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Edited Transcript of AUFI.NS earnings conference call or presentation 26-Jul-19 8:30am GMT

Q1 2020 AU Small Finance Bank Ltd Earnings Call

JAIPUR Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of AU Small Finance Bank Ltd earnings conference call or presentation Friday, July 26, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bhaskar Vittal Karkera

AU Small Finance Bank Limited - Chief of Wheels

* Deepak Jain

AU Small Finance Bank Limited - CFO

* Rishi Dhariwal

AU Small Finance Bank Limited - Chief of Secured Business Loans

* Sanjay Agarwal

AU Small Finance Bank Limited - MD, CEO & Director

* Sunil Parnami

AU Small Finance Bank Limited - Chief of IR, M&A

* Uttam Tibrewal

AU Small Finance Bank Limited - Whole Time Director

* Vivek Tripathi

AU Small Finance Bank Limited - Chief of Strategy Business Solutions & Transaction Banking

* Yogesh Jain

AU Small Finance Bank Limited - Group Head of Strategy - Treasury, FIG, DCM, Wholesale Liability and Investor Relation

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Conference Call Participants

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* Aditya Jain

Citigroup Inc, Research Division - Assistant VP & Senior Research Associate

* Amit Nanavati

Nomura Securities Co. Ltd., Research Division - Associate

* Ankit Choudhary

Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst

* Darpin Shah

HDFC Securities Limited, Research Division - Equity Analyst

* M.B. Mahesh

Kotak Securities (Institutional Equities) - Senior Analyst

* Nidhesh Jain

Investec Bank Limited (SA), Research Division - Research Analyst

* Nikhil Walecha;Sundaram Mutual Fund;Analyst

* Nitin Kumar Aggarwal

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Rohan Mandora

Equirus Securities Private Limited, Research Division - Analyst

* Saurabh Dhole

Trivantage Capital Management India Pvt. Ltd - Senior Financial Sector Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the AU Small Finance Bank Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Sunil Parnami from CDR India (sic) [AU Small Finance Bank]. Thank you, and over to you, sir.

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Sunil Parnami, AU Small Finance Bank Limited - Chief of IR, M&A [2]

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Thank you, AO. This is Sunil Parnami from AU Small Finance Bank, so just a correction on that. Good afternoon, everyone, and welcome to AU Small Finance Bank's Q1 FY '20 Results Conference Call.

Today, on this call, from AU Bank side, we have our MD and CEO, Mr. Sanjay Agarwal; our Executive Director, Mr. Uttam Tibrewal; and our CFO, Mr. Deepak Jain, and other members of the senior management team. Since most of you have already interacted with the members of the management team, therefore, I would request them to please introduce themselves as and when they interact with you further on this call.

On the call, I also have my colleagues, Hemant Sethia and Ayush Rungta from the IR and the M&A team of the bank.

Before we begin, a standard disclaimer. Certain statements made in today's discussions may be forward-looking in nature and a note to that effect was stated in the earnings call invite sent to you earlier. We trust you would have received the documents covering our Q1 FY '20 results and would have gone through the same. We will begin this call with the opening remarks, following which we will have the floor open for your questions.

And into the weaker sentiments and a challenging macro, in the first quarter of FY '20, our core performance, that is our growth and asset quality, were on track. And there was a further marked improvement in our incremental spreads too.

Last quarter, our AUM grew 44%, disbursement rose 40% and deposits were up nearly 100% compared to same quarter last year. As we had outlined, sequentially our new loan disbursement IRR improved 90 bps, and our cost of funds marginally declined by 10 bps to 7.9%. NPAs, which generally are prone to elevate in the first and the second quarter, were stable despite we moving to daily NPA tagging of all loans.

As we all know since our inception, AU has grown as a diversified retail asset franchise. And today, nearly 80% of our AUM is secured, small, driven for income generation and risk priced. And between some of the other banks, this continues to be one of our key differentiator. As we have outlined as a strategy, we want to remain focused on the retail diversification, and therefore, you would see that even in FY '22, retail would continue to be as a similar proportion or thereabouts. So over the next 11 quarters, until we achieve our first medium-term milestone as a small finance bank, the strategy is to remain retail focused.

As a young small finance bank, we are trying to replicate retail in our deposit franchise as well. In that, we undertook some key changes in the previous quarter, which will be covered in detail by our Executive Director, Mr. Uttam Tibrewal, when he would interact later with you on this call.

As a measure of prudence, we carried relatively higher liquidity in the previous quarter. We did a securitization transaction amounting INR 1,336 crores. Moreover, we divested 0.8% equity stake out of our total equity stake of 7.23% in Avas Financiers Limited. High liquidity and leverage had some impact on our margins. So at an overall level, there is surplus liquidity in the system, and we expect interest rates to further ease-up -- ease going forward. We would continue to maintain our cautions, both on liquidity as well as our cost of funds going ahead.

Last quarter, we further strengthened our risk monitoring and supervision. We need to take all the required core corrections, including discontinuing SBL-SME lending, which we were anyway not going for the last 8 to 10 quarters. Starting first April, we have merged that SBL-SME team with the Agri SME and housed this merged vertical within our small and mid-corporate segments, given the significant overlaps in the borrower profile and their requirements for holistic solution around terms to working capital lending, current accounts, payments and so on and so forth. And all of these verticals are housed at our transaction banking or commercial banking fees. Additional figures also include assigning highest focus on solvency, governance and liquidity in our NBFC and real estate book, which has anyway remained static for the last 4 quarters and a concentrated reduction in the average ticket size in whatever negligible business that we most selectively did in these verticals in the last few months.

Last quarter, our new product launches include personal loans and a 3-in-1 Bank Demat and Trading account. To foster the customer convenience, we launched missed call banking. We continue to get strong traction on our internal lead investment app and we converted nearly 8,700 leads amounting to a total business of INR 131 crores, purely through internal lead generation. We have made a significant progress on our discriminate debt and payment initiatives. And some of them are already in the works and will be unveiled soon.

We would now like -- now we would like to briefly touch upon the headline of those numbers before opening the floor for questions.

Our AUM grew 44%, quarterly disbursements at INR 4,033 crores were up 40% year-on-year, which was primarily led by 27% Y-o-Y growth in the Wheels disbursement, driven primarily by a change in mix towards use and cash on wheel and full of the banking platform. SBL-MSME disbursements were up 32% year-on-year. Other retail loans, including housing, gold, consumer durable loans also grew steadily. Deposits grew nearly twofold over first quarter of 2019 and came at INR 19,849 crores. Excluding Certificate of Deposits, the growth was 124%.

Sequentially, CASA growth was a bit muted on account of first quarter seasonality and our strategy of focusing more on retail term deposits. There was a continued momentum on retail term deposits, we mobilized more than INR 850 crores of retail term deposits. Proportion of CASA and retail term deposits continued to be at 46%. Proportion of individuals, HUFs, sole props and partnership rose to 35% from 31%, again outlining our focus on retail.

We added 1.6 lakh new deposit and loan accounts in the quarter. Focus continues on growing retail asset and liabilities and being granular.

Total balance sheet assets rose 61% year-on-year and were at INR 33,762 crores. Net worth was up by 18% and was INR 3,361 crores. On the cost to asset ratio, we saw continued improved reduction and it reduced from 4% in the fourth quarter to 3.8% in Q1 of FY '20 on the back of operational efficiency. Profit after tax from the normalized operations grew 56% to INR 119 crores, and it excludes a profit from our stake in Aavas Financiers. ROA and ROE for Q1 were 1.4% and 14.7%, respectively.

Our capital adequacy ratio was 18.6%, which comprised of Tier 1 capital adequacy ratio of 15.5%. As you would all know that reported capital adequacy does not include PAT of the first quarter. If we include PAT, the capital adequacy will further shore up to 19.5%.

Before we now conclude, we would like to take this opportunity to once again remind you that on 5th of August, which is a Monday, we are hosting our first annual Analyst and Investor Day, for which we had sent the save the date a few days back. Some of you have already registered on the link given in the save-the-date invite. Early next week, we'll send you a detailed invite and the agenda for the same, and look forward to hosting you for our first annual strategy workshop and interacting with our senior management. While we've taken an utmost care while sending these invites to all of you, we would request you to just drop us a line on Investor Relations at aubank.in or reach out to us, should you have been missed out.

For the convenience of our overseas analysts and investors, we will also share a link for a live webcast of this event.

With this, we conclude our opening remarks. And we will be happy to answer any questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Darpin Shah from HDFC Securities.

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Darpin Shah, HDFC Securities Limited, Research Division - Equity Analyst [2]

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The first question is on your cost front. We have seen relatively slower growth in cost for last 3, 4 quarters. So how could we see this going forward? And where should we see your cost to have the assets cost-to-income see by FY '21 or '22?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [3]

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Yes. Sorry, we commented in our previous call that we are expecting that our cost-to-income should be -- we are targeting the cost-to-income should be around 52%, 53% in next maybe 2 to 3 years, and we are on that right course. We have this time, as you know, the fixed asset has come down to 3.8%, right? Total assets. So in that sense, we are targeting around 3.25% in FY '22 kind of year, and we are quite hopeful that because of the optimization of resource, we are now planning better in terms of our branch, people, product and also the leverage effect is coming up, and we hope that it is quite achievable in the next 8 to 9 quarters.

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Darpin Shah, HDFC Securities Limited, Research Division - Equity Analyst [4]

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Okay, great. And, sir, the second question was on margins. We have seen margins deteriorated for a while. Now that we are seeing incremental gains, which look much faster. So when can we see this translate into higher margins?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [5]

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So we are on the course, right? Because this pressure is not because of our pressure on yield or cost of money, it is because our leverage effect and also we are keeping some money in our investment and retail book because to maintain extra liquidity. So as soon as the whole scenario gets stable, we will be in the right course, but it's not alarming. It is all very deliberated kind of strategy. And we believe that -- an ROA of 1.8, 1.9 is achievable in the year '21, '22.

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Operator [6]

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The next question is from the line of Nitin Aggarwal from Motilal Oswal.

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [7]

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Congratulations on the very strong results. I have a few questions. Firstly, like this quarter we have reported 15% growth in disbursements and MSME verticals. So what sort of like risk mitigants are we putting in place to ensure that we don't take any undue risk in the segment, especially on slowing macro?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [8]

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So your question is on MSME or your Wheels?

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [9]

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MSME, MSME.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [10]

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So, Rishi, can you answer this?

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Rishi Dhariwal, AU Small Finance Bank Limited - Chief of Secured Business Loans [11]

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Yes. So, it's a good question. In a slowing matter of how we are part of continuing to grow this book. So the important thing about our book is that most of our -- the customers that we fund are in the B2C space. And they are actually consumer-facing businesses where we are funding these customers in the semi-urban and rural markets, where we don't really find too much of a challenge of an overall slowing macro. The other important ingredient of this book is that we are having very low proportion of any supply chain linkages of funding or manufacturer segment being funded. So we don't really find anything significant in any of the clusters or in any supply chain-related businesses. So we do not really think that these are sort of going to affect the kind of book that we have.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [12]

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Okay. So just to add on, because this is our now 8 year old book and given the whole nature of this book, this is our main product. And if given a choice, I just wanted this book. But the challenge is not on NPA or the opportunity, the challenge is more how you execute because the ticket size are so less and we do secure. And we also expect to have a yield of around 15% plus. So I think these are 3, 4-well guarded risk management already in place, where we do secure, we have a high yield, but the ticket is small, right? So we don't do -- we don't have to do anything else, honestly. We just have to be there, execute our plans more perfectly and manage every day and entire team is very intact, very bullish and well oriented around this whole strategy.

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [13]

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Okay. Just the second question is on the vehicle business. Now the used vehicle disbursements have been very strong and the segment share, in terms of total disbursement has increased to 31% from 18% last year. So how do you see this trend turning out? And what are the geographies wherein you are getting market share in the used business?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [14]

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Yes, Nitin. This is Bhaskar here. I take care of Wheels business. The reason of -- frankly, the traction on the used business, we are as a country 1:1.2 ratio in new to used. As the country grows, then used proportion continues to grow and that's what data shows internationally everywhere all over the world. It goes to as much as 1:3 and all. If you personally ask me what has changed over the last 18 months in the used business is that more organized players have bought into this business. And this business, which was hitherto Mom and Pop Show has now moved into a more organized format, the market true value, the multiple choice, more organized CARS24, CarDekho. So there's a lot of organization, which has come into this, number 1. Number two, if we look at when I am sourcing and where I am sourcing, everything is similar to new. I am in the same geography. I am in the same profile. I am in the same application. So I have not shifted anything except that now that the used business also has found itself everything, we are also using our same dealer management skills, channel management approach and using the same to build a huge book parallelly, in addition to, also that you would have read in the presentation, there's something called Cash on Wheels, which is nothing but using -- giving money to our existing customers also. So these are the 2 levers, which we're using currently because I believe that this will always be an opportunity, which continues to come to us as we're growing this Wheel business more and more.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [15]

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And, Nitin, just to add on what Bhaskar is saying, we want to be very meaningful player in this space of used and Cash on Wheel. And we have actually improved our more focus and put a lot of team effort for the talent management to get there.

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [16]

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And, Nitin, just to add on here, we could gauge the market in year '13, '14 itself. And that time only we rebuild on our separate dedicated team for use and catch on these. And from last year, April onwards only, we calibrated it. And earlier my assessment was 40% of use and Cash on Wheels. Now this quarter, it is around 52%. So we could gauge the market at new vehicle because of rate also, because the market was shrinking. And from September onwards, the last Diwali onwards, the market was going down. And so we calibrated our team, we shifted our new business -- new team's business to used business, and we have this year and we have increased the IRR also. So it was a very strategic taken call. It's not just an obvious or quarter phenomena. We were planning over the last 4, 5 years.

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [17]

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Right. And lastly, what explains the decline in margin this quarter? Is this completely driven by the fall in investment yield? Because our yield on disbursement has increased, our cost of funds has declined, but yet the margins have still declined as well.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [18]

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Yes, I think so. As we were saying, because the -- it's a leverage effect and also the...

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [19]

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(inaudible)

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [20]

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Yes, Nitin, hope this answers.

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [21]

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Yield on investment. Sorry, what is a change in yield on investment between 4Q and this quarter?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [22]

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More than change of Wheels, we have kept higher liquid investments as a proportion. It is higher than what we had kept in quarter 4. And therefore the weighted average.

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [23]

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Okay, okay.

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [24]

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Approximately, it will be around 5% in my opinion.

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Operator [25]

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The next question is from the line of Amit Nanavati from Nomura Securities.

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Amit Nanavati, Nomura Securities Co. Ltd., Research Division - Associate [26]

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Yes. Again, on your yields. Your retail disbursement yields have improved by around 150 basis points in the past 3-odd quarters, right? So to that extent, when you see that transmitting into overall stock yields, right? The transmission is not reflecting. Maybe some bit of it could be because of your bad book, which was sitting at a higher yield is running off. But can you give some clarity on when you start seeing that reflecting in your yields? This doesn't capture the change in asset mix, right? So to that extent if you can...?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [27]

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Yes. So I think it's more of an accounting and a calculation where we've done some kind of low yield asset in year '17, '18 and in the first half of '18, '19. And post that only, we started building our more high-yield book. So there will be some light effect of that. And in my opinion, in next year, quarter 3, quarter 4, maybe quarter 4 of this year, you will see that improvement in our ROE.

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Amit Nanavati, Nomura Securities Co. Ltd., Research Division - Associate [28]

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Okay, okay. And so another question linked to that is, basically you've raised your rates or you've seen a disbursement yield going up sharply. I just wanted to understand, can you scale up, right, grow 2, 3 years from now, how easy is it to generate these kind of disbursement IRRs that you're generating today? Or where should it come to over 2, 3 years of time?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [29]

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So I think in next 2 to 3 years, it's not only about yield also, it's also dependent on cost of funds, right? So we are really focusing on our spread. So in my opinion, in next 3 years, we'll have a lower cost of money also. And thus already signals are coming and we are seeing some kind of traction there and improvement there. And our high yield book run, in my opinion, we are doing used now, we are doing MSME, we are doing home loans. That's the way that the franchise has been built over the years. So we know our markets. We know how to deal with customers, how to do make delivery. So in my opinion, AU, as we move forward, will maintain the spreads, maybe for next -- till we remain SMB.

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Amit Nanavati, Nomura Securities Co. Ltd., Research Division - Associate [30]

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Sure, sure. So On the cost price, sir, if you can just give some more color on your CASA traction? I see that, that stagnating around 12% to 13% of liabilities. And especially when I look at retail side, right, it's been around 21, 22-odd billion since the past 3-odd quarters now.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [31]

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Yes.

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Amit Nanavati, Nomura Securities Co. Ltd., Research Division - Associate [32]

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So if you can give some color there, what's happening?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [33]

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So I think the whole challenge, we are -- we need to figure out as a unit is to build our liability franchise. And so it's not a challenge around -- on our resource profile, right? We have a lot of other pool of money, which comes from securitization, refinance, the bond market, the treasury market, but the whole CASA and the deposit franchise. So we have already taken right course of action there. We are building our retail branch profile, where the whole branch profile has to just build around INR 5 crores of money. Beyond that, money goes to wholesale liability team. We have separated our government business from branch building team. So that whole course of action has been done in quarter 3 and quarter 4 of last year and quarter 1 of this year. So in my opinion, you have to give us some more time because we are just 9 quarters old in this industry and long way to go, and we are also learning day and day out. CASA coming is not easy. And due to this lot of competition, right, it becomes more tedious than said. And so we are really focusing it, in my opinion. In this year itself, in quarter 4, you will see some kind of more traction there, more specific numbers and more learning around it, right? And then only we can comment then how in next 3 to 5 years, our branch profile, branch identity will look like.

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Amit Nanavati, Nomura Securities Co. Ltd., Research Division - Associate [34]

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Sure, sir. Sure.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [35]

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Do you want to add something? So one more point is that as a strategy, what we have focused because there have been 3 moving items in retail, one is CASA and the other is TD, that is term deposit, which is long term in nature and a stable book. So we have picked up this quarter as the first lever as the retail TD book. We want to build this long-term stable retail TD book as our first target in the market. And there also if you will see our focus is on low-cost funds because we are not offering very high interest rates like some of the very competitive banks are. So we are building low cost, stable retail TD book as our first target and parallelly building customer acquisition on the retail fund strongly, which will help us acquire clients up. On current accounts, specifically, because it is a very low-cost book, we have created a separate team, a separate channel. There is a separate vertical now. We are focusing on their productivities -- value productivities. All the levers of retail are being engaged in terms of channels. So we see that by quarter 4, like I mentioned, we'll be able to show you some good amount of traction and strong numbers on that book also.

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Operator [36]

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The next question is from the line of [Hetal Desai] from (inaudible).

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Unidentified Analyst, [37]

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Congratulation on a great quarter. So I have a question on -- I actually had a question on the cost of funds. If you broadly see, liquidity seems to be easing and within cost of funds, if I look at cost of deposits, we are at about INR 760 crores right now. And as you mentioned, I think, on the retail term deposit side, especially, there has been a lot of intensity from private banks. So wanted to know your thought for next 2 or 3 quarters, especially on the cost of deposits.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [38]

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Sorry, it's a brilliant question because we also want to figure out the right solution around it, but the lowering rate just have started post budget, right? Which is around 23rd -- sorry, 5th July. So I think up to 30th June, which we are talking about, not much of rate downsizing was there, right? So that is -- as should we told you, now there is low intensity by other competitor also. Even big private banks are also offering FDs around 7%, right? And some of them...

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Unidentified Analyst, [39]

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Sanjay, as the -- does the growth has started slowing, especially on the asset side? Are you seeing that intensity coming off, let's say, in first 15 days of July?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [40]

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No. So I think intensity on a liability is on a higher side. Intensity on asset is on a lower side. So I do not know why people want money when they don't want to put it, right? But if it there, there is more of a refinance. Maybe they want to make their ALM better, right? So I think -- but at AU level, the advantage with us is that we have a 24 of legacy. We have lot of relationship with many banks, refinance institutions, foreign institutions. And so we have lot of other resource also to manage our asset growth and that to at a better cost. So the idea is not to put -- not to raise our branch liability on a higher cost. That's the first principle we want to put. The branch banking need to build business on relationship. For that, value proposition. And that is why this whole zone has been given to Uttam who has managed our retail assets so well over the years. So he is now in-charge of this retail franchise around branch banking. And we believe that we need some time because the relationship, the value around product and, of course, the intensity by your team is not easily achievable, right? So in next 3 to 4 quarters, you will see that AU will also emerge as one of the best franchise in retail branch banking space. The way we are building our retail asset space, which is immune to any challenges. So I think that's the whole idea to build your retail branch banking, which is immune to any challenges around you.

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Unidentified Analyst, [41]

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Okay, okay, fair enough. Yes, sir, as I actually missed Bhaskar's comment on Cash on Wheels, so this is loan, which is given as a top-up to the existing customer. Is it?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [42]

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That's correct, that's correct.

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Unidentified Analyst, [43]

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And, Bhaskar, what would be the yield on this book?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [44]

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It is upwards of '17, '18, we think. It always been that way, but -- it's always been that way, but it's always a decent deal.

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Unidentified Analyst, [45]

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Okay, okay. Sir, next was on the excess liquidity that we are carrying of about INR 2,000 crores of non-SLR investments. Now this is transient given the macro right now? Or is there a thought of always maintaining some surplus liquidity on the balance sheet?

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Yogesh Jain, AU Small Finance Bank Limited - Group Head of Strategy - Treasury, FIG, DCM, Wholesale Liability and Investor Relation [46]

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This is Yogesh. So broadly, we have decided that we will maintain some liquidity cushion of around 8% to 10% of our balance sheet size. And as far as non-SLR liquidity is giving me higher yield than my cost of funds, we are absolutely fine to maintain that amount of liquidity. So broadly, we will maintain this kind of liquidity going forward also.

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Unidentified Analyst, [47]

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Okay, okay. And, Sanjay...

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [48]

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So thus they're following resumes. It is giving us good upside also, right?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [49]

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Upside also.

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Unidentified Analyst, [50]

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Right, yes. Right, right. Sanjay, the other is between loans and deposits. As of now, I think we have about 1.6 million customers. So I just wanted to understand what is the amount of data that we capture with respect to our customers? So is it in line with what typically other private banks would have in terms of richness of data? Or is it work-in-progress for us currently? And this, I'm asking more from our future cross-sell perspective.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [51]

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So if you -- we are actually putting the whole strategy around 4 principles, which is data, digital, distribution and delight. And we are really working over the last 4 quarters, and I'm happy to say you that, the most of the work has been done, and we are getting good amount of data from our customers. So our whole systems now capture similar kind of data of a customer, right, whether it's coming for liability, whether it's coming from asset, whether it's coming from trade finance. So we are capturing all similar kind of data of a customer. And I hope that we already launched 2, 3 data-driven product last quarter and we are very happy to say that -- I'm happy to see that it's coming up and -- but it's a long way to go because data quality is there, maybe data containment might not be there. But as we move as a franchise, it will help us to grow seamlessly.

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Unidentified Analyst, [52]

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Lastly, Sanjay, as you aspire to get to INR 70,000 crores of assets and 5 million customers by FY '22, according to you, are the top 3 internal challenges for AU?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [53]

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So top 3, of course, because of this competition space, which is so much intensifying daily -- day by day, the cost of deposits can be a challenge as we move forward. And the people retention, because not many companies can poach your team because your team has been around retail franchise. So everybody is looking to build retail franchise. And third, which is not in our control, maybe the economy.

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Operator [54]

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The next question is from the line of M. B. Mahesh from Kotak Securities.

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M.B. Mahesh, Kotak Securities (Institutional Equities) - Senior Analyst [55]

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Just a couple of questions. One, why did you do securitization this quarter? Second, why did you also do a stake sale in hours in the current quarter?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [56]

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So it's not depending on the current quarter or -- because we as an executive of the bank thought that it was the right time to optimize your all resources. And so securitization, as we move forward, will be our strategy because in 2 years' time, we didn't do that because we thought that PSLC will have more benefits. But we had our own calculation, and there was a good rate offered. And with the allowance of your PSLC benefit, so I think as we move forward, you will see lot many of the securitization happening to us. Because it's not about that we have the choice, many banks don't have a choice. So we have that ability to do that, right? And Aavas because as we sensed that as we move forward, the economy is not doing well and there might be some pressure on some pricing, and we opted out to exit our -- the free portfolio in the month, in May or June. So it is just about putting yourself in the right frame of mind and believing that your decision will be right for these banks. So that's why we do these 2 things.

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M.B. Mahesh, Kotak Securities (Institutional Equities) - Senior Analyst [57]

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Sir, just one more clarification. The securitization you're saying proves to be a better alternative as compared to an IBPC or through PSLC. Why exactly is that you get this benefit?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [58]

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Because it depends on the cost, right? So we have done around sub 7, and our cost of money is around 8, right? And so -- and if you don't sell much of the macro of the farmer book. So the premium on PSLC is around 0.5. So it makes lot of sense, and there is no capital allocation required. You get ALM matching. So good for us. So, Mahesh, if you will see PSLC premium nowadays around 50 to 70 basis points in average, so you have to analyze what would be better. So we have done both actually. If you will see, we have issued PSLC as well as we have securitized our portfolio. So if you are getting better cost in terms of securitization with capital saving and also long-term funding for your ALM, I think some time it is better comparative statement to do, right? So we have done some securitization. (inaudible) will continue also.

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M.B. Mahesh, Kotak Securities (Institutional Equities) - Senior Analyst [59]

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Just one follow -- one another question to Sanjay. Take an example that given the way you're building the portfolio, you do see a meaningful expansion in net interest margin by 3Q and 4Q, which probably would beat your estimate on your ROA guidance for the next 1 to 2 years' time. Will you again put back a lot of it back to your business? Or do you think you can probably give a little bit back more to the shareholders?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [60]

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So I can't comment now. But of course, the shareholders are prime for us. So anything which will be decided by Board will be done. So -- but hopefully, we should get that kind of ROA, which we should go back to shareholder and say that your money is there, right? So I hope you can do that as soon as possible.

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M.B. Mahesh, Kotak Securities (Institutional Equities) - Senior Analyst [61]

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Sir, the reason I'm asking this question is given that you are building reasonably high-yielding book today...

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [62]

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Correct.

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M.B. Mahesh, Kotak Securities (Institutional Equities) - Senior Analyst [63]

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It is much different in terms of our scenario, in terms of our expectation of interest rates.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [64]

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Correct.

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M.B. Mahesh, Kotak Securities (Institutional Equities) - Senior Analyst [65]

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There is also a meaningful reduction in cost of funds. It looks very clear that you will see a meaningful expansion in margin in just a couple of quarters. So just trying to understand, is there a possibility that you say that there is going to be a meaningfully higher ROA that we get out here, and let's put it back into business. That's the rationale of asking this question.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [66]

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So because, as you know, banks will require capital day in and day out, right? So it will be actually on the day when we get high ROA because it is a still [faucet] story. So -- but bank will require money, and we also have to give back to the shareholders. So it is a balancing act, which should be decided on the time and when we come to that point, right? So a little bit tricky to answer now.

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Operator [67]

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The next question is from the line of Nidhesh Jain from Investec Capital.

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Nidhesh Jain, Investec Bank Limited (SA), Research Division - Research Analyst [68]

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Sir, on asset quality, we are seeing one of the lowest credit cost. So what should be sustainable credit cost we should build, especially given we are now also increasing the share of used segment in our portfolio?

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Unidentified Company Representative, [69]

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So, Nidhesh, as we have been mentioning this in our conversations earlier also that over a period of time, which is, say, 5 years' period, we should estimate 60, 70 basis points as our credit cost. So in good years, you will see low credit cost. Last couple of years have been very good for us. And yes, so you should estimate 60, 70 basis points in your estimation.

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Nidhesh Jain, Investec Bank Limited (SA), Research Division - Research Analyst [70]

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And even with the increase of used portfolio, don't see any change to that?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [71]

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No, no, no. Yes, though I said it for the used business, it's not that we are picking some risky business or so that. What we did that, what about products we are doing for the new, exactly the same products, same kind of customers, same kind of geography, we are doing the use. Actually, we are treating the used-car dealers as good as the new-car dealers. So my rate of yield is 600 basis points difference. And delinquency is only 50 basis points. So it's not that I am doing use, that's why I'm taking more risk. It's not like that. If you see that historically, we are doing for the last 7, 8 years, so it's not exactly that I'm taking a higher risk, margin will move further. So risk-adjusted IRR is better in used finance kind of Cash on Wheels. And we are very particular about the product what we are financing and what we are not financing. That's the key. That's the key in this business.

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Nidhesh Jain, Investec Bank Limited (SA), Research Division - Research Analyst [72]

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Sure, sure. And just one clarification. Have you moved to daily (inaudible) in this quarter?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [73]

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We moved 50% in quarter 4 itself. On a full retail asset, we have moved from 1st of April. The whole asset is on a daily DPD -- sorry...

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Nidhesh Jain, Investec Bank Limited (SA), Research Division - Research Analyst [74]

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(inaudible).

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [75]

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Yes, yes.

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Operator [76]

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The next question is from the line of Rohan Mandora from Equirus Securities.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [77]

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If you could share some trends on the lead generation and the rejection rates in new and used vehicles business?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [78]

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The new and used business, you said, right, Rohan?

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [79]

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Yes. New and used vehicles, used business.

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Uttam Tibrewal, AU Small Finance Bank Limited - Whole Time Director [80]

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When you look at it, there are 3 elements to this. Firstly, what are the new and used business we do. Dealer refers the case which we do -- before even we put it into the system, we do our own FY and we check a -- do a rough check before it actually comes into the system, okay? So at the dealership level itself, we tell them like clear yes or clear no. So technically, here what happens is before the lead comes into the system itself, there is rough (inaudible). And if we were to look at from a data point of view, out of the total leads that come to us, broadly, about 15% must be getting rejected in both new and the used line business post our field trip.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [81]

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Okay. And how are purchaser strength moving in -- difference between the new and used?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [82]

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I didn't catch that, sorry.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [83]

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Particular DPDs trends and what is the difference in new and used right now?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [84]

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Right now, there is no great difference as Uttam just answered in the previous one. While traditionally used has been considered as a separate, let's call, (inaudible). What we to do is everything remaining same, you know, profile, geography, location, asset class, data, all of that is of the same metrics. It is just that somebody is buying a used vehicle and somebody is buying a new vehicle. So at this point in time, for the last 5 years that we have been learning this book. There has been no great elevation difference between the 30-plus between new and used.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [85]

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All right. Sir, what I was trying to understand is that going ahead as we are increasing the disbursement of the used vehicle, is there a possibility that the credit cost may inch up to your run rate average going down the line?

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Deepak Jain, AU Small Finance Bank Limited - CFO [86]

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This is actually price -- is that even if there is a market, there will be a marginal increase. Even today also, there is a difference between new and used of around 50 bps -- 50 to 60 bps or higher. But as we said earlier, the INR difference is upwards of 5.5% to 6%. So at any point of time, this always is price. And that's one of the primary reasons why used business has a higher rate. So it is always price.

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [87]

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And I will speak or tell you INR 3,00,000 -- INR 4,00,000 or INR 3,00,000. So it's a pure retail, retail general book. It's not consist of [M&S] really or concession shipments. A pure retail book, yes.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [88]

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Retail of used vehicle will be 3 to 4 years, right? The used vehicles?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [89]

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Yes. Around 5 to 7. Between 5, 7, yes.

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [90]

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No, no, no. Tenure, you asked for tenure?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [91]

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No. He said vehicle's retail.

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [92]

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Oh, yes, yes.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [93]

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Vehicle's retail, not the tenure.

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Operator [94]

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(Operator Instructions) We'll take the next question from the line of Saurabh Dhole from Trivantage Capital.

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Saurabh Dhole, Trivantage Capital Management India Pvt. Ltd - Senior Financial Sector Analyst [95]

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Just one clarification. On the incremental yields now on Slide #18, you are talking about incremental yield and disbursements. What is exactly the reason why the yields are inching up? And where do you think these will peak?

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Vivek Tripathi, AU Small Finance Bank Limited - Chief of Strategy Business Solutions & Transaction Banking [96]

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Saurabh, this is Vivek here. You're talking about Slide #18 refers to the small and mid-corporate assets actually?

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Saurabh Dhole, Trivantage Capital Management India Pvt. Ltd - Senior Financial Sector Analyst [97]

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Yes, yes. That particular slide. And the top right-hand side chart.

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Vivek Tripathi, AU Small Finance Bank Limited - Chief of Strategy Business Solutions & Transaction Banking [98]

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Both. So this actually refers to both. So the reason is, if I can go ahead, I believe this is also showing what we're talking about that. There is a product mix change in the yields. There is a continued upwards on the SBL side too and on free deals. Also if you look at the small and mid corporate assets, these, quarter-on-quarter, we've consciously increased our lending rate in the declining segment, the agri segment, as well as the -- in the retail segment. And obviously, there was a -- actually, in the market, there is implied, "Hey, we must select on due to price your products and that's why they're very strong, the competition was not good.

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Saurabh Dhole, Trivantage Capital Management India Pvt. Ltd - Senior Financial Sector Analyst [99]

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Okay. But do you think this...

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Vivek Tripathi, AU Small Finance Bank Limited - Chief of Strategy Business Solutions & Transaction Banking [100]

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To be precise, we need to work here with those options. So in these, we are trying to build 16.5% to 17%, building at 16.2% somewhere sub 17%. In MSME, you're looking at around to 15% to 16%, 15.5%. I said that. And then mid corporate, 13.3% or 13.5% is fine. So we get to that, it will not inch up more from here. We will try to maintain somewhere here on.

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Saurabh Dhole, Trivantage Capital Management India Pvt. Ltd - Senior Financial Sector Analyst [101]

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And sir on the stake sale on Aavas, can we expect some more stake sales in the coming quarters?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [102]

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So the lock-in period is still October, right?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [103]

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September.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [104]

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September. So we haven't made our mind till now. And hopefully, as time comes, we'll make our decision based on our Board decision.

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Operator [105]

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The next question is from the line Ankit Choudhary from B&K Securities.

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Ankit Choudhary, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [106]

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I'm not sure this question has been asked before or not but on overall vertical ROA slide, if we see the total assets, the ROA in total assets, they tend to declined last year for full year around 2 -- more than 2%. It has come to around 1.7%. And as we were expecting that this to remain stable, whereas, there could be some upside or there could be breakeven on the branch and treasury side. So how are you looking at this, sir -- on that?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [107]

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Ankit, maybe the full vertical-wise ROA which you are comparing for this entire year, so as we had earlier pointed out that there was impact of higher leverage. So that is one impact, even in the asset classes. And second is that first quarter is typically a slower one. Third is that the employee expenses for this quarter incorporates a high console. So that also impacted this to some extent.

So full year basis, I think we will be able to keep it around the levels, which we had kept it for the entire financial year '19, and you will see improvement in our branch banking, which is a drag still now, but the next, say, 1 year to 1.5 years, we should be able to breakeven in branch banking.

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Operator [108]

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(Operator Instructions) The next question is from the line of Aditya Jain from Citigroup.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [109]

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So I think last quarter, there was a wind down of securitization income, which was also affecting the yield and margin. So how did that factor play in the recent quarters? The securitization income which you had reported in Q4 was INR 26 crores. So what has happened in this quarter?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [110]

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Sorry, what's the question?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [111]

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Sorry, Aditya, can you repeat the question?

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [112]

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Sir, last time you shared a slide on, which are showing the breakup of interest income, which showed the amount of securitization income, and that, that had been coming down, which was a factor for a NIM decline? So just wanted to understand what has happened in this quarter to that line item?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [113]

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So can you take off-line because we don't have the numbers? Okay.

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Deepak Jain, AU Small Finance Bank Limited - CFO [114]

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So broadly, we see it is slightly lower in line with the NIM because this time we have done the securitization also. So it is not exactly comparable now.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [115]

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Okay. So that drop in that has stopped. Is that a fair statement? That actually stopped?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [116]

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Look, there was no drop actually. If you remove securitization, it was stable at 4.8% last 4 quarters. This quarter, there is some drop because of the overall NIM is also dropping as we have explained the reasons.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [117]

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Sir, I mean the drop in securitization income now that you've started it -- as you've started it. That securitization income line item can stabilize or rise.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [118]

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Yes, yes, yes.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [119]

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Okay. And then could you give the average rate on the Retail TD and the SA.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [120]

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So largely on the savings account side, we operate on rates which are 5% to 6%, and 6.4% is our peak rate. On an average side, it should come around 6.1%, 6.2% in terms of the book rates are concerned. On Retail TD, currently what we are offering is 8.10% as our peak rate. We are not very high as compared to our other SMB players, the competitive players in the industry. This is again dynamic given into the economic situation and the drop in interest rate scenario, which is expected. We have committed that like Shoorveer explained in earlier communication that we are committed that the branch banking franchise will raise low-cost fixed deposits and granular CASA. And that is what is the core focus in terms of overall acquisition is.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [121]

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Got it. And then, there was some increase in the NPA ratio in deals with real estate and Agri SME. I guess part of it could be seen, but just your comments on what has driven it.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [122]

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So there is not -- I mean it is more stable, around some basis points here and there. So we are seeing stable asset quality across. In real estate, there was one account, and that's the reason why it...

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited - Chief of Wheels [123]

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And that has been mentioned also.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [124]

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And that has been mentioned also. So, yes.

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Deepak Jain, AU Small Finance Bank Limited - CFO [125]

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Yes. And the reason for the slight decrease is also because we moved to the new NPA recognition from this quarter on the entire portfolio. Up to 30th of March, we had -- we flagged the loans above 25 lakhs on an NPA basis. And now the entire book is on an NPA basis. So that effect, which is a onetime effect has got factored into the NPAs now.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [126]

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Got it. And then lastly, ROA of 1.8%, 1.9%. So how do you look at the bridge from 1.4% to 1.8%? If there is a view there, which factors will drive it?

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [127]

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Primarily, it will be cost of our OpEx, which are primarily pointed out in the conversation on OpEx. And we are targeting around 3.7% to 3.8% of OpEx in this year and reaching to 3.2%, around 3.2%, 3.3% range of OpEx by FY '22 quarter 4. So that will be the major contributor. And now we are also having decent PSLC scope securitization as a measure of having a better either cost of funds or other income depending on what rate we get.

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Operator [128]

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The next question is from the line of Nikhil Walecha from Sundaram Mutual Fund.

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Nikhil Walecha;Sundaram Mutual Fund;Analyst, [129]

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Sir, I just wanted to know, do you have any exposure to these -- such names like Dewan, Reliance Commercial Finance, Reliance Home Finance trends? Have you made any fluid or big deals...

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Sunil Parnami, AU Small Finance Bank Limited - Chief of IR, M&A [130]

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Nikhil, I'm sorry, we can barely hear you. Could you please speak a little louder? Or I request you to use the handset.

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Nikhil Walecha;Sundaram Mutual Fund;Analyst, [131]

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Sir, just wanted to know whether do you have any exposure to the such names like Reliance Home Finance, Commercial Finance or Dewan Housing?

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Vivek Tripathi, AU Small Finance Bank Limited - Chief of Strategy Business Solutions & Transaction Banking [132]

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Nikhil, Vivek here. So we do not have any exposure in the names which you have earmarked. It's a quite granular annuity book, largely the smaller and midsized credits.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [133]

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0 plus is 0.

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Vivek Tripathi, AU Small Finance Bank Limited - Chief of Strategy Business Solutions & Transaction Banking [134]

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0 plus is 0. And this is already there in the presentation, Nikhil, but it is distributed among 161 accounts, 161 names.

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Nikhil Walecha;Sundaram Mutual Fund;Analyst, [135]

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So neither in loans or investments...

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Vivek Tripathi, AU Small Finance Bank Limited - Chief of Strategy Business Solutions & Transaction Banking [136]

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No. So no exposure to these groups.

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Operator [137]

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We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

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Sanjay Agarwal, AU Small Finance Bank Limited - MD, CEO & Director [138]

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Yes. And we've tried to answer most of your questions but in case somebody did not get an opportunity, please feel free to write to us at investorrelations@aubank.in or you can reach out to us directly as well. And we look forward to now hosting you on 5th of August. So we'll tell you more details on the same. Thank you very much.

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Operator [139]

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Thank you very much. On behalf of AU Small Finance Bank, that concludes the conference. Thank you for joining us, ladies and gentlemen, you may now disconnect your lines.