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Edited Transcript of EQUITAS.NSE earnings conference call or presentation 11-Nov-19 10:30am GMT

Q2 2020 Equitas Holdings Ltd Earnings Call

CHENNAI Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Equitas Holdings Ltd earnings conference call or presentation Monday, November 11, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* A. John Alex

Equitas Holdings Limited - CEO & Director

* Dheeraj Mohan

Equitas Holdings Limited - Head of Strategy, IR & Analytics

* H. K. N. Raghavan

Equitas Holdings Limited - CEO of Equitas Micro Finance Limited

* N. Sridharan

Equitas Holdings Limited - CFO of Equitas Micro Finance Limited

* Pathangi Narasimhan Vasudevan

Equitas Small Finance Bank Limited - MD, CEO & Director

* Srimathy Raghunathan

Equitas Holdings Limited - CFO

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Conference Call Participants

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* Aseem Pant

HSBC, Research Division - Analyst, Financials

* Bhavik Shah

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

* Dhaval Gada

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

* Dhwanil Desai

Turtle Capital Investment Ltd - Founder

* Jehan Kersi Bhadha

Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst

* K. SivaKumar

Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager

* Nagraj Chandrasekar

Laburnum Capital Advisors Private Limited - VP

* Nidhesh Jain

Investec Bank plc, Research Division - Analyst

* Rohan Mandora

Equirus Securities Private Limited, Research Division - Analyst

* Sajan Didwania

Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst

* Umang Shah;SAIF Partners;Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to Equitas Holdings Limited Q2 FY '20 Earnings Conference Call. Mr. S. Bhaskar has retired as ED and CEO from Equitas Holdings Limited with effect from October 21, 2019, and Mr. John Alex has been appointed in his place as ED and CEO in the Board meeting held on November 8, 2019. Along with Mr. John Alex, we have with us Mr. P. N. Vasudevan, MD and CEO, Equitas Small Finance Bank Limited; Mr. Sridharan N, CFO, Equitas Small Finance Bank; Ms. Srimathy Raghunathan, CFO, Equitas Holdings Limited; Mr. H. K. N. Raghavan, Senior President, Inclusive Banking and Vehicle Finance; Mr. Ramasubramanian, Head Corporate Banking; Mr. Alok Gupta, Chief Risk Officer; Mr. Natarajan M., EVP, Treasury; Mr. Dheeraj M., Head Strategy and IR. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. John Alex. Thank you, and over to you, sir.

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A. John Alex, Equitas Holdings Limited - CEO & Director [2]

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Good afternoon, everyone. Welcome to the Equitas Holdings Limited Second Quarter of '19/'20 Earnings Call. As a quick introduction to myself, I've been a banker all my life. I worked with Indian Overseas Bank for 27 years before joining Equitas. I've been associated with Equitas from 2008 and conceptualized and set up the team for social initiatives. As you're aware, our social initiatives focuses on large spectrum of requirements in the field of health, education, skill development, food security and placement for unemployed youth among the low-income households.

Now moving on to the half year results for Equitas Holdings Limited. Our PAT for the first half year was at INR 112 crores, as against INR 79 crores in the first half of 2019. Return ratios for the half year, first half, ROA at 1.35% and ROE at 8.97%.

Before I request Mr. P. N. Vasudevan to give a commentary on the bank's performance, I request Mr. Dheeraj Mohan to highlight certain changes made to the earnings presentation.

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Dheeraj Mohan, Equitas Holdings Limited - Head of Strategy, IR & Analytics [3]

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Thanks, Alex.

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Operator [4]

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Excuse me, this is the operator. The line has been muted at the management end.

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Dheeraj Mohan, Equitas Holdings Limited - Head of Strategy, IR & Analytics [5]

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Thank you, Alex. Good afternoon, everyone. As you have noticed, there are certain changes to this quarter's presentation as we are in the process of getting the bank shares listed. In lieu of the above, the following slides, which used to be part of the earlier presentation, are not part of this Q2 FY '20 PPT. Firstly, the segment-wise details on our advances, which we used to give which was number of live loans, average ticket size at disbursement portfolio, the rate of interest in GNPA; secondly, collection efficiencies across various products, the number of accounts, number of customers and their average balances, especially for CASA and TD, the daily average cost of deposits and cost of funds, debit card spend details and the HoldCo consolidated financials under iGAAP. So these have not been included and the following are the changes we have made to the presentation.

The unsecured business loan, which is previously part of the MSE finance is now shown in the other section, both for AU and disbursement. All of the ESFB stand-alone numbers in the PPT are on iGAAP basis and all the Equitas Holdings Limited consol numbers in the presentation are on Ind AS basis.

Lastly, as per the regulatory framework, we are not allowed to make any forward-looking statements or provide guidance, so we really request all the participants to refrain from asking such during this call. We will, however, be very happy to talk to you about the industry as a whole and any forward-looking comments we make will pertain to the industry as a whole and not our bank.

And now not to take more time, I would like to invite Vasu to update you on the bank's performance.

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [6]

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Thank you, Dheeraj. Good afternoon to all of you, and thank you for dialing into our call. Since most of the financial performance has already been captured in the presentation, I would like to give perspective of each of our business lines.

The Small Business Loans, which contributes the largest part of our portfolio, has seen a growth of about 45%. Within the segment, we see strong traction in the INR 5 lakh to INR 10 lakh ticket size. Our yields continue to remain stable despite new players entering into this small ticket GLAP. Over the past 6 months, we have strengthened the sales and collection team in our existing branches.

Our second largest portfolio is vehicle finance, of which 73% is used commercial vehicle finance and the remaining are the new commercial vehicle finance. We have seen growth in these books compared to the previous quarter. The growth has been driven by strengthening the sales team and improving sales productivity in both the new and the used CV. The new CV loans continue to see strong growth. We operate in the new small commercial vehicle and in the light commercial vehicle market. We currently do not finance new heavy commercial vehicle -- vehicles.

New CV financing is also at -- in around 100 branches, and we have recently appointed our business head to drive those verticals. As in the last year, the seasonal delinquency trend was seen in the CV portfolio this quarter 2.

Moving to microfinance. Our disbursements improved over the previous quarter. The asset quality continues to remain stable and we have added more sales officers in our existing branches and seen productivity improve as we have started to add clients to the existing centers. The team has also successfully been able to offer to recurring deposit to our members. We now have more than INR 2 lakh new microfinance borrowers who have availed RD scheme with us.

For the existing microfinance borrowers, we have just rolled out a pilot to enable them to avail this RD scheme. The smaller asset businesses like the corporate and the MSE finance continue to see growth. Corporate loan book grew 63% year-on-year to INR 693 crores, primarily led by loans to NBFCs, mainly MFIs.

MSE finance loans, being offered through around 200 existing branches, grew by around INR 155 crores quarter-on-quarter. The working capital book is now around INR 435 crores.

The bank continues to invest in technology to aid business growth. We have recently launched an SMS-based real-time credit score download by the field team. This has helped improve the TAT at the field level.

On the liability side, our instant account opening savings account through tab has gained momentum. Apart from this, the bank has invested in outdoor advertising in Tamil Nadu and a few other locations to promote our deposit products and brand building.

On the liabilities, we continue to focus on retail term deposits. Our retail RDs, as per RBI definition has stretched to INR 2,600 crores and overall deposit, including CVs, have crossed INR 10,000 crores.

Cost of funds on a quarterly average basis, I repeat, cost of funds on a quarterly average basis was at 8.49% compared to 8.23% on daily average basis during the previous quarter. There's been a change in the way the calculation is done from the daily to quarterly in line with the requirements that we will be showing in the proposed IPO documents.

Lastly, the bank has returned down deferred tax asset on account of change in tax regime. This is approximately around INR 24 crores. This has had an impact on the bank's profit after tax.

With this, I would like to hand over to the operator and we'll be happy to take questions from your end. Thank you so much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Nagraj Chandrasekar from Laburnum Capital.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [2]

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I just wanted to get a sense on the vehicle finance side. In terms of the kind of risk we are underwriting, who are we typically competing with and what yields are we underwriting to -- on this, in particular, as the banks start to push more on the segment? How do we see ourselves in terms of our competitive differentiation? Are we looking to move into riskier segments and up the yield? Or are we likely to stay within relatively safe segments within VF?

The second question is on the microfinance side. Are you seeing a falloff in disbursement-wise smaller MFIs and because of the general liquidity issue is that small and midsize NBFCs are facing? And is this allowing you to take -- to basically get more attractive pricing for a given level of risk?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [3]

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So on the vehicle finance, in 2011, we started with our used commercial vehicle funding. And our used commercial vehicle funding, as you know, is at the kind of the end in terms of the risk spectrum of vehicle finance where typically the borrower is really a first-time user, he's most typically a driver who has been driving a commercial vehicle for someone else for a better number of years and now he is wanting to try and convert into a owner of a vehicle. So that's the kind of the highest end spectrum -- risk spectrum, and that's what we started with in 2011. And the yield typically in that book is approximately around 20% to 21%. And that kind of gives you certain level of risk-adjusted returns. And -- so that's more or less like we started with the higher risk spectrum. So it's -- I mean, there is no space -- you were saying whether we are tending to a higher risk spectrum in the vehicle portfolio. Frankly speaking, we started at the highest risk end spectrum. Now we are actually coming down the risk end by trying to get into the, what is called the small fleet operators. They just typically are people who will own may be anywhere between 2 to 5 or 2 to 6 vehicles, again taking a used vehicles. So there the risk level comes down. Of course, the yield also would come down to some extent, but the risk level also proportionately should come down. And this was started about 4, 5 years back.

Now about 1.5 years or so back, we've started our new commercial vehicle financing, which is really the new SCVs and the LCVs. These are the typical large mile delivery vehicles, mostly used for intra-city or intercity. So that's the one we started. The yield in that currently in the market will be anywhere around 14%. And typically, that at that level gives you a reasonable risk-adjusted return for that particular portfolio.

The one we are not into currently, as I mentioned in my opening remarks also, is the new heavy commercial vehicle. That's something that we are not into right now. There the yield is generally lower. And at this point in time, we are not in a position to compete at those rates, so we are really -- we have not moved into that as of now.

I'll request Raghavan to take up on the microfinance.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [4]

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Sorry, just one thing -- that was very helpful, but one aspect that wasn't covered is, who's the competition in each of these segments? Obviously, Shriram Group -- Shriram Transport is big in this segment. Are they the main competitor? Are there other major competitors? And if you look at Shriram, they, over the years, put very large networks, built a lot of internal expertise in terms of being able to assess used CV. How confident are we given our relatively short operating history that our processes, procedures, et cetera, are able to handle the appraisal of what has historically been a pretty difficult class to underwrite well?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [5]

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Yes. You're right, in the used commercial vehicle, of course, the large player is Shriram Transport. Now -- and in terms of the new LCVs and new SCV financings, which I mentioned, there typically the competitors, if you look at the dealer-wise reports of financials and all that which is available from the market, typically the major competitors there are still HDFC Bank, Cholamandalam, IndusInd and TATA Motors Finance, of course, Mahindra Finance, Sundaram Finance. So typically, the old traditional vehicle finance people and a few of the banks. They are typically the competitors as far as the new LCV, SCV is concerned.

In terms of what you are asking in terms of our robustness of process for managing the risk on the used CV, which is really like the risk of assessing the customer, the risk of assessing the vehicle, et cetera, these are things which, of course, you have to build into the system because when you are financing an used vehicle, the valuation of that used vehicle becomes critical. You do have LTV, which can typically be in the range of 70% to 75%. That's typically the LTV, at which the used vehicles are funded, but that LTV makes sense only if the valuation is arrived at appropriately. If by mistake you arrive at a wrong valuation, then the LTV itself doesn't have much of a meaning after that. So there is a certain level of knowledge and expertise that your own staff has to process on that. Plus, not only that, even the customer assessment, you are basically assessing a driver. He doesn't have much of repayment track record with anyone else. So your ability to assess the driver is based on understanding the profile of the driver, understanding what type of vehicle he's been using, which market he has been covering right now, what type of goods he is moving and the kind of vehicle that he's planning to buy now, how does that kind of match his current profile of -- current profile and knowledge of the transport market. So there's some amount of market intelligence and market knowledge that you need to have to be able to even assess the customer also. So on both ends, there is a certain level of expertise required.

And that's something that we have built over maybe the last, what, 8 years since we've started. That's something that we have been building. And if you also see our own portfolio over the last maybe a couple of years, we have been having, I would say, reasonably steady growth. It's not been kind of skyrocketing. The percentages would kind of bear that out because these are experiences that you build into the system. And the more and more that you have built into the system, that will allow you to kind of scale up faster. So that's something that we have been going through. And after 8 years in business, I think we can say that our portfolio quality stands to kind of compare really well with the market rates.

Hold on, I'll now give it to Raghavan.

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H. K. N. Raghavan, Equitas Holdings Limited - CEO of Equitas Micro Finance Limited [6]

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Can you just, again, from my benefit repeat the question on microfinance?

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [7]

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I just wanted to see if given the issues with NBFC, especially mid- and small-sized NBFCs are facing on the liability side, are you finding that there's reduced competition in the market, which is letting you get better pricing at any given risk level or is getting you better credit quality overall because a lot of the small- and mid-sized groups that were ramping up aggressively maybe be 2, 3 years ago aren't doing now because they're constrained?

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H. K. N. Raghavan, Equitas Holdings Limited - CEO of Equitas Micro Finance Limited [8]

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I think the -- at least, I would say that 50% to 60% of the good NBFCs which contribute to the business are getting funding. It's not a major problem. And also, if you look at the complete composition of the finance sector today, almost 60% are from banks, right? So absolutely, there's no liquidity issue as far as these banks are concerned.

The rest which is the NBFCs which are there, very small NBFCs, which have INR 200 crores, INR 300 crores to INR 400 crores of portfolio are finding it difficult. But otherwise, funding is I don't see an issue. And further that, in terms of reducing competition is also. I would say that there's more number of microfinance institutions operating now. To that extent, what will happen is that it may not impact on the pricing, but I think the productivity levels are likely to get impacted. The center sizes which used to be around about 20 clients per center today, for the industry hovers around 10 to 11.

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Operator [9]

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The next question is from the line of Umang Shah from SAIF Partners.

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Umang Shah;SAIF Partners;Analyst, [10]

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So wanted to see clarification regarding, once the SFB gets listed, then how we plan to reduce the ownership of the holding company in the SFB?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [11]

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So we are currently in the listing process, so we hope to get the bank shares listed shortly. Yes, you are right that there is a second requirement of the RBI guideline for SFBs, which is for the promoter to reduce their holding to 40% by the end of the fifth year. So that's an issue. As you probably may know, that's an issue which is there in 2 -- I think 7 out of 10 SFBs. And -- so there are various ways in which that can be done. So we are exploring the different ways and frankly, I'm not in a position to right now tell you exactly what we plan to reduce that because it's still a work in progress and we shall definitely be kind of making announcements as and when anything keeps getting crystalized. But the standard ways are, one is, of course you can directly dilute; and second, is you can dilute by raising fresh capital; and third, is you can acquire companies or acquire other companies in the bank, and that will help dilute the holding company's shareholding. I mean there are the 3, 4 standard methods which I'm sure all of us are aware of. And for us, which will be the most appropriate one or a combination of some of these is things that we are working on and that's why it's work in progress. And as and when we have something concrete, definitely we should be able to announce.

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Umang Shah;SAIF Partners;Analyst, [12]

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All right, sir. And if I may pull things a little bit here, is it possible for us to do the same scheme of arrangement, which we had supposed earlier once the SFB gets listed?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [13]

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No, not really. Because the reason why SEBI kind of turned down our earlier request was that the issue of shares from the bank to the holding company shareholders was not under a scheme of merger or under a scheme of reconstruction. So SEBI guidelines talks only these 2 specifically. Specifically, they only talk of these 2: scheme of merger and scheme of reconstruction.

Scheme of merger is the companies merging. In our case, that is not there. The second one is scheme of reconstruction. Scheme of reconstruction really means that some businesses are being bought and sold between 2 companies and because of that, there's a kind of restructuring within those companies. And in consideration of such kind of buying and selling of certain business assets or divisions, sale -- I mean, shares of some company gets given to the shareholders by other company. In our case, the holding company doesn't have any business to kind of divest into the bank. And in return for which the bank could issue shares to the shareholders of the holding company. We don't have such business lines. So even after the bank gets listed, the fundamental position that the holding company is purely an investment company just holding 100% of the bank shares or later on the -- after the listing maybe something less than 100%, that premise remains the same. There's no change in that. So the scheme like the one we thought of earlier will still be outside these 2 particular requirements of the SEBI guideline. So assuming that there is no further change in the regulatory framework, then the scheme may not go through again still, so that may not be on the cards, unless there's a change in the regulatory framework.

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Umang Shah;SAIF Partners;Analyst, [14]

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Got it, sir. Got it. And sir, I would like to dig a little deeper on the small business loan portfolio. So in the small business loan, the INR 4,341 crore portfolio, what's the composition of GLAP, MLAP? And what are the various tepid types and use of those products?

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Operator [15]

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Excuse me, this is the operator. It seems the management line is on mute.

(technical difficulty)

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H. K. N. Raghavan, Equitas Holdings Limited - CEO of Equitas Micro Finance Limited [16]

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Okay. Fine. The MLAP, which is -- MLAP and agri, which is below INR 5 lakhs, the yields are around about average 23%. And the GLAP, which is INR 5 lakhs to INR 10 lakhs and above, which is roughly around 18% and Business Loans are between 14% to 16% yields.

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Umang Shah;SAIF Partners;Analyst, [17]

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And what's the size of the Business Loan?

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H. K. N. Raghavan, Equitas Holdings Limited - CEO of Equitas Micro Finance Limited [18]

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Pardon. Business Loans are all above INR 10 lakhs, above. Secured Business Loans are above INR 10 lakhs, above. Due to composition...

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A. John Alex, Equitas Holdings Limited - CEO & Director [19]

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Yes. So if you don't mind, we'll -- you can maybe refer to our previous quarter's presentation. So most of the product details are there in that. So you really have to bear us on these specifics for the next some time in the -- till our listing process gets over. But really, there not too much has changed from the previous quarters on these items.

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Umang Shah;SAIF Partners;Analyst, [20]

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Got it. Sir, one last question to Vasu sir is, consistently throughout the quarters, we were seeing improvement in the cost-to-income ratio. But this quarter, there seems to be some sort of an uptick there. So how do you see this trending going forward? And how do you see the performance of the cost to income?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [21]

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Yes. So we have had an increase in the operating expenses in the first and second quarter, principally because of 2 factors: one is that we have added nearly about 1,800-odd staff, principally consisting of sales and collection teams at different branches for our different products; the second reason for increase in the costs is the 10% increment that is given to the staff in the month of April. So these are the 2 reasons for the increase in the costs. And so if you -- I mean, I'm really unable to talk about how it will trend into the next 2 quarters because you know that, that is not permitted at this point in time for us. But just to suffice to say that the increase in the number of field staff was basically for some sales and collection recruitment, which, of course, will be an ongoing stuff. And the 10% increase, of course, you know that it's yearly phenomenon which happens in the month of April.

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Umang Shah;SAIF Partners;Analyst, [22]

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Got it. And Vasu sir, if you go for the IP of the SFB, it will require to raise more equity capital. Does that impact your ability to reach higher levels of ROE?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [23]

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Yes. That's true. Yes, we actually should be able to manage with our current equity for some time, and we have been saying that in the past also that we really don't have to raise capital for the next couple of years, also. That's what we have been saying in the past. So these things will be kept in our mind. When we have to sit and decide on the structure of the IPO, these are the things that will be kept in mind.

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Operator [24]

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The next question is from the line of SivaKumar from Unifi Capital.

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K. SivaKumar, Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager [25]

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Sir, the fresh refi business was slightly on the higher side at INR 115 crores compared to about INR 79 crores in last quarter. Can you give the breakup as to the segment-wise slippages for this quarter? And can you also comment as to, do you think this is more of an aberration this quarter that we're seeing this higher level of slippages?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [26]

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Yes. So I'm finding it very difficult to answer this because we are unfortunately...

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Dheeraj Mohan, Equitas Holdings Limited - Head of Strategy, IR & Analytics [27]

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Siva, Dheeraj here. So unfortunately, we can't give the breakup. So you really have to pardon us. Though we would love to, but just bear with us for some more time. So we'll not take that part of the question. I think the second part, Vasu will answer.

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [28]

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Actually, we are really in kind of a tight spot because we are now expected to kind of act like an unlisted company and be very chary in terms of sharing data before an IPO of the bank share. And on the other hand, we are the listed holding company, which requires us to give certain disclosures. And of course, from an investor and analyst point of view, they would like to have a lot of information. We are really kind of in a difficult spot I have to admit. And while -- I mean if you see the last few quarters, we have been giving a lot of information and, of course, have been very open in our communication on all the details. But we have so much of restrictions in terms of what we can share. And anything that we share has to be necessarily coming into the DRHP and that needs to be kind of validated evidence, so et cetera, et cetera, et cetera by auditors all and that. I mean it's too many regulations. So I'm really afraid that we can't get too much into details. But just to kind of tell you that please look at the past trends, and the past trends of quarterly movement of both slippages, NPA, et cetera, and that's something that we -- I mean that's the only thing that I could kind of highlight at this point in time and not really be able to say anything about how the next few quarters will look like.

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K. SivaKumar, Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager [29]

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Right, sir. I understand. Sir, but what are the time lines for the IPO? Has the Board put up any time lines within which we should complete this because the longer this kind of moves on, we won't be able to get more granular data on this segment-wise performance, right?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [30]

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Yes. That's true. Well, I -- again, I'm not supposed to say anything about that is what strictly we have been told. But I can definitely tell you something, which is that general process of an IPO in India, you file the DRHP then it takes approximately 60 days for DRHP to get approved. And from the time a DRHP is approved, typically as a listing can be completed both the opening of issue and listing, can be completed based on market conditions, et cetera, et cetera, in a matter of anywhere between 30 to 60 days. So from the time you'll say let's join IPO to the time you can list, typically in India, assuming no unforeseen kind of circumstance, from a regulatory and other perspective, you can talk of about 5, 6 months. But beyond that, in our particular case, I'm not permitted to say anything beyond that.

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Operator [31]

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The next question is from the line of Aseem Pant from HSBC.

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Aseem Pant, HSBC, Research Division - Analyst, Financials [32]

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Just one thing, when you said that you've added 1,800 staff, et cetera, and 10% -- was that factored into your 15% OpEx guidance for FY '20?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [33]

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Yes, yes, yes. That was part of the plan.

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Aseem Pant, HSBC, Research Division - Analyst, Financials [34]

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Okay. Okay. Great, sir. And sir, secondly, sir, just one maybe some more color on this CASA growth, which has been kind of moderating in only one. So if you could provide some perspective on that, how to think about it? Is it that maybe you need to hire more people in the branches or maybe open up new branches? Or how are you thinking about that?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [35]

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Yes. So CASA, if you see, over the last, I think, 5, 6 quarters, there was some growth initially and then it's kind of flat during the last 2 quarters. That's the trend as we can see. Of course, on a year-on-year basis, there is some growth. But on a quarter-on-quarter basis, there's not much growth. And of course, the CASA is a long-term player. I mean we do know that. And the bank has spent certain amounts of money. We highlighted that in our opening also that we have spent some money in terms of advertisements, putting up some holdings here and there for the brand recall. Besides that, we have also started a significant level of below-the-line marketing, where across the branch network we conduct a lot of activities, mainly to popularize the brand of the branch in that particular 2-, 3-, 4-kilometer neighborhood, so we are -- we do lot of activities at the branch level, which is more to popularize and improve the brand recall awareness within a very small area of local community of 3, 4 kilometers. So a lot of efforts are going into the CASA growth, and we have to see how it goes into the future. But beyond that, of course, I can't comment on the future, but a lot of efforts going on in that direction.

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Aseem Pant, HSBC, Research Division - Analyst, Financials [36]

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Okay, sir. And sir, finally, on asset quality, can you give some color on how asset quality in especially the Small Business Loans segment is progressing? Has it been -- I mean it's been remarkably good in the past. Is -- are the trend sustaining? Or are we seeing some impact of other factors?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [37]

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So again, see, I'm constrained to say -- keep on saying once -- over and over, again, that I can't talk about the next few quarters, but I have the liberty of at least taking you down the previous quarters' trends. Our SBL loans have touchwood performed really well in the past. This is now, what, it's about 5- to 6-year-old products. It's gone through one full cycle. We are into the second cycle.

And -- so this is -- this has been a good product for us right from the beginning. And this has gone through the demonetization period. There was an impact of demonetization. We did see a certain level of increase in the stress in the portfolio of our Small Business Loans, both the demonetization. And when GST happened, that also did have some impact in terms of the portfolio quality of Small Business Loans. But it's kind of come back. It's weathered it and come back and has continued to do quite well. And it's shown a lot of resilience. And if you see one of the key reasons for this could be that in the MLAP, especially, significantly large number of the borrowers are people who have relationship with the bank in the form of microfinance borrowing.

So most of them are either microfinance borrowers or their family members or their referrals. And the people who source and the people who collect are the same, which is microfinance branch managers and the people who have been operating microfinance, who have been having or building a relationship with these clients, they are the ones who are involved in this sourcing and collection also. Maybe that's probably one of the reason why this book has done well. And -- so those are probably the difference between a stand-alone small ticket lending entity, vis-à-vis as that we have a relation in that community where we lend. So we should just note that in the past also this product has shown resilience even in terms of a few major external factors such as what I mentioned earlier.

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Operator [38]

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

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [39]

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Sir, just going in relation like without going into numbers, what were the reasons that led to an uptick in the NPA? And are those factors changing in terms are they stable, deteriorating, improving some qualitative comments on that?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [40]

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See, first 2 quarters, as we mentioned earlier, it's a trend that we have seen in the past and that trend that's just kind of repeated. Typically, the first 2 quarters are, at least in our experience what we have seen, it's weak. It's coming off the year-end and then the rains and so on, and of course this year we have the elections. So these are typical events, which results in some level of collection efficiency going down in the first 2 quarters. And typically, subsequent to that for a variety of reasons that where the reasons which at the industry level takes place, it does change and it does come up. So beyond that, there's nothing very specific that I could allude to.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [41]

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Sir, essentially we are not seeing an overall vis-à-vis, say, last year similar time and economic environment deteriorating, that's not a factor. It is just the seasonality that has led to it because last year in 2Q, the uptick was primarily because you had moved to the daily recognition of NPA. But this year, even if you adjust for that, it's around 50 -- around 45%, 50% higher.

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [42]

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Yes. I mean the external market factors cannot be taken out of the equation completely. I mean the commercial vehicle space as we all know is under certain level of stress in the market. And -- but our new vehicles, if you see, we do not fund trucks, we do not fund the HCVs, and the HCVs are the ones which are maximum impacted in terms of the growth and things like that. So we are really not into that. We are really into the last mile delivery vehicles, which is like the SCVs and the LCVs. But the reality is that there is a market slowdown in terms of commercial vehicle offtake, which is clear, and so the availability of freight for the transporters, et cetera is definitely less than probably what it was in the past. So that is going to have its effect, but yes -- so what do I conclude? I can't talk to you about the third and fourth quarter expectations, but the market stress is definitely there. There's no doubt on that, but hopefully, the third and fourth quarter, you know how the market response, so we have to just see how it goes.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [43]

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And sir, lastly, in terms of the SRTO and the used segment where we lend to, will all of the vehicles be financed as in they would have existing loans? Or will there be free vehicles, some color on that borrower segment for us?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [44]

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See, in the used CV, most of our borrowers are first-time borrowers. So there, this is the first vehicle that they'll be buying. In fact, nearly 80% of our borrowers will have a minus one civil score, which is like they don't have any record of borrowing and things like that. So that way most of them will be the first-time borrowers, first time -- first vehicle that they are buying.

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Operator [45]

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The next question is from the line of Jehan Bhadha from Nirmal Bang.

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Jehan Kersi Bhadha, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [46]

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Sir, other income is down for second quarter in a row. So if you can provide some details why the fee income on both assets and liabilities is not growing?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [47]

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I'll give it to CFO.

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [48]

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See, the other income on quarter-on-quarter basis, if you take now it is higher by nearly INR 5 crores, INR 59 crores was last year, and -- sorry, last quarter. This quarter is INR 63.92 crores. And the thing is that even if you look at the liability segment income, no, it has gone from by INR 30 lakhs actually.

Year-on-year -- see if you look at year-on-year on the liability segment income, no, it has gone up from INR 14.68 crores to INR 17.09 crores. See we had PSLC fee income in the last 4 quarters, which is not there in the quarter 1 and quarter 2 of this year.

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Jehan Kersi Bhadha, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [49]

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Sir, but even if we adjust for that, then even then the Y-o-Y figures are flattish.

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [50]

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Go to Slide #30, where -- go to the Slide #30, where in other income, we have given the detail of quarter 2 of last year and the quarter 2 of this year, and it is -- except for the adjustment for the PSLC fee income and securitization, no, which is now decreasing trend, no, otherwise, it's most similar actually.

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Jehan Kersi Bhadha, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [51]

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Okay. Fine, fine, fine. Okay. Because we were expecting -- I mean because looking at your deposit growth and -- as well as your loan growth, it should have been slightly higher, right?

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [52]

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See on the...

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Unidentified Company Representative, [53]

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(inaudible) down the cycle.

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [54]

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See, if you look at the processing fee on the loan side, no, the composition with regard to asset growth, no, it makes the difference because we have different fee income percentages for different products actually, microfinance to other corporate income -- corporate loans and other things. With regards to -- if you look at the...

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [55]

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See, if you see processing income has gone up a little bit, about maybe INR 2 crores or so. But mainly there's a reduction of INR 7 crores in PSLC and there's a reduction of, what, nearly INR 4.5 crores or INR 5 crores on the interest from securitization. So that's about nearly INR 12 crores. So the INR 12 crore has gone out because of that -- those 2 factors, which probably is one of the biggest factors. But these are the onetime income, which came and that will -- that has gone out.

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Operator [56]

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The next question is from the line of Sajan Didwania from Frontline Capital.

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [57]

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Actually, I was also looking breakup of this NPAs and the slippage, which you have said in the earlier question that you cannot reply, so nothing else I have.

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [58]

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Okay. Okay. Thank you.

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Operator [59]

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The next question is from the line of Dhwanil Desai from Turtle Capital.

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Dhwanil Desai, Turtle Capital Investment Ltd - Founder [60]

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Sir, question is with respect to our aspiration to reach around 2% ROA until we work for that and without getting into any forward-looking numbers. But were the 2 major ROAs booster are one is cost to income and another is our cost of funds, so one where we need co-working CASA, which has been pretty tepid in last 4, 5 quarters and one service, do you know what all you are doing?

On cost to income, sir, what all majors are we taking to bring it down, I'm not looking for a number but what all things that we are doing so that this cost-to-income ratio can come down?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [61]

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Yes. So if you see, I think we have answered this similar kind of a question may be in the past also. If you look at it, our number of branches hasn't been really growing in the last maybe 6 quarters or so. Most of the branch expansion has happened and now we are really in the process of leveraging those branches and that is where the cost to income should keep supporting over time as we leverage existing branch network. I think currently we have -- in terms of the banking outlets, we are pretty strong in terms of both liability and asset branches and the cost to income directionally would be kind of supported by the fact that there's a lot of leveraging opportunities that's something that we have been talking about in the past and working on.

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Dhwanil Desai, Turtle Capital Investment Ltd - Founder [62]

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Okay. And sir, do you see your need to continuously add people to grow your asset base and liability franchise? Or you think that the productivity improvement can -- it can -- and that can kind of flow through the cost-to-income ratio, is that a possibility? Or like we added 1,800 people in first 2 quarters, we need to continuously add people?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [63]

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See, product -- the final business outcome is a combination of number of branches, number of people and productivity. So number of branches, we have been saying quite a few times in the past that we are fairly well network now. And the staff-wise, yes, we will continue to invest in staff, be it for sales or be it for collections. But with the staff in various other functions such as our back end, our legal, et cetera, et cetera is fairly well settled. And those are the things, which will continue to get leveraged. So I mean, I'm really struggling to find the right words to ensure that I'm not giving a forward-looking statement, but I hope that I have been able to fairly communicate.

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Dhwanil Desai, Turtle Capital Investment Ltd - Founder [64]

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Okay. Got it, sir. And sir, second question is on the disbursement, I think for last 2 quarters, advances growth has been fairly decent, but the disbursement growth has been lower. So can you comment on that to what may be the reasons behind that?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [65]

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So microfinance disbursement, if you see Page #18, microfinance disbursement year-on-year was less than last year by 14%. And overall, it's up by 11%, all products put together. And this 11% compares to 5% in the first quarter. So between first quarter to second quarter, the disbursements have actually moved up. And -- so I mean -- so beyond that, I'm not able to say much because I would not be able to predict into the future. But yes, there's been an uptick in disbursement between the first and second quarter. And yes, the other products have grown. Microfinance year-on-year has come down. Other products have grown.

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Operator [66]

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The 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 [67]

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Vasu, three questions. First is on -- could you sort of give some color around these 1,000 people that you've added since the fourth quarter, where exactly have you sort of put? And how much would have been in frontline staff? And how much would have been in the back office? Just some color around where the capacity is going on since we are not adding branch distribution?

The second question is on -- if I remember correctly, actually in the base quarter of 2Q '19, there was a one-off in the employee cost of about INR 13-odd crores related to gratuity. Just wanted to reconfirm that, that was correct, and that's the reason the employee cost is looking slightly higher?

And the third question is, just -- I mean, I was -- some days back I was just seeing the website and Sanjeev's name was not there. So just wanted to check any specific reason, some color around that? Yes, those are the 3 questions.

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [68]

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Okay. So the first question in terms of the new headcount which has been added. So as we mentioned earlier, this is largely in both sales and collections at the front end. The staff taken are typically for both the commercial vehicle -- in the used commercial vehicle to some extent the new commercial vehicle to a larger extent, and in the Small Business Loan, the remaining are in the Small Business Loans. So these are the areas where most of the staff have got added.

In terms of the third question, yes, Sanjeev Srivastava, who was handling our branch banking, he has decided to move on. And so we are looking at someone else to replace him.

I'll give it to Sridhar for the second question.

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Dhaval Gada, DSP Investment Managers Pvt. Ltd. - Assistant VP of Investments & Equity Analyst for Financials [69]

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Just before that, on the first one, I mean, almost 80% or 70% would have been on sales and 30% would have been collections. Some ratio around how much would have been on sales and collection?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [70]

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I mean I don't have the exact plate. But approximately, if you want me to, I mean, guestimate, without holding me to it, I think it will be closer to about maybe 50%, 55% on sales and balance 45% to 50% on collections. So we have been also strengthening our collection teams. From the last September to this September, that 1,800-plus staff that I had mentioned about, there's been a lot of strengthening of the collection teams also over the last maybe about a year's time, and so it's not exactly 50-50, maybe it's likely very, very close to that, I would say.

But -- yes. I'll give it to Sridhar for the second point.

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N. Sridharan, Equitas Holdings Limited - CFO of Equitas Micro Finance Limited [71]

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See, regarding the gratuity valuation, it's done based on the actual valuation. We had a INR 13.48 crores in the Q2 FY '19, and it was one-off situation and depends on a lot of parameters done by the actuarial. For this quarter, we had INR 3.8 crores on account of this reversal.

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Dhaval Gada, DSP Investment Managers Pvt. Ltd. - Assistant VP of Investments & Equity Analyst for Financials [72]

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Okay. This quarter also there was a reversal, is it?

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N. Sridharan, Equitas Holdings Limited - CFO of Equitas Micro Finance Limited [73]

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Yes. There is -- it's a small amount. As I told you, it depends on a number of parameters as per actual valuation.

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Operator [74]

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

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [75]

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Sir, on cost again, what our understanding was that we have already invested in our franchise both on asset and liability. And since the growth has also been quite tepid -- growth has improved slightly in Q2 but 11% disbursement growth on our base -- on a base that you have currently given the infrastructure that you have, is not a great number to speak about. So what is the rationale of investing in -- so much in the employee count, given the growth environment is also not that great?

Secondly, this 5% and 11% growth that we have reported is -- have we been cautious that has resulted in lower growth or we have already maxed out in our -- on our capacity side? These are the 2 questions, sir.

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [76]

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So as I mentioned in the previous question also, we have been strengthening the collection team also significantly over the last 12 months. And -- so as I said earlier, close to 50% is really on the collections side. And on the sales side, the remaining really going on the sales side. Yes, so we have not opened much branches. If you can notice for the last 12 months, the number of new branches added have not been much. So it's basically the team strengthening is one on collections which will anyway keep happening as we go forward, and the sales side, and sales side is typically because some products have not rolled out all the branches.

There's still a lot of products where it doesn't work across all the branches. So the growth really coming from rolling out of product -- existing products to branches, which is still not covered. So that's where the investment in the sales happens. And collection happens necessarily over a period of time. If you see we are significantly into the lending to informal economy customers, where their banking habits are not very strong. So we tend to have much higher average check return ratio compared to, let's say, people who will be funding to the different profile of customers. So collection investment is something that we have been doing right from the beginning and that's something that we continue to and we'll have to continue to do it. And on a risk return business, you'll have to see whether it's still making sense.

Then -- what was the second question? Sorry, what was the second question, if you don't mind?

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [77]

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In terms of growth, we have seen -- I did say, 5%, 11% growth number...

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [78]

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Whether it's been maxed out or whatever?

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [79]

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On simply muted growth, it's not a great growth number to speak about. So do you think our capacity is maxed out? Or we were extra conscious -- cautious in this environment?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [80]

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Yes. Typically, you want to take it easy in the first half because as I have mentioned earlier, that the collection does go -- get reduced in the first half as a trend, as we have seen that. And on top of that, the macroeconomic scenario is there for all of us to see. So we will necessarily have to be taking all factors into account while pushing for growth. Our commercial vehicle, of course, is the most exposed to the market because it's directly linked to the economic movements. To that extent, yes, we want to be a little cautious. We have to be always cautious anyway. Whereas the Small Business Loans to some extent are not so linked. So with that -- the impact of that, as I mentioned earlier, we have been able to weather a GST or weather monetization, et cetera, and the Small Business Loan has been able to weather all of that and still come out fairly well. I mean they did go down in collection during those periods. But within some period in time, they were able to catch up, again. So these are things that we -- I mean I'm sure everybody will calibrate on a continuous basis. And so the level of growth is something that we will keep calibrating based on what we see outside in the overall market and what we see inside in terms of our own portfolio behavior. So these are things that one keeps balancing out, yes.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [81]

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Sure. And secondly, sir, on the credit cost, I see the write-off number is quite high in the quarter, and I think which is the main difference which has led to sharp increase in credit cost on a Y-o-Y or sequential basis. So can you give some color on the write-off in which segments we have done the write-offs? And what is the quantum of write-off?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [82]

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Yes. See, we had -- first quarter, the provisions was INR 30 crores, and second quarter, the provision was INR 45 crores. So there's really a difference of INR 15 crore between Q1 and Q2. If you want to kind of look at the breakup of this INR 15 crores extra, about INR 7.5 crores came from vehicles, more than what it was in the first quarter. And another about INR 3.5 crores came from the extra provision required to be made for certain assets, which moved from 25% to 100% provisioning. So though the NPA did not change, but the provision requirement changed because of the aging of the NPA of certain book which moved from 25% to 100%. And lastly, the standard of the provisioning, there were some change in that. So these are the contribution for that extra INR 15 crores.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [83]

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Sure. Sure. Sure. And sir, I know you cannot comment on the forward-looking guidance, but the growth that we have seen, we have seen some slowdown in growth. So do you expect that to normalize over a period of time or...

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [84]

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You told me you'll not ask me about a forward-looking and then you asked me exactly that. I'm constrained that we're not in a position to not give you an indication of how we expect things to move. I'm really constrained, sorry.

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Operator [85]

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Due to time constraint, we'll take the next question, which is the last question of this conference, from the line of Bhavik Shah from B&K Securities.

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Bhavik Shah, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [86]

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Sir, how much percentage of your loan book would be linked to the external benchmark as mandated by the RBI?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [87]

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See, there are factors in what the question that you're asking, one is how much of loan is linked to the EBR, second is how much of those loans are floating or fixed. So there are 2 parts to that question. In Equitas, because of my MCLR has traditionally been in the range of around 15%-plus, somewhere in that range, all through. So any kind of a loan where the lending rate is anything less than around that mark of 15% has been always linked to EBR, right? But those loans are fixed -- fixed-rate loans because traditionally these borrowers are small borrowers, and they do not understand the meaning of floating rate. So traditionally, these loans tend to get given in fixed-rate loans. The percentage of loans, which are linked to EBR and also floating, as a combination, that percentage may be in the range of, what, about maybe between 2% to 3%. That could probably be the thing. I'm just trying to hazard a guess, but I also think it may not be very far beyond that.

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Bhavik Shah, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [88]

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Okay, sir. And I had one more last question. Sir, I see a lot of P&L numbers of Equitas Small Finance Bank being restated of previous quarter and last year. So I mean, I understand you have been moving to the IPO, but any sense on why have the restatements been done?

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [89]

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So previous, this was on iGAAP. Whereas in the case of now the consolidated, no, EHL is on Ind AS basis actually.

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [90]

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The previous numbers were consolidated EHL iGAAP, and now we have given you is for the stand-alone bank. So it's -- you can't really compare those numbers with this.

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Bhavik Shah, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [91]

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Sir, from what I understand, last quarters PPT had P&L of Equitas Small Finance Bank?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [92]

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No, no, no.

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [93]

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No, we have given you a consolidated on iGAAP basis, and reconciliation we have provided between the Ind AS and iGAAP basis. This time, what we have made is that the iGAAP of bank numbers and consolidated EHL on the Ind AS basis.

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Operator [94]

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Thank you. Now I would like to hand the conference over to Mr. John Alex for closing comments.

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A. John Alex, Equitas Holdings Limited - CEO & Director [95]

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On behalf of the management, I thank all of you for the interest in our performance and also for joining in this call. We look forward to your continued interest and participation. Thank you.

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Operator [96]

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Thank you. On behalf of Equitas Holdings Limited, we conclude this conference. Thank you for joining us, and you may now disconnect your lines.