IDFC First Bank Limited analyst Q&A

Thank you very much . We will now begin the question -and-answer session. We have the first question from the line of Gao Zhixuan from Schonfeld.

Congratulations on a good quarter. Just on the MFI, do you mind shar ing with us your outlook because the SMA-1 plus 2 seems to have increased sequentially more than what we have seen in some peers. So do you mind sharing with us what kind of credit costs are we expecting in the next 1, 2 quarters? And also on the overall credit cost, how are we thinking about FY 25 because our previous guidance is, I think, 225 basis points. And just look at 9 months, I don't know whether that still stands. That would be my first question.

Yes. Thank you for the question. Maybe I'll take that. So on the MFI, we have seen an increase in certainly in the SMA-1 and SMA-2 book, even the NPA levels have gone up. As you would have noted from the presentation that we had an impact, which was felt because of the holidays in October, essentially Diwali, coincident with Diwali. And because we have a weekly collection cycle, the last week of collections got impacted which also led to some close into the subsequent months. So we have seen a pile up in the MFI book and the challenge very much continues to be there. We are also closely monitoring the portfolio. As you would have noted that we have consciously slowed down on the disbursements. The good part is all our increment al disbursements, what we are doing is also CGFMU insured and so on. So on this book, if I give you the 9 -month number, we are already coming with credit cost of 8%. And this doesn't bake in the additional contingency provision of INR315 crores, which we have, right, because the SMA book levels went up, the NPAs went up, we felt it was more prudent to hold on to the provision and not utilize at this stage. On your question on 225 basis points, as I sort of covered earlier that excluding MFI, the rest of the book is very much coming in line, right? We have not seen increase in SMAs. We have not seen increase in slippages. So we feel that on the rest of the MFI book, we could still hold on to this number even into the next quarter. However, the overall guidance for 225, that may slightly inch up a bit. We, of course, need to see how the situation sort of pans out in Q4. But that would be a few bps of increase could be because of MFI because we are seeing slightly higher losses sort of coming there vis-à-vis the anticipation which we had maybe in the previous quarter.

But our own sense is that the credit cost of MFI should peak out in Q4. So it should be even more than this quarter. But when we estimate the credit cost based on the collection percentages, assuming credit collection percentages continue to stay what it was in December and maybe probably even improve from here. But we expect that Q4 to increase and then Q1 FY26 to be less than the prior quarter, Q2 to be less than Q1, Q3 to be less than Q2 and Q4 to be less than Q3. So basically, there's the peak of it. Our estimates are that the coming quarter, that's ongoing right now is the peak of it.

And my second question is on the 14 -odd percent revenue growth estimate for FY 26. Do you mind sharing with us what's the breakup in terms of the loan growth that we are expecting to do and also the margin outlook? But it seems that the strategy for now seems to have changed to grow more corporates in the last 1, 2 quarters. So how should we think about ma rgins and loan growth?

So basically next year, we believe loan book will continue to grow by about 20 -odd percent. And deposit will probably grow by maybe 24%, 25% next year. The reason why the income will not grow directly in proportion is that the microfinance, like I said, is a highly profitable business. We're lending at 24%. Incidentally, though the microfinance book is only maybe 6%, 7% of the book, maybe until a couple of quarters ago, it's now come down to even less than that. The impact of the withdrawal symptom of not doing that high -yield book is also coming in the form of income line. So that is the reason why we expect the FY26 income line to get affected. But the good news is that opex, like I said, we expect to be low because I told you a lot of initiatives are going on. And therefore, by Q3, Q4 of next year, I mean, you should see a reasonably sharp upward movement of operating profit, let me say. And for those of you who are going to be with us until that time and see how the room is turning, you'll be able to see how the margins are expanding. And frankly, like I said before in the opening comment that once that MFI will , then probably by that time, be probably even 4% of the book or something like that. So it won't be much and it would also have been the spring cleaning up of the MFI book would have happened by that time. Our book would be insured largely by that time. So we expect that from there on, MFI shouldn't give us trouble. And then the rest of the book is anyway doing well. So we expect that, like I said before, after that, the rest of the story will keep moving in a positive direction.

Yes. Just to add, this is our current estimation. Of course, this factors in that the shares in the MFI portfolio continues for a few quarters. If things sort of ease out maybe and some growth sort of comes in here, then we could see some uplift in these numbers. But these are our current estimates that income could grow by about 14.5% to 15%.

Got it sir. Sorry, just to double check, you are saying that the opex -- the material drop of opex growth, which should be much more visible in the second half of FY 26? Is that , did I get it right?

You will see it every quarter. You can see it even already this quarter itself, if you see Q1 to Q1 of this year, Q2 to Q2 of this year, Q3 to Q3 of this year. For example, our opex growth in Q1 FY25 was 21.1% Y-o-Y. In Q2, it was 17.7%. In Q3, it's 16.1%. So our opex is stabilizing and definitely coming down. I'm first of all happy that you're asking this question because many people do believe that, listen, this bank is spending and spending and this opex never seems to come under control . What's going on? Well, you see the numbers, it's dropping quarter-by-quarter, at least in the percentage Y-o-Y sense. And we are confident of next year , because we believe that the bulk of the investments have been done. Of course, investments are never completely done in life, but at least like I said before, whatever we had to launch, we launched. So we're not going to set you up with a new business launch tomorrow morning and say, oh my God, it is losing money. That's not coming , that trouble is not coming your way.

The next question is from the line of Jai Mundhra from ICICI Securities.

Thanks for additional disclosures on slippages, MFI and a lot many things. Sir, first question is on MFI only. So outstanding book is around INR10,900 crores, that is the MFI book. But I wanted to check, is there any other loans that we offer to this customer, maybe 2-wheeler, maybe small auto loan or any other PL loan or that these customers get only MFI loans from us?

No, we don't sell many other products along with it. It's a regular MFI, the short answer.

Okay. So the second question is, sir, just to get this correct, you have mentioned that you have a conservative provisioning policy and you have not utilized any contingent, right? So as against the SMA-1 plus SMA-2 outstanding of roughly around INR500-odd crores, as of now, we still have INR300 crores provisioning that we had at the end of the Q2, right? That is the right understanding.

That's correct. In fact, if you sum up the NPA book on MFI and the SMA-1 and SMA-2 book, the cumulative provision which is in hand is about 70%.

Okay. And thirdly, sir, collection on MFI book again. So collection efficiency, you have mentioned that it has come up to 98.6%. But what we can also recall is there is likely to be tighter guardrails, which will be coming in effect from April 1, which would create further disturbance, at least for the people who have slightly higher share of lenders. If you can comment, are you factoring into that development while saying that the MFI should be peaking in fourth quarter?

No. When we say MFI should be peaking in fourth quarter, basically, we have estimated the collection percentage that is coming currently and assumed a little more improvement because the trend line is in that direction, slightly assume. And then we know the flow on the portfolio. So our estimates are that Q4 on this basis should be the peak. The other thing is that in terms of your question about the changes in the industry, about the norms with which others are going to work with, if they're going to work with, etc. We are going to follow all the norms of the industry. And we have a little more controls over and above that at our own end. So basically, once you follow all the norms of industry, number of lenders, amount of exposure, etc, we'll broadly be in line with the industry to say.

Right. And sir lastly, if you can elaborate your assessment of the current situation in the state of Karnataka? And what is the portfolio that we have in the state of Karnataka.

When you move to the next question, as and when we get it, we'll share on Karnataka.

Yes. So we have about 9% in Karnataka, that is the number.

Okay. Sure. And lastly, sir, your consumer loan growth, right? So consumer loan growth, it has been coming down, as with every other bank also. But if I look at now, it has come down to 10% Y-o-Y. Is this more or less stabilizing here? Or you think it can more or less continue to see a bit of a moderation because of the ongoing cautiousness at the system level?

See, frankly, for us to grow any of these businesses is not difficult at all because like we always say, they are coming on a low base as compared to, let me say, industry leaders who have a very large share of the market. We are like nothing or nobody. So we are not so concerned about market share. We are not even talking that language within the organization or outside. But more specifically on consumer loans, we feel that they're all doing well. There's no issue.

Right, sir. And sir lastly, last question from my end, sir. We now estimate that fixed cost to income should be ideally 65% by FY '27

Sorry to interrupt Jai, but your line seems to be unclear right now. Could you please repeat the question?

Sir, I was talking about cost-to-income trajectory that you have given that by FY 27, we should be hitting 65% mark. Assuming we do that, what kind of an ROA would you expect on 65%, cost-to-income.

See different analysts have different estimates on this front. If you don't mind, can I just take you a little larger question about the breakup of our various lines of businesses and their economics. So if you move to Page 65 of the presentation, we have shown the operating profit as a percentage of the loan book of the lending business. We've broken our bank into 3 parts. One is entire lending business, retail, MSME, rural, corporate all put together is one family. Now on that front, we are having 4.3% of the loan book as an operating profit. This includes MFI, by the way. So before the MFI crisis stuck, it was 4.7%. We actually expect it to go to 4.8% or 4.9% because of operating leverage. But of course, it's come d own to 4.3%. But still 4.3% is 4.3%, there's nothing bad about it's pretty good actually. And we believe this should go up because end of the day, even as our loan book grows from INR2.2 lakh crores, which is today to, say, INR5 lakh crores in the next 4, 5 years, this has to go up. Obviously, we're not going to keep on spending more and more money in the same proportion of the loan book growth. So this will come. So think of this n umber a little higher than this. Now the second thing is like, you take the second business I told you, the liability business has said that you must expect us to take it to 0%, which is cost income to come down to 100%, which means that the loss will come to 0. So let us assume for a minute that it does hit to 0. And let us assume for a minute that the credit card business, of course, we're not doing this for a social work or a research work. It's a profitable business. We want to make money on it. So that business has already touched 100% cost -income ratio. And we believe it will touch the 60 -odd in the next 4, 5 years. So that should be making like INR500-odd crores of PAT by that time. Today, it's making loss of INR300 crores last year, probably about INR180 crores, INR200 crores this year. And next year, breakeven for sure. And then from year after that, I have to bite my tongue when I say for sure because sometimes it may play, it may not play. But we are expecting -- we're highly confident that next year, credit cards should be positive. And by that time, like I said FY24, FY29, FY30, it should be making like INR500 crores, INR600 crores of PAT. So therefore, if you take this 4.3%, which is today and get some operating leverage on it take it to maybe 4.7%, 4.8% by that time, probably more. And then you assume both liabilities that will become positive at least, if you know, then you see what happens. On this 4.3%, you take some credit cost of maybe 1.1% off or 4.5%, take 1.1% off because we are comparing everything of assets and then you subtract 1.1%, assuming credit cost stays at current levels, ex MFI. So you would take that off. So 4.4% minus 1.1% looking like about 4.3% or sorry, we should take the percentage of loans, my bad , let me correct myself. So let me say this 4.6% or 4.7%, you subtract from that about 1.7% as the credit cost by that time. So you'll be looking like about 3% or so. And then you have tax on it or maybe 2.9% and then you take tax on it of maybe 60, 70 basis points. This bank is surely headed to a 2% plus ROA basis or 2% plus for sure. And it will be a 2% plus ROA bank. It will be a growing bank. It will have unique technologies. It will have growth. It will have its own moats. And culture is very good, a customer -friendly approach. So we will tick all the boxes. Today, we tick 5 boxes, but we don't tick one box, which is the cost-to-income ratio. But we are conscious of it, we'll fix it. So that's the only way to think about this bank in the longest run. Honestly, I have zero doubt in my head, the bank is heading in that direction. Now you may have one year plus/minus whatever, but I'm pretty sure the bank is heading in that direction.

Right sir. Sir, your assessment of the current situation in Karnataka for MFI, there are quite a few development state government trying to sort of intervene , if you can update as to what is happening on the latest front?

Yes. Before I come to the question, let me just give one finishing touch to the previous question because I answered that detail. So think about like I was saying earlier , that this 4.5%-odd and you take 1.7 %-odd for credit cost. So you are left with 2.8 % or so. And then also remember, that's all percentage of loans. We've got to convert the percentage of assets that will come down to something like 2.4% or so. And then you take the facts off compared to 2%. I'm sorry, I just want to just make the distinction between percentage of loans and percent of assets, so that you can get the math right. So in this math, if you did the math, went through a spreadsheet, you will get to see a 2% ROA bank. And the only catch here can be credit cost. There's no other catch here. Now in the credit cost front, well, like this long period of 14, 15 years running a good credit cost company, except the MFI mishap that has happened now, you should believe th at we should be able to run the credit cost on the lines we're talking about . 1.7% percentage of loans, which will probably be 1.2% percentage of assets. Sorry, that's the previous question. Now back to your question again.

Yes. And with respect to Karnataka, again, this is a very latest development. This has come in the last 3 days. So we will closely watch the situation. It's difficult to sort of give out what could be the impact on that front, but we are quite watchful any way on the overall MFI portfolio.

Thank you, sir. All the very best.

Thank you. The next question is from the line of Piran Engineer from CLSA. Please go ahead.

Thanks for taking my question and t hank you very much for all the enhanced disclosures. Just firstly, on MFI, the 3-member rule that's coming up next quarter. Have we proactively moved to that?

No, we are currently following what is allowed in the system. I told you there are to reasons we like the business also. It makes the money and it is insured. So we are happy the way we're doing it right now. We are just following the rules of the broader ecosystem.

But don't you think it makes sense to tighten right now when it's eventually going to come a quarter later? I mean if you're going to be the fourth lender today and it's not going to be allowed, say, April 1 onwards, and the next lender is not able to, let's call it, evergreen that borrower, she will default to you, right?

No, that's true. But we are very carefully, very, very carefully watching this. So basically, what we have done is we put some extra controls in our MFI business over and above the normal market rules. We're not restricting ourselves to the ecosystem rules that have come, the 4 lenders or 3 lenders. That's not only condition. We have developed actually a very active scorecard where we have introduced a lot more number of parameters, which we believe will give us a much more scientific decision-making process than blunt rules.

Got it. And do you also track the entire household debt?

Well, as part of the appraisal process, certainly, our people ask the question, we understand the household debt and we’re supposed to meet certain requirement of as a percentage of the household debt is what is supposed to lend, etc. We follow all of that. You get the best estimate from the situation. We go by our best estimates of what our people assess on the occasion actually. But you can understand that much of these households anyway.

Thanks for the opportunity. Sir, coming back to Slide 65, 66, 67, I just want to understand a couple of assumptions here. One was the opex, which is linked to the technology part of the head office and other things, which are not allocable to a certain business, they are not captured here. I just want to get that right. And second was on the fee income piece. Like is it getting captured in -- if it's a wholesale business fee, is it getting captured anywhere? And if not, is that missing in this analysis? Or is it getting captured somewhere? And third was on the liability business, the ratio that we are showing. Are we building in any transfer pricing income in the interest income for the liability business? So that was one part of the question...

Rohan, let's take one question at a time. It will be easier for us. Let’s take the first one, Sudhanshu, do you want to take that.

Yes. So maybe I'll just tell you how this has been constructed. So essentially, if you take the P&L of the asset book, which includes retail as well as wholesale. So these numbers capture both the businesses. Then we have a liability business, then we have put out a credit card business separately, right? Then we have a small income and opex, which comes to the toll business. Essentially, these are the broad lines of business. If you sum all of it, then it becomes the bank's numbers, right? In terms of how are we assessing this ? So this is based on an internal transfer pricing and a cost allocation methodology, which we have put in place. So to your question on IT cost, even a portion, all of it is allocated in any one of these businesses, right? So it's on a fully allocation basis, how these numbers have been drawn out when we are computing the pre- provisioning operating profit for all of these businesses. So on your question on liability , in terms of how this number has been computed ? Let me just quickly dwell on that. So there is an NI where the liability unit earns on the deposit, which it mobilizes, right? So they could mobilize current account, they could mobilize savings account, they could mobilize term deposits, right? We all know current account is the best form of money to have, right, because it comes at 0% cost. So we give an internal transfer pricing income to the retail liability unit. Similarly, on savings, we get some transfer pricing income. And so is the case with TD, which is more a commodity product, it will be much lesser there, right? So that would be the NI income from the retail liability group. Then there are fees, which can b e directly identified and attributable to the retail business. This could be fees you are earning by not maintaining average monthly balance or a quarterly balance by the customer, could be ATM -linked fees, could be fees on account of insurance, FOREX, distribution of mutual funds and so on. So that would be the second pool of income for the liability branch. We could also sell assets or say, sell a home loan, a personal loan, loan against property. We given certain intern al transfer pricing fee to the liability unit, okay? So NI and that fees, all of these components makes it the total income. In terms of a cost, there are costs which are directly attributable to the branch, which could be the people cost, the housekeeping, salary, the DICGC premium, ATM running cost and so on. And second, as I said, is it's also loaded for the allocations, right, which could be for IT, which could be for operations, which could be for customer service, which could be for the corporate center teams. So it's on a fully loaded basis. That's how fin ally the P&L is arrived for each of the businesses, right? And like for an asset specific, you will load it with the sourcing cost, you will load it with the collection cost. So some of these items change according to the nature of the businesses.

So sir, I was trying to reconcile this number. So if you look at FY 24, the asset income coming at 4.7%, and this is on total advances, is roughly two-third of the total balance sheet. If you look at the retail liabilities, the cost is 1.7%, which is again roughly two-third of the balance sheet. So if we adjust this 3% is a net that we make. If I add the interest on investments, that is roughly 1.4%, so we get to around 4.4% at a PPOP level. And if you take two-third of it, it comes to around 3% odd, whereas the computed ROAs for the bank was coming at around 2.4%. Roughly 50 basis point gap was coming in. So that's where I was trying to understand what could be explaining the difference vis-a-vis the analysis that you have shared?

We also have the credit card business, which also generates NII and fees, right? So…

But that was a small amount on the total loan book, so that's fair?

Yes. Then on the investment income, as you said, you have taken a certain component -- we have treasury investments. We have a few other investments. So let me assure all of this adds up to the bank's numbers, right. And so -- and these numbers are in that way, very sacrosanct.

And they're also shared with the Board and I mean the sense that whatever we're sharing with you, they've all gone past the Board over.

Maybe this reconciliation, we can take it offline and we will be able to give you more details around this.

Sure, sir. And secondly, sir, this was on the deposit piece. See, if you look at it, you have been delivering healthy growth on deposits. So I just want to understand in terms of the contribution, if we are -- the journey wherein an asset customer is comin g to us first and we are converting them into liability subsequently, how would that journey play out? And what could be the contribution in terms of incremental growth? And overall, how is the mix of new to bank customers on deposits vis-a-vis the organic growth on deposits? Some color around that?

So currently, as we are new bank in the sense that if you think of any bank that has been around for 20, 30, 50, 100 years, they'll have a large customer base. And even if they gave interest credit of 5%, all of them, the balances goes up by that alone. And then they got to get a little less of the external market, so to say, because they're flying on 2 wings. A bank like us, which is starting up right now since you start with zero base, today, we're no longer zero base, we're still two lakhs but in the context in what we want to build in life, maybe INR10 lakh crores, INR15 lakh crores, INR20 lakh crores over the next many years, we're still zero based. So a large part of our business is still very heavily NTB. And good thing is that we build really good journeys to make it smooth for customers to bring money to us. So that's how we think about it. So we are -- right now, we're still a zero -day company and a zero -based company, and we still have a good percentage that is coming from new customers.

Sure. Anything on the asset linked originations?

Sorry. What was that?

Any mix that you can share on how much deposits coming from the asset customers whom we were originating first?

Yes, assets are useful. But see, frankly, all asset customers are not really good liability customers. So, in the sense that we are not finding customers with consumer durables and 2 - wheelers, etc, bringing any meaningful asset liabilities at all. They are really relatively more modest income and therefore, they're borrowing to buy 2 -wheelers. So it's unlikely they'll have money with them. So I mean they may keep INR5,000, INR8,000, INR10,000, so that's not good balances. But the customers who avail say, a home loan, for example, or customers are availing these kind of products or even loan against property for that matter. These are the people who have money. And the credit card customers are usually coming in, they have m ore money because there's a credit self-selected people. So what I'm trying to say is that the high affluent customers is what we make the money. So not all asset customers on our bank are high affluence. But we do have people who open home loans, etc, we do open the savings account to a very, very high degree actually.

And sorry, before you put up the next question, just on the previous question, the number question which you asked, see, as you said, 4.4% is the PPOP on assets, right? And 1.7% is the negative on liability, which makes it 2.7%. And the advances book is up roughly 70% of the asset balance sheet, right? And on the rest 30% essentially investments or incomes coming from toll, right If you apply these proportions, you will get a number of about 2.3% on PPOP, which is the disclosed number for us for the 9 months, right? PPOP to total assets is about 2.29%, and this is the broad reconciliation.

So you added that interest income from investment also addition to this? If we exclude that the net margin, if we include that okay. I'll just take it offline and then just reconcile that?

And also to the previous question I was answering on the how the economics in the longer run will play out. This Sudhanshu's question answers it very well because this 4.4 % we've shown there, which we believe will move towards the 4.7% or so comfortably and you take off the 1.7% from that, it comes down to the 3%. And then that math when you do that way also, you'll come back to the same answer. Because we'll come, net of your credit cost will come down like the 3 %. And then because of the fact that we are now going to comp as a percentage of assets, not loans, that 3% will start looking towards like a 2.4% or so and then you subtract the tax from, it will come back to 2%. So we feel that any which way we look at it, this bank is feeling the heading there, whether you can reach there in 2030, or FY31 or FY32, I mean, it would be very hard to really pick a number. But this bank will have zero doubt in my mind that this 1.7%, 1.8% kind of ROA. This is not a difficult thing for a bank with our economics. The true real issue is that our true economics, which is a true incremental profitability of this bank is getting clouded by the fact that all of you are looking at the whole thing and you're not factoring for the fact that the liability loses money or credit liability loses money. Or by the way, there are many products which are not called out to you because it will become too complicated. There are many other business bankers launched. Like I told you, like we've launched so many. They are all in negative zone, but we have no interest in running business in negative zone whatever. They're just meant to become profitable. It's just a matter of time. So every product is going through its own J-curve of loss to profit. And when they all come up together, it will become -- it will all come together.

Sure sir. And sir, lastly, just on this composition of operating expenses slide, the volume expenses and channel sourcing expenses. If you can help us understand what would be the contribution from the asset side and the liability side, if there's anything that you can share?

Yes. So sourcing expenses or channel sourcing expenses would be essentially from the asset side, right. This is cost for your DSAs, DSTs, business correspondents and so on. The volume linked, largely, I would say it would be across, right, because you could have first credit card, the reward point expense, which comes in, you could have the cash backs and p ropositions, which go along with the credit card. On the liability side, it could be the DICGC premium, it could be IMPS, RTGS, NEFT and so on, right? On the asset side, it could be the collection linked cost. It could be even like a bureau cost and all which you incur at origination. So it's across all of these verticals, I would say.

Sir, just wanted to check on 2-wheeler. In our slide also, we've shown that the industry is seeing some uptick in terms of 30-plus DPD and asset quality issues. What is our sense we have that as a large book, and it's a high-yielding, high credit cost business as well. So what do you see there?

It's paying quite stably. But in this business, we all learned never to be too sure. So we'll be very, very watchful. But we built the business. We built this business over the last maybe 10, 15 years, actually more 15 years than 10, 15 years probably. And we've seen lots of cycles. So as of now it's bearing very well for us.

Yes. Sorry, on the 2-wheeler question, just adding a few inputs here. So 2-wheeler is the bulk of the book in the vehicle segment. That's roughly at about 70% of the vehicles book. If you see the presentation, we have also given SMA 1, SMA 2 numbers and NP A, right, at the vehicle level. So it has been holding up quite well, 2-wheeler has been growing quite nicely for us. We have a formidable market share here. we have been, again, invested in this business for quite long, right? So while we are quite watchful because of the economic environment, but we feel comfortable at this stage, probably in terms of the sourcing and the portfolio sort of which is sort of moving on this front.

Sir, the current participant seems to have dropped from the queue. We will proceed to the next question, which is Mr. Piran Engineer from CLSA.

Sorry, I probably got dropped off from the line earlier. So just on MFI, how much money can we expect back from CGFMU right now? Is it fair to say that since half the loans are insured and assuming the same slippage ratio between the insured and the non-insured book, this should be the amount we get back?

Yes. So essentially, today also when we have an NPA pool, which has got piled up, this has some proportion which is out of the CGFMU portfolio and there is some portion which is out of the old sourcing. Right? So particularly on the CGFMU insured book, right, we would start getting claims starting from FY 27, right? And the recoup of credit losses could be as high as about 70%, right, of the losses, which we incur on the CGFMU linked NPA.

It's only up to 70%?

Yes, it's up to 70%.

So like 30% is sort of co-pay? Is that how I have to think about it in insurance...?

So let's skip 2 years ahead just for simplicity's sake, so that let's assume 100% is insured.

Okay.

But the policy which we have, we end up providing earlier, right? While the money generally comes within 2 years after the date of disbursement. Hence, I said for the disbursements, which we started from January '24, we expect the tranche to sort of come in from FY '27. So we would have provided to a great extent on these N PAs. So we could expect a recoup in credit costs in that year.

And just lastly, how are things on the credit cards front? I see that your NPA is stable, SMA 1 and 2 has improved quite a bit. Your comments on this would be useful.

Our credit card is doing well. You could see our numbers. Our SMA 1 and 2 credit cards has come down last quarter. It come down from 1.69% to 1.32%, in fact, last 3 quarters come down to 1.88%, 1.69%, 1.32%. So even on the NPA number...

Yes. The GNPA has come off to 1.91% vis-a-vis 1.95% in the previous quarter. I had mentioned in the call last time that on credit card, we feel quite comfortable because of various timely policy interventions, which we had done. And credit cost in credit card on the book is marginally lower than the previous quarter. And we expect this trajectory could continue.

No reason to get very disturbed anything like that. We have one problem, but that's a known problem in MFI. It's not the credit cards.

Understood. Okay. No, because for the industry, it has been an issue. And since you have now started disclosing SMA-1, SMA-2 data, it was quite useful?

Yes.

The next question is from the line of Anurag Mantry from Oxbow Capital. Please go ahead.

Just one question on the credit cost ex MFI. So eventually, if I do the math for this quarter and for the last couple of quarters, it seems that the normal book ex MFI and that we had last quarter, the credit cost is coming more like 1.7%, 1.8%, 1.9% trajectory for the last 3 quarters as such. So just wanted to understand how you're looking at it because there has been a margin increase every quarter in that as well? Do you see the current level is more stable? Do you see maybe potential for some more increase? And if you can point to any reasons why this increase has happened in the couple of quarters.

Yes. So on this front, the credit cost ex MFI and the tool account, if you also keep it aside, for Q1, the credit cost was about 1.7%. In Q2, it was 1.8% and Q3 has also come in at 1.8%. We feel that this could broadly remain in this range, maybe it could be or maybe 180 to 190 that kind of range. So we per se don't foresee this to materially go up or it could marginally sort of inch here and there, right? So we feel quite comfortable on the rest of this book.

In fact, people often ask us because it's a concern because if you're an investor, you should worry all the time, so you should. Many people do ask, not just us, I've seen some television interviews on these business channels, etc., saying that is the issue on MFI going to spill over to consumer credit and people do half an hour discussions on these things. Really, we are not seeing any spillover or anything like that. That's a very rural MFI, it's a very rural kind of stuff. Within urban, we've seen no impact at all. There's no reason for any impact. So where is the question of spillover? Now we're talking of rural, the microfinance is a very unique business as compared to any other business. What is unique about microfinance? Microfinance is when the group of borrowers are coming together and repaying when our people have to go to the customers to a common venue and customers to come and pay, meaning we have no right to debit the customer’s bank accounts for an EMI. Every other product we sell, we have a right to debit the customer's bank account. And we have to only deal with the terms that come. In MFI, the nature of the business is different. We give the money on the due date to go sit in the college or the school or somewhere and a t a joint, customer has to pay. So MFI is a unique thing. So it's a unique thing behaving differently. It has its odd behavior sometimes, but it's only very, very MFI-focused thing for us, rest of the book, we said that before, I'm saying it again. It's doing well. I mean, in the sense, the entire corporate book is doing well, entire retail book is doing well, entire MSME book is doing well, business banking is doing well, credit card is behaving well. They're all doing well. And you see the numbers. And let me just tell you one very, very important thing, which towards the closing, I'll share with you. We are giving you not just NPA or credit cost. These are standard, of course, everybody should give it, and that's part of the job. We have in our investor presentation and even otherwise, we are explaining our basis of lending. We are giving an EMI check bounce, the EMI bounces. We're giving collection percentage efficiency on those bounces. Then next, we're giving SMA data, then we give SMA data by product, then we give NPA data, NPA data give by product, then we give NPA data by product and by the 4 quarters at a stretch. Then we give vintage analysis, then we give industry comparison, 30 DPD of our bank versus other industry. So the amount of detail we give is something. I mean, we're giving the full funnel to you. So it should not be difficult to estimate any and all our numbers reconcile. So it should not be difficult for you to realize that this is only a microfinance problem. Others are doing well. All the numbers are there. In fact, if you went to Page 13 to maybe 45, you'll find all the information.

And just to add, even into the next year, so as Vaidya said, that on MFI, we expect the peak to sort of come in, in Q4, and the credit cost should keep coming down into the next year, every quarter. And for the rest of the book, we feel the provisions could be very range bound or more or less around the current levels, right . So which means that the overall credit cost is expected to come down for the next year vis-a-vis the pain -- some of the pain on the MFI, which we saw into this year.

So only as a caveat, just to be safe because we're speaking and a lo t of people listening to us, etc. Now we have seen this, like I said, for a long time, I'm talking ex MFI. I told you we've given every part of the chain and funnel we've given to you publicly there in the presentation. Now we have seen that every business has their own nature. They have their own credit cost behavior. If you do some product of all of that, you'll get a reasonable estimate of our bank credit cost, which is the 1.8% we're talking about. We are human, we're running a business, 1.8% can become 1.9%, may can become 2%, who knows, maybe it can become 1.8% or 1.6% also. But it's going to be range bound. It's going to be here. It's not like, I'm not saying by the way, it will become 2% tomorrow morning or something, but I'm just telling you that it is the range. It's never gone completely off back because there is a certain credit criteria we lend to. We don't fiddle with our credit criteria. We have lent and we learned and we refine and we refine. So as long as we don't get greedy and we don't want big business and we d on't want to get aggressive, etc., which you don't want to, it will be a particular way and it's behaving a particular way it will behave a particular way because it has a particular cadence to it.

The next question is from the line of Anand Dama from Emkay Global. Please go ahead.

My first question is on your opex. I think you said that 18%, 19% of opex will go down to 13%. Any 3 to 4 key drivers that you see where basically you will see this kind of a cost reduction going forward?

Sorry to interrupt Anand, but your line is not very clear.

Is it better now?

Yes, this is better. Request you to please ask your question again.

Sure. So basically, you said that your opex, which is about 18% to 19% growth...

Sudhanshu, will answer it.

Yes. So essentially, the overall theme is that we expect the operating leverage to play out, right, clearly as we move along into the next year. If you see, we have given some level of details, like if you see employee cost, right, that was growing at a much higher pace and the pace has considerably come off. So even into the next year, we expect that employee cost percentage increase could come down, right. It's a combination of the number of employees, which we foresee could sort of come in, in terms of addition for the expansion, which we are planning and so on, right. So we expect that the employee cost to taper down. Even on the nonemployee cost, right, I'm saying there, as I said, there is some fixed component and there is some variable component, right. So there also, the fixed cost will grow in a particular trajectory. And the volume is something which will go -- which is linked to the volume, right . Some of the examples, which I can sort of give here, like we have said that we may grow the deposits at 25%, the branch may not come in that tandem, right. We may add about 75 to 100 branches into next year, which is 10% over the current stock. So clearly, some leverage sort of comes in there, right . Then our tech costs and so on, we have already done a lot of front loading in last few years, right . So that could increase at a particular pace. So we feel that because a lot of expenses have sort of already come in, there is clearly an operating leverage or the proportion increase could definitely come down from the current levels.

And would that also mean that next year, our growth could be sub -20%, and that also, to some extent, will contribute towards this kind of lower opex?

No, we are not planning to slow down the growth. I mean like 20 % of the loan and about 22%, 23%, 24% of the deposits because, frankly, as you have seen for the last many years, we are good at deposits. If we wanted, we could grow 25%, 27%, whatever we want. But the need will come down next year. So therefore, is that 24%?

So we may require only 23%, 24% kind of growth in deposits next year, fueling a 20% growth on the asset side.

So our deposits are growing well already. So we don't need very many branches. The short answer is, Sudhanshu if I were to sum it up for you. On the deposit side because deposit is one part of our expense, as you know. On that front, we are not planning to load very many branches because current branch architecture of 1,000 odd is good enough to give us roughly the numbers you want. Of course, we think a little ahead. I don't want to be caught on the wrong foot for FY27 or FY28 or FY29. So just as an insurance, we'll still go and put about 100 -odd, but we are comfortable. And of course, we may tinker the size of the branches, we may reduce the size and put a little more or we may increase and put a little less, whatever. But you'll get the drift that this is order of magnitude we're planning to grow. So let's call it 100. So if a current base is 1,000, you go 100, you're going to add only 10% branches, but we are expecting book to grow by 20% plus. So that is operating leverage.

Thank you. Ladies and gentlemen, we will take that as a last question for today. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments. Over to you, sir.

I want to just thank all of you. I think you've had a long time with us today, and we thank you for being with us for this long. And we do request you to think a little ahead. We've given you quite a few new things. I think for 4, 5 years were known issues, suddenly comes the MFI issue. We're also feeling a little disturbed by that. So why we are surprising like this, and we are a bit unhappy with ourselves that after settling everything right, suddenly the MFI has come at us, and we are having to have this conversation. But we believe after this, we see the back of MFI, there should be, we are not seeing any major crisis other than that. Thank you.

Yes. Thank you, everyone. Just to add to it. So while we are seeing some top line pressures, which would come in, but clearly, we are working towards improving the operating leverage. And that's why the opex growth could moderate and so on. I also touched upon that provisions would be lower on an overall basis. So we are very much sort of working on improving the set of numbers. And thank you for a patient hearing, and have a great weekend.

From all of us at IDFC FIRST Bank, if any of our employees are hearing this call, I want to just take the opportunity to say that we're building an amazing bank, have confidence in yourself. In a long journey, these odd things can happen in a quarter, 2 quarter s, 3 quarters, but have confidence of building something amazing. Yes. Thank you, everybody. And if any employees are hearing, that's for you. Thank you, everybody.

Thank you. That concludes this conference, ladies and gentlemen. Thank you all for joining us. You may now disconnect your lines.