share the data? We can share. But it will become relevant, on a more serious note, it will become relevant as the P2P goes live to as that clubbed the P2P and P2M to the point Anup made as the — as the payments, online PG goes live all that clubbed together is how we are looking at GMV.

So GMV will be relevant conversation as we accelerate the payments rate. Between P2P, P2M, PG, POS and our loan volumes. That’s really how we see the payment start to be. These are the five stack frames and we do foresee this number to be reasonably substantial in a three year horizon.

Kuntal Shah — Oaklane Capital — Analyst

Thanks, sir. And I really look forward to seeing this numbers because I think you’re directionally that will set the tone of our customer engagement. Thanks. Thank you.

Rajeev Jain — Managing Director

I think you can call it a day.

Operator

Thank you. Yeah. Ladies and gentlemen due to time constraint that would be our last question for today. I now hand the conference over to Mr Anuj Singla for closing comments. Thank you, and over to you Anuj.

Anuj Singla — Bank of America — Analyst

Thank you, Aman. Rajeev, any closing comments from you?

Rajeev Jain — Managing Director

No. Wish you all a very happy Diwali. And may the — go and shop. And we are there to support you. Thank you all. Thank you.

Operator

[Operator Closing Remarks]