Earnings Call Transcript
HDFC BANK LTD (HDB)
Earnings Call Transcript - HDB Q2 2025
Operator, Operator
Ladies and gentlemen, good day, and welcome to HDFC Bank Limited Q2 FY25 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.
Srinivasan Vaidyanathan, CFO
Thank you, Nirav. Welcome to all the participants. I appreciate your dialing in today. We have our CEO and Managing Director, Mr. Sashi Jagdishan with us. We'll start with his opening remarks and then get back to you all. Sashi, over to you.
Sashidhar Jagdishan, CEO
Thank you, Srini, and thank you, friends. Let me first wish you a belated Dashera festivities and also wish you in advance Diwali festivities that's going to come next week itself. Let me start with some of the macro environment which we are witnessing. Liquidity has been gradually improving over the last couple of months, so that's a bit of good news. However, the deposit rates continue to be elevated and sticky. Probably the credit growth still outpaces deposit growth in the system, and that's maybe the reason why it continues to be sticky. As we have witnessed in previous high-interest-rate cycles, customer preferences continue to be towards time deposits, probably to lock in at higher rates. Despite the intense competitive environment, deposit growth has been very healthy. On an average basis, we have grown around 15% year-on-year. The retail branch continues to contribute around 80% to 85%, in fact, to be precise, 84% of the total deposits. Let me talk about the advances under management. We have mentioned in earlier public forums and calls that we will bring down the CD ratio faster than what we had anticipated in the past. Let me spell out some of the bright spots of our credit growth. For FY25, we would probably grow slower than the system; for FY26, we may be at or around the system growth rate; and for FY27, we should be faster than the system growth rate. Our assumption is that from all the regulatory comments and the monetary policy statements, there will be a convergence of system loan growth and deposit growth rates somewhere during this period. In the light of the above strategy, the average assets under management grew by about 10.2% year-on-year. The margins have been stable in the range that we have been talking about at 3.45% to 3.5%. It printed at 3.46%. The gross NPA continues to be stable at about 1.4%. In fact, the gross slippages at 1.2% is better than what we had witnessed the same time last year. The profit after tax grew at about INR 16,800 crores. It shows an optical growth rate of about 5.3%, but adjusted for the bond gains and for the tax adjustments that we enjoyed the same time last year, the adjusted growth rate is about 17%. Let me pause here. We will take a lot of questions, and we have the team out here, Srini and Bhavin, who probably will also chime in for responding to your questions.
Srinivasan Vaidyanathan, CFO
Thank you, Sashi. Nirav, with that, you can open it up, please?
Operator, Operator
Thank you very much. We'll now begin with the question-and-answer session. The first question is from the line of Mahrukh Adajania from Nuvama. Please go ahead.
Mahrukh Adajania, Analyst
Yeah, hi. Good evening. My first question is on fees. So it's grown strongly. Is there some securitization income in fees? And if you could also refresh us with the accounting for any securitization, as in where it should come? That's my first question. And my second question is on the movement of contingent provision. So what kind or what class of loans would they have been used for because I think the contingent provision looks lower Q-o-Q?
Srinivasan Vaidyanathan, CFO
Sure. Fees were approximately INR 8,000 crores, reflecting a year-on-year growth of about 17%. The growth in fees from third-party products and distribution was particularly strong, rising by nearly 32% this quarter compared to the same quarter last year. When looking at all retail categories such as assets, cards, and retail liabilities together, they collectively experienced a growth of about 15% to 15.5%. On the other hand, wholesale showed a decline of around 5% due to certain episodic factors. Overall, fees have been increasing at a similar rate over recent quarters, generally between 14% and 17%. Regarding securitization, it's important to note that the excess spread generated from it does not count as fees, and since this was executed late in the last week, there’s minimal income reflecting in this quarter.
Sashidhar Jagdishan, CEO
And Mahrukh, it will be amortized over the life of the loan and nothing is upfronted. So the fee item is not impacted by securitization at all.
Mahrukh Adajania, Analyst
Got it. Will the margins appear higher than yields starting next quarter, or not really since they will be included in investments anyway? Okay, sure. And regarding contingent provisions?
Srinivasan Vaidyanathan, CFO
Okay. Contingent provision, if you see that there was a release of contingent provision. There's a footnote in the accounts that AIF provisions, we received clarifications on AIF. We had reserved 100% of our contribution to the AIF. The clarifications came that we don't need to provide rupee for rupee of the amounts that we have provided to the AIF. It is sufficient to provide on a proportionate basis based on the AIF lending to the getter company. And so appropriately, the provisions have been taken down.
Mahrukh Adajania, Analyst
Okay. Perfect, thanks.
Srinivasan Vaidyanathan, CFO
Thank you.
Operator, Operator
Thank you. Next question is from the line of Kunal Shah from Citi. Please go ahead.
Kunal Shah, Analyst
Yes. Thanks for taking the questions. Sir, first question with respect to RBI's draft circular.
Operator, Operator
Your audio is not coming clear. Can I request you to speak through the handset?
Kunal Shah, Analyst
Yes. Is it clear now?
Operator, Operator
Yes, thank you.
Kunal Shah, Analyst
Yeah. So the question is on RBI's draft circular in terms of the overlap in lending with group entities. So what do you think should be the impact on HDB Financial, and maybe till the time there are the final guidelines, would it in any way impact the listing of the HDB Financial that is being planned and that is required as per the regulatory requirement, yeah?
Srinivasan Vaidyanathan, CFO
Thank you, Kunal, for your question. There are two main points to address. First, the draft circular is indeed a draft, and comments on it must be submitted by November 20. Our bank, along with others in the industry, will be issuing comments, so we will have to wait for the final version to see the outcome. Second, it's important to remember that HDB operates as a regulated entity under a license from the Reserve Bank of India. It meets all licensing conditions and is supervised by the same team overseeing the bank. HDB’s policies and procedures align with those of the bank regarding income recognition, provisioning, and lending standards. This ensures that there is no arbitrage between the bank and HDB. The bank provides products on a program basis for specific segments, while HDB engages more closely with customers through its branch network, offering a more hands-on approach, which is vital in a market where credit development is still emerging. Regarding the IPO, a circular came out a couple of years ago indicating that HDB must list by September 2025. We have begun the listing process, as communicated in our press releases following board discussions in July and August. However, I can’t provide specific timing details due to publicity guidelines surrounding the IPO process.
Kunal Shah, Analyst
Okay. Okay. Thanks, that's helpful. And second question is on LDR. So you indicated in terms of how we should look at the overall growth compared to that of the system averages. But when we look between our own loan and deposit growth, the way we have been maybe at least contracting the LDR, till what level should we assume that we'll be so aggressive in getting the LDRs down? Would it be like 90%, 95% odd level, and then we will get relatively more comfortable, or would there be any time period, maybe that we would want to get it down or maybe we will see a much higher deposit growth compared to that of loan growth for next two, three quarters and then maybe both of them should normalize, yes?
Srinivasan Vaidyanathan, CFO
Yes, Kunal provided a lot of details. The bank's loan-to-deposit ratio was closer to 86% or even 87% if rounded, which was the level prior to the merger. We reached as high as 110%, justifiably funded through longer-term borrowings. Typically, for leading banks, the borrowing mix in their funding profile is around 7% to 8%. For us, it was 8% before rising to 21%. To enhance our economics and align our balance sheet, this required repositioning. Currently, the borrowing mix stands at about 16%. We anticipated that the LDR would take four to five years to return to historical levels in the mid to high 80s. However, given the increase in credit growth over the past two years, which is expected to align more closely with deposit growth, we now see the opportunity to reach those high-80s levels within two to three years. While we don’t want to commit to specific quarterly or yearly targets, we do aim for an accelerated approach. In terms of retail lending, we are aggressively marketing our mortgage products to enhance customer relationships, especially given the favorable pricing dynamics compared to legacy banks. We experienced year-on-year growth of almost 11.7% in mortgages and 11% in non-mortgage retail this quarter. However, we have moderated our growth based on credit dynamics and our underwriting standards. The priority sector saw a 4.7% sequential growth, fitting within the range of 16% to 20%. We prioritize high-quality loans while being price-sensitive, especially given the rise in bond spreads recently. At this point, we've chosen to moderate growth rather than pursue aggressive targets, and while we cannot provide specific short-term goals, the direction is in line with what Sashi has discussed over the last few months.
Sashidhar Jagdishan, CEO
And the reason for the change in our thought process is, we also believe from the various regulatory commentaries that you have been listening and we all have been listening that it may coincide over the next two to three years with a change in the credit environment. So we want to ensure now that we have mentioned and we have been witnessing a very stable asset quality, we want to be extremely well-positioned when the positive cycle probably changes in the next two to three years; we want to be well-positioned to capture the kind of incremental growth that we have seen in the pre-merger levels. That's one of the reasons why we are accelerating the, bringing down the CD ratio or the loan deposit ratio, which is what I mentioned in the beginning of my commentary as to what our glide path of credit growth would be vis-à-vis the system growth rate over the next three years, including FY25, '26 and '27. Thank you.
Kunal Shah, Analyst
Thank you, thank you and all the best.
Operator, Operator
Thank you very much. Next question is from the line of Gaurav Singhal from Aspex Management. Please go ahead.
Gaurav Singhal, Analyst
Hi, thanks for taking my questions.
Operator, Operator
Gaurav, sorry your voice is not clear.
Gaurav Singhal, Analyst
I have a couple of questions. So one is it better?
Operator, Operator
Yes. Go ahead.
Gaurav Singhal, Analyst
Hello. Yeah. So I have a couple of questions. The first is on the priority sector loans. Maybe if you can share some more detail on how much are we meeting organically? Because I noticed that in the last few quarters, our other assets as a percentage of total have gone up a lot, like used to be 3%, 4% premerger, now it's like almost 6%. But this quarter, it has actually come down Q-o-Q. So I'm just curious if that is because we are meeting more priority sector requirement organically. So maybe if you can share some thoughts on that? And the second question is about the non-mortgage retail that you mentioned. Do we envisage us reaccelerating this and start gaining market share again because a lot of our peers actually are now seeing credit costs go up and they were growing faster than you? So in the next several quarters, we will see us gaining back market share as our peers' step back? Thank you.
Srinivasan Vaidyanathan, CFO
Thank you for your question. Regarding the PSL achievement for March '24, that information has already been published in our annual report and various disclosures. Overall, our PSL stands at around 50%. However, for small and marginal farmers in the weaker sections, we are slightly under the target, at less than 1%. Sequentially, you may notice some fluctuations in other assets due to various factors, including the maturity of RIDF, estimated at about INR 2,000 crores. Currently, our primary focus on PSL is organic growth concerning small and marginal farmers and weaker sections. We are balancing our efforts between organic growth and our involvement in markets like PSLC, IBPC, and PTCs, maintaining our range around 9% to 10%. While we aim to close the gap organically, we cannot predict the final outcome due to market variations. Regarding non-mortgage retail, we have indeed experienced a slowdown in growth rates, reducing our unsecured loan growth to between 9% and 10% in recent quarters, down from 19% the previous year. We are proactively calibrating risks by monitoring market conditions. Our non-performing loans stand at a GNPA of approximately 1.36, with retail GNPA at about 0.8%. In terms of market share, we are currently leaders in private lending, auto loans, and credit cards, outperforming competitors. We maintain a significant share in high-quality customer segments, particularly among those with credit scores above 750. Our approach continues to focus on calibrated credit strategies, without setting fixed targets for credit growth.
Sashidhar Jagdishan, CEO
And all the portfolio, as I said, in the beginning of the commentary, while the quality continues to be very stable across the board. And of course, there will be this quarterly fluctuations, but we are not overly concerned. So it also sort of helps us to position ourselves very well. When we probably are ready when the cycle changes back into a positive territory. And that's the time when we will probably pick and choose the right customers at the right price, which will be contrary to some of the banking system trends.
Operator, Operator
Thank you. Next question is from the line of Pranav G. from Bernstein. Please go ahead.
Pranav Gundlapalle, Analyst
Hey, good evening. Thanks for taking the question. The question is on the loan yields for the bank. I think if you look historically, the bank, as well as the pro forma entity, has always had a higher yield versus peers. We have a significant gap versus peers. And incrementally, is the bank's loan yields on par with peers or are we still seeing a lower yield because of our conservative stance on underwriting?
Srinivasan Vaidyanathan, CFO
You need to consider it by segment; when examining the mortgages, our published rates are approximately between 8.8% and 8.9%. The private sector competitors are generally in the same range, within a 10 basis point difference. However, the real competition comes from the legacy banks, which have price differentials around 50 basis points. Regarding non-mortgage retail products, we apply risk-based pricing based on the quality of the assets we originate and the customer segments we target, ensuring the prices align with our risk models. In our commercial and rural banking segment, we've tested various price points ranging from 10 to 25 basis points over the past six months. Demand has proven to be very price-sensitive, indicating that as prices rise, demand drops due to the lower rates offered by legacy banks. As a result, we haven't been able to increase our prices; this is further evidenced by the fact that even with repo rates increasing by 250 basis points, the weighted average lending rate has only risen by about 150 basis points. Public sector banks have seen rate adjustments much lower at around 120 basis points, which restricts the private sector's ability to adjust prices in alignment with repo rate increases. In the wholesale market, concerning larger ticket sizes, credit spreads may shift, but they don't always match the movement of bond spreads. Hence, there’s a decision to make regarding pricing strategies. Although the credit quality in this sector is very strong, we need to consider lifecycle credit costs, not just the immediate credit costs we are facing. This presents challenges for pricing in that segment.
Pranav Gundlapalle, Analyst
Understood. That's very helpful. Thank you.
Operator, Operator
Thank you. Next question is from the line of Rahul Jain from Goldman Sachs. Please go ahead.
Rahul Jain, Analyst
Yeah, hi. Good evening, Sashi, Srini, and Bhavin. Three questions. First is on the trajectory of the liquidity coverage ratio. So wanted to understand, we have been inching that higher. Clearly, there is a draft regulation out there. So is that something that you are baking into our assumptions and pushing this LCR higher or what exactly is the reason why it's inching there? So that's question number one.
Srinivasan Vaidyanathan, CFO
The liquidity coverage ratio is currently at 128. Our typical target range is between 110 to 120, and historically, we have aimed for around 115, give or take 1% or 2%. Recently, last quarter it was 123, and now it’s 128. This increase is largely due to an influx of deposits, specifically granular, retail-driven deposits that carry substantial value. We are focused on increasing our deposits, which enhances our reserves. We have also discussed our lending strategy and how we are managing loan growth. The current situation reflects our efforts to optimize available deposits while adjusting our loans to suit current conditions and to reposition our balance sheet and credit policies accordingly.
Rahul Jain, Analyst
So just to simplify, Srini, so LCR, would it further go up or you would run it down a bit because clearly now the mix is also changing and we would want to push up our margins also because the ROA could potentially be better, or you will keep inching this up because there's an impending regulation that is out there or draft regulation that is out there?
Srinivasan Vaidyanathan, CFO
Yes, we need to wait as the regulation is still in draft form. We have provided feedback along with various organizations, and we will have to see how it develops. For instance, if you consider those with digital banking capabilities, including UPI transactions, it could become challenging as we aim to digitize many processes, including everyday transactions. We are uncertain about its final outcome. Regarding whether it will increase, decrease, or stay the same, it depends on the market conditions related to deposits. As we mentioned, we are well-positioned to capture a significant share of deposits and are carefully managing our loan growth. Therefore, we could either maintain the current levels or potentially increase them, but our primary focus remains on enhancing our customer base, growing deposits, and achieving our desired loan levels.
Rahul Jain, Analyst
The reason why I asked this question is because in the balance sheet, quarter-on-quarter, the G-Secs still went up by about INR 15,000 crores, LCR also went up. I appreciate the point about the granularity of deposits and therefore, the lower runoff factor. But just wanted to get some directional sense. Fair enough. The other question is on the branch expansion, etc. So what are the fresh thoughts out there? How are you all thinking about it?
Srinivasan Vaidyanathan, CFO
We added approximately 240 branches this quarter and around 350 branches for the year so far. In comparison, last year we added 917 branches. Our goal has been to invest in branches now while the credit environment is favorable, which it continues to be. We have ceased providing a specific target for branch growth, whether it's 1,000, 750, or 1,250. Our strategy remains focused on expanding our branch network into more areas where we need coverage, as well as increasing density in urban locations to attract as many customers as possible. We will continue to grow, and the pace will be adjusted periodically.
Rahul Jain, Analyst
Thank you for the insights. I have one last question regarding your current views on credit quality. It seems you've successfully managed the unsecured lending cycle by initially staying away but are now beginning to expand in that area, contrary to others who are facing normalized or rising credit costs. Can you share your latest perspective on asset quality overall, including unsecured microfinance and any other segments where you may have concerns? What should we be aware of regarding potential credit issues that could be arising?
Sashidhar Jagdishan, CEO
No. We have mentioned this for quite some time. As Srini pointed out, for a couple of years, we have been adjusting our growth based on early indicators. The decisions made by our credit architecture have proven effective once again. Currently, we are in a very comfortable position. There are risks in the system, and the macroeconomic impacts are unpredictable. However, based on our portfolio, we do not have significant concerns at this time. This is one reason why, although it will take some time for our book to grow, we are observing an increase in retail disbursals. It will take a while for this growth to be reflected in our book since a large portion will develop over the next 12 to 18 months, assuming this momentum continues. We believe we will stay ahead of the curve and will capture the right customer segments at the right prices going forward. We remain vigilant about the environment and the ecosystem, and it is encouraging that we are not currently seeing any major red or amber alerts. We will continue to adjust our growth based on our observations at the ground level. Additionally, I want to emphasize that we do not want to compromise our deposit franchise. The momentum in deposits cannot be achieved overnight; it requires time to build. We are operating in a competitive environment with challenging macro and liquidity conditions, so we prefer to maintain a higher liquidity coverage ratio. We've discussed our planned credit growth rate, which will lead to an increase in high-quality liquid assets that might temporarily affect our margins. We are comfortable with this because we are focused on ensuring our balance sheet and financial statements are resilient in the medium to long term. There is also concern about how future regulatory guidelines will impact us, and we want to be prepared for that. The current elevated levels we are seeing may be temporary, and we will monitor how the macroeconomic and regulatory landscape evolves. Eventually, we expect these levels to normalize to where we have historically operated, which Srini mentioned. The elevated liquidity coverage ratios we are experiencing right now are likely just a timing issue that will adjust itself in the future.
Rahul Jain, Analyst
Very helpful. Thank you so much.
Operator, Operator
Thank you. Next question is from the line of Rikin Shah from IIFL Securities. Please go ahead.
Rikin Shah, Analyst
Good evening, everyone, and thanks for the opportunity. Just have one question. With faster normalization in the LDR, we are generating excess liquidity on the balance sheet. So the cash balances have gone up almost by INR 750 billion in this quarter. In the past, we have demonstrated to prepay some of the bond borrowings in addition to the scheduled maturity. But this quarter, we didn't see that. So I just wanted to understand, do you still see those prepayment options available in the quarters to come by or we could probably see for a few more quarters where this excess liquidity could sit on the balance sheet?
Srinivasan Vaidyanathan, CFO
Rikin, you're correct. Our efforts continue towards that goal. However, as you know, a significant portion of the borrowings we inherited from the previous HDFC is non-callable, meaning it involves extensive negotiations. It’s essential that these discussions are favorable to investors, and it’s not guaranteed that we will succeed. The outcome will depend on their interest. Nonetheless, we're actively working on it. Additionally, in response to Rahul's earlier question, we aim to maintain sufficient liquidity and cushion to manage not only the sustainability of future deposits but also the upcoming draft guidelines. If there’s a chance to reduce our borrowings, we will take it, provided we can still ensure adequate liquidity. We need to be flexible and respond to how situations evolve in the future. If an opportunity arises, we will pursue it while keeping our liquidity needs in mind.
Sashidhar Jagdishan, CEO
That's exactly.
Operator, Operator
Thank you. Next question is from the line of Abhijith from Axis Mutual Fund. Please go ahead.
Abhijith V., Analyst
Yeah, thank you for taking my question. Sir, the first question is the other OpEx. Growth is sharply down. What is driving these efficiencies? And what is the trajectory we should expect in the near term?
Srinivasan Vaidyanathan, CFO
Yes, the total other operating expenses are what you're referring to regarding expenditures. The total expenses are increasing at about 10%. We have also moderated our headcount to some extent this quarter. It's a seasonal aspect regarding our spending for festivals and similar occasions. Additionally, certain third-party expenses related to origination could be adjusted. There are various factors involved, but there is no specific strategy related to that.
Abhijith V., Analyst
Sure. Thank you. And second question is I just want to understand, you have spoken about CDR, the budget play, etc., of eight figure.
Operator, Operator
Abhijith, sorry to interrupt you, but we are losing your audio. Your voice is breaking. Can I request you to come back in the question queue? Due to no response, we move on to our next participant. Next question is from the line of M.B. Mahesh from Kotak Securities. Please go ahead.
M. B. Mahesh, Analyst
Hey, hi. Just two questions from my end. One is you have started to see a slowdown in the commercial banking space, especially on the emerging corporates, if you could just kind of highlight as to what's happened there?
Srinivasan Vaidyanathan, CFO
Emerging corporates are sensitive to interest rates, and currently, the rates are not aligning with the bond spreads in the market. These corporates are well-rated, and we require an appropriate price that reflects their quality. If we don't achieve that, it adjusts to a lower level. However, we also experience growth within this segment. We prioritize certain areas, including loans for small and marginal farmers and agricultural-related activities, which we support. Our approach is not one-dimensional; we consider various factors such as cost price and priority sector pricing to manage this business line effectively.
M. B. Mahesh, Analyst
Sure, sir. Second question is on the deposit side and loan growth. Is there any number in mind when you're looking at below industry average and looking at where the sector is growing in terms of deposits or you don't have an opinion about it at all?
Srinivasan Vaidyanathan, CFO
See, the deposits, what we have seen is that the industry has grown anywhere between 10.5%, 11%. And we have grown more than that, gaining market share any time period, if you take a year, 3 years or 5 years between 50 to 70 basis points a year, gaining market share. But I'm not sure, which one you talked about where that.
M. B. Mahesh, Analyst
No, Srini, the deposits at a system level, let's say, is about 15 and loan growth starts to accelerate for the system. Is there a number in mind as to where you want your loan growth to grow or you're going to keep it a very flexible number out here?
Srinivasan Vaidyanathan, CFO
Yes. We are not focusing on a specific target, Mahesh. As mentioned, we are not strategizing toward achieving a single number. That's not our approach.
Operator, Operator
Okay. Just one clarification. On the savings account balances, if you look at the number of credits that are happening into the account, has there been a slowdown there or this is just transition to term deposits that we are looking at?
Srinivasan Vaidyanathan, CFO
We appreciate your question. Looking at the credits entering the accounts, they are growing significantly, increasing in the 20% range. This growth is also driven by new customers. It's important to note that I'm not referring to a static customer base; we’re consistently adding over 2 million new customers each quarter, which indicates that the credits are indeed rising. We're witnessing strong increases in these credits. Consumers are spending, as evidenced by card spending trends averaging from the high teens to low 20%. Within our own base, we hold slightly under 40% of the acquiring spend share, and we are experiencing robust growth in spending activity. It's essential to recognize that while people are spending, funds are also tied up with the government and are not being reinvested or recycled as one might expect. Additionally, there's a noticeable shift of savings moving into time deposits.
M. B. Mahesh, Analyst
Perfect, thank you, thank you.
Srinivasan Vaidyanathan, CFO
Thank you.
Operator, Operator
Thank you. Next question is from the line of Saurabh Kumar from JPMorgan. Please go ahead.
Saurabh Kumar, Analyst
Sir, just two questions. One is on your Slide 36, your RWA to total assets is down quarter-on-quarter, and you have de-grown the corporate book and the mortgage book has also grown lower than the overall growth quarter-on-quarter. So what would explain this lower RWA? And the second is just on the savings account again, I mean, assuming you get a 50 basis point rate cut, would you expect savings account growth to go up or do you think this is more structured this time? Thank you.
Srinivasan Vaidyanathan, CFO
Let's discuss the RWA density. It decreased from 69 last quarter to 67 this quarter. This change is largely due to the increase in our liquid assets. Our High-Quality Liquid Assets, or HQLA, rose by nearly INR 40,000 crores this quarter. This reflects our strategy to maintain more liquid assets. Regarding the impact of a 50 basis point rate change on savings rates, it's too early to predict the outcome.
Sashidhar Jagdishan, CEO
We'll watch it.
Srinivasan Vaidyanathan, CFO
We'll monitor the system in terms of how it performs.
Sashidhar Jagdishan, CEO
We have observed that changes in rates have a limited effect on the accumulation of savings balances. Therefore, we cannot make decisions in isolation; we need to consider how the broader banking environment evolves. At this moment, we prefer not to make any commitments and would like to monitor how this situation develops in the future.
Saurabh Kumar, Analyst
Thank you.
Operator, Operator
Thank you. Next question is from the line of Abhishek Murarka from HSBC. Please go ahead.
Abhishek Murarka, Analyst
Yes, hello Sashi, Srini, and Bhavin, good evening. I have two questions. First, could you provide the details of the loans that are linked to repo, EBLR, MCLR, and fixed rates? I will follow up with my second question later.
Srinivasan Vaidyanathan, CFO
The loans that are floating, our external benchmark is, I think, roughly about 69%, 70% or thereabouts, which is similar to what last quarter or the previous quarter that we had mentioned. So it is pretty at that level.
Abhishek Murarka, Analyst
Srini, does this include MCLR as well, or is this entirely external?
Srinivasan Vaidyanathan, CFO
MCLR is a tiny piece of that.
Abhishek Murarka, Analyst
Okay. And the rest is fixed?
Srinivasan Vaidyanathan, CFO
Yes.
Abhishek Murarka, Analyst
Okay. The second question is about NIM. It appears that after considering all of Sashi's comments during the call, there are both positive and negative influences, such as liquidity buildup and a decrease in the CD ratio, that are affecting NIM. Looking ahead, there will be a repo cut eventually, which is expected to bring it down. What strategies do you have in place to counteract that? If you aim to maintain or improve the current level, what options do you have available to you?
Sashidhar Jagdishan, CEO
While Bhavin and Srini will add to what I'm about to say, we've consistently maintained a well-matched modified duration of our balance sheet. We don’t anticipate significant impacts on the margins within the range where we've been operating in the near term. Although it's not a perfect correlation, and there will be some quarterly fluctuations, we should generally maintain our current operating range. In the medium term, we expect to manage our margins effectively within this range, especially if we gain clarity on the sustainability of liquidity in the macro environment and our ability to mobilize deposits. Additionally, if the upcoming draft guidelines provide useful insights and we normalize the liquidity coverage ratio to previous levels, we should see some advantages that we've often discussed in the past.
Abhishek Murarka, Analyst
All right.
Operator, Operator
Thank you. Next question is from the line of Prakhar Sharma from Jefferies India. Please go ahead.
Prakhar Sharma, Analyst
Yeah, good evening and congratulations on the results. I just wanted to ask on the credit cost part. Generally, 1Q tends to be a seasonally heavier quarter from the agri side. So generally, slippages tend to come off in the second quarter adjusted for the seasonality and same for credit costs. But if I look at the slippage ratio, it's kind of flat Q-o-Q, which I wanted to ask for clarity. And similarly, if I look at the provision number of about INR 2,700 crores and add back the reversal that would have been done of the AIF, it will probably go to INR 3,300 crores. So can you just explain if there is any other moving part in the credit cost line? Thank you.
Srinivasan Vaidyanathan, CFO
Prakhar, while it is true that the NPA is stable, the question of whether it should be improving is quite pertinent. Historically, we have seen some improvement, and we can debate whether it is around 3 or 5 basis points, but improvement is necessary. That's the range we are discussing. Additionally, we have ventured into small and marginal farming and deeper geographical segments over the past one to two years, which means that seasonality affects different years in various ways, especially as we expand into these segments.
Prakhar Sharma, Analyst
Understood. Thank you so much.
Srinivasan Vaidyanathan, CFO
Thank you, yeah.
Operator, Operator
Thank you. Next question is from the line of Chintan Joshi from Autonomous Research. Please go ahead.
Chintan Joshi, Analyst
Hi, good evening, and thank you for taking my question. Can I revisit the balance sheet? You mentioned that there is limited flexibility in repaying borrowings and that you are increasing securitizations, which has also slowed your loan growth rate. With the excess deposits you have—this quarter, for instance, you had an average of 700 in deposits against 300 in advances—how do you plan to optimize this situation? If your liquidity builds up too much, does that provide you with some opportunity to increase your loans for a quarter until the borrowing options become clearer? Should we view this sequentially as a way to optimize the balance sheet structure?
Srinivasan Vaidyanathan, CFO
Thank you for your question, Chintan. As I mentioned earlier, regarding deposits, our goal is to maximize our distribution and customer base, which includes over 96 million customers and 207,000 personnel focused on increasing our deposits as much as possible, depending on other factors. We are not adjusting our strategy here; our priority is to gather as many deposits as we can. Pricing doesn’t play a significant role; it's more about building relationships. Once we secure deposits, we need to consider how to allocate those funds on the balance sheet. This relates to your inquiry about the liquidity coverage ratio. The LCR is a result of our actions, not a goal we strive for. Our focus is on maximizing deposits and managing our loan portfolios effectively. We aim for as many loans as we can obtain that meet our credit standards and desired pricing, particularly for mortgages and retail loans. However, we find challenges with larger loan amounts due to consistently low pricing. Other than credit qualifications and pricing, we don't have other criteria impacting our loan strategy. We are not aiming for a specific number or range in this regard.
Chintan Joshi, Analyst
So the bottom line is that if you keep growing deposits faster than loans, you don't have any issues with growing liquidity because the point here is to deliquid this LDR ratio rather than worrying about the NIMs in the short-term?
Srinivasan Vaidyanathan, CFO
No, that is building of liquidity is a outcome that comes and it is a good thing to be having because when there is a growth opportunity, that is what it gets positioned for growth. It's a good thing to have.
Chintan Joshi, Analyst
My second question is regarding asset quality. One area that has experienced significant growth over the past few years is CRB, MSME. We are currently navigating cycles in MFI and consumer credit. I'm curious if there are any developments on the horizon in that area, whether for you specifically or more broadly for the industry.
Srinivasan Vaidyanathan, CFO
We have not seen, in our book, any kind of a credit that inhibits the growth or inhibits any kind of different approach to how we operate that.
Chintan Joshi, Analyst
That's good to hear. And it is heartening to see the improvement in the LDR ratio at an accelerated rate. Thank you for taking my questions.
Srinivasan Vaidyanathan, CFO
Thank you.
Operator, Operator
Thank you. Ladies and gentlemen, due to time constraint, we will now take the last question from the line of Manish Shukla from Axis Capital. Please go ahead.
Manish Shukla, Analyst
Good evening and thank you for the opportunity. Srini, just to reconfirm the floating proportion of the book. Corporate loans are about 19%. So I'm assuming that would be entirely linked to MCLR, right?
Srinivasan Vaidyanathan, CFO
You can't look at it like that. There are some corporate loans that could be linked to MCLR and others as well. Yes, a significant portion of your assumption is correct; a majority of this EBLR will be.
Manish Shukla, Analyst
And the question is purely on repo. So purely repo-linked book would be what proportion of your overall loan book, just linked to repo?
Srinivasan Vaidyanathan, CFO
No, I don't have that information available, but EBLR has repo across mortgages and some CRB products as well as wholesale corporate products. Some of these are T-bills and others are linked to MCLR. So, in total, that’s 69% to 70%, as we previously mentioned.
Manish Shukla, Analyst
Okay. And the last question, before merger, HDFC Limited used to carry hedges on the liability side for interest rates. Are you still carrying any of that or all those have matured?
Srinivasan Vaidyanathan, CFO
Yes, we do carry those hedges. You know that hedges presuppose the risk of borrowing that is attached, so to the extent that the borrowings have not been paid down, that means they've not rolled down or prepaid, the hedges continue.
Manish Shukla, Analyst
Would you be able to quantify that proportion?
Srinivasan Vaidyanathan, CFO
For the annual report, as of March, we have included it in our derivative schedule, and you should be able to find it there, but we only publish that information annually, not quarterly.
Manish Shukla, Analyst
Got it. Thank you. Those were my questions.
Srinivasan Vaidyanathan, CFO
Thank you.
Sashidhar Jagdishan, CEO
Thank you.
Operator, Operator
Thank you very much. I now hand the conference over to Mr. Vaidyanathan for closing comments.
Srinivasan Vaidyanathan, CFO
Thank you all for participating with us today and engaging here. I appreciate your time. Thank you, Sashi. And any of you have more questions or comments to provide, feel free to connect with our Investor Relations over time, and they shall be happy to engage. Thank you all. Have a nice weekend. Thanks, Nirav. You can switch off now.
Sashidhar Jagdishan, CEO
Thank you. Thank you, all.
Operator, Operator
Thank you, everyone. On behalf of HDFC Bank Limited that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.