I want to talk about your asset quality firstly because during last quarter your NPAs deteriorated. What is the picture looking like right now because it was partially attributed to the Tamil Nadu floods and in that sense it was a one-off?
PN Vasudevan: In the third quarter, our NPA had moved up from 2.21% to 2.39%. There were two factors; one is that we did a securitisation transaction in the third quarter. We have done a securitisation for the first time since becoming a bank and so when we do a securitisation you know part of the asset moves out of the system and that has an impact on the NPA. If you adjust for the securitisation, our NPA would have moved from 2.12% to 2.29% instead of 3.9%. So by and large, NPA is fairly under control and the third quarter typically for us is a seasonally weak quarter from collections because in most of South India, we get the heaviest rains during the third quarter and that does have an effect on collections.

Last year, in the third quarter, we had a 5% gross slippage whereas this year in the third quarter we had a 4% gross slippage. So it has slightly improved over the previous year’s same quarter but as I said, if you adjust for the securities to book that we did by and large, we are very comfortable. Our pre-Covid GNPA used to be in the range of 2.5% and we are fairly back to our pre-Covid level after the two years of Covid impact.

Why were slippages so high and could some of the slippages reverse also?
PN Vasudevan: Yes. The slippage tends to increase in the third quarter of every year because of the heavy rains we get in Tamil Nadu and parts of Andhra, Karnataka etc. Normally, it reverses in the fourth quarter. Generally our slippages are very comfortable in the fourth quarter which is what we have seen traditionally. This year we will have to see how it goes but normally yes most of them do get reversed because when the customers come back to normalcy the repayment starts coming back again.

Let us also talk about your net interest margins and due to the rise in the cost of funds as well we have seen a little bit of a compression here? What is the outlook in terms of the trajectory, are you planning to reduce the cost of liability?
PN Vasudevan: In 2022-2023, we had a 9% NIM for the full year but this year we have guided earlier also that this year the full year NIM should be in the range of 8.5% down from 9% of the previous year. And we have guided that our exit NIM for the fourth quarter should be somewhere in the range of 8.25%. So, in the third quarter, our NIM was 8.36%. There should be a further drop in that in the fourth quarter largely because our interest cost has been going up by about 1% over the last 12 months.

So that is an impact on the NIM but in Equitas Bank, almost 85% of our loans are fixed rate loans and last year when the rates went up, we had the worst of the times from the NIMs perspective. Hopefully, if the rates stabilise if not go down, our NIMs should be fairly comfortable going forward.

So contingent on a lot of factors as well and looking at your overall housing finance book as well, that is up from 7% in Q3 to 10% plus AUM in the current quarter. Is this a strategic move to increase the share of housing finance in AUM?
PN Vasudevan: If you look at our loan portfolio, the largest of portfolio contribution is coming from small business loans which are secured against the house property of the borrower that is about 38% and the second largest contributor is vehicle finance commercial vehicle largely with a little bit of used cars which is about 25% and the third largest contributor is microfinance which is about 19%.

Our fourth largest contributor is affordable housing finance. We started affordable housing finance sometime about three years back and that has been touchwood coming along quite well and yes we have been able to grow that fairly well. Basically what is happening is that our unsecured book is coming down proportionately while the housing finance book should be going up to that extent.When do you really require capital?
PN Vasudevan: We are fairly comfortable, our capital adequacy is over 21% at this point in time so we are fairly comfortable on capital. We do not have much of tier 2 so there is a plan that sometime down the line when we need additional capital we would look at the option of tier 2 to the extent possible. So raising equity capital is sometime down the line.

Where is it your outlook in terms of the overall interest rate scenario because that is not really looking favourable for the bank given the high rate of fixed rate loans, as we are going forward are there any expectations of rate cards do you think that that at least is desired a 2.25% ROA would that be achievable for FY25?
PN Vasudevan: We have not guided a 2.25% for FY25. All we are saying is that a model like ours should ideally produce an ROA in that range is what we are saying we are not really guiding in terms of the timeline by which we should be able to do that but coming back to the interest rate scenario yes you are right the general expectation is that the rates are likely to remain where they are for some time to come and maybe two quarters from now or maybe three quarters from now assuming that the inflation does come down it is possible there may be a drop in the interest rates.

But from our side, as a bank we are quite well placed even at the current interest rate scenario and as I mentioned earlier if the interest rates even hold steady without necessarily dropping, I think our name should be fairly comfortably placed. And as I said 85% fixed rate loan gives us a positive impact in this scenario compared to the negative impact we had over the last 12 months.

I would like to draw your attention to the fee-based income of the bank given that you are a small finance bank. Does that in a sense become an impediment for you to grow?
PN Vasudevan: The fee-based income is about 1.85% or so. That is a very comfortable level. Basically our fee income is contributed by our loans where we get the processing fee income. From the liability side we get fee income from distribution of third-party products and also we get fee income from transactions.

These are the three large contributors of fee income, and 1.8 to 1.85% contribution from fee income I think compares very favourably with other banks. Being a small finance bank and fee income I do not think are really connected in any way so the one thing that we do not have a contribution as of now is our AD-1 the fee income from our foreign exchange transactions because we just got the license from RBI recently, and the work is on in terms of launching products under the AD-1 category license. As and when we are able to roll that out, it will add further to the fee income but otherwise ours is fairly comfortable at this point in time.