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Edited Transcript of BAJFINANCE.NSE earnings conference call or presentation 26-Jul-19 3:30am GMT

Q1 2020 Bajaj Finance Ltd Earnings Call

Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Bajaj Finance Ltd earnings conference call or presentation Friday, July 26, 2019 at 3:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rajeev A. Jain

Bajaj Finance Limited - MD & Executive Director

* Sandeep Vijay Kumar Jain

Bajaj Finance Limited - CFO

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Conference Call Participants

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* Abhishek Murarka

IIFL Research - VP

* Atul Bhole

DSP Investment Managers Pvt. Ltd. - VP of Investments and Fund Manager

* Bharat Shah

ASK Investment Managers Limited - Executive Director

* Karan Singh Uberoi

JM Financial Institutional Securities Limited, Research Division - Vice-President of Equity Research

* Kuntal Shah

Oaklane Capital Management LLP - Partner

* Nischint Chawathe

Kotak Securities (Institutional Equities) - Senior Analyst

* Parag Jariwala

White Oak Capital Management Consultants LLP - Senior Investment 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 Bajaj Finance Q1 FY '20 Results Conference Call hosted by JM Financial Institutional Securities Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Karan Singh from JM Financial Institutional Securities. Thank you, and over to you, sir.

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Karan Singh Uberoi, JM Financial Institutional Securities Limited, Research Division - Vice-President of Equity Research [2]

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Thank you. Good morning, everybody, and welcome to Bajaj Finance's earnings call to discuss the first quarter FY '20 results. To discuss the results, we have on the call Mr. Rajeev Jain, who is the Managing Director; Mr. Sandeep Jain, CFO; Mr. Atul Jain; CEO Bajaj Housing Finance; Mr. Anup Saha, President Consumer Business; Mr. Deepak Bagati, President, SME Collection; and Mr. Ashish Panchal, President Rural Business Insurance and Liabilities.

May I request Mr. Rajeev Jain to take us through the financial highlights subsequent to which we can open the floor for Q&A session. Over to you, sir.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [3]

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Thank you, Karan. Good morning to all of you. I'll be referring to the investor deck, which was uploaded yesterday in our Investor section of our presentation. We've added 2 slides, which are essentially Page number four 4 and 5, which essentially covers the executive summary of the quarter that went by. I'm going to read some of the important points there to give you texture, and then we'll go -- be open to Q&A.

Overall, I would just open with saying that, as a company, we continue to remain focused on growth, profitability and sustainability in Q1 FY '20 as well. Overall AUM grew by 41% to tad below INR 129,000 crores. Adjusted for IPO financing book of INR 2,500 crores that sat there, core growth was 38% and balance sheet came in at INR 126,340 crores. AUM growth was quite granular in nature, which has really been the way we've been building business over the last 12 years. Even the so-called slowing businesses, the Consumer B2B business, which is discretionary spending business, grew by 24%, B2C grew 48%, rural B2B, which is discretionary, again, grew 48%, B2C grew 65%, mortgages grew 45%, and AF grew 65%. Commercial business grew overall 18%.

New customer acquisition momentum continue to remain very strong. We added 2.5 million customers in Q1, that's a pretty strong growth on a year-on-year basis. Came in -- total franchise came in at 37 million customers, a tad below 37 million customers and cross-sell franchise stood at 22 million customers.

The strategy remains simple, continue to just grow wallet share of our clients, these 22 million customers. Existing customer contribution went up, went up to 66% from 63%. Company on a steady basis, continue to add new locations, added 65 locations in Q1 to tad below 1,900. We'll probably get to 2,000 locations by March '20.

Cost of funds remained steady. Liquidity position remained very comfortable. Incremental borrowings given rally in g sec, given surplus liquidity in the system are clearly coming in both the short term and the long term, are both coming at a much lower cost.

Liquidity position was very comfortable. We were sitting on close to INR 6,500 crores of liquidity buffer, and remain very comfortably placed. Since the sectoral crisis started, company has added close to INR 32,000 crores, INR 33,000 crores of additional balance sheet in the last 3 quarters, just as a separate point. We will continue to diversify our ECB. We're all set, we will probably raise anywhere between INR 600 million to INR 750 million in the calendar year of the -- in the current calendar year. FD continue to grow, came -- crossed INR 15,000 crores. Overall, consolidated balance sheet was 13.5%. Standalone balance sheet was at 16%, and we are continuing to invest deeply in growing retail fixed deposit channels to continue diversification of our liability profile. Fee revenue pool, that's an in-general question you ask, we'll end up communicating that as part of a question, we have now started to cover that. Overall, fee revenue pool on a year-on-year basis grew by 65%.

Loan losses came in at 69% growth. As I mentioned here, last year Q1 was very, very strong, loan losses grew only 7%, Q2 grew 43%, Q3 grew 69%, Q4 was 80%, and Q1 has come in at 69%. OpEx to NIM, there's continued progress on the metric, came in at 35% versus 37% in -- on full last year. The number was 37% year-on-year, went to 36%, went to 35%, remained at 35% and came in at 35%, again.

Gross NPA and net NPA, sequentially there's just a 5, 6 basis points momentum gross NPA, net NPA went up by just a basis point, so one could argue, it didn't move at all. PAT came in very strongly, at 43% at -- just a tad below INR 1,200 crores.

Return on equity was ever high, came in at 23.5% as the overall -- overhang of the equity also went away, the return on equity has moved better. Return on assets remained very steady at 4%. Capital adequacy remained strong. Tier 1 is at 15.5%. Consolidated leverage is now 6.6x. In general, as you've guided in the past that we do go out and raise capital within 6.6 to 8.8x, that's really been the track record over the last 8, 9 -- 3 raises that we've done over the last 8 years, so we may, subject to Board and shareholders' approval, may go out and raise capital.

Bajaj Housing Finance continue to grow very well. The results are in public domain. Q1 profit came in at INR 70 crores. Overall, balance sheet growth on an -- overall, mortgages was 45% given the year-on-year comparison for BHFL is not relevant because the company started its operations only in January last year.

Bajaj Financial Securities has received all the requisite approvals, and has just commenced business. We are quite excited about growing this business over the next 3- to 5-year horizon.

That largely, in general, covers the Q1. Given that we -- I would just now take you to panel 41, where given we are a risk business, we pride ourselves on saying that and doing that. So let me just take 2 minutes to cover that from a management assurance standpoint, we've actually moved 2 of the portfolios, which essentially contribute to 11% of our book from a green to a yellow, from a management assurance standpoint, not from a portfolio movement standpoint that much. On a year-on-year basis, two-wheeler, three-wheeler is better off. However, given the sequential moment on one hand, and two, given our higher share in -- of Bajaj Auto's domestic sales. As the management prudence, we've just -- from a disclosure standpoint, from a guidance standpoint and from the management assurance standpoint, have marked it as a yellow.

Digital Products, it is in yellow. So we are seeing movement in the portfolio. We've taken -- we have been taking action since -- actually since last 4, 5 months, but we've taken harder action in the last 2 months. And it's a very short-term portfolio. In general, if you were to actually look at this portfolio over -- and we've been publishing this data for the last 6, 7 years, 7 years that we've done this business, this business was actually much worse off earlier. We got full handle on the business, full control on the business, but in the last 2 months we've seen some degree of -- it's 3% of our portfolio. And given the short-term nature, in general, washes off in a quarter or so. But just from a prudent standpoint and from a communication standpoint, I thought it prudent that we will communicate the same with you.

The red on the -- on red quality is loan against property, which essentially on a non-IL&FS remained very steady. There is progress that we are seeing even on the -- on our IL&FS exposure. We've begun to see sale of premises on a -- have starting to sell. We've received monies into our escrow account to the tune of INR 18-odd crores in the last 20 days. Company has received all requisite approvals and has actually gone out and put the building blocks on sale, which is really where our exposure is. So we're quite optimistic. And given the movement that we are seeing in the last 30 days, we are quite optimistic that subject to legal issues being behind for the company broadly not on our exposure because our exposure is exclusive security, we may just be able to get out unscathed. Our total provision on IL&FS account at this point of time stands at 26%.

So that's really the highlights on the quarter. On panel 43 because we added a guidance. Commercial Lending portfolios have only 1 NPA account, that's published and its 65% provided for. Securities lending is 100% current, despite the volatile environment that you've seen since IL&FS crises, we're in a very good shape.

As a major prudent, as we've written there and -- so if we see data -- as I said, we are data dependent. If we see any of our portfolios deteriorate, the right thing to do in our business from an early warning signal standpoint is to act. What is done is done, but you can reduce your exposures if you were to act in time. So that's one part.

Second, and as I mentioned to a few people, when I read the newspapers, when I read -- watch the television, it all looks gloomy and doomy. And like any business manager, we are impacted by it. And given that we are building businesses next 5- to 10-year view, the right thing to do -- when we look at the micro, it doesn't show up that way, but when we hear the macro, it shows up that way. As a conservative company, the right thing to do from a prudence standpoint is to go out and prune the bottom 10%, 15% of the business. That's really what you've done. If you take an example in the Rural business.

Rural business, the gross NPA and net NPA structurally lower and that's published behind urban businesses. So I could argue there's no reason for us to act. But as I said, when I read and hear, as a conservative company, as a company building a business with the long-term view, as a company which if the gloom and doom is right, we could get into trouble, you go out and act in time. So that's really the context of the point number three -- point number three half part, point number four full part. And in AF, as I said, point number four is full part, the only point here, as I said, because on a sequential basis, you've seen moment we've made the decision. So in AF half part. That's really the context we would like to continue to provide, which we've done over the last 8, 10 years. Complete disclosure to all investors in the way we see the business. We want you to read the business that way. We're doing it for disclosure and for ensuring that our transparency is as good as it is for anybody. Read it that way is all -- just I would say. That's really from me.

And I'm happy to take questions with -- between me and my colleagues.

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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 [Pranav Tendulkar] from [Red Enterprises].

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Unidentified Analyst, [2]

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Congratulations on a great set of numbers in a tough environment. I just wanted to ask if -- what is the number of people that are employed in the origination side of the business and number of people that are employed on the collection side. Because I frankly think that this proportion might change because the time of origination is, say, 15 to 20 minutes, but time of collection can be anywhere between 1 month. If it is not paying on time, that is on auto mode.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [3]

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Yes. So out of 20,000 people, 4,464 people, to be precise, work in collections across the country. You have to remember one thing, only 8%, 9% default. So it's -- there'll always be more people because one is to do work on 8%, another is to work on 100%, that's point number one. Point number two, as I said, to be specific, it's 4,400 people. Point number three, the company runs a very -- given, as I said, the gloom and doom conversation that's happening around, that's one part. But we do track, as a company, how many days do we take to collect from these -- from the clients who default, which is 8%, 9%. In general, if I take the last 5, 6 quarter view post [demon], once the demon walked away, let's -- washed away in June '17, that number has remained steady between '15 and '16, they used to collect on an average every month. It's an internal metric we track every month, just to give you texture.

Third order point, we fundamentally have very rigorous, globally anywhere, collections, whether it's run through call centers or through physical or through agencies, it's a capacity planning model. It needs sophisticated, rigorous discipline capacity planning models and execution. You have that right with underlying metric being dovetailed into it unless and until a [demon-like] event happens, in general, there is sufficient time that provides you.

Third -- fourth order point. 5 years ago, only 5% of our clients paid through digital. Today, anywhere between 21% to 23% of our clients pay through digital. That has ensured that we can continue to manage growth without adding correspondingly in a linear manner people. So -- and that number, the 21% to 23% number, we, in a 5-year horizon, want to take it to anywhere around between 40% and 45%. For 2 reasons, it's better for the customer and it gives us the suspension and the width required to continue to grow the business. And third, it would bring down cost dramatically.

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Operator [4]

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The next question is from the line of Pratik Chheda from IIFL.

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Abhishek Murarka, IIFL Research - VP [5]

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This is Abhishek from IIFL. So I have 3 questions. One is on growth. Now with your outlook tight, you're being a little prudent and trying to sort of take steps ahead of time to reduce the risky underwriting that may happen in this kind of an environment. What kind of growth are you building for yourselves in the medium term? So we know your long-term target of 25% to 30%, but in the next year or 2 years, what kind of growth you're building? And what kind of sectoral focus will you have in that growth?

The second question is really on costs. So as you growth moderates, how much room do you have to keep your cost ratios where they are? What are those discretionary expenses, which you would sort of cut back on? And given that in your annual report also you mentioned that you have built almost 5x the capacity that you need to handle through -- enough capacity to handle the throughput that's coming right now. So when do you start utilizing that capacity and reducing the investment intensity on people, technology, et cetera?

And the third is on asset quality. So with growth slowing again, you will see slippages increasing, and you're seeing that over the last couple of quarters or few quarters even FY '19 over '18. So what kind of credit costs and slippage rates have you built in your estimates? And what do you think -- where do think you'll be comfortable going forward?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [6]

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Yes. Very fair. That's -- so 2, 3 things. A 38% core growth or a 41% growth is a very high growth number, Abhishek. That's first point I want to make. Growth environment at this point in time -- our medium-term outlook doesn't change, okay? We are a growth company, we'll continue to remain a growth company. The environment, as I say, is patchy. You ask me this question in April, I would say, look, what slowdown? By 15th of May, things -- in May, things turn, by 15th May. We expected that World Cup -- just on super discretionary consumption will lead to consumer working and spending. It didn't happen. So -- but I'm not as yet saying that -- as I said, when I look at micro, a 24% super discretionary consumption does not represent a slowing customer. Now you add to it also slowdown and this and that, that's a macro conversation you guys can do, that's not for me to opine on. We have to wait to -- wait for the incoming data, wait for at least a quarter to say that there is a cyclical movement downwards. I won't sign off on that as yet is the first point I would make.

We are a growth company, but I've always said, Abhishek, we are first a risk company. Risk -- between risk and growth, we will choose risk. It's a pretty simple point. I've said this many times, but we are a growth company as well. And we pride ourselves that, I think, given we are 115 basis points of the total credit in India, given we are a diversified company, playing across many sectors and businesses, there remains -- and our market share remains very small. There remains very large opportunity for a long, long period of time. So long term, there is no question on. Medium term, I would wait for a quarter to see how things are moving. I would like to believe if you were to dovetail this into macro , if all the gloom and doom conversation is correct, you will see some action by respective people in places to stimulate growth. The entire conversation can change completely. So that's one part. I'd rather look at micro at this time -- at this point patchy. Q1 was very strong. We will take a Q2 view to determine so-called medium term, which is a 2-year view.

Cost. Look, costs have to be looked at separately. We run a reasonably high variable cost model. That's one point. I can dial up and dial down, 70% of my tax tag runs on cloud infrastructure, allows me to dial up, down dial at a far more rapid pace than anybody in the country. That's point number one. My point to sale people are temp staffing, allows me to dial up, dial down. I'm giving you texture so that we're all on same page. My main office, back office is run by BPO companies, dial up, dial down, 90 days.

Level 4. We would like to -- we remain a disciplined company in terms of managing costs. Sandeep has a unit, which fundamentally runs a financial planning analysis wing, whose goal is take out blind spots on costs. This year goal alone is that INR 250 crores of cost has to be taken out. I'm just giving you texture so that we're all doing a disciplined conversation on the way we run business rather than a transient conversation.

So that's really on management of cost and our approach to managing expenses and cost. Slippages, I have said, 2018, '19 was a record best. Now when I say record best, you have to read it as record best. What does that mean? Can record best become better than record best? Of course, it can. But in general, it need not be that. So it's a glass half full and glass half empty. That's point number one.

Let's assume for a moment fundamentally that we are 130 basis points of credit cost last year. We -- unfortunately, we're unable to publish the last 5-year data on it because of the change in methodology from -- to ECL. Otherwise, I would've given you last 5-year data, discussion would've got settled. I can do some maths on it and give you data, but even then it would not be appropriate because that's a number that you will not be able to, let's say, validate. So it's not fair to give you a number that you cannot validate.

ECL, has meant -- let me first take that conversation away. If you were not on ECL methodology, this number of 69% would have looked like 60%. Let me simplify that conversation first, okay? If you do -- because internally ECL is very difficult to -- so our internal dashboards are all run on previous GAAP because of the statistical methodology. Small swings in 30 days past due can lead to swing in a month, need not be swing in a quarter. So -- and that's why internal management is -- and even when banks transition, they will require to do that, that way. Do we run? Do our CROs and EROs run -- walk against on a lag basis? But risk decisions are made not on lag basis, risk decisions are made on run-time basis. So on a lag basis, they run -- we build the waterfall, but on a running the business basis, they run it on -- we run it on previous GAAP.

So the credit cost fundamentally, let's assume for a moment -- now that has to take into account, now what happens to the environment. I mean, a week ago, we were sitting on 12% negative monsoon. Today, we're sitting on 19%, that was 2 days ago. I'm feeling ready that if monsoon was to fail, would I act? I'm just giving you texture so that you understand that agility in an environment, which is perceptibly slow. I'm not saying they need to be slow. We'll have to be higher and we'll have to be watched carefully and acted quickly.

Now let's assume for a moment, okay? Let's cut the conversation. Let's assume for a moment, 130 basis points comes in at 160 basis points. Let's do this conversation, okay? Now number does not change the material trajectory of the profit pool of the company for the current year. And as I said, I believe these things will change, but even then it doesn't change. The number is not material. You know the math, you can do the math, from 130 to 160 basis points, if you do, what happens to the number is not material at all. Does that answer your question?

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Abhishek Murarka, IIFL Research - VP [7]

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Yes, broadly. But -- so just one part of the first question in growth. So which sectors have you planned for? Obviously you would have planned for something, and then depending on the environment, you'll tweak that strategy. So basically, what I was trying to understand is what your plan is? So which sectors do you plan to grow in? And...

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [8]

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Wherever we are green on, we are growing, come on. The management assurance green means what? So technically, out of -- we publish here for 8 and 3, 11 businesses, 9 are growing. Okay, let me make a second order point so that we're on the same page. Even the yellows are growing, okay? The net impact of growth on these yellows will be a net impact because what happens is when I go and tell the business manager in Digital Product financing for a moment that, look, I'm pruning your bottom 15%. He goes out and finds ways and means to look -- go after a better customer in the process, okay. When he goes after a better customer, the net impact of 15% to 18%, in general, will turn out to be on a lag of a quarter or lag of 60 days at 7% to 8%., let me make that point clear. Because, as I said, we remain a growth company. The opportunity remains very large.

Let me give you statistics on Digital Product financing, so that we are all on same page. Country sells 2 crore phones in a month. 90 lakh phones are feature phones, which we do not finance. 110 lakh phones per month are smartphones. We do not finance less than INR 10,000. That is 55 lakh phones is what we finance. Out of 55 lakh phones, company does, let's say, 8 lakh phones, okay? Our goal is to be 30% of it, which is really where we are in consumer durable. Now that gives you lay of the land from a depth of the market and breadth of the opportunity that it represents for us.

So we would go out and tell your business, we are pruning your bottom 15%. He will take 60 days and find better customers that he wants to do business with. So the net impact will probably be -- not will probably be, in general, will be 7%, 8%, 9% depending on the effectiveness of the business manager.

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Operator [9]

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The next question is from the line of Parag Jariwala from White Oak Capital.

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Parag Jariwala, White Oak Capital Management Consultants LLP - Senior Investment Analyst [10]

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Yes, Rajeev. So I have two questions. One is Digital Product, B2C and SME, where you're saying that there will be some cut in disbursement. Is it fair to assume that barring SME, other products are very short in tenure so a cut in disbursement would be a cut in the overall asset under management? That's one.

Secondly, I know you have replied to the earlier question that the products, which are green we are growing. But is there any slowdown in the momentum in terms of, let's say, for housing finance, the number of [five login] you get it or what are you picking up from the -- from your staff on the fields?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [11]

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So look, when I said patchy, what I mean is, a month is harder, a month is softer. That's what the meaning of patchy is, that July can be good, August can be bad. September can be good or great. That's the patchy conversation. I want to -- and I should have made that point even earlier. What would a company with 37 million customers do when it is finding the environment patchy? What -- why do we have the franchise? We have the franchise because when -- then we go dig deep into the franchise, we find that clients were great -- on the count 37 million customers, we today banned 18 million. 18 million we banned. Okay, interesting part is, longer the customer stays with you, you've got to spend more to engage him or reengage him, because he is a more prudent customer. He is a better customer. Lot more customers are chasing that customer. And we see it structurally play in loan loss. The loan loss of a new customer is x, I've always said that, existing customers 0.33x, a greater than 18 months customer is 0.15x. So what do you do? You go after them, you reengage them, you spend more on them because adjusted for risk cost their cost is lower.

So see, in a way this point is tied to the previous conversation on Digital Product financing. When I tell a business manager that "look, you know what, you got to -- we're pruning your bottom 15. Go out and find ways to grow." These are ways and means he goes out in grows.

The second order point, which we have talked to certain people about is our prospect franchise. We've given that in India, in general, super discretionary business remains a highly unorganized sector. These retailers need help in organizing their data infrastructure. Over the last 6, 7 years, we have worked with these retailers to help them stimulate their cash customers and their credit card customers. And it's part of our broader data as well project, and we continue to work with these retailers.

We've aggregated working with these retailers to help them over the last few years, added over 100 million people in India, non-37 million that we have a view on, okay? The number is north of 100 million.

Very interestingly over the last 2 years, these customers perform virtually like a store card customer. So we are accelerating that. We're accelerating EMI card. That's really what you do in a patchy environment, so-called slower environment. Dig deep, find the best customer, reengage them, spend a little more money on them. And given the strength of the franchise and stickiness and loyalty of the franchise, we're very confident that -- and it will be on a forward basis, on a 12-month forward basis, eventually it means lower costs.

So I'm just connecting the last question by Abhishek and by you to give you texture on how growth fundamentally will get generated from, even if the environment was to so-called television and newspaper environment was to say the way it is. Does that answer your question?

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Parag Jariwala, White Oak Capital Management Consultants LLP - Senior Investment Analyst [12]

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Yes, yes. Some color on the green ones in terms of...

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [13]

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Green ones, we continue to grow. That's my limited point. Some color on the green, mortgage business is a result of the separation given what's happening externally through the sector. So 2 things came in at that time: We separated the business; created more -- created a sharper focus.

As you can see, pre-January or pre-March 2018 to post-March 2018. You take the last 3-year data on mortgages, business was going growing 25%, 28%, if you take the 3-year number. That number in the last 5 quarters is growing on an average between 40% and 45%.

Mortgages, we think, while it's tough for the team is their new -- that's a new business, new company. Not a new business, it's a new company. They're still getting their arms around new way to run a business, but I would say it represents a tremendous opportunity to become a dominant mortgage lender in this country in the next 5 to 7-year horizon. And that moment going to be is now, because tough times then also represent opportunities for company. So that businesses will grow. I would say all our businesses are remain on a growth mode ones, which are represented here in green. The yellow, we are pruning the bottom. We should be able to find growth. On the other side, I want to repeat, it remains very small, remains very, very small.

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Operator [14]

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The next question is from the line of Nischint Chawathe from Kotak Securities.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [15]

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A couple of questions. One was on the cost to income ratio and on a year-on-year basis and I guess, these numbers are, again, comparable because these are in test. Your ratio actually went up from 50% to 56%?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [16]

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What's the ratio, again?

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [17]

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Cost to income.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [18]

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Cost to income. OpEx to NII is what we tried to publish. So I don't know what you're talking about. So at least I don't have the number, I have OpEx to NII, which is what we published. So it will be useful if you refer to that rather than number that we don't publish. Nischint?

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [19]

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So I'll take it -- I'll take it definitely...

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [20]

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And it will be helpful not for anything else, it will just be helpful, nothing else. What we published -- because when we track it that way and I have last 5 quarters data on OpEx to NII that number was 37%, 36%, 34% -- 35% -- 34.6% and 35%. So.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [21]

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Let me just kind of -- if you could discuss that offline. The other thing is that RBL has indicated that their credit card losses, eventual losses are somewhere close to 4%. So would your experience be very similar?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [22]

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So 2, 3 things. We have worked with Bureau and I'm sure, RBL can tell you that. We work very closely with them to -- we are -- they've been a fantastic partner of us. The business continues to grow well. We are helping them acquire close to 100,000 to 110,000 new cards a month. We came in at close to 1.3 million cards in force as of Q1. We are well on course to grow with RBL the relationship to 2.2 million to 2.3 million cards by March '20.

Second order point, the book is maturing now or has matured now over the last 2.5 years. They share with us the vintage household data. The vintage household and we have worked with Bureau to look at how this portfolio that we originate results, given that we work very closely with them and the portfolio of, let's say, top 4 leading credit card issuers in the country pans out.

Our numbers are lower, let me make that point clearly. Now company to company may differ, but because Bureau cannot share company-wide data, it shares the aggregated top 4 card issuers data in the country, and you know who are the 4 that we're fundamentally talking about because they're 85% of the market. That number is structurally better, okay? Not for anything else, not for anything else. It's better because we sell to existing customers as a company.

Even then, let me make a second order point. Card-to-card customer operates much better. If you took a very harsh view and said we will only card the [carded] because those numbers are half of that of a new to card. Because there is a learning involved of the customer, we have to educate the customer. But for the long-term growth of a credit card business in this country, for a long-term growth of creating a dominant credit card issuing business in this country, we think that road has to be traveled upon. Blended, it still comes through lower than the top 4 leading card issuers in India. And we're committed to remain that way, for us, as a company, over the next few years. Does that answer your question?

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Operator [23]

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The next question is from the line of Atul Bhole from DSP Mutual Fund.

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Atul Bhole, DSP Investment Managers Pvt. Ltd. - VP of Investments and Fund Manager [24]

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Rajeev, this is Atul Bhole, just a couple of questions. First is on the portfolio quality. So if you look at how we are shaping up in terms of increasing share of existing franchise customers in the portfolio and also the new flow that is coming through is far more filtered. And given the duration of our portfolios, would you expect that in next 6 to 9 months the portfolio quality can actually be much better than where it is today? I mean, would that be sort of positive?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [25]

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I would just say to you, given the patchy environment, given the degree of -- in general, the patchiness that we are seeing, I would wait for a quarter to fully opine on it. I would only just say to you what I said in the beginning, we remain a risk-driven business, okay?

In the short term, between risk and profitability -- risk and growth, if you have to choose, we will choose risk because we're building a business with a 5 to 7-year view. Does it remain our aim to keep bringing down credit cost as a company because that is what represents what I say, a true engine of a risk business. The engine of a risk businesses not capital, not pricing. Engine of a risk business is risk cost. That is the foundation on which we've built this business. The long-term engine of a risk business is risk cost. And that is why we are so conscious about this line. So in the long run, it has to keep coming down.

In a few forums, I've talked about what are collections efficiently used to be 4 years ago or 3 years ago, 2 years ago, and a year ago. All that represents keep working on bringing down credit costs. But that does not mean it can mean one way down, we run a real business, we run an operating business. We remain in a subsystem of a broader economic system in a country. However, if it was to deteriorate the environment, I can only just tell you one thing, that we will be amongst the less affected people. It's a limited point I would make to you. Because we are agile, we act early, we mobilize the company and ensure that we keep our head above water through difficult times. That's really all I would say. Does that answer your question?

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Atul Bhole, DSP Investment Managers Pvt. Ltd. - VP of Investments and Fund Manager [26]

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Yes. Yes, it does. And just 2 more things. One is on the rural business, if you could just give violets and green, just qualitatively, if you could talk a little bit about how you've evolved this business over the last 6, 9 months and some color or texture around that?

And just one last thing is, in the last few months, how has the competitive landscape changed, I would assume that it would have got even more stronger for the company. So if you could just talk a little bit around that -- the business that we've avoided and some texture around that? Yes.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [27]

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So look, fundamentally, it's a business, which takes time to build. We've been invested in the business for the last 6 years. This is the seventh year of business. Sixth year. Yes, sixth year of business. We took the first 3 years to put our arms around it. In the last 3 years, the business has grown much more rapidly. In the first quarter, the entire addition of -- am I mistaken or, I mean, most of the addition is in rural of branches that we've actually done. Can you just go to the -- just give me 1 second.

For the quarter, the entire addition in -- majority of the addition, if you go to panel 28, has been in rural. From 903 branches in March, we went to -- we added 48 branches in rural, out of the total 65 and balance 17 only in urban.

So you can see our stance on expansion is much more stronger in rural than it is in urban. That does not mean we are not growing urban. We're using a different way to grow in urban. One of the biggest challenges in urban is that the cities are expanding. So we're actually -- the number here may not represent the urban branch growth, but we're deploying in 120-plus market, a very different methodology to actually grow the pool of customers that we work with in urban. So that's a separate point, but I thought I'll just cover that.

Stance on rural remains strong. But rural is, while we don't lend to farmers less than 2% of the total book is -- of the B2B is to farmers, 0 and B2C to farmers, B2B to farmer is 2%. But they operate in an ecosystem where they can -- where they can be affected and impacted if monsoon fails. Now that also doesn't mean securely. Wherever there is ground order supply in abundance, monsoons has no impact. Wherever it's lesser, monsoon has an impact.

Having built the business over the last 6 years, every year as part of the discipline process, we start to check in June what -- which are the markets where impact -- if there can be impact on monsoon, and so on, and so forth. So we're watching the movement of monsoon. So far other than 4 districts in India where we are present in, we are fine. Second order point.

Third order, overall in a strong growth stance, we'll grow -- there are parts of our businesses in rural, which are starting to grow more -- lot more strongly now. We were very strong in B2B, we were very strong in B2C. Rural gold loan is something that we've been building for the last 3 years. Given the -- that business is now moving much more rapidly. We've just opened 23 standalone branches in rural, which only do gold loans. We've tested with 10 branches 9 months ago. Performance was very good. We are adding 23 more.

As we perfect the model, rural gold loan could be 500 to 700 branches business in the next 5 to 7-year horizon. We won't do rural -- we won't do gold loan in urban. It's 120-plus cities, that's really where we would do -- So we continue to look for opportunities, seize opportunities, find new areas of growth, that's rural.

Has market opportunity become better in rural? Answer is, I would say, no. These are -- rural for us, it's 550 markets plus. It's a damn hard one to reach. Other than one of the leading private sector banks, there is very little presence. So the market remains underpenetrated or unpenetrated at this point in time and has remained so over the last 5, 6 years.

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Atul Bhole, DSP Investment Managers Pvt. Ltd. - VP of Investments and Fund Manager [28]

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Yes. So just one follow-up. How does rural -- in rural gold loan business you talked about, how does that sort of come in the overall strategy of catering to the affluent customers segment?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [29]

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Our average, I could say -- No, no, very valid question. Our average, I could say, in gold loan is INR 85,000. Let me give you a texture. I'm sure you track other, so that means the client is facing -- the maximum loan that we can do in rural gold loan is INR 1 crore. If you're willing to place INR 1.5 crores gold, we give you -- so the strategy remains affluent. To get sizes upwards, as I said, between INR 85,000 to INR 90,000. So that's the texture.

Third order point, and it's a little more structural, I think, somewhere I saw one of the analyst present -- one of the brokerage presentations talking about how NASA is lit up, how India is lit up better than NASA, so you can trust the data. How India has lit up well in the last 5, 7 years. It's quite at 1 level I would say shocking, which means shocking in a positive way how India is lit up. And that is really how the demand outlook of the rural market would get transformed.

So electricity is ensuring discretionary conventional move. Second order, I think the overall Law & Order in most of the states that 5 years ago you would say, "I struggled to do business in, has improved." Let's say, I'll use 1 state example, Bihar. People won't buy cars and homes and big televisions because they can be targeted. I'm just giving you texture, I don't mean -- I'm just giving you what the people on the ground say to us, our retailers on the ground say to us.

So overall -- so gold loans fits in from affluent rural customers because it is one of the assets that they own in abundance. Second product that they own, land. I can't do financing on land, so the only thing that I do is gold. And it's a 3-year-old business. We figured out -- we found our way to growing and building it and we're quite excited about growing the business as we move from here and remains in affluent focus.

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Operator [30]

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The next question is from the line of Bharat Shah from ASK.

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Bharat Shah, ASK Investment Managers Limited - Executive Director [31]

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Rajeev, I -- while this quarter is a short number -- short period, I was just comparing the numbers for this quarter compared to last 12-year average on various key parameters. And I was quite -- I must say impressed to see that even on a larger base, asset growth continues to be in line of what has been done over a 12-year growth. Interest income actually exceeds. Fee income exceeds. Net interest income also exceeds the 12-year compounded average. So on a larger and larger base to achieve that, truly significant.

On 3 numbers I saw with the quarter numbers are kind of having bit wash off in the 12-year average. So one goes into expense but which, I guess, probably what you've mentioned that going forward, the cost of borrowing is coming down significantly, probably that may turn, again, favorable. So I would like to kind of hear your comments on that.

On the operating leverage, I think, has continued, but little less than has been the case over the last 12 years. And third, which has been significant for this quarter, and of course, it is too short a period to make a meaningful comparison. But the quarterly provisions have risen materially at 69% compared to average loan losses of about 27% over last 12 years. So on these 3 aspects, if you can just give some view that would be helpful.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [32]

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The first question was expense based, right?

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Bharat Shah, ASK Investment Managers Limited - Executive Director [33]

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First was I was saying interest expense. For this quarter, it grew 55%. Last 12 years if we see interest expenses have grown at 40%. So this quarter, it may be a bit of 40% too, but I've seen the comments that interest expense incremental borrowings are at much lower cost, so I suspect interest expense probably, again, will start turning favorable in spreading that leverage.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [34]

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So 2 points, Bharat bhai. So incrementally whatever issuances that we do in the bond market and the CB market are available in public domain. Clearly, if I took a 2, 3 months prior view to today, they're clearly coming down. I mean, from 8.5% 3-year bond that we were issuing and I'm talking in quantum conversation, has come down to 8%. It's available in public domain. I raised money at 7% in 60-day CPs. I raised at 6.3%, 6.4%. I mean, last raise it was 6.3%, 6.5%.

So clearly -- so that's one part. Second order point, Bharat bhai, is that capital adequacy, you'll have to tie this interest cost along with. So that's -- if you adjust for those periods, capital adequacy, you may see a more steady line adjusted for, given interest cost is a macro market driven conversation. But if the -- one of the silver lining in the crowd of this whole patchy environment showing economy is likely to be more surplus liquidity in the system should lead to lower inflation, should mean tailwind on that line. Yes. Should mean tailwind on the line, but it's difficult to predict. We will continue to sharpen the pencil on that.

But there's a third order point, Bharat bhai. You will see the line, however, adjusted for the macro move up a little because we are investing and building for the sustainability of the business, a retail deposit business. If I did not have this INR 15,000 crores or INR 15,100 crores of retail deposit, they do come in at a higher price. It's the cost of sustainability that I have to invest in to have a 10-year view on us as a company and a business.

So there are moving parts in this. I can only tell you we continue to chase efficiency in ensuring we keep bringing down our cost of funds, adjusted for the macro, adjusted for retail because it's an investment that we must make to deliver greater sustainability of the business model.

So that's part #1. Operating leverage, I have said in the past that, I said actually last quarter as well, that so far OpEx to NIM movement has fundamentally come in from movement in NIM than movement in OpEx. In fact, I want to add a dimension to just the earlier comment that I made that why are we not seeing urban branches growing, okay? Branch expansion in a retail business -- and I'm giving an illustration to make my point.

The branch expansion represents a 12 months forward investment. We realize that in urban business, we're already in 550-odd cities, adding a location is dilutive than -- and given that these urban cities are going on the fringes, so to open a spoke in a city is more economical than opening a city. I'm just giving you texture.

Earlier point I made as well, there is -- the entire INR 250 crores number I just -- for illustration I was making the point on is focused on costs that we will -- we must as much focus on NIM as we focus on cost. We're investing very deep in areas like robotic process automation across the company to take out, let me say, headcount variable headcount or fixed account.

So there's lots of work happening. I would say I'm seized of it, I'm aware of it and rightfully balancing between growth, controllership, sustainability will keep navigating through that.

On third point, which is loan loss and provisions, I've said this over the last 1 hour that you -- and as I said, last year, they were at record best. Are you given the granularity of the portfolio that does not mean it can worsen from here? As I said, our intent remains to continue to improve it because that is sophisticated risk management conversation. But if environment is patchy in a given quarter or for a few quarters until we readjust the portfolio to -- let's say, it is an environment is to persist, let me make a point. If this environment is to persist, you will see the 66% existing customer to new customer probably shift to 70% to 75%. It will, in a 3-quarter, bring down loan-loss, let me tell you. My problem is new customer represents the future growth of the company.

So you have to balance even that equation to -- from a medium-term standpoint. So it's a calibration, Bharat bhai, keeping into account these dimensions. And as I said earlier, I made a -- I was not giving guidance, I just made a point that let's assume the full year credit cost came in at 160 basis points. It doesn't change materially the color of the business or color of the profitability in a material manner. So I've left you with some questions, I realize, but I have to give you rounded, I mean a comprehensive answer rather than a straight line response. I hope you appreciate.

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Bharat Shah, ASK Investment Managers Limited - Executive Director [35]

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Yes, absolutely, Rajeev. I fully appreciate what you said. I must say this is a remarkable performance in the overall context, and especially maintaining ROA at 4% and record return-on-equity at 24%. Congratulations to your team and you.

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Operator [36]

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The next question is from the line of Kuntal Shah from Oaklane Capital.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [37]

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Since the gloom and doom is a favorite of the season, I have two questions on that. Sequentially, hardly any change in GNPA, NNPA, but narrative has changed. So can you go to the Slide 44 and run through that. You have already provided for INR 1,270 crores of stage 3 slippages and have -- are aspiring to collect INR 824 crores of things, which is you think is recoverable based on your internal estimate. Is that a fair estimate to say? And that you are over providing based on ECL, 86 bps versus required 40 bps, so that gives you the quotient, coupled with 61% coverage ratio.

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Sandeep Vijay Kumar Jain, Bajaj Finance Limited - CFO [38]

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Kuntal, this is Sandeep here. The point is correct. Based on ECL model, the net NPA number of INR 824 crores, as of 30, June represent the recoverable amount that we expect on the portfolio. So that statement is completely correct. As far as Standard assets provisioning, which is provisioning on stage 1 and 2, which is customers less than or up to 60 days overdue is concerned. Coming based on expected trade loss model, we are providing as the model is showing the numbers out. It is higher than what regulatory provisions required you to make in earlier environment, which is 40 basis points. But this is purely based on statistical outcome of how the performance of the balance sheet and the portfolio is being seen.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [39]

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We note that your metrics are far better than the other financial services players, larger ones and banking ones you get compared with. So comparing with them, when I see the fees based income is almost 38% to 40% of their total income and almost 60% to 65% of their PBT versus like 38% of PBT for you, so any 5-year road map you can highlight, Rajeev, on how you're planning to increase your fees based income, which is more distribution and not balance sheet linked and hence, more stickier and ROE accretive?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [40]

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Kuntal, it's already higher than -- my -- in general experience and in general expectation, we will continue to -- I'm not saying steady, and so on, and so forth. Our focus has to continue to create products and services, which our customers want to buy. So it's limited by that rather than anything else. And that's really how I would look at it. That's one part.

Second part is the more we reduce friction, more it creates opportunity for our customers to do business with. I think, and we, as a company, remain very focused on that. And as long as we remain focused on that, we will be fine. I'll give you a texture. We talked about in the AGM yesterday that we've invested in a new point-of-sale reinvent platform, which can process 50 million customers annually from let's say, if you take 7 million customers on the quarter that means we're talking about 30 million customers or 28 million, 30 million customers on a full year basis.

The number used to be, if you take 3 days to pay our retailer. That number is now tracked at how -- if I throw the number you'll be -- the number is flagged at how many customers you're paying, how many retailers you're paying in 3 hours. 55% of what the moment of transaction is done, we pay in 3 hours. Now what does that do, let me make a point. Then the point-of-sale boy invests less time in selling and documenting, and so on, and so forth and more time in selling products and services that we create. I think that's -- so we remain focused on improving efficiency, #1. Creating products and services. This number can go to wherever it goes to. So I'm giving you philosophy rather than a number guidance. Hello?

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Kuntal Shah, Oaklane Capital Management LLP - Partner [41]

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(technical difficulty)

charges and some of the illiquid auto ancillary companies?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [42]

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Sorry, I lost you. We didn't hear you.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [43]

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There has been regulatory filings where Bajaj Finance has taken pledge of shares of some midsized auto ancillaries, which are primarily illiquid and are loan against shares, but would you clarify charges loans against shares or are these additional over collateralization of other kind of auto ancillary loans, which you are giving out?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [44]

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These are -- this is over collateralization of our security structure. The names are only 2 or 3, first of all. I must just qualify that. The total exposure on that is sub INR 30 crores, that means that the second point I must make, I can consolidate INR 40 crores. They are very well run companies. We want to ring-fence our predominant position of working with those promoters and companies. They generate -- their issues are very good. So it's a commercial lending conversation on these 2, 3 clients rather than anything else.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [45]

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And Rajeev, last question from my side. At what price of sale of towers in the GIFT City would you breakeven? And what kind of time lines you end with such? I know it's a...

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [46]

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The sale, Kuntal, I don't know if it's in public domain -- it may not be in public domain. The sale has happened higher than our -- actually -- okay, let me make a point. Sale has happened at what we sold the last hour in 2017, December '17. That should...

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Kuntal Shah, Oaklane Capital Management LLP - Partner [47]

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So you're confident of full recovery?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [48]

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Yes. I must just qualify subject to NCLAT proceedings.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [49]

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What's time line you have in mind approx.?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [50]

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Company says that given the nature of the collateral, CBRE has sales anywhere between 4 and 6 months' time. It can happen faster, but that's the internal conversation -- or conversations that management seems confident of.

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Operator [51]

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Ladies and gentlemen, due to time constraints, that would be our last question for today. I now hand the conference over to Mr. Karan Singh for any closing comments. Thank you, and over to you, sir.

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Karan Singh Uberoi, JM Financial Institutional Securities Limited, Research Division - Vice-President of Equity Research [52]

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Yes. On behalf of JM Financial, I would like to thank Mr. Rajeev Jain, the Senior Management Team of Bajaj Finance and all the participants for joining us on the call today. Thank you, and goodbye.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [53]

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Thank you. Thank you, Karan. Thank you for hosting us. Thank you.

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Operator [54]

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Thank you very much. Ladies and gentlemen, on behalf of JM Financial, that concludes today's conference. Thank you all for joining us and you may now disconnect your lines.