JAIPUR Jul 25, 2020 (Thomson StreetEvents) — Edited Transcript of AU Small Finance Bank Ltd earnings conference call or presentation Friday, July 24, 2020 at 4:30:00am GMT

AU Small Finance Bank Limited – Chief of Strategy Business Solutions & Transaction Banking

AU Small Finance Bank Limited – Group Head of Strategy – Treasury, FIG, DCM, Wholesale Liability & IR

* Manish B. Shukla

Ladies and gentlemen, good day, and welcome to the AU Small Finance Bank Q1 FY ’21 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Aseem Pant, VP, Investor Relations.

Thank you, and over to you, sir.

Thank you, Janice. Good morning, and welcome, everyone. We would like to thank you for joining us on the call today, and I hope that you and people around you are safe and keeping well. On the call today, we have members of our senior management, including our MD and CEO, Mr. Sanjay Agarwal; our Executive Director, Mr. Uttam Tibrewal; our Chief Operations Officer, Mr. Deepak Jain, our Chief Risk Officer, Mr. Mayank Markanday; our CFO, Mr. Vimal Jain; and our Chief of Strategy for Business Solutions and Transaction Banking and Head of Creditors for the bank, Mr. Vivek Tripathi as well as other heads of businesses who you might have interacted with in the past, and I would request them to introduce themselves as and when they answer your questions.

Before we move into Q&A, I will take a few minutes to share our on-ground experience and approach in the quarter on a few aspects. At the start, I’m pleased to apprise you that we recently concluded our 25th AGM, which was our first virtual AGM and a key milestone for us. And we would like to thank our regulators, Board members, depositors, shareholders and other stakeholders for their continued faith and support in us. On the macro front, we continue to live in unprecedented times amid the ongoing COVID-19 pandemic. And it is difficult to say when this will end. Nevertheless, compared to our last interaction on 4th May, the situation on the ground has been improving, more so in semi-urban and rural areas compared to metros.

During the last 2 months, as we moved from lockdown to unlock, we have seen a steady pickup in our operations. The number of employees in offices and field has improved to 93% by June, and we are seeing very good energy levels.

A special mention of the 14 COVID warriors who fought COVID and recovered completely, and our best wishes and support to the 27 employees who are currently recovering from COVID-19. We also extend a big salute to all AU employees for their commitment, courage, passion and positivity during these difficult times.

More specifically, in relation to our business, I would like to highlight 3 key points. First, engagement with our borrowers. Our focus in the last few months has been to understand the borrower situation and explain to them how moratorium works and its financial implications. Driven by our approach of being close to the ground and enabled by technology, our entire sales, credit and collections team joined forces to connect with respective borrowers, specifically mapped to each of them on the ground as things opened up. The experience, especially in June, has exceeded our expectations as we saw that borrowers choose to come out of moratorium despite having the right to opt for it. Based on ground experience so far, we expect further improvement in July. That being said, we believe moratorium remains an evolving situation, and customer behavior is changing every month. Therefore, while in Q1, asset quality trends have indeed shown improvement, we expect to have a clearer picture post August once moratorium is lifted.

In terms of growth, we expect it to gradually pick up as both borrowers and ourselves remain cautious with regards to the outlook. At the same time, we remain vigilant and close to the ground to meet borrowers and assess their needs and meet them basis our assessment. Second, strengthening of our Branch Banking franchise further. Being an essential service, all our branches were opened throughout the lockdown, except where there were any intermittent local challenges. And key transaction metrics have been picking up substantially.

During the quarter, we remained focused on making our deposits franchise more granular and share of retail deposits has now increased to 45%. During the quarter, we also planned an outreach program to help senior citizens and assisted in meeting their daily needs, including procurement of essential items.

Further, we used these difficult times as an opportunity to leverage our 17,000 employee base to raise deposits. We conducted virtual trainings on liability products for all bank employees and enabled them to open accounts digitally, which has effectively turned our non-branch banking staff into all-rounders, and this has opened up new opportunities for us.

We continue to refine our approach in branch banking and have enhanced our focus on quality acquisitions and deeper understanding and engagement with our existing customers. Based on our learnings, we have segregated our core markets — our markets into core and urban, with an aspiration to be a leading player in the core market by leveraging our asset dominance there. To add a bit more color here. By core, we mean smaller centers in rural, semi-urban areas, which typically have a local economy built around agriculture and small businesses and where we typically lend in.

Larger centers, which have more advanced infrastructure such as malls, airports, et cetera, are defined as urban. We see significant opportunities for us to grow in both of these markets, though with different strategies adapted based on our strengths and resources. In this respect, it is indeed encouraging to see that as on 31st of March 2020, 26 of our branches were above 5% market share of total banking system deposits in their respective centers. Thirdly, strengthening our balance sheet further. We continue to adopt a cautious stance in terms of liquidity management and have created adequate liquidity cushion in this uncertain scenario. We have also made additional provisions related to COVID-19 to fortify ourselves against adverse asset quality outcomes that could arise due to the ongoing pandemic.

To conclude, we believe the bank’s performance has been satisfactory, given the challenging context. We wish you good health and hope for better times ahead. Being into essential services, we remain deeply committed to serve our nation and society with unwavering dedication and agility.

With that, we will now open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take the first question from the line of Bharat Shah from ASK Investment.

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Bharat Shah, ASK Investment Managers Limited – Executive Director [2]

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I must say, I think this is a remarkable performance in a very difficult time, (technical difficulty) so quickly in such uncertain and challenging times. So really remarkable achievement by AU team under your leadership. One key issue that I wanted to touch with on, on all those aspects whether asset quality, the cost control that has been exercised, other parameters of ROE, everything has been robust. On the fee income, the core business fee income, I wanted to have some understanding. That number understandable in a challenging quarter where disbursements are difficult. But would you throw any light as to how you want to ramp it up because that number kind of fell short of expectation?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [3]

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Yes, Bharat bhai. So good morning. I hope everybody is safe and healthy. Again, as we all know, these are very uncertain, unprecedented times for everybody. So in last full quarter, literally 70 days, nothing was moving and — but AU kept its head high, energy high. So what we’ve done in last quarter was only around, do some collection, do some engagement with the existing customers, whether it was in deposit customer, whether it’s a loan customers. So disbursement never happened, honestly, because — and we never tried also because nothing was clear on the ground, neither customer was coming and looking for credit. Actually, everybody was looking actually to look more into terms of stability, and whether we can continue our business, whether the whole continuity comes back. So I think in the last 90 days, whatever we have done, it is just and shadow of what we are doing from last 3 years, and it really helped us. Our past really helped us to get this kind of numbers this quarter. So I would say, if you really see our collection efficiency, the whole activeness around borrowers kept on increasing month-on-month right from April to May and June. That is very encouraging for us because as of now, the whole idea is to really maintain that quality, maintain the customer, maintain the whole NPS, right? So that we are doing fabulously well, honestly.

The second priority was to keep your team morale high because there was a lot of challenge around the whole — the narrative around COVID, right? So we’ve done that also very well. And fortunately, nothing adverse happened in AU as of now. So I would say so far so good. Other thing, liquidity flow — a lot of liquidity happened because there was no disbursement. RBI also put in a lot of money in systems. So in that also, we actually had to keep more money being an SMB to manage our whole scenario around liquidity, right? So — and of course, when you are not doing any business, so — and our cost is around 70 fixed, 30 variable, that saved us a lot of money in this quarter. I won’t say it is a deliberate attempt. It just happened because no incentive was paid to the system, no incentive was paid to the vendors or dealers or your associates. So — and no traveling happened. So naturally, there was — a lot of expenses were reduced, right? So — and of course, the drag can be the asset growth, which you are talking about, but we never attempted, honestly. And we really took that quarter as a quarter of learning. How we really want to build quarter 2 and quarter 3 from that learning.

Of course, the — still, I would say, the clarity on the portfolio is still not clear, but signs are good. We have done a better job around that. And of course, we have to also be at the cost of additional liquidity. So I think these are the broad parameter, but I would say as soon as growth comes in, as soon as disbursement starts happening, our other income will be again stable, right? So I would say I’m very satisfied around the way the whole thing ended in June end, actually. It was a nightmare in April and May, but how we’ve done our closing in June is giving us good encouraging and good kind of energy to move forward with more positivity.

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Bharat Shah, ASK Investment Managers Limited – Executive Director [4]

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No, without doubt, that is what I said, Sanjay. This is a remarkable performance in extremely trying and challenging condition, make it move around so many parts is never an easy affair. So full congratulations to AU team. My question was more on a longer-term basis. Other income or the fee income is a very strategic part of the bank’s income. And to create a multiple streams through which other, the fee income can be extracted, can you keep a pretty — over a period of time, it gives a strategic balance to the bank’s sort of lending activity and it creates a possibility of an improved return on equity. So from that perspective, I was saying, I understand in particular profile it obviously was really challenging. But more on a longer-term point of view, core other fee income is developed from the bookings. That was the comment. And secondly, when do you think we’ll be ready for growth?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [5]

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So Bharat bhai, 2 questions. So the first one, right, as you know, the whole SFB design has happened around, do inclusive banking, right? So we have certain obligation to fulfill for next 18 months, which is around the loan size lesser than INR 25 lakh and blah-blah things, for IT sector more than 75%. So the whole motive of SFB is to do inclusive banking than to only earn, honestly. But I take your view, and we already had an insurance. We already had a third-party wealth product. We already had a PSLC. We already had a treasury operations. So in that sense, I would say bank is complete, and we have to reinforce.

So for example, we might looking for more partners in insurance, rather in life and motor and health and whatever way. So beyond a point, honestly, AU is not thinking to build a more fee line because we really want to focus on our core, which is our lending into the semi-urban and rural markets, where the whole purpose of SFB is. Yes, we will come out with some product like credit card, right? Because we feel that the rural India, the semi-urban markets has a lot of potential. But I think that also will take some time to really get the real ROE benefit on AU balance sheet, right? So honestly, we don’t have large, large options like universal banks. But I’m pretty happy because if you really see, Bharat bhai, over the years, AU is — AU earns more from their assets rather than the other income. And we really want to continue that thought process till we become universal. And so that’s one thing. Second, your question around growth. I think it’s so difficult to predict as of now because we have just completed a good 70 days of — maybe 50 days of the unlocking, right?

And still, you see a lot of challenge around the normalcy. Some states goes for another lockdowns. But the hope is that the confidence of people is coming back. And particularly, our area of operation. We are having only 2 challenges. One may be in Pune, one may be in Mumbai, and one maybe in Surat, right? Other than that, entire our operation is back, back on the road. People are coming to their offices. So I feel it’s a first step of people coming to their office. Now second would come when they will look for the growth. So once they look for the growth, bank’s growth will happen. So I would say I will take this quarter 1 more to really comment on our growth prospects. But one thing is sure, post this pandemic, lot of things will change, whether it’s digital, whether it’s about building your own business again and new opportunities. And AU will be there to handle those opportunities because we are becoming more and more stronger in terms of our franchise. And this kind of pandemic, this kind of event actually makes you more strengthful to handle crisis. So I’m very hopeful that once things become normal, AU will be the — one of the few banks who will take that opportunity in a right spirit.

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Bharat Shah, ASK Investment Managers Limited – Executive Director [6]

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Sure. No, I appreciate. One last point from my side. While lending, of course, there’s been support to AU and that is the way the AU has built itself over a period of time in its core market. But I would say, as AU gets bigger, the opportunity to stimulate income — the available income streams out of insurance products, investment products and the payment products, I think those 3 expanding various verticals within each space and deepening each of the spaces, I think is a worthy idea in my opinion. But of course, you have to make just the offer (technical difficulty)

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [7]

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So Bharat bhai, I’m saying insurance, investment and payments, all are key focus area for us, but we do have to do other things. We have to build deposit, we have do build assets. So — and being in a new bank, it’s not easy to sell investment product. People need to convince around brand first. And then took all these products. So I think we are — we have already put a lot of foundation around it, but need a little bit more patience to really get to the next level around it.

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Bharat Shah, ASK Investment Managers Limited – Executive Director [8]

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Hearty congratulations again. This is a remarkable feat of performance by AU. That’s all I have, Sanjay, and all the very best.

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Operator [9]

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We take the next question from the line of Karthik Chellappa from Buena Vista Fund.

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Karthik Chellappa, Buena Vista Fund Management, LLC – Investment Analyst [10]

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Congrats on a great quarter. I have 2 questions. If I were to just look at our loan mix, especially in the small- and mid-corporate segments, one segment that has seen significant degrowth year-on-year is the NBFC segment, will be around almost 40% year-on-year degrowth. This is despite the collection ratio in NBFC actually doing pretty well, almost crossing 100% in June. So just wanted your thoughts on why is this segment seeing a lot of defocus when the collection trends are actually positive?

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Vivek Tripathi, AU Small Finance Bank Limited – Chief of Strategy Business Solutions & Transaction Banking [11]

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So Vivek here. NBFC, as you would know that last 2 years, post September 2018, actually, things have been very, very different, right? The entire space has gone through a lot of confidence crisis, liquidity issues and ALM issues largely on the mid- to larger-sized balance sheet. So it’s not that we didn’t want to be there in the space. But for us, it was never a franchise business, it was always driven by opportunity. And we continue to lend. We continue to evaluate proposals based on purely merit. So as we speak today, NBFCs are sitting with a large amount of liquidity because of TLTRO support. There was support from SIDBI, NABARD, NHB. So the entire space, even the smaller one got enough liquidity. So there’s a couple of prepayment and foreclosure also happened in this book. It is not a complete natural drain down of the book. It is also that some of the entities preferred to repay because they were sitting on surplus liquidity.

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [12]

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Yes, Karthik, one more there — to add to Vivek’s view that we being a bank, we don’t have focus on NBFC funding. We were doing as NBFC from 2015, but once we became bank, we thought that overall relationship around NBFC helps us to build bank. It’s not only about lending, it’s about nonfund based, the whole enterprise salaries, the banking of the promoters. So we took that view. That is why we are doing NBFC funding. And overall, also, we have capped the 10% on our cap — there is a cap of 10% on the total assets around NBFC funding. So if we get the right kind of cases, right kind of borrowers, we’ll be doing that. And — but our prime aim is to do — really do that retail lending, right? So that’s the way that AU want to build their future.

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Karthik Chellappa, Buena Vista Fund Management, LLC – Investment Analyst [13]

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Okay, very clear, Sanjayji. The second question is, if I just look at the Wheels segment, where the collection ratio is hovering around 83% for June, could you give us a sense of the top segment wise, which are the segments that are significantly below this average and underperforming, either from a segment or geography perspective?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited – Chief of Wheels [14]

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Karthik, my name is Bhaskar, and I look after Wheels. It is essentially the commercial passenger segment, which I — here, broadly get categorized as the car taxi, which is the one which is a little lower than the normal average. And that also is a little more in Bombay, Delhi, Pune, Ahmedabad vis-à-vis the rural market where we generally operate. And it is more about some — it’s a little more about uncertainty, lesser to do from a crisis, crisis point of view. It is just that temples are closed, marriages are not happening, people are not moving. And hence, so are the operators wanting to just be, let’s call it, cautionary, and they want to keep the money with them, not that they have a lot, but then they just want to hold on till normalcy comes. So that is how it breaks between geography, and that’s how it breaks between profile.

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Karthik Chellappa, Buena Vista Fund Management, LLC – Investment Analyst [15]

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Excellent. Just one further point to Sanjayji and his team. The disclosure on the collection month wise is very, very useful. So that’s fantastic. But there was a lot of other disclosures, which we used to give out in the past, like disbursement segment-wise, gross NPA segment-wise for Wheels, SBL, et cetera, that was missing this quarter. It would be nice from the next quarter, even these details are made available so that it’s useful for our tracking. That’s all from my side. Wish you and the team all the very best for the following quarters.

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Operator [16]

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We take the next question from the line of Amit Kumar Premchandani from UTI.

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Amit Premchandani, UTI Asset Management Company Limited – Fund Manager [17]

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I just wanted to understand the difference between Slide #25 and #26 in terms of collection efficiency?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [18]

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Yes, you can go ahead with your question.

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Vivek Tripathi, AU Small Finance Bank Limited – Chief of Strategy Business Solutions & Transaction Banking [19]

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This is Vivek here. The Slide #25 talks about absolute collection efficiency, excluding the any foreclosure, and we have given product-wise detail, what was the billed amount and what is the collection of month of June. And it also gives comparison vis-à-vis of April and May, how the things — the collection efficiency at overall level as well as the product level moved. Wherein the Slide #26 talks about in terms of my absolute percentage of gross advances in that book, how much of that paid in month of April, month of May and month of June. So it talks about customer activation, actually.

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Amit Premchandani, UTI Asset Management Company Limited – Fund Manager [20]

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Sir, just to understand, in case of SBL, while 55% was the number of full in April, which moved to 67% in June. But if you look at Slide 25, that number is 95%. Why is this difference?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited – Chief of Wheels [21]

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Collection efficiency.

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [22]

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Yes. So these are 2 different thing, right? You can’t correlate with — activation with the collection efficiency. So 95% denotes that out of the INR 223 crore we need to receive, we got to — we got around INR 211, right? So there would be a customer who would have paid you all 3 installments also. So it’s the total collection and it’s the number of customers. So you can’t correlate with the customer activation versus collection efficiency. So collection efficiency generally we get around 95% to 100% every month in a normal time. So we want to tell you all people that in the month of June, that percentage is 90%, right? Of course, there was a lot of overdue in the month of April and May, but that also helped the collection efficiency to 90%. But I think the customer is coming and paying in the month of June, which is still in moratorium, is a sign of resilience, is a sign of normalcy, right? And in terms of customer activation, 67%, that — in that particular month, June, 67% of the book were paid at least 1 EMI. So to put it simple, if we take example of SBL, which says that 67% of customer in June had paid actually 95% of money in month of June.

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Amit Premchandani, UTI Asset Management Company Limited – Fund Manager [23]

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Sir, just to get — from a clarification point of view, you billed INR 223 crore and you got INR 211 crore, so 95%, that is fine. In June, the next slide, 67%, the billed number is same as the EMI number?

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Vivek Tripathi, AU Small Finance Bank Limited – Chief of Strategy Business Solutions & Transaction Banking [24]

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No, I’m sorry…

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [25]

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Billed by number of customers.

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited – Chief of Wheels [26]

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Billed by number of customers.

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Unidentified Company Representative, [27]

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No, no, no. This is a book.

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Vivek Tripathi, AU Small Finance Bank Limited – Chief of Strategy Business Solutions & Transaction Banking [28]

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See, let’s say, INR 100 crore of mine, SBL book is INR 10,500 crore, out of which INR 6,800 crores, INR 6,900 crores, close to INR 7,000 crores, customers have paid the EMIs in the month of June. How much was the EMI, which was paid, which was INR 211 crore? On an overall book, which was — there was a billing of INR 223 crore. Considering that there was no moratorium given to any of the customers. So just to make you more understandable, like if there is a — in a normal time, generally, 80% of the books were paid in every month. And in this June, it is around 67%. So idea was to, again, communicate to you people that the normalcy is coming because if a normal month, 80% books were paid, we’re getting 67% now, right? And we expect in July and August, this 67% touching maybe around 72%, 73% in July and maybe 76%, 77% in the month of August, if everything remains like what we are seeing as of now, right? And this collection efficiency can be around 100% in the month of July itself, right? So this means that the customers who are able to give, who are able to sustain is paying, right? And of course, there are certain group like 10% of our book, which is not paying, it still has to be addressed.

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Amit Premchandani, UTI Asset Management Company Limited – Fund Manager [29]

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So the disclosure are very good, and thanks for that. I was just trying to understand. Another question was, sir, on the disbursement side, you have given overall disbursement number, but any specific reason why have you not given the other disbursement number, the breakup? And if you can just share it with us now?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [30]

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So we’ll share you off-line, but the whole idea is to tell you guys, we never focus disbursement. So if we are not showing that, that means it never happened, honestly. So I would say it is more of a TLTRO, it is more or often OD against FD. We’ve done close to INR 300 crores in the retail asset, maybe to INR 300 crores around SMEs. So honestly, it is just 30%. So we thought the — because we never focused disbursement this month. I think no company focus, honestly. So it’s not about selling anything. We can off — share with you off-line. So that’s the number, right?

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Operator [31]

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We take the next question from the line of Anitha Rangan from HSBC Asset Management.

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Anitha Rangan, Hsbc Asset Management (India) Private Limited – VP of Fixed Income [32]

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I just wanted to understand in terms of like collection efficiency, the numbers which you reported for June, like close to 90%, and some sectors are even like close to 100%. What is the difference between you and the industry? Because at the industry level, none of the players actually have reported such strong collection efficiency. Do you think it is a definition of the business? Or it is a definition of a geography? Can you throw some light over there?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [33]

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I’m sorry (inaudible). .

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Vivek Tripathi, AU Small Finance Bank Limited – Chief of Strategy Business Solutions & Transaction Banking [34]

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So I will not be able to — Vivek here, I’ll not be able to comment exactly how industry has reported. What we want to say that, that team was there on the field. And if you see our numbers in April, May, vis-à-vis April, May, June number significantly improved because businesses got open, people who are holding back the money and there was a — obviously, a comfort in posturing that what will happen, uncertainty in the mind. Lot of that uncertainty would have gone out. So that people have paid — maybe instead of clearing the June month EMI instead, they would have cleared April, May instead. So instead of opting for a complete, 2 months or 1 month moratorium, they would have done a calculation on the actual interest outgrowth would be over the period of loan tenure, et cetera. So they would have paid. As far as the product-wise this thing is concerned, we’ve already given complete breakup. The performance in terms of geography, if I have to take a 2 larger books, which is Wheels and SBL, which is a larger billing book as well. So there is a difference of between the semi-urban and rural market. But that difference is more from an activation point of view. Collection efficiency point of view, that difference is not much. But your customer activation is still there were — still gap of being metro there are — it’s actually very, very small book line. There is a 15%, 16% difference of customer activation between both the geographies.

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [35]

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Yes. So I just want to add here because a lot of credits should go to the team also. And one advantage we actually enjoyed that we being a Jaipur headquarter bank, our approach was always to really not to sit at home or work from home. We actually built an environment where people were really confident to operate from office. If you really see our whole activation of employees over demand, in April, we were around 30%. Then we — in May, it was around 60%. In June, it was 95% people working from offices, right. And the semi-urban and rural markets really opened up from the 20th April onwards. So I think we built that momentum and which really helped us in the month of June. And we actually told our customers that we are there to help you out in case you need money in future to come. But why you want to hold your moratorium because it will actually have your additional cost. It is not free. So I think a lot of people got convinced. And I think a lot of companies which got on the field in the month of June, I would say they’ve got a similar kind of collection efficiency.

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Anitha Rangan, Hsbc Asset Management (India) Private Limited – VP of Fixed Income [36]

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Yes. So just one more question. Also, can you just throw some light on your liquidity, please, like, in terms of, like, what are the — I mean you have your balance sheet liquidity, but also in terms of your liability and your ALM profile?

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Yogesh Jain, AU Small Finance Bank Limited – Group Head of Strategy – Treasury, FIG, DCM, Wholesale Liability & IR [37]

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This is Yogesh Jain. So I think liquidity, as we mentioned in March, disposals also that we were maintaining liquidity of around INR 5,000 crores, that’s more because of our stable deposit profile and also less disbursement momentum. So currently, our liquidity is around INR 7,000 crores. So we are carrying around 3,000 crore more liquidity what Sanjayji mentioned in his preliminary statement also. So we are putting some additional cost on liquidity, but we are fine given uncertain time. But in terms of our ALM profile, it’s broadly matched what we have mentioned earlier also. So within regulatory and Board approved limits, we are maintaining our ALM statement.

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Operator [38]

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We take the next question from the line of Chirag Sureka from DSP Mutual Fund.

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Chirag Sureka, [39]

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My question is actually a follow-up from the previous set of questions, it’s around the deposit base. There is both growth in retail as well as wholesale deposits. So on the wholesale deposits, what I wanted to know is there were other private sector banks that faced volatility in deposits in March and April post the Yes Bank issue. Did you face any volatility? Or what is your customer base there? Again, I wanted to know your secret sauce in retail also. In terms of — it’s a strong growth. And so what is the demographics of the customer? Are they second account holders, senior citizens looking for a higher rate? How do you — what is your strategy on retail deposits?

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Unidentified Company Representative, [40]

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Chirag, (inaudible).I’m the Chief of Products with — on liabilities with AU. So 2 parts of your question. One, whether we face any volatility on the wholesale deposits after the Yes Bank episode and during this period. So obviously, whenever any impact in the banking industry, like the Yes Bank situation or DMP happens, we being an SSB, new player in the banking industry, there is a question in customer’s mind. But like we mentioned in our last quarter call also, we were very proactive in terms of our engagement on the ground. Our largest book has been retail and we operate our geographical spread as being balanced and largely focused towards our core markets because of which, we actually grew in that period of March also when that entire Yes Bank crisis was going on. There were certain questions from certain institutions, which were typically where the decision-makers were larger. But then all those questions were answered. This is our proactive engagement with the customers. And practically, there was no stress observed during that period of time. Then our larger focus this year, as we have also shared in the initial commentary, has been towards the retail growth. This quarter, specifically, if you see, we have practically not grown on the wholesale deposits or the bulk deposits at all. And that has been intentional. When you see my deposit growth quarter-on-quarter, 4%, this deposit growth easily could have been much higher, but we intentionally took the route of not taking rate-based, high-value deposits or bulk deposits, which are usually rate oriented in nature and not relationship oriented. The entire focus is to build relationship-oriented granular retail business on ground, which is reflected very clearly in our retail deposit and savings growth this quarter. Your (technical difficulty) about the color of the deposit of the profile. Yes, senior citizen being an important part of the India’s demographic deposit profile, it is also an important profile for us. But it is not largely rate oriented because if you see my retail rates are very competitive in the industry. I am offering my retail deposit rates or the saving deposit rates at par with the — these net in line after the top 4 banks in the country. And that is a completely engagement driven or a transaction engagement driven approach by which we are acquiring customers on the retail side. We have moved strategy towards acquiring profile based, a little more quality oriented acquisition. So yes, we are focusing on profiles like doctors, house wives. We are focusing on professionals. We are focusing on segments where salaries segment. We have specifically defined direct acquisition channels for NR, which is a very important profile in the savings landscape task business, which is clubbed in association, societies and club is an important part of our acquisition strategy. Apart from that, the specific profile-oriented businesses are something where this entire year, the entire focus is on. And this is — this will be completely retail and granular in terms of acquisition and relationship engagement.

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Unidentified Analyst, [41]

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Okay, sir. So to summarize this, you’re just basically spreading your wings along various of your initiatives is what you’re saying broadly. You just said that just focusing on that.

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [42]

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Yes.

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Operator [43]

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We take the next question from the line of Ravi Singh from HSBC.

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Ravi Singh, HSBC, Research Division – Senior Analyst of Banks Research [44]

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So again, question on the slide 25, 26. Is the right way to look at it is that on SBL, if 67% of customers pay full, they also made payment for the previous EMIs, and hence, the overall collection efficiency is higher at 95%?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [45]

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Absolutely right. Yes, that’s absolutely right.

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Ravi Singh, HSBC, Research Division – Senior Analyst of Banks Research [46]

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And when you say that average monthly basis, customer paid full is 80% and 5% part. So rest 15% are those customers with by habit, miss 1 or 2 EMI and then later on pay together before becoming NPAs?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [47]

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Yes, yes, yes. Correct, correct. So comparison is basically 18% to 67%, right? So in a normal month also, we only expect 80% people to pay us. And in the month of June, 67% people paid us in spite of the write-off moratorium. So the comparison is that that normalcy is coming up. And the main challenge at this moment is only about forecasting your asset quality, right? We all know that India will have growth, India will have — need credit, right? But is it just a matter of time when this pandemic gets over? Or we all control our fear around it, that will come. But I think that damage can be only around asset quality because of that 2 months lockdown. But I think that we — I’m very sure that it is not that large level. The June data showed that, and of course, July and August will again reinforce that as soon as normalcies coming in, people have sustainability, people have resilience to pay their debt. So I think that’s a great sign, honestly. That’s a great sign.

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Operator [48]

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We take the next question from the line of Abhijeet from Kotak Securities.

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Unidentified Analyst, [49]

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First question is on collections. If you could quantify the absolute amount of collections in the first quarter? And a related question is, if you could also share the inter-quarter movement of the moratorium book at the end of April and May? And then a clarification on moratorium is, would it be fair to assume that the 25% of the AUM, which is not paying either part or full, also includes the moratorium book?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [50]

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No. So our stand at moratorium is still very open because it’s a very continuing evolving story. As you know, moratorium we started from March, right? So people opted out for moratorium in the month of April, but they paid us in the month of maybe May and June, somebody paid in April, somebody opted out in June, July. So for us, it’s so difficult, honestly, being a retail asset organization where to assess who is taking moratorium, who is not taking moratorium because it’s so difficult to actually get a hold of customer and ask him that give us an application, (technical difficulty) give us all those things. So we haven’t gone to that way. We have said that our old 10% people, we consider them as a moratorium because they haven’t paid us, right? Otherwise, other than that, the customers are paying us, and those customers are zigzag, right? So I think the final call on moratorium would be only taken on 1st of September if moratorium does not get extended, right? On that day, the AU has the philosophy to talk to their customer, whether they want to reschedule their account for future period or they really want to have a default and pay us in maybe as a default customer, right? So it’s difficult to answer as of now. We have given our clarification around 10%, 11%, which is a complete moratorium. And the other question, I’m not able to understand.

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Vivek Tripathi, AU Small Finance Bank Limited – Chief of Strategy Business Solutions & Transaction Banking [51]

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So collection for this quarter, INR 2,200 crores?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [52]

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Okay. So the actual number you’re asking?

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Vivek Tripathi, AU Small Finance Bank Limited – Chief of Strategy Business Solutions & Transaction Banking [53]

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No, actual number — from what we hear — what we could understand from your question if you want to know the actual collection being done amount wise in the last quarter? So that is around INR 2,200 crores.

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Unidentified Analyst, [54]

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So just — sorry to insist on this one. When we look at the ALM tables in the annual report, the scheduled collections were somewhere around INR 1,300 crores to INR 1,400 crores. So just a little surprise, given the difference between the 2 numbers.

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [55]

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Sorry, which table you are in…

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Vivek Tripathi, AU Small Finance Bank Limited – Chief of Strategy Business Solutions & Transaction Banking [56]

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No. You must have seen in the ALM table you are saying, the INR 1,300 crore number? INR 1,300 crores because ALM, you have to show the schedule. So there’s — since the — since lockdown moratorium had started from 27th of March. So in ALM, we only take a part of those payments, which are actually due through systems. So a lot of customers have paid later on, who have taken the moratorium earlier. So in ALM profile, you cannot show that this amount is scheduled to be paid once the customer is opted for a moratorium.

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [57]

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Correct.

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Unidentified Analyst, [58]

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Got it. Sir, second question is on the Wheels book, if you could share the disbursements in the cash on Wheels? And would it be fair to say that the entire cash on Wheel book is towards the existing customers?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [59]

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So this quarter cash on Wheel?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited – Chief of Wheels [60]

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Perfect. Abhijeet Bhaskar here, Abhijeet. Firstly, we did not disburse anything on cash on Wheels in this quarter because that was a pre decided decision, number one. And number two, yes, you’re right, that it is more often than not to an existing customer. Yes.

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Unidentified Analyst, [61]

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Sir, Bhaskar, sir, just further clarity on this would be, what would be the overlap between customers using cash on Wheels and those against the moratorium?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited – Chief of Wheels [62]

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The customers who are using moratoriums are not much different than whatever is my book. It is — the behavior pattern is same Abhijeet, no specific spike or down, same derisking.

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Unidentified Analyst, [63]

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Okay. And last question is what’s — how big is the non SLR book? And is it fair to assume that some of the NBFC exposure is now kind of shifted to the investment book, given the loan book has declined sequentially?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [64]

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No. So honestly, Abhijeet there is no sense around loan book versus investment book because investment book is governed by the whole investment policy, right? So of course, the — most of the NBFCs — most of the investment books generally goes into a larger NBFCs are AAA, AA kind of rated. But this is not — it’s not a balancing act which we are doing it. It’s an opportunity like in TLTRO, the whole subject was only to do industry funding, right? So it’s not related that investment book is going up or we are reducing our NBFC book. The — both things are very separate in nature and in approach.

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Yogesh Jain, AU Small Finance Bank Limited – Group Head of Strategy – Treasury, FIG, DCM, Wholesale Liability & IR [65]

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Abhijeet, just to add, I think this non SLR book is having either AAA or AA+ rated portfolios been PSU or bank-led NBFCs. So which is completely different to what we are doing in the NBFC space, right, in our NBFC book except TLTRO book where we had that right from a regulator that it would be an NCD form only. So that is the only amount.

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Operator [66]

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We take the next question from the line of Vibha from FairConnect.

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Unidentified Analyst, [67]

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Sir, my question is again on the Slide 26. Would it be right to say that 67% of the customers have paid in full and 11%, although this is number and 11% is by value, but broadly speaking, 67% plus 11%. So 78% have — are under moratorium or have paid. And rest are habitual kind of delayers, and they will pay in time.

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [68]

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Again, we are interpreting too much. And I request every shareholder to really respect this time because this is a very evolving situation where from March to August, and the customer has right to not to pay us. So they are right, right? And customer is opting out every possible way to pay and not to pay, correct? So we are not doing any maths around it. We have just given you status as of June. So there would be a customer who has taken a moratorium for 1 month, maybe for half an EMI, may be for full EMI, maybe everything, honestly. So we need to wait for till 1st August, 1st September, to be very honest, and engage with them. But my only suggestion of view is that there is a lot of good signs. You don’t expect people to pay you now, but they are paying you. That’s the only statement I want to give here, right? So 67% people — of course, the 90% collection efficiency, which is as good as normal ones, right? And this is only 1 month data. Only June unlocking. You believe in July and August, and if you’re not in Mumbai, if you’re not in Delhi, if you’re not in Pune, you’re not in Surat, the semiurban rural markets, larger markets have opened up, right? So I believe there would be a lot of sensibility around asset book portfolio in the month of quarter — in this quarter, right? So that’s the overall message we want to give, right?

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Unidentified Analyst, [69]

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Okay. So what is your sense on overall credit cost for current year, given that 11% people are under moratorium and you said a lot of them want to pay but would pay? Is this provision…

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [70]

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So very difficult to give any number, honestly. What we can tell you is this — that, historically, our data base year ’18, year ’19, year ’20, we were around 0.35 to 0.4. We are secured — we do secured lending. We are around essential funding. We are small in nature, high in collection, high in touch and feel. So I would say, come this quarter end, based on the people who has — want to reschedule beyond a point, there would be a lot of data analytics around the whole behavior pattern of this 6 months. And then we can assess on how it came in. So I would request, give us one more quarter to have, in case lockdown — in case moratorium is not extended, right? So then I think it will be right for us to comment. But as of now, I am not that worried around the NCL ones, right? There can be delayed, but not NCLs.

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Unidentified Analyst, [71]

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Okay, okay. So would it be worse than demand? Or it will be at par with demand?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [72]

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For us, demand never was worse, honestly. If you go and see our data, I pray it can happen like demand. I can take it any day. So of course, it will be — and so if you take my honest view, I would say, it will be worse than demand because demand was only a very localized or maybe it was around for some days and then people really come back. It has more fear, right? It has broken some continuity, and still some businesses are not up and run. Some places are not up and run. So — but I hope the whole government of India, RBI, and everybody is putting their effort to again build this continuity. And of course, the 6 months moratorium, in my opinion is the best tool to manage this continuity. And so that’s why I’m saying you that people are reading too much around moratorium. If somebody takes moratorium, it will default. That won’t be a case, honestly. So I think we need to be a little patient enough to our customer and then really comment in quarter 3, quarter 4 on the real impact of this pandemic.

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Operator [73]

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We take the next question from the line of Rohan Mandora from Equirus Securities.

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Rohan Mandora, Equirus Securities Private Limited, Research Division – Analyst [74]

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Would it be possible for you to share, out of the 4 months of collection that have happened from March till June, what percentage of customers would have paid all 3 or 3 — all 4 or 3 EMIs high value?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [75]

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Brother, I’m again repeating when customer is not supposed to pay.

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Rohan Mandora, Equirus Securities Private Limited, Research Division – Analyst [76]

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So just trying to understand like, because 11% would have not paid anything from March and remaining, they are making some payment. So just to get some color on what percentage of customer would have made all the payment. Any idea on that?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [77]

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Rohan, I think — comment as of now. And we can talk off-line or wait for quarter 2.

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Rohan Mandora, Equirus Securities Private Limited, Research Division – Analyst [78]

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Sure, sir. Although sir, in case you can share some color on within the commercial segment of the passenger vehicle , like the trend that you have shown on Slide 25 and 26, what would be the numbers for that segment?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited – Chief of Wheels [79]

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I did mention a little earlier that commercial taxi — this is Bhaskar here, sorry. Commercial taxi is a shade lower than the commercial loading. Commercial loading, we do not do much of it, we have a very small book. My commercial loading is primarily a small commercial vehicle, and that is more rural. And hence, that has not — that collection efficiency is, in fact, same as our regular one. It is only the car taxi part, which is a some percentage a bit lower than the normal collection changes that you have seen in Wheels. And that’s pretty obvious. It will also come back once everything gets back to normal, that will also kind of go back to where it was.

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Rohan Mandora, Equirus Securities Private Limited, Research Division – Analyst [80]

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Sure. So in case qualitatively, you can share like what kind of income trends are you seeing in that segment? Because what we are understanding is that still the incomes are very challenged for that segment across geographies?

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited – Chief of Wheels [81]

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Yes. Silence is because in Bombay, Siddhi Vinayak is closed, Mahalakshmi is closed, Church is closed, marriages are not happening, people are not going for dinner. So the view that we have is only Bombay, but it is not so in Sikar. It is not so in Jhunjhunu. It’s not so in Latur. It’s not so in Katara. I mean people are moving, sometimes they carry people, sometimes they also can some goods. They have managed to manage. These are all driver cum owner. So they are not really sitting at home and waiting for something to happen. They’re doing something and something — they do something and they are — since these are driver cum owner, is takeaway is not looking at profit, is just looking at sustainability. Somehow, let me try and pay the EMI, so that moratorium has a cost, we go and explain that thing. And in some form, they manage to pay from their agri income or they take a loan from their father and things like that. So that is the real picture on the ground.

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Rohan Mandora, Equirus Securities Private Limited, Research Division – Analyst [82]

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Sure, sir. And sir, lastly, on the deposit side, that INR 8,000 crores of deposits were refinanced on a quarterly basis, and this quarter around INR 10,000 crores. If you could share, what is the split between, say, the retail term deposits and wholesale in this? And also just on the addition on that. And as per the ALM, the number of proportion of deposits in less than 1 year as of FY ’20 and has increased to 70% vis-à-vis 62% last year. So any specific strategies that we are following to increase the longer-term deposit incrementally?

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Unidentified Company Representative, [83]

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So Rohan, in terms of deposits, if you see from a strategy perspective, the bucket which we are driving, specifically in the 18 months and above bucket where if you see my retail term deposit has a peak rate, that is 18 to 24 months, 18 to 36 months bucket. And that is in the current situation, when you see downward interest rate scenario, that is the right bucket, optimal bucket to be placed from an specific to our asset profile, which we have, right? From a — if you see a slide number 19, it talks about the retail deposit profile in terms of the percentage, where you see that our share of retail term deposits, the way we have been increasing year-on-year, quarter-on-quarter from that perspective. So this quarter itself, see there is a incremental growth of around INR 700 crores on my retail term deposit. And like I mentioned sometime back, the core focus of the bank is to build retail, granular deposit base with larger focus on CASA this year. Our first 3 years of strategy was largely around deposits where we have built a good foundation of overall deposit base now. And now we need to scale up in terms of customer engaged accounts led by CASA by digital payers and the overall ecosystem around digital payments to ensure that customer is active in transacting with us.

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Rohan Mandora, Equirus Securities Private Limited, Research Division – Analyst [84]

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Sure, sir. And sir, mix of finance within the quarter between retail term deposits and wholesale out of INR 9,000 crores, the data is given on Slide 5.

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [85]

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So when you say refinance, do you mean by renewals?

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Rohan Mandora, Equirus Securities Private Limited, Research Division – Analyst [86]

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Because the term which is incremental funds raised during the quarter is INR 10,000 crores in 1Q FY ’21. So — and that was INR 7,700 crores in 4Q and INR 8,500 in 1Q FY ’20. So just how is the spread between, say, wholesale term deposits and retail between the incremental term — incremental funds raised?

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Yogesh Jain, AU Small Finance Bank Limited – Group Head of Strategy – Treasury, FIG, DCM, Wholesale Liability & IR [87]

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So Rohan, it’s not only deposits, there are other means also because it’s fund rate. Actually it’s not deposit. So we got some refinance also from financial institutions like SIDBI, NHB also this time because they were coming up with their special refinance schemes during this time. So we got some amount from these institutions also. So that amount is also included in this calculation.

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Rohan Mandora, Equirus Securities Private Limited, Research Division – Analyst [88]

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Sure, sir. And sir, just 2 data points, what is the headroom for further PSLC sales during the year? And also any unbooked MTM pressure against so that which — on which we are on the quarter, at the end of the quarter?

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Yogesh Jain, AU Small Finance Bank Limited – Group Head of Strategy – Treasury, FIG, DCM, Wholesale Liability & IR [89]

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So both are evolving actually Rohan, so we’ll figure out our situation, how we will go. We’ll see our disbursement plan collection number. And basis that and also our PSL requirement, which is 75%. And then we’ll see again what we can do. On MTM side, again, evolving situation wise. So the interest rates are on declining trend. So we will assess our overall investment for different basis that we will figure out if we have to do something, right? So we’ll figure out with the quarter actually.

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Operator [90]

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We take the last question from the line of Manish Shukla from Citigroup.

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Manish B. Shukla, Citigroup Inc., Research Division – Director & Lead Analyst [91]

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So we saw this big uptick in activity in June. But there are some data points suggesting that momentum has slowed in July as virus has spread beyond the larger cities. Do you see that happening in terms of the economic activity in the areas where you operate that last 3 weeks in July, have probably not been as great as what we saw in June?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [92]

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No. Sanjay this side. So as I already commented that people have actually started living with this kind of fear that the COVID-19 will stay here, right, for some time. But that won’t — should not now hamper their general activity. So in our area of operations, barring Pune, barring, Mumbai and Baring Surat, there is a partial lockdown maybe in Bhopal, maybe sometime in Ahmedabad, maybe sometime in some part of the cities, but that is not hitting the overall sentiment, right? So as of today, also, our 95% people are coming and operating from office. This month also our collection efficiency, which is 90% in the month of June can touch 100%. Our activation of a customer can go up by 72%, Can go to 72%. So I think the — what we are seeing every day that there is some challenge around the COVID and there is some solution around also. So people are really not discussing on a very daily basis, our people are able to meet customer, are able to understand his business, his requirement. And this month also, we have started doing disbursement at a planned program.

So I would say it’s so difficult to predict, honestly. But if India continues this kind of spread, I think, we will not see that fear, which was in April and May. And we, as a country, we’ll start living with this and come September, October, and there is a lot of discuss around vaccine and a lot of other treatments, then I think we will have a different mindset to handle this. So I believe — I’m very hopeful that we won’t be seeing the kind of April and month again, and there would be barring some parts and some areas where we can have this kind of impact. Otherwise, we are there to understand this issue and then live with this, right? So that’s been overall comment on the situation.

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Manish B. Shukla, Citigroup Inc., Research Division – Director & Lead Analyst [93]

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Sure. And 2 small clarifications. Slide #26, customer activation is by volume. That is its number of customers and not value, right?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [94]

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No, it is a value. So just an example, if you are saying 67%, and we have a book of around INR 30,000 crore. So that means it’s around INR 21,000 crore of booked customers are active. And it’s similar to a number of customers also to be host. It is similar to a number of customers also.

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Bhaskar Vittal Karkera, AU Small Finance Bank Limited – Chief of Wheels [95]

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Exactly.

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [96]

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It doesn’t change much.

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Manish B. Shukla, Citigroup Inc., Research Division – Director & Lead Analyst [97]

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So I’m just trying to add up the math here. So 67% full 8 part, that is 75%, 11% is moratorium. So what is the case with the balance 14%?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [98]

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So I’ve been repeating honestly that this is one data which shows that how the activity level goes up. And I would — no, I’ll be honest in saying this that if customers take 2-month EMI as a moratorium, but paid 2 months, then how do you read him? So for me, it’s a good customer because even if you’re having a right not to pay, he’s paying you. So I think it’s not a time of doing maths, it’s a time to do, are really the analysis around how much customers are coming and talking to us and want to pay their EMI, maybe 1 month EMI, maybe 2 months, maybe 3 months and how they want to build their business again, right? So I think the exit data, I think you have to give us one more quarter, if moratorium gets closed on 1st of September. So then only we’ll give you a bit of data that how many customer, how much month moratorium they took.

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Manish B. Shukla, Citigroup Inc., Research Division – Director & Lead Analyst [99]

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Okay. Sorry, the really last thing here. The 11% moratorium when you say, is it fair to conclude that, that 11% has not paid anything for the last 4 months?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [100]

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Correct.

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Manish B. Shukla, Citigroup Inc., Research Division – Director & Lead Analyst [101]

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Is that a fair conclusion?

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Sanjay Agarwal, AU Small Finance Bank Limited – MD, CEO & Director [102]

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Correct, correct.

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Operator [103]

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Well, ladies and gentlemen, that was the last question for today. I would now like hand the conference back to the management for their closing comments.

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Aseem Pant, AU Small Finance Bank Limited – VP of IR and M&A [104]

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Thank you. Thank you, Janice. Thank you, everyone, for your time and for your very valuable inputs to us. Please feel free to reach out our investor relations team for any follow-up queries. I wish you the best of health and hope for better times ahead. Thank you.

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Operator [105]

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Thank you. Ladies and gentlemen, on behalf of AU Small Finance Bank, that concludes this conference. Thank you all for joining. You may now disconnect your lines.