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Edited Transcript of EQUITAS.NSE earnings conference call or presentation 13-May-19 10:30am GMT

Q4 2019 Equitas Holdings Ltd Earnings Call

CHENNAI May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Equitas Holdings Ltd earnings conference call or presentation Monday, May 13, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bhadresh Pathak

Equitas Small Finance Bank Limited - President of MSE Banking

* N. Sridharan

Equitas Holdings Limited - CFO of Equitas Micro Finance Limited

* Pathangi Narasimhan Vasudevan

Equitas Small Finance Bank Limited - MD, CEO & Director

* S. Bhaskar

Equitas Holdings Limited - CEO & Executive Director

* Sanjeev Srivastava

Equitas Holdings Limited - President & Country Head of Branch Banking Liabilities, Products & Wealth at ESFBL

* Srimathy Raghunathan

Equitas Holdings Limited - CFO

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Conference Call Participants

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* Amit Premchandani

UTI Asset Management Company Limited - Fund Manager

* Anand Bhavnani

Unifi Capital Pvt. Ltd. - Analyst

* Gaurav Kochar

AMBIT Capital Private Limited, Research Division - Associate of Banking and Financial Services

* Jehan Kersi Bhadha

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

* Kunal Shah

Edelweiss Securities Ltd., Research Division - Associate Director

* M.B. Mahesh

Kotak Securities Limited, Research Division - Senior Analyst

* Nidhesh Jain

Investec Bank plc, Research Division - Analyst

* Rohan Mandora

Equirus Securities Private Limited, Research Division - Analyst

* Roshan Chutkey

ICICI Prudential Asset Management Company Limited - Associate VP and Analyst

* Sajan Didwania

Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst

* Saurabh Dhole

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

* Umang Shah

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Equitas Holdings Limited Q4 FY '19 Earnings Conference Call.

We have with us today Mr. S. Bhaskar, Executive Director and CEO, Equitas Holdings Limited; 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 Retail Finance; Mr. Sanjeev Srivastava, President and Country Head Branch Banking, Liabilities, Product and Wealth; Mr. Bhadresh Pathak, President, SME Banking; Mr. Ramasubramanian, Head, Corporate Banking; Mr. Alok Gupta, Chief Risk Officer; Mr. Natarajan M., EVP Treasury; and 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. S. Bhaskar. Thank you, and over to you, sir.

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [2]

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Good afternoon, everyone. Welcome to the Equitas Holdings Limited Q4 FY '19 Earnings Call. During the year, the company adopted IND AS for financial reporting. While RBI has mandated IND AS for NBFCs, it has deferred IND AS implementation for banks.

While we have prepared a consolidated and stand-alone financial for EHL on an IND AS basis for the reporting -- statutory reporting, for the purpose of this presentation, we have continued to follow iGAAP for an easier understanding and for easier comparison with peers. However, the reconciliation of IND AS results have been provided for the investor -- in the investor presentation.

Coming to our performance. We had a good quarter. The total advances for March -- as of March 2019 stood at INR 11,835 crores, producing a growth of 44% year-on-year.

PAT for the quarter was at INR 68.7 crores as against INR 34.89 crores in Q4 FY '18, producing a growth of 97%.

The return ratios for the quarter also saw improvement with ROA at 1.77% and ROE at 11.16%.

Before I invite P.N. Vasudevan to take you through the performance of the bank in detail, I'd like to mention that we are awaiting regulatory approval especially from RBI and SEBI for filing the scheme of arrangement with NCLT's further approval for the eventual listing of the bank.

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

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Thank you, Bhaskar. Good afternoon to all of you and thank you for dialing into our call.

We had a good fourth quarter backed by robust growth in advances, stable operating expense and continued traction in new products like new commercial vehicles and the working capital loans. The portfolio is diversifying as per our plans.

Vehicle finance and microfinance contribute approximately around 25% each, while the small business loans contribute around 40%.

The growth of used commercial vehicle last year was a little muted. This year, we are increasing the sales team for the used commercial vehicle which we expect to increase the contribution of UCVs for the current year.

The new LCV financing which we introduced last year has started off well and we already managed to get about 2% all India market share and this will continue to remain a thrust area for the bank.

In our small business loan segment, we are seeing a strong growth in the 10 lakhs to 25 lakhs ticket category, which also helps us in our private sector agreement. However, the average ticket size for the small business loans is still at 4 lakhs. And very interestingly, the first-time borrowers out of these borrowers from this segment is nearly 98%.

In the MSE segment, we have seen good traction in the secure working capital loans. And since we have stopped the unsecured business loan, that port will continue to de-grow.

Our Corporate Loan book grew as resumed lending to NBFCs, which are largely focused on microfinance and retail secured lending. Our exposures are typically to NBFCs who are not either exposed at all or very little exposure to the CP market.

Also, currently we are not looking at funding housing finance companies.

Coming on to the GNPA. It was 2.52% for the fourth quarter against 3.13% in the third quarter. There was a technical write-off of about 31 crores. And the GNPA before technical write-off would have been at 2.79%, which is still good compared to 3.13% of the previous quarter.

On liabilities. We focused on building our retail deposits as we increased our term deposit rate. We mobilized around INR 425 crores in retail FDs in the fourth quarter.

CASA came in at about 28% as against 30% in the previous quarter. Going forward, we expect CASA ratio to remain a little muted as we'll continue to keep focusing on TD to fund our asset growth.

We have continued to focus well -- I mean progress well on the third-party distribution in the last year and the bank had mobilized over 159 crores in the insurance premium.

For this current year, financial year '20, though we plan to add only 20 liability and 20 asset branches, however, we are looking to add a sales and collection team to help leverage the existing geographical presence. While this will increase the headcount, it should also help grow the advances by leveraging the rest of the operating cost.

To sum up, we are seeing good growth in all our lending products and our book is now fairly diversified. The portfolio quality continues to remain healthy and stable and we are seeing good improvement in the productivity.

On the guidance trend, we are looking at about 35% to 40% growth in advances for the current year and we expect a 15% increase in OpEx.

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

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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 Jehan Bhadha from Nirmal Bang Securities.

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Jehan Kersi Bhadha, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [2]

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Sir, if I look at your disbursements, they have been around the level of INR 2,200 crores every quarter for last 3 quarters. So what should we read into this? I mean, why are they not growing? Hello?

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

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Yes. Yes, so the third quarter was around INR 2,275 crores or something in that range. And fourth quarter was slightly lower than that, largely because in the fourth quarter, we couldn't really increase the lending in our microfinance and the small business loans because of the -- one, of course, there were a lot of holidays in January. But beyond that, in March, when the Code of Conduct was released for the elections, we couldn't really do a lot of mobilization of the groups for the microfinance lending. And to some extent, the smaller end of the small business loan is a cross-sell to the MFI customer. So both of them, we had to slow down a little bit during this period of March. So that's why the third -- the fourth quarter disbursement is actually slightly lower than the third quarter. Yes. Hopefully that should come back.

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Jehan Kersi Bhadha, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [4]

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Okay, okay. And sir, on the OpEx front. If I remove the PSLC expenses for this quarter and immediately last quarter Q3, there is a growth of almost 10% -- almost 11% in the OpEx. So what has led to this increase?

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

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I will ask Sridhar, our CFO, to take that.

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N. Sridharan, Equitas Holdings Limited - CFO of Equitas Micro Finance Limited [6]

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This is Sridhar here. If you look at the difference, it is -- INR 263 crores to INR 275 crores, that's a INR 12 crore increase. So if you leave the onetime thing like a PSLC premium, the other expenses no -- on the other expense has moved from INR 80 crores (sic) [INR 82 crores] to INR 96 crores, so INR 14 crores. One is that no -- because of the Supreme Court order, which is not clear with regard to the legal position, we have to make a provision in respect of the special allowances being considered as part of the [basis]. So we have to provide the employee-employer contribution [accumulated] interest to the extent of [tens of] crores. So this is one thing. And second, the normal year-end provision generally we make on expenses, the remaining which happens every year.

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Jehan Kersi Bhadha, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [7]

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Okay. So post these extraordinaries, I mean you still maintain that OpEx growth will be 15% for current year?

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N. Sridharan, Equitas Holdings Limited - CFO of Equitas Micro Finance Limited [8]

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Yes, we maintain that for the next year, it will likely to maintain at 15% actually because there are not much of branch additions.

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Jehan Kersi Bhadha, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [9]

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Right. Right. Sir, also in the opening remarks, you mentioned branch additions 20 for liability and assets. So do you mean totally there will be 40 branches, 20 for liability and separately for assets?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [10]

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Yes. As of now our branches are still separate. So yes, it is 20 liability branches and 20 asset branches.

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Jehan Kersi Bhadha, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [11]

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Okay. And sir, last question. Again, in your opening comments, you said that small business loan, I am referring to Micro-Lap. So there, you say that 98% of the borrowers are first-time borrowers. Whereas, I had the impression that you actually pick up customers from your existing MFI pool, the top customers and lend to them. So is my thinking wrong? Or -- like if you can just explain?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [12]

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Yes, yes. No, your thinking is absolutely correct. Nothing wrong with that. When I say new to bank, what I mean is the individual loans, not the group loans. They have no exposure on the individual loan side. They are only part of the microfinance group, but they have not borrowed under individual names. So just when they take a loan from us, they are actually borrowing on their individual name for the first time from that [format].

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Operator [13]

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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 [14]

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Sir, first, any guidance on the return ratios over next couple of years? And from diversification perspective, you mentioned that [portfolio] diversification has been done. So do we expect our loan books to remain broadly stable from here onwards?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [15]

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See, in terms of guidance, we have mentioned 2 things. One is our expected growth in advances for the current year and also the expected increase in the expenses that we foresee for the current year. But beyond that, as a practice, we haven't really given guidance on anything else. So I'm afraid that you'll have to just kind of predict your own model to find out the likely return. But of course, we have the trends over the last few quarters to help you -- guide you on that.

In terms of the loan growth and stability, yes, it seems we have diversified -- we have a good diversified set of products now. And currently, where I don't think we are even looking at any introduction of new products, the existing products is what should really be scaling up. And on the asset quality, that should remain good. And that's a principal concern for us all the time. We'll always be very, very cautious on our asset quality and fully focused on that. And we'll keep investing in terms of our collection, legal, et cetera, et cetera, to ensure that our asset quality remains good. Because only if asset quality remains good, there is any motivation left in us to do business. So asset quality will remain a principal focus for us all the time, and we hope that the current trend of good-quality assets will continue.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [16]

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Sure. So from ROA perspective, the trend has been on the upward trajectory. So you expect ROA to further improve from here onwards?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [17]

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I think I told you that we don't want to give guidance on things other than the 2 that we are talking of. But you can see the trend, and I am sure you should be able to work that out.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [18]

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Sure. Sir, and the last question is that you have almost now 2.5 years of elapsed post bank transition. So the progress that you have seen is as per your expectation? Or do you see further room for improvement on any front in terms of your transition in the last 2.5 years?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [19]

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Yes. See, when we were about to convert into a bank, obviously we had certain plans at that time in terms of our financial performance over the next few years. And of course, it was majorly upset by the demonetization and its after effects. So definitely, that was an issue. And I think it set us back by nearly about a year's time.

But now that is behind us and that's completely taken care of on our books. And that issue is behind us now. And we are now back to kind of steady state business.

And if you look at that from -- compared to our plans, I think we are fairly in line with our plans. We did expect that we should be able to comfortably mobilize deposits to fund assets. So we never really expected that we should have trouble mobilizing deposits. And that proved to be true because we have been able to be very comfortable on our liquidity front. We don't have much of an issue on that. We also knew that CASA will be a challenge for a new brand and especially other small finance in your name and when you go to the deposit, and customers market and people don't even understand what small finance means, they've not seen it in any other banks so far, so there will be a natural hesitation to start a savings or a current account with you. So we knew that those will be some kind of are difficult to overcome. And we knew that CASA growth will take some little time to kind of come up. And -- but slightly -- we have done slightly better than what we initially estimated. Our CASA ratio at 28% is slightly better than what we kind of imagined when we convert into a bank. On the asset side, of course, as we mentioned, we have a good range of products. And most of them are products that we are doing as an NBFC. What we introduced after becoming a bank is principally the lending to other NBFCs. The MSE loans that we have started and the slightly larger ticket loan, which is 10 lakhs to 25 lakhs business loans, secured BL that we have started. These are the 3 we started post becoming a bank and all of them, thankfully, have settled down well and people are all in place. And so I would say, by and large, our plan, whatever we had when we convert into a bank, by and large, I think we are on the borrower loan on that, with the exception that I think we probably lost about a year of our expectations because of the de-mon issues.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [20]

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Sure. And just last one but on the balance sheet. The investment book has come off quite a bit. So do you expect further reduction in investment as a percentage of funding or it's mostly done? And we have seen cash going up for quite a bit in this quarter. So what is the reason for that? And whether it will come down over next subsequent quarters?

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [21]

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Yes. On the investments, during the first half of the year, we had some discretionary higher investments just to earn some spread income both on the SLR and non-SLR. We are looking at the developments in the [CV] market and as well as the shrinking spreads in the investments that we consciously decided to shrink down the book to VaR -- minimum VaRs. It was meant only to make the reserves. So now it's sort of a hand-to-mouth kind of investments with adequate liquidity cushions. So going forward it's likely to grow in the near future. It will be growing along with the balance sheet growth.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [22]

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Sure. And the cash?

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N. Sridharan, Equitas Holdings Limited - CFO of Equitas Micro Finance Limited [23]

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On the cash front at the year-end, there was a INR 784 crores money at call and short notice. So if you remove that, it's normal actually.

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Operator [24]

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The next question is from the line of Kunal Shah from Edelweiss.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [25]

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Yes. Firstly, in terms of deposits. If we look, sir, the proportion of deposit picked up more than INR 10-odd crores and there is still 60-odd percent. So maybe with the strategy of focusing on the term side, would it again be like more or less a similar proportion? Or we see the retail deposits inching up from the current level?

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Sanjeev Srivastava, Equitas Holdings Limited - President & Country Head of Branch Banking Liabilities, Products & Wealth at ESFBL [26]

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This is Sanjeev here. I think if you look at it, our -- currently our focus is more on building retail term deposit. So term deposit is basically looking at the asset growth figure rising as per the comfort. But our retail in India recently started working very well. Post we increased our [SAR] number onwards. We are starting getting good flows. So focus is primarily on retail TD only. But in case we need -- and as what I said, requirement is there on the TD side, we raise up our deposit. But at this moment, I would say that our -- it never is to do at least 16% growth in retail TD out of the total term deposit requirement..

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [27]

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So what would be the differential between this more INR 10 crores and less than INR 1 crore. So up to INR 2 crores for 1 year, we are offering 8.2%. But actually for INR 10 crores, what will be the differential rate which we are offering now over a year?

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Sanjeev Srivastava, Equitas Holdings Limited - President & Country Head of Branch Banking Liabilities, Products & Wealth at ESFBL [28]

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So that rate depends upon the market. So maybe in the month of March, that money was coming at a rate of about close to 9% in the market. But now that rate has also come down. Currently, that money is coming at 8.4% to 8.5%. The market also has corrected. So we can't give an indication otherwise because our focus on retail TD, that also we have reduced some -- from 16th of April because we're comfortable in terms of getting close.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [29]

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Okay. So this 8.2% which you are offering, I don't think we -- maybe in terms of this strategy of mobilizing more retail, we need to take it up further. In fact, we are getting good, close even at the current level?

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Sanjeev Srivastava, Equitas Holdings Limited - President & Country Head of Branch Banking Liabilities, Products & Wealth at ESFBL [30]

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Correct. Absolutely right.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [31]

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Okay. And secondly, in terms of the overall loan mix. So you highlighted in terms of the particularly, say, with respect to the Business Loans? So now hereon, you said like this book would continue to run down further, in fact, we'll not be seeing the growth in this?

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [32]

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Yes. This is Bhadresh here. So we are running down the unsecured Business Loans. But the secured portfolio is a wider focus area right now. So whatever is growing -- de-growing is unsecured, actually, and that is a conscious strategy to de-grow it.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [33]

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Okay. Okay. And when we look at this overall GNPLs, say, on small business loans, which is almost 2.56%, so obviously there is growth of more than 70% from FY '18. So if I were to look on that base, the NPL trends still seem to be relatively higher compared to where the industry is there currently on the small business loans. So any view on this in terms of how should we maybe -- and what would be the seasoning in that portfolio?

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [34]

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See, if you talk of unsecured business loans, the denominated... okay, you are talking of secured business loans?

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

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Small business loan.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [36]

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Yes, small business loans, 2.56% is the GNPL. And in fact, this itself has grown at 75%. So if I just look at 1 year lag the book, in fact that the GNPL seems to be much higher than the market.

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [37]

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Before -- until 2018, originally we had started 2 verticals which was LAP as well as housing, I'm sorry, LAP as well as housing. And in that case, what has happened, the -- that particular vertical got closed off. And that verticals outstanding is roughly around INR 450 crores. So that particular percent of loans that we saw was at a higher NPA. But if we look at the NPA of the products, which is small business loan up until 25 lakhs, it is less than 1.5. So as we -- that particular portfolio comes down, the NPA percentage will also come down. But otherwise, in terms of small business loans, it is well under control. It's a legacy book of roughly around INR 400 crores is still there. There the NPAs are.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [38]

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INR 400 crores, even if we include maybe, I don't know the NPL ratios. But considering that overall book itself is INR 3,800 crores or INR 4,700 crores...

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [39]

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INR 4,700 crores, yes.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [40]

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Yes, so maybe if it's like a delta of 1%, is like significant part of it which is under stress already?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [41]

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The legacy book which is there, definitely there, the portfolio, if you look at it, they are under stress. One sec, I'll just give you the details.

See if you look at the legacy book which is there, it's stable now, it's not further deteriorating. And the fresh loans that we have lent, which is small business loans, is absolutely under control, around 1.1%.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [42]

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Okay. All right. So maybe if we write it off or maybe if we do 100% provisioning, is there -- then overall...

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [43]

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All secured loans will be recovering. They do write off. They're all secured loans where the LTV is around 60% -- 50% to 60%. So there's no question. And all the SARFAESI has been filed and we will definitely be able to recover sufficient.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [44]

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Okay. And lastly, in terms of MFI. So this quarter (inaudible) the sequential growth. So now maybe given the current situation, what will be the outlook, particularly with respect to the MFI? Would it be growing now in line with the overall growth? Or maybe it will be the normalized growth of 10-, 15-odd percent in this portfolio?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [45]

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I think the normalized growth in microfinance would be around the 20%, 25%, it's the normalized growth. Whereas the industry, when I look at it, was growing at 40%, 45%. So we should look at then about 25% growth which is a normal growth.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [46]

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Okay. So from hereon, maybe we should look at almost 20%, 25% in MFI.

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

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Yes.

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Operator [48]

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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 [49]

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Sir, within the housing finance portfolio, like we had a disbursement of around INR 289 crores for FY '19. But outstanding has still seen a dip of around 19% year-on-year.

So just wondering as to what's happening there? And is there a change in strategy on home loans and are we facing significant (inaudible) prepayments? And who are these entities who are taking all the loans from us?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [50]

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One sec, one sec. Hold on. I think -- housing, if you look at it, there is some reclassification of housing because housing also had a 20% of housing LAP, which was -- we generally booked under -- classified under the same heading. But after reclassification, so there is a reduction because it's now pure housing, it's not LAP under housing. So that's the reason you will find a difference of around about 20%. But whereas actually if you look at it, the current year, we are disbursing around about INR 17 crores to INR 18 crores month-on-month. So maybe next time, we'll kind of put it across reclassified and then send it across. It's not comparable. Q4 will correct it [in the end].

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [51]

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Sure. And just in terms of prepayments, like how is the trend in the home loans right now?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [52]

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Home loans, currently we are disbursing around about INR 18 crores and we expect the current year some kind of a growth in terms of disbursements. Otherwise, there is no special focus as such because it's a normal -- we do have -- leverage our existing distribution. So like we kind of pitch for all products, we also pitch for housing. And there's no housing vertical which separately goes [into rise] housing.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [53]

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Okay. And sir, any guidance on NIMs for FY '20?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [54]

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One sec. No, as I said in the beginning, we don't give guidance on anything except those 2, which is our advance growth and the cost. The rest is something I'm sure we can calculate because most of the data points are there on the presentations.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [55]

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And sir, in terms of the other OpEx, you indicated that there are some year-end provisions. So if you will quantify that, what was that amount?

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Pathangi Narasimhan Vasudevan, Equitas Small Finance Bank Limited - MD, CEO & Director [56]

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That was about INR 5 crores, INR 6 crores.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [57]

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INR 5 crores, INR 6 crores. Okay, sir.

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Operator [58]

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The next question is from the line of Roshan Chutkey from ICICI Prudential.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [59]

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Yes. Sir firstly, I want to understand the growth in number of loans that you have done year-over-year. It looks like because the ticket size -- if I look at the disbursement ticket size, it is for example for the MSE finance business, it has grown by almost 3x, right? And the loan book growth is something on the order of 28%, 30%.

Now is it because of a change in mix here and think you would be moving towards working capital? What is leading to this significant increase in ticket size and what is the number of loans that you are going to...

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [60]

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I'll tell you. I'll tell you. See, we are de-growing the unsecured business loans which had a lower ticket size. And we are only focused on secured working capital, which is a higher ticket size. So if I compare that to this reporting combined actually, so the average ticket size of BL on a stand-alone basis would be around 13 lakhs to 14 lakhs, whereas working capital will be in the range of 60 lakhs to 65 lakhs.

So the combined portfolio when the working capital is growing significantly and the BL unsecured business loans is coming down with no addition at all, the average ticket size is bound to increase. So that's the reason why we see that increase.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [61]

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Who are these business that we are lending to?

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [62]

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Sorry?

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [63]

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What gives us about more comfort to give a INR 60 lakhs loan compared to a INR 13 lakhs, INR 14 lakhs limit? Is it because you have -- maybe have secured also right now or is it...

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [64]

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I will tell you the working capital is completely collateralized. Plus we have an exclusive charge over the entire current assets. So he is into exclusive banking relationship with us, plus the collateral security is to the extent of more than 100% of the exposure. So we're just covering more than required -- that kind of cover it is providing.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [65]

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But can you share the number of loans here? How many accounts do we had -- did we have a year ago? And how many accounts do we have now?

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [66]

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See, this working capital phenomenon is only 1 year old. So if I tell you the number of accounts...

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [67]

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BL unsecured and working capital put together?

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [68]

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Yes, I will tell you the number of loans. The number of loans total is 2,874, out of which, secured is 302 and BL is -- unsecured BL is 2,572.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [69]

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And what was it a year ago?

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [70]

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So a year ago, if I tell the -- there was nothing in terms of secured working capital kind of a thing. So the entire portfolio was unsecured a year ago.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [71]

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Sure. And on the working finance side? Similar numbers, number of loans as of now and a year ago?

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [72]

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Sure. And on the vehicle finance side? Similar numbers or number of loans as of now and a year ago?

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Unidentified Company Representative, [73]

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A year ago. I think we have current number.

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [74]

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83 (inaudible).

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Unidentified Company Representative, [75]

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83,000. And currently, it is 96,000.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [76]

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Then the -- okay. So this pickup from 3 lakhs to 5 lakhs almost in ticket size. How does ...

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [77]

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Especially since we started the new CV.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [78]

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New CB, that's right. But in the...

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [79]

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So the new CV on an average is around about 4.5 lakhs to 5 lakhs, it's slightly bigger than -- more than the new CV and also currently.

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Operator [80]

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The next question is from the line of Gaurav Kochar from Ambit Capital.

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Gaurav Kochar, AMBIT Capital Private Limited, Research Division - Associate of Banking and Financial Services [81]

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I have a couple of questions. Firstly, you mentioned that you will be moving towards more secured lending, retired share of working capital business loans is already part of the loan book and increased focus on secured lending. And on the liability side, you also mentioned that the CASA would be muted, and you would focus on the retail PDs instead. Don't you think this strategy would put NIMs under some sort of pressure?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [82]

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Yes. See basically as I said in the beginning, we have already distributed product range. So 25% of our business comes from microfinance, 25% comes from commercial vehicle, and 40% from the small business loans. 5% is from the small corporate, mid-corporate, which is largely lending to the NBFCs. And another 5% is from the MSE division. Now out of that last 5% is where today, the unsecured deal, which was there earlier was there. And now that's being replaced with secured working capital which will come at a lower yield. But the secured working capital that we are giving now is, the ticket size typically, on an average, is around 70, 80 lakhs. And the cost of operation for that is obviously going to be reflecting that kind of a ticket size. And the quality of the customer should reflect in our NPAs also. So overall, if you see our NIMs, it is going to keep coming down over a period of time until it stabilizes. And when it will stabilize is really a question of when our portfolio mix will kind of mature. Over the next, maybe 3 to 4 years or a 5-year time frame, you will see our portfolio mix changing. The MSE, which is about 5% now, should maybe become, maybe, around 15%, 20%. While that will then be reflected in terms of the other product's contribution coming down by, maybe, 3%, 4% each. When that happens, more or less we will reach to a situation where the product mix would have kind of stabilized. And then from there on, you should be able to see a stable NIM. So until that time, the NIM will come down a bit because the new products have a lower yield. But then the new products also come with a lower operating cost and hopefully much better quality of asset also to reflect in a lower GMP. So the offset of that should really be able to manage the drop in the yield.

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Gaurav Kochar, AMBIT Capital Private Limited, Research Division - Associate of Banking and Financial Services [83]

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Sure. Sure, sir. Sure, that's helpful. Also, sir, we've seen many of the small banks expanding into the Eastern geography. Any specific reason why we are not venturing into that geography? Because many of our peers are doing that. Because we get a steady liability in East. And there is a lot of opportunity in the East. Why are we not exploring that?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [84]

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See, we are already having a lot of our persons involved towards the North, and the investments have already been done in terms of the supervisory layers, structure of zonal heads, zonal offices, everything is already done in Southwest and North. And so there is no reason why at this point we should really try and expand in the East where again, there will be a lot of investment cost that we will incur. And in the markets that we are currently operating in the present, we actually see still a very large amount of the potential which is not tapped. So we still see a large potential, be it liabilities, be it nuances. We still see a very large amount of potential in just the markets where we exist. So that's why we are not really looking to invest in completely a new zone because that's going to be heavy investment cost if we are to go to a new zone, starting from a new zonal office, et cetera, et cetera. So we will not do that for the present. Maybe we will have to look at it a few years down the line when we believe that we are kind of saturating at least at some level of the current markets.

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Gaurav Kochar, AMBIT Capital Private Limited, Research Division - Associate of Banking and Financial Services [85]

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Sure, sir. Sure. And lastly, sir, disbursement ticket size in microfinance is 29,000. Where do we see this going in the next year or so? Do you -- I mean is there any possibility of that reaching close to 40,000, 45,000 which we've seen some of our peers?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [86]

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I think the -- currently, average is around about 29,000. And it might increase it very partially maybe a minimal of about 3,000 to 4,000 increase, but definitely not 45,000.

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Gaurav Kochar, AMBIT Capital Private Limited, Research Division - Associate of Banking and Financial Services [87]

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Okay. Okay. And this would be pan-India, right? This would not be different for different geography? It would be close to 30,000 in all geographies?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [88]

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Yes. More or less, yes.

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Gaurav Kochar, AMBIT Capital Private Limited, Research Division - Associate of Banking and Financial Services [89]

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All right. All right. So is it fair to assume that going forward, the microfinance book would grow in line with the customer growth -- the number of customers that you add?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [90]

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Yes. I think, maybe, the rate at which you're about to add the client, right? And the rate and a little bit of increase in the ticket size, we should look at roughly around 20% to 25% growth in terms of advances.

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Operator [91]

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

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [92]

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First of all, congratulations for a good set of numbers, sir. Sir, just want to clarify on OpEx front. As you said, that 15% growth you are seeing in FY '20. So in last 3 quarters, we have seen that quarterly it was around 215, 216 crores. So can we expect that it will be 250 crores around every quarter in coming FY '20?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [93]

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No. On a quarterly basis, it's been typically around 250 crores. Now, for the full year, for example, I think our OpEx is just over 1,000 crores, 1,010 crores or something like that. So if you divide by 4, more or less, your top-most end will have average quarterly expenditure of around 250 crores. So that should go up by about 15%. But it may not go up in the first quarter. But it should average to that over the entire year, current year.

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [94]

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Okay. Got it. So what is the unsecured loan absolute number?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [95]

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Well, the microfinance is also unsecured. And that, I think, is about 3,000-odd crores. And the unsecured deal is also an unsecured product. And I think that's about 340-odd crores.

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [96]

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So it is, say, around 3,300 crores, 3,400 crores unsecured.

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [97]

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Yes. Absolutely.

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [98]

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And will this be -- will be changing now very soon?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [99]

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No. The microfinance, we are not saving on that. Raghavan has been very clear in communicating also that microfinance should be looking at a growth of around 20%, 25% as we go forward. So that's something that will continue.

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [100]

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Okay, sir. And another thing, you just said that you will be focusing for funding this retail deposit? And suddenly in that scenario, probably our cost of fund is going to increase from current 7.8% in this Q4?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [101]

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Well, we don't expect the deposit rates to actually grow from where we are now because our asset is offering fairly good attractive interest rates in our retail deposit. So at this moment, from the market side also and from our internal perspective also, we don't see the deposit rates going up. So, maybe, it may remain here. Or if the market eases up and the deposit flow increases, it might come down a bit, we don't know. But at this point in time, there's no indication that the deposit rates might go up from here. And remember that our asset is we are offering fairly attractive rates.

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [102]

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Okay. And one more question, sir. Just -- you said that you have added 20 asset branches. 392 was the branch earlier. So now it is 412?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [103]

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We are going to add that in this current year.

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [104]

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So it has not been added?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [105]

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Not yet.

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [106]

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So currently the number of branches is 392 around only?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [107]

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That's the liability branch. And the asset branch has been about 500.

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Sajan Didwania, Frontline Capital Services Limited - Investment Advisors & Equity Research Analyst [108]

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500. Got it. Okay.

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Operator [109]

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The next question is from the line of Anand Bhavnani from Unifi Capital.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [110]

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Sir, our customer base in CASA seems to be down from 69,000 to about 40,000. So what could be the reason for this -- this is for current account, and for savings account, this is down from 378,000 to 357,000. So what would the...

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N. Sridharan, Equitas Holdings Limited - CFO of Equitas Micro Finance Limited [111]

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No. That's a typo error, so you'll have to correct the number, that's 74,925 is current account, and that is about 4 lakh 2,300-odd. So that numbers are actually what we put -- those numbers are customer excluding the MSI customers. So the total customer base is 74,925 for CA and about 4 lakh 2,000 for SA. Per deal remains the same.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [112]

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Okay. And sir, overall, if I were to think NIMs have contracted in Q4 as compared to Q3. So apart from -- I mean is this primarily driven by increasing term deposit rates? And if you can comment a bit more on that.

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [113]

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No. Between the third and fourth quarter, if you'll see, our cost of funds has more or less remained the same, 8.11% and 8.09% or something. So practically, the cost of funds has remained the same. So the NIM contraction of nearly 15 bps in the fourth quarter compared to the third quarter has not contributed from the cost of funds. But it really contributed from the changing asset-mix perspective. And as I mentioned, in the beginning itself, in the fourth quarter, our disbursement in both microfinance and the microlab was lower given these sensitivities around the election process going on in the country. So that was a little reduced consciously. And obviously they're the higher-yielding ones, so naturally they have an impact on the NIM. But this quarter onwards hopefully, those 2 products should be back to normal.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [114]

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Sure. And sir, earlier in the call, you mentioned that as we -- and we saw it in the business at the time of starting the bank, we are broadly on track. I just wanted to understand, in terms of CASA, at a percentage of borrowings, we are good. But in terms of the rates that we are paying, are we really comfortable? And what's the aspect of this CASA ratio that we'd like to improve?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [115]

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See, in terms of the rates we pay on CASA or CV is all -- 2 things. One, it is just a factor of the market conditions, what's happening in the market, who is paying what, and what's the kind of flow that comes in, et cetera, et cetera. That's one factor, which clearly, we have to be also factoring when we kind of look at our interest rates.

And the second thing is in terms of the percentage of CASA contribution is, currently it's about 28%. But you might see that come down a bit, basically because of we are looking at a 40% asset growth. And the 40% asset growth really means that you'll need to kind of raise money, which is about 55%, to provide for your SLR CRR also. So our deposits have to grow by anywhere around 50% to 55%. And that level of growth we'll try, of course -- our first year, of course, will be to try to get that growth as much as possible from CASA. But what our CASA cannot produce in the immediate term has to be filled in by both retail deposits and wealth deposits.

So because of that, the CASA may come down as a percentage of contribution, while it may continue to grow as a quantum. But maybe when the bank's growth rate kind of stabilizes at a more normal level, then you will see CASA percentage starting to both stabilize and start growing. But until the time that the bank is going to pursue a fairly high level of advanced growth, it's very unlikely that the CASA will keep up the contribution at that level of growth.

And also remember that we are still a 2-year plus kind of a brand. And so the brand recall -- everything is at that particular level. So as the bank matures and these local markets where our branches are existing, the local awareness goes up, et cetera, et cetera. That's when the CASA growth will really start coming in.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [116]

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Okay. And sir, lastly, in Vehicle Finance business, our AUM growth was about 30% in Q4, and market conditions were adverse. So was this direct growth to branches? Or did we acquire any portfolios?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [117]

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No. No, it's the -- see, in terms of vehicle finance, the result is largely -- new CV has grown by 12%, and largely the growth has been driven by new commercial vehicle. And the portfolio is small as of now. And I don't think the market adverse conditions are actually as stretched as of now.

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Operator [118]

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

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Umang Shah, [119]

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Sir, I wanted some clarification regarding the small business loans. Could you give your breakup of the small business loans with the various tickets sizes and their yields?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [120]

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See, in terms of disclosure, I think we have given partly high level of disclosure. In terms of the small-business loan, it consists of really 3 categories of loans. One is loans of INR 50,000 to INR 5 lakhs. Second is INR 5 lakhs to INR 10 lakhs. And third is INR 10 lakhs to INR 25 lakhs. These are the 3 subcategories in that bucket called small-business Loans. So the average ticket size for the INR 50,000 to 5 lakhs, average ticket size is around 1.6 lakhs. And for the 5 lakhs to 10 lakhs, the average ticket size is around 6 lakhs or 6.5 lakhs. And for the 10 lakhs to 25 lakhs, currently the average is around 12 lakhs to 13 lakhs. So that's their average ticket size at the time of disbursement. But in terms of any further information and all that, I mean we can always note on what kind of information you need. And we'll have to see how much of that I know is comfortable in terms of sharing publicly.

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Umang Shah, [121]

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Sure. Sir, just breakup of the SBL book. Let's say 30% -- 50 lakhs to 5 lakhs, some rough split?

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Unidentified Company Representative, [122]

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80% is below 5 lakhs.

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [123]

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80% percent is below 5 lakhs, it's what I'm told. I don't know. I haven't checked that out. But approximately, maybe that will be it.

We'll, I will have to, maybe, look at it next quarter in terms of making a further breakup. We'll have to look at that. But the 80%, this number is saying -- it's telling you off the top. But frankly, I don't know. I'll have to check that out.

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Umang Shah, [124]

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Got it, sir. And sir, I would want to get your view on the credit costs in the small business loans. So as you mentioned that this loan is a cross-sell to MFI customers. So would want to understand the correlation between the credit cost in the MFI business and the small business loans. So for example, if demonetization happens again, MFI book will have a certain level of GNPA. So I wanted to understand how the credit scores on GNPA levels in the small business loans would look like.

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [125]

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I think -- we have a substantial portfolio of individual, that means small sale business loans, they're really a de-mon., and fortunately, we are not seeing any cross impact of microfinance getting impacted to individual retail loans. 80% is what I'm told.

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Umang Shah, [126]

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Got it, sir. Got it. And sir, one question on -- data keeping question. So the yield which you mentioned in your slides across the various products, if you add them up, we don't get the actual interest income. So if you can explain what's the difference here.

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [127]

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You should not read it as yield. That's why -- this is the rate of interest of all the loans disbursed and the retail rate. So it won't add up to the interest income because you have NPA assets -- so you'll have interests of assets on that. So it's not equal to the yield or IRR of the book.

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Umang Shah, [128]

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Got it. Got it. So going forward, is it possible for you guys to disclose that number? Because that will be easier for us to modulate going forward because there's no guidance on the NIM, so…

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [129]

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Right on. I think we'll take that in and I think come our future presentations, we'll try to get yield putting that in our product segment level.

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Operator [130]

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

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M.B. Mahesh, Kotak Securities Limited, Research Division - Senior Analyst [131]

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Sir, 2 questions. One to Mr. Raghavan. If you could just kind of highlight as to what are the reason that you had to discontinue the unsecured loan book or reduce the disbursements in that particular portfolio?

And the second question is on the OpEx part. If you're projecting about 15% kind of a number for next year, if you could broadly highlight where are you putting those expenses given that you also indicated there is significant room available from a productivity perspective, et cetera.?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [132]

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Mahesh, Bhadresh will answer the first question.

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [133]

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So on the unsecured loans, you asked like the reason for degrowing it?

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M.B. Mahesh, Kotak Securities Limited, Research Division - Senior Analyst [134]

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Yes.

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [135]

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See, one thing is there. The -- we are a new bank, and starting the business of MSE to unsecured may not be perfectly advisable. We'll grow the portfolio in a secured way, make a very strong and a solid foundation in terms of asset quality and then explore the unsecured. Now when we will explore, at what level of portfolio, that remains to be seen. But right now, it was not a -- we found that it's not a good idea to grow only unsecured with the obvious asset-quality concerns in the industry. Not that our portfolio was the worse in the industry so we stopped it. It was just because of the general asset-quality concerns. And the business model of doing unsecured loans for a new bank was also not very much feasible as we thought.

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M.B. Mahesh, Kotak Securities Limited, Research Division - Senior Analyst [136]

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But was there any specific concern that you specifically saw in your portfolio because of which you kind of slowed down?

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [137]

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No. So...

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M.B. Mahesh, Kotak Securities Limited, Research Division - Senior Analyst [138]

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Because you kind of coincide with the same amount -- you kind of comment to also the fact that you saw higher NPLs. So if you did see higher NPLs and that was against what your initial estimates was, just trying to understand what is the -- what went wrong with this?

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [139]

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See, one thing is that we were not comfortable with the business model of the unsecured loans as it is expected in the industry today.

So when we -- the strategies of Equitas would be when we grow our customers in terms of liability franchise as well (sic) [as] asset franchise, we will then offer unsecured to the customers who have a vintage with us, the customers whom we know. We'll do analytics and then find out who would we offer unsecured out of the existing portfolio. That would be a more prudent strategy than acquiring customers from the market -- open market. So that is what we thought. As a post-correction, we did it. And that's how we'll create our base portfolio, foundation portfolio. And then we'll venture into the unsecured.

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M.B. Mahesh, Kotak Securities Limited, Research Division - Senior Analyst [140]

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Okay. The question on OpEx?

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [141]

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Mahesh, Srimathy here. [Vasudevan's] opening remark mentioned that there, 40 branches will be added. And in addition to this, we'll be increasing the sales and collection staff, actually, which will increase the efficiency, the disbursements going up. And with the increment amounting approximately 10% and additional number of employed around 2,000 we will be adding at the year end, quarterly. So the OpEx will likely to be 15%, which will be more than the FY '19.

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M.B. Mahesh, Kotak Securities Limited, Research Division - Senior Analyst [142]

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Okay. This is mainly the sales and collection team, not so much on the liability side?

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Srimathy Raghunathan, Equitas Holdings Limited - CFO [143]

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Yes. There will be some small increase in the liability, but the major increase really comes on the sales and collection for the assets.

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M.B. Mahesh, Kotak Securities Limited, Research Division - Senior Analyst [144]

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Okay. See, the question, again, just not to -- the question I'm pursuing on the first part on Bhadresh is that since most of the customer segment is quite new, we're just trying to understand that, is there a learning curve across all these products which results in higher credit costs? Hence we ask those questions.

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Bhadresh Pathak, Equitas Small Finance Bank Limited - President of MSE Banking [145]

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See, basically this unsecured BL is a product that's there in the market. But it is -- we believe that the risk in unsecured BL has gone up very sharply over the last maybe about 4 quarters or 5 quarters. And that's when we really took a call to slow down and then not stop it, which is not the phenomena maybe, I would say, let's say, 2 years back or 2.5 years back. What we see clearly is that the unsecured BL borrowers, borrowers who are borrowing on unsecured business loans for the businesses, we see that the number of straight lines or credit lines for them has gone up very sharply -- just the last maybe 4, 5 quarters. This really has gone up very sharply. And we kind of felt where that's the first indicator of something which is not very comfortable going forward. And so kind of we took a call in advance of what would be the result of that kind of a practice in the market. We took a call in advance of that. And -- so that's where basically our approach comes from.

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Operator [146]

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The next question is from the line of Amit Premchandani from UTI Mutual Fund.

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Amit Premchandani, UTI Asset Management Company Limited - Fund Manager [147]

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You are growing at around 40% plus AUM growth and asset growth, while the ROEs are still at 11%, 12%. So most likely the capital convention will remain to be high. So how are you play it in terms of capital raise given that you also need to lead the bank separately and the shareholding of the bank norms still also came too? So any guidance on capital?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [148]

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See, our current capital cost is around 22%. And if you see our Tier 1 contribution to that, it's hardly much. So we don't actually foresee a requirement to raise capital from the perspective of funding our asset for the next maybe 3 to 4 years. Even if we assume a growth rate of 30%, 40%, even then we foresee that we may not need the additional capital only from the perspective of funding our assets. We have enough capital right now, and our Tier 2 capital is not much. So that's also -- there's a lot of scope in terms of raising Tier 2 capital asset when required. So we might end up raising some Tier 2 capital over the next 3 to 4 years. But we don't expect to raise year on capital this period of time.

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Amit Premchandani, UTI Asset Management Company Limited - Fund Manager [149]

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And what likely capital consumption run rate on Tier 1, which you expect towards the next 3 years? Yearly run rate?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [150]

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See, right now, Tier 1 capital is around 21% or 22%, somewhere 21%, 21.5%. So maybe in a 4-year time frame, our Tier 1 might come down. Maybe, I mean I'm just guesstimating. You ask me a number, I'm just trying to guesstimate that. It may come down to maybe 14% or something in that range. So you can then imagine what will be the kind of yearly kind of -- [sometimes] it's not clear on capital. But this is just a ballpark figure I'm giving you of costs. So it's not like something that I am giving as a guidance, just from a very broad perspective.

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Operator [151]

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The next question is from the line of Saurabh Dhole from Trivantage Capital.

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Saurabh Dhole, Trivantage Capital Management India Pvt. Ltd - Senior Financial Sector Analyst [152]

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Yes. A couple of questions from my end. Firstly, like we are hearing from a lot of dual-focused businesses that there is some sort of tightness in the (inaudible). Just wanted to get some sense from you whether you're getting a similar kind of a feedback from your own loan activities, especially in the MFI business or the other small business loans.

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [153]

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I think from microfinance, I think I'll be most specific about the small business loans. If you look at an average ticket size small business loans around 4 lakhs. And below 2 lakhs contribute almost towards [35%] of our portfolio.

And they are all from a rural and a local economy, which are -- who are dealing with the daily needs. Most of the clients whom we service for their daily needs, and they're not fully integrated into a larger economy like, what they call it as an auto ancillary if you look at it. There'll be a lot of spare parts, multiple products they will do it. But these are not integrated into a larger economy. They are local economy products. So the hint is that whatever largely you look at indicators, which is lackness and all, will have lesser impact in this type of segment of clients. So I haven't seen such kind of a slowdown at least.

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Saurabh Dhole, Trivantage Capital Management India Pvt. Ltd - Senior Financial Sector Analyst [154]

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Okay. And that also does not reflect on your MFI customers also?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [155]

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Yes. Definitely not.

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Saurabh Dhole, Trivantage Capital Management India Pvt. Ltd - Senior Financial Sector Analyst [156]

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Okay. Okay. And second question is are there any geography-specific issues that you might have observed in the last 3 to 6 months? Are there stressed -- is there any stress in particular geographies that you might have suspended or maybe stalled incremental disbursements?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [157]

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No. Not at all.

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Saurabh Dhole, Trivantage Capital Management India Pvt. Ltd - Senior Financial Sector Analyst [158]

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Okay. And sir, just one last question. On Slide #33 where you've given a breakup of -- that's the Rupay versus VISA percentage share. I just want to understand, is there a result -- as a result of this particular mix changing, does that also have an impact on your revenues?

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [159]

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No. It does not have any impact on the revenue as such. It does not have.

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Operator [160]

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Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. S. Bhaskar for closing comments.

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S. Bhaskar, Equitas Holdings Limited - CEO & Executive Director [161]

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

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Operator [162]

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Thank you very much, sir. Ladies and gentlemen, on behalf of Equitas Holding Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.