Q3FY23 CCT Notes
MISC.
We serve 7.3 million customers through 607 branches and an employee strength of 17,000.
Board will identify next CEO and he will work with me over next year to succeed me,
Growth
This quarter, even post-implementation of the new credit MFI norms, we disbursed INR 4,838 crores and almost another record from the previous quarter. The system took a little while to settle down with the new norms but now all is back to normal.
This quarter, even post-implementation of the new credit MFI norms, we disbursed INR 4,838 crores and almost another record from the previous quarter. The system took a little while to settle down with the new norms but now all is back to normal. In fact, December ’22 was the highest ever monthly disbursement for Ujjivan. Our gross loan books grew 5% sequentially to INR 21,895 crores
Asset Quality
total write-off of INR 179 crores
On the asset quality, our collection efficiency continues to be around 100%, taking our PAR further down to 4.9% from 6.1% as of September ’22. If you look for year-on-year improvement, it is around 1,000 basis points. As of December ’22, our GNPA is at 3.4% and NNPA is just 0.05%. Also, our SMA book, as well as restructured book have shrunk further indicating the reduced stress. The restructured book is now just INR 302 crores with collections, almost in line with the overall book.
Floating provision is governed by RBI norms. So it really depends on when the Reserve Bank of India allows us to take a call on floating provision. We have represented this matter to Reserve Bank of India and we are waiting for a response. So we have to just wait till RBI comes back to us, because this is under a regulatory guideline.
Deposit
Asset growth was outpaced by the growth of our deposits, which grew at 14% sequentially, registering the highest ever quarterly inflows of INR 2,806 crores. Growth in deposits is in line with our guidance of reducing the CD ratio and bringing it closer to 80%, in line with the rest of the banking industry. Our retail deposits grew 15% sequentially and CASA grew 10% sequentially in a market where most banks are witnessing negative CASA growth. I believe this underlines our efforts towards building a granular liability franchise
So we have not taken any TD rate hike after November. The last we took was November and after that market has seen a decent amount of rate hike and we have not been taking rate hikes. We are still seeing very good flow on our liquidity side, our deposit intake, we just mentioned, Mr. Davis mentioned in his speech also, this quarter was very good in terms of overall deposit inflow. In fact, we got INR 2,800 crore of deposit inflow. And in January too, we saw very good amount of deposit inflow. So we haven’t taken rate hike. And as of now, we are feeling — we feel comfortable with that…
Guidance
We expect Q4 ’23 to be similar to Q3 ’23.
Financial year ’24 branch addition would be close to between 50 and 70. Focus is to expand in deposit-rich catchment areas.
Overall, we expect to grow our gross loan book by about 25% in FY ’24
Will focus on CASA to control pressure on NIMs due to COF increase. CI ratio will be kept in control. FY23 exceptionally good in credit cost. Not be repeated. Next year we expect provisions to move up towards 1% on average gross loan book and recoveries though significant, this would be lower than financial year ’23.
Current focus was on quality customers than quantity and thus ATS has increased. Future growth will be through new customer acquisition.
we are developing several of our secured products, which will be launched into the market next year, that will help us. And we are also growing our secured housing and MSE portfolios. There are some system changes, which are taking place right now, which will help us to grow these portfolios faster.
So in the short-run, what has happened is that, post-COVID, we were more prepared with the micro-banking business as an overall to — to come out of COVID. So that is why it has grown faster. But eventually, the other businesses, the secured portfolios will have to catch-up and overtake in terms of rate of growth, but micro-banking will continue to be an important part of our portfolio. And as I said, eventually, in five years or thereabouts, we are looking at a 50-50 breakup between secured and unsecured debts. the micro-banking portfolio is doing much better. We also need to see that the micro-banking portfolio is much more profitable also and giving us that kind of income that is required for the business to invest in all other businesses that we have.
So today, about 26% customers pay us digitally. This not only is convenient for our customers, but at the same time, it reduces your opex as well. As far as long-term numbers are concerned, we are looking at first looking at the milestone of 30%, but the data which is available in the market, that says that close to 40% to 45% customers at this point of time have smartphones, and we are targeting these customers in the next financial year, and this number will gradually increase. So we are looking at gathering more and more customers into a digital repayment so that the entire process of collection becomes much more inexpensive.
In this kind of a business is 2.25% to 2.5% kind of a sustainable ROA is easily manageable. And yes, and with a few years being exceptional like current year was a good year for us as an exception. So we are having that 4% kind of a return. And ROE is largely a factor of your what kind of capital adequacy you are maintaining.
Expect 300 cr in Q4, H2 600 cr, FY23 – 1200 cr PAT.
I mean, definitely the pricing on the secured book is lower than the micro-banking book. But we hope that the credit quality and other aspects will also enhance – the longer-term return on assets will be around the 2%, 2.5%, which is what we expect. And also the return-on-equity will have to be in line with what we are expecting from the market for this sort of thing. But the main thing is that, we build a balanced book and the risk is mitigated through this process.
We are turning around. And this year, we have had fantastic recoveries. Our collection team and our credit team have worked extensively with our customers. And what we are seeing is perhaps second to none in the industry, at least definitely in the small — SFB space. So I think that is helping us. Now, this cannot — this is a very unique situation. And when we come to a more normal environment next financial year and beyond, the things will be different. And we’ll be operating at a normal thing, not at current levels of profitability. It will come more normal profitability. But we expect the business to continue to do well and go back to what we were doing pre-COVID days in terms of how we were operating at that time. Our profitability was good, and the business was doing well. So I think when we get back to normal conditions, that is what we are aiming for.
Maybe the interest rate environment, so far we are not seeing a problem with loan growth. And that, I think, is not just us, the whole industry is continuing to see because we are coming out of COVID and there is a demand for credit. So I think that will continue into next year as well. Now if interest rates continue to remain high throughout next year, then we’ll have to see how to address that situation. But the whole industry is expecting a turnaround or a decline in interest rate to start sometime in the second half of the financial year, definitely. So once that happens, I think the credit demand will continue to be sustained.
Merger
Now an update on the merger with UFSL. As per the update published by SEBI on their website, basis our submission of scheme documents with the exchanges, the NOCs have been received from both the BSE and NSE on January 6th, and SEBI is in the process of seeking clarification from other regulatory bodies. Further, Reserve Bank of India has given us notice to our application, which was uploaded on the exchanges last night. Once we are in receipt of the SEBI clearance, we will proceed to file the application with the NCLT. On submission of our application with the NCLT on receipt of their requisite regulatory and shareholder’s approval, we will positively expect to get the proposal — the proposed merger completed by September this year.
MicroFinance
Micro banking continues to be well backed by strong credit demand, while we did see some hiccups in process due to implementation of the new MFI credit norms, but that is all settled down now and we are seeing good disbursements.
Individual loan is something which is we offer to our customers after completion of one GL cycle, but largely, we have seen that customers opt for individual lending generally after two or three cycles. 90% of our customers in individual loans are the one who graduates from the home loans.
So yes, the entire acquisition process for GL lending. GL lending is something which is very old in Ujjivan. We have been doing GL lending business for last about 12 years. And process is — the product and process is that, as far as Ujjivan is concerned. The entire acquisition process and collection process is separate from group loan business. The customers who graduate to IL, the underwriting mechanism is very, very different which is they are in group loan. And apart from that, we have completely independent credit team right from the field to the top, which is — which has no relation with the business team and a great team besides upon ticket size and customer acquisition of GL lending customers.
We have consciously not taken on board any customers who we or anyone else have written off in the past. They are not in the qualifying list for acquisition.
So about 35% to 40% is disbursements to new customers, the NCA, and between 65% to 70% are existing Ujjivan customers
MSME
You would have noticed a small decline in the MSE book. This is in-line with what we have been mentioning since the last two calls that we are adjusting our strategy there and we’ll see growth once all changes are in place, and systems also upgraded for that.
The micro and small enterprises, we are currently in a transition phase and investing and expanding our product suites and services to be more relevant to the semi-formal and formal segment. Also, we are upgrading our technology platform to serve the customers better.
So on the MSE side, yes, I mean, we did speak about revising our strategy. We will be focusing a lot on the shorter tenure products in the strategy, going-forward and also our customer segment will move towards the semi formal and the formal segment. So this is something that we’re working on. And also we have launched the product called Prime LAP for our customer segments for the longer-term loans. And this would be facilitated also to a large extent through our growth in FinTech partnerships.
Affordable Housing
The other businesses that we have, one is housing. We are pleased to say that we have crossed the INR 3,000 crore OSP this year for housing. Incrementally, we are focusing on semi-formal in Tier 2 and Tier 3 towns. We implemented a state-wise collection collateral policy and ROI metrics and recently — and increased productivity. Consequently, the business has turned profitable. And we have now opened a couple of new asset centers as well, where housing will be operating out of these centers.
Vehicle
Vehicle finance, our IT integration is in place. We look to scale up the business in the coming year, once this is fully operational. Currently, we are doing limited business, majorly with ETB MFI customers. Now we are looking to focus on the new to bank customers as well.
Gold
Among other secured businesses, we are looking to scale up our gold loan business once the test marketing is completed and this will be done commercially across 50+ branches.
First thing is that we have entered into gold loan market. We have launched it in some branches, and we are testing, and we intend to start operation in about close to 50 branches next financial year. You are right that the competition is intense in gold loan, but at the same time, we see that in our micro-banking customers, the overlap is close to 10% to 11%, and that is a huge number. And we see that our customer is in demand of gold loans and because we are giving loan, we are also trying to offer them gold loans.
Apart from micro-banking loan, we have other customers also in the branches, including branch banking, MSE and housing, there also we see demand. And looking at the customer demand with an in-depth survey with the customers and even open market customers, we decided to enter into gold loan market business. And this will allow customers to take a one-stop-shop kind of solution where they can get all kind of loans that they need from us. At the same time, it will also help us increase our secured loan portfolio, which we target to reach 50-50 in the next five years.
And in addition, we will be launching this product in identified geographies, where we believe that it makes sense for us.
FIG
Also our NBFC lending business is doing well with Nil delinquencies
Fee Income
We are focusing on our fee income with the addition of new products like 3 in 1 account, NPS and mutual fund in FY ’24. We are confident that the new initiatives will start materializing in the second half of ’24 one by one and you will see this impact.
Competition
Overall, see, for industry-wide, there is a lot of banks, what we are seeing is there’s a lot of passon that most of the banks are doing in terms of the interest rate hike. In fact, we have not been doing that, for example, in micro-banking, while peers have passed on a lot of rate hike, we have only taken a 50 bps rate hike so far. Even in housing, like Mr. Davis mentioned, it is linked to EBLR, the increased rate that we have done for the new disbursement is around 90 to 100 bps. We have not passed on yet. So we still have that up our sleeve that we will be able to do a little bit of a rate hike, and that’s what he mentioned in his speech also that for whatever cost of fund hike is there, we’ll have to see how we increase our yields going ahead.
Good questions
And this long-term ROA sort of a thing that you’re looking in the range of 2%, 2.5% seems to be pretty low compared to where we are already at 4.5-odd-percent because it would mean essentially that even if you are going to double your asset book in three years, perhaps with 25% growth, you will still be at the same level of profit after tax or something like that. So is that overly conservative guidance? Or what is leading to this sort of a number?
So what we said as a sustainable ROA. The question was the sustainable ROA in this kind of a business. This year, as you are aware, the credit cost is almost negligible and the bad debt recoveries are quite high. That has increased or that has skewed the ROA this year towards on a higher side. But a long-term sustainable with all the changes that you’re talking about, the ROAs sustainable should be around 2.5 percent.
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