FINO Payments Bank Ltd (FINOPB) Q4 FY23 Earnings Concall Transcript

FINO Payments Bank Ltd (NSE:FINOPB) Q4 FY23 Earnings Concall dated May. 03, 2023.

Corporate Participants:

Rajat Gupta — Investor Relations

Ketan Merchant — Chief Finance Officer

Rishi Gupta — Managing Director and Chief Executive Officer

Analysts:

Ashish Kumar — Infinity Alternatives — Analyst

Harsh Shah — Reliance General Insurance — Analyst

Shreya Shivani — CLSA — Analyst

Vishal Singh — ICICI Securities Limited — Analyst

Deepak Agarwal — Individual Investor — Analyst

Rahil Shah — Crown Capital — Analyst

Parimal Mithani — Credential Investments — Analyst

Umang Shah — Kotak Mutual Fund — Analyst

Bhaskar Chaudhry — Entrust Family Office Investment Advisers — Analyst

Kaustav Bubna — BMSPL Capital — Analyst

Vishrut Babna — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Fino Payments Bank Q4 FY ’23 Earnings Conference Call hosted by Go India Advisors. [Operator Instructions]

I now hand the conference over to Mr. Rajat Gupta from Go India Advisors. Thank you, and over to you, sir.

Rajat Gupta — Investor Relations

Yeah, thank you, Davin. Good afternoon, everyone, and welcome to Fino Payments Bank earnings call to discuss the Q4 and FY ’23 results. We have on the call with us today, Mr. Rishi Gupta, Managing Director and Chief Executive Officer; Mr. Ketan Merchant, Chief Financial Officer; and Mr. Anoop Agarwal, Financial Controller.

We must remind you that the discussion on today’s call may include certain forward-looking statements and must be, therefore, viewed in conjunction with the risk that the company faces. I now request the MD, Mr. Rishi Gupta, to take us through the company’s business outlook and financial highlights, subsequent to which we’ll open the floor for Q&A.

Thank you, and over to you, sir. Thank you, Rajat. Good afternoon, ladies and gentlemen, and thank you for joining us today. As you all know, Fino has come a long way since it’s inception as a payments technology company in 2006. We became the first profitable Payments Bank in 2020 and since then have worked diligently to build a niche for ourselves in this space with profitability being our core. Ketan Merchant, CFO, will take to take through the financial performance for the quarter, for FY ’23, and FY ’23 in detail. I would like to highlight that our revenue has grown 22% year-on-year for FY ’23 and 13% year-on-year on quarter 4 FY ’23. PAT margins have improved in FY ’23 significantly to 5.3% at INR65.1 crores against 4.2%, whereas for quarter 4 FY ’23, it stands at 6.8%. Our business journey, as we had discussed earlier, is based on the time strategy, which is transaction, acquistion and monetization. The first phase, which we call the transaction phase is focused on building a base. It is the phase we’re in our remittance and cash withdrawal products act as a hook to bring in customers to Fino ecosystem. In this phase, we have set a distribution network. I’m happy to report that we have so far added 13.7 lakhs merchants to Fino ecosystem and build customer trust, providing them with innovative timely solutions for their banking needs. We offer simple and convenient solutions like domestic money transfers, Micro ATM, AEPS as neighborhood banking. And I’m also happy to say that we are one of the leaders in all the three segments of business. The transaction phase required strong execution skills and feet on-ground and is the foundation for our next phase of growth. While Phase 1 continues to have its own growth strategy, we are now wholeheartedly focus in building up the Phase 2 and Phase 3 of our business journey. Phase 2 of our business is focused on customer acquisition and maintaining the ownership. This phase is well underway and we are seeing great results, as you can see from the numbers. Customers ownership is gaining momentum, and there is a strong trust equity build. This is also the phase where we laid the foundation for our customers’ digital journey. And at the same time, we’ll run avenues for monetization through cross-sells and building a liability franchise, which has been challenge for most of the universal Small Finance Banks. Our deposits have grown significantly by 66% to INR1,200 crores in FY ’23 over last year. With that said, reassured that we are on the right track and that our customers believe in the Fino model and business partners, banking partners. The success of our second phase is evident from the strong CASA growth, which has shown a CAGR of 74% since FY ’20. We have built great momentum in the segment and are opening an account almost every 10 seconds. We have added 3 million new CASA accounts in FY ’23, 50% more than what we added in FY ’22. Our endeavor is to convert the walk-in transacting customers — I’ll repeat, our endeavor is to convert the walk-in transacting customer of us to CASA customer on us, and we have been able to do it successfully. This also results in the shift of the revenue pie from transaction business to higher-margin ownership business. This is important value created once again. This also results in shift to offer the new buyer from transaction business to higher-margin ownership business. While we are going wider, we are also able to maintain customer stickiness, here has been a massive increase in the renewal income which has grown almost 10x in the last three years. Our debit card spends have shown a CAGR growth of 66% since FY ’20. Digital throughput has grown its share of total throughput from 16% in quarter 1 FY ’23 to 23% in quarter 4 FY ’23. On an average, we have been at 20% growth on UPI and digital compared to last year. The customer activeness in physical or digital platform is increasing, thereby assuring higher annual income in the form of subscription renewal. So UPI and digital now constitutes 20% of our total throughput vis-a-vis 10%, which was there last year. UPI is actually beneficial to our business, and a lot of times people actually think that UPI is a cost center and you don’t make money, but UPI has incidental benefits and that is why we say, UPI is actually beneficial to our business journey. We have observed that our customer renewal rate is higher for transaction UPI customers versus non-UPI customers. The average is about 83%, 84%, versus 60% otherwise. As a bank, our endeavor is always to be clear with our customers. So our aim is to become preferred and everyday banking customer and that is where we have put a slogan called, Har Din Fino, to become a transacting bank for our customers and that’s where we call ourselves an everyday bank. We started working with our customers to build their digital journey, which will be the key driver for our future growth. We’re actually adding physical and digital together, so becoming a truly digital company. We are building new digital products and targeting new customer segments. We are also strengthening our digital partnerships and doing tie-ups with technology and printing company, with specific use cases rather than open CASA relationships and expand our base as well as the their base. In FY ’23, this was around December of ’22 when we launched our digital savings account, and we have opened nearly 40,000 accounts since then in the last quarter. We also started to focus a lot more on our FinoPay and our digital journey. So, roughly about 5.7 lakh monthly active, unique customers are there on the FinoPay app, which has seen a growth of over 3.5 times over FY ’22. Nearly 35% to 40% of our customers are actually transacting on the UPI platform as we speak. UPI and mobile banking continue to be an integral part of the digital offering by the bank, and we are focusing on building new capabilities on our UPI and mobile banking offering, as to top the Tier 1 and Tier 2, and also grow digitally in Tier 3 cities. You will be happy to know that your company is actually Moved away from a third-party UPI switch and built their own switch in-house. And we are already starting to see the benefit of moving the switch internally rather than with a third-party. And it’s a big change, I must say, we are one of the very few companies or banks who have internal UPI switch. CMS being our second higher-margin product is also key growth driver for us in FY ’23. And we continue to remain growth driver in FY ’24 as well. From a modest 39 partners in FY ’20, we have come a long way, and now we have 186 partners, and as you can see in the presentation, it talks about the variety of partnerships from NBSC to online to CRA to banks to e-commerce companies. So, we have definitely come a long way in our CMS business. CMS throughput has grown by 10x from INR4,300 crores in FY ’20, to nearly INR46,000 crores in FY ’23. That’s a 10x growth in matter of four years. We have been able to achieve and deliver primarily on account of our foundation of distribution network, covering the length and breadth of our company. Our priorities for FY ’22 will be to continue the customer acquisition momentum, strengthen the customer ownership, enhance merchant network, and increase digital footprint to FinTech and B2B partnerships. While these are the key management parties, in fact, in our presentation, we have included our goals also for 2026. While this is our key management priorities, our driving principle will be to create a sustainable incorruptible bank, something which we have been speaking about and talking for in the last two, three events as well. With this, I would like to hand over to Ketan Merchant, CFO, to walk us through the financial results. Over to you, Ketan.

Ketan Merchant — Chief Finance Officer

Thank you, Rishi. Good afternoon, ladies and gentlemen, and thank you for joining us once again. As Rishi mentioned, we’ve come a long way since 2006, and this is our 13th consecutive quarter of strong profitability, and I can say that highest profitable quarter till date, and also the highest year-end closure in terms of profitability.

Let me start with some distinct statistics. Our margins have improved by 240 basis points, 2.4% to 32.7% in quarter 4 ’23, which was at 30.3% in quarter 1 ’23. EBITDA has increased from 8.4% in FY ’22 to 11.1% in FY ’23. And the exit run rate in quarter 4 ’23 is 13.3%. Our FY ’23 PAT is up 52% and stands at INR65 crores, 25% up from quarter 4 as compared to the previous, on a year-on-year basis. Our asset-light model and strong focus on high-margin products as Rishi said, are the key levers for driving our growth. Throughput has increased by 36% to a whopping number of INR2.55 lakh crores. This number for the previous year was INR1.87 lakh crores. As Rishi mentioned, we’ve been working diligently to bring a strong merchant base and investment we have made in Phase 1 of our business, which he alluded to as transaction focus is now delivering results.

I would like to bring to your attention of one key aspects of performance. The fact that operating leverage is kicking in as we scale up and this is evident from cost income ratio, which is come down by 11% over the three-year period, we were at 37% of cost income three years back and now this is 25.9% or 26%. On a related note, just to note that our operating expenses year-on-year has grown by 3.4%, whereas revenue has grown by 22%.

I will now quickly touch upon product wise performance, part of it Rishi in his headlines and in a trend over a strategic aspect is given, CASA, as you would have seen from our presentation, we are currently focused on acquisition phase and the key driver for growth here is CASA. We are delivering robust performance here and opening a new CASA account every 10 seconds. We have a CASA ratio of around 75 lakhs, which is an increase of 64% on the y-o-y basis. Revenue has gone up by 87%, primarily driven by CASA acquisition which I just mentioned, and annuity income as well.

Our total deposit has also shown a significant growth and have grown by 66% from INR724 crores to INR1,200 crores on a year-on-year basis. Average cost of funds for us stands at 1.9%. Low cost deposit without acquisition cost of acquiring the liability account is a real differentiated aspect for us. Continuing the ownership strategy while we are increasing our CASA base, we are also working hard to ensure customer engagement and stickiness. The best way to see that is to improving customer loyalty is through CASA renewal income, as I call it, annuity income. This is growing for us by 167% on a y-o-y basis. This for us is annuity income and mix base for Fino 2.0. A strong renewal income also reflects a healthy bottom line because the margin for renewal income is 75%. Currently, renewal income is at INR74 crores, this is for FY ’23, and constitutes one-third of CASA income, which we anticipate and working towards making it 50% over the next couple of years, 50% of the CASA income should be through renewal.

CMS, Rishi also mentioned at top, it’s our second high-margin product and we continue to enjoy a leadership position in this space. Our revenue has grown up by — grown by 79% in FY ’23, with diversified clientele, and constitutes 8% of our revenue pie. We are now hitting volume of INR4,500 crores per month, our throughput has increased by 93% in FY ’23, and which is at INR46,000 crores plus over FY ’22. We continue to add new partners here, which diversify our client base. Over the last two years, our client mix has moved from 97% in NBFC MFI in FY ’21 to 51% in FY ’23, along with double throughput on a year-on-year basis. This is a growth which we’ve seen in CMS largely. As of 31st March, ’23, we have 186 CMS clients across sectors, whether it’s banks, NBFCs, e-comm, cab aggregators and all, we are now covering 14 states with average monthly throughput of over INR100 crores in Q4 ’23. This number in Q3 ’23 was eight states. Again, the advantage of wide-spread distribution network enables us to cater in this product. So new client addition and expanding reach is our key priority here.

AEPS, this is the part of the transaction income which Rishi alluded to. Our AEPS revenue has grown by 25% y-o-y, while the AEPS industry growth was around — was more or less flat at or growing by 0.3%, the throughput for Fino grew at a healthy 8.8% y-o-y. AEPS momentum or the growth has helped us to partly compensate the challenges for the industry by challenges which we are facing across MATM [Phonetic].

Very quickly on Fino2.0, Rishi has already covered some statistics, just to reiterate it off, our FinoPay digital accounts, which we have opened, in three months time, we opened more than 40,000 accounts and FinoPay users have grown by 3.6x. Our digital throughput is now close to 20% of the total throughput for FY ’23 and 23% in quarter 4 ’23. FinTech and B2B partnerships would be our prime focus for revenue generation. We now have a full UPI open banking, Rishi explained, and are looking at a very holistic partnership approach here.

We are continuously focusing on building new capabilities on UPI ecosystem and mobile banking offerings. Based on renewal trends and this is very important to allude to the point, which Rishi said, what are the incidental benefits, which UPI is giving to us, based on the renewal trends, the probability of renewal of customers doing UPI transaction, this is the current account renewal is as high as 83% as compared to a normal customer, which is 60%. This is the benefit of the ecosystem and this is why we are investing into the digital as well.

I will now summarize by saying that we are on high growth trajectory with inherent asset-light model and cost control, our profitability growth percentage in times to come will continue to grow by 2.5x of the revenue growth percentage.

With this, I would like to open the floor for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Ashish Kumar from Infinity Alternatives. Please go ahead.

Ashish Kumar — Infinity Alternatives — Analyst

Thank you, Rishi and Katen, and thanks for a very detailed presentation this time around and putting this perspective of past as well as future. My question was in relation to a couple of your business lines, which have actually seen a degrowth [Phonetic] this year.

Rishi Gupta — Managing Director and Chief Executive Officer

Ashish, can you be a little louder?

Ashish Kumar — Infinity Alternatives — Analyst

Sure. Is it better now?

Rishi Gupta — Managing Director and Chief Executive Officer

Yeah, much better.

Ashish Kumar — Infinity Alternatives — Analyst

My question was in relation to a couple of your business lines, which have seen a degrowth this year. One was your Micro ATM as well as on the business correspondent side, where we’ve seen a degrowth this year. Can you kind of let us know what is happening on the industry? And what’s your outlook going forward on those two?

Rishi Gupta — Managing Director and Chief Executive Officer

So on the micro ATM side, two things. One is on the cash withdrawal business and remittance business in general, one thing which I also mentioned in my opening remarks was the shift from off us to on us. So partly the revenue of Micro ATM, remittances, as well as AEPS has moved from that line of business to our CASA income category as an account holder. So one part is that. Apart from that, on an overall basis, the Micro ATM market, which we saw a big surge happened during the post-COVID and during the COVID period, is now kind of stabilized. So we are not seeing a substantial growth or growth in the industry per se as far as Micro ATM is concerned. There was a surge of competition, which came around ’21, ’22, which has also eaten up into markets for everybody. So we believe Micro ATM will move sideways only for some time before we can see a trust coming in that segment.

As far as the BC business is concerned, in the BC business, there are two things which are there. One is that getting new business on the BC side has become more challenging post the payments bank license because — and then the SFB conversation. So that mandate — getting new mandates have become more difficult on account of that. And secondly, also, the focus of the ground team is more in terms of building up their own revenue rather than a BC revenue because the margins in BC revenue is lower than our own business revenue margins. So to some extent, that gets sidetracked to some extent, while there are internal conversations in terms of how do we bring that back. And so some actions we have taken this year to segregate the teams completely so that we can focus on both the businesses separately other than each business eating into each other. But just on both the sides, we, in our projections also, the growth projections which you’re talking about, we are not expecting a very high growth in either of the two lines of businesses that you just mentioned.

Ashish Kumar — Infinity Alternatives — Analyst

Sure. And the second question was on growth per se on, Rishi. So while we look at the full year, 22% is a very commendable growth in the payments business. For the quarter 4, if I look at it, the growth rate is down by — is at 13%. Do you think which is more sustainable? Can we go back to your historical growth rates of 20%? Or do you think it will be more in terms of the meetings to kind of budget ends?

Rishi Gupta — Managing Director and Chief Executive Officer

Our target is to be at 20% growth for the year. Some quarters may see higher growth, some may see a lower growth, but on an average, we should maintain and that’s the target which we are working on to maintain a 20% growth rate as such. This quarter, particularly, it has been a little low, you are right, 13%. We are also expecting a little higher partly because of the Micro ATM and some cash withdrawal businesses not growing or degrowing at a faster rate than what we expected. But on an average basis, we should be growing at 20%. That’s the target, and that’s the plans which we have in place.

Ashish Kumar — Infinity Alternatives — Analyst

So nothing to read into this thing?

Rishi Gupta — Managing Director and Chief Executive Officer

No, not really. Plus also in that, we are focusing, as you see, our own business rather than API business. So from 62% owned business, we have moved to 67% on owned business. So that also improves our margins. Our net margin, which was 30.2%, has now become 32.8%, something like that, 32.7%. So those are substantially higher numbers, jump out to 50 basis points in one year. On the net margin, I think, is a good jump.

Ashish Kumar — Infinity Alternatives — Analyst

Sure. And lastly, which is a data-keeping question for you Ketan. How long do you think that zero tax structure will continue, one more or two more years?

Ketan Merchant — Chief Finance Officer

Good one, Ashish. We have our tax losses, which will be able to cover us for FY ’24.

Ashish Kumar — Infinity Alternatives — Analyst

Okay. So ’25 will get to a full tax rate?

Ketan Merchant — Chief Finance Officer

It looks like.

Ashish Kumar — Infinity Alternatives — Analyst

Okay, that’s it, and I’ll come back in the queue again. Thanks.

Rishi Gupta — Managing Director and Chief Executive Officer

Thank you, Ashish.

Operator

The next question is from the line of Harsh Shah from Reliance General Insurance. Please go ahead.

Harsh Shah — Reliance General Insurance — Analyst

Hi, Ketan, and hi, Rishi. So I wanted to understand one thing that we have close to 75 lakh accounts. So how much of these accounts would be inactive?

Rishi Gupta — Managing Director and Chief Executive Officer

Okay. So only one question, or you have something more to add to it?

Harsh Shah — Reliance General Insurance — Analyst

No, I’ll come back to the other questions later.

Rishi Gupta — Managing Director and Chief Executive Officer

So roughly 60% of them are active when we look at from our activity level and about 35%, 40% of them are active on the UPI alone. So as the new acquisitions are using more UPI, we believe our activity levels will continue to grow. And that is why Ketan has also said that in the year to come, our renewal income and our new acquisition income should be more or less equal.

Harsh Shah — Reliance General Insurance — Analyst

Okay. So what will be our strategy to get the remaining 40% accounts to be more active?

Ketan Merchant — Chief Finance Officer

So Harsh, the model which we are essentially running and the base effect, if you’ve seen, in last year, we have opened around 30 lakhs account. We are doing some things to get those remaining 40% also this thing. But however, for any such kind of a subscription business, if you do an industry analysis, a 60% plus renewal rate is something which is good. I’ll come back to the statistics, which I earlier said it off in the entire UPI ecosystem, which we had mentioned, people who are using our UPI, which is growing tremendously and now constitutes 23% of our total throughput, there the renewal rate is around 83%. So if we continue the momentum and if our hypothesis, which has been built over the last 12, 18 months works out, we can see a natural progression happening. However, I will again say that off with an increasing base as well, our annuity income, even at 60% on an overall basis should be a good point to reckon in terms of sustainability.

Rishi Gupta — Managing Director and Chief Executive Officer

Having just to add to this, Harsh, we are also running on multiple campaigns on digital as well as marketing campaigns to see how we can bring the inactive customers into active levels. So that is an ongoing thing which we keep on doing.

Harsh Shah — Reliance General Insurance — Analyst

Okay. Got it. And secondly, what will be our digital expenses for FY ’24 investment intake?

Rishi Gupta — Managing Director and Chief Executive Officer

So on an overall basis, Harsh, we have — we typically look at — this is for FY ’23, right?

Harsh Shah — Reliance General Insurance — Analyst

No, no, ’24. What is the planned…

Rishi Gupta — Managing Director and Chief Executive Officer

So I’m not making a pointed forward-looking statement out here. But however, I can say that we are looking at anywhere in the range of INR10 crores to INR12 crores plus kind of a digital for which I’m looking at in terms of the new partnerships and the new products which we are doing.

Harsh Shah — Reliance General Insurance — Analyst

Okay, got it. Thanks a lot, Ketan and Rishi.

Operator

[Operator Instructions] The next question is from the line of Shreya Shivani from CLSA. Please go ahead.

Shreya Shivani — CLSA — Analyst

Hi, thank you for the opportunity. And congratulations on a good set of number. I have three questions actually over here. First is on the Micro ATM book. So for FY ’23, if I see the gross yield of micro ATM revenue by throughput, that’s about 67 basis points, which is significantly higher than FY ’22. So I want to understand whether it’s because you were charging more on the Micro ATMs, you sell more Micro ATMs or did — I mean, some color on this would be helpful. Also, while we are on the Micro ATM topic, the RBI data shows that your market share in the past three, four months has been stable at around 23%, 24%. So is this an indication of the competition coming down? Any color on this, that would be helpful.

Second is on your AEPS. It’s a data-keeping question. Last year, you had given us that how much market share you hold in the AEPS industry. If you could help — that was at 11%, if you can give that number for FY ’23, that will be useful.

And third question is on the cost of funds and the yield. So the yields were quite high. For FY ’23, we came in at 5.6%. And the cost of funds from we came in at 4.5% interest expense divided by borrowing the deposit. So how should I build this up for the next three years because this moves our revenues quite a bit now? If you can help me with these questions.

Rishi Gupta — Managing Director and Chief Executive Officer

So, Ketan, we will talk about the cost of fund and borrowing. Let me just concentrate on the first, Micro ATM and AEPS question. So Micro ATM, as I mentioned earlier also that part of the movement of customers from off us to on us is eating up into the off us market share for Fino, but we are making more money and better margins by having the customer ownership rather than as an off us customer. And you are absolutely right. Our market share has been stable. So at least in the last two, three months, we have not shown a degrowth on that number. We have been stabilizing on that. Competition is more or less the same, which has not gone better or worse from Fino’s point of view. So Micro ATM market is right now in a very stable phase, so to say.

Coming to your second question on the AEPS, we continue to maintain among the Top 4 banks in the country on AEPS. Our market share is now about 12.5% as such. I think in December, it was 11-odd percentage, yeah, something in that range.

Ketan, do you want to take the borrowing cost question?

Ketan Merchant — Chief Finance Officer

Yeah, So, just a couple of points, if I’ve understood your borrowing-related aspects. Firstly, 1.9% is the cost which we are looking at in terms of our deposits. So on a 1,200 basis deposit, which we have our weighted average cost is 1.9. To that, obviously, there will be some borrowings which are at a market rate. These are our INR1,200 crores are the low-cost deposits, which we were essentially focusing on. Your reading is right that last year, we’ve seen around 220 basis points kind of a move happening. We have positively benefited out of that as well.

In terms of our spread, which has been in the range of 3.5% to 4%, we intend — our structuring is such that without any kind of ALM risk, we are looking at any spread up in the range of 3.5% still. Point to note, and I think Rishi also mentioned and it is there in one of the slides as well, where we’ve put our strategic kind of an outlook as well. This INR1,200 crores of deposits, which we have put, we are eventually looking — we are not focused on building the balances as much in the past. If I go to Slide 18, the kind of margins and the kind of balance sheet which we are looking at is we are definitely giving an impetus to this with the 66% growth in the previous year, we are definitely looking at INR3,500 crores kind of low-cost liability over the next couple of years, as mentioned in our Slide 18.

Shreya Shivani — CLSA — Analyst

Got it. So for my stats, I should — for the next years, I should take it at about 3.5% to 4%.

Ketan Merchant — Chief Finance Officer

Yeah, in that range.

Shreya Shivani — CLSA — Analyst

In that range only?

Ketan Merchant — Chief Finance Officer

Yes, please.

Shreya Shivani — CLSA — Analyst

Okay, thanks.

Operator

[Operator Instructions] The next question is from the line of Vishal Singh from ICICI Securities Limited. Please go ahead.

Vishal Singh — ICICI Securities Limited — Analyst

Hi, thank you for the opportunity. I had just one question. While our throughput in CMS has grown quite strongly year-on-year, but it is a flat Q-on-Q despite adding kind of same number of partners during the quarter that we’ve been adding for the past few quarters. So just wanted to understand, is there a one-off? And how should we look about, see it, I mean, going forward as well?

Rishi Gupta — Managing Director and Chief Executive Officer

Good observation, Vishal, I was expecting this question. So you are absolutely right. On the CMS side, that quarter 4 versus quarter 3 of financial year ’23 has been more or less flat, just a few — maybe a few hundred crore difference on that. I would take you to quarter 3 number. Quarter 3 number, we saw an exceptional jump in our CMS business, somewhere around 27%, 28% growth was there in one quarter vis-a-vis quarter 2. And that was the quarter where we saw the festival season also. And because, as I mentioned earlier, we are now doing a lot of business in e-commerce, logistics, CRA companies, banks, over and above the NBFC MFIs. So all of them saw a big jump in that business in that quarter. So our target for this quarter 4 was to maintain that number. So when you see a 28% jump in one quarter, obviously, you have preponed growth of nearly two, three quarters in one quarter. So that is where we have our numbers in quarter 1 — quarter 4 of financial year FY ’23 is more or less flat. But hopefully, in the coming quarters to see, we should see — continue to see a growth in our CMS business. So this is one-off because of the substantial jump, which happened in quarter 3. And our target was to maintain that growth and to sustain that level.

Vishal Singh — ICICI Securities Limited — Analyst

Okay, thank you so much. I think that was my question.

Rishi Gupta — Managing Director and Chief Executive Officer

Thank you, Vishal. [Operator Instructions] The next question is from the line of Deepak Agarwal, an individual investor [Phonetic]. Please go ahead.

Deepak Agarwal — Individual Investor — Analyst

First of all, congratulations on the great set of numbers for FY’23. My first question is…

Rishi Gupta — Managing Director and Chief Executive Officer

Deepak, sorry, you may have to be a bit louder, please.

Deepak Agarwal — Individual Investor — Analyst

Is that audible now?

Rishi Gupta — Managing Director and Chief Executive Officer

Yes, better.

Deepak Agarwal — Individual Investor — Analyst

And then in the cash flow statement, there is a fixed asset increase of INR94 crores during the year. So if you can briefly explain what are the major investments here? And the second question is regarding the subscription income and the CASA total income is around INR67 crores. So out of this, how much is the subscription income?

Rishi Gupta — Managing Director and Chief Executive Officer

Let me just take the first point first. I know our increase which has happened on account of the INR95 crores, which you essentially said, largely or mostly, it is on account of technology. From first call onwards, I have been saying it of that we keep on investing into technology and service. And one more point to note is in all my factorings or in my projections, also, we are factoring that our operating leverage will essentially come after this investment, whether in technology or digital. So just to give a perspective, and this is something which had come up in quarter 1 as well, that we will invest and we have put — we have increased our capacity. We have done sophistication. We’ve had some RBI kind of a thing. We’ve also invested into digital aspect as well. So with all of this, the investment which we’ve essentially done. So that’s the point of the first question.

I’m so sorry, second question, I did hear you, but you may have to repeat it out, because of the…

Deepak Agarwal — Individual Investor — Analyst

The second question was regarding the subscription income.

Rishi Gupta — Managing Director and Chief Executive Officer

Sorry, subscription income?

Deepak Agarwal — Individual Investor — Analyst

Right.

Rishi Gupta — Managing Director and Chief Executive Officer

Am I reading it right, yeah. So if you’ve seen our total growth in CASA is still 87%, our renewal is essentially grown by 167% is what we have seen in renewal growth and for the reasons which I explained. We’ve opened around 30-odd lakhs accounts in terms of the whole year. So on 30 lakhs accounts, we have a revenue coming of INR380 per account, and that’s the income which we have seen in subscription.

Deepak Agarwal — Individual Investor — Analyst

Thank you very much.

Rishi Gupta — Managing Director and Chief Executive Officer

Thank you, Deepak.

Operator

[Operator Instructions] The next question is from the line of Ashish Kumar from Infinity Alternatives. Please go ahead.

Ashish Kumar — Infinity Alternatives — Analyst

Thank you for giving me an opportunity again. I think, Rishi and Ketan, you’ve done a phenomenal job in terms of keeping your fixed cost growth at 6% last year. How do you see it over the next 12 months for the coming fiscal year? Because a large percentage of your cost is employee-related. So how do you see that over the next 12 months?

Ketan Merchant — Chief Finance Officer

Ashish, good point, and thanks for putting this question. I go back to my reference to quarter 1 as well. This year has been quite lower in terms of cost. I would answer this in two manners, the way the model which we have essentially built up, okay, is something which Rishi earlier alluded to that if we are growing at a rate of 20%, and I made it in my opening comments as well, typically, the profit will grow in the range of — if this goes at 20% profit, typically, will have a 2.5% or that kind of the growth which is coming in the revenue. How will that essentially happen and which are the line items which we will grow? I earlier mentioned about the investment, which we’re doing in digital and technology that will continue. However, our operating leverage, which has been playing, if that is your question, operating leverage has been playing good in terms of the fixed cost. So that intends to continue it off. So we will continue to have operating leverage coming for next couple of years as well. So there is — is there any abnormal kind of a growth in cost for last year was an exception? The answer is no. Our model, which I explained, the equation between revenue and the profit percentage growth will remain and continue.

Rishi Gupta — Managing Director and Chief Executive Officer

I just want to add to what Ketan is saying, Ashish, is that the model which we have built is a very asset-light scalable model. So there is hardly any fixed cost except for the man power and some of the offices which we have. On large investments, which we are doing during the last year and the year to come will be largely on the technology and the digital side. So we are internally working on a full stack revamp of our entire technology stack, which we started last year. So that’s where you see a large jump in fixed cost, fixed assets. and that will continue in the next two, three years to come because we are building up a completely new stack, which will make us future ready for the next seven to 10 years.

Ashish Kumar — Infinity Alternatives — Analyst

Sure. So would it be fair to say that your operating costs might continue to grow in single digits. Is that a fair thing to pencil in from a modeling perspective?

Ketan Merchant — Chief Finance Officer

You’re putting it so pointed, the answer is yes.

Ashish Kumar — Infinity Alternatives — Analyst

Okay. And secondly, on the depreciation, we’re seeing the depreciation grow much faster than the revenue. And I understand fully that you are kind of building it in building in a full stack and the digital cost, the infrastructure is what you are investing in. So — but that would kind of continue to grow at a much faster rate, I would presume in the next 12, 18 months?

Ketan Merchant — Chief Finance Officer

Yes, I think that’s what Rishi was alluding towards, and the question which Deepak has asked as well that the investment which we essentially done in the past and will continue on technology and digital as well in the next couple of years as well.

Rishi Gupta — Managing Director and Chief Executive Officer

See, you can see that from the volume growth, which we are doing on our business, both on the physical as well as the digital side, I think the growth has been phenomenal, and we continue to see that growth in the years to come. So it is important for us that we keep us as future-ready as well as technology…

Ashish Kumar — Infinity Alternatives — Analyst

No, absolutely, that’s a must-have requirement. So these are more of modeling and questions just to kind of make sure. Okay, thanks a lot. And wish you all the best.

Rishi Gupta — Managing Director and Chief Executive Officer

Thank you, Ashish.

Operator

[Operator Instructions] We have the next question from the line of Rahil Shah from Crown Capital [Phonetic]. Please go ahead.

Rahil Shah — Crown Capital — Analyst

Hi, good afternoon to the management. So sir, considering everything you just said about scaling up in digital as well as any necessary means. So are you — at this moment, are you able to share any outlook for FY ’24 in terms of revenue and the margins? So how — what can one expect — are these sustainable numbers?

Ketan Merchant — Chief Finance Officer

Rahil, I’m sorry, I am not sharing a perspective appointed number in terms of FY ’24. However, I think we should take some view. We’ve given the strategic growth, which we have given in Slide 18, wherein we’ve shown how we’re going to essentially grow over the next couple of years as well. So there is a queue out there. As regards to the growth momentum sustainable, I think, between Rishi and myself, we’ve said what kind of top line growth which we are looking at, what kind of product growth which we are looking at in CASA and CMS. And if all of us, we do that way and with the kind of cost which we, Ashish just asked in the past, in the previous question, the kind of bottom line growth, which we should anticipate given our asset-light model. So whilst no number, but from a sustainability perspective, from a long-term perspective, the momentum is good, and this is what we mentioned it.

Rahil Shah — Crown Capital — Analyst

Got it, no problem. Thank you and all the best.

Ketan Merchant — Chief Finance Officer

Thank you.

Operator

Thank you. The next question is from the line of Parimal Mithani from Credential Investments. Please go ahead.

Parimal Mithani — Credential Investments — Analyst

[Indecipherable]

Rishi Gupta — Managing Director and Chief Executive Officer

Parimal, sorry, you’ll have to be a bit louder, please.

Parimal Mithani — Credential Investments — Analyst

Can you hear me now?

Rishi Gupta — Managing Director and Chief Executive Officer

Yeah, better.

Parimal Mithani — Credential Investments — Analyst

Yeah, thanks for the opportunity. I just wanted to understand in terms of [Indecipherable], in terms of other expense, you mentioned INR640 crores paid to business for funding and your operating expense for the year is some INR915 crores. So is this figure going to be increasing or how it is you extreme…

Rishi Gupta — Managing Director and Chief Executive Officer

Yes. So Parimal, the way schedule 16 of the financial statements and notes to accounts REITs is, our business, this is common to the entire banking sector. Our business, we do not have an NII NFI split. So all direct costs or what we call as product cost, which we essentially stage are part of this other expenses cost. This is a very unique thing for a payment bank where a fee-based income is — the commission is largely 95% of revenue and the cost as well. So this is nothing but what we call as a direct cost or product cost. As we’ve said, if we are looking at a high-margin product, net margin, which we get for CASA or CMS, which is 60% or 40%, the product cost mean not as increase as much as the revenue kind of a cost. For other thing, if the question is related to what will be the margins which we are looking at, with the kind of growth which we are looking at, we are looking at a range bound and with a slightly upward bias in terms of margin. So what you picked up is the commission cost, which is a larger part of the cost which we call as product or direct cost for simplicity.

Parimal Mithani — Credential Investments — Analyst

Okay. So since, what I understand from your previous calls also, I think you’re going to move towards your own channel partners compared to a business part of this cost to be increasing or a downward trend?

Ketan Merchant — Chief Finance Officer

Yeah, I think if you are looking at it, it is a fair point and Rishi also alluded to it. Since the beginning, we have been increasing on a quarter-by-quarter on a steady basis between our own channel and open banking channel. We are now at 67% and 33%. This is how it’s essentially shaping up. We want to operate in the levers where we are range-bound in the extent of 67% to 70% of our income coming from own and the remaining coming from API or open banking, sorry.

Parimal Mithani — Credential Investments — Analyst

Okay. And secondly, just wonder, what is the regulatory requirement of cash that you will keep with RBI in terms of your cost accounting?

Ketan Merchant — Chief Finance Officer

Yeah. Parimal, that is also interesting for all of us who have been tracking banks. It is different for us to wait for is whatever deposits we generate, that we have to maintain something called DDB with the regulator or the banks. So whatever deposits essentially comes 75% of that has to be in GX [Phonetic] and 25% can be deployed up to 25% can be deployed in bank deposits. Over and above that, whatever CRR, cash reserve ratio, which applies to us as well. So whatever deposit comes, it has to fully go either into GX or bank deposits and 4% of that has to be kept with the Reserve Bank of India as TRR.

Parimal Mithani — Credential Investments — Analyst

Okay. And my last question is in terms of any policy in terms of dividend since you’re coming to a profitable side and you go to fund normal taxes from next year onwards. Is there any way to [Indecipherable] do your shareholders or?

Ketan Merchant — Chief Finance Officer

Sorry, Parimal, your question was on leverage or?

Parimal Mithani — Credential Investments — Analyst

In terms of dividend distribution policy, what is the — I think your coming to positive side and you…

Ketan Merchant — Chief Finance Officer

Yeah, we are — our entity is a converted entity from this thing and earlier also, there was some question we are into the accumulated losses, which is why we’re getting tax benefit as well. As and when we cover up our accumulated losses, we will be progressing or we will be exploring the dividend distribution policy.

Parimal Mithani — Credential Investments — Analyst

Thank you.

Operator

[Operator Instructions] The next question is from the line of Umang Shah from Kotak Mutual Fund. Please go ahead.

Umang Shah — Kotak Mutual Fund — Analyst

Hi, good evening. Thanks for taking my questions. Just one question that I have is, what is the thought process in terms of exploring the possibility of conversion to a, or a transition to a small finance bank? Thanks.

Rishi Gupta — Managing Director and Chief Executive Officer

So Umang, this is something which we have been discussing. We are inclined. — let me put it that way, to convert ourselves to a small finance bank. — is obviously a process which has to be followed. You can say we are in that day one of the process as far as getting our internal documents ready for application, getting the internal approvals, getting the entire understanding, which is required for an SFB. So all that work is happening. Anyway, we are 18 months to 24 months process from the time we apply to RBI. And that is the stage at which we are, but if you look at some of the matrices, which we have specified, especially if you look at Page 18, which talks about the total deposits, the 2 crore customers, the 20 lakh merchants, the kind of balances which will be there, it goes to show that the foundation is already underway to build up a very differentiated digital bank, which will have an SFB license. It will not be an SFB, the way — the kind of SFBs you see currently. It will be a very differentiated digital data-driven bank, which will have an SFB license, so to say.

Umang Shah — Kotak Mutual Fund — Analyst

Sure. So just to understand this correctly, you mentioned that it’s still 18 to 24 months before we apply and assuming if we get all the approvals and if the transition has to happen, obviously, it’s going to be 24 months out. I mean, not before that. Is that understanding correct?

Rishi Gupta — Managing Director and Chief Executive Officer

No, no, no, that 18 to 24 months is from the time of the application applied, not 18 to 24 months to apply. Application will happen in this calendar year, but the conversion will take 18 to 24 months for reason, do you, in terms of approvals, technology, getting everything in place, as such. One big requirement is on the capital side, which is there in many, but in our case, we have enough capital to start the SFB. So it is more of technology and getting the team together once we get the approval.

Umang Shah — Kotak Mutual Fund — Analyst

Understood. Okay, thank you so much. And wish you good luck. Thanks.

Rishi Gupta — Managing Director and Chief Executive Officer

Thank you, Umang.

Operator

[Operator Instructions] We have the next question from the line of Bhaskar Chaudhry from Entrust Family Office Investment Advisers [Phonetic]. Please go ahead.

Bhaskar Chaudhry — Entrust Family Office Investment Advisers — Analyst

Yeah, hi. Sorry, this might be a little bit of a basic question. But when I look at your target for FY ’26 on Slide 19, it looks like that you have assumed that the effective take rate, which is the conversion of your total throughput to revenue will remain the same between FY ’23 and FY ’26 on a percentage basis. However, if you look at the past three, four years, it has been consistently coming down. So what will — what are you going to like move the needle here so that it remains the same or approximately the same?

Rishi Gupta — Managing Director and Chief Executive Officer

Good observation, Bhaskar. In terms of leverages, total throughput of INR5 lakh crores between digital and physical, our digital throughput, which is INR50,000 crores in FY ’23, we are expecting a ForEx growth on that piece, which could be — which is a combination of both the number of customers using digital as well as the digital throughput per customer going up. So that is one observation. So that INR50,000 to INR2 lakh. The other is that physical throughput is roughly about INR2 lakh crore write-down. We are expecting it to go to INR3 lakh crores over the next three years. That means about 25% to 30% growth, we expect to happen it over the next three years, which is a combination again of remittances, cash withdrawal, largely AEPS and CMS business. So all of that put together, and we also started our work on a new LOB on the payment side, which is just in the first month of implementation, so we’ll talk about it in the next quarter earnings call. And that also will add up to this total throughput, which we expect to happen in the next — and some of it will happen this year, but substantially will start from next year onwards.

Bhaskar Chaudhry — Entrust Family Office Investment Advisers — Analyst

And these would be at higher take rate, so to speak?

Rishi Gupta — Managing Director and Chief Executive Officer

Yeah, take rates, more or less, these take rates will be definitely better than the API take rates.

Bhaskar Chaudhry — Entrust Family Office Investment Advisers — Analyst

Okay, understood. I’ll reach out separately to get more clarity. Thank you.

Operator

[Operator Instructions] The next question is from the line of Kaustav Bubna from BMSPL Capital [Phonetic]. Please go ahead.

Kaustav Bubna — BMSPL Capital — Analyst

Just a basic question. On your total treasury income — on your total treasury investments that you made because of your CASA business, what is your MTM gain for FY ’23?

Rishi Gupta — Managing Director and Chief Executive Officer

Yes, thanks. [Indecipherable] set it off. We are not doing any kind of a trading and we do not have any trading portfolio essentially coming neither anything is in HFT. There is no distinct. So it’s an AFS kind of a portfolio, which we essentially run through. Our average tenure is largely 6 months kind of a scenario. We are allowed just by the virtue of our regulations also, we have essentially allowed investment up to one year, and that’s the regulation of the payment bank. So whilst I understand your question, which is coming that given the kind of the yields which have increased, is there any hit which has come on account of HFT book or on account of an HTM kind of a book, the answer is no. We are holding in AFS and there is not material MTM, which has hit us or which has benefited us in any manner in FY ’23.

Kaustav Bubna — BMSPL Capital — Analyst

Okay. So the question was stemming out of — thanks for that. The question was stemming out of — do you have any — so out of this — I mean, based on regulation presentation, you obviously break down everything as revenue, product revenue. But based on regulation that you give your financial results, it comes under other income, right? So the point is, is that in this other income, is there anything notional or it’s all realized value?

Rishi Gupta — Managing Director and Chief Executive Officer

No, it’s all realized value. There’s nothing, which is essentially notional, which comes from — which can typically come for any other bank given the differnt banking regulation which we have.

Kaustav Bubna — BMSPL Capital — Analyst

So, nothing is notional?

Rishi Gupta — Managing Director and Chief Executive Officer

It’s a realized income.

Kaustav Bubna — BMSPL Capital — Analyst

Okay, thank you.

Operator

[Operator Instructions] The next question is from the line of Parimal Mithani from Credential Investments. Please go ahead.

Parimal Mithani — Credential Investments — Analyst

Hello.

Rishi Gupta — Managing Director and Chief Executive Officer

Hi, Parimal.

Parimal Mithani — Credential Investments — Analyst

Yeah, I just wanted to understand, you mentioned in your opening remarks, when you moved from a third-party UPI to your own UPI, how does it benefit us? And what are the — can you explain that?

Rishi Gupta — Managing Director and Chief Executive Officer

So there are two, three benefits, Parimal, by moving the UPI switch to our own in-house switch. One is that we have full control over the switch, the development on the UPI platform is faster. That is one. Secondly is the fact that UPI switch is capable of handling larger volumes of transactions, and we are able to — as you can see, the growth has been substantial on the digital side. So one is from a speed to execution is faster. The second is that it captures the growth aspect. Third is the quality of the switch is there. So in terms of the faster turnaround time on transactions, the technical declines, the ability to handle large volume of transactions. Currently, the IPL season is on, and we see a surge of nearly 2.5 times from 6:55 p.m. to 7:25 p.m. every day. And that surge we are able to handle with our new UPI switch. And the fourth is that because of the movement of which from a third-party to our own, we definitely will get some cost advantage also. So it kind of — it is a moral booster for our team as well, both the technology and the digital team, because we are able to be one of the very few banks who is actually running on their own UPI platform.

Ketan Merchant — Chief Finance Officer

Parimal, on the last point, while Rishi explained the qualitative kind of a thing, on the financial kind of a thing which we are looking at anywhere in the range of INR70 lakhs per month saving, which comes on account of this UPI.

Parimal Mithani — Credential Investments — Analyst

Okay. Two more questions. Hello?

Rajat Gupta — Investor Relations

Sir, you’re audible, you can go ahead.

Parimal Mithani — Credential Investments — Analyst

Yeah, in terms of your related party transaction between the holding company and you, there is a service charge for infrastructure. So how do — what is the start, can you explain that?

Ketan Merchant — Chief Finance Officer

What essentially happens is we have some premises which are being inter used. So we have taken an arm’s length kind of a situation out there, and that’s what we are essentially having intercompany charges between the holdco and the bank.

Parimal Mithani — Credential Investments — Analyst

Okay. But in terms of the software part — what do you call, the technical in the [Indecipherable].

Ketan Merchant — Chief Finance Officer

That is everything essentially is in the listed entity.

Parimal Mithani — Credential Investments — Analyst

Okay. Thank you.

Operator

[Operator Instructions] The next question is from the line of Vishrut Babna [Phonetic], an individual investor. Please go ahead.

Vishrut Babna — Individual Investor — Analyst

Hi, hello.

Rishi Gupta — Managing Director and Chief Executive Officer

Yes, please.

Vishrut Babna — Individual Investor — Analyst

Hi, good afternoon. Just a quick question on this period. I’m not sure if this was mentioned in the last call, but are all cross-selling any sort of lending or insurance products to the current customer base?

Rishi Gupta — Managing Director and Chief Executive Officer

So, Vishal [Phonetic], we have been working on that and some mixed progress, which is there are jewel loan, which is gold loan has gone up in the quarter 4 number. Our individual lines of credit for customers as well as for merchants has also gone up. But having said that, does it meet our expectation? Not really. We are still falling short of our expectation. I think we need to work a little bit more in terms of getting the right partners onto the platform. Is there a demand for the customer? Yes, definitely, the demand is there. But I think we have been working with largely the fintech players and fintech players have been facing some challenges lately, post the RBI tightness on the regulation. So we are working on building up some more lending partnerships, which should see a more consistent flow of loan coming into our customers’ accounts.

Second is on the insurance side. Insurance, we are reasonably maintaining our run rate on the health insurance per se. We are in the process of rolling out our investments, which is on the mutual fund aggregator platform that we have received the approval from the Reserve Bank of India. We are in the process — right now in the process of integrating that platform, it has taken longer than what we had actually planned for. But that is something which should go live in this financial year.

Vishrut Babna — Individual Investor — Analyst

And are there any sort of numbers on like the cross-sell rate or what percentage of the base is sort of gravitating towards being cross-sell one or more for these traditional products?

Rishi Gupta — Managing Director and Chief Executive Officer

So when we look at the cross-sell largely, I would say, roughly 2% to 3% of the customer segment is currently which we are focusing. So first, we have to get the supply side in place. So right now, we have a supply side issue on the credit side. Once we have that thing in place that is when we are going to actively and look at a more deeper kind of products with our customers as well as our merchants, so to say.

Vishrut Babna — Individual Investor — Analyst

Great. And just one quick clarification I just wondered on the accounting side. The top line revenue that you’ll report, I just wanted to clarify that, that consists of the net interest income and the revenue generated from the business correspondent activities, right?

Rishi Gupta — Managing Director and Chief Executive Officer

Yes, indeed, INR1230 [Phonetic] is the total revenue which we look at.

Vishrut Babna — Individual Investor — Analyst

Okay. Thank you.

Rishi Gupta — Managing Director and Chief Executive Officer

Thank you.

Operator

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

Rishi Gupta — Managing Director and Chief Executive Officer

Thank you very much. Thank you, everyone, for joining the quarter 4 FY ’23 call of Fino Payments Bank. As we started with, we are continuing with our TAM strategy of transaction to accounts to monetization. As you can see, our Phase 1 has gone quite well. Acquisition, which is Phase 2, is also going quite well both in terms of new customers, renewals, liability franchise, as well as the income which we are generating on digital transactions. Monetization is an area where we need to strengthen ourselves on the credit partnerships. And as we go into the next year or this financial year, we will build some more LOBs, which we’ll be talking about in our quarter 1 or quarter 2 presentations, which are largely around the payments ecosystem.

Let me assure you that the customers are moving to the digital platform, and Fino is already ready and getting more ready, both on the technology and the digital side. As we move our customers from physical to digital journey as well as from off us to on us. And thank you for your support in this journey of Fino till now. Thank you very much.

Ketan Merchant — Chief Finance Officer

Thank you very much.

Operator

[Operator Closing Remarks]