The first question is from the line of Nitin Aggarwal from Motilal Oswal.

Congrats on a good quarter. Few questions, first is on the CD ratio. We have seen like a good increase in CD ratio in past 1 year and LCR also we have deployed a fair bit of liquidity this quarter. So how much excess liquidity do we now have on the balance sheet? And do you think that going forward liability accretion will limit the loan growth as we continue to guide for over 20% loan growth?

We have carried average Rs.37,000 crores of excess liquidity in our balance sheet in Q2, and that's reflected in our balance sheet. Having said that, I don't think our loan growth ambitions will go down. What is more important is, we have to get our liability growth faster a nd we are working on all the dimensions to make sure that to happen. What we've said of our loan growth ambitions of 18% to 23%, and we are on the right-hand side of the growth, we will continue to maintain that growth, and we believe that the second half of the year is better than the first half of the year.

Right. Sure and the other question is on the yields, like this quarter, the corporate banking yield has come off a bit and the retail book is also, the rise in yield is well controlled, while considering the stable pricing and no repo actio n in the recent period. But what proportion of the corporate loan book is linked to MCLR? and should we not expect any further uptick in the corporate yields going forward?

As you know, our corporate book is almost entirely floating rate. One third of the book is MCLR- linked, balance two third is linked to external benchmark s. These external benchmarks are dependent on the market rates, those benchmarks will change in line with market rates, and that goes into our loan book. So, it all depends on how the market benchmarks are and basis that you will see corporate yields changing.

The other thing which you have to consider on corporate side, as we grow our small businesses, and as the mix of the business changes over a period of time, you will see that the yields will start getting up because the smaller corporates do come at a little bit higher yield than the large corporates.

Right but given that how the deposit cost is inching up like this quarter, there is a 23-basis-point rise in the cost of deposits and if I were to adjust for current accounts, this implies that our cost of deposits is almost close to 7.4% so how much more like uptick are we looking at in terms of deposit repricing? and what is the incremental cost of deposit?

The maximum differential which will happen is 10 to 20 basis points in the cost of deposits over the next two quarters, but I don't see more than that as an uptick on the cost of deposits as we go.

And lastly, just one observation, Sumant we have started disclosing the average loan outstanding in MFI. Why is this number higher than the average ticket size, like which we used to disclose until now?

So, what happens is, we work on a sanctioned limit basis. So, there could be a customer where you sanction INR40,000 loan. Now the customer has an option to either withdraw entire INR40,000 or take INR30,000 now and INR10,000 later. But what was happening, operationally working on those lower ticket size loans was becoming operationally cumbersome. So, we have reduced people opting for less than INR15,000 of loans. So, more and more people will move towards now whatever is the sanction limit. And that's where we attract the customer. So, whatever is the customer's total loan outstanding, that's what matters, whether you have taken in one tranche or two tranches that doesn't matter and that may not be the right way to look at also. So, thinking of that, we have changed the disclosure to show, at a customer level, what is the total indebtedness for that customer.

Next question is from the line of Abhishek from HSBC.

So, one question on slippages. Now retail slippages are down to Rs.1,250cr and approximately somewhere close to 3.5% of opening loans. Do you think there's still scope to improve? Or are we at the bottom here?

I think, you will see more improvement on the retail slippages on the CFD/ vehicle book. That’s because the second half of the year has always been better for the vehicle finance book. So, you can see hope for some improvement there, o n the micro finance book, there is still a scope of improvement. So, we will see slippages coming down as we move forward on the retail side of the book.

And Sumant, on the overall slippages, I believe the guidance was around INR1,200-1,250crores or so. Whereas we are hitting INR1,450 -odd crores this quarter, maybe one account here and there, but we have to account for those one -offs as well. So again, do we stick to INR1,250 crores going forward? Or do you think now we are at a more representative run rate?

We should see slippages around INR1,200 crores to INR1,300 crores. That is our base case and this quarter we had an unfortunate corporate account slippage, which happened, we just took the slippage because it was in the SMA for past two to three quarters, so it was better to take that and I don't think there are any such more things which can come in, and we will see retail flows improving, we can stick to INR1,200 to INR1,300 crores, accounting for any corporate slippages of INR50 crores to INR100 crores, if it happens.

Got it a nd just one question on deposit growth again. So, if we just look at the last five, six quarters, on a Q-o-Q basis, the deposit growth has lagged credit growth and fine, we had some extra liquidity, which we were deploying in that period , n ow with this excess liquidity also normalizing, we will need to accelerate deposit growth, right? So will pricing have to be one important strategy because we've had our deposit rates, I mean, low er than or rather are spread over other banks is historically very low now. Do you think you need to increase that spread and incentivize more flows?

No, I don't think so. We are able to a ttract deposits. We are doing multiple things. With the digital capability, expansion of branch distribution and the product launches, which we are doing in the branches, plus the marketing efforts which we are doing. We should be able to pull up the liabilities. I cannot say that everything will c ome in CASA, if we want to open the tap in term deposits, we're able to get the term deposits immediately. So, I can tell you, we will start seeing the deposit growth coming ba ck and we are working towards getting the deposit growth back. Yes, you're absolutely right that this quarter, we used the excess liquidity gap to maintain the margins, and you will see the deposit growth coming back in the next two quarters.

Got it. Just one quick question. The entire corporate slippage was owing to that 1 account?

No, INR169 crores was owing to one, then there were small amounts spread across multiple accounts.

Next question is from the line of Kunal Shah from Citigroup.

So firstly, in terms of the cost of funds, the increase has hardly been like 9 -odd basis points compared to 23 bps rise in cost of deposits. So maybe in terms of this repricing and repayment of the borrowing, high -cost borrowing, is it largely done? Or should we see the benefit in the coming quarters as well?

Yes. So, a couple of things here, the borrowing is always an option available to the bank, and we've seen how it plays out in terms of longer-term financing with cheaper rates as well. That's a thing that we conti nue to assess and keep on doing in terms of the cost of borrowing. So the idea is that if my borrowing numbers are going to be lower and my deposits are going to increase and the cost of deposit is going to be higher, you'll have a higher cost of funds that's as simple as that. So as a result, you will see a small rise in cost of funds because we've decided that our basic aim is to focus on more on deposits, to maintain that. Some other c olleagues get asked about the CD ratio as well earlier. Yes. So, I think CD ratio being one of the measures that we take in terms of our advances to deposit book, that needs to be maintained at a particular level and in order to do that, yes, our deposit growth will be higher than the borrowing growth and as a result, it will impact our cost of funds. Obviously, as I said, borrowing cost is lower than the cost of deposits and as a result, there was another question that had come earlier that without current account my deposit cost is at 7.3% or whatever it is, will I reprice my asset book. The way to look at it is you've got to look at the cost of funds because that is the sort of funds available to the organization rather than just the deposit base. So that would be my take on this.

Sure and secondly, in terms of the credit cost and utilization of the buffer, so maybe we were highlighting that we would be building up the buffer also towards maybe the transitioning to Ind-AS. But again, we saw almost like Rs.180crores kind of utilization this quarter. So, would that start to happen from Q3 onwards in terms of the further build -up on contingent provisions and still comfortable with 1.1% to 1.3% credit cost?

Yes. So, you will see that we will start building up the buffers. So, you will see it in the second half of the year. I cannot commit quarter three or quarter four, but in the second half of the year, you will see the buffer. Like what we've committed, we r emain committed to building up the buffers and you will not see us utilizing any more of the contingent provisions as we go forward.

Okay. So, utilization is largely done now?

We will not utilize anything. We said that last time also. So, I must be open to it, but we had to because of the restructure d book, but we've now seen our restructured book, and we are very comfortable with that.

So, this utilization was from restructured, what you were highlighting INR1,800-odd crores?

Yes. So, we told that the total restructure flows over the last six quarters was about INR2,434 crores, and we utilized about INR1,800-odd crores of that book.

Yes. So INR180 crores was for restructured provisions?

Yes.

Okay and secondly, in terms of the employee cost. So last time also we highlighted that there would be employee incentives, additions and annual incentives were there, which led to a higher opex, but we are seeing the t rend continuing almost like further 11% increase on a quarter -on- quarter basis. So, any one-off out there in the employee side?

So, there were incentive payouts, which were done in Q2. Some of these were related to the sales performance so that was one cost which came in. 3,500 employees got added in Q2. We have added about 7,500 employees over the last six months and that base effect had also come in the cost. Now what you will see is stabilization of the employee cost as we move forward.

Next question is from the line of Suresh Ganapathy from Macquarie Group.

Sumant, I have a question on contingent provisions because if you are saying you want to make INR300 crores contingent provisions this year and make 1.3% credit cost, including that, then why did you dip into INR500 crores of contingent provision in first half, you did INR500 crores and then you make INR300 in second half. So, this not a coherent strategy I feel. So just wanted to get a clarity on this. How are you looking at it are we still maintaining that you will be between 1.1% to 1.3%, inclusive of the INR300 crores contingent provisions that you want to make this year?

Yes, I will be comfortable between 1.1% to 1.3% and you see what happened, t he first half of the year is a relatively troubled year for the vehicle finance and the micro finance unit. T hat's where the flows happened and I've made a statement that the gross flows should see a reducing trend in the quarter three and quarter four and as a consequence, I'll get the capability to provide the cost or the buffer provisions, and we would be able to get the credit cost between 110bps to 130bps.

Okay. Now the thing is about slippages, right? So, see your slippage is up this quarter, you had some corporate numbers, so you ha d INR1,400 crores of slippages a nd last quarter was a somewhat similar number. So, you see this number trending down, you're saying in the second half, right?

I see slippages coming down, and I still continue to maintain that we would be between INR4,800 crores to INR5,200 crores. That's what the numbers we've been giving to the market and we continue to believe that we will be within that range and you will see the retail slippages coming off very strongly.

That means your second half numbers only INR2,200 crores because you are guiding for INR5,000 crores, right? And you've already done INR2,800 crores for the first half.

Correct.

Yes. Okay. Now just one last question, again on slippages. See, I mean, the economy has been fantastic, and you are seeing such great outcomes even in public sector banks, what explains the 3.5% annualized run rate on your retail book? This looks too high . If I look at the individual segment this quarter, and the reported NPL numbers, all the unsecured loans have created a problem in retail. I've seen personal loans going up, MFI loans going up and card NPLs going up. Can you give some clarity what's happening on the unsecured loan NPLs?

So, you're absolutely right, if you look at the merchant acquiring business, which we have created in Bharat Financial, does have a 2.5% to 3% credit cost and the annualized flow is around 4%. That's one of the businesses which we are growing, but the gross yield is also at ~28%. It's unsecured business to a large extent although eligible for guarantee by the government. The second is the card business, where we've seen a little b it of slippage in this quarter, which is a little higher than what it was projected to be. So that's another business where our credit cost is touching about 3% to 3.5% against what we had thought it will be at 2.8% to 2.9%. So that's something which has come up 60 basis points and our gross flows in the PL business has moved up by about five basis points this quarter.

Suresh, also just to clarify, like you know that, GNPA also is a function of write-offs, et cetera. If you see the gross slippage, every segment has seen a QoQ improvement be it vehicle, MFI, or other retail also. So, the GNPA depends on how much you write-off in which quarters. Slippage wise, we have seen the improvement on gross as well as net slippages across both secured and unsecured book.

Next question is from the line of Saurabh Kumar from JPMorgan.

Yes. So NRI, of course, it gets benefited or impacted depending on how the currency rates are between INR and respective currency, and also the interest rates that are there. But that all you'd have to take it, and currency-wise we are fully hedged. We don't carry any risk at all in the book. In terms of the security receipts, we had reduced security receipts from 0.44% to 0.39%

Okay, and what's your outstanding amount of NRI deposits right now?

INR40,000 crores.

0.39% is the net security receipts outstanding.

Next question is from the line of Rahul Jain from Goldman Sachs.

I had three questions. Number one, to start with, how much excess liquidity we would be carrying on the balance sheet now?

INR37,000 crores.

Okay, and that you think can be deployed all of it in lending or you'll keep some part of it on the books as liquidity?

We are comfortable with keeping some excess liquidity around INR20,000 crores. We've always said that. So, we would keep that at our minimum threshold of INR20,000 crores in our books.

Okay, and in terms of LCR, what would that imply?

So, we are at currently 117% LCR as what we've disclosed. 115% to 125% is what we want to be on LCR.

So INR20,000 crores excess liquidity, you will be in that range of 115% to 120%?

Again, INR20,000 crores is just a number that we are just talking. At the end of the day, LCR has other components to it in terms of what constitutes your LCR, right? I mean HQLA and then outflows or the type of deposits that you have with the financial ins titution, nonfinancial institutions, corporate, non-corporate, TASC etc. So, that may not be the right measure to take, but yes, it gives you an indication of LCR. I think another good measure to reflect on stable funding book is NSFR which is an important measure to know how stable is your funding are over a period of time for your asset book. That is a big measure. In terms of excess liquidity, while the threshold is INR20,000 crores, that we are going to keep, but I really believe that we are not going t o go down to that level. I mean because at the end of the day, it's about utilizing that liquidity in a manner, which is most conducive. So, if you think that my liquidity is laying in cash only, it is not. It's in treasury bills or very short -dated government securities where I don't have risk, and I can get it back whenever I want to raise that temporary liquidity should the need arise.

Thanks for the elaborative answer. Actually, the reason I was asking is because the competition on deposit is, of course, heating up for us, the LDR has gone up, the deposit growth therefore, will start becoming critical at some stage and I was just trying to see how much buffer we've got on that side that we can deploy and maintain our growth rates. So that wa s the reason I was asking that. All right. Second question is on retail slippages. Well, of course, it has come down, 3.5%, odd, it still appears to be on the higher side, no? What should be the right run rate in the cycle on the retail side, Sumant?

So, you have to go by segments. So, MFI slippages should be around 350 basis points. The MFI credit cost would be around 250 to 300 basis points. That's wh ere these would stabilize at. On the vehicle side, 2% of gross slippages and 100 basis points of credit cost will be what we would stabilize at. On the other retail side, it will be 300 basis points of gross slippages and 200 basis points of credit cost. So, if you look at it, you have to look at it in totality that we have recoveries & upgrades also. Overall, the gross slippages should stabilize between 2.75% to 3% in the retail book, and that's where our overall credit cost will be around 110 to 130 basis points.

And when do we see that number, Sumant, this year or by end of this year or next year?

You will see it in the second half.

Okay. The third question is, again, coming back to the corporate slippages, right? So, it's a standard book and then you've got restructured, which is a very small amount. You said SMA, so what SMA and what is the nature of this slippage, INR16 9 crores that one account that you called out? Can you give some more colour on SMA1 and SMA2 towards the pool of that book in corporate?

So, the SMA1 and SMA 2 is 0.26% of our overall book. SMA1 is 0.06%, and SMA2 is 0.2%. This was one account of INR16 9 crores, which was booked in somewhere in 2017-18, which slipped, we have adequate collateral against that account, and we should see the recovery sooner than later on this account.

Okay, and any particular sector or this is an idiosyncratic case and you don't expect this to be repeated?

I can't predict whether corporate slippages will come or not. At this point, we don't see anything, which is a burning issue on corporate side on which I can comment on.

Because the economic environment seems to be pretty robust. So, I was really surprised to see this number. That's why I'm asking you this question.

This is one account which was always in SMA2 for the last three quarters and it was not coming out of SMA2.

Fair enough. The last bit is , somebody else has asked this question earlier about the unsecured bit. You talked about the merchant financing portfolio, but what about the consumer loans like credit cards and personal loans. How comfortable are you in this environment given that clearly, the cycle seems to be peaking?

Rahul, I fully agree with you and it will be around 5% of our loan book. This is what we have said, and we will continue to believe in that. We are not growing the unsecured asset book or the credit card & PL business as a strategy. We have market share of ~2.7% in number of credit cards and we are about 1%-1.5% on the PL. And overall, this is 5% of our loan book. We are not growing that fast. So please understand while the businesses have grown, look at what is the share in our overall outstanding book. We have around INR16,000 crores in the overall loan book, so we have not grown these businesses at that fast level and considering our Bharat Financials portfolio, our overall unsecured exposures will go for a toss if we do that. So, we are not growing share of these businesses.

Understood and then since we are on that and maybe the last question, the RBI also sounded quite cautious. So, are you seeing anything, which is we should be aware of as a fraternity on the unsecured side?

If you look at Transu nion data or any other bureau data, the PL flows have not increased. So, there is no such thing on the PL. In the small ticket PL cases, where the ticket sizes are less than INR50,000 or INR70,000 we are seeing some stress , but not in the other tickets. On the credit card also, there is a 30-plus flow of about 25 basis points, but nothing to be perturbed as of now.

Next question is from the line of Piran Engineer from CLSA.

Firstly, I just wanted to reconfirm two third of the corporate book is MCLR link ed or EBLR linked.

Sorry, two third is the EBLR, one third is MCLR.

Got it. Secondly, if you can just talk about your credit card partnership with Poonawalla, what's really in it for you?

It's just a partne rship where we have a goo d relationship with Poonawalla a nd we are doing a co-brand to get some clients, and hopefully, those clients will convert into liability customers for us. The risk on the balance sheet is low. I can tell you this much.

So, it's their customers and you are going to provide credit cards to them?

Yes.

And so, can you give us some colour on the cohort? What exactly are you looking for out there? Because I would have expected you all to have a better customer set than them?

I agree with you. But please understand the portfolio will not be more than INR200 crores or INR250 crores over a period of three years. That's what we are looking at. We will follow our own credit underwriting criteria. So, a lot of these clients will get rejected as a consequence. But sometimes you have to do these businesses.

Okay. Fair enough and just lastly, I'm curious to know, you mentioned about your LCV market share improvement over the last few years. Just wanted to get a sense of what you all did to drive that improvement? a nd at the same time, who lost market share, really? Was it the ca ptive financials or others?

So, before the different segment s, which we created, we were very focused that we wanted to diversify from the MHCV exposure and diversify the overall book in the vehicle finance segment. That's number one. We also saw that this segment was occupied by NBFCs in a large way and the leading NBFC had a very large market share of 11% to 12% at that point of time. We thought it was an opportunity because we had the distribution and the capability and the dealer network to get into this market. I have Sriram who runs our vehicle finance.

The main NBFC, which has lost the market share is one of the captive NBFCs which has lost market share in OEM of that captive NBFC and then we have also cornered some market share from leading NBFC in other OEMs.

Next question is from the line of Rikin Shah from India Infoline.

Just have one question now on the OpEx, particularly. So, with the investments on the human capital side, branch additions, digital capability buildup as well as marketing, how do you envisage the cost-to-income ratio to improve by 3%, 4% points in the next couple of years?

So first of all, if you have to invest in a retail business, the costs are upfront while the operating leverage comes over a period of time. We are investing in new lines of businesses like merchant acquiring, NRI, affluent, mortgage business, affordable housing etc. So, we've invested in these businesses and digital. I think, all these are still subscale businesses. These businesses will start playing out in the next two to three quarters, you should start seeing some improvement in our cost-to-income ratio. Our cost-to-income ratio will go to 45% to 46% before it comes to 41% to 43%. That is where, by year 3, we believe our right cost -to-income ratio will be between 41% to 43% for a bank of our size.

So, the OpEx will continue to be elevated, but the income will kind of ki ck in and which will drive the moderation. Is that the correct understanding?

So, let me put it in another way. I think if the digital businesses play out, the Opex will moderate. In the initial stages of build-up of the digital businesses, the Opex is elevated. But over a period of time, as you fine-tune your digital businesses and your capabilities, the cost of acquisition of an account goes down dramatically. For example, in a credit card s, when we started the digital business, we were about INR6,000 per card acquisition. Now we are at INR1,800, and we should get down to about INR1,000. That's where the real advantage of a digital business comes into play. We are doing a lot of campaigns and understanding what quality of client is coming in, what is not coming in. So, you will have some cost , it builds up over six to nine months, you will see the fine -tuning of that portfolio happening. Now let's go to other lines of businesses. In the initial phases, mortgage business doesn't create any result, they are 100% efficiency business in the initial phase. As you grow and get your book above INR5,000 crores to INR7,000 crores, the operating leverage comes into play in a mortgage business. Today, the operating leverage in the mortgage business is negative. It's a negative carry. So, I'm fine with it as long as it supports my liabilities and it grows, because it's an annuity- based business. So, we have invested in new initiatives, new branches and as long as those play out over a period of time, you will start seeing the revenue growth happening. Of course, the increase in cost will not be to the extent what you are seeing right now. So, increase in cost will be moderated, to be less than the revenues. So, the negative carry which we were seeing at this point in the revenue growth at 17% to 18% and cost growth at ~25%. Going forward, you would see revenue growth at ~20% and cost growth at 10% to 11%. That's how it will happen. The negative carry will go away.

Ladies and gentlemen, we will take that as a last question. I now hand the conference over to

for closing comments.

So, thank you for participating in the investor call. As usual, Indrajit and me are available for any clarifications or further discussion, which we want to have. Thank you, and God bless.

1. Gross Slippages Details

BU (Rs.cr) Gross Slippages (Standard Book) Gross Slippages (Restructured) Gross Slippages (Total)

Q2FY24 Q1FY24 Q2FY24 Q1FY24 Q2FY24 Q1FY24

CFD 443 502 56 80 500 581 MFI 335 336 9 33 345 369 Other Retail 397 363 10 19 406 382 Corporate 206 43 8 - 214 43 Total 1,382 1,244 83 132 1,465 1,376

2. Segment Wise Restructured Loans

BU Sep-23 (Rs.cr) Jun-23 (Rs.cr)

CFD 910 1,182 MFI 29 85 Other Retail 311 380 Corporate 449 327 Total 1,700 1,974

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