Suryoday Small Finance Bank Ltd (SURYODAY) Q3 FY23 Earnings Concall Transcript

Suryoday Small Finance Bank Ltd (NSE:SURYODAY) Q3 FY23 Earnings Concall dated Feb. 10, 2023.

Corporate Participants:

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Kanishka Chaudhary — Chief Financial Officer

Unidentified Speaker —

Analysts:

Shailesh Kanani — Centrum Broking Limited — Analyst

Varun Ghia — Dimensional Securities Pvt. Ltd. — Analyst

Unidentified Participant — — Analyst

Anil Tulsiram — ContrarianValue Edge — Analyst

Sachin Shah — SS Securities — Analyst

Manav Vijay — Deep Financial Consultants — Analyst

Yash Agarwal — GM Financial. — Analyst

Sanjay Pandit — 1729 Capital. — Analyst

Anjana Shah — Shah Investments — Analyst

Anil Tulsiram — Contrarian Value Edge — Analyst

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen. Welcome to the Suryoday Small Finance Bank Q3 and 9M FY ’23 Earnings Conference Call hosted by Centrum Broking Limited. [Operator Instructions]

I now hand the conference over to Mr. Shailesh Kanani from Centrum Broking Limited. Thank you, and over to you, sir.

Shailesh Kanani — Centrum Broking Limited — Analyst

Thank you, Jasin. Good morning, everyone. On behalf of Centrum Broking, I welcome you all to the 3Q and nine months FY ’23 Earnings Call of Suryoday Small Finance Bank. We have with us top management team of Suryoday represented by MD and CEO, Mr. Baskar Babu Ramachandran; Chief Services Officer, Mr. Narayan Rao; CFO, Mr. Kanishka Chaudhary; and IR Head, Mr. Himadri Das.

With this brief introduction, I hand over the floor to the management team of Suryoday. They will start with a brief overview on the results, after which we will move on to the Q&A session.

Over to you, sir. Thank you.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Thank you, Shailesh. Good morning, everybody. On behalf of Suryoday Small Finance Bank, I extend a warm welcome to our Q3 and nine months FY ’23 Earnings Conference Call. I hope everyone had an opportunity to go through the presentation for the quarter and nine months ended December 31, 2022, uploaded on the stock exchanges.

The global economic outlook now seems to be getting back on track in the last few months and inflation showing signs of a descent. However, with inflation still above the target in major economies coupled with the volatility in the global financial markets and the continued geopolitical hostilities, there remain some uncertainties around the global economy. The Indian economy has demonstrated resilience amidst all these global volatilities.

As per the Union Budget, the government has estimated a GDP growth of 6.5% for FY ’24. The growth is attributed towards multiple growth drivers such as the robust GST collections, rising consumption level and driver of the rural economy. On the industry front, RBI has recently hiked the repo rate by 25 basis points, taking it from 6.25% to 6.5%. India central bank has adopted a calibrated approach while raising interest rates amidst global developments.

Now coming to our operational and financial performance, we are delighted to report that the bank has delivered a steady performance during the nine-month period ended December 31, 2022, as the microfinance and connected lines of business have almost recovered back towards pre-COVID levels of growth.

The bank’s gross advances stand at INR5,408.2 crores, as compared to INR4,872.3 crores in nine month FY ’22, an increase of 11% year-on-year and a normalized growth of 19.6% including the ARC portfolio. Disbursements for the period surged by 33% to INR3,395 crores, as compared to INR2,547 crores in the same period last year.

Along with the growth in disbursements, the bank has 21.9 lakh customers as on December ’22, an increase of 18.4% over the same period last year.

We are committed in delivering a monthly pre-provisioning profit of approximately INR40 crores from the month of March ’23 of this financial year. On the profitability side, the bank has reported a profit of INR38.8 crores against a loss of INR44.9 crores during the similar period last year.

I would also like to mention about the recently concluded ARC transaction. Suryoday Bank has sold stressed loan portfolio, including written-off loans to Edelweiss ARC for the translation amount of INR135.1 crores.

Now let me throw some light on our key operational and financial metrics as of nine months ended December 31, 2022. On the business performance, the disbursements have grown by 33.3% during the nine-month period on a year-on-year basis, indicating strong momentum across businesses on the ground. The disbursements particularly in the microfinance stood at INR1,873 crores during the nine-month period resulting into a growth of 27.2% against the previous nine-month period. The bank has ramped up its disbursements in the micro home loan and commercial vehicles segment. Disbursement in the two-wheeler business, which commenced in Q2, is gaining traction, and we expect to scale up the book in the next financial year.

The collection efficiency has been improving steadily on the back of businesses’ growth and economy nearing pre-COVID levels. The overall collection efficiency stood at 110.4%.

On the gross advances front, we grew by 11% to INR5,408.2 crores on a year-on-year basis, excluding the net asset ARC portfolio of INR317.8 crores [Indecipherable] as of December ’22 and it translates into a normalized growth of 19.6%. The inclusive finance comprises of 61.1% of asset book, while affordable home loans is at 9.8% and the commercial vehicle loan and secured business loans are at 6% each. As a strategy, we have been increasing our noninclusive finance portfolio gradually over the last few quarters.

On the deposits and borrowings front, our total deposits witnessed a growth of 48.2% to INR3,169 crores year-on-year. Our focus will be to grow granular retail deposits along with CASA. The borrowings at the end of December formed 26.5% of the total liabilities, majority of which were from refinancing institutions.

Suryoday has a network of 571 branches, out of which 92 branches are fully liability-focused branches while 364 branches were asset-focused branches and the balance comprises of rural centers.

On the asset quality front, the GNPA, NNPA and PCR stood at 4.2%, 2.7% and 79.2%. Delinquency in the portfolio has declined mainly due to the sale of loan portfolio to the ARC and substantially improved collection efficiency.

On the earnings update, the net interest income stood at INR536.5 crores as compared to INR438 crores, an increase of 22.5% year-on-year. The net total income stood at INR599.9 crores, as compared to INR511.6 crores, an increase of 17.3% year-on-year. The net interest margin currently stands at 9.2% for Q3 FY ’23.

Despite rising interest rate scenario, our cost of funds reduced to 6.6% compared to 7.1% in the corresponding quarter last year. Cost-to-income including loss on stressed assets of INR21.5 crores stood at 60.7%, as compared to 58.8% during the nine-month period of FY ’22.

During nine months FY ’23, the company turned profitable and reported a robust profit of INR38.8 crores, as against a loss of INR44.9 crores on a year-on-year basis.

On the capital adequacy front, we continue to remain well capitalized. Capital adequacy of our bank is currently 36.4%, as compared to 41.4% as on nine months ended FY ’22. Tier 1 comprised of 33.5% and Tier 2 comprised of 2.9%.

Finally to summarize, we envisage multiple tailwinds that will enable the bank to scale up on a faster pace. We foresee five growth drivers which will act as the catalysts for growth in Q4 FY ’23. On the asset front, the growth will be driven by rising disbursement and sustained momentum in Vikas loans. The Vikas loan portfolio book currently stands at INR828 crores, with a PAR of 0.9%. The bank intends to focus on product diversification and bridge the gap between inclusive finance and the noninclusive finance mix and move towards a robust ratio of 50% each.

Moving on to deposits. We would also like to focus on the CASA mix and raise deposits to fuel growth going ahead. Talking about asset quality, it’s our endeavor to achieve net NPA of 2% on the back of robust collections by the end of this financial year.

Lastly, at Suryoday, we believe in technological prowess and how it can be leveraged to achieve [Technical Issues] growth. The usage of multiple applications such as Sarathi and Jyoti app helps us in reducing not only turnaround time, but improve efficiency and effectiveness substantially across both asset and liability products. We are confident on a quarter-on-quarter improved performance and deliver a very robust and sustainable performance in FY ’24.

Thank you for your continued support, and over to Shailesh. Thank you.

Operator

Thank you. [Operator Instructions] The first question is from the line of Varun Ghia from Dimensional Securities. Please go ahead.

Varun Ghia — Dimensional Securities Pvt. Ltd. — Analyst

Hello. Good morning, sir. I have two questions. One is I think, the opex cost, the employee and operating expenses both have gone up. The number of employees have gone up, but the addition in the branches have been more or less similar, so these employees have been added in the existing areas and what role are they added for? And even the operating expenses have jumped quite a bit. So this and secondly, the yields have been going down consistently quarter-on-quarter despite the interest rate hikes and all. So if you can explain that too? And when do you see these yields increasing?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Thank you, Varun. Over to Kanishka.

Kanishka Chaudhary — Chief Financial Officer

Hey, hi, good morning, Varun. So first, on the employee cost, you will see that we have had about a INR13 crore increase on a quarter-on-quarter basis. That’s largely explained by two facts. One is you would remember that in the last quarter, we had released INR7 crores of provisions which were no longer required. So that’s one of the reasons why the numbers were suppressed for the last quarter. And in this quarter, we had a concerted effort to increase our feet on street and especially in the inclusive finance business. We had increased the head count there by almost 400 people, which has also resulted in an organic growth in our compensation expenses.

Insofar as the other expenses are concerned, there are three elements to that. First is the loss on sale that we had booked on account of the ARC transaction of INR21.5 crores. There is an increase in depreciation by INR3 crores because our transformation project got completed and we capitalized it. The last is that we have had some expenses of about INR1 crore-odd across stationery and others where we have had increases.

Coming to your point on the yields, our yields have dropped by about 40 basis points quarter-on-quarter. One of the reason is that our mix is gradually shifting towards retail assets. About — as things stand today, about 40% of the portfolio is retail assets today. What it means is that, over a period of time, while there will be a bit of a compression in the yields, it will also result in the amount of loan loss provisioning that we have in a steady state. So that’s what we are targeting at this particular point in time.

Apart from that, I think, if you look at the interest volatility, it has been our endeavor, especially in mortgage businesses and FIG, to have floating-rate loans [Technical Issues] continue.

Varun Ghia — Dimensional Securities Pvt. Ltd. — Analyst

So what would be the guidance on yields going forward for the full year [Speech Overlap]?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Couple of things, Varun, will happen. One is that, as we increase the portfolio of Vikas loan, which is curated, graduated individual loans, which currently we operate at around 28% and the capacity which has got released out of the sale of these assets, which now goes purely from a servicing point of view for the collection team, the increase in portfolio which we really anticipate now in the next few months should really add to at least the compensating yield of around 40 basis points by March or April of next year. So we should be back to where we were at around closer to 18.5% — 18.8%.

Kanishka Chaudhary — Chief Financial Officer

And the other thing to note, Varun, would be that now with — the nonpaying GNPA portfolio having been taken off the balance sheet, so that will also result in a bit of an increase in the yields overall.

Operator

Thank you. We’ll move onto the next question that is from the line of Renish [Phonetic].

Unidentified Participant — — Analyst

Hello, am I audible?

Unidentified Speaker —

Yes, Renish.

Operator

Yes, sir, please proceed.

Unidentified Participant — — Analyst

Yeah, sir, two questions from my side. So one, again, on the yield. So sir, what is the cumulative rate hike we have taken on the MFI book, because we have seen industry across have hiked rates by anywhere between 150 to 200 basis points. And I do remember that the last quarter, we haven’t had any rate hikes on MFI book, so just wanted to know whether we have increased rates in this quarter.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Renish, we have not increased the rate, but what we are kind of doing is that increasing the tilt towards the Vikas loan, which is a little higher price and we deal with a customer on a one-on-one basis through the standing instruction directly debiting our savings account. So as the percentage of that portfolio grows, the overall yield adjustment towards the upward side will happen. Otherwise, we did not really anticipate any increase in the microfinance portfolio, considering our cost of funds has been broadly flat, but if really required, we will increase it by 50 basis points. We’re certainly not in this quarter. We’ll watch and then if our cost of funds goes up, then there will be a corresponding increase at least to 50 basis points on the JLG loans, and the Vikas loan and the Vikas loan will continue to operate at the same rate, which is currently at 28, that will probably move it up by 50 basis points or 75 basis points from the Q1 of next year, but however, the natural balancing will happen as the percentage of Vikas loan portfolio which is currently around INR900 crores to INR1,000 crores [Indecipherable] February, of the overall portfolio of around INR3,200 crores will go to probably INR1,200 crores, is what we’re expecting by the end of March.

Unidentified Participant — — Analyst

So sir, what is the yield difference between JLG and Vikas loan?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

3%.

Kanishka Chaudhary — Chief Financial Officer

Yes, 3%.

Unidentified Participant — — Analyst

So Vikas loan is only higher by 3%.

Kanishka Chaudhary — Chief Financial Officer

Absolutely, yes.

Unidentified Participant — — Analyst

Okay, okay. And sir, my second question is on the incremental book. In PPT, you have mentioned that — I mean, we have split between post-June ’21 originated book and the pre-June ’21 originated book, wherein it’s clearly visible that the collection efficiency or let’s say, the portfolio performance is much better in the new book. So if you could just highlight, let’s say, a broad two, three credit filters or geography changes which we have implemented post-June ’21 which is leading to this kind of portfolio performance.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Yes, Renish, what we have done is that, in the filters in terms of graduating loans, we are more operating on a model of a second cycle higher than the first cycle, third cycle higher than the second cycle. So we have introduced this RTR where we want to have a full grip in terms of the household economic status. So many a times, a good repayment type record of 25,000 does not naturally mean that the repayment type record will be good for 35,000 and 55,000 and 65,000. So we have stopped growing within the book only by increasing ticket sizes. Any increase in ticket sizes has to be accompanied by an individual credit assessment, which is possible now through this RTR.

And we’re also collecting some documents which clearly demonstrate the stability of the household in a particular geographical location, which is we either collect the document in terms of a gas bill — gas connection bill, which demonstrates that they have moved in and then they shifted — and that does reflects that or and also — or in terms of any proof of their residence that they have. So any higher-ticket loan is accompanied by the assessment of the customer to handle more than 60,000. Till 60,000, while we’ll go through the normal JLG process of a group assessment and or an AOCPV [Phonetic] as we call it, which is a quality assurance officer visiting. Inside the app, the decisioning itself is centralized, they only capture the data and based on various tools available to it.

Also the new microfinance regulations gives — has enabled us to also collect details of the household, at least of one significant earning number. So with — Equifax also will now start giving up a composite report, so we’ll utilize that composite report and further strengthen it. I think that’s one reason. And in some of the geographies where it has been very difficult, specifically in terms of say, Maharashtra, we have slowed down our business and focused only in terms of customers who have passed through both COVID one and two without any delay. So we aren’t really acquiring any new-to-credit customers in those difficult markets for now.

Unidentified Participant — — Analyst

Got it.

Unidentified Participant — — Analyst

Got it. This is very helpful, sir. Best of luck. Thank you, sir.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Thank you, Renish.

Operator

Thank you. We’ll move on to the next question that is from the line of Anil Tulsiram from ContrarianValue Edge. Please go ahead.

Anil Tulsiram — ContrarianValue Edge — Analyst

Yeah, thank you for the opportunity. Sir, the first question is, both during de-mon and COVID, our credit costs were higher than our peers. So what are the reasons for the same? And so that’s the first question.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Yes, Anil, the thing is that overall, there is the data which is available at the industry level which really talks about a 19% or 14%. So there could be no various methodologies in which each one will operate, but clearly, we see a credit loss of around closer to 20% on the March 31 to 1/2024 [Phonetic]. And currently, as everything, the dust has settled down.

What we are really looking at is in terms of we have not kind of funded any customer who are in delinquency. And to an extent, sometimes, nonfunding of a delinquent customer will take the customer to delinquency level, but that’s the culture code for the organization. We didn’t want to fund more as a motivation for them to repay their previous loan. So to that extent, there could be some discrepancies, but however, I think the best way to compare would be to the published industry data which is available in terms of both write-off, as well as in terms of 90-plus and compare the performance of any institution, including ours.

So I’ll leave that judgment to you, but however, what we are really now trying to do is that, there are five lakh approximately delinquent customers who just flow through either write-off or are in GNB [Phonetic]. We have put a collection force of 1,000 to kind of get a complete handle in terms of how much of them would really end up [Technical Issues]. Our guess is that around close to 35% of that by continuously pursuing and where the customers are still available, we will be able to recover. And that is a reason where we have sold our portfolio without any other restructuring of INR135 crores. And we are fairly confident we’ll recover more than INR135 crores of the portfolio which we have sold, which translates to more than 30%.

And currently we have — the learnings of specifically the COVID 1 and 2 have been that, well, individual assessment becomes paramount in terms of increase in ticket sizes beyond a particular level, which for us currently we consider 60,000. The operating mechanism for JLG [Phonetic] is 50,000, max 60,000, depending on the number of cycles. Post that, we’ll move to individual assessment. And this what — where it can likely help is that, even in times of turbulence or any other challenges, far more effective to reach out to the customer one on one because you don’t get them influenced by the influence of the group in — by either small political disturbances or economic disturbances. And that happens on the back of assessment. And hopefully based on this, we are fairly confident that excluding any other challenges that may really come up, we’ll be able to deliver a better performance as a dealing on a one-on-one basis. On the comparison, I think probably we’ll share the industry data one-on-one basis.

Unidentified Participant — — Analyst

Yes. Thanks.

Anil Tulsiram — ContrarianValue Edge — Analyst

Yes. Sir, the second question is what’s our assessment of our strength of middle and top management. And do you think we need to strengthen it? Or you are already happy with it?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

It’s an ongoing exercise, Anil, but however, I think where we need to really, really strengthen now while that good times are really returning and that is where we tend to do some slack in terms of not putting the monitoring layers, so we have built up a very solid monitoring layer at the central office level, which we’ll now take it to the regional office level, so which means even connecting up with a customer, assessment, underwriting on individual basis, the data collected will be centralized. To that extent, I think we’ll be strengthening, at least around 150 to 200 people for the current existing number of branches and the centralized monitoring specifically for inclusive finance.

And on the retail assets front, we are expanding our team as we fairly got a good grip in terms of — specifically during the last year. One of the businesses which we are very, very bullish is the 5 lakh to 10 lakh segment and the micro home loan which currently operates at around — close to 16% to 18%, a small portfolio of around INR60 crores at this point of time but zero delinquency portfolio.

We intend that we will continue building on that, at least to an extent of around INR250 crores to INR300 crores end of next year. And that would really require probably adding another 150 people and that partially will be even at the middle management level.

Anil Tulsiram — ContrarianValue Edge — Analyst

Yes, sir, and the last question is when I compared your liability strategy with your peers, say, like Ujjivan, our strategy is totally different, like we have very less liability branches and we are not even expanding the liability branches very aggressively. And in the — one of the earlier calls, you said you are happy with the double-digit wholesale borrowings also. So can you explain our liability strategy a little bit in more detail?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

We have been wanting to focus only on — specifically on the retail segment, to start with, through the FD route and thereafter convert itself into CASA. Our CASA strategy is predominantly focused in terms of getting the real granular, sticky, mid-sized CASA. So we haven’t really kind of had a strategy in terms of acquiring large-value SAR [Phonetic] accounts because we believe that, specifically in terms of large-value [Indecipherable] accounts, the flow-through account is almost like a cash management. So however, we are clear that the minimum of our 22% is what we wanted to reach at the end of the financial year. We are lower at this point of time. We would focus on that in terms of focusing [Indecipherable] in the 2 lakh to 5 lakh segment. So we are reinitiating [Phonetic] that will be a focus area for the Q4 and obviously continues to do so.

On the retail liabilities, we have been pretty strong, closer to around nine — we were at 85%, 86%. Currently it’s at 77.9%. Our intent is to really increase the 3 lakh to 15 lakh of focus in the retail asset — retail liabilities, which is in terms of fixed deposits. And we had a pretty good traction during the last quarter, and we intend that we’ll continue that even for the coming quarters.

And in spite of the increased rates, which we rolled out for a period of three weeks with a campaign, our overall cost of deposits and cost of funds remains almost flat. And probably it will marginally go up now as you kind of acquire more deposits at a little higher pricing. So that will continue to be our strategy. However, we’re adding another 50 branches during the next financial year, our existing asset branches converting them into liability branches. So we can have closer to 150 branches by end of FY ’24. And the rollout of that will start from Q1. Q1, probably we’ll have 25 branches converted. And thereafter, gradually, so we’ll add approximately 50 new liability branches, many of them getting converted from our existing asset branches, larger-size branches. Maybe we will have to do a shifting of those locations to a little more visible locations. So that exercise will be on.

Anil Tulsiram — ContrarianValue Edge — Analyst

Yes, thank you, sir. I’ll join back the queue.

Operator

Thank you. The next question is from the line of Sachin Shah from SS Securities, please go ahead.

Sachin Shah — SS Securities — Analyst

Yeah, thank you for giving me an opportunity. I have couple of questions. First is, we have acquired some one lakh customer in this quarter and approximately 3.4 lakh customers in nine month or just wanted to understand how many from this would be new to credit?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

I don’t have an immediate data, but we have defocused on new to credit substantially from

Kanishka Chaudhary — Chief Financial Officer

JLG zero.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

JLG is much lesser than even 5,000 customers. Max, it will be around 5,000 customers. We are focusing more in terms of NTB but not NTC in microfinance at this point of time.

Sachin Shah — SS Securities — Analyst

Okay. And my next question will be on broader-level question. One of the largest NBFC, that is Bajaj Finance, in their latest release mentioned of entering the MFI space. If that may happen, how do we see the competition landscape shaping for us as an SFB focused on inclusive finance?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Markets are large, for sure, so each one will kind of carve out a space but microfinance being a business where we will have to feet on street and the required infrastructure, any new competitor entering irrespective of the size, will take time, but however, I think our intent has not been to kind of continues to grow our business only in unsecured JLG business, too large a market. For instance, when we do our retail footprint, there are — approximately, two lakhs of our existing customers have excellent track record in mortgages — micro mortgages, either in terms of a small home loan — when I say small, it could be anywhere between 5 lakh to 25 lakhs. This is purely from a JLG customer segment where we have visibility only of the customer data. We don’t have the visibility in terms of the household data.

So this is a very large market, so we have — the focus has been in terms of collections, I am getting it back on track, but starting from Q1 of next year, our endeavor will be to kind of convert a pretty large percentage of our existing customer base into secured loan customers. When I say large, it’s approximately at least 15% to 20%.

So the markets are large once they enter and depending on what their strategies will do it. The microfinance segment as of now has not translated itself into repaying through the bank however our Vikas loan portfolio of 80,000 customers and currently we have — 1 lakh customers we have, the entire repayment has been insisted through our own savings account and if we are able to do that very successfully, then that becomes operative account rather than only a disbursement account which will lead to various opportunities so we will to have stay focused on what we are. Currently we are at only INR5500 crores, our focus will be to how to strongly grow by 30% year on year rather than be little distracted about any new entrance or any other increase to competition.

Sachin Shah — SS Securities — Analyst

That was really helpful. Thank you. Thank you so much.

Operator

Thank you. The next question is from the line of Manav Vijay from Deep Financial Consultants. Please go ahead.

Manav Vijay — Deep Financial Consultants — Analyst

Yes sir, thank you very much, sir. Sir, first of all, if you can tell us, so what is the loan growth that you’re targeting for FY ’24?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

As we’ve guided, Manav, earlier, we continued to be confident and want to stay in the range of around 25% to 35%, so the sweet spot for us would be around 30%, strong asset growth, continuing to do on that as we did in the new portfolio of post June ’21, keep the 90 plus delinquency at less than half a percent and also just kind of start meaningful standard asset provisioning, starting from FY ’24 on the unsecured piece of the business. So 30% will be our target and the range will be 25% to 35%.

Manav Vijay — Deep Financial Consultants — Analyst

Okay. And I like the way we have ended this quarter with around 62% on the JLG side and rest on the secured assets side, is there any target number that you have for FY’24 to end with?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

The same ratio will be good because 62 adjustment has happened out of the sale of the year of assets of approximately INR430 crores, so there will be a fill-up which will happen. The target which we will get for FY’25 around closer to 50:50. If you go to work, we continued to maintain a very strong 60:40 which will be vey good.

Manav Vijay — Deep Financial Consultants — Analyst

Okay. And in that case — so since the secured portfolio will be growing, let’s say at a slightly faster pace, so what is the credit cost that you guys are looking for in FY’24?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Irrespective of the actual credit cost what we are likely to do is, we are kind of — we have been speaking on guiding, is that to have a meaningful standard asset provision for the unsecured IF business, probably kind of closer to around 1.5% to 2% year on year. The history kind of at least shows us that three, four years of good growth with very minimal credit cost and then some event or the other which is absolutely unpredictable whether it is a demonetization [Phonetic] Or it’s COVID or next risk could be anything else or it may not even happen but just that if it were to happen, we would like to kind of start the standard asset provisioning and have a very robust closer to around 5 to 6%, so to that extent if I have to guide including making that provision would be closer to 2%.

Manav Vijay — Deep Financial Consultants — Analyst

2% in total

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Yeah, in total.

Manav Vijay — Deep Financial Consultants — Analyst

My last question to you, sir, so regarding the SR that we have received from Edelweiss of INR135 crores, so what kind of provisioning you need to make on them in terms of let’s say the time provisions?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

So we have already discounted our SRs in terms of valuation. If you note that our net book value at the time of transfer was around INR250 crores and we discounted that further and then sold it at INR135 crores which closely approximates to the collection ability that we have forecasted out of the INR490 crores of overall pool. For the time being, we see ourselves being able to do the collection up to that amount so as of now no provision is foreseen.

Manav Vijay — Deep Financial Consultants — Analyst

Okay. And sir, last question, so in quarter two, you were guiding for around INR130 crores of operation provision cost in H2, now you have done INR40 crores in this quarter, are you still sticking to that number of INR130 crores?

Kanishka Chaudhary — Chief Financial Officer

No. Given how things have turned out, we are not looking at that kind of a number. We may possibly have another INR50 crores to INR60 crores for Q4 is what we would have in mind basically to be able to clean up whatever residual COVID impact of that remains with us.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

So Manav currently our GNPA is INR230 crores of which INR60 crores is ECLGS loans, so while we continue to kind of capture but the repayment seems to be — reimbursement have started, so while it will take time, we are fairly confident that we will cover at least 30% — 50% of the INR60 crores over the next couple of months but over a period of time that is reimbursable one guarantee and of the remaining INR170 crores, we currently have a provision of around closer to INR80 crores and we have to cover even the entire balance probably as Kanishka guided, another INR50 crores to INR60 crores is the maximum that we need to do. Around 15% to 20% of the portfolio of even GNPA customer is continuously paying customers. So we do expect to recover out of the INR160 crores [Phonetic] at least around closer to INR40 crores to INR50 crores.

Manav Vijay — Deep Financial Consultants — Analyst

Okay. Thank you and all the best for actually looking forward for you guys to do INR40 crores [Indecipherable] monthly from March onwards, sir.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Thank you, Manav.

Operator

Thank you. The next question is from the line of Yash Agarwal from GM Financial. Please go ahead.

Yash Agarwal — GM Financial. — Analyst

Yeah, hi. I do want to check, is there any interest reversal there this quarter that you’ve done?

Kanishka Chaudhary — Chief Financial Officer

Yeah, so there has been a bit of an interest reversal on account of the newly tagged NPS. At a gross level, the new NPS for the quarter has remained more or less the same at around INR160 odd crores which translates to about INR7 crores of income reversal, which is what we would have had in the last quarter as well.

Yash Agarwal — GM Financial. — Analyst

Okay. Okay. Got it. And so, again coming back to the operating profit, even if I adjust for the provisions made on the ARC, the operating profit is down 8% to 10% quarter on quarter, so in the context what are the drivers that you see that — right now you are doing about INR80 crores to INR85 crores quarterly and guiding for about INR110 crores, INR120 Crore quarterly from March or maybe the first quarter of next year. So what are the major drivers you see taking it to that number? How realistic is this number that you put across?

Kanishka Chaudhary — Chief Financial Officer

Yeah. So that will almost entirely depend on the amount of book growth that we have. So from the 5400 [Phonetic] levels that we are here today, we want to be somewhere closer to 6000 to 6200 [Phonetic] in that particular range and like we said, we have been fairly cautious in growing our Vikas loan book. So in this particular quarter, we would possibly have a 50:50 mix between Vikas loan and the traditional loans. So that uptick is what is going to help us increase [Technical Issues].

Yash Agarwal — GM Financial. — Analyst

Okay. And do the costs plateau out from here about INR125 crores of operating expense despite the fact that we could grow about 8% or 10% in the fourth quarter? Would that plateau out here? Is this…

Kanishka Chaudhary — Chief Financial Officer

So we see a little bit of increase in our cost because there is some staffing still left to be done in the inclusive finance segment in terms of feet on street, but after that, I mean we would be fairly there. So there would be some increase on employee costs but apart from that we would be fairly stable.

Yash Agarwal — GM Financial. — Analyst

Okay all right. Best of luck. Thank you.

Kanishka Chaudhary — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Sanjay Pandit from 1729 Capital. Please go ahead.

Sanjay Pandit — 1729 Capital. — Analyst

Hello, my question was sort of thinking longer term. Obviously there is still some provisions to be made. There is some dealing within amidst of the effects of COVID etc. If you look beyond the next four quarters i.e. into FY’25 and after, what kind of sort of returns on assets and return on equity are you targeting as being sort of realistic for your business long-term?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Ideally the way in which we have build the model earlier, we will kind of not want to repeat it and quite a bit of take the learnings of the COVID. We have to look back into it. I think it becomes extremely important that if the financial services are delivered at a household level meaningfully which we mean that a lot more effort and cost goes in terms of assessing them first, but if you adjust for credit loss and the opportunities in terms of growth it is pretty significant that the operating cost can remain flat as a percentage, I mean as an amount and there could be a volume kicker of around approximately 25 to 30 [Phonetic] that would translate into ROI of around 3% to 3.5% but more importantly it be very sustainable after making a meaningful standard as the provisioning is around 15% to 16% is what we will be targeting for FY’24 and probably thereafter a steady state between — anywhere between 16% to 18% on a consistent basis without any swings including such years when it happens is what will be targeting.

Sanjay Pandit — 1729 Capital. — Analyst

I see. Okay. Thank you.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Thanks.

Operator

Thank you. The next is question from the line of Anjana Shah from Shah Investments. Please go ahead.

Anjana Shah — Shah Investments — Analyst

Thank you for this opportunity sir. Couple of questions from my end. Sir, we planned to take our Vikas loan book to INR1200 crores from the current, say about INR828 crores. So could you throw some color on this product and the bank strategy on this product going forward?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Vikas loan is a graduated loan given on an individual basis without any group guarantee and the repayment of that is done through the existing savings account of the customer and we do a standing instruction. Currently, the clearance rate on the due date is approximately closer to 90%. The intent is to really kind of keeping it — it used to be at 94, but stabilized at 90. The intent is to really take it. What it really means is that the underlying savings account becomes an operative account for us to introduce various products including meaningful savings and government insurance schemes like PMJJY and PMSVY. Based on our own assessment whenever we do our death claim processing unfortunately of the customer or of the spouse in majority of the cases around 12,000 to 15,000 claims, we find that the penetration of even the basic insurance scheme of the government is very close to nil without any exaggeration. So such things to be built upon it which really leads to the customer stickiness, it is imperative that the dealing is not at a group level but an individual level. Considering the cost of servicing at this point of time we operate around 28% and the traction now currently is that we do around 40% of our monthly disbursement of around INR350 crores in the Vikas loan. The shortlisted customers are approximately around 6 lakh based on various parameters including their retail track records with other institutions. So currently we have 1 lakh customer. The intent is to really add closer to 1 lakh customers in the Q4, making it closer to around 2 lakh customers. So that is our strategy on that front and we use what we call as a Sarathi app which captures the entire household data and the decisioning is done on a centralized basis for loans which are above INR65,000 [Phonetic]. So the — given that our target rate — our run rate at this point of time is INR350 crores to INR400 crores of the INR1000 crores that we will do, we are targeting that will cover close to INR400 crores to INR450 crores in Vikas loan for this quarter, which takes it to closer to INR1200 crore at the end of this financial year.

Anjana Shah — Shah Investments — Analyst

Sir then, is Vikas loan as a product only offered to existing MFI customers?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

As of now, yeah, but with the combined credit bureau being released by the various credit bureau at this point of time, the intent is to do Vikas loan even for new to bank customers but not NTC because it is purely based on the long track record of the customer across institutions. So we are yet to introduce but we look forward to introduce it towards close of this financial year but specifically for scale up from Q1 and not even Q1 probably Q2 of the next financial year.

Anjana Shah — Shah Investments — Analyst

Sure sir, sure. Okay. So, and how do we see our marginal cost or overall cost of borrowing moving ahead going forward?

Kanishka Chaudhary — Chief Financial Officer

So if you look at our funding profile, two-thirds is deposit and about one-third [Phonetic] is borrowing. We expect that in this quarter, we may have around 50 bps of increase in the deposit rates overall, right, which will mean that on an weighted average basis, we will have around 30 basis points of increase in our cost of funds. So that is like maximum that we are anticipating at this particular point in time.

Anjana Shah — Shah Investments — Analyst

Sure sir. Thank you so much. That was really helpful.

Operator

Thank you. [Operator Instructions] The next question from the line of Anil Tulsiram from Contrarian Value Edge. Please go ahead.

Anil Tulsiram — Contrarian Value Edge — Analyst

Yeah. Thanks once again. Sir, most of our products are targeted towards informal and semiformal segments, so do we have any plans to introduce the products for formal customer, say, credit cards, personal loan or for MSME formal segment?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

That is focus of last year this year and probably going forward will be to stabilize our entire portfolio. We do formal segment in terms of secured business loan on the underlying business rather than only on the strength of the property, so that business currently clocks around close to INR25 crores to INR30 crores. The intent is to scale that out as interest rates are hardening, banks become far and more competitive compared to NBFCs. We target anywhere between INR30 lakhs [Phonetic] to around INR150 lakhs [Phonetic] on that. So intend growing that business segment which will be more on the formal basis including all returns file, GST, so other than that, we do not have any immediate plan except for doing some pilots with some fintechs for the personal loans at this point of time.

Anil Tulsiram — Contrarian Value Edge — Analyst

Sir, and the last question is, do we have any plans to introduce risk based pricing in the microfinance segments based on geographies or the customer vintage period?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

We need to. Currently we do only segmental base in terms of first cycle, second cycle, third cycle, but increasingly depending on the credit behavior of various geographies, it will really be scientific to do risk based pricing based on the customer profile as well as in terms of the geographies. Currently we don’t — we are not doing and we do not have any intent to do it, so probably in the immediate next quarter but yeah we should really move on to it.

Anil Tulsiram — Contrarian Value Edge — Analyst

Thank you.,

Operator

Thank you. We will move on to the next question that is from the line of Pulavarthi Sai Kiran from Pulavarthi Advisors. Please go ahead.

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Hi sir, thanks a lot for taking my question. Good set of numbers. So just quickly on the liquidity on the balance sheet, it is still pretty high. I remember you guiding us saying that this liquidity will slowly inch downwards as the balance sheet grows. What is the thought process over there? Thank you.

Kanishka Chaudhary — Chief Financial Officer

So the liquidity has been reducing over time as the funding book grows, right? We will be personally comfortable with having liquidity closer to around 10% of our loan book that is the kind of number that we would be wanting to drive. I think this is one number that has been consistently reducing quarter on quarter as a natural organic growth of the business so I think by Q4, we will be there.

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

But if you look at from September to December, the investment book is marginally increased, but cash and balances have increased by almost like INR220, INR230 crores, so that surprised me, in September, yeah, from March to September, it had fallen but from September to December, it has been increasing, probably it is also acting as a drag on the margins.

Kanishka Chaudhary — Chief Financial Officer

Yeah. So that is a little bit temporary side to be honest because we had a deposit drive to attract retail balances for three weeks in December. So there is a spurt because of that, but that will get taken care of in this quarter.

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Got it and just a couple of questions on the data keeping side. If you can just help us to understand the movement of NPL in terms of slippages and recoveries upgrades and write offs for this quarter?

Kanishka Chaudhary — Chief Financial Officer

So in this quarter two things happened. So one is that, from the NPL levels of last quarter, we had around INR160 crores of new NPL getting added and from that, we have had around INR70 crores of recoveries and the rest INR430 crores moving out because of the ARC transaction.

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

So there are no write offs this quarter?

Kanishka Chaudhary — Chief Financial Officer

No, no. No write offs for this quarter.

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Got it. And this — just one more thing in terms of recoveries plus upgrades. Again just trying to understand how this trend is progressing because you guys have put in lot of efforts in terms of investing in the people for the recoveries and upgrades, how this is progressing? How one should look at for the next couple of quarters probably?

Kanishka Chaudhary — Chief Financial Officer

So, the focus on collection continues. We had a combination of in-house and third party teams working on the — based on the kind of performance that we have seen of the third party teams, we will do a bit of a recheck. There are some part of the portfolio that we will pull back in, but over time, I think the idea is that the entire portfolio that has been sold to the ARC and written off portfolio is something that we will be taking care of ourselves. So in one of the previous question, I talked off a little bit of increase in headcount in the inclusive finance segment, so that is what it will address.

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Got it. Got it. But just trying to understand this moment of NPLs, when I just put this into the numbers like INR532 crores plus INR160 crores minus INR498 crores gets me to the closing entry of INR194 crores

Kanishka Chaudhary — Chief Financial Officer

Correct. So INR228 crores is what we have, right?

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Yeah.

Kanishka Chaudhary — Chief Financial Officer

Right. So there have been some runoffs as well because of which we came to that number. I will give you — I mean I can separately share the quarter wise split with you.

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Got it. And last question from my side in terms of the restructured advances, I think you guys have got 65% collection efficiency. Do you foresee a scenario where this restructured advances, how this will get run off and probably is there any scope for increase in the collection efficiency in these numbers?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Whatever has been restructured, where there is moratorium, coming out of the moratorium, quite a bit of that flowed into NPA. The current ones which we are kind of having a standard, it is behaving exactly like any other good portfolio, fairly confident that the standard restructured advances as on December, 95% will continue to be standard and will close from the customers again.

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Sir, just trying to understand how this restructured will move into the normal book. that means that they are still having some principal or interest moratorium that is why they are classified as restructured?

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

No. Once restructured, they continued to be classified and referred as restructured, but there is no moratorium and all the moratorium for us got over in the month of June. So for maximum for three month, if they are not paid by September or latest by October, they all — those customers became NPA. So we do not have any moratorium book running at all beyond June.

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Got it sir. So I think the restructured as of now does not have any moratoriums and that restructured has collection efficiency of 65%. Currently they are broadly — as there is no overlap between restructure and NPS, majority of these or 100% of this is standard. Is my understanding right?

Kanishka Chaudhary — Chief Financial Officer

Right. Yeah. So one other thing, Sai, to your previous question. So we have added around INR300 crores reduction in our NPS. So the work of that is INR160 crores of new NPA, INR30 crores of recoveries and INR430 crores of assets moving out due to the ARC transaction. So that gives you the INR300 crore reduction book [Phonetic].

Pulavarthi Sai Kiran — Pulavarthi Advisors — Analyst

Got it. Understood. Okay. Thank you very much.

Operator

Thank you. Ladies and gentlemen that was the last question. I now have the conference over to the management for the closing comments.

Baskar Babu Ramachandran — Managing Director and Chief Executive Officer

Thank you very much. As we — in the last three quarters, there has been a sequential improvement. We really see a robust performance including tighter controls and monitoring systems and addition of quality manpower. We are fairly confident in terms of an asset growth of ending the year with around close to 25% as Kanishka guided around closer to INR6000 crores, INR6100 crores and robust growth in terms of retail liabilities. The focus continues to be on CASA. Our intent is to really move it from 15% to closer to 17% to 20% by end of this financial year. We are targeting a [Indecipherable] of INR40 crores starting from March and slightly on track considering the current run rate as well as the growth in quality disbursements. So we look forward to deliver a very robust financial year in FY’24 and subsequently build on it for future. Thank you very much for your continued support.

Operator

Thank you. Ladies and gentlemen, on behalf of Centrum Broking Limited that concludes this conference. We thank you for joining us and you may now disconnect your lines. Thank you.