Cholamandalam Investment and Finance Company Ltd (CHOLAFIN) Q2 FY23 Earnings Concall Transcript

Cholamandalam Investment and Finance Company Ltd  (NSE:CHOLAFIN) Q2 FY23 Earnings Concall Nov. 02, 2022

Corporate Participants:

Vellayan Subbiah — Chairman and Non-Executive Director

Ravindra Kumar Kundu — Executive Director

Arul Selvan — Executive Vice President and Chief Financial Officer

Analysts:

Nischint Chawathe — Analyst

Rajesh Kothari — AlfAccurate Advisors — Analyst

Rikin Shah — Credit Suisse — Analyst

Dhaval Gada — DSP Mutual Fund — Analyst

Darpin Shah — Haitong Securities — Analyst

Shweta Daptardar — Elara Capital — Analyst

Shubhranshu Mishra — PhillipCapital India Pvt. Ltd — Analyst

Piran Engineer — CLSA — Analyst

Pranuj Shah — J.P. Morgan — Analyst

Shreepal Doshi — Equirus Securities — Analyst

Ankit Patel — L&T Mutual Fund — Analyst

Ashwani Kumar Agarwalla — Edelweiss Mutual Fund — Analyst

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Umang Shah — Kotak Mahindra AMC — Analyst

Pranav Tendolkar — Rare Enterprises — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to Cholamandalam Investment and Finance Company Limited Q2 FY ’23 Earnings Conference Call hosted by Kotak Securities. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Nischint Chawathe from Kotak Securities. Thank you. And over to you, Mr. Nischint.

Nischint Chawathe — Analyst

Thanks, Michelle. Good morning, everyone.

Welcome to the earnings conference call of Cholamandalam Investment and Finance Company Limited. To discuss the 2Q FY ’23 performance of Chola and share industry and business updates, we have with us the senior management represented by Mr. Vellayan Subbiah, Chairman and Non-Executive Director; Mr. Ravindra Kundu, Executive Director; and Mr. Arul Selvan, President and CFO.

I would now like to hand over the call to Vellayan for his opening comments, after which we can take the Q&A.

Vellayan Subbiah — Chairman and Non-Executive Director

Thank you, Nischint, and good morning, everybody.

Just a quick update on the quarter and then we’ll get into individual businesses. Disbursements for the quarter was at INR14,600 crores, which was up by 68%. And for the half year, we’ve been at INR27,900 crores, which is up by 126%. Total AUM is at now INR91,841 crores, which is up by 22%. And our net income margin is at INR1,697 crores for the quarter, which is up 21% year-on-year and INR3,337 crores for the half year, which is up 20% Y-on-Y. The PAT is at INR563 crores for the quarter, which is down by 7%. We’ll talk a bit more about that, and INR1,129 crores for the half year, which is up by 21%.

Broadly, the macro environment continues to look at interest rate hikes in response to high inflation. So, there’s all of these questions around the global recession coming up. But in general, India seems to be in a good place relatively. Obviously, we’re just kind of a bit dependent on kind of seeing what happens with global factors. But otherwise, when we look at Chola’s performance, we’ve achieved our highest quarterly disbursals, which has really become possible because of our diversified product mix, right? So basically, a lot of the new businesses we talked about, the growth in housing loans, loan against property. All of that is basically helping this. And this will really help us — help sustain the momentum moving into the festival season ahead.

Just a quick commentary on the profit number. Like we said, we were down by 7%. But basically there is — it’s driven by what happened last year in Q2. Last year Q1, we had — we were impacted by the COVID second wave and therefore, we had huge forward flows into higher buckets and higher provisioning. And then post release of lockdowns in Q2, we will be basically able to roll back a lot. And so we had a — so basically they moved into higher buckets in Q1. They have moved into higher buckets in Q1. And therefore, Q1 of FY ’22 had higher credit loss provisioning at over 3% and NCL of INR563 crores. And Q2 resulted in just 7%, and NCL of INR69 crores, which is what basically caused our profit in Q2 to be, I would say a bit abnormally high, which is why we look at the PAT for the first half of the year, we are at INR1,129 crores, which is basically up by 21% year-on-year.

I’ll just give you some details in the individual businesses. We said aggregate disbursements grew by 68%. Vehicle finance disbursements were at INR8,502 crores for the quarter, which was a growth of 38%. Loan against property disbursed INR2,246 crores, which was a growth of 38% again. Home loans basically disbursed INR743 crores, which was a growth of 23%. Our SME business dispersed INR1,473 crores, which was a growth of 367%. And this is a — consumer and small enterprise loan business disbursed INR1,579 crores for the quarter.

Secured business and personal loans was at INR81 crores. And that’s what resulted in helping build the book to INR91,000 crores — INR91,841 crores. PBT ROA was at 3.4% for the quarter and 3.5% for the half year and ROE was at 18.3%. We continue to hold strong liquidity, INR4,841 crores of cash balance and a total liquidity position of INR6,573 crores and ALM is comfortable with no negative cumulative mismatches across all time buckets.

So, with that, let me — we’ve talked about asset quality also. So, I’ll just kind of briefly allude to that. At the end of September 2022, our Stage 3 assets stood at 3.84% versus 4.16% at the end of June 2022. So, we’ve come down by about 0.32%. And our provision coverage went up to 41.48% versus 40.69%. The total provisions currently carried against the overall book is at 2.73% as against the normal provision levels of 1.75% that we carried prior to the COVID-19 pandemic.

And as per revised RBI norms, GNPA and NNPA as of September 2022 stood at 5.84% and 3.99%, respectively. And so we carry INR771 crores higher provisions under INDAS over IRAC. And as per prevailing IRAC norms, the GNPA will be similar to the Stage 3 numbers we just gave you. And capital adequacy was at 18.4% as against the regulatory requirement of 15%. Tier 1 capital is at 15.77%.

So, let me stop with that and we’d be happy to take it over all of us. We’re happy to take a lot of questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Rajesh from AlfAccurate Advisors Private Limited. Please go ahead.

Rajesh Kothari — AlfAccurate Advisors — Analyst

Good morning, sir. Thanks for the opportunity. Sir, I had just two questions. The first is, if you can give color on the yield on loans, which has declined about 75 basis Y-o-Y. And of course, the cost of funds is up 13 bps. So, this leads to 88 bps lower spread. Can you give your near term, how do you see that? And next year, how do you see the same? That’s first question.

And second question is with reference to the operating expenses, which is up about 28% Y-o-Y? How do you see this number and the cost to AUM ratio in the near term and in the FY ’24? Thank you.

Arul Selvan — President and Chief Financial Officer

Sorry. Arul here. So the yield has moved from 13.7% to 13.5% as compared to last year. This is primarily because we are again comparing the previous year. Actually the yield in the Q3, Q4 had dropped further because of the prevailing benign interest rate scenario at that point in time. And from there, it has actually moved up if you compare the Q3, Q4 numbers versus what we are now doing at Q1, Q2.

The cost of funds, again, on year-on-year businesses is still lower than last year. That’s what you’re seeing here from 6% to — still at 5.8%. While the Q1 versus Q2, it has moved up. The expectation on cost of funds increase over the full year would be around 50 basis points, 60 basis points on a year-on-year comparisons is what I’ve reiterated in the last call also and we still hold to that.

While we will be improving the yield by way of increasing the yield on the floating rate books, which is our LAP and HL book on the entire book and for the vehicle finance book being a fixed rate book, we will be increasing it on the marginal yield on the first disbursement as the yield improvement happening progressively as we move into the subsequent quarters. Regarding your opex question, I think we still hold that we will be in the 3% to average ratio. We will endeavor to keep it at that or slightly below that level.

Rajesh Kothari — AlfAccurate Advisors — Analyst

So, basically, when I look at FY ’24, the net yield, how do you see the yield as you move forward, particularly in FY ’24? And same question for — whether one should look at operating expense in absolute terms in FY ’24? Should we expect about 10%, 12% kind of a growth? Or you think because of the start of new business development, it can be higher?

Arul Selvan — President and Chief Financial Officer

So, the yield will be a factor of the product mix. As you know, the strength of Chola is we have a wide product mix, even within each of the product categories we handle which is vehicle finance, LAP or any other products. That would be dramatically driven by which products we focus on depending on the demand in the geographies we operate in. So it is very difficult to say that will it be exactly what would be the FY ’24 number right now on yield, NIM, etc. The way we operate is to make — have that product mix done in such a way that the ROTA rate of 3.5% pre-tax is delivered irrespective of wherever we are on the yield line or cost of funds online or on opex line.

When we do a higher yield product, the opex will be larger, because these will be of small ticket like, say, for example two wheeler loan or the new businesses, which is like mostly CSEL, SME, etc. But then the yield compensates for the higher opex. So individual line items will keep varying based on product mix. So, I would rather request that the focus be on the ROTA, which would be what we will continue to deliver in the 3.5% limits pre-tax.

Vellayan Subbiah — Chairman and Non-Executive Director

Just to give you the yield trajectory for last few quarter, Q2 last year, we were actually, for the marginal book, we achieved 13.77 and then Q4, it went down to 13.38 for the entire CSEL book. And now in Q1, it has gone up to 13.73. In Q2, it has gone up to 14.25. So from the lowest bottom of 13.38, our marginal book yield in the Q2 has gone up almost closer to 80 basis points. In addition to that, we have also done rate revision for our home loan and loan against properties. And that is going on.

So that is also impacting improvement in the book yield. In the current year, if you see that from the Q2 last year in the vehicle finance, the new weaker sales have picked up. And that is also a reason for — we have to participate in the market and till Q1 because last year Q2, the used component was high. Marginal book yield was higher. In spite of that, we have been successful in increasing the rates of the marginal book.

Rajesh Kothari — AlfAccurate Advisors — Analyst

And my question on operating expense. On an absolute basis, how should we look at it for FY ’24?

Arul Selvan — President and Chief Financial Officer

See, we cannot tell on the absolute basis. We’re giving you on an average asset basis. I told that it will be less than 3% level. So, we stick to that.

Rajesh Kothari — AlfAccurate Advisors — Analyst

Thank you, sir. Thank you. Wish you all the best.

Vellayan Subbiah — Chairman and Non-Executive Director

Thank you.

Operator

Thank you. We have the next question from the line of Rikin Shah from Credit Suisse. Please go ahead.

Rikin Shah — Credit Suisse — Analyst

Hi. Good morning, sirs, and thanks for the opportunity. Just had one question. So the disbursements for the new businesses has moved to the quarterly run rate of INR3,000 crores. Probably even ahead of what was kind of guided earlier. So as these new products keep getting rolled out to the existing branches, would you be comfortable sharing your growth guidance? Or what proportion of this new businesses will constitute the total book credit around 5% in medium term?

Arul Selvan — President and Chief Financial Officer

We have reached to 5% now. See, that is on the AUM level. 5% is the — total size of this little vehicles, new businesses, three businesses which is CSEL, SME and SBPL. And obviously it will go up. Just to give you the direction of vehicle finance, how it is happening in terms of disbursements. For a few quarters, last four, five quarter, vehicle finance in Q1, the disbursement was — the mix of the disbursement was 78%. In Q2, it came down to 71% and Q4, 69%. And Q1 at 64%. And Q2 at 68%.

So, obviously, the disbursement mix of the vehicle finance is coming down in spite of — vehicle finance is also growing at the rate of, say, 38% in quarter two and overall growth has been 89% for the half year. So all the divisions are trying to basically grow their disbursement depending upon the market condition and portfolio behavior. Obviously, the new businesses will take little more share as they go ahead and expand their operation because they are also finding out success in their last one year operations. So obviously, they’re confident and quite committed to grow rest of the branches as well.

Rikin Shah — Credit Suisse — Analyst

Sure. Any number that you would probably point to in terms of 12% [Phonetic] of AUM could settle in next two years?

Arul Selvan — President and Chief Financial Officer

As of now, we are not giving any number. I mean we have to just wait another one year to start giving the numbers because these are basically very good in terms of the disbursement. So obviously, directionally, the new business mix is going up.

Rikin Shah — Credit Suisse — Analyst

I understood. Okay. Thank you. That’s all from my end.

Operator

Thank you. We have the next question from the line of Dhaval from DSP Mutual Fund. Please go ahead.

Dhaval Gada — DSP Mutual Fund — Analyst

Yeah. Hi. Thanks for the opportunity. Just had one question relating to the new business. So could you split the disbursement between CSEL, SBPL and SME, and also give some perspective around what percentage of the CSEL book is via partnership channel?

And just one more follow up on that is how do you see the rundown of the new businesses? Since right now we’re in the build-up phase, the run-off rate seems to be relatively low. If you could give your expectation that would be useful. Thanks.

Arul Selvan — President and Chief Financial Officer

Yeah. So, if you see that in Q2, the quarter we ended now, we have done the disbursement in terms of, SME is INR1,473 crore and INR81 crores came from secured business and personal loan. And CSEL added two channels. One is the traditional channel where we based on — we have INR1,108 crores and partnership channel INR471 crores. This partnership channel INR471 crores is [indecipherable]. Rest of the volumes are in normal channels.

Dhaval Gada — DSP Mutual Fund — Analyst

Understood. And sir, directionally, how do you see the run-off rate on the new business portfolio? Should it be around the current level? Or you would expect this to move much higher, especially in the consumer and SME?

Arul Selvan — President and Chief Financial Officer

No. It will be in the same level vis-a-vis our partnership book, which is small ticket size short term PL, is actually smaller. One third of the overall book. So, therefore, that is not going to change anything. And also we are growing in the home loan and affordable housing, affordable home loan and also loan against property, which is a longer book.

Vellayan Subbiah — Chairman and Non-Executive Director

The MSME has got some amount of billed discounting, which will be, again, one third of that, which will again run down personal loans. Rest of the books will perform in line with the similar rundowns like vehicle finance book.

Dhaval Gada — DSP Mutual Fund — Analyst

Understood. And just one more broader level question in terms of growth. Do you see this momentum that we see in second quarter sort of continuing for — not just FY ’23, but into FY ’24 as well, given the contribution of new business will materially go up from the current level? Do you see 25% kind of trajectory even in FY ’24 likely?

Arul Selvan — President and Chief Financial Officer

All depend on macro and even India is highly depending on monsoon. So monsoon has been better, although it is uneven. So second half is going to be better. So for the second half, we can actually expect better disbursements than what we have been disbursing so far in terms of absolute value. So obviously, we will be growing and as of now, our growth has been pretty good at 2% [Phonetic], which can go up even 25% this financial year. If next year things are remaining as it is, then we will continue this momentum. But for the next year, we have to see the industry also having a higher basis. So that’s the reason we don’t want to give any kind of forward-looking statement for the next financial year. As of now for the — as we stand here, this year is getting very good.

Dhaval Gada — DSP Mutual Fund — Analyst

Got it, sir. Thank you, and all the best.

Arul Selvan — President and Chief Financial Officer

Thank you.

Operator

We have the next question from the line of Darpin Shah from Haitong India. Please go ahead.

Darpin Shah — Haitong Securities — Analyst

Yeah. Thanks for the opportunity. First question is to Arul, sir. Sir, the floating rate for the home loan and LAP, we have not seen any kind of repricing.

Operator

Sir, sorry to interrupt, I would request you to speak a little bit farer from your mic because we can hear the disturbance along with your voice.

Darpin Shah — Haitong Securities — Analyst

Is this better?

Operator

Yes. Please proceed.

Darpin Shah — Haitong Securities — Analyst

Sorry about it. Yes. So Arul sir, in terms of the floating rate book that is home loans and home equity, we have not seen any kind of a yield revision in this quarter. How do we see that?

Arul Selvan — President and Chief Financial Officer

See, we have increased the floating rate on our LAP book by 40 basis points in June and 40 basis points in September, and we’ll be doing another 40 basis points in November. So, you would only see — you would have most probably seen only the first 40 basis points impact in Q2, which you may not see — you will only see as we move into Q3 the impact of the second 40 basis points and then one in Q4, the third 40 basis points. But we have been doing this increase in a staggered manner. So, we also want to address the impact of variable that we pre-closures and how the market and the industry is behaving.

And we are pleasantly surprised that the foreclosures have not been actually as we expected it to be. And the way the market has increased rates like more than 100 basis points, 150 basis points in one shot, I think we have been more kind to the customers if I may say so, in taking it in a staggered manner. The same applies for SL. We have done those changes. And so you will see them progressively coming in.

Darpin Shah — Haitong Securities — Analyst

But sir, the 40 basis points increase in June, we have not seen any impact on the overall yield for second quarter as well, because the reported numbers suggest that the yields are stable at 11.7 times for home equity?

Arul Selvan — President and Chief Financial Officer

Yeah. See, that is also, to some extent, will be driven by the new disbursement that would have happened in the Q1 and Q4 of last year and Q1 of this year. So, where — as we were talking earlier, the same principle applies because in those periods, the interest rate was benign and the cost of funds was benign. We had also scaled down our lending rate. So to that extent, it is offsetting the increase that you might be seeing there.

Vellayan Subbiah — Chairman and Non-Executive Director

The impact will start in the next quarter.

Arul Selvan — President and Chief Financial Officer

Next quarter you will see the results.

Darpin Shah — Haitong Securities — Analyst

Okay. And sir, in terms of provisioning, any additional macro-related problems you have done this quarter?

Arul Selvan — President and Chief Financial Officer

We have not increased the management overlay. We have held it there because, actually, we don’t see — as you can see, our NPA numbers are coming down. Environment is more stable from the incremental or unexpected loss perspective. So, we have not either increased it, nor have we consumed it. We will evaluate it as we go on into the next two quarters and take a call over, maybe at the end of this financial year or around that time.

Darpin Shah — Haitong Securities — Analyst

Sir, lastly, Kundu sir, how are we seeing things on ground? We are hearing that the numbers have been relatively slower in the month of October. Your thoughts on — especially on the vehicle finance side?

Ravindra Kundu — Executive Director

No. October has been one of the biggest month in the history for Chola as of now and for the industry also for that matter. Perhaps the passenger car picked up, two wheelers, three wheelers picked up. Tractor has also gone up. So — and commercial vehicle has been growing rapidly speed. So October, we have deserved the highest so far. So market is looking better. Yeah, there are some pockets in the market where there are some issues are there related to mining or construction. But at overall level, things are looking better. But on a specific market, there are some problems that we have. But that we need to consider that as a part and parcel of the business.

Darpin Shah — Haitong Securities — Analyst

Great. Thanks. And all the best, sir.

Ravindra Kundu — Executive Director

Thank you, Darpin.

Operator

[Operator Instructions] The next question is from the line of Shweta Daptardar from Elara Capital. Please go ahead.

Shweta Daptardar — Elara Capital — Analyst

Thank you, sir, for the opportunity. Sir, you just made a leading mention of management overlay being held up almost, with marginal increase quarter-on-quarter. So against that backdrop, even if I look at ECL coverage, that is also seem to be normalizing like we saw 1.59 percentage vis-a-vis 1.58 in March ’20 quarter. So, do we see now declining trends in terms of coverage and credit cost going forward, factoring in the worst is behind? I also remember last quarter you mentioned, there is not much of stress on restructured [indecipherable]. So can you throw some color there?

Arul Selvan — President and Chief Financial Officer

See, as you could see that our NPA numbers even in absolute terms as well as in percentage terms are coming down, both in Stage 2 and Stage 3. And if you go pre-COVID, if you remove the management overlay and look at pre-COVID, our average provision requirement, our provision coverage is in the range of around 30% to 33%. That’s what is expected.

Vellayan Subbiah — Chairman and Non-Executive Director

So, we will — while we may not go down to all that level, at least from the perspectives what we are seeing today, we will certainly not be increasing the management overly because certainly we don’t see that requirement coming up. However, regulations are keeping on changing, market is very dynamic. So, we want to wait for the next one or two quarters before taking a call on how to utilize this management overly in the coming quarters.

Shweta Daptardar — Elara Capital — Analyst

Okay. Just a related question. You also mentioned that your Stage 2 is declining. So, that is also rightly reflected in Stage 2B, which is also declining. So any vulnerability left there, both on Stage 1B and Stage 2B in terms of repayments? And one of two EMIs or more EMIs coming through now?

Arul Selvan — President and Chief Financial Officer

See, the Stage 2B and Stage 1B are a representation of what the RBI norms is wanting us to do with regard to — I mean, declaring them as part of NPA and the IRAC norms. From an AGL perspective, we are showing them as separate categories because they are already showing trends of improvement. They had touched the NPA sometime in the past. And there have been collections of their outstanding, which had made them move into Stage 2B and Stage 1B, which means they are progressively moving towards becoming a zero delinquent book. But till that time they become zero, we need to categorize them in these two categories. And that’s what is being presented.

So, the overall NPA number, Stage 1B, 2B and Stage 3 put together is what we will be declaring to RBI. And actually that we have early adopted this as against many others in the industry where a product — which becomes effective from 1st October. So, this is a good trend only if the 2Bs and 1Bs or they coming down, and that means they are moving out and become standard.

Shweta Daptardar — Elara Capital — Analyst

Sure. That was pretty helpful. Thank you, sir.

Arul Selvan — President and Chief Financial Officer

Thank you.

Operator

Thank you. We have the next question from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.

Shubhranshu Mishra — PhillipCapital India Pvt. Ltd — Analyst

Hi, sir. Good morning. Thank you for the opportunity. Sir, the first question is on the employees. You have increased almost 12,000 odd employees over the last two odd years. Just wanted to understand where they are deployed? How many into the new businesses and how many into collections, sales, so on and so forth? And also [Technical Issues] collection architecture, how many onboard employees were deployed into collections across verticals, if you can split that out? And if you have any collection with NPA also growing, high collections? Thank you.

Arul Selvan — President and Chief Financial Officer

Shubhranshu, I think this is too much of detail that we generally would not want to share. Broadly, I will give you, almost like one-third of our total population working for us is on roll and two-thirds would be off roll. And I would say that, again, half of that would be in collection and half of it would be in the rest of the other activities at a very broad level. And your question on collection agencies we don’t engage collection agencies. We do use some of them to coordinate with RTO office or the police, etc, and parking yards, etc. But most of our collections are done by our in-house team.

Shubhranshu Mishra — PhillipCapital India Pvt. Ltd — Analyst

Understood, sir. Sir, you really answered my entire question. If I can just ask one last question, what is our active number of customers? You have given the total customer pool, but how many of those bank on a monthly basis?

Arul Selvan — President and Chief Financial Officer

21 lakh customers are active across all businesses.

Shubhranshu Mishra — PhillipCapital India Pvt. Ltd — Analyst

Right, sir. Thank you.

Operator

Thank you. We have the next question from the line of Piran Engineer from CLSA. Please go ahead.

Piran Engineer — CLSA — Analyst

Yeah. Hi. Congrats on the quarter. Before I get to my question just a clarification on Slide 14. In the pie chart for home loans, what is that 10% AL? What does AL mean?

Arul Selvan — President and Chief Financial Officer

Affordable LAP. It’s a variant of the home loan, where we view — this is more like a LAP loan given to customer profiles which fits the home loan profile, which is like a very small business guy who is taking a loan against an existing property. Since the home loan team addresses this segment of customers, we have grouped it under that.

Piran Engineer — CLSA — Analyst

Okay. Okay. Got it. Got it. And just getting to my initial question sort of overlapping with the previous guy. In the last two quarters, we’ve added 5,000 employees, but no proportionate increase in branch count. That’s been largely stable. So just wanted to get a sense of — so are we adding more manpower to the same branches? And also in the future do we expect more branch openings in the next few quarters? Or this is where it sort of stabilizes? Because your peers are also around 1,200, 1,300 branches. So that’s the saturation point in vehicle finance, so to speak.

Arul Selvan — President and Chief Financial Officer

So yes, overall count has gone up because we are adding manpower in the new businesses and new businesses are all co-located in the vehicle finance branches. And that’s the reason vehicle finance branch count is actually not going up and therefore you are — there is a difference between what you are seeing. Otherwise, the headcount has gone up because of — mainly because of the new businesses.

Now in addition to that, we have also opened up around 500 resident locations, which doesn’t have as of now the physical branch, which will be getting converted in the branch as and when they start hitting the target volume. That is also where the vehicle finance has actually increased the footprint and also increased the manpower. So, these are the two headings. One is the vehicle finance resident location and second is the new businesses, which we have expanded onto the vehicle finance branches.

Piran Engineer — CLSA — Analyst

Got it. These are mini branches in resident locations.

Vellayan Subbiah — Chairman and Non-Executive Director

Yes. Satellite [Phonetic] branch, you can say that. It’s not a physical branch. It is the person being operated from a certain location to assess the market and look at a few agreements being captured. Then once we are confident about that location, then we open a branch.

Piran Engineer — CLSA — Analyst

Okay. Got it. Okay. Thank you. I’ll get back in the queue and all the best.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Pranuj Shah from J.P. Morgan. Please go ahead.

Pranuj Shah — J.P. Morgan — Analyst

Hi. Thank you for the presentation. Sir, growth has been very strong and second half is likely to be even better as Mr. Kundu already highlighted. Sir, my question was how you are looking to fund this growth? Will you be looking to move away from bank term loans and rising rates? And related also, at what level of Tier 1 would you look to raise additional capital? Thank you.

Arul Selvan — President and Chief Financial Officer

See, we will continue to be dependent on banks for funding to a large extent. If you look at it, we need a AAA rating to become more independent on market borrowings. And as long as we are AA plus, we will continue to be dependent on banks. Banks have a large appetite for priority sector, otherwise most of our businesses which we do, whether it is vehicle finance, LAP, CSEL, etc, that is why the priority sector is conditioned.

So, we do lot of securitization of assets under the priority sector. So we — and also depending on market situations, we raised the ACPs. We have done in Q1 some movement of ACPs. And keep looking out for such opportunities. There is no dearth of funding from banks on this, and we don’t see a challenge in this, but we will keep evaluating that as we move forward to look at newer avenues of funding.

And regard to the capital, we are very clear that until and unless we come to less than 13%, we won’t be seeking capital. Right now we are on the Tier 1. At Tier 1, we are comfortable with around 15% plus. So, we will not be seeking capital immediately. And if our growth takes us down to the 13% level, then we will certainly quit.

Pranuj Shah — J.P. Morgan — Analyst

I understood. That’s very clear. Thank you, sir. I’ll get back in the queue.

Arul Selvan — President and Chief Financial Officer

Thank you.

Operator

Thank you. We have the next question from the line of Shreepal Doshi from Equirus Securities. Please go ahead.

Shreepal Doshi — Equirus Securities — Analyst

Hi, sir. Thank you for giving me the opportunity. Sir, wanted to understand how would the cost of fund move from here? And what are the changes that you are looking on the liability mix side? Because if I look at your debentures share has increased from 10%, like five quarters back to almost 18%. So what is the thought process for going for debenture, increase in the debenture share in the liability mix?

Arul Selvan — President and Chief Financial Officer

Yeah. See, the cost of funds, again, as I had mentioned earlier, we are looking at the cost of funds moving almost like 50 basis points, 60 basis points on a full year as of last year. So, I still hold to that unless something more drastically happens. We have a new MPC meeting tomorrow. So, I don’t know what shocks or surprises would get thrown out of that. But as of now, our expectation is that it should not be more than 56 basis points compared to last year. So, we will try and keep it at that level. With regards to debentures, as you would be aware, there is a SEBI norm that 25% of incremental borrowings needs to come through market borrowing. So, we consciously are capitalizing on whatever, whenever there is risk benefits out in the market to try and do debentures. So, we need to fulfill that requirement. So consciously, we’re increasing that. So, each has got its own positives, negatives, but at the current level and now at the current stage, going into any new change in the approach of SEBI’s, we are not looking at any big changes.

Shreepal Doshi — Equirus Securities — Analyst

Got it. Sir, second question was with respect to the pricing side. So on the non-new business — on the non-vehicle finance book, how frequently does the loan book get repriced? So, I understand that you highlighted that you have been increasing rates in LAP and SME segment and also in the SL segment. But how like — how does it get reflected in the customer’s account? Does it get repriced once in a year? Or as and when it gets — as and when you increase, it directly gets reflected in the loan book?

Arul Selvan — President and Chief Financial Officer

Yeah. As and when it gets increased, it will automatically result in the tenure increase or EMI increase depending on how the customer would prefer it.

Shreepal Doshi — Equirus Securities — Analyst

Got it, sir. Sir, just one last question on the vehicle finance side. So on the growth for that segment, how do you see that in the second half? Like I understand you highlighted that the growth would be 22% to 23%. But if this segment also delivered a healthy growth, how do you — what sort of range would you view in that case?

Arul Selvan — President and Chief Financial Officer

See, actually, it would be that the first half numbers for the commercial vehicle has been 453,000. And in the past during ’18, ’19, we saw industry delivered almost 1 million vehicles sold. So, we have — actually, we have a cushion to basically grow. And whatever number we have seen industry delivered, we can double the number in just the second half. And second half is always higher than the first half in the history also. And Rabi is actually expected to do better than Kharif because the first half was slightly uneven rain. But the second half there will not be any problems. Mining and construction activity is also going to improve. So put together, commercial vehicle sales will significantly better. That is what the manufacturers are talking about. Passenger car is still selling very high and there is huge demand actually. The waiting period is up. From OEM to OEM, it’s varying from say three months to six months to one year. Three wheeler, two wheeler also likely to go up. So put together, we are expecting that the industry growth of all the vehicle and tractor and construction equipment put together, which is as of now at 31%.

Can we maintain at this level or slightly go up to 35%? Now, this is the unit number growth. Now if you convert into the value growth, ticket size has gone up because the prices have gone up from BS-IV to BS-VI. To that extent, the value growth will be higher. And for us we have — we can either maintain the market share or can look for improving the market share, which will be also a trigger point for having a higher growth. So, that is what is the number in terms of vehicle finance. We are actually in line with that, and we are expecting that we will be better than industry in terms of both unit and value.

Shreepal Doshi — Equirus Securities — Analyst

Got it, sir. Thank you so much, sir, for answering my questions. And good luck for the next quarters.

Arul Selvan — President and Chief Financial Officer

Thank you.

Vellayan Subbiah — Chairman and Non-Executive Director

Thank you. We have the next question from the line of Ankit Patel from L&T Mutual Fund. Please go ahead.

Ankit Patel — L&T Mutual Fund — Analyst

Yes. Good morning, sir. Congratulations on a good quarter. My question was around the asset quality. The classification you earlier mentioned on the GS3 and the GNPA numbers. Now once the RBI circular came in end of last calendar year, I think the first quarter that you released, the difference between the two numbers was about 270 bps and now that has come down to 200 hundred bps. Just wanted to understand. It’s been almost a year and operationally, obviously, we would be trying to put in place your systems to try and see that these two numbers come closer. And earlier, we were seeing that a trajectory could be more faster than this. What are your thoughts around how this could be moving in the future? And do you see any real challenges in actually trying to bring this down?

Arul Selvan — President and Chief Financial Officer

See, the customer profile that we handle, this variance will be there. The customers will — and they cannot move back from Stage 3 to zero delinquency instantaneously. There will always be a time lag between them, because they cannot afford to pay two or three instalments in one go. So to that extent, whenever there is a movement of a customer to Stage 3 and then progressively he moves back, it will take a few months or quarters to get over and come to the zero delinquency level. The large chunk which we saw was on account of the Stage 3 movement in Q1 last year which had a larger impact. And as we keep moving on to our Stage 3 book and resolving them, you will see a good amount of traction in the reduction in the variance between the GNPA as per RBI and the Stage 3 as per what the ECL models were there. So to that extent, you’ll will see some more reduction, but I don’t think the variance between these two numbers can be completely eliminated.

Vellayan Subbiah — Chairman and Non-Executive Director

Just to add, see 1B and 2B, which is basically Stage 3 at some point in time, they have come back to lower buckets. So for such customer, we cannot do anything other than just guiding them or educating them that you are considered as NPA. But till 30th September as per RBI and as per bureau, they were not considered. From 1st of October, if it is applicable, then bureau also will start applying them as NPA. If that is happening — if that happens, then only there will be some pressure on the customer. Otherwise customer will say that, I was actually at 90 bps had come down. So, we cannot put any undue pressure on the customer. We can only just go and say that kindly come out of the flagging of 2B and 1B because you have touched the 90 plus at some point in time. And during the previous period, there were lot of good customer went up and we have to give them adequate time. Maybe after one year, when things are actually better, obviously, every customer who actually has come down from, say, 90 plus to 60 and 30, obviously, he would like — he or she would like to definitely go down to zero delinquency, zero level of delinquent.

Ankit Patel — L&T Mutual Fund — Analyst

Okay, sir. Thank you.

Operator

[Operator Instructions] We have the next question from the line of Ashwani Kumar Agarwalla from Edelweiss Mutual Fund. Please go ahead.

Ashwani Kumar Agarwalla — Edelweiss Mutual Fund — Analyst

Good morning, sir. Sir, if we look at your spreads for last three years, four years, the spread started increasing post Q2 FY ’21 when we had ample of liquidity in the system. Now interest rate has been normalized, liquidity has been spread out again. So do we see the NIMs on AUM going back to 6, 6.5 trajectory on a steady state basis?

Arul Selvan — President and Chief Financial Officer

See, the NIM improvement — when cost of funds comes down, that is also a pass-through on the yields. So to that extent, this thing happens and when — again, the cost of funds, we will again progressively increase yields. We spoke about it a few minutes back at the same point. So such cycle happens, but there will be certain amount of time lag between these two happening. So to that extent, you will see some drop in NIM over next few one or two quarters. And then as the book changes with regard to the marginal yield catching up on the fixed rate book and with regard to the change in rate on the floating rate book, then we will catch up.

So, we will certainly not let go of the NIM aspect of a certain product. Again, as I said earlier, based on product mix, the NIM will change. For example, if we focus more on two wheelers, the NIM may look very attractive because of yield size. But then the opex will be higher because of the small ticket loans and to some extent the NIMs will be high. So, I mean, my request is when we have such a wide product range with differing yield levels, the focus is better to be on the ROTA rather than the individual line items of NIM, yield, NIM, opex, etc.

Ashwani Kumar Agarwalla — Edelweiss Mutual Fund — Analyst

Okay. Thanks.

Arul Selvan — President and Chief Financial Officer

Thank you.

Operator

Thank you. We have the next question from the line of Abhijit Tibrewal from Motilal Oswal Financial Services. Please go ahead.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Good morning, and congratulations on a healthy quarter. Sir, my question is for Ravi sir. Sir, I understand you might have covered it briefly. While answering to the first participant, my line had dropped off. So in case of sir’s repetition, please let me know. Sir, just trying to understand, I mean the competitive landscape that is there today, is it allowing you to take increase in yields on your incremental lending? Or is there a reason to kind of watch out this space in terms of how the competitive landscape evolves and what kind of yield increases we will be able to take on the incremental lending in vehicle finance.

Ravindra Kundu — Executive Director

See, we have been successful in increasing the yield of the marginal book because we are deeply rooted in small, small branches, Tier 2, Tier 3 town, that competition is not there. And if the numbers have started growing further in these Tier 2, Tier 3 towns, it is a reflection of the improvement in rural demand. Obviously, we’ve been positioned to sustain our growth in terms of marginal book yield and it has been so far as of now. But it evolves depending on the product mix. If the heavy commercial vehicle or light commercial vehicle growing faster as compared to a small commercial vehicle or tractor, then we need to maintain the market share in each and every product line. Suppose if heavy commercial is growing fast, then we would maintain our market share, then it also start impacting on the yields. So, this is depending on the geography, product and the mix of the products. Till now, we have been successful and we are expecting that we will continue to do so at least for this financial year.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

This is useful, sir. And then my last question is for Arul sir. Sir, while we understand that RBI has very clearly said that under the new RBI circular, IRAC norms and IndAS guidelines will be very, very different. Given that the implementation date of the circular was October 1st, and given that now those loans will have to be tagged as GNPA, which they were not required to be done until, let’s say, 30th September. Under IndAS, I’m just clarifying, under IndAS, will there be any change in accounting norms in terms of recognition of interest income or the way you do provisioning?

Arul Selvan — President and Chief Financial Officer

No. The IndAS was on a loss given default on the probability of default. These are done based on the past history or past experience of each product line or the sub product line that we do. So, we have to take the loss given default of each of the sub product, and that’s how we calculate what is the LGD if a product touches 90. Now if we can also take — the same approach we have taken when we did the 1B, 2B also. When the product touched 90 and moved back to 60 or when you have between 30 to 60, how has been LGD and that’s how we have already calculated and put the differential provisioning under ECL also for the 1B and 2B.

Now there is differing views in the industry on how to treat this — should we align Stage 3 to gross NPA itself as per RBI is a view that the industry will and then the auditors and the other participants in the industry and maybe the regulator themselves may come up with. Because prior to these guidelines, the view of RBI has been to sort of align Stage 3 and NPA as per the old norms. But here they have categorically mentioned that it need not be aligned. However, again, the regulator can take a stance differently. So, we are keeping our options open with regard to how to account this. But right now, if you look at pure IndAS, the way we have accounted is what it needs to be done.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Understood, sir. Thank you so much. That’s all from my side, and wish you and your team the very best.

Arul Selvan — President and Chief Financial Officer

Thank you.

Operator

We have the next question from the line of Umang Shah from Kotak Mahindra AMC.

Umang Shah — Kotak Mahindra AMC — Analyst

Yeah. Hi. Thanks for taking my question, and congratulations to the team on a good quarter. Just one question on the asset quality front. Now it might be a little early to call out on the asset quality performance of the new portfolio, but based on your initial experience, how should we look at the steady state credit cost going forward given the fact that the share of new businesses will only increase in the overall asset base? So will our asset — or the credit cost — steady state credit cost experience be materially different from what we have seen in the past? Just wanted to understand that.

Arul Selvan — President and Chief Financial Officer

See, what we need to look at is each business, you need to look at the credit cost in line with that business. This is exactly why I said that even in the earlier context with regard to the yield and the NIM part, but each business will have a different yield and it will have a different opex and different credit costs. Now the new businesses will certainly turn out a much, much larger yield as compared to the traditional businesses. But their opex will be more and their credit cost will be higher.

So the ultimate game is to get a ROTA, which is allocable to all its stakeholders. That is what we will endeavor to. And that is the whole point of having a diversified mix of products. So, we are not getting impacted by one factor on the P&L line. So, we will work towards that. So if you look at it as an independent line item, credit costs may go up as we move up the slightly higher risk book. But our ROTA will be better because these are actually ROTA attributed to the existing businesses, the new businesses.

And again, as Kundu was saying earlier, we are not going to scale up these businesses like how we have always been doing in any new product, we will be testing the market, experiencing the product and then scaling them up as we go and get comfortable product by product, customer by customer, geography by geography. That’s how we will scale up this business. And as we scale up, we will make sure that they give us the ROTA that we endeavor to reach.

Umang Shah — Kotak Mahindra AMC — Analyst

Perfect. Thanks for that. And just one data point. What were the write-offs for the quarter?

Arul Selvan — President and Chief Financial Officer

Write-offs? One minute. I can try and take it out. So write-offs have been in the range of around INR80 odd crores.

Umang Shah — Kotak Mahindra AMC — Analyst

INR80 crores. Perfect. Yeah. Thank you so much. Those were my questions. Thanks.

Operator

Thank you. We have the next question from the line of Pranav from Rare Enterprises. Please go ahead.

Pranav Tendolkar — Rare Enterprises — Analyst

Hi, sir. Thanks a lot for the opportunity. Sir, I just have two questions. One is that I understand that your LGD is much lesser in vehicles business. But why not just provide for whatever is due after certain days in that business also and take PCI to say, 60% to 70%? That is first.

Also second question is that what kind of precautions or questions the Board is asking management where the new lines of business have been growing very fast? And why not let them have some maturity and then take a call before scaling it up to a big level? Thanks a lot, sir. And congrats for the good set of numbers.

Arul Selvan — President and Chief Financial Officer

Okay. With regard to the first question, it’s not — unlike the earlier period under IndAS, the way we need to provide is much more determined by past experience. And we don’t have that much independence to simply say that I will add up more provision or I will provide less. It is based on your book’s performance in the past. So, we need to stick to that. Actually, COVID-related period, we have kept this management overlay outside this, and that is how we are carrying the extra provision. And even now right from the committee, etc, there have been questions on how we need to fall in line with IndAS with regard to the management overlay by itself, which we will work on. I think I spoke about it in the early part of this conversation. Now on second question, I think the conversation of the Board with us, I think that’s private affairs. So, I would not want to discuss that.

Pranav Tendolkar — Rare Enterprises — Analyst

Right. I meant to say that what kind of precautions you are taking? So prudent way would be just to originate some book and then let it mature over to 1 or 1.5 years and then scale it up because whatever said and done [Speech Overlap].

Arul Selvan — President and Chief Financial Officer

We are in line with whatever is the direction of the Board and the senior management, we’ll take this. [Speech Overlap]

Vellayan Subbiah — Chairman and Non-Executive Director

Yeah. Just to add, the way we are expanding, if you see that, we have even given the count of the branches with respect to each and every business. In the vehicle finance, we have 1,100 branches. So as of now, in the CSEL business, we are now operational in the less than one-third of the branches. In the home loan also, first, we have done south zone for last straight seven years. And now only we started expanding into east, west, north. And within the east, west, north also, we identified which are the states, which are the customer segments, what are the type of property.

So it is not that we are just expanding. We are going by geography, going by the customer segment, going by the product offering. And once we are tested in a particular bigger town, then we go to a smaller town. So all three new businesses like CSEL, SBPL and SME, the growth in terms of volumes are looking high because the industry size itself is very big. For example, CSEL industry, our market share as of now is 0.5% because that industry is very large.

And if you want to do it in, say, one-third of the branches also this volume will come. And if we are going to in a town and if you’re not addressing all the — if you’re going in a traditional way and if you’re not attending all the DSAs, then you will be negligible player in that town. So wherever, whichever town we are going, we are trying to basically reach out to all the lead sources for taking that loan. And in terms of the quality, so like, for example, CSEL, their bounce rate, in fact, it’s significantly lower than the industry. And although it is yet to be matured in terms of the portfolio size and book, but we are far ahead in terms of quality. So both quality and size of customer and in terms of growth, we are very cautious and we are moving very slow.

Pranav Tendolkar — Rare Enterprises — Analyst

Right, sir. Right, sir. Thanks a lot. Thanks a lot, sir.

Operator

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

Nischint Chawathe — Analyst

Thank you, everyone, for joining us today. We thank the management for providing us an opportunity to host this call. Thank you very much.

Arul Selvan — President and Chief Financial Officer

Nischint?

Nischint Chawathe — Analyst

Yeah?

Arul Selvan — President and Chief Financial Officer

Nischint, Arul here. Nischint, can you hear me?

Nischint Chawathe — Analyst

Yeah.

Arul Selvan — President and Chief Financial Officer

Mr. Vellayan wanted to speak on something. [Speech Overlap]

Vellayan Subbiah — Chairman and Non-Executive Director

No. It’s okay. I think Arul it’s okay. Now, we can wrap this.

Arul Selvan — President and Chief Financial Officer

I’m sorry about this.

Vellayan Subbiah — Chairman and Non-Executive Director

No problem.

Arul Selvan — President and Chief Financial Officer

Yes. Thanks.

Vellayan Subbiah — Chairman and Non-Executive Director

Okay. Thank you. Thank you, everyone.

Arul Selvan — President and Chief Financial Officer

Thank you. Thank you.

Operator

[Operator Closing Remarks]