EQUITAS SMALL FINANCE BANK (EQUITASBNK) Q2 FY23 Earnings Concall Transcript

EQUITAS SMALL FINANCE BANK (NSE: EQUITASBNK) Q2 FY23 Earnings Concall dated Nov. 01, 2022

Corporate Participants:

P. N. Vasudevan — Managing Director and Chief Executive Officer

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

Murali Vaidyanathan — Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth

Natrajan M — President and Head Treasury

Rahul Rajagopalan — DVP Strategy & Investor Relations

Dheeraj Mohan — Head Strategy

Sridharan N — Chief Financial Officer

Analysts:

Shreepal Doshi — Equirus Securities — Analyst

Renish — ICICI Securities — Analyst

Savi Jain — 2Point2 Capital Advisors LLP — Analyst

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Ashlesh Sonje — Kotak Securities — Analyst

Nihar Shah — New Mark Capital — Analyst

Sameer Bhise — JM Financial — Analyst

Anand Dama — Emkay Global — Analyst

Abhishek Murarka — HSBC — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Earnings Call of Equitas Small Finance Bank Limited’s financial performance for Q2 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. Natrajan M, President and Head Treasury; Mr. Dheeraj Mohan, Head Strategy; Mr. Rahul Rajagopalan, DVP Strategy and IR; and Ms. Srimathy Raghunathan, CFO, Equitas Holdings Limited. [Operator Instructions]

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

P. N. Vasudevan — Managing Director and Chief Executive Officer

Thank you. Good afternoon to all of you. Hope you all had a great Diwali. There are many macro environmental headwinds in the system. While the India growth story has remained resilient so-far, we need to see how long our domestic consumption factor of our economy is going to help us grow against the global recessionary trends. Banking industries credit growth is almost double of the deposit growth in the last few months. There is hardly any bank, reporting a single-digit credit growth rate. This was putting pressure on liquidity and we already see interest rates in the deposit market harden over the last couple of months.

The credit demand story is quite similar in the informal economy which is where Equitas largely operates. Be it commercial vehicle finance, small business loans or affordable housing finance, we see demand remaining very strong in all these areas. Against this backdrop, we have seen a 20% year-on year growth in advances. The growth is even across all our product lines. On asset quality, we continue to see improvement and our restructured loan behavior has stabilized. The credit cost has normalized to almost INR75 crore quarterly run-rate in the second quarter, and we hope to maintain this for the rest of the year. If all goes to plan, we should contain our credit cost to 1.5% for the full-year as guided in the beginning of the year. On the future front, the banks has a stringent provision policy in-place which we have shared with you in an earlier presentation.

Apart from our credit cost guidance, we had also guided that our loan growth would be about 30% for the year. While we have built a strong foundation in the bank in terms of a well-diversified loan portfolio to deliver a sustainable 30% annual growth. However, for the current year we had a slow start and we believe a 25% loan growth for this year looks more realistic now. The deposit growth has been in-line with asset growth. The Bank’s liquidity position remains comfortable. However, the rise in incremental cost of funds is a concern possibly for the next two quarters, three quarters.

Our retail deposit growth continues to strengthen and as credit growth picks up, we will tap into bulk deposits and wholesale funding options as required. Murali and Natrajan, will walk you through this in more detail. This year we have been working tirelessly and upgrading our technology backbone for the asset businesses. As you know, we are very strong in digitally on our liabilities business, in fact already nearly about 9% of our savings balances come from accounts which are forced to digitally. This year our focus has been to try and improve our technology backbone for the asset business.

Three loan origination systems are being worked upon, out of which one has gone live. This should help improve productivity and reduce disbursement turn run times. Apart from this, we are also in the process of building a customer app for our borrowers to help improve their overall experience in the bank. Some of the other large technology introductions being planned or a state-of-the art CRM platform for which we have signed-up with Microsoft. Our future energy [Phonetic] super app structure to-be-built on native platform for mobile banking applications and various other smaller projects will help us scale-up digitally. On the amalgamation of holding company the bank we are on-track against the earlier estimate of completing these by the financial year end, we may be able to complete it a couple of months earlier, and we will be happy to welcome shareholders to the holding company to the bank.

To conclude, we have created a bank with a very well-diversified retail loan product mix, strong granular liability franchise, putting the ability to put digital to work and a high-quality management team. We believe that these are the foundation stones required for building a very strong stable, sustainable and scalable differentiated banking franchise in the country and take us closer to our long-term vision of creating consistent returns for all our stakeholders.

Thanking you once again, and now I’m handing it over to Rohit.

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

Thank you, Vasudev, and good evening, friends. The last quarter advances grew by 20% year-on year, and 5% quarter-on-quarter. Disbursements grew by 22% year-on year, and 19% quarter-on-quarter. We see strong demand for credit across segments. Collection efficiency in every business has shown a marked improvement. Expected collection efficiency was 99.3% in small business loans, 97% in-vehicle finance, and 98.9% in micro finance. The one to 90 bucket has come down to 8.9% in September from 10.3% in June.

In small business loans, our focus is on increasing the volume of non-Tamilnadu business. A digital loan origination system has been piloted in five branches and we intend to take this across the country in the coming months. Vehicle finance has shown strong growth riding on the back of increased CV sales. Used-car was a new product that we launched a year-and-a-half back, and it is already clocking about 50 crores in disbursement month-on month. We intend to scale-up the volumes induced us.

The micro finance portfolio has shown strong recovery, the one to 90 DPD bucket has come down to 5.8% from 8.5% in June. The overdue has come down from 13.2% to 10.9% in micro finance. Advances have de-grown in the micro finance book by 9% year-on year and we intend to grow the book this quarter. Affordable home loan disbursements have increased to about INR100 crores a month, and the scale-up for this business is progressing as per plan. Last quarter has seen good growth across various retail segments.

CVs have grown by 19% year-on year across all categories, passenger vehicles by 10% and even two-wheelers have grown by 9% year-on-year. The data from CIBIL show the strong demand for credit in small business loans. As per the ICRA report, affordable housing finance has grown by 22% year-on year. In micro finance, the gross loan portfolio has grown by 24% year-on-year, INR2.93 lakh crores. Overall, all segments at the screen were [Phonetic] strong demand for credit and we feel that this will continue in the coming quarters, which will help in achieving a 25% growth and annualized credit cost of 1.5%.

Thank you. I’m handing over the mic to Murali.

Murali Vaidyanathan — Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth

Thanks, Rohit. Good evening, friends. Just to continue where we left the last time, we were speaking about the segments, products, markets and most important their relationship management on the digital side. And on the digital side, we were talking about acquisition and digitally-enabled solutions, what they are doing. So let me give you some brief insights on to that. So on the growth side, I think we are seeing fundamental shift of three segments; mass segment, which we acquired to digital is growing their balances and booking a small retail TD, so which means there is a duration of customer enhanced at the March level itself. So digital is actually helping us to cross-sell TD of smaller tickets, which earlier never used to happen, so this is one fundamental shift and it’s good, timing-wise, the rate-wise it makes up. I think very attractive.

Second proposition what we do it through our relationship management, we have virtual relationship managers as well as physical relationship managers at the branches. So virtual relationship management today has crossed one lakh customers and that portfolio is growing healthy and we are seeing many of the customers have migrated up towards the program as well as the relationship management team. And this plus relationship management team put together is showing us a growth of 25% to 30% on the portfolio and for the first time LE tower [Phonetic], the premium program today crossed 20 — close to 20,000 families, 40,000 customers and 10,000 crores of book size. I think this is one of the very first, I think in this space to have happened and we are very proud of that. This shows up program proposition, relationship management and the customer lifecycle management which we are doing.

And our continued — focused on individual sourced savings account is one of the key thing. Today, we have close to, 87%, 88% of the savings account customers who are individuals. I think this is one secondary thing, which is actually priming up the product holding as well as product proposition towards better penetration at a family level. And extension of this is we are actually sourced close to 1,200 corporates, which means corporate sale [Phonetic] segment that’s the one which we created sometime back is now getting in a enough pull factor. And all these three things actually help us to actually get the customer proposition and relationship management, right.

NR is another segment, which is showing good growth. We should have grown 40% to 50%, but the good part is post the new scheme, which is announced by RBI, we could leverage that and we could see that deposit mobilized through that actually helping us. And we are now present in almost, we have customers from 20 different countries is one good unique point.

Now on the digital side, earlier we used to talk about number of accounts sourced. Today, thanks to our VKYC and end-to-end fulfillment team, which we have created. Today, we have on a month-on month sourcing we could do at least 40% of the customer VKYC of the same month and the book is inching up towards 1,000 crores, which is a very healthy sign for two reasons; one is the demography of the customers what we get through B2C our own product, and B2B2C through our fintech partners, both are showing that equal trajectory of demography, March — coming in. And then second important part is product proposition is getting sold.

And last quarter we did launch our three-in-one with HDFC Securities. It’s a encouraging sign. And expansion into broking account has actually facilitated opening close to 50,000 accounts in this period. And importantly all our new propositions acceptance is good. Expansion of this, we have our prepaid running very good through our fintech partners, micro ATM, and as well as issuance business which is showing an encouraging sign.

Last but not the least, our TPP penetration, our insurance fee-based revenue and mutual fund fee-based revenue again it’s showing a good trajectory. This shows our customers are not only saving centric. They expand the horizon towards investment. And they also are keen in trading. So I think this trajectory of cross-sell is really helping us. And with regard to fundamental shift, I think as we move on, we will have people getting into more-and-more RTD and BTD in coming days and more on this subject we’ll take it later.

Let me pass it onto Nat to give us some treasury views and market update.

Natrajan M — President and Head Treasury

Hi. Good evening, friends. Globally, the central banks are facing a deadlock within high inflation low-growth in some cases there are even threads of precession [Phonetic]. Central banks have been hiking rates across the globe at each meeting to tame inflation, which is well-above target level in respective countries. The upcoming FO [Phonetic], which is going to happen in a couple of days. The market is expecting another rate hike of 75 basis points to control inflation taking the fed fund rates, the new range of 3.75% to 4%. And market is also edgy looking for a fed guidance for further action.

Our near home, China is also having a low-growth, coupled with lockdown to contain renewed concern about COVID cases. So all it points out is on the commodity side it has a repercussion. Commodity prices are under pressure, mainly on account of recession fears and lower demand. Russia and Ukraine war has rattled the global supply-chain, so realignment of supply chain will take a while to meet global demand. So the outlook for global economy has also mentioned is somewhat bleak.

Near our [Phonetic] home domestic economy, India is likely to grow in the range of 6.7% to 6.9% in the current fiscal, well below RBI growth projection of 7.2%. And our inflation print is at — the latest print is at 7.4% in September. Again, well above RBI tolerance level of 6%. So while India has far better than the relative sense, inflation continues to be sticky, which entail that RBI will be forced to hike rates. Banking system deposits grew by 9.6 year-on year, and credit growth was up 17.9. As also mentioned, it is almost double. So system liquidity is just about adequate on the back of high credit demand across sectors.

GST collections have been robust. FX reserves, there is a depletion by close to 112 billion [Phonetic], RBI have been pulling down from just of 640 billion [Phonetic], mainly to control volatility in rupee. Rupee depreciation is an area of concern for India due to higher CAD and higher FII outflow, but that’s how the global economy functions and as long as we have sufficient reserves which RBI uses [Indecipherable], it should be, okay. In the upcoming MPC meeting, we do expect RBI to [Indecipherable] the another 25 basis points to 35 basis points, the counter inflation and the rupee depreciation.

And coming to treasury performance for Equitas in Q2, it was another quarter of stable performance by Treasury. We kept our — yields inching up, we continue to keep the low duration in our investment portfolio for us to reduce the impact of adverse MTM. Then yields slightly utilize the opportunity to add to HTM portfolio, RBI has made some room available to fill for all banks, so we use that opportunity to fill HTM portfolio to some extent. Also IDO [Phonetic] markets provided some opportunities to augment our income during the quarter. On wholesale funding, they do have sufficient loan assets to generate liquidity by way of both refinance from term lending institutions, as well as IBPC. [Indecipherable] ran through.

Rahul Rajagopalan — DVP Strategy & Investor Relations

Thank you, Natrajan. Good afternoon to everyone. Our net interest income came at INR610 crores as compared to INR484 crores during the same quarter last year, registering a growth of 26% Y-on-Y. Other income came at INR115 crores as compared to INR106 crores in the same quarter last year growth of 8% Y-on-Y. Net income grew 23% Y-on-Y and came at INR725 crores for the quarter as compared to INR590 crores during the same quarter last year.

Coming to opex, the total operating expenditure came at INR483 crores as compared to INR399 crores during the same quarter previous year. On a sequential basis, opex increased by 9%, adjusting for one-off in the previous quarter. This was largely driven by employee cost due employee addition, increases related to business cost like increase commission and brokerage, higher branding and technical expense. Going forward, we expect our cost-to-income ratio should be in the range of 60% to 63% in the medium-term.

Pre-provisioning operating profit, PPoP came at INR242 crores as compared to INR199 crores during the same quarter previous year, registering a growth of 22% Y-on-Y. PPoP as a percentage of assets expanded Y-on-Y to, 3.33% from 3.14%. Profit-after-tax for the quarter came at INR116 crores, as against INR41 crores during the same period last year.

Now moving on to asset quality, provisions and restructuring. The outstanding restructured pool, stands at INR986 crores. Segment-wise breakup of restructuring has been provided in the presentation. The bank carries a total provision of INR611 crores, which includes NPA provision for INR439 crores, provision on restructured standard assets of INR95 crores, provision on standard assets of INR68 crores, an additional provision on standard assets for INR9 crores.

The GNPA including IBPC sold came at 3.82% in Q2 FY’23, as compared to 3.95% in Q1 FY’23 and 4.64% in Q2 FY’22. NNPA came at 1.93% in Q2 FY’23, as compared to 2.07% in Q1 FY’23 and 2.37% in Q2 FY’22. Slippages for the quarter was at INR314 crores and slippages in Q2 FY’23 were relatively higher because we have stopped meeting intra month slippages and upgradations and on a like-to-like basis the slippages for Q1 FY’23 would have been at INR338 crores. Annualized credit cost at 1.62%, excluding the one-time impact, it is at 1.35%. The provision coverage ratio stands at 50.49%. As of September 30, 2022, the total CRAR is at 23.08%, where the Tier I at 22.55%, and Tier II at 0.53%.

With this, I would like to hand over the mic to Operator, and we’ll be happy to take questions from your end. Thank you.

Questions and Answers:

Operator

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

Shreepal Doshi — Equirus Securities — Analyst

Hello, sir. Thank you, and good evening. And thank you for giving me the opportunity, sir. My first question was with respect to the employee cost. So if, you look at even after adjusting for the reversals that we had done during the last quarter, which was I suppose close to 30 per. Their growth on employee cost has been much higher on a sequential basis. I suppose we’ve hired 1,000 employees during the quarter. So wanted to understand that what functions have these employees been hired? And also what would be the — do we expect any moderation in the run-rate on the employee cost?

Dheeraj Mohan — Head Strategy

Hi, Shreepal, Dheeraj here. So I take the second part first. So, what we envisaged for the year is to have the employee expense grow about 18%. So we are currently at that run-rate in the first-half. And as you know large part of the employee expense gets incurred in the first-half because one there’s wage revision, which happens in Q1 and Q2. And also, a lot of people get added for meeting current year’s targets. So we don’t expect employee cost to grow the same speed in which it has grown in this current year, but maintain the current annualized growth rate of about 18-odd percent.

Functions in which we have recruited broadly we have recruited across-the-board — [Speech Overlap]. Yeah, so just to give a breakup of the 1,000 people. Yeah, so on the branch banking of the franchise, which comes under, Murali, it’s about 280-odd people and the remaining is largely spread across assets and we’ll have about 100-odd people in the support staff [Phonetic]. So they largely sales, so they are again front-end branch teams only, where we have recruited.

So the breakup of 1,000 nutshell is largely on the field side, it should start translating in disbursements. So if you see vehicle finance for example where we’ve added about 200 people, 300 people you will start seeing disbursements pickup same with housing which we have told, I think in the first quarter you’ve seen some of those movements happening and again 200 odd people in the liability side. That’s how the…

Shreepal Doshi — Equirus Securities — Analyst

[Speech Overlap] business side is value added, not on the collection side broadly?

Dheeraj Mohan — Head Strategy

No, collections is broadly what we did last year so that team will remain stable and only replacement will happen there. The addition of 1,000 is not likely towards collection. Plus collection pressure as you see in the numbers have started to come down and we are now broadly close to normal. So largely replacement is happening there.

Shreepal Doshi — Equirus Securities — Analyst

The second question was on the restructured book, so while that book has been coming off, I just wanted to understand from the, 1,700 — of 1,700 crore of restructured gross book that we originally had now that has come down to close to, 990 crore. So how much of that has been sort of written-off, and what would be the standard restructured book — what would be the like — what would be the repayments that would have got closed like of these cases?

Dheeraj Mohan — Head Strategy

Yeah, one second. So the — this financial year we’ve had a write-off about INR163 crores, large financial year, just give us one second. Yeah, so roughly is about INR250 crores is what we have done total write-off and the remaining is rundown. So 1,000 plus 250, and the balance would have been render [Phonetic] from the book.

Shreepal Doshi — Equirus Securities — Analyst

Alright, Alright. And we already have 250 crores of NPA from the 990 crores of restructured book, which is outstanding.

Dheeraj Mohan — Head Strategy

Correct. Yes, correct.

Shreepal Doshi — Equirus Securities — Analyst

Okay. And any like color if you could give how much more could slip to NPA from the standard restructured book that we have? And also one last question was that with respect to slippages, that we have had during the quarter, what would be from the restructured pool, and what would be the nature of it as in what book would it have come from?

Dheeraj Mohan — Head Strategy

Roughly about 100 crores of gross slippages is from the restructured book.

Shreepal Doshi — Equirus Securities — Analyst

Okay. So from the 314 crore, 100 crore is from the restructure book?

Dheeraj Mohan — Head Strategy

Correct, correct.

Shreepal Doshi — Equirus Securities — Analyst

All right.

Dheeraj Mohan — Head Strategy

And how much of the likely — Rohit –?

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

So, if you look at the restructured book, most of the book is — hello, if you look at you know the current, last time also we had said that, actually we should not differentiate now between the restructured and the normal book, because most of it — most of the restructured book is behaving now like a normal book. So we don’t see many much flows now into NPA, and that is the reason why we are saying that an annualized credit cost of 1.5% is possible. Going forward, you will find the credit cost coming down quarter-after-quarter.

Shreepal Doshi — Equirus Securities — Analyst

All right, sir. All right. Got it, sir. Thank you so much. I’ll come in the queue for more questions. Thank you and good luck for the next quarter.

Operator

Thank you. We have our next question from the line of Renish from ICICI. Please go ahead.

Renish — ICICI Securities — Analyst

Yeah, hi. So just one question on the growth. Okay, sir last quarter you were guiding at 30%, and when we look at the disbursement growth of 19% sequentially, plus when we look at the employee addition of 1,000 people of that around 800 is towards sales. And in your opening remarks also, you did mention about the U.K. [Phonetic] demand remaining stronger begun level. So what is leading to cutting down growth aspiration for this year?

Dheeraj Mohan — Head Strategy

Yeah. I think we’ve been in each business we’ve been planning some fundamental changes in the sense of how we operate. For instance in the small business loan, we want to see our volumes is outside Tamil Nadu growth and you know we’ve been adding manpower and beefing our organization structures there. So we feel that there is some delay in our execution. We needed to be meaning we don’t want to promise and not delivered that. So that is why we are saying that we will be comfortable with that 25% growth. Similarly in vehicle finance, you’ve gone across the country now. Vehicle finance is started one-year back and we’ve now across the country throughout. So there we are seeing better growth. Similarly, we want to do that in small business loans and small business loans and 38% of the book a larger portfolio, so that is what we expect and that is why we have been conservative and giving you a 25% estimate.

Renish — ICICI Securities — Analyst

Okay. So maybe in some pockets we are calibrating the growth to realign deposits or to make underwriting better, is that the correct way to look at it?

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

I think the way to look at it is you know in some pockets we want to increase growth and those pockets are outside Tamil Nadu and we are building a structure to ensure that our non-Tamil Nadu volumes grow up. So I don’t think we are calibrating volumes in any pace, because now I think the market is looking up, the credit demand is good and cash flows with customers have also improved. So this is the time I think to really gung-ho or rather they know. Our general cautiousness regarding credit appraisals do [Phonetic], so we’re not been away with that, so that is what it is.

Renish — ICICI Securities — Analyst

Got it. Got it. Rohit, so my next question is to Murali. On the deposit side, we look at the share of retail TD, sort of fell from a peak of 80% to 68% now. And despite the system at large is still not that aggressive on the deposit side. So when the degradation comes from the larger tiers, how are we going to maintain the retail TD base and grow the balance sheet?

Murali Vaidyanathan — Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth

See, in this growth of what you’re seeing as 1 crore to 10 crores, see ideally it should have been 2 crores to 10 crores that would have reduced the price, okay, up to 2 crores is retail. And what we have done in terms of present tweaking is, if you see the earlier part of the savings account up to 2 crores, we used to pay 7% on savings account. Say, person after crossing the 2 crore will automatically move into TD.

So they were set of people who are holding up to 2 crore in savings account and they continue to hold at this point of time. So this 23% assuming you’re moving towards 2 crore to 10 crore, it will look like more like 15%, 16%. So this is predominantly HNI segment and as I said where we have gone aggressive and opened investment account for three-in-one. We are getting those traders account also coming. So you’ll have a blip on 2 crore to 5 crore savings account growing and RTD coming down to that proportion.

But on a book level, as I said 88%, 89% of mid-sized individual. Today, on RTD same 80% to 85% is individuals as well as individual plus family and proprietorship plus individual. This is how the structure is built. So this categorization is done just to make you understand the bucket level. So if you covered this 1 crore to 10 crore, as 2 crore to 10 crore as a bucket you will actually have 67 plus 5, 72, plus another 10, same 80% levels of retail people who are holding it.

Now coming to your second question when everybody is even, how are you going to grow it, we have a substantial amount of customers now at this point of time, unlike, two years back. So the only option is cross-sell and enhanced duration and that work has started and to complement that we have relationship management structure at every possible end.

Renish — ICICI Securities — Analyst

Okay. Got it. Okay, sir. Thank you.

Murali Vaidyanathan — Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth

Thank you.

Operator

Thank you. We have our next question from the line of Savi Jain from 2Point2 Capital Advisors LLP. Please go ahead.

Savi Jain — 2Point2 Capital Advisors LLP — Analyst

Yeah, hi. Just on the cost side, you have given a guidance of 18% on employee incentives [Phonetic], and what is the guidance on the other expenses?

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

So other expenses should be close to about 25% on — and on an overall opex net of digital, we should be between the range of 20% to 23% for the year.

Savi Jain — 2Point2 Capital Advisors LLP — Analyst

So this cost-to-income guidance that, I think one of your colleague gave 60% to 63%. That is like — what do you mean by medium term, is that likely to be achieved here?

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

Yeah, we should see this by in the year. So if you have a cost-to-income of close to 63%, it would then translate to an opex of, of 20% to 23%. So we should see that for the year.

Savi Jain — 2Point2 Capital Advisors LLP — Analyst

For the full-year.

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

Correct, correct.

Savi Jain — 2Point2 Capital Advisors LLP — Analyst

Okay. And just employee addition, there were 20 crores Q-o-Q, increase in employee costs. Now, if 1,000 employees, would have received only maybe half of the quarter salary. So I don’t know how — this should increase further right next quarter?

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

Yeah. So the employee jumped our cost — employee cost jump in the first two quarters would be largely because of incentives being paid out and a large part is due to recruitment for the year. And going — and so you’ll have that wage revision also which will happen. In the next two quarters, you’ll typically not see this run rate of employee cost growing.

Savi Jain — 2Point2 Capital Advisors LLP — Analyst

No, no. What I’m saying is that, just a 1,000 employee that you added in this quarter, they would have received only on an average half of the quarter salary. And —

Murali Vaidyanathan — Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth

Sir, I understood the question. See, while they would have received half the salary, there are two things which we do. One is planning at the time of resignation. So there’ll be a overlap of 40,000 of the employees who stay and handover also. So these are all portfolios need to be handed over, right. So there will be at this point of time put together they would have consumed four months or five months of salary. It is not exactly, six months. I assume you visualize the branch, there is a item [Phonetic] we decided to put on his paper then you recruit a person, this person has to handover in next 45 days, so technically 45 plus 45, which otherwise I would have paid only 45, 90 days happened. So this overlap is what is taken as partly through this drive balance like real-estate this is a quarter where we had all our incentives, statutory bonuses and everything paid out.

Savi Jain — 2Point2 Capital Advisors LLP — Analyst

So there is a decline in employee next quarter because there is an overlap this quarter, is that what you’re saying?

Murali Vaidyanathan — Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth

Yes, yes. And normally what happens if you see attrition also peaks in this industry post the appraisal first quarter, because many people start shifting and then there is a overlap that happens. And these are front-end roles, it is not like, we have created [Indecipherable] management or anything.

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

Hold-on, hold-on, this is actually here. See, basically the employee cost in the first quarter will always shoot up because we give the increment in the first quarter for the full-year. So always April salary will be higher than the March salary by approximately 10%. And that will remain kind of steady over the rest of the year. As far as new employees were recruited in the second quarter, so if you see the number of employees has gone up, almost about 1,000 in the second quarter. You are right, that they will obviously come for a full quarter salary in the third quarter and to that extent we should see an increase in the salary cost of the third quarter compared to the second quarter. But how much will be that increase because it’s 1,000 employees part salary increase on a base of about 18,000, 19,000 employees.

So it is not a significant change that you should be seeing. And there will be further recruitments in the third quarter and fourth quarter also, as we build for growth and build for the next year, because third quarter we’ll still be building for growth for this year, and in the fourth quarter we’ll be starting to add people for the next year. So there will be a certain number of employee growth again coming by and large as Dheeraj explained, almost 95% of the new recruitments are all at the field level. There’ll be hardly 5% staff who are really recruited at the head office level in functions like risk [Phonetic] or IT and other functions. So it’s almost largely on sales. This year the recruitments are almost largely on the sales be it liability sales or asset sales.

Collections as Dheeraj mentioned, is kind of steady now, so the number of people getting added on collections is not going up much. So that’s the picture. I think you should see more employees coming in, in the third quarter and fourth quarter. And to that extent if the employee costs should go up, but how much it’ll go up and all that, you know it’s not that — it should not go up very sharply, because you’re talking off a base already of 19,000 employees drawing certain level of salaries, an addition of maybe no 500, 2,000 people, that’ll be the incremental change in cost that you should be seeing going forward.

Savi Jain — 2Point2 Capital Advisors LLP — Analyst

So I think what’s been basically happen is that, we — while the growth guidance has come down, the opex guidance has gone up, so will we be able to achieve this 2% RoA exit that we had earlier [Indecipherable].

Dheeraj Mohan — Head Strategy

We have not been guiding on the RoA at all. So I don’t think we will start guiding on that just now either. But yes, as a model, we have always been saying that Equitas model is something which should be geared for a 2% RoA, feeling that there are no heavy headwinds from the market. And we did reach that position, I mean during the demon, if you remember 2017, ’18, we did go down significantly because of demons impact on micro finance, but once that effect started bearing out, then the third quarter of 2019, ’20, we are already over the 2% RoA level. December 2019 if you see, our RoA would be over 2%. But then again the corona came and it has had a tail headwind as strict on the portfolio of the bank, but with things settling down now, yes as a model definitely, I think that’s what we are geared for.

Operator

Mr. Jain, does that answer your question.

Savi Jain — 2Point2 Capital Advisors LLP — Analyst

Yeah, thank you.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Jai Mundhra from Batlivala & Karani Securities India Private Limited. Please go ahead.

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Yeah. Hi, sir. Good afternoon, and thanks for the opportunity. Sir, if you can talk about the slippages change that has happened in the quarter on monthly netting off. Because my understanding was that RBI has asked this change many quarters ago. And most of the banks would have already implemented. So you know, what was done in this quarter, particularly on this slippages netting off?

P. N. Vasudevan — Managing Director and Chief Executive Officer

See, basically, till last quarter, we were — whatever NPA comes up on a daily basis, they get recognized as an NPA at the end of each day in the system. And then during the month if they get upgraded as to as standard, then at the end of the month, they were being netted off, the gross slippage and upgrades were being netted off till last quarter because our system capability was not there, know, that has been built up.

And so from the second quarter what we’re doing is when an account goes into NPA on a daily basis within the month also, the gross slippage gets added up, and if they get upgraded during the month, the upgrade, it also gets recognized. So if we had done it on the same basis as the first quarter, then against INR296 crores of gross slippage in the first quarter, the equivalent number would have been around INR235 crores or INR236 crores for the second quarter.

And in the second quarter, if you see the numbers we have put out now under the new method is INR314 crores, but again the upgrade also, you see there’s a sharp uptick in the upgrade to INR136 crores from about INR51 crores basically because those are upgrades which happened within that month itself. So your — answer to your question is on a like-to-like basis, the slippage would have been around INR235 crores, INR236 crores.

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Right, understood, sir. No — and is there any more changes, sir, or you are now fully compliant on RBI daily NPA or this is across all product and for overall bank, right, so no more changes on this front?

P. N. Vasudevan — Managing Director and Chief Executive Officer

Yeah, see our daily NPA, there’s no change at all. I mean we went on a daily NPA recognition more, I think more than three years or four years back, long time back, I’m not able to recollect. Three years, four years back, we had gone live on a daily NPA basis. So that went live long, long time back. This — and which means that recognizing an NPA, upgrading an NPA and provisioning under the IRAC norms, all that we went live on a daily basis quite some time back, three years, four years back. This one is only the gross slippage method of calculating gross slippage which we have now upgraded through our system improvement on a daily basis, but as you know, this does not have any effect on provisions at all.

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Right, right, understood. And second question is, sir, on tying up between slippages and credit cost. So if I see slippages outside restructuring book, right, if I remove INR100 crores from this, INR300-odd crores of gross slippages, let’s, say, INR200 crores as normalized slippages outside restructuring book. And against that, you’re saying INR75 crores of provisioning. I mean both these numbers, is that the right understanding, and how would you tie that up that INR200 crores on a growing book, maybe INR200 crores plus and then INR75 crores of credit cost?

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

Yeah. So this INR75 crores of credit cost is removing the INR15 crores additionally we had to make in Q2 because of that RBI FAQ. So if that FAQ had not come out, we would not have to make that INR15 crores additional provision. So the INR75 crores includes the restructured provision, all the slippages from the restructured and non-restructured book.

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Right. And you think that outside after this one-off INR15 crores, this is the — you have already achieved, let’s say, the steady state or the normalized level of credit cost?

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

Correct. Yeah.

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Right. And what was this FAQ, sir? I went through that, but there was — if you can exactly say that what was this that changed the provisioning requirement?

Sridharan N — Chief Financial Officer

This is Sridharan here. The FAQ had two impacts. One is that the residual debt exposure has been defined in good borrower level, not at the loan level. And the second thing is that the additional or whatever the standards provision, which we have been providing on round-down basis, it has been kept at original level, that’s the two FAQ issued in August ’22.

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Sure. Understood. And the next question is to Murali, sir. So if I look at the cost of deposits, right, now there is a very small difference between the cost of SA and your cost of TD, very small difference between the two. And there is a dip or is a very flattish SA balances in this quarter. So how should one look at the cost of SA and cost of TD from going ahead perspective? And do you think that this very miniscule difference between SA cost and TD cost, I mean how would this play out?

Murali Vaidyanathan — Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth

See, SA is a layer product, correct. Let’s take the structure, INR0 [Phonetic] to INR1 lakh, that is INR1 to INR1 lakh, you get 3.5%, INR1 lakh to INR5 lakh, you get 5%, and then INR5 lakhs to INR5 crore, you get 7%. Let’s assume these are the three buckets. On contract to TD, what happens, every first rupee what you get in is blocked at the same contract rate.

So how we used to manage cost of funds is we’ll see how do you expand the entry-level bucket that is INR0 [Phonetic] to INR1 lakh from point A to point B. So this year the important thing that has happened is the trajectory has moved up between INR0 [Phonetic] to INR1 lakh bucket, INR1 lakh to INR5 lakh bucket and then INR5 lakh to INR2 crore bucket is the third. In that sequence only it has grown.

Now the differential between INR5 lakhs to INR2 crore bucket and TD is minimal, whereas in both the other buckets it is maximum. So that’s why I said in my initial call itself, there will be a tendency for people to keep at the INR0 [Phonetic] to INR1 lakh bucket keeping only two months or one and a half months salary and backing, moving into our TD so is the next bucket. So we are seeing — rather than seeing it as SA or TD at this point of time, are you locking a customer for a duration and penetrating more is more important opportunity than anything else.

So as we go forward, anything between INR1 to INR5 lakh bucket is far more conducive because the temptation for the consumer as well as the bank to move into TD is high. And this will continue to play out this way at least for next two quarters, three quarters since the interest rates are going up. At one point of time, I’m sure RTD will — see, for example, senior citizen is at 8% today. So there is no reason for that person to keep money at 5%, even if he has INR5 lakhs.

So I think these are the flexibilities and the arbitrage market offers to the consumer. And till the point of time you’re growing consumer and getting consumer and enhancing the relationship value, it’s all the same. It will have a cost of fund impact maybe for the short-term, but over a period of time it evens out.

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Right. And any comment on the flattish SA balances this quarter?

Murali Vaidyanathan — Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth

No, actually people have moved it into RTD, one. Second thing we have actually let gone INR500 crores worth of savings account, which were not LCR-friendly for us. So there is a specific regulation which we have internally based on our own appetite. And, see, it is very complicated equation, individuals are different from institutions are different from financial institutions. So we let go few of the savings account conscious. So INR500 crores of SA, which were not LCR-friendly, we allowed it to let go.

And this in the last meeting itself, we have discussed this. Finally the money has to be deployed right, it’s not only for top-line. So there are a set of customers where if you keep the money with you, 100% needs to be kept as a reserve ratio. So we exited those sort of relationship, and few of them has come back as BTD also, non-callable. So it made more eco-friendly deposits for us.

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Right. And last question, sir, this…

Operator

Mr. Mundhra, I request you to come back in the queue.

Jai Mundhra — Batlivala & Karani Securities India Private Limited — Analyst

Sure. Thank you so much.

Operator

Ladies and gentlemen in order to ensure the management is able to answer all queries, kindly restrict your questions to two. We have a next question from the line of Ashlesh Sonje from Kotak Securities. Please go ahead.

Ashlesh Sonje — Kotak Securities — Analyst

Hello, hi, sir. I hope you can hear me.

Operator

I’m sorry we’re not able to hear you.

Ashlesh Sonje — Kotak Securities — Analyst

Hi, can you hear me now? Is this better?

Operator

Little better. Please go ahead.

Ashlesh Sonje — Kotak Securities — Analyst

Yeah. Sir, first question is on the restructured book. So if I look specifically at the vehicle finance book, about 6% of that book is still restructured, plus there is an improvement because 8% of that book was restructured as of last quarter. So how are you looking at the delinquency performance of this book now? And along with that if you can give the 31 DPD to 90 DPD book in the — in your key segments, MFI, Vehicle Finance and SBL?

P. N. Vasudevan — Managing Director and Chief Executive Officer

See, the breakup of the restructured is given in the presentation itself, right?

Ashlesh Sonje — Kotak Securities — Analyst

Sorry. I meant non-restructured, non-NPA, 31 DPD to 90 DPD, if you can give that as well?

P. N. Vasudevan — Managing Director and Chief Executive Officer

We won’t share that segment.

Ashlesh Sonje — Kotak Securities — Analyst

Okay, sure.

P. N. Vasudevan — Managing Director and Chief Executive Officer

Yeah. So I can give the overall book.

Ashlesh Sonje — Kotak Securities — Analyst

Yeah. I think we have that in the presentation at about 3.4% [Phonetic]…

P. N. Vasudevan — Managing Director and Chief Executive Officer

That is the restructured book. I can give you the overall…

Rohit Gangadhar Phadke — President and Head, Emerging Enterprise Banking & Mortgages

Overall, 3.5% is our non-restructured 31 DPD to 90 DPD fold.

P. N. Vasudevan — Managing Director and Chief Executive Officer

Yeah. So overall — if you want the overall OD book, in 1 DPD to 30 DPD bucket, we have 4.25%, in 31 DPD to 60 DPD, we have 2.97%, in 60 DPD to 90 DPD, 1.7%, in 1 DPD to 90 DPD, 8.9%. And in 90 DPD plus, we have 3.92%. This is the overall OD book.

Ashlesh Sonje — Kotak Securities — Analyst

Okay, fine. Sir, and the other question on the delinquency performance of your…

Operator

I’m sorry, we are not able to hear you.

Ashlesh Sonje — Kotak Securities — Analyst

Yeah, sir, the other question on the delinquency performance of your restructured vehicle finance book, which is…

P. N. Vasudevan — Managing Director and Chief Executive Officer

Yes. So to give you a flavor you know, see what is happening in the market is that you realize freight rates have gone up, our market availability is there and the operators are also able to pass on the increasing costs through higher freight rates because of the loan availability. So because of this the cash flows of operators have inched.

When we look at our loss on sale, we realize that in quarter four, it was 46%, in quarter one, it came down to 38%, and in the last quarter, it has further come down to 36%. And going forward, my expectation is that the loss on sale will come down to about 30%, 35% [Phonetic]. So if you take in both the consideration that the cash flows are improving, markets are improving, as well as the resale prices of vehicles are improving and the — because of which the loss on sale is improving, the delinquencies in the vehicle finance book will improve. So the restructured book will not have such a great impact as it has had in the past.

Ashlesh Sonje — Kotak Securities — Analyst

Okay, thank you, sir. And just lastly if you can qualitatively talk about the liabilities side, the deposit side, what is the — if you’re seeing any pressures on deposits running off and any increased effort that needs to be put to acquire new deposits given the increased competition in the market?

Murali Vaidyanathan — Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth

Yeah, Murali here. I think there is no running off and all. Is there a shift from savings account to time deposit happening, yes. Are we acquiring enough customers in the market, yes. Are we able to penetrate them through all the other peripheral product, yes. So the only fundamental shift is the idle money is getting into time deposit, in fact our front-end RMs are encouraged to do that because that’s a right thing for us to do for the customers.

We believe on our core valued customer first. I think there is no point in allowing money also to idle beyond a point while it might sound very odd but that’s the reality. So if you see any customer having above certain threshold, our RMs meet them and move them into the relevant bucket, get the duration and this is how we build trust, right. So I don’t see any money running off. We are not seeing other than the set of customer which I told in the last question also where they were LCR unfriendly, we went to those consumers and converted few into the bulk TD and few allowed them to go because it was not suiting our pattern of banking.

Otherwise we — at the retail level, we continue to get the support of senior citizens, we are continuing to get the — 52% of our book is employed professional, as I said, 1,200 corporates have already opened accounts, NRAs are supporting. Is there a shift happening between the pockets, yes, from SA to TD, and we are very open towards that.

Operator

Thank you, sir. We have a next question from the line of Nihar Shah from New Mark Capital. Please go ahead.

Nihar Shah — New Mark Capital — Analyst

Hi, good afternoon to everyone. I’m just going to ask a question again on the cost-to-income ratio. We have over time sort of talked about operating leverage and maybe getting to 55%, somewhere in the mid 50% cost-to-income ratio on a steady state basis. Now this 65%, 66% has been pretty sticky over the last three years, four years, some of it might be related to COVID slowdown and other factors.

But this year as well you’re going to — you probably look like you end up somewhere in the mid-60s just like last year. Is this — is there any change to your thought process on how you think about a steady state cost-to-income for your model? And what is driving this level of stickiness in our cost-to-income?

Sridharan N — Chief Financial Officer

Yeah. So I think we have explained earlier also that Equitas model is basically a fixed cost model. And we have — I don’t think we have too much of our cost on a variable basis. So we don’t have, for example, an off-roles team, everybody is on-roles. And we don’t outsource our collections, everything, collections are all done by the bank staff, and we also do not source through DSAs, practically our DSAs sourcing, I mean, it will be extremely small.

We source directly through our own teams. Of course, we generate leads from new commercial vehicle dealers, that’s for the new commercial, but most of the other businesses, sourcings are done directly. So you see that we have explained this in the past also that our model is basically a fixed cost model lastly, and so the cost gets incurred whatever happens on the business side.

So when the — when there’s a robust growth in business, you would see our cost-to-income coming down. But if at some point the growth is not there because of whatever reason, then the cost-to-income is bound to see an uptick and that’s what we’re seeing currently. The cost-to-income did go down in my memory the lowest that we went down towards 56%. Again, it was pre-COVID quarter, it went down to 56% or 56.5%, because that’s the time when after the demon impacted worn off and before Corona was visible in the market, we actually had — we are back to our normal growth rate levels of 30% plus.

And so our cost-to-income actually went down to nearly that 56%-odd. But after that what has happened is our growth has come down. The two years of Corona, 2020-2021 and 2021-2022, our growth rate was only about 15% per annum. And the cost doesn’t go down but the growth rate goes down to as low as, say, 15%, then the cost-to-income stats showing the effect. It’s not just cost-to-income but also other ratios like cost to advances, etc., all of that will show a similar trend.

So why — while we would say that 55% to 57% cost-to-income is a reasonable expectation to have for Equitas, but that presupposes consistent growth of about 30% on a quarter-on — I mean, year-on year basis. And if at anytime you see the rate of growth coming down less than that, then you are bound to see the cost-to-income going up, which is where we are today.

So this year we might end up with about as we mentioned earlier, 25% plus growth rate, which means that our cost-to-income, we don’t expect it to go down into the mid-50s or slightly over the mid-50s, instead, we do expect it to be around the early-60s, that’s where we expect to be. So going forward, if next year our growth rate comes back to our normal levels pre-COVID of 30% plus, then we should see the cost-to-income again inching below the 60% level. So that’s our model and that’s how the whole thing is structured. And at anytime you would see very strong correlation between our cost-to-income and our growth.

Nihar Shah — New Mark Capital — Analyst

Okay, great. Thank you so much.

P. N. Vasudevan — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, kindly restrict your questions to two at a time. We have a next question from the line of Sameer Bhise from JM Financial Institutional Securities. Please go ahead.

Sameer Bhise — JM Financial — Analyst

Yeah, hi. Thanks for the opportunity. Just wanted to understand more about this slower growth anticipation ahead, given that you expect demand environment has been pretty robust. What is driving this cut in growth expectation? Is it some product category or is it pricing which you think is not commensurate with your return expectations or competition? Just wanted to get a sense more on this, especially given that we continue to add cost items, especially on employees, so what is driving this growth reduction?

P. N. Vasudevan — Managing Director and Chief Executive Officer

Yes. So we did guide for 30% in the beginning of the year. And now we are saying that for the — we are giving a revised guidance of 25% for the year. This is basically because we have gone through half year, six months has gone by and we have registered a 20% growth. And while 30% growth from here does look a little stretched and 25% looks a lot more reasonable. So we didn’t want to stick to that 30% of the earlier guidance, and we thought it’s better that we turn down the expectation for the year. If there could be a possible surprise on the upside, so be it, but at least we wanted to kind of moderate the expectation for the rest of the year.

But again if you see the other question that you asked is that the demand looks robust and all that fundamentals look strong, you’re right actually, everything does look good, the demand does look good and our own comfort on collection is quite comfortable on collections now. Our credit cost guidance is something that we are still sticking to, and that’s something that we still expect to deliver as per our original guidance. So everything is in place, everything looks good. But as Rohit mentioned sometime earlier to someone else on the same question, there has been some level of delay in execution of certain plans.

Especially our focus on the non-TN areas, part of that 30% growth was supposed to be contributed by regions outside of South, and there has been some slowdown in the execution in terms of recruitment of certain state-level teams and things like that. So there has been a delay in execution at some level in these areas, and that is where we see that first half growth is only at 20%. And now, of course, we will try to catch up, we will try to ensure that we improve the execution and catch up last time, but we don’t think we should give a guidance which we may not touch in the next six months. It’s better we thought that we give a guidance that we’ll definitely touch, maybe exit, but definitely not fall short.

Sameer Bhise — JM Financial — Analyst

Okay. And especially is it related to, say, slower pickup in the SBL book or you would say it is broadly across — across products?

P. N. Vasudevan — Managing Director and Chief Executive Officer

See, there were — vehicle finance has been doing quite well. So that I don’t think should see any issue from a growth perspective. As far as the small business loans are concerned, the Housing Finance which we have carved out now, earlier that used to be part of small business loans, now we are showing Housing Finance separately that also registers good growth. So that should hopefully continue to go quite strongly. The Page Number 16, you see the disbursement percentage growth, there you can see that the micro finance at 4% and small business loans at 15%, are the ones which have actually reduced the overall growth of the bank.

Sameer Bhise — JM Financial — Analyst

Yes, yes.

P. N. Vasudevan — Managing Director and Chief Executive Officer

In micro finance, yes, we are very cautious. I think we’ll continue to remain cautious in micro finance. There is a change in RBI guide rules for micro finance, that came into effect from 1st of October, and it required certain system changes. Basically the rules are — the change in rules are that the loans that our bank can give to a micro finance borrower, it’s now dependent on his total borrowing from the industry and what is his total EMI that he has got to pay back to the industry — to the — all the lenders, and what will be the EMI as percentage of their income. So there are certain new rules that RBI has levied on those areas in micro finance lending.

And it has to come into effect from 1st October, but we were actually able to implement that from 1st September. And so there is some level of impact because of that. But even otherwise, we do want to remain cautious in micro finance. We don’t want to really jump too hard on that, given that it’s fundamentally still an unsecured form of lending. So micro finance sits at 4% is a drag on the growth.

But small business and agri loans, which is at 15%, that is where Rohit was talking of the improvement, the contribution to have come from non-TN areas, which has taken longer than what we were hoping for. And that is where that should pick up in the second half. And because of that picking up, that’s where we believe that our 20% September level should go to 25% by March.

Sameer Bhise — JM Financial — Analyst

Okay, that’s all from my side. Thank you, and all the best.

P. N. Vasudevan — Managing Director and Chief Executive Officer

Thank you. Bye-bye.

Operator

Thank you. We have a next question from the line of Anand Dama from Emkay Global. Please go ahead.

Anand Dama — Emkay Global — Analyst

Hello. Yeah, sir, sir, firstly on the management tenure, so basically you had said that we would be looking for a new MD and I believe we have also formed a committee as such. So any progress over there?

P. N. Vasudevan — Managing Director and Chief Executive Officer

That is work-in-progress. So as of now we don’t have any concrete thing to share. So we will share as and when something happens, but it’s work-in-progress.

Anand Dama — Emkay Global — Analyst

But what’s the thought process of the appointed committee in terms of looking for the person to replace you. So looking for a very long banking career, and anything on that you can talk about?

P. N. Vasudevan — Managing Director and Chief Executive Officer

You know that I won’t be able to talk about it, you know it, and you’re just putting me up. You know we can’t really say anything. It’s obviously something that will be held in confidence at the committee level. There is no way that we will be able to share details of what exactly we are looking at or what we are doing, you know it, you know that I won’t be able to answer that question. And so I will also have to say that, I’m sorry, I won’t be able to give any further detail, but definitely take it that we are on the job and it’s a work-in-progress.

Anand Dama — Emkay Global — Analyst

Sure. And just secondly that you have cut down the credit growth target that is fair on your side, but how about the deposit growth? Do you see that there is going to be a challenge over there as well, given that most banks are now looking to raise the deposit rates and try and challenge on the deposit front, so what is the outlook over there?

P. N. Vasudevan — Managing Director and Chief Executive Officer

See, deposit growth, we don’t see that as a challenge. If at all, we drop down on our growth, overall growth, largely be from a credit pickup and not from a deposit pickup. We don’t see a challenge in that. And yes, the more deposit that you want to mobilize could have an impact on costs, that’s always a possibility because if you’re more hungry for money, then there are times when you may have to pay a little bit more to generate that liquidity. So it might be a trade-off from a cost perspective.

But as you have seen in our results, second quarter results also, as a bank Equitas, we do not really have so much of stress in terms of our margins and yields. So that is not really a major challenge. So we don’t think, I mean we don’t see any issue as far as deposit is concerned. If at all, we have pruned down our growth expectation by that 5%, it’s largely from the credit side.

Anand Dama — Emkay Global — Analyst

Okay, thanks, thanks a lot, sir.

P. N. Vasudevan — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have a next question from the line of Abhishek Murarka from HSBC. Please go ahead.

Abhishek Murarka — HSBC — Analyst

Yeah, thanks. Hi, good evening, everyone. So couple of questions. One, from a NIM perspective, what is the outlook? We — deposit costs are going to rise up and on the asset side, the repricing is going to be relatively slower because of a large amount of fixed rate book. So do we expect NIM to continue to moderate?

P. N. Vasudevan — Managing Director and Chief Executive Officer

See, our NIM currently is about 9%. And if you see the last four quarters, it’s hovering around that 9% to 9.1%. But in the four quarters if you look at the background, our yield has more or less remained the same. Our cost of funds has remained reasonably same, I mean marginally down a bit and up a bit, and the NIM has also remained steady. And that is from the picture that you are seeing in our presentation.

Now if you want to go a little bit behind the picture into the banking operations itself, what — I mean you may not know this, but what’s happening in the bank is that the contribution to business from the existing products is more or less steady in terms of percentage as compared to two quarters, three quarters, four quarters back. So we have not really changed our product mix, in the last maybe three quarters, four quarters, there’s really no significant change in the product mix. So product mix has remained more or less steady, which means that everything remains kind of uniform or kind of same.

Now the question is the next three quarters, four quarters or six quarters, what do we expect this to be, will be actually based on any change that might happen in our product mix. So that is what might lead to certain change in the NIMs. So you’ll see Housing Finance is growing. So — and Housing Finance is a product with a lower yield. In vehicle finance, the new vehicle finance is growing. And the new vehicle finance is a product which is at a lower yield than used commercial vehicles.

And similarly, micro finance, the growth rate is not as high and micro finance does have a higher yield, but the growth rate is not as high. So there is some — there — so you are seeing in the presentation that we have set out itself, you’re seeing the indications of some small changes in the product mix contribution to the total portfolio. Now it has not played out in any way in the last three quarters, four quarters on NIM, lastly, because the changes are too minor.

But going forward in the next few quarters, yes, these changes might start reflecting a little bit more, which means there should be some level of change that you should see in the yield and corresponding NIM also. Then the question will be that was whether that will put a pressure on that spread of the bank, but I think that is where we will be toggling it internally between drop in yield, as well as the reduction in the opex because some of the yield drop comes from products which are having a higher ticket size.

So once see us doing more business of ticket size which are larger and the operating cost to that extent, to that marginal extent should see some support from our operating costs. And then over a period of maybe six months to nine months to 12 months, there should be a marginal change that we should see on the credit cost also because they are supposed to of a better credit profile.

So while you might see some level of dip in the NIM over the next maybe four quarters or so, but as a bank, we are geared to kind of manage that by ensuring that the product mix changes will be very gradual and the product mix change that happens gradually should be reasonably supported in a — on a real-time basis through a opex and credit cost benefit.

Abhishek Murarka — HSBC — Analyst

Understood. Vasu, well, again, related to NIM, why are we carrying a 200% LCR? Most large banks are at 120% or so, but I’m sure we can come down to 150%. So that will also help NIM. So anything particular why we are maintaining such a high level of LCR?

P. N. Vasudevan — Managing Director and Chief Executive Officer

Yeah, actually, our NIM, sorry, our LCR, when you have a 200% LCR, it actually doesn’t mean that you’re sitting on a high level of excess liquidity, which was parked in government securities. It’s — even I use to think like that, I’m also learning nowadays from that. So it is really not that high LCR means lots of money sloshing around in the system being parked with the RBI, no. It actually depends on the quality of the type of deposit that you have.

Then there are — there’s other rule which is the SLR. Now as a bank you are supposed to maintain a minimum SLR of 18% at all points in time. That 18% is, obviously we know that 18% is a sacrosanct. And if you have to maintain 18% SLR, you also always want to have a buffer, you don’t want to be at 18% exactly. So you will want to keep it at maybe 18.5% or somewhere in that range.

Now if you keep a SLR at 18.5%, let’s say or maybe even 19%, let’s say, then what would be our LCR. If that LCR is more than 100%, you’re actually quite comfortable. The question is — and Murali, if you remember, mentioned that we gave up nearly about INR500 crores of savings in the quarter because they are not LCR-friendly. And obviously it’s difficult to explain in a call like this what is LCR, what is LCR unfriendly and all that is impossible to explain on a call like this. But very, very briefly I’ll tell you that there are some deposits which are very LCR unfriendly, and if you have that kind of money, then your LCR is not showing a high percentage but your SLR will be very high.

So you may end up with 25% or 23% SLR, which will give you that 100% or 120% LCR, which is actually strain or a drain on bank. In our case — so for any bank for that matter, any of you looking at the liquidity of any bank for that matter [Technical Issues].

Operator

Ladies and gentlemen, we have lost the connection of the management line, request you to stay connected. We have the management back on the call. Please go ahead, sir.

P. N. Vasudevan — Managing Director and Chief Executive Officer

Abhishek, are you still online?

Abhishek Murarka — HSBC — Analyst

Yeah, yeah, yeah, Vasu.

P. N. Vasudevan — Managing Director and Chief Executive Officer

Okay, okay. Sorry, we got cut out. I’m back now.

Abhishek Murarka — HSBC — Analyst

No worries…

P. N. Vasudevan — Managing Director and Chief Executive Officer

So the question that all of you should ask banks is what’s your SLR? If they say my SLR is 18% or 18.5% or even 19%, then you should go back home saying that these are very efficient banks, they are managing their liability well. But if their SLR, say, 22% or 23% or 24%, that’s actually the one which is the indicator that they have a high level of liquidity which is all put in government security and a drag on the financials.

The LCR is more like a gate criteria. If the LCR is more than 100% or 110%, you’re comfortable, you don’t really care. And if the LCR is 200%, it makes no difference. If it is 250% also, there is no issue at all. But if your SLR is 18.5% or 19%, you’re actually perfectly fine. So in our case, the question you have to ask is that you have 200% LCR which is very good, but what’s your SLR? And that’s the answer that I also don’t know. What’s — what is the SLR?

Our SLR, Matt says [Phonetic] is around 20%, which means that we are not absolutely efficient, but we are marginally inefficient. If my SLR had been 19% and the LCR 200%, it means that you are taking a very, you are taking deposits which are extremely LCR-friendly. In our case we are maybe slightly away from that, but not very far. So that’s the question you have to ask.

Abhishek Murarka — HSBC — Analyst

Sure, sure, Vasu. Finally, just a very quick question coming back to cost, but you said 60% to 63% in the medium-term. How do we — what is medium-term? Is it an FY ’25 target or just the timing?

P. N. Vasudevan — Managing Director and Chief Executive Officer

So as I just explained boss, I just explained to a question the same point…

Abhishek Murarka — HSBC — Analyst

No, I understood the reasons, but I’m just trying to understand what…

P. N. Vasudevan — Managing Director and Chief Executive Officer

Medium-term, long-term, what Sridhar mentioned, don’t take it from a timing perspective, take it from a growth perspective. So suppose we are able to come back to 30% growth, let’s say, six months from today, that’s the time that we’re talking of. If we take, let’s say, another one year or another one and a half years to come to a 30% growth level, then it’s actually a one year to one and a half year timeframe. So from a timeframe, it’s actually very closely linked to our growth rate. So it’s not basically about six months, 12 months or 18 months.

Abhishek Murarka — HSBC — Analyst

No, basically, Vasu, the question was that I was trying to figure what — when do we hit the 30%? Is it, let’s say, this year, we understand 25%, but next year do we think we can get to 30%?

P. N. Vasudevan — Managing Director and Chief Executive Officer

See, I’ll — let me be very frank with you, this year is something we were very keen to hit the 30%. We were very keen. So you can take it that it’s a failure on our part that we are now talking of 25%. But otherwise there is no reason why we should not have hit the 30% because there is no Corona, there is no disturbance. From 1st April of this year, there has been no dynamics in the market which has been negative.

Our portfolio touch out [Phonetic] has been doing well, and all indicators are that the rest of the year, our portfolio quality should remain very good. And our vehicles has been doing well. So basically some little bit of execution challenges and that pulled our growth rate a little bit down. So if you ask me when will we hit the 30%, I mean I would love to say that we will like to hit it six months from today, nine months from today, I want to say that, I really want to say that. And that’s our objective, that’s clearly our objective and our goal. So just give me some time, we’ll tell you when.

Abhishek Murarka — HSBC — Analyst

Sure, sure. Thank you, Vasu. All the best.

P. N. Vasudevan — Managing Director and Chief Executive Officer

Thank you, Abhishek.

Operator

Thank you. Ladies and gentlemen, due to time constraints that was the last question for today. I would now like to hand the conference over to Mr. P. N. Vasudevan for his closing comments. Over to you, sir.

P. N. Vasudevan — Managing Director and Chief Executive Officer

Yeah, thank you, thank you all of you, thanks for being on the call, and do keep working with us. And any questions, doubts you have, please keep asking us, happy to provide you, and wishing you all the very best. Thank you. Bye-bye.

Operator

Thank you. On behalf of Equitas Small Finance Bank Limited, we conclude today’s conference. Thank you for joining us. You may now disconnect your lines.