Earnings Call Transcript
HDFC BANK LTD (HDB)
Earnings Call Transcript - HDB Q2 2022
Operator, Operator
Ladies and gentlemen, good evening, and welcome to HDFC Bank Limited Q2 FY '22 Earnings Conference call on the financial results presented by the management of HDFC Bank. 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, Rutuja. Good evening, and welcome to everyone. Let's begin by discussing the current environment and policies that are positioned for accelerated growth. With the support of pent-up demand and the easing of mobility restrictions in the country, economic activity has surpassed the levels seen during the second wave as of early August. Notably, recent weeks have also shown sustained robust economic activity. We anticipate further recovery in economic activity, driven by the festive season, an increase in vaccinations, and a likely rise in government spending. Activity indicators such as CMI and GST collections have performed better in Q2 and continue to make progress. We expect GDP to show positive sequential growth in the upcoming quarters. Inflation remains within the policy range, and the RBI's policies are currently favorable. In this context, the bank is well-positioned to seize significant growth opportunities. Key enablers are in place for executing our strategy. For example, our capital adequacy stands at 20%, and our CET1 ratio is at 17.4%. Our liquidity remains strong, evidenced by an average LCR of 123% this quarter, which is about $6 billion above the 110% minimum requirement. We have built a resilient balance sheet, with a GNP ratio in a reasonable range of 1.35%. We have set aside floating and contingent provisions totaling INR9,200 crore to mitigate risks in our balance sheet. We aim to open around 400 branches soon, having already added 432 branches in the last 18 months, strategically positioning us to take advantage of opportunities as we progress with our vintage maturity models. During this quarter, we hired 5,868 employees, bringing our total for the first half of this financial year to 9,248. In the past 12 months, we have added 12,259 employees to ensure that our workforce is ahead of the productivity curve as markets reopen after COVID. We are also advancing on technology initiatives to create a future-ready organization through various partnerships for co-creation, product sales, and marketing. Several large programs are underway under our digital factory and enterprise factory, utilizing agile methodologies. In September 2021, HDFC Bank became the first to launch its own cloud landing zone using a hybrid multi-cloud strategy to host applications. This will allow us to build and deploy highly scalable platforms while ensuring robust security. The bank's website saw around 82 million visits from approximately 31 million unique visitors in September, a 24% increase compared to last year. Our analysis indicates that HDFC Bank received between 30% to 80% more traffic than the nearest competitor, whether public or private. Over 60% of visits were from mobile devices, highlighting the mobile-centric nature of our customers. The positive growth momentum we've witnessed is promising. This quarter, we opened a record 2.4 million new liability accounts, a 31% increase from last year and a 45% increase from the previous quarter. Total deposits grew sequentially by 4.5%, largely driven by a strong increase in CASA deposits, which rose by 7.6%. Our total advances also grew by 4.5%, with notable increases in retail assets and the commercial and rural segments, which grew by 5.4% and 7.4%, respectively. Credit card spending increased by 36% year-over-year, with a 27% sequential growth. Early data for the first 10 days of October indicates a 42% increase in card spending compared to the same period last September, driven by festive spending. We are making significant progress in leading the market in digitizing the economy. In the last five weeks of the quarter, we issued 416,000 credit cards, reviving our aggressive strategy to digitize the economy through card payment products, which we expect to sustain and grow moving forward. We are also working on consolidating many ongoing merchant offers, with two large partnerships already in place. Bank customers contributed nearly 55% of the spending during special sales organized by e-commerce platforms. We are launching over 7,000 hyperlocal offers for the festive season to provide customers with the best deals across regions. Several strategic partnerships are in the pipeline, including rebranding our Millenia, Infinia Metal, and Freedom credit card offerings. We anticipate seeing increased momentum with new offerings in the consumer commercial business card space in the upcoming quarters. UPI transactions, including both P2P and P2M, have grown sequentially by 35%, amounting to INR89 crore, and have risen 2.2 times year-over-year. For the quarter, P2P market share is about 10%, while P2M market share is roughly 15%. Mobile banking transactions surged by 66% year-over-year in the first half. We are well-positioned to capture opportunities in the rapidly growing BNPL segment with enhanced product offerings and targeted marketing strategies, making it easier for customers to manage small value purchases with convenient payment options, including easy EMI plans. We have over 3.5 million customers utilizing these EMI loans, and our consumer finance business is now available at 1.3 lakh merchant locations. The bank's merchant services are scaling up to provide more value-added services across various sectors. As of September, we have 2.5 million acceptance points, reflecting a 27% year-on-year increase. Our acquiring business volumes, encompassing credit, debit, UPI, EPI, and direct pay, have grown by 45% year-on-year to INR3,53,000 crore for the quarter, achieving a market share of 47%. We are continually enhancing merchant and customer engagement and user experience on the Smart Hub platform, implementing several new developments in September. As of September 30, one million small businesses are utilizing the new Smart Hub platform. With this strategy, the bank is confident in achieving a target of 20 million merchants and establishing the largest payment ecosystem in the country. Our asset volumes are on the rise, driven by effective relationship management, digital offerings, and product development. In the wholesale segment, corporates are experiencing strong cash flows and prefer market instruments for borrowing while managing a fair degree of prepayments. On the retail side, our incremental disbursals this quarter have shown impressive growth of 50% sequentially and 71% year-over-year, resulting in a sequential growth of 5.4%. Arvind Kapil can provide further insights into market conditions.
Arvind Kapil, Retail Assets Head
Thank you, Srini. Good evening, everyone. The retail assets book has shown strong growth of about 4.5% from June to September 2021, and an impressive 11.5% compared to the same time last year. This growth is driven by increased disbursals in the quarter, particularly in areas like auto loans, unsecured loans, and mortgages. We anticipate continued growth in the upcoming quarters. Looking at macroeconomic indicators, the monsoon has returned to normal levels, contributing to a positive sentiment in the rural economy, which we expect to flourish in the next six months. Employment indicators appear to have recovered to pre-COVID levels, and loan inquiries are up month-over-month, reaffirming strong demand across our retail asset business. Additionally, the mobility index has improved, which could enhance consumer spending. Other metrics such as GST, electricity generation, and industrial production indices are also reflecting positive trends. Regarding the auto loans sector, despite an overall industry decline in vehicle sales, HDFC Bank has reported a 36% increase in auto loan disbursals during the same period, indicating our significant traction in this area. There are some global supply chain issues affecting vehicle availability, but we expect these challenges to be resolved soon, further bolstering our disbursal strength. On the unsecured personal loan front, we are seeing consistent growth with manageable delinquency rates, focusing on increasing government business, which is yielding favorable results. We plan to continue growing in this segment steadily. In the mortgage segment, both home loans and loans against property are demonstrating strong growth, which we believe will continue in the latter part of the year. Larger loans, above INR 1 lakh, are showing particularly high demand, and we expect disbursal rates for smaller loans, such as 2-wheelers and microfinance, to peak in the next two months. We are enhancing our distribution capabilities for both business and home loans, which will pay off in future quarters. At the ground level, self-employed individuals in sectors like textiles are anticipating a growth of 30% to 40%, while businesses in home appliances are expecting 20% growth compared to pre-COVID levels. Other sectors such as food grains, telecom, and FMCG also indicate growth estimates of 20% to 30%. We are not only increasing our market share across products but also improving our quality across various risk categories. Our open market distribution gives us a competitive edge, enabling us to leverage new digital products in the auto loan and mortgage segments as opportunities arise. Furthermore, we're expanding our geographical reach and enhancing our digital capabilities, which became a strong asset during the pandemic. With our position as market leaders, high portfolio quality, ongoing economic recovery, and a festive season ahead with promotional offers, we are optimistic about retail assets growth in the coming quarters and aim to stay ahead of the competition. Thank you, Srini.
Srinivasan Vaidyanathan, CFO
Thanks, Arvind, for that. The next segment I want to talk about is the commercial and rural business that saw a robust sequential growth of 7.4% quarter-on-quarter, capturing strong underlying economic activity and continued market share gains. Rahul, a few words on this, please.
Rahul Shukla, Commercial Banking Head
Thank you, Srini. As Srini said, commercial and rural banking had an end-of-period growth in assets of 27.4% year-on-year and 7.5% quarter-on-quarter. The CASA performance remained strong at 21% year-on-year and 4.6% quarter-on-quarter. Business growth was aided by continued market share gains, expansion in SURU segments, the semi-urban and rural areas, underlying strength in the economy, and the carry forward of June momentum as we opened up after the still environment in April and May. While the growth rates were high in a normally quiet quarter, we entered into a traditionally strong second half where we are already seeing strength. We have a strong growth outlook in both the December and March quarters. Our rural banking business had approximately 12% quarter-on-quarter growth, helped by record disbursements and strong customer acquisition through deeper village penetration in 1 lakh villages where we already operate; secondly, through program expansion in another 1 lakh more villages which we are steering over the next 18 to 24-month period; crop diversification, focus on small and marginal farmers, slightly delayed, but strong sowing from June to July with a normal monsoon; and rural infrastructure support initiatives. The business remains on track for a 20% to 25% growth for the full year on a conservative basis. Our transportation finance business saw a 5.2% quarter-on-quarter increase. We have now improved our market share to 25% to 30% with almost all OEMs in the product categories that we want to be strong in. Retail commercial vehicle volumes that we financed in this particular quarter compared to year-on-year was 4.5 times. But if you look at it, the industry volumes grew 1.2 times. So we significantly improved our position. Similar trends in both construction equipment and tractor. The second half is expected to be a stronger period, and the industry is in a growth phase. The industry has absorbed the impact of changes such as axle load norms and BS VI, etc. With overall growth picking up, e-commerce growth particularly leads to strong demand pulls for the CV industry, sustained infrastructure spending by the government, and the take-off of the scrappage policy over time, this business is on a strong footing for growth. In our mid-corporate segment, which is largely self-funded, it saw a 29% year-on-year increase and 5.6% quarter-on-quarter. We began the year with a goal to expand our business footprint to over 100 cities by end of the year, which is March 2022. We have already achieved this by the end of September. Business remains on track to expand with strength. We see growth in CapEx demand in several sectors. We believe a recovery in consumption and exports over the coming quarters will help lift capacity utilization rates. The favorable environment and improvement in corporate revenue growth bode well for improvement in balance sheet positions. This, coupled with policy measures such as lower corporate tax rates, labor response, PLI scheme, and the transition to a multipolar world with companies looking to diversify incremental production, should help improve private sector CapEx growth in the next 12 to 15 months. Our wholesale SME business saw asset growth of 33% year-on-year, 7.5% quarter-on-quarter, and remains largely self-funded. At the start of the year, we set a goal to expand our footprint to 575 districts during the year. We are almost there at the end of 6 months. In our retail SME business, we had record disbursements, 83% higher than quarter one. It remains on track for a 50% plus growth during this financial year. Our healthcare business had a 5.2% quarter-on-quarter growth rate. This is a result of strong cash flows in the sector. We have an optimistic outlook for this segment and are enthusiastically participating in the government's flagship LGSCAS scheme. What stuff are we doing digitally? Well, but for mortgage perfection, which is dependent on SRO, the bank largely does the entire processing digitally. That includes customer front end for transaction initiation and execution, checks, clearances, and documentation types of search and disbursement. The proof that it works beyond the storyline is reflected in the pace of customer acquisition. Let me just share an anecdote. It happened in a dry fruit belt in a particular part of Southern India, where a lot of banks are present. When we went in over there, we basically saw a particular need. All that we simply did was the ability to go out and do PCFC in foreign currency as well as forward cover as a hedging tool, being able to do online, together with the normal support that we go out and provide. We were able to convert that entire belt into HDFC Bank customer segment. And these are stories that come from all around the country. We are also working diligently on our system upgrade to be able to plug-in with the product and data SME stack in India, which is fully developed. During the quarter, we launched our Dukandar Overdraft program supporting street vendors and small hawkers. We also piloted Kirana Overdraft with an FMCG major. As we roll these out, we are digitally reaching out to areas of the economy that need a helping hand. Srini, in summary, we are on track to have the strongest growth over the last few years in both our rural and MSME business. Number two, when we look at the SME growth outlook, not just this year, but for the next financial year, we are poised for a 1-plus-1 model, which basically means that whatever our book is as of March 31, 2022, we feel confident that we will be able to aid exactly the same amount of disbursement, incremental disbursement in the next fiscal year. That is how strong the business momentum is within HDFC Bank and how strong the underlying trends are in the economy. Having achieved our cities and district expansion goals for mid-corporate and wholesale SME businesses, we are working diligently to expand our village footprint by another 1 lakh villages through our Har Gaon Hamara village campaign, our BC network, and leveraging the common service centers. We are also participating in a lot of government schemes, such as the Agri Infra Fund, CGFMU, LGSCAS, CGTMSE, PMFME, PM Kisan Saturation, PMMSY, ECLGS, Kusum, and a variety of other schemes. There are about 25 schemes that we are looking at and participating in and supporting what is needed to be done for the ecosystem. Thank you, Srini.
Srinivasan Vaidyanathan, CFO
Okay. Thank you. Thanks to you both, Rahul and Arvind for that, getting the ground level view of what's going on there. Now getting to revenues. Net revenues grew by 14.7% to INR25,085 crore, driven by advances growth of 15.5% and deposits growth of 14.4%. Net interest income for the quarter was at INR17,684 crore, which is 70% of net revenues. It is up 12.1% over the previous year and up 4% over the previous quarter. The core net interest margin for the quarter was at 4.1%, which is similar to the range in the prior period. Net interest income growth is reflective of the underlying shift from unsecured lending, essentially gravitating towards higher-rated segments in the COVID period. This is also represented in our ratio of net interest income to RWA, which is consistent at around 6%. Moving on to the details of other income. Other income at INR7,401 crore was up 21.5% over the prior year and 17% over the previous quarter. Fees and commission income, which constitutes approximately 2/3 of other income, was at INR4,946 crore, and grew by 25.5% compared to the prior year. Retail constitutes approximately 93% and wholesale constitutes 7% of fees and commission income. FX and derivatives income at INR867 crore was higher by 55% compared to the prior year. Trading income was at INR676 crore for the quarter, while the prior year was at INR1,016 crore and the prior quarter was around this level at INR601 crore. Miscellaneous income, of which is at INR912 crore, includes recoveries from written-off accounts and dividends from subsidiaries. We'll cover about the recoveries from written-off accounts at a later stage. Expenses for the quarter were at INR9,278 crore, an increase of 15% over the previous year. Year-on-year, we added 256 branches, almost 1 branch per workday, bringing the total branches to 5,686. We also added 1,350 ATMs since last year. We have 15,717 business correspondents, which is 3,747 higher than the same time last year. This quarter expenses include approximately INR80 crore charge taken for employee stock options granted in the quarter. The expensing of employee stock options through the P&L is consequent to regulatory circular issued in August '21, applicable to the industry on a prospective basis, effective financial year '21-'22. Our cost-to-income ratio for the quarter was at 37%, which is similar to the prior year level. As technology investments are stepped up and retail segments pick up further, we anticipate the spend levels to increase, driven by incremental volumes, sales, promotional activities, and other discretionary spends in the retail segment. Moving on to PPOP. The pre-provision operating profit at INR15,807 crore grew by 14.4% over the prior year. Pre-provision operating profit was about 4 times, a little more than 4 times, coverage of the total provisions. Coming to asset quality, the GNP ratio was at 1.35% of gross advances as compared to 1.47% in the prior quarter and 1.37% on a pro forma basis from the prior year. The net NPA ratio was at 0.4 of net advances. It's pertinent to note that the 1.35% GNP ratio has about 20 basis points that are standard. These are included by us in NPA as one of the other facilities of the borrower is in NPA. The core annualized slippage ratio for the current quarter is 1.8%, on a quarterly basis, 45 basis points or INR5,300 crores. During the quarter, the recoveries and upgrades were about INR3,500 crores, approximately 30 basis points. Write-offs in the quarter were approximately INR2,600 crores, approximately 25 basis points. Sale of NPA was INR500 crore, that is included in one of the above categories. The restructuring under the RBI Resolution Framework for COVID-19 as of September stands at 150 basis points; 152 to be precise. It is pertinent to note that this is at the borrower level and includes approximately 25 basis points of other facilities of the same borrower, which are not restructured, but included in restructuring reported above. Provisions, the core specific loan loss provisions for the quarter were at INR2,286 crore. The total provisions reported were INR3,925 crore. The total provisions in the current quarter included additional contingent provision of approximately INR1,200 crores. The specific provision coverage ratio was at 71%, but no technical write-offs, no head office and branch books are fully integrated. At the end of the current quarter, contingent provisions towards loans were approximately INR7,700 crore. The bank's floating provisions remained at INR1,450 crores. General provisions remained at INR5,800 crores. Total provisions comprising all of these, which is specific, floating, contingents, and general, were 163% of gross nonperforming loans. This is in addition to the security held as collateral in certain cases. Looking through another lens, floating, contingent, and general provisions were 1.24% of gross advances at the end of September. Coming to credit cost ratios, the core credit cost ratio, that is specific loan loss ratio, is at 0.76% for the quarter against 1.46% for the prior quarter and 91 basis points on a pro forma basis for the prior year. Recoveries, which are recovered as miscellaneous income that I referred to, amount to 23 basis points of gross advances as against 14 basis points in the prior quarter. The annualized credit cost for the quarter was at 1.3%, which includes the impact of contingent provisions of approximately 40 basis points. Prior year was at 1.41%, and prior quarter was at 1.67%. Now with that, Jimmy, do you want to give some color on credit at that stage, please?
Jimmy Tata, Credit Head
Thank you, everyone. I'd like to provide an update on our credit and credit quality situation. As we entered this quarter, the effects of the second wave were diminishing due to the easing of lockdowns, the reopening of the economy, and the rapid vaccination progress. This improvement in economic and business activities continued to strengthen throughout August and September, resulting in better key risk indicators that suggest a return to normal business conditions. Regarding portfolio quality, I’ll start with retail assets. In September, the demand resolution for retail assets reached 97.5%, nearly matching pre-COVID levels of 98%, and surpassed the figures from before the second wave in March 2021. We have also observed significant improvements in bounce resolution, with many products now performing better than they did pre-COVID in February 2020. Notably, around 10% more customers who previously needed help resolving bounce issues are now handling these on their own. When looking at collection resolution across various categories, most have returned to pre-COVID levels, and some products even exceed those levels. We anticipate the remaining resolution rates will also return to pre-COVID levels by December or January 2022, assuming no major unforeseen impacts from a potential third wave. To prepare for the third wave, we’ve ensured that our staff and collection vendors are getting vaccinated, with nearly 100% first-dose coverage and over 90% expected for the second dose in the next month. Therefore, we are not anticipating a halt to collections this time, except in cases of enforced lockdowns. On the recovery front, we are seeing encouraging trends, with recoveries around 10% higher than pre-COVID levels for the quarter and about 20% higher in September alone. Wholesale credit remains stable, with healthy underwriting and credit performance. The SME sector was affected by the second wave but has begun recovering due to a decrease in COVID cases and the uplift in economic activity. Our SME portfolio remains diversified, with no single industry exceeding 5% exposure, except for agriculture, which aligns with priority sector requirements. Key metrics such as self-funding, collateralization, and average cash flow in this segment have remained stable. We have proactively managed our ECLGS portfolio amid exceptional circumstances. Our continuous risk assessment of this portfolio indicates minimal stress, estimated to be in the single digits. We also addressed the two restructuring schemes known as R1 and R2, and we will continue to monitor this portfolio closely. We anticipate a peak potential impact of around 10 to 20 basis points. In addition to focusing on portfolio quality, I want to highlight the growth opportunities we are pursuing. We have been quick to adopt analytics to drive credit decisions and enhance customer experiences, with successful initiatives for existing customers now being extended to new clients. We’re investing in digitization to improve customer interactions and have developed in-house models for new customers. Our credit innovation lab is designed to test new products and delivery channels across various lending sectors. We’re collaborating with technology partners to accelerate our market readiness and maintain our competitive edge alongside fintech innovations. We will keep you informed as we progress in this area. Thank you.
Srinivasan Vaidyanathan, CFO
Thank you, Jimmy. We reported a profit before tax of INR 11,883 crores, reflecting a 17.5% increase, and a profit after tax of INR 8,834 crores, which is up by 17.6%. Moving on to the balance sheet, I'll keep it brief since it’s part of the published balance sheet. I want to highlight a 4.5% growth from the previous quarter and a 14.4% year-on-year growth in deposits, which translates to approximately INR 61,000 crores in net growth this quarter and INR 1,77,000 crores since last year. On the advances side, we also saw a 4.5% sequential growth and a 15.5% year-on-year growth, which equates to around INR 51,000 crores in net growth for the quarter and INR 1,51,000 crores growth from the previous year. Our capital adequacy stands at 20%, surpassing the regulatory minimum of 11.075%, with a Tier 1 ratio of 18.7% and a CET1 of 17.4%. Now, let me provide some highlights on HDB Financial Services, based on NDIS accounts since that is how NBFCs report. As of the end of September, our total loan book was INR 60,000 crores, with secured loans making up over 70% of that. We continue to maintain conservative underwriting policies for new customer acquisitions established post-COVID, and we will reassess our strategy based on the external environment. We focused on disbursements of about INR 8,000 crores for the quarter, showing a 93% increase quarter-on-quarter and a 27% increase year-on-year. With the monsoon ending and the festival season approaching, we are optimistic about further increases in disbursements in Q3 and Q4, historically strong growth periods. For this quarter, net revenues reached INR 1,917 crores compared to INR 1,704 crores for the same quarter last year, which is a 12.5% growth. The cost to revenues for our lending business was around 35.4%. Provisions for contingencies this quarter were INR 634 crores, including a consolidated management overlay of INR 125 crores on an NDIS basis. Profit after tax for the quarter was INR 192 crores, compared to a loss of INR 85 crores in the previous year and INR 89 crores in the prior quarter. By the end of the quarter, our Stage 3 NPA was 6.1%, a reduction of over 200 basis points compared to the previous quarter. More than 70% of the Stage 3 book is secured and carries over 100% collateral in the SME book and over 80% collateral in the asset finance book, with a provision coverage of 43%. The unsecured Stage 3 book had an 88% provision coverage at the end of September. Our liquidity coverage is robust at 157%, and the cost of funds has been reduced to 5.96%. The total capital adequacy ratio is 19.8%. HDB operates 1,336 branches across 956 towns and cities. We have leveraged the previous quarters to advance significantly in data analytics, enhancing our omnichannel model for business velocity, customer acquisition, and experience throughout the loan lifecycle. We have enabled unassisted straight-through processing for small ticket consumer loans, which account for 90% of new customer acquisitions. An enterprise-wide automated underwriting engine has also been implemented, providing real-time scorecards for customer applications. In terms of collections, we have facilitated digital payment methods for customers. As the markets recover and customer access approaches pre-COVID levels, we are well-positioned for healthy growth moving forward. HDFC Securities maintains a widespread network of 213 branches across 147 towns and cities, along with 4 digital centers in the country, achieving a 42% increase in total revenue to INR 489 crores. The net profit after tax rose by 44% to INR 240 crores compared to the previous year. HSL has successfully implemented digital account opening journeys, significantly increasing the overall client base to over 3 million by the end of September. In summary, we have navigated the challenges posed by the ongoing COVID pandemic since early 2020 by adopting new operational methods to ensure a seamless banking experience for our customers. We seized this opportunity to strengthen our infrastructure, tightening credit filters to prevent adverse selection, and are now returning to normal operational levels to support growth. We have largely overcome the pandemic effects over the past 18 months concerning the balance sheet, P&L, and human capital. We are now in a growth acceleration phase, with a future-ready organization in place for over a quarter and key growth drivers prepared to capitalize on early positive indicators. The quarter’s results reflect a 14% increase in deposits and a 16% increase in advances, setting a solid foundation to build upon. Our return on asset stands at 1.9%, earnings per share for the quarter is INR 16, and the book value per share is INR 395. With that, may I request the operator to open the line for questions, please?
Operator, Operator
The first question is from Mahrukh Adajania from Elara Capital.
Mahrukh Adajania, Analyst
My first question is on NII growth. So what would it really take to get back NII growth to the mid-teens? Would it be traction on credit cards? What would it take? That's my first question.
Srinivasan Vaidyanathan, CFO
There are a few key points to consider. Over the past 6 to 8 quarters, we've seen a shift from retail to wholesale, and we're now at a crucial point where retail is beginning to rise, with momentum in retail surpassing that of wholesale. I previously mentioned our net interest income on risk-weighted assets at 6%. The pricing reflects the associated risk, and we've focused on growing low-risk segments over the past 18 months, which naturally comes with lower pricing. However, looking at our performance, our return on equity has remained stable at around 1.9% in this quarter, consistently tracking between 1.9% and 2% in previous quarters. It's important to note that as retail begins to grow, it produces a higher net interest income. Additionally, even though retail is growing this quarter, it will take a few quarters for the averages to align with the overall base, similar to the timeframe it took for the initial transitions.
Mahrukh Adajania, Analyst
My next question is on restructuring. So the restructuring is higher than what we saw in the first wave, that is R 2. So what is the profile of these restructured loans? Were they the ones that opted for moratorium last year?
Srinivasan Vaidyanathan, CFO
I want to highlight that out of the 150 basis points, 25 basis points are from accounts that haven't been restructured, even though we've classified them as restructured. This is because another facility of the same borrower was restructured. If that wasn't the case, I would have reported 125 basis points instead of the 150 basis points, specifically 152 basis points. Jimmy, would you like to discuss the profile of…
Jimmy Tata, Credit Head
Yes, sure. Thanks, Srini. The restructuring has been availed by many diverse people. And as I mentioned earlier, we've been quite empathetic on this. We haven't tried to be excessively strict as to whether want to or not. If someone has asked for it, and we felt that the person is going to recover well, we would offer that restructuring. Yes, there will be moratorium customers in the restructuring book. And in fact, in the various analytics that I mentioned, one of the considerations is a moratorium customers' behavior, pre- and post-moratorium as well. So there would be some moratorium customers in that portfolio.
Mahrukh Adajania, Analyst
Sure. But the analysis that you have done would be on R 1, right, not on R 2?
Jimmy Tata, Credit Head
We have done it on both, Mahrukh. Of course, one has to admit that there’s not so much time lapsed post R 2 and therefore the analytics on the R 2 book has focused a lot on the behavior of the customer and his attributes before the restructuring. We have found, when we are building these models, that both the behavior before and post-restructuring has had a significant bearing on the outcome of the stability of the person thereafter. So of course, we’ll keep up to date with you in future calls as well as to what’s happening. But at this point of time, yes, we have analyzed R 2. We have a reasonable insight into it. And what we put out is what we think the impact is going to be at this point in time.
Operator, Operator
Thank you. The next question is from the line of Kunal Shah from ICICI Securities.
Kunal Shah, Analyst
Again, on restructuring. So broadly, what you are suggesting is with respect to OTR 2. But if you look at the outstanding restructured pool, should that be altogether at around about INR20,500-odd crores, both OTR 1 and OTR 2 put together?
Srinivasan Vaidyanathan, CFO
1.5% would be a little less than INR20,000 crores. 1.5% would be about INR18,000 crores or so.
Kunal Shah, Analyst
Yes. So INR18,000 crores would be this under 2.0. And OTR 1, the way we had given the movement out there, that is INR5,600 crores, and there is overlap of INR2,600 crores. So there would be a further addition of INR3,000-odd crore under OTR 1 as well?
Srinivasan Vaidyanathan, CFO
No, no. This is for the total number I gave you. 1.5% is the total, R 1 and R 2 total.
Kunal Shah, Analyst
Okay. And secondly, in terms of the nature, so broadly, when we look at retail, in particular, wherein, say, under 2.0, it is INR14,000-odd crores, would the split in retail between secured and unsecured be similar to the overall loan book or will it be more skewed, say, toward either of that?
Srinivasan Vaidyanathan, CFO
We have not disclosed the split between secured and unsecured loans, and it is not included in the table.
Kunal Shah, Analyst
Sorry?
Srinivasan Vaidyanathan, CFO
No. The table we published, Kunal, there is no split between the secured and unsecured.
Kunal Shah, Analyst
Yes. No, sir, just wanted to get some sense if it will be similar or maybe it is more skewed toward the secured houses that maybe the profile, particularly within the retail loans of INR14,000-odd crores. If maybe, qualitatively, you can comment, yes.
Srinivasan Vaidyanathan, CFO
I don't have it in front of me. Jimmy, if you have...
Jimmy Tata, Credit Head
I don't have the numbers either, but it's mixed is what I can tell you, but I don't have exact numbers.
Kunal Shah, Analyst
Sure. And in terms of the movement which is shown with respect to OTR 1, so finally, and the way we are seeing is almost 20%, 22% has slipped. There is 12% odd, which has written off. So both put together almost like 30% from the last time's restructuring, it has either slipped or written off. Now, maybe with respect to the current pool, okay, what we are seeing under 2.0, should we see similar kind of behavior within this restructured pool? Because I think you highlighted 10 bps, 20 bps kind of an impact when you did that risk assessment analysis. So how we are actually getting towards that, yes?
Srinivasan Vaidyanathan, CFO
That's what Jimmy went through, Kunal, which is to analyze the entire book according to his risk models, the models that he uses for both application review as well as the models that he uses for collection behavior and prioritization. Through those models, that's how we arrived at saying that we need to be watchful for 10 basis points to 20 basis points at any time that we need to be careful in that portfolio.
Kunal Shah, Analyst
Sure. I'm inquiring about this payment product. A substantial part of it is the credit card portfolio. If I loosely compare it to last quarter's figures, there might be around INR3,000 crore. This amount likely includes the pay-later options or EMI services that you mentioned being integrated into that portfolio. Is this a reasonable estimate?
Srinivasan Vaidyanathan, CFO
So that is part of the consumer durables that is added there right now.
Operator, Operator
Thank you. The next question is from the line of Suresh Ganapathy from Macquarie.
Suresh Ganapathy, Analyst
I have a couple of questions. First, we see that staff expenses have increased due to the ESOP issue, but other expenses have also risen significantly quarter-over-quarter. How much of this increase is attributed to technology spending, and do you expect this to decrease? Will there be a steady increase each quarter as you invest more in technology? I would like to understand the potential impact on other expenses this quarter. The second question is about the GMV of the SmartBuy platform. If you could provide that information, it would be helpful. Additionally, can you comment on your relationship with Paytm and your objectives regarding the Paytm network?
Srinivasan Vaidyanathan, CFO
Sure. On expenses, as retail continues to grow, you'll notice that the costs associated with acquiring customers, sales, and marketing are higher initially. Revenue builds up over time. Historically, when retail activity declined, costs also decreased. Now that retail is picking up, expenses will rise accordingly. When retail activity indicators show an increase, you can expect costs to follow suit. Our management will decide on the balance of growth, pricing, and cost-to-income ratios. We're committed to making the right investments for future growth. Regarding technology costs, they have risen, but the increase has been typical, around 15% to 16%, with a sequential growth rate of about 4%. As we continue to invest in technology, we anticipate a reduction in costs per acquisition since there will be less manual intervention in sales processes. As for our partnership with Paytm, we are focusing on enhancing acceptance through QR code integration, which allows us to increase the number of merchants that can accept Paytm payments. Additionally, being a bank, we aim to strengthen our banking relationship with these merchants. We're also looking at card acquisition on the Paytm platform for both merchants and customers, leveraging data analytics to provide instant access to credit options. This partnership encompasses card issuing, acquiring, and deepening banking relationships. Essentially, this approach will establish another channel for offering multiple products to our current and potential customers.
Operator, Operator
Thank you. The next question is from the line of Adarsh Parasrampuria from CLSA.
Adarsh Parasrampuria, Analyst
Srini and team, my question is about the provisioning for contingencies. I would like to know if all the restructuring provisions are included in that pool of contingencies. Can you continue to increase that buffer? You provided INR1,200 crores this quarter. How do you view this number? Is there a specific threshold the bank aims to reach to feel comfortable with it? Because based on previous figures, the provisioning seems a bit low.
Srinivasan Vaidyanathan, CFO
We evaluate provisions every quarter to determine our approach. When considering total provisions, you should look at the INR9,000 crores we have, which includes about INR7,700 crores in contingent provisions and around INR1,400 crores in floating provisions. We consider restructuring when assessing our various provisioning methods. There isn't a specific target; we will evaluate as necessary. Our aim is to make the balance sheet more resilient in case of future waves or shocks. Historically, we've taken a conservative approach, and that hasn't changed.
Adarsh Parasrampuria, Analyst
Got it. And the second question is, Rahul, to you. If you can break up that loan book piece that is now being disclosed separately for rural and commercial into the top 3, 4 pockets, then that will help just to put it in context of the growth opportunity in each of them.
Rahul Shukla, Commercial Banking Head
So, look, I’m not familiar as to what breakup do we go and give out. But let me just basically talk to you about what the opportunities are. I have a rural book, in which, if you look at bureau data, between June ‘20 and June ‘21, we increased our market share, whereas if you take a look at the private sector banks as a whole, there was a decline in market share. We feel very comfortable in terms of expanding in that space because we had an NPA percentage decline as per bureau data as well as the absolute NPA amount, whereas if you take the ecosystem, other partners in our category, they had a 2 percentage increase in NPA percentage. So we are going to grow. Now the question is, what is the opportunity space in this to grow? And that opportunity space is INR15,00000 crore. So we are a small proportion of that. If you split that between secured and unsecured lending, we would be about 10% to 11% of the secured lending, but there is a lot of room to go out and do that, especially given government policies transitioning agri to a sustainable rural ecosystem focus rather than just focus on crop – three crop, which basically is water guzzling, so to say, wheat, rice, and sugarcane. Now on the MSME piece, come back and think about the SME, retail and the SME wholesale, that entire space is roughly about – again, INR20,00000 crores or so. And that is the number that you’re looking at. And so when we say that, look, wherever we are going to be at the end of the financial year, that amount, we are going to do incremental disbursement in the following year. That looks very possible because there are about 1.5 crores MSMEs who today borrow, of the overall spectrum of 6.5 crore MSME customers. My share of those 1.5 crores is fractional, very small. I mean, I wouldn’t say that it is something that does not leave room for growth for me. And of course, if you look at today, the mid-corporate segment, it’s vibrant, it’s healthy, it is growing. We just have to go out and meet customers. And let me put it this way, the brand pull and the offering is so strong that one of my team members was telling me day before yesterday that we just have to show up at certain places, and customers are ready to tie up and welcome us into their banking relationship. So that is sort of where we are. And that’s how I gave you the current growth numbers and the growth outlook, which should give you a sense that there isn’t a ceiling on the growth in the near term or medium term in this space.
Operator, Operator
Thank you. The next question is from the line of Saurabh from J.P. Morgan.
Saurabh Kumar, Analyst
Srini, could you just quantify first the growth and the net slippage number for this quarter? The second was, if you could also quantify what is your technology spend to revenue and where would you want it to go to over the next 2 years? And thirdly, was a question on growth. So Rahul and Arvind have spoken about doubling their books over next 2, 3 years. So I just want to, number one, confirm if that indeed is the outlook? And secondly, what's your view on the corporate loan growth?
Srinivasan Vaidyanathan, CFO
Okay. Regarding technology spending, we haven't provided specific forecasts or outlooks on that. What I can share is that we're making broad investments. For instance, we plan to open 400 branches soon and have already added 12,500 employees in the past year, with plans to continue hiring. Our commitment to technology investment is ongoing, and we intend to enhance our digital offerings. While we've discussed our efforts in digitization and digital delivery during this call, forecasting specific numbers isn't something we do. Therefore, I can't provide a detailed outlook on that.
Saurabh Kumar, Analyst
Srini, can you quantify the current number? What will be your current percentage to revenue or percentage of cost, how much will that be?
Srinivasan Vaidyanathan, CFO
That's how it's delivered, with a given period being 2.7% to 2.8% of revenue. You can think of it like that, and that's our current position. In other terms, that's about 7.5% or 8% of our expenses, which reflects our technology costs.
Saurabh Kumar, Analyst
Okay. Got it. Slippage and the growth?
Srinivasan Vaidyanathan, CFO
Slippage I have given you 45 basis points or annualized at 1.8% or INR5,300 crores, that's the slippage. And...
Saurabh Kumar, Analyst
The next slippage also, Srini, if you have?
Srinivasan Vaidyanathan, CFO
I can discuss the wholesale growth outlook. It depends on two factors. First is government infrastructure spending, which appears to have begun based on positive early indicators we are observing. We anticipate that corporates will support this initiative, so we could see its impact on corporate lending within a quarter. Currently, about 30% to a third of our lending book is related to this area, as we are one of the largest infrastructure funders in the country. We intend to be part of this growth. The second factor influencing wholesale growth is the need for corporates to expand capacity. At present, capacity utilization has not yet returned to the strong mid-70s percentage, which is something to monitor. The last time we reached that range, there was no added capacity; however, this time, we expect demand to increase once utilization hits those levels. Corporates now have greater flexibility since they can access capital markets directly. It’s important to be patient for another quarter or so to see how this evolves.
Operator, Operator
Thank you. The next question is from the line of Abhishek Khanna from Jefferies.
Prakhar Sharma, Analyst
This is Prakhar. Srini, my question is on the restructuring and the provisioning. Just wanted to take some perspective from you and Jimmy. So in Round 1, you had restructured over INR7,800-odd crores of loans, of which INR5,467 crores were actually personal loans in that category. And against that, you have made some overall provisions of INR930 crores. Now when I'm looking at the flow of these restructured loans, of the total loans, about INR1,680 crores have slipped, the majority being in personal loans. If I'm just looking at the personal loan bucket, about 25% have slipped into NPAs and you have written off a majority, maybe 70%-plus of it already. I'm assuming this is like a 6, 7-month phase period that we have gone through since the restructuring was completed. So my question is, one, are we seeing almost 40%, 50% of the personal loans likely to slip into NPAs out of Round 1? And should we be applying a similar percentage to the INR14,000 crores you restructured now? And in that context, how do you look at your contingent plus floating provision levels?
Srinivasan Vaidyanathan, CFO
One thing I'll comment on the contingent and floating and Jimmy will talk about the quality, which I believe he talked about, but he will recap it again. One, we believe that our contingent and floating provisions have done broadly, not just directed on the restructuring, but more broadly, to make the balance sheet more resilient for any shocks, right? So that's something to keep in mind. So it's not just the contingent provision for restructuring. It is broadly against the balance sheet to be more resilient and not have fits and starts so that we are able to go through the growth cycle without the fits and starts. That's what the contingent provision is supposed to cushion ourselves.
Jimmy Tata, Credit Head
Yes. Sure, Srini. I’ll just go through it once again. So we do have our restructured portfolio, and we continue to monitor this, and it is under heightened monitoring at all points in time. To answer the question you asked directly, should we expect 50% of that to slip into NPA? The answer is no. We are evaluating this, as I mentioned, on several different criteria. I think Mahrukh had also asked a question on that. I mentioned about one of the criteria, even being the moratorium customers and their behavior pre- or post-moratorium as well as their behavior, pre- and post- the restructuring. Based on the analysis that we have done so far at this point, we don’t think the impact would be more than 10 to 20 basis points on our NPAs at any given point in time.
Operator, Operator
Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Vaidyanathan for closing comments.
Srinivasan Vaidyanathan, CFO
Okay. Thank you, Rutuja for hosting and conducting this. We thank all the participants for participating and engaging with us today. We appreciate your time. And anything further you need, we are available and Ajit Shetty from our Investor Relations would be available to talk at any time. Thank you. Bye-bye.
Operator, Operator
Thank you. On behalf of HDFC Bank Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.