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Edited Transcript of BAJFINANCE.NSE earnings conference call or presentation 22-Oct-19 11:30am GMT

Q2 2020 Bajaj Finance Ltd Earnings Call

Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Bajaj Finance Ltd earnings conference call or presentation Tuesday, October 22, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Atul Jain

Bajaj Finance Limited - CEO of BHFL

* 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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* Adarsh Parasrampuria

Nomura Securities Co. Ltd., Research Division - Executive Director

* Anuj Gupta;Researcher;Perfect Research

* Bhavesh Sanghvi

Emkay Global Financial Services Limited - CEO of Emkay Wealth Management

* Dhaval Gada

DSP Investment Managers Pvt. Ltd. - Assistant VP of Investments & Equity Analyst for Financials

* Divyesh Mehta

Investec Capital Services (India) Private Limited - Intern

* Jignesh Shial

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* 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

* Piran Engineer

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Shubhranshu Mishra

BOB Capital Markets Limited, Research Division - Analyst

* Umang Shah

HSBC, Research Division - Analyst of Financials

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Presentation

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Karan Singh Uberoi, JM Financial Institutional Securities Limited, Research Division - Vice-President of Equity Research [1]

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Welcome to Bajaj Finance's earnings call to discuss the second quarter FY '20 results. To discuss the results, we have on the call Mr. Rajeev Jain, who is the Managing Director; Mr. Sandeep Jain, who is Chief Financial Officer; Mr. Atul Jain, who is CEO, Bajaj Housing Finance; Mr. Anup Saha, who is President, Consumer Business; Mr. Deepak Bagati, who is President, SME Business and Collection; and Mr. Ashish Panchal, who is President, Rural Business, Insurance & 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 [2]

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Thank you. Good evening to you all. I'll be referring to the investor presentation that we have uploaded on our website. Let me quickly take you to Panel 4 and 5. These essentially capture the quarter in an essence. We remain focused on all 3 dimensions of growth, profitability and sustainability in the current quarter. Assets grew 38%. Core assets in Q1 had also grown 38% to INR 135,500 crores. New loans booked grew by 23%

(technical difficulty)

Overall, Q2 in terms of loan growth was slower than Q1 given the general demand slowdown on one side and cautious view of growth on the -- or cautious view of risk on the other side. So if you look at our Q1 accounts growth, Q1 accounts growth was 29% and it came down to 23%. As I said, poorer outlook from a demand standpoint on one hand and our cautious risk view on the other hand.

Overall, the growth was pretty granular. Our finance business grew 19% versus 23% in Q1, B2C grew 46 %, Rural grew 35%, SME grew 34%, Mortgages grew 43%, Auto 61%, Commercial Lending 18% and so on and so forth. So it's a pretty granular growth. Between 2 quarters, sequential as well. Pretty narrow range in which both have moved. So it's pretty granular growth from a balance sheet standpoint.

New customer acquisition, we acquired 1.92 million customers. Overall franchise is just a tad below 39 million now. Existing customer loans were -- 70% of the loans were existing customers in Q1 versus 66%. Happened in a -- in general, our long-term view is 72%, 74% of the loans, eventually in a medium-term horizon should come from existing customers as they are better risk customers. But given our cautious stand and whenever we have to manage risk better, the right way to do is to reduce new customer acquisition. So it's more by design than by anything else that 70% of the loans in Q2 were existing customers and 30% were new customers.

We added 102 locations, taking us just to a tad below 2,000 locations. We will add another 200 locations in the next -- between 160 to 200 locations in balance second half of the year as well.

Cost of funds continue to go down given surplus liquidity in the banking system in general. The -- versus 8.49% in Q1, we came down to 8.38% in terms of cost of funds. It could fundamentally still be lower if not for the overhang that we are continuing to carry in the balance sheet in terms of cash. As of September 30, we stood at INR 8,000 crores of cash. As of today, actually, we are sitting on INR 10,000 crores of cash and cash equivalents. Does create a cost of carry, but given the environment that's probably the -- in our internal ALCO assessment is the right thing to do. ECB we raised, raised at a pretty attractive price, raised at 790, all-in cost from a 3-year fully hedged facility standpoint. We've also taken a Board approval today to go and seek approval from RBI for -- to raise another IND 700 million in balance half of the year, subject to RBI approval.

Deposits booked continue to grow well. Both ECB and deposits are creating significant amount of diversification on a liability profile for us as a company, grew 60% on a year-on-year basis; 15% of the liability profile is now retail and corporate deposits, INR 11,000 crores of this is retail and INR 6,500 crores is wholesale.

Focus on fees and commission remain, grew 66%. The differential mainly contributed by 3 core lines came from credit card fees, came from penal fees and other fee lines like financial fitness report, convenience fee, et cetera.

Loan losses were higher than, in general, what it's been so for the past few quarters, in line with Q1. Overall number grew by 80% in Q1 as well. Stage 3 asset from loan loss and provisions grew by 80% in Q1, grew by 80% in Q2. In general, the way it's looking like is that... Hello, are you there? Stephen?

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Operator [3]

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Yes, sir. You may go ahead.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [4]

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Yes, yes. Okay. In general, the way the year is looking like....

(technical difficulty)

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Operator [5]

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Ladies and gentlemen, the line for the management has disconnected. Please stay connected while we reconnect them.

Ladies and gentlemen, the line for the management is reconnected. Thank you, and over to you, sir.

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

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I was on point #12. The way it's -- in terms of credit cost, the way it's looking like, it's looking like more like FY '17, which was a demon year. Our credit cost in that year came in at 162 basis points. If you add ECL to it, fundamentally, you'd add anywhere between 12 to 14 basis points depending on which portfolios are moving -- are slipping. So the number is likely to, on a full-year basis, look like 175 to 178 basis points. That's really how our outlook at this point in time is on credit cost for the year. Doesn't change the operating metrics, doesn't change the earnings profile of the company, but -- and given the cuts that we're taking in, incoming and by tightening underwriting standards, we think by -- we should start to see reduction by fourth quarter or the first quarter of next year.

OpEx to NIM continued to improve, came down further sequentially and on a year-on-year basis; year-on-year came down from 35.5% to 34.5%. Overall NIMs was strong.

Gross NP and net NPA, year-on-year, there was a movement because of IL&FS. Sequentially, they were up -- they were flat. As a result of the tax cut, adjusted for DTA, profits grew by -- profit before tax grew 41%, they grew 43% in Q1. Consolidated profit for the quarter post-tax grew by 63% to INR 1,506 crores.

Return on equity as a result of the tax cut is looking very strong. It’s looking like -- annualized return on equity is looking like 28%.

Capital adequacy, we actually added to the capital in Q2. Q1 was 15.66%. I think we've come in at 15.9%. There was accretion to the capital. Actually, in terms of the core Tier 1 capital in Q2. I think we've got the Board approval as everybody is aware. Standard assets provisioning was steady between 87 and 91 basis points.

BHFL continues to grow well. It delivered a profit after tax of INR 130 crores, pretty solid and steady growth, Bajaj Financial Securities. And if you are happy to become our customers, open a demat account and start access to our broking services.

That's really quarter in general. There are detailed slides that are there. I think what I would do is to open up for questions and try and refer to the slides in the event of -- based on the questions.

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Questions and Answers

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Operator [1]

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The first question is from the line of Divyesh Mehta from Investec Capital.

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Divyesh Mehta, Investec Capital Services (India) Private Limited - Intern [2]

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Can you give us some clarity regarding the write-offs in the last 2 quarters?

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

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Write-off is referred on panel in the presentation, on Panel 41 -- sorry, 40, between INR 275 crores, INR 280 crores in the current quarter. And in general, we don't write-off -- a smaller part of the write-off is write-off. We generally sell down the portfolio based on the NPV of the portfolio as to -- rather than recovering from it, we'd rather sell down to an asset reconstruction company. And so as you can see on Panel 40, there's a INR 13 crores of recovery from realization on sale of NPA and the entity raise here.

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Divyesh Mehta, Investec Capital Services (India) Private Limited - Intern [4]

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Okay. Can you give me some clarity regarding just write-offs, which segment contributes a major chunk of it?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [5]

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No. These are millions of customers. These are, in general, written-off consumer portfolios. In general, out of INR 293 crores, INR 35 crores would have been -- INR 32 crores was mortgages. Write-off was INR 15 crores, out of INR 293 crores, was mortgages, rest were all consumer portfolios.

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Sandeep Vijay Kumar Jain, Bajaj Finance Limited - CFO [6]

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Consumer and SME.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [7]

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Consumer, SME portfolios.

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Divyesh Mehta, Investec Capital Services (India) Private Limited - Intern [8]

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Okay. One last final question. If you go to the new -- to Bajaj Finance customers in a new loans book, both of them have, as you said already, declined the growth on a Y-o-Y basis. This is only due to the respect regarding you being more cautious or is there any competition that scenario playing out here because on the ground level many of the banks have also started promoting their activities aggressively.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [9]

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They have been promoting for a while. So it's not new. As you can see, the data here on Panel 25 is last 6 quarters. During these 6 quarters on most of the competitive activities in top 25, 30 towns in India in point-of-sale businesses where majority of the competition that you're referring to is. So it's not driven by competitive activity. It's driven by our cautious view on the business.

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Divyesh Mehta, Investec Capital Services (India) Private Limited - Intern [10]

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Okay. One last final question. If you go to the customer franchise slide, where you have the triangle, in that there is an overall cross-sell franchise and the nondelinquent customers. Can you give me an explanation regarding what this is? And if I would subtract both of them, would I get the delinquent customers if that a fair map? Would it work out?

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

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That fundamentally means we are -- the client could have bounced and we are not willing to do business with him. And the -- so he is nondelinquent, so client may have bounced, may have paid me fully, but I'm not willing to give him any more lending products. I'm happy to give him insurance products, wallet products, happy to give him deposit products, but not lending products.

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Divyesh Mehta, Investec Capital Services (India) Private Limited - Intern [12]

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Okay. So the difference between 2 of them can be taken as delinquent customers, like he has defaulted any one of the time and you won't be lending to him, correct?

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

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Not delinquent, defaulted at some point in time, yes.

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Divyesh Mehta, Investec Capital Services (India) Private Limited - Intern [14]

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Okay. But now recovered? Okay.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [15]

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Yes.

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Operator [16]

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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 [17]

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Again, you surprise us and reconfirm that big and clean is getting bigger. My 2 questions. Firstly, products, so how does it all function?

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

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Activity rate -- activation rate is distinctly better than a physical plastic. So today, in a way, out of 20 million, 11.8 million are sitting, balance 9 million, we are making efforts to onboard on our wallet platform. So that's point number -- the response to your point number two, in a way.

Point number one, these are 2 separate instances. If you go on to the App Store, you will see MobiKwik wallet and you will see Bajaj Finserv MobiKwik wallet. These are 2 separate instances, fully ring-fenced from each other and have nothing to do with each other. We work with MobiKwik, manage, operate, invest in, add capabilities to Bajaj Finserv MobiKwik wallet. We, on a month-on-month basis, are moving from the 20 million EMI card franchise, anywhere between 600,000 to 700,000 customers every month to -- from EMI card to digitized EMI card/wallet. That's really what the -- how the structure or the partnership structure with MobiKwik is organized there.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [19]

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So Rajeev, at some point of time, we can consider that Bajaj will be launching co-branded wallets and cards with large -- people with large customers? No, like say, a store card for a retailer or a coffee shop or a retailer or some people who don't want to invest in that area, but could piggy ride on the technology and the lending platform of Bajaj.

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

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It's conjuncture. We will -- as and when we are ready, we will update all of you.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [21]

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And secondly, Rajeev, what is the fully hedged cost of ECB today, you are raising at?

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Operator [22]

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Mr. Shah, just a minute, sir. Ladies and gentlemen, the line for the management is disconnected. Please stay connected while we reconnect them.

Ladies and gentlemen, the line for the management is reconnected.

Mr. Shah, you may go ahead.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [23]

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Yes. Rajeev, what is the fully hedged cost of ECB borrowing and how does it compare with the local borrowing apart from the diversification and the maturity? Can you throw some color on this?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [24]

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The bank monies, in general, come at 1-year MCLR, which are between 815 to 825. This money has come in between 790 to 795. And all in -- this is all in, which is interest payable on maturity. And local currency borrowing, which is NCD in the marketplace, are coming in at between 755 to 765. So it gives us diversification. It sits right in between bond market borrowing and banking borrowings, and helps us target new pools of liabilities.

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Sandeep Vijay Kumar Jain, Bajaj Finance Limited - CFO [25]

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Kuntal, this is Sandeep Jain here. So the domestic bank borrowings are about 830 or so -- 825, 830 corridor, but the interest is paid on a monthly basis. So when you do annualized number, it works out to 8.5%, 8.55%. Versus that, the ECB money has come in at 795 and the interest is payable on an annual basis.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [26]

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Excellent. So Rajeev, just one suggestion, please do consider ADR next time when you raise the fund.

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

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We'll tell the Board.

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Kuntal Shah, Oaklane Capital Management LLP - Partner [28]

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Because -- yes, it comes with a more disclosure, but I think that the cost of borrowing and cost of equity, both will drop. That's just a suggestion and diversify the investor base as well.

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Operator [29]

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The next question is from the line of Anuj Gupta from Perfect Value Fund.

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Anuj Gupta;Researcher;Perfect Research, [30]

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I've got 2 questions with you. First is, in consumer durable finance, what competitive advantages do we have against someone like HDFC Bank (inaudible)? All these players (inaudible) for subvention? This is the first. Another question is, what thrust do we see in long run from digital players like Apple Pay, Google Pay or Paytm coming in digital finance?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [31]

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See the core benefit fundamentally remains who is reducing friction, number one; number two, who has risk management understanding; and number three, in the process, who has customers. All these 3 are, in general, a response to both your questions.

If you look at Q2 data of ours, we did 6.5 million loans. Let's say, safe to assume 6 million loans came from point-of-sale. Fundamentally, somebody to be able to underwrite -- 70% of those 6 million loans came from existing customers. Existing customers being defined as ready to do business with a line. So it's a set of many things, Anuj, that fundamentally create a moat or a heft at the point-of-sale business. So 70% -- let me convert the point into to demonstrate the heft point, 70% of overall financing market in consumer electronics, we help move. This is manufacturer subvention data. So it is not data from -- 15% of mobile phones sold in India -- or 30% of electronics sold in India we move; 15% of mobile -- smartphones sold in India, we move. So -- 8% to 10% of organized furniture market, we move. So if we are moving those kind of volumes and velocity in 2,000 cities across millions of customers in a given month, at one level means we have developed ability to reduce friction, manage velocity and the earlier 4 points that I made.

Does that answer your question?

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Anuj Gupta;Researcher;Perfect Research, [32]

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Yes. I understand the point -- the point-of-sale thing. If you could throw some light on the digital payment part?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [33]

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Digital lending is -- wallet -- in general, to an earlier question as well or whether it's Google Pay or Apple Pay, wallet is a railroad infrastructure. Gives you velocity of data that becomes a variable or a set of variables for you to build risk model, for which you need to have risk understanding. So just because the Google Pay and Apple Pay -- yes, Apple Pay is not here, they have input data variables emerging as a result of you using the railroad without having understanding of the risk, need not convert into a proposition on which -- based on which you would do lending. So they are 2 different things. Payments platforms are -- need not fully result into a risk business or a lending business. Not that they cannot be, but they are 2 distinct businesses. As long as they are run distinctly for the same consumer, there is an opportunity. But to believe that you have the railroad on which you will just -- as a result of which you will be able to do lending, is misplaced.

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Operator [34]

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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 [35]

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My question actually pertains to the credit cost guidance. You've upped -- you are guiding for around 170, 175 basis points of credit cost for the year as compared to around, I think, 140 last year...

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [36]

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150.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [37]

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150 last year. So this is incrementally in the B2B Digital and Lifestyle business and two-wheelers?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [38]

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It's across. There is marginal movement in general across, but more so in 3 businesses. In two-wheelers, yes; in digital, yes; and rest is all margin.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [39]

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And the B2C segment broadly look okay for now?

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

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Yes, data is here for you. If you see sequentially, let's take, personal loan cross-sell, March '19, let's take, 122 basis points 30-plus is 155 basis points 30-plus. Doesn't change the trajectory. It was 2 years ago. But more so, Nischint, let me make a point, as I said earlier, it's looking more like a demon year, which is '16, '17, where credit costs were 161 basis points. And if you add ECL to it because in bucket 2 -- 1 and 2 by 2, in general, if you take aggregate basis across -- of course, it differs by portfolios, on aggregate basis, we'll end up provisioning 21%, 22% already, which was not so the case prior to ECL being deployed. So if you actually add that number, you'll get 280. Actually, a little more, you'll get to. So that's really how we are seeing the year play out.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [41]

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Sure. And do you see further tightening of credits, please?

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

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It's a month at a time Nischint at this point in time. July was okay. August was better. September was not so good. October is looking better. So it's -- the default metrics are volatile at this point in time. I don't know whether a bottom has been formed as yet.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [43]

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Sure. The 70% of the customers who have -- sorry, 70% of your loan comes in from existing customers. In terms of percentage of disbursements in value terms, what could this ratio be like?

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

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We don't even compute it. Actually, we don't even compute the 70-30, except for you guys. We focus on our business. We get to know about it only at the end of the quarter. We -- Sandeep can help you with the number.

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Sandeep Vijay Kumar Jain, Bajaj Finance Limited - CFO [45]

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Yes, yes.

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

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We don't have it handy. We don't even try...

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [47]

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No issues, no issues. Just one final commentary if you could give on the festive sales month till date?

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

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Festive season, till Navratri, if you take discretionary consumption because let's take out the retail products which are not -- so let's stay with B2B products, in general, till Navratri was not good. Dusshera onwards it's improved dramatically. I would say significantly, dramatic would be a wrong word because you're all looking for hope. But the way it is -- next 10 days are very critical till Bhai Dhuj, which is next Wednesday.

Can you hear me, Nischint?

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [49]

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Yes, very much.

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

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Thanks, okay. However, I would say the following to you, this quarter will go up till the last ball of the last day. Because the way we've seen in general...

(technical difficulty)

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Operator [51]

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Mr. Chawathe, please stay connected. Ladies and gentlemen, the line for the management is disconnected. Please stay connected while we reconnect them.

Ladies and gentlemen, the line for the management is reconnected.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [52]

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Sorry. Nischint, are you there?

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [53]

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Yes, yes, very much.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [54]

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So the way we have seen wherever Diwali is a little early is that we will fundamentally see a slump after Diwali, but then December picks up much earlier than -- in general, if Diwali is early November, December picks up by 20th, 21st of December. In general, when Diwali is early, then it'll pick around 10th or 12th of December. So I think it will be a last ball, last day play. Given the actions that the government is taking and the cascading impact as it starts to play, we are sitting very -- pretty prepared to seize on that.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [55]

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So we should not get too much carried away by the big numbers reported by the online players?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [56]

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Online players, you have to read the fine print and see what is their year-on-year growth. It's been very strong for us. We are reasonably large contributor of both. But in one -- for one larger, we've contributed reasonably on a year-on-year basis strongly to their sale. But look at their core year-on-year metric, core year-on-year growth are much weaker.

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Operator [57]

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The next question is from the line of Adarsh P. From Nomura.

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Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [58]

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Very good set of numbers. On the fee, just wanted to understand if you can break up the fee either of this quarter or the first half, what's the fee which is non-linked to any balance sheet credit activity? So if you can't distribute, then value added...

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [59]

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Credit cards fees is not linked. Penal fees that we collect from clients is not linked. Insurance that we distribute is not linked. EMI card fee is actually not linked because I may sell you an EMI card but if you default, it's not linked. So these are 4 lines that are not linked. Other than that, there are set of other services where, let's say, at the point-of-sale you want to increase your loan limit, you can pay a small fees and increase and so on and so forth. So there are various lines over the last few years that we've created, which are "not linked" to loan.

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Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [60]

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I just wanted to have a proportion of your -- this fees as a percentage of the total fee because that pool is becoming pretty large.

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Sandeep Vijay Kumar Jain, Bajaj Finance Limited - CFO [61]

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So in each of these components, whether you look at credit card revenue, insurance or value-add services revenue pool or EMI card or for the matter, penal income, they are reasonably large in the overall number. So it's not that one particular number is contributing to the overall growth for the quarter. So these numbers individually also play a very, very large role in that number.

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Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [62]

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And I'm just trying to assess, over a 2- year period, what's the addition to the ROA number without actually having a risk-weight consumption? So just trying to get sense of what percentage would it be which really doesn't eat into capital consumption?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [63]

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So fundamentally -- I mean, the point that we are politely trying to make -- okay, let me make a different point. There are 19 different lines that contribute to fee line, okay. It comes differently for different businesses. From a disclosure standpoint, we -- that's all really we can tell you. So we're not giving line item by disclosure because we -- let me make a different point, we see it as an IPR infrastructure that these are the lines that can get created in a retail business. So -- but overall, as an investor, I would just tell you that we remain quite focused on ensuring that the sustainability of the business model should not be linked to balance sheet. So fee should grow nonlinear to balance sheet. And we've demonstrated that over a few years, and we remain committed to continue to deliver that.

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Operator [64]

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The next question is from the line of Umang Shah from HSBC Securities.

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Umang Shah, HSBC, Research Division - Analyst of Financials [65]

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Congratulations to your team for a good quarter. I just had one question. During this festive sales -- festive season sale, we have seen a lot of cash back being offered by Bajaj Finance as well. What proportion of that is being borne by Bajaj? And how much of it is being borne by the OEM?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [66]

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OEM is not bearing anything. If at all -- so these are different structures by geography, by retailer, by better customers. We are investing very deep in existing customers. And so its promotions being created to fend off competitive activity to attract footfall into the store is really what the driver is. Manufacturer does not bear anything. If at all, at times, it can be borne by -- part of it can be borne by the retailer.

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Umang Shah, HSBC, Research Division - Analyst of Financials [67]

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Okay. So technically, from -- so it has to be netted off from your product IRR and from the OEM standpoint, it's just a subvention that he shares with you?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [68]

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Yes. There is a phase in promotion expense line for every festival season that we invest in to generate velocity. Would it be more stronger this year than it was in prior years because of the tax cut benefit that has emerged? The answer is yes, but that is all.

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Umang Shah, HSBC, Research Division - Analyst of Financials [69]

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Okay, understand. And just my second question was related to the tax cut. What proportion of the benefit you think you would be able to retain, let's say, from a 2- to 3-year perspective? Or how much you think will have to be given off either in the form of margins or higher OpEx to kind of sustain the growth and profitability?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [70]

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I am waiting to hear from -- I mean, let me make a point, we are the first company to go out within -- as the tax cut got announced and announced for out of 19,000 of our people, 16,000 people, we increased their salary by 5%. We remain committed to add value to shareholders, customers, employees. These are the 3 main constituents, and accelerated investments. I would say we're working on all 4 areas. But it's difficult to quantify what goes where.

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Umang Shah, HSBC, Research Division - Analyst of Financials [71]

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So basically, what I'm trying to understand is that your medium-term ROA/ROE target, which you put in your presentation, doesn't really change for now at least?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [72]

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No, it does changes because of -- we're in the middle of a capital raise, we've actually removed that. We do believe that from 18%, 20% medium-term guidance, we'll look more like 20%, 22% medium-term guidance.

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Operator [73]

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The next question is from the line of Jignesh Shial from Emkay Global.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [74]

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Congrats on a very good set of numbers. Just 2 things. One, if I see your zero DPD delinquencies, I guess, everywhere, sequentially, we are seeing a rise has been there, right? So across products, I mean, obviously, two-wheeler had been much higher, but this means the pressure is getting built up, right? So I understand part of it is also because you are cutting down the addition customer base, that is understood. But do you think so -- I mean, what's your assessment, do you think this trend seems to be getting even further worsen off going forward? Or you think there is -- because the difference is sizable, if you see almost 100 basis points if I'm seeing it in the two-wheelers, 30 basis points, 50 basis points across. So what's your sense over this? That your zero DPD -- so it is not reflected in NPAs, but it is somewhere getting reflected in your zero DPDs. So there is a pressure which is getting built.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [75]

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So no, it's a fair question. If you look at portfolio by portfolio, in a slow environment -- you know, our business being financial services is a tough business because when the demand slows down, not only you get hit by slowing NIM, you also get hit by credit costs. So it's a double hit, fundamentally, right. That's the nature of our business. If you look at it in a difficult environment, if you stay with, let's say, Panel 45, in say, consumer durable, the rightful way to look in a difficult environment would be where are you on 30-plus because zero-plus is material, but the credit cost will eventually flow from 30-plus. We started to see things slowing from November onwards.

(technical difficulty)

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Operator [76]

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Ladies and gentlemen, please stay connected while we reconnect the management.

We have the management line connected. Thank you, and over to you.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [77]

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Sorry, and Jignesh?

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [78]

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Yes, yes. Yes, sir.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [79]

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So we started to see things slowing from November onwards. What used to happen was 0 and 1 client used to be collected by same collections infrastructure. In June this year, we separated 0 and 1. If you see, let's take, 30-plus in consumer durable, you see 87 basis points 30-plus moved to 84 basis points. If you see Lifestyle, while we have stamped it as yellow, you see a 14 basis point movement versus March to June of 21 basis points. If you see Digital, it's actually improved. By February, March, we expect things will -- things should improve.

If you go to the next Panel, you will see 13 basis points movement versus a 20 basis point movement between March and June. So we are -- salaried personal loans were steady. So things are not deteriorating. As you see, business and personal loans, which is 96, has steady. But is the environment slow? Yes. In part slower? Yes. In geographies slower? Yes. I think we remain reasonably -- we are watching carefully. We are cautious. We are investing deeper in collection structure. We are prudently tightening underwriting standards wherever we see a yellow emerging. As I said earlier on the call, I see the year to look like FY '16 -- FY '17, which was a demon year, where overall credit cost adjusted for ECL went to 175, 178 basis points. We look like 180 basis points. It doesn't change the operating trajectory of the business or the earnings profile of the business.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [80]

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But -- okay, so now -- okay, since now your Lifestyle, your Auto and your Digital is yellow, so the only one, technically speaking, is white goods which seems to be green right now. So overall, your customer addition has anyhow slowed down in last quarter. So isn’t it a fair assumption that this slowdown will continue at least for a quarter or two? And if that happens, do you think the momentum to grow aggressively will stay? Or do you think there is a risk emerging on the growth -- AUM growth as such as well? I mean since...

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [81]

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This panel does not represent AUM. Actually, we retained Lifestyle because this panel of yellow is only INR 1,000 crores of assets. The largest block in this panel is actually consumer durable. But we never wanted to remove it because if we remove, you guys start doing WhatsApp. So it's INR 800 crores to be precise. To -- so we didn't want to remove the panel in any given manner. The largest panel is consumer durable, but that's on one side. On the other side is that it is -- there is one of the things that I didn't talk about is that when Nischint was asking on demand, how the festival season has been, I have no view on how Q3 will look. I was guiding -- I was not even guiding. I believe, that's really how it'll be. We won't know till December 31 because that's also a big season sale day as to how the year will -- how Q3 will pan out. But I do believe very strongly given very strong monsoon, well-distributed monsoon, reservoir capacity we're running at 10-year -- 25% ahead of last 10-year average, that semi-urban, rural demand revival will emerge by fourth quarter. Urban demand is difficult to predict. We are -- as I said, we are well prepared for growth. We are in 2,000 cities in India and towns in India. Revival will emerge from there, penetration rates are lesser there, profitability is better there, access is harder there. So the moat of the business is stronger. That's really how I would -- it's difficult for me to guide or predict how things will look in the near term. I can guide you for long-term, that in the long-term, we will continue to grow in a robust manner.

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Operator [82]

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Sir, the line for the current participant is disconnected. We move to the next question, which is from the line of Shubhranshu Mishra from BOB Capital Markets.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [83]

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So this is a question for Deepak. I just wanted to understand your collection infrastructure, how many people are deployed? And what would they be as a proportion of your total manpower? And is it split category-wise? If yes, what are these split in terms of manpower in terms of category? That's my first question.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [84]

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Deepak has unfortunately stepped out. Out of 20,000 people in the company, 4,500 people work for -- 4,800-odd people work in collections. They essentially work with managing agencies. They don't collect directly. They manage agencies. We have very deep well-oiled collections engine. We think it's an entry barrier to the retail business. And in general, we have created one of the lowest cost collections infrastructure in the country.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [85]

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So how many agencies? I just want to understand your infrastructure there in terms of collections.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [86]

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We would work with close to 16,000 agencies in 2,000 towns in India.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [87]

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Right. And all these -- this is for all the products or just for your consumer products here -- consumer and personal products?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [88]

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Of course, all products. It differs. The company is verticalized on business, risk, underwriting and collections. So if there are 15 key lines of businesses, we'll have 15 different collections heads and collection structures. And they may have distinct collection agencies or common collection agencies, but distinct teams within collection agencies.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [89]

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Right. And out of these 16,000 agencies, how many would be in the top 10 cities?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [90]

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40% of our business comes from top 10 cities. Reasonable to assume -- not to be 40%. This is more consolidated. It will be probably 20% of the agencies will be in top. Atul can respond. Atul used to be our collections head earlier. He's now the CEO of BHFL.

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Atul Jain, Bajaj Finance Limited - CEO of BHFL [91]

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So what happens generally is when we say 16,000 agencies because we work in 2,000 towns and cities, as you go below, the absolute volume per location is low. So you will have more people when the agency there may represent 1% or a 2%. But when you come to top city like Bombay, one agency can represent even 200 or -- 200 FOS or so. So number of agencies would not be a right criteria. Basically, you have to look at it only in terms of a basis of volume the people are available to collect in each of the market.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [92]

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So just to get back at the number, 40% of your business comes out of top 10 cities, that's the correct number?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [93]

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Yes.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [94]

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Sure. And my second question is with regards to your leaning towards the existing customer, as in 70% of your new originations are for the existing customers, but then this existing customer lies within the same slowing down economy that you and I are. So how is he any different from the new-to-credit customer or any other customer?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [95]

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The basic principle of banking remains that existing customer is lower risk. It is not no risk, right. So it's lower risk. I have to do business. We remain committed to growth on one hand and we remain committed to sustainable growth on the other.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [96]

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No, I understand that part. What I'm trying to allude to is that, which you have also alluded to, that the entire economy is slowing down or is in a slowdown. The festive season hasn't been great. So this existing customer is also part of the same economy that you and I are.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [97]

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So if he is part of the same economy and if he is not behaving properly in some place based on bureau data, I would also not offer him.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [98]

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Okay. Then is he likely to behave improperly or has he in the past 6 months?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [99]

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That goes to -- okay, we have not seen. The EMI card customer has not moved -- okay, both have moved. New customers have moved much worse off than existing customer.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [100]

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Can you put a number to that, please?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [101]

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What kind of -- what would you mean by number?

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [102]

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Any 0 DPD for new customer or 30 DPD for new customer, any kind of...

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [103]

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That's in public domain in the past that existing customer gives 0.25x loss versus new customer gives 1x loss.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [104]

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So has this changed? Has this proportion changed?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [105]

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It hasn't changed.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [106]

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Okay, sure. And just one last question, if I can squeeze in. In your commercial lending which you do to your auto ancillaries, now auto ancillaries are also slowing down.

(technical difficulty)

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Operator [107]

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Sir, please stay connected, the line for the management has dropped.

Ladies and gentlemen, the line for the management is reconnected.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [108]

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So my last question is for your commercial lending where we are lending to the auto ancillaries. Now I understand we do it for the Bajaj Auto ancillaries. But then auto ancillaries, in general, are also slowing down. They have had planned shutdowns. So how do we see that particular book growing? Any kind of incremental risk management strategies in that particular book itself?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [109]

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Yes. So we don't do only to Bajaj. It is a -- only 40% -- it's a consolidated supply chain. Those who work for Bajaj, in general, there would be very few people who would only work for Bajaj. In 2007, '08, the industry -- the auto ancillary industry went through a structural change where they realized that too much reliance on a single OE represents existential challenge for them. So in general, in the last 12, 13 years, the entire auto ancillary industry has created its own model, small or large or medium, that they only do particular amount of business with a single OE industry structure. We don't do only Bajaj, we do -- we lend to auto component manufacturers IL&FS incident -- after the IL&FS incident last September. But otherwise, all parts of our -- other parts of our FIG businesses continue to grow in a healthy manner.

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Operator [110]

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The next question is from the line of Bhavesh Sanghvi from Emkay Global.

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Bhavesh Sanghvi, Emkay Global Financial Services Limited - CEO of Emkay Wealth Management [111]

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Sir, just a quick question regarding to the balance sheet. Sir, I see like a big jump in the other receivables compared to the same item as on 30th September of '18 and 31st March of '19. What is this attributable to?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [112]

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I'll let Sandeep respond.

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Sandeep Vijay Kumar Jain, Bajaj Finance Limited - CFO [113]

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So other receivables -- so we had a mutual fund sell down at the fag end of the quarter end and the money came in on the first day, which is after the working hours of 30th September and that's what shown as other receivable instead of being shown as investments.

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Operator [114]

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The next question is from the line of Piran Engineer from Motilal Oswal Securities Limited.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [115]

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Congrats on the quarter. I just have a couple of questions. So firstly, in the HFC subsidiary, I've noticed over the last few quarters, that our cost of funds is 50, 60 basis points lower than the parent. So firstly, am I right? And secondly, how is it that we get such a low cost of funds around 7.4%, 7.5%?

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Atul Jain, Bajaj Finance Limited - CEO of BHFL [116]

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To answer the cost of funds in BHFL, Atul here, is same as BFL. So our cost of fund for the last quarter is also in the same range of 8.4% to 8.45% which remains. The reason for you see a higher NIM or a higher spread is because the HFC as of now is much more capitalized than the base -- the capital level required, so the spread looks more. The cost of funds is not different.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [117]

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No, but, I mean, I'm just doing the simple math of dividing interest expense by the borrowing book. So like INR 371 crores divided by average borrowings of INR 22,000 crores to INR 23,000 crores and I've seen that for the last few quarters that the cost of funds is significantly low and even compared to other HFCs, like HDFC and all, it's much lower. So I just wanted to know if there's some allocation of interest expense to the parent or is that a correct way of looking at it?

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Sandeep Vijay Kumar Jain, Bajaj Finance Limited - CFO [118]

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No. So -- nothing of that sort. Two things: One, this is a growing balance sheet, so the monthly acquisition of borrowings is not same as the quarter divided by 3. So that's one point. Second, if you notice in the current quarter, we have borrowed a lot of money at the fag end which we have parked in the investment as well. So when you are calculating the interest cost to average borrowing, you are counting the borrowings raised at the fag end of the quarter into the average number. So once you correct that, you'll come to a number close to 8.4%, 8.45%.

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Atul Jain, Bajaj Finance Limited - CEO of BHFL [119]

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And there is no transfer or allocation because both BFL and BHFL borrow independently, separately on their books. There is no cross transfer or allocation between BFL or BHFL.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [120]

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Okay, got it, got it. And my second question is basically in digital products financing. What percentage of our customers are new to BAF and what are existing? Because my assumption was that digital products customers are a subset of the consumer durable customers, in which case the delinquency should have actually been lower than consumer durables. So is my thinking correct? Or...

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [121]

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It is correct, except even the existing customer who takes a refrigerator versus takes a mobile behaves differently. So context to the point, yes.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [122]

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And he is more likely to default on the mobile?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [123]

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Yes. Conceptually, it's correct. It's a same customer for a panel -- same customer behaves differently for a panel versus a refrigerator versus a microwave versus a mobile. There -- we run them as 6 different businesses, not as one. The risk metrics change. You may be offered a refrigerator but may not be offered a mobile and vice versa won't happen. But -- so that's one part. Second, digital products would be 75%, 78% existing customer because going back to the earlier conversation, we have tightened underwriting standards. So newer customers, right now, we are not encouraging that much in digital products. So on an overall basis, digital products -- if we are 70%, digital products will be 75%, 78%.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [124]

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Okay, okay. Understood. And what would be the LGD in these products?

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Sandeep Vijay Kumar Jain, Bajaj Finance Limited - CFO [125]

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So if you look at, let's say, customer crossing bucket 3, which is, let's say, NPA bucket, the provisioning are generally in the corridor of 80%. So that represents the LGD in digital lend and consumer electronics business. Of course, if the customer crosses 5, 6 installment overdue, then the LGD becomes 90% plus.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [126]

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Okay. Understood, understood. And just lastly, on Nischint question on credit cost, Rajeev said that by the time you reach the H2, you make 21%, 22% provision. I didn't really follow that. If you could just repeat what you meant?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [127]

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So once the customer moves from all installment paid on time to customer with 1 or 2 installment overdue, we end up making anywhere between 16% to 24%, 25% provisioning on the account. Now it varies product by product. If you take an example of consumer electronic or digital product, maybe the number moves almost to a 40% level. If you take an example, let's say, of mortgage market, the provisioning maybe in the corridor of 15% to 18%.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [128]

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And this has changed under the ECL model, is it?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [129]

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Yes, exactly. It is ECL model. Based on statistical empirical evidence, as I said earlier, for AC, it can be different and for a PC, it can be different, and different for, let's say, digital product.

But on aggregate, anywhere between 18% to 22%.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [130]

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So what's your point was that earlier, since it was a standard asset, you made only 40 basis points of provisioning, but now you're making 16% to 24% of provisioning on that 30- to 90-day bucket?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [131]

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Yes, that's correct. Between bucket 1 and 2. Bucket 3, any which ways, it was always (inaudible) and we would provide whatever was our conservative provisioning standard. Now even as accounts move from 1 and 1 to 2 on the incremental flows, as Sandeep said, between 18% and 22% gets provided for.

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Operator [132]

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The state next question is from the line of Dhaval Gada from DSP Mutual Fund.

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Dhaval Gada, DSP Investment Managers Pvt. Ltd. - Assistant VP of Investments & Equity Analyst for Financials [133]

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Rajeev, congrats on good set of numbers. Just one question on the rural business. I just wanted your thoughts around the 30-plus sort of rising and I was checking the heat maps where we used to give around...

(technical difficulty)

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Operator [134]

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Mr. Gada, sorry to interrupt, sir. Please, stay connected while we reconnect the management.

We have the line for the management connected. Mr. Gada, you may go ahead.

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Dhaval Gada, DSP Investment Managers Pvt. Ltd. - Assistant VP of Investments & Equity Analyst for Financials [135]

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Rajeev, just to ask, so checking on the rural business and the 30-plus seems to be on rising there and if I go back in history where you used to share the overall rural lending 30-plus data, this number in the B2C and probably when in the B2B segment seems to be at the upper end. So I just want to understand what -- at what -- till what level are you comfortable doing business here? And at what point do you say that this comes into the sort of yellow category? That's the first question I have.

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [136]

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See, the matrix of the business actually, there's a structural level to the earlier point that I made, margins are better, credit costs are lower, access is harder which means the moat is stronger. If you just compare, let's say, rural lending B2B business with a blend of -- on 2 panels prior on -- with consumer durable and digital, you see distinctly better, safer, stronger rural business. It is just that you're doing comparison. So even a 98.87 or 84 basis points, 30-plus, leading to, let's say, 40 basis points loss rate business relatively looks worse off, but that is not so the case. So we remain -- our internal model show that we can go far lower. But that is not really how we run business. We have pruned between January and June in the rural lending B2B business and B2C business around 20%, 25% of the business in the last 6 months. So because we do see it as an important profit moat and want to hold the current standards of underwriting and risk metrics.

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Dhaval Gada, DSP Investment Managers Pvt. Ltd. - Assistant VP of Investments & Equity Analyst for Financials [137]

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Understood. And the second question that I had was on the -- I mean, you sort of partly answered that earlier as well, but just some color more, on the new to Bajaj customer base, what are the triggers that one needs to sort of watch out from outside to get a sense that, that engine which you're sort of filtering it far more prudently today, sort of, gets back to the normal sort of momentum that we used to see maybe couple of quarters?

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Rajeev A. Jain, Bajaj Finance Limited - MD & Executive Director [138]

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Credit cost should come down. We should go back to 150, 155, we'll be fine. So it's very simple, right. I mean at the end of the day, all the English will be of no consequence if the credit cost go up. So as credit costs start to go down by, I'm hoping reasonably by the fourth quarter end, we will hopefully be back to much more stronger growth from a durable growth.

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Operator [139]

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Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Karan Singh for closing comments.

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Karan Singh Uberoi, JM Financial Institutional Securities Limited, Research Division - Vice-President of Equity Research [140]

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Yes, on behalf of the JM Financial, I would like to thank Mr. Rajeev Jain and the senior management team of Bajaj Finance and all the participants for joining.

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Operator [141]

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That concludes this conference. Thank you.