EQUITAS SMALL FINANCE BANK (EQUITASBNK) Q1 FY23 Earnings Concall Transcript

EQUITAS SMALL FINANCE BANK (NSE:EQUITASBNK) Q1 FY23 Earnings Concall dated Jul. 29, 2022

Corporate Participants:

Vasudevan P N — Managing Director And Chief Executive Officer

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

Murali Vaidyanathan — Senior President And Country Head – Branch Banking – Liabilities, Products And Wealth

Dheeraj Mohan — Head Strategy And Investor Relations

Natarajan Muthusubramanian — Executive Vice President And Head – Treasury

Analysts:

Shreepal Doshi — Equirus — Analyst

Savi Jain — 2Point2 Capital — Analyst

Renish Bhuva — ICICI Securities — Analyst

Nidhesh Jain — Investec — Analyst

Deepak Poddar — Sapphire Capital — Analyst

Jai Mundhra — B&K Securities — Analyst

Rohan — Retail Investor — Analyst

Ashlesh — Kotak Securities — Analyst

Ankit Biyani — JM Financial — Analyst

Sarpaksh Shah — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good morning, and welcome to Earnings Conference Call of Equitas Small Finance Bank Limited’s Financial Performance for Q1 FY ’23. We have with us today Mr. P. N. Vasudevan, MD and CEO; Mr. Murali Vaidyanathan, Senior President and Country Head, Branch Banking, Liabilities, Product and Wealth; Mr. Rohit Phadke, Senior President and Head Assets; Mr. Natarajan M, President and Head Treasury; Mr. Dheeraj M, SVP and Head Strategy, IR, BI and Customer Experience; Mr. Rahul Rajagopalan, DVP, Strategy and IR; and Ms. Srimathy Raghunathan, CFO, Equitas Holdings Limited.

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. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. P. N. Vasudevan. Thank you, and over to you, sir.

Vasudevan P N — Managing Director And Chief Executive Officer

Good morning to all of you, and thank you for taking time out to be with us today. The financial year has started out well for the industry as a whole with pickup of credit growth, increased economic activity and the declining worry of any residual shocks from COVID.

In the segment Equitas operates, we are seeing very positive sentiments across small fleet owners, small business owners and an update in the housing sentiments also. Inflationary worries have not yet crept into the segment and the impact of inflation on household consumption, investment, etc. remains unclear at this point in time.

We largely believe that the segment that we serve will generally remain reasonably resilient to inflation because they deal with the daily use products and services and their ability to adjust their selling price or service charges based on certain increase in their own input cost is very high, given the fact that they are dealing with daily use products and services.

Coming to the first quarter performance, it’s been largely in line as disbursements remained strong despite the seasonally first quarter sluggishness. Our fee income has been robust. We had a very strong growth in our liabilities and our asset quality has been consistently improving. Our advances, excluding the restructured loans are behaving normally and almost all the parameters of performance, the non-restructured book, which is approximately around 95% of the total book.

That’s come back to the pre-COVID levels practically in all parameters in terms of performance metrics. The annualized gross slippage for the non-restructured book in the first quarter was 2.7%, which is back to almost the old levels and that book also exhibits a very strong expected collection, which means that the buildup of stress into the future quarters is also very, very comfortable.

Our provisions, however, made during the quarter is elevated since we increased our provisions of those restructured accounts in the last year, which has slipped into NPA in the first quarter, we increased the provisions on these assets, specifically with respect to vehicle finance, where it has moved to 100% and a small business loan, which moved to 25%.

If you remember, last year itself, last quarter itself, for microfinance, we have done a similar action that all restructured book in microfinance, which slipped into NPA, we moved into 100% provision in the last quarter itself. This quarter, we have added the vehicle finance into that category of moving it to D1, which in our case, for D1, it’s 100% provision.

And for small business loan, again, D1 really means 25% provision. So, because of this for the quarter, we had about an additional provision of INR76 crores, which we did in the first quarter. But this is — this, we believe, is a one-off because as you know, our restructured book itself is coming down consistently quarter after quarter and most of the pain of restructured book is behind us and we expect that the credit cost should start to normalize going forward.

The bank continues to invest in technology to ensure we are future ready.

Operator

Sir, sorry. Shall we open the floor for questions?

Vasudevan P N — Managing Director And Chief Executive Officer

Just hold on. Just a minute.

Operator

Sure sir.

Vasudevan P N — Managing Director And Chief Executive Officer

The bank continues to invest in technology to ensure we are future ready. We have now revamped our loan origination system for vehicle finance and that’s now rolled out all India. And the work is underway to introduce a similar state-of-the-art loan origination system for the rest of the products. This, we believe, will help us further improve our sales productivity and reduce our disbursement turnaround times.

On the digital transformation, we are actively engaging with partners to draw out a plan that will help us leverage cloud, data, and customers, and you shall be hearing shortly from us on these initiatives as they progress.

Lastly, we have progressed well on our reverse merger. We have filed a scheme with NCLT and we have received the orders of NCLT for convening the meetings of creditors and shareholders. These are fixed on the 6th and 7th of September. So, the progress on the merger scheme is going actually slightly ahead of our estimate itself. We had guided that by March ’23, we should be able to complete the merger, but we believe that we will probably do that a few months ahead of that schedule.

Thank you so much. Now, I hand it over to Rohit to talk about the asset side of the bank.

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

Good morning, everybody. This is Rohit here. The last quarter has been good. Advances grew by 22% year-on-year and 5% quarter-on-quarter. We have seen stable growth across all the segments. Our disbursements of INR3,238 crores, was the highest ever in the beginning quarter of the year.

In small business loans, we continue to witness strong growth and good logins. Here, we cater to the informal segment. And we also now plan to cover the formal segment in loan against property going forward.

In vehicle finance, vehicle sales continued to show an upward trend. CV sales are — were higher by 5 — 4% from the pre-COVID levels in June ’19. If we compare the sales in June ’21 — with June ’21, sales were higher at 89%. We have disbursed INR889 crores, which is a phenomenal growth because the first quarter of last year was — we had very low disbursement.

We also saw the highest ever disbursements in the used car segment, which we started catering to last year. Freight rates have stabilized and the free cash flow for operators has also stabilized because fuel prices have been rationalized across. So, vehicle replacement demand has come back. Prices of used vehicles have also seen a slight increase.

The most comforting part is the two-wheeler sales have grown by 20%, which does indicate that the stress in the rural segment has come down and the rural segment has begun to grow. So, two-wheeler sales grew by 20% year-on-year, though they are yet to reach the pre-COVID levels.

In microfinance, our ex-bucket efficiency remains stable at about 99%. We have seen improvement across. However, some pockets in the South, namely Kumbakonam, Pondicherry and Mayiladuthurai are continuing to show less improvement over the other regions.

Affordable housing continues to show strong growth. We are in 35 branches now. And we — other than rest, we are now live in the southern states of Tamil Nadu, Andhra Pradesh and Telangana and Karnataka.

We see good growth momentum across segments. And as Vasu, sir explained that the impact of commodity prices and inflation is unclear. We see strong growth and I’m quite optimistic that this — the quarter ahead, which is full of the festive season coming ahead will show good growth. Thank you.

Murali Vaidyanathan — Senior President And Country Head – Branch Banking – Liabilities, Products And Wealth

Hello. Good morning, Murali here. I would like to give you a perspective of liability branch banking, TPP, digital and marketing. What went right. As we are aware, we are continuing the journey what we laid out for last two, three quarters on focusing on key segments. So, I would like to give you some highlight, which actually gives us the confidence that we are traveling in the right direction.

Our program, Elite, which is meant for middle class plus and HNI is now close to 40% of the book that is close to INR8,800 crore, INR8,900 crore. And increasingly, it is because of a primary reason, the proposition and the relationship management structure, which we netted behind it is actually showing us the good trajectory. So, that is one good perspective, which is contributing towards buildup of granularity. Most importantly, saving-centric approach. And third important parameter, which is happening is do-it-yourself, we are seeing more from this segment. So, Elite is one prime driver.

Second key highlight for this quarter is NR book crossing INR1,000 crore as a key measurement index. I’m sure that all of us are aware, all of — most of the SMPs doesn’t have a presence nor can we have a representation outside India, despite the fact the percentage of goodwill, beyond banking initiatives through marketing and most importantly, the virtual RM based on time zone is actually helping us to grow the book. It’s not few customers. We are adding granular customers month-on-month. And most importantly, the active customers and the primary customers of NR has now got up to 80%.

Now third important perspective, which is giving us most comfort in terms of two things. One is people’s aspiration towards saving and spending that we call it as a demographic that’s entry-level customers, which you get through digital mode. So, we are now having a B2C selfie. That book has crossed INR500 crores. And we have a tie up with Neu [Phonetic] and which has also crossed INR500 crores, which means INR1,000 crores of book, which is now close to 8% to 9% of our entire liability base has started coming from digital sourced account. Our ambition is to double it, and we are on towards the trajectory, but the most important part here is the demographic excellence is actually helping the branches to get [Indecipherable] centric.

So, now the relationship management structure, which we have put in is actually helping us. And now we have a full stack of full KYC conversion and virtual management through CLCM. So, the entire VKYC to full KYC to business correspondent, all these three things are actually helping us to get digitally-savvy demographic centric customers. So, now all these three things backed by — we have a strong propensity in data lead management system, which we run here that is helping us for cross-sell also.

So, if we look into it, whether it’s AUM growth, whether it is overall protection penetration inside the book, the actual activation of debit card where to go and how to get the unique card. So, the only saver as a ecosystem, which we started two years back, now is expanded into spender. Now, it has expanded into investor. Now, we have a tie-up which has happened, which has helped us to get into three in one accounts also those demat. We have now recently tied up with HDFC Securities also. So the extension of saver to investor is actually propelling the balances.

And last but not the least, these are backed by predominantly marketing cap and high visibility, high penetration, high impact, which we do it through predominantly on social media platform and sticking to our core theme of Beyond Banking as an initiative. So, all coupled this put together and on one slide, which we will touch when we have the question-and-answer session, the absolute transaction active part and primary part is actually propelling our customers to get more and more engaged through do-it-yourself mode.

I think we continue to hold our retail focus. We are now close to 80% of our book is retail. And very important part is individuals are close to 65% of the total book composition. Increasingly, that will try to expand it also. So overall, we are looking ahead with a lot of optimism, a lot of planning and most importantly, integrating multiple departments towards giving a customer first as an objective.

Thank you. And I’ll hand it over to Dheeraj.

Dheeraj Mohan — Head Strategy And Investor Relations

Good morning, all of you. Dheeraj here. So this time, I’ll walk you through the performance because Sridharan has taken leave, he’s not feeling too well, so please bear with me this quarter.

On the net interest income, it came in at INR581 crores as compared to INR461 crores during the same quarter last year. This registered a 26% year-on-year growth. Other income came in strong at INR100 crores as compared to INR59 crores the same quarter last year, registering a 69% year-on-year growth. Net income grew at 31% and came in at INR681 crores for the quarter as compared to INR520 crores during the previous quarter last year.

On treasury, the profit on sale of investments for the quarter is about INR6.52 crores and MTM loss on investments was limited to less than INR1 crore, INR0.83 crore to be precise. From next quarter onwards, we’ll invite Natrajan to talk to us more about the bank’s treasury operations.

Coming to opex, the total operating expenditure came at INR412 crores as compared to INR356 crores during the same quarter last year. Employee expenses for the quarter takes into account reversal of employee provisions of INR31 crores. This is related to the COVID policy and some performance incentives, which we have provided for. Adjusting for this, our opex would have been about INR445 crores instead of INR411 crores as we reported.

On a daily average basis, our cost of funds has improved by 73 basis points and now is at 6.2%. In terms of PPOP, we’ve registered INR269 crores as compared to INR164 crores during the same quarter last year, registering a 63% year-on-year growth. PPOP in terms of percentage to assets expanded and now we it is at 3.87% compared to 2.65%. PAT registered at INR97 crores as against INR12 crores. I’m now talking on the asset quality provisions and the restructuring pool. The total restructuring pool now stands at INR1,190 crores. We have given segment-wise breakup and some other parameters in the presentation. The bank now carries total provisions of INR603 crores.

To give you a breakup, NPA provisions is about INR415 crores. Provisions on restructured standard assets, it’s about INR114 crores. Provision on standard assets is INR61 crores. And we made an additional provision on standard assets or what we would call management overlay of about INR13 crores. GNPA comes in at 3.95% in Q1 compared to 4.06% in the sequential quarter previous to this. NNPA comes at 2.07% compared to 2.37% in Q4.

Our provision coverage ratio has improved because we’ve made some additional provisions. I think that’s also mentioned in the presentation. So, it’s improved to 48%. Credit costs came at 2.68%. Provisions on Q1 is INR142 crores, comprises INR95 crores from restructured loans and INR47 crores from the non-restructured book. During the quarter, the bank also saw gross slippages at INR296 crores and 53% of this INR296 crores is actually moved in from the restructured pool. Write-offs during the quarter was about INR130 crores.

Lastly, we remain well capitalized. And in June, our capital adequacy was 24.62%. LCR also has improved sharply to 211% as we’ve been focusing on better quality deposits.

With this, I’d like to hand it over to the operator and we can start questions.

Questions and Answers:

Dheeraj Mohan — Head Strategy And Investor Relations

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Shreepal Doshi from Equirus. Please go ahead.

Shreepal Doshi — Equirus — Analyst

Hello, sir. Thank you for giving me the opportunity, Sir, firstly, just wanted to check on the restructured book. So, while the disclosure is very detail.

Operator

[Speech Overlap] go to the question please.

Shreepal Doshi — Equirus — Analyst

Hello, can you hear me?

Operator

Yes, we can hear you now.

Shreepal Doshi — Equirus — Analyst

So just wanted to check that of the INR1,764 crore of restructured pool that we had as on 3Q, what has been — what has slipped to NPA and what is the write-off from the same like INR1,764 crore of the pool? And how much have we collected from this pool? Wanted to get these numbers.

Dheeraj Mohan — Head Strategy And Investor Relations

Just give us one second.

Shreepal Doshi — Equirus — Analyst

Sure.

Dheeraj Mohan — Head Strategy And Investor Relations

Yes. So last quarter we were at INR286 crores in terms of NPAs and this quarter, we are showing INR271 crores, but this takes into account we have written off microfinance loans of INR95 crores. So roughly, you can say about INR80 crores or so would have added.

Shreepal Doshi — Equirus — Analyst

Okay. So basically the NPA is INR271 crores outstanding and the write-off is INR95 crore from the INR1,764 crore pool, and the remaining would have recovered and that’s how the outstanding restructured book is INR1,190 crore.

Dheeraj Mohan — Head Strategy And Investor Relations

Correct, correct. The normal rundown is also there.

Shreepal Doshi — Equirus — Analyst

Okay. I was like in your presentation on slide 19, the MSE, the value we show segment-wise details. So there the average ticket size disbursement for MSE has gone up significantly high on a sequential basis. So, is there a change in thought process there or strategy there? Like last quarter, it was 4.6 million, this quarter, it is 8.6 million.

Dheeraj Mohan — Head Strategy And Investor Relations

No, there is no change in strategy. As far as MSE is concerned, we’ll continue to focus on the mid segment. We don’t want to focus on the large ticket sizes. So, we are clear. I mean, there’s no change in strategy there.

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

So, there is one — in MSE, there are two types of loans. So, one is the working capital loan, which we give and the other one, which is called treads, which is on the — is a screen-based lending. So, there the ticket sizes would have improved, which has resulted in this.

Shreepal Doshi — Equirus — Analyst

Okay. Okay, so there the ticket size is like materially higher? Or like what would be the ticket size range there?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

So there the treads ticket size is generally INR1 crores to INR5 crores compared to the working capital loans, which are INR25 lakhs to INR50 lakhs.

Shreepal Doshi — Equirus — Analyst

Okay. Okay, got it. Okay, thank you so much for answering my question.

Operator

Thank you. Next question is from the line of Savi Jain from 2Point2 Capital. Please go ahead.

Savi Jain — 2Point2 Capital — Analyst

Hello, can you hear me.

Operator

Yes.

Savi Jain — 2Point2 Capital — Analyst

So, one is I just wanted to know the guidance for credit cost for the full financial FY ’23. I mean we have had very high credit cost this quarter. So, what is the expectation for the full year?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

So see, we will be below 2% is what — we’ll be below 2% for the year because improving collection efficiencies also in the restructured book, most of the restructured book was in the vehicle finance — vehicle finance segment. And there, even while recovery, we realize that the loss on sale of vehicles is decreasing. The price of used vehicles is going up. So, we will see lesser credit costs going ahead.

Dheeraj Mohan — Head Strategy And Investor Relations

So, just to be a little sharper. What we said in the past is 1.5% credit cost. This takes into account a couple of factors. one, it takes into account the guidance we have given in terms of loan growth of about 30%. And it also takes into account some level of beefing up of PCR and the provisions we need to make in regard to the restructured loans. So far, we seem to be on track of that on those targets. So, we are quite hopeful that we will contain it at 1.5% for the year. I think Rohit was just trying to give you a slightly broader range. At this point in time, that’s what basically is.

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

Yes, 1.5% seems possible.

Savi Jain — 2Point2 Capital — Analyst

So is this — I mean, so most of the provisioning has been done this quarter or and the rest of the year will be at normalized levels? Or do you expect another round of elevated provisioning and then a sharp decline there thereafter?

Dheeraj Mohan — Head Strategy And Investor Relations

Yes. So, it may not be uniformly distributed in the remaining three quarters. So, you may see some elevation in Q2, but definitely not in the lines you saw in Q1. And again, Q1 INR76 crores is because we made some additional provisions, which is reflecting in the improvement in PCR, but we don’t foresee that this level of provisions or credit costs will hit in Q2. But Q3 and Q4 definitely will normalize to almost business as usual credit cost.

Savi Jain — 2Point2 Capital — Analyst

And second was on the opex. opex is, I mean, it’s not — it doesn’t seem to still stabilize. It’s still increasing every quarter. So, when do we see a stabilization in the opex?

Dheeraj Mohan — Head Strategy And Investor Relations

Yes. So, just from an opex stabilization in terms of percentage, we can understand, in absolute terms. So, Q1 also has wage inflation, which is reflected. So, you will not see that level of growth. And this typically happens for most organizations in Q1. So, you should not see the same rate of growth every quarter, clearly. But in terms of cost to income comes in, and obviously, the operating expense will not grow at the same pace.

Savi Jain — 2Point2 Capital — Analyst

Yes, I understand the employee expenses, but the other expenses, for example, in Q4 was INR148 crores, it has gone up to INR169 crores in Q1 alone. So, is this a trajectory this is going to follow because in that case, there will still be substantial increase?

Dheeraj Mohan — Head Strategy And Investor Relations

So there are — as I think Vasu’s commentary also had mentioned, we are making some investments in technology to help increase business. So, these are largely in the digital transformation space. We’ve already gone live with the loan origination system for vehicle sense. So some of those will reflect in the technology expense, which comes under the other expense. These are technology, not from fintech technology, but technology as the foundation to the bank and we’re now five years old. So, there are some upgrades which are happening. But we don’t think it will derail any of the cost to income or opex to assets numbers, it will be calibrated.

Savi Jain — 2Point2 Capital — Analyst

So, ROA for the full year should be above 2% in that case?

Dheeraj Mohan — Head Strategy And Investor Relations

At this point in time, we are silent to it. I think what is more important is to see ROA hit 2% for a quarter, then we’ll discuss of how more it can go to. So, at this point in time, please pardon us for not answering that.

Savi Jain — 2Point2 Capital — Analyst

Okay. Yes. That’s all from my side.

Operator

Thank you. Next question is from the line of Renish from ICICI Securities. Please go ahead.

Renish Bhuva — ICICI Securities — Analyst

Yeah, hi, sir. Congrats on a great set of numbers. Just two questions again, sort of on the restructuring side. As of total slippages this quarter, how much of the tax loan from restructured book?

Dheeraj Mohan — Head Strategy And Investor Relations

53% of INR296 crores has flown from the restructured book. About INR156 crores.

Renish Bhuva — ICICI Securities — Analyst

Okay. Is from the restructured book?

Dheeraj Mohan — Head Strategy And Investor Relations

Yes.

Renish Bhuva — ICICI Securities — Analyst

Okay, got it. And secondly, sort of on the PCR point, okay so, we have been always mentioning that the LTDVs in vehicle finance will be lower and not of course at the 100% level. So sir, what is the thought process behind sort of improving the coverage in vehicle finance NPAs to 100%? [Speech Overlap]

Dheeraj Mohan — Head Strategy And Investor Relations

So Renish, last quarter, we had given our coverage policy. [Indecipherable] it becomes 100%, and this is an accelerated provision I think we did two years back. So, I think you should draw comfort from the policy which we have. And that — so every incremental NPA is getting a higher PCR than it was couple of years back. So, that is one. Rohit?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

To add to what Dheeraj has said, see the vehicle is earn and pay asset and the value is there, till you use the vehicle. If the vehicle is stationary for some reason, if the value starts depreciating because to make it start, you will again need investment in that. So, just to give you a perspective, you will understand. So, if I compare the loss on sale in quarter four and quarter one, and I’m not going back into the COVID area, COVID period. So, if we just take Q4 and take the comparison between restructured and the normal regular book. So, if you take the restructured book, the loss on sale on the restructured book on vehicles, where we had done restructuring in the COVID period, it was 47% in Q4. The same loss has come down to 39% in Q1 — sorry yeah, 39% in Q1.

And if you take the non-restructured book, the regular book. The regular book in Q4, the loss on sales was 37%, which has come down to 28%. So overall, we had 45% loss in Q4. It’s come down to 36% in Q1. So to be conservative, we have decided to provide 100%, but in actual as we go ahead, the loss will keep decreasing because the prices of used vehicle will keep increasing.

Another perspective, which I want to give you is, see the cost of a B6 vehicle has gone up phenomenally. So B6 vehicle, who can afford B6 vehicle, a fleet operator who’s got many vehicles, who’s got contract, where the turnaround time of the vehicle is — I mean the utilization is 100%, he can really go and buy a B6 vehicle. A B4 vehicle is still in demand and that is why the prices of B4 vehicles have gone up. So, that is another perspective to this. Just to give you a full perspective.

Dheeraj Mohan — Head Strategy And Investor Relations

And Renish, the PCR on the vehicle finance, restructured NPA pool is 77%.

Renish Bhuva — ICICI Securities — Analyst

Okay. Total NPA coverage?

Dheeraj Mohan — Head Strategy And Investor Relations

Yes. For vehicle.

Renish Bhuva — ICICI Securities — Analyst

And sir, just last question on the growth side. I mean just a clarification [Speech Overlap]

Operator

Renish, sorry to interrupt. But your voice is breaking. Can I request to come in a better reception area?

Renish Bhuva — ICICI Securities — Analyst

Is it better now?

Operator

Slightly.

Renish Bhuva — ICICI Securities — Analyst

So, I was just confirming that we are maintaining the 30% growth guidance for FY ’23, right?

Dheeraj Mohan — Head Strategy And Investor Relations

Yes, Renish, yes, we will grow. And see growth will be better because see traditionally in India the festive season starts in August, the end of August festive season starts. So, August till October-November is a full festive season. So, we see growth. We are all poised for growth, yes.

Renish Bhuva — ICICI Securities — Analyst

Brought it is very helpful, thank you. Thanks everyone.

Operator

Thank you. [Operator Instructions] The next question is from the line of Nidhesh Jain from Investec. Please go ahead.

Nidhesh Jain — Investec — Analyst

Hello, sir. So firstly, on restructured book, how are we saying that we will not see more slippages from this book or incremental slippages from this book, given that 60 to 90 DPD in the restructured book is INR169 crores plus one to 60 DPD number that you have shared among that INR340 crore of pool. On INR40 crore of pool in last three months only one EMI has been received. So this INR210 crore pool will have high probability of slippage. Even if we assume, let’s say, 50% of that getting slippage of 20 [Phonetic] that will still lead to reasonably high trade costs in coming quarters?

Dheeraj Mohan — Head Strategy And Investor Relations

Before Rohit comes in, I just want to put that credit cost to this number. Let’s stick with your number, let’s say, INR200-odd crores. About 80% is vehicle finance and secured. There the LGDs are about 40% and the remaining 20% or thereabout is microfinance. So if you look at it from that perspective, impact on credit costs on a terminal basis, maybe only about 0.5% of advances. Not saying that it will come next month, next quarter. But if I go with your numbers and put the loss on repo numbers to that pool, this is what it works out to. But anyway I’ll give it to Rohit to talk more on what trends we are seeing.

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

So Nidhesh, even if you break this down INR169 crores, INR64 crore is from CV and INR54 crore from SBL. In SBL, there’s no loss because it’s fully backed by property and we see good recoveries in SBL. In INR64 crore CV, I’ll just give you the breakup. The loss on sale when we repurchase a vehicle, the loss has come down from 45% to 36% on an overall basis. And particularly, if you talk about the restructured basis, it has come down from 47% to 39%. So, as I explained, as prices of vehicles keep going, as growth picks up. So, I think this number will keep going down. So, it is not — like Dheeraj explained, it is not with the total INR169 crores plus INR40 crores, which will go back.

Dheeraj Mohan — Head Strategy And Investor Relations

And Nidhesh, to reclarify, the restructured book has come back into billing now about six, seven months back, a little more than that. So, in a seven- or seven -month period, if you have paid two EMIs and you are in that 60 to 90, that essentially means you have only missed two out of those seven EMIs. So, we’ll have to look at it from that perspective also.

Nidhesh Jain — Investec — Analyst

So, can you share this number, disclosure that we have shared for one to 60 — how is the 60 to 90 DPD book behaving in terms of customers who have paid only one EMI, two EMI, three EMI in last three months?

Dheeraj Mohan — Head Strategy And Investor Relations

Yeah, we’ll try to put that.

Nidhesh Jain — Investec — Analyst

Sure. Because that will give some clarity that how much slippage may happen from this book. Secondly, in terms of margins, how should we think about this 9% margin, given that we are scaling in formally small business loans, we are scaling in affordable housing? So, what could be the margins or how should the margin trajectory will flow? Specifically also, probably the cost of funds may start to enter from next quarter?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

See, 77% of our book in small business loans is new to bank. And if I get into further segments, it’s as high as 85%. So, we have the pricing power in the segments that we serve. This is number one. Number two, home loans, in the industry itself, despite rising interest rates, home loans have not slowed down. So, home loans across the industry, the growth momentum is there, whether it’s affordable or whether it’s prime. And the inventory of home loans, home has also come down, new project launches also in full vigor. And this being the festive season, I don’t see any problem there. Thirdly, as we mature into products in the future, going by, we should always — I think we should look at a risk-adjusted return rather than pure yields — so that’s — as our credit cost keeps coming down and as our credit cost normalizes, we should rather go to a more risk-adjusted return. That’s what I feel.

Dheeraj Mohan — Head Strategy And Investor Relations

Yes. I’ll also get Nats to just talk on the cost of fund.

Natarajan Muthusubramanian — Executive Vice President And Head – Treasury

Nats, here. On cost of funds, though the rates are rising, policy rates are expected to go up, I think the market is largely factoring in all this. Even if you see that as we speak today, the [Indecipherable] are rallying, just rallied by five basis points to 10 basis points in the last couple of days. So, any hike in interest rates, which is expected by RBI is normally factored in, so we do not expect cost of deposits also to go up significantly from here. And also from Equitas perspective, we have already built up sufficient reserves as a factor in our higher than required LCR. We have been sort of front-loading in anticipation of hike in trades. So, we are well positioned to meet any — obviate any short hikes in the cost of funds.

Nidhesh Jain — Investec — Analyst

So, what will be your estimate of cost of funds, let’s say, in a current scenario assuming whatever information we have, it’s quite difficult to call out how the interest rate will play out, but how should you see this cost of funds trending in coming quarters?

Natarajan Muthusubramanian — Executive Vice President And Head – Treasury

It should not go up. See, for — you’ll not see our automatic corresponding concomitant rise in rates. So, if the policy rate raises by 50%, it doesn’t mean that our cost of funds we do not expect it to go by 50% or 40%. It can marginally inch up by five basis points or 10 basis points.

Nidhesh Jain — Investec — Analyst

Okay. Okay, sir. Thank you. That’s it from my side.

Operator

Thank you. Next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.

Deepak Poddar — Sapphire Capital — Analyst

Yeah. Thank you very much sir, I just wanted to understand more on the credit cost front. Now you did mention that 1.5% credit costs you are looking for the entire year. So, I just wanted to understand, do you think that it’s a little aggressive considering our first quarter credit cost is already at 2.8% and you expect second quarter to also be elevated. So, balance nine months, I think our credit cost should be 1.1% to 1.2% to make it 1.5% for the entire year average? So, any comments that you want to make on that.

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

See, most of the flows, as we said, even in the gross slippages, 53% has flown in from the restructured book. As we see — what we notice is the stark difference between the behavior of the normal book and the restructured book. Normal book delinquencies, collection efficiencies are coming back to pre-COVID levels. So, what you saw in the first quarter was the effect of, we started restructuring last year in July and ended in about September. So, September was the last month where we restructured. So, the 12 months of restructuring are getting over this September. But most of it we have are upfronted by provisioning. So, according to me, the pain will last only for one more month, maybe in July and then things will come back sharply. Secondly, the recoveries from the restructured book also good, particularly on the SBL and the CV side, recoveries are pretty good. So, that will help us in getting the credit cost down from the current elevated levels of 2.6% to 1.5% as the year goes by.

Deepak Poddar — Sapphire Capital — Analyst

So, by third quarter, fourth quarter, if our credit cost reduces to 1.5%, let’s say, so our average would be at least around 2%, right, for the entire year?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

It might go down below 1.5%. In the fourth quarter, your credit cost will be below 1.5% for that quarter.

Deepak Poddar — Sapphire Capital — Analyst

Okay, understood. And what would be our PCI target? Is there any kind of target we have set for ourselves in terms of PCR because it’s still at 48%, right?

Dheeraj Mohan — Head Strategy And Investor Relations

Yes. So we — like we said earlier, we have a long-term target that should — it should be at 70%. But obviously, we can’t do it this year because it can sacrifice ROAs, PAT, etc.. What we’ve done is we have put a policy to drive that and that’s what we shared last quarter. So hopefully, as the quarters go by, you will start seeing PCR inch forward. But internally, we wanted to come to around 70%.

Deepak Poddar — Sapphire Capital — Analyst

70% maybe two years. Would that be a fair time line?

Dheeraj Mohan — Head Strategy And Investor Relations

I can’t give a time line right now because like I said, it is a function of write-off slippages, etc., but we are working towards it.

Deepak Poddar — Sapphire Capital — Analyst

Okay, understood. And my final query is on your cost to income. So, how do we see our cost income going forward, maybe in the next one to three years?

Dheeraj Mohan — Head Strategy And Investor Relations

So we’ve got, like we said, from the model to work out, we should be at 55% kind of cost to income. The idea is to start being stable at about 60% and then move to about 55%. Those are the milestones we have and what we have also communicated earlier.

Deepak Poddar — Sapphire Capital — Analyst

Okay. And this milestone is over the next three years?

Dheeraj Mohan — Head Strategy And Investor Relations

Yeah, it should happen before that. But I would say in the next two years, you will start seeing at least some of these milestones getting hit.

Deepak Poddar — Sapphire Capital — Analyst

Fair enough. Fair enough. That’s it from my side, all the very best sir. Thank you very much.

Operator

Thank you. Next question is from the line of Jai Mundhra from B&K Securities. Please go ahead.

Jai Mundhra — B&K Securities — Analyst

Hi, sir. Thanks for the opportunity.

Operator

Sorry, to interrupt you sir. You’re not audible. Can I request you to speak through the handset.

Jai Mundhra — B&K Securities — Analyst

Yeah, hi, thanks for the opportunity. Sir As you said, the restructuring, we had stopped restructuring, and we had given 90 days moratorium. So, why is that and that the slippages from restructured has gone up in this quarter? I mean, is there any specific reason versus last quarter? Ideally, it should trend down, right? So, was there any particular reason for slippages to go up in this particular quarter?

Dheeraj Mohan — Head Strategy And Investor Relations

No, no, it has come down sharply. INR296 crores compared to INR400 crore and something, come back to INR300 crore and something. So it’s coming down only.

Jai Mundhra — B&K Securities — Analyst

No, no. Only from restructuring, sir, right?

Dheeraj Mohan — Head Strategy And Investor Relations

No, no. Even the earlier INR408 crore is largely from restructuring.

Jai Mundhra — B&K Securities — Analyst

Okay. Okay, understood then. Okay. And second question, which is slightly different, sir, in your vehicle book is — what is the degree of overlap between customer segment/geography with AU Small Finance Bank, for example. I mean just wanted to understand this thing. Is there any significant overlap or there is no material overlap in terms of geography and segment and products in vehicle?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

AU operates more in the formal segment. See, 50% of our book is — so I don’t know. I mean I can’t talk about comparison with AU. But I don’t know. It’s not right to in a investor call to talk about competition.

Jai Mundhra — B&K Securities — Analyst

Sure, sure. understood, sir. Yeah, that is very helpful, sir. Thanks.

Operator

Thank you. Next question is from the line of Rohan, a retail investor. Please go ahead.

Rohan — Retail Investor — Analyst

Hi all. First of all, thanks for the opportunity. Sir. I have three questions. First is, what is our plan to reduce the LPS to pre-COVID levels? Second is regarding credit cards, what are our road map to launching new credit cards? And third is we have recently partnership with HDFC Securities. So, how will it benefit Equitas?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

See, credit card, we are already running our white labeled co-branded credit card with HDFC. We have started distribution. Now we are automating it to issue through the tab. This is through the distribution mode. Will we have a credit card of our own? The evaluation and the technical feasibility and initial discussions have started. So, that will take some time for us to come to the market and declare it. So, which means do we have a product to offer to a consumer in form of co-branded white labeled credit card? Yes, and we’ll go full throttle from this month.

Second part on HDFC securities, already, we were distributing three in one of Aditya Birla and we have crossed 40,000 consumers who are actually using our three in one active accounts. Now that we are getting aggressive into digital, we thought that digital should have a digital connected, do-it-yourself mode sort of a technology through which we will align. So, that’s why HDFC Securities comes in place, where the entire alignment through digital happens. So, we will have a separate sort of stream for digital and separate sort of stream for digital. So HDFC Securities is on that line. Dheeraj?

Dheeraj Mohan — Head Strategy And Investor Relations

On the NPA, I think — sorry, on the NPA, I’ll draw your attention to what the bank’s asset quality was before COVID and that will give you a sense of how we used to operate and what is the impact of COVID. So, the number used to not be at 4%. We used to be in the 2% range. Now, once the COVID impact is over and our segment is the bottom of the pyramid. It is not the prime segment where they will immediately bounce back. But this segment, as you know, rural and urban has been impacted fairly badly by the COVID, especially the second wave. So, it will go through that process. What I think you need to look at is the incremental pain is it there? That is not there. Like we’ve said, and I’m sure you’re also witnessing it from — in terms of COVID, lockdown, etc. So, it’s just a matter of time once this moves off the book, and we should then revert back to our normal levels of credit cost of 1%, 1.25%, NPAs of 2, 2.25%. But it will take some time. And I think lastly, what is important is to understand Equitas book. We are only 18% microfinance, which represents the unsecured portion. The rest is secured.

And in secured, I think Rohit had spoke about vehicle finance, loss on repo is 40%, which is the highest among the other products. So, all in all, we are far more stable than what we were five years back when demon happened and we’re also fairly stable compared to other SFBs who are in the evolving space. Like I said, the products are also fairly seasoned. These are not products we started last year, but most of these projects are now well seasoned at least in two, three cycles now. So, that’s the direction it should move back to.

Rohan — Retail Investor — Analyst

Okay, thank you sir for explaining in detail. My last question is regarding housing finance product. So, do you see the — is what do you project the growth strategy for next five years regarding housing finance product?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

So clearly, it’s a growth area for us. And we will ensure that we are present across the country and the product becomes a significant part of our portfolio going forward. Very, very clear strategy on this.

Rohan — Retail Investor — Analyst

Okay. Yes, thank you. Thank you and all the best.

Operator

Thank you. Next question is from the line of Ashlesh [Phonetic] from Kotak Securities. Please go ahead.

Ashlesh — Kotak Securities — Analyst

Hi everyone. Good morning. First question is on the gross slippages if you can just give a breakup of [Speech Overlap]

Operator

Ashlesh, can I request you to speak a little louder please.

Ashlesh — Kotak Securities — Analyst

Yeah, sorry. I hope this is better. Can you please give a break up of the gross slippages for the quarter across segments?

Dheeraj Mohan — Head Strategy And Investor Relations

Yes, yes. So, the INR296 crores we spoke about, like we said, the restructured book is INR156 crores, the non-restructured book is INR139 crores. In this, the key segments, I will talk only about the restructured pool. Microfinance is about 36%, vehicle finance is about — sorry, INR36 crores, vehicle finance is about INR75 crores, small business loans is about INR40-odd crores, and the MSE is about INR3-odd crores.

Ashlesh — Kotak Securities — Analyst

Okay, thanks. And what about overall number? Overall slippage number?

Dheeraj Mohan — Head Strategy And Investor Relations

INR296 crores.

Ashlesh — Kotak Securities — Analyst

Can we get a breakup of that, please?

Dheeraj Mohan — Head Strategy And Investor Relations

Oh, the product-wise, yes, yes. So overall, microfinance is about INR68 crores, vehicle finance is about INR130 crores, small business loans is about INR85 crores. These are the large segments.

Ashlesh — Kotak Securities — Analyst

Okay. Thanks for this. And second is on the MSE segment, if I look at the restructured book that has not changed meaningfully, but the gross entry level in this book has gone up a bit. Any trends here?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

So here, you see what happens in restructured is once the account touches NPA, it stays restructured for 12 months, even though the customer is paying regularly. So, we have some accounts in MSE where they are paying regularly, but they form a part of the restructured book because they had touched NPA once.

Ashlesh — Kotak Securities — Analyst

The flow seems to have increased because — there seems to be significant forward flow.

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

MSE, the book is only about — if you look at the total one, 61 to 90 is only INR4 crores and one to 60 is only INR18 crores.

Ashlesh — Kotak Securities — Analyst

Okay, understood. Thanks. That’s all from my side.

Operator

Thank you. Next question is from the line of Ankit Biyani from JM Financial. Please go ahead.

Ankit Biyani — JM Financial — Analyst

Yeah, hi, sir. congrats on a good set of numbers. I just wanted to ask what has been the impact of the new MFI regulations on your book? So, I believe the growth has been largely driven by ticket size increase this quarter. Has any challenges due to the new regulations?

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

Yes. No, the — see, we have always been conservative on the MFI side. If you look at our ticket size on the book, it’s just about 21 lakh, sorry 21,000, right? So, we have always been very conservative on the MFI side. So, now the harmonization norm talks about an income of INR3 lakhs. And if you consider income of INR3 lakhs for the household, the average ticket size will come to about anywhere between 1.3 lakhs to 1.5 lakhs. So, we are nowhere in that game. I mean, we want to play it secure and we have always given a guidance that our unsecured book on microfinance will be in the range of 10% to 15% of our overall portfolio. So, no real impact for us on the harmonization norm, except the fact that we have to make the regulatory changes in our systems as RBI has recommended. So, that we are in.

Vasudevan P N — Managing Director And Chief Executive Officer

It will lead to the aggressive lending by others and will effect [Indecipherable]

Rohit Gangadhar Phadke — President And Head – Emerging Enterprise Banking And Mortgages

It will lead to aggressive lending by others because the ticket size is more, but I think the market is pretty big enough. We are very clear where we will operate. So, we are aware of the risks that it will cause in the microfinance industry because of some players trying to increase their ticket sizes. So, we will not do that. We will not play that game. We will play a very secure game.

Ankit Biyani — JM Financial — Analyst

Okay, thank you for that.

Operator

Thank you. Next question is from the line of Sarpaksh Shah, Individual Investor. Please go ahead.

Sarpaksh Shah — Individual Investor — Analyst

Yes, good morning, sir. my question is regarding MTM [Phonetic] loss or many banks are facing that. So, can we expect any one-off from the treasury department?

Natarajan Muthusubramanian — Executive Vice President And Head – Treasury

Yes, it is true that most banks have significant MTM losses. But the major shock has happened in the Q1. There is a very sharp and unexpected out-of-cycle policy announcement by RBI. So that was — that has taken market by surprise, and that’s why people who are not well positioned had to suffer MTM losses. As far as Equitas is concerned, we have consciously run a very clean book by the end of last quarter. That is Q4 of last year. So, we built the book post the hikes by the RBI. So, we did not suffer any MTM loss. Of course, there is a very small MTM loss of around INR83 lakhs, given the size of the book, very significant. That’s part of the trading book. So, we do not envisage any — even for the industry, we do not expect similar shocks in Q2 and talking of ESFB, we do not expect any major negative surprises from that trend.

Sarpaksh Shah — Individual Investor — Analyst

Okay, that’s good part from you sir, that’s it from my side.

Operator

Thank you very much. I now hand the conference over to Mr. P. N. Vasudevan for closing comments.

Vasudevan P N — Managing Director And Chief Executive Officer

Yes. Thank you. Thank you for attending the conference. And we hope that the first quarter performance will continue to reflect in the next three quarters and we should look for a very good year as we go by. Thank you so much, and thanks for being with us. Bye.

Operator

[Operator Closing Remarks]