ICICI Bank - Earnings Call - Q2 20/21

Transcript

Sandeep Bakshi (Managing Director and CEO)

Greetings to all of you, and welcome to the ICICI Bank Earnings Call to discuss the results for Q2 of financial year 2021. Joining us today on this call are Vishakha, Anup, Sandeep Batra, Rakesh, and Anindya. We thank you for joining us and hope that you are safe and in good health. We thank the medical and healthcare fraternity, sanitation workers, providers of all essential services, and police for enabling us to navigate these unprecedented times. We express gratitude to our colleagues for the dedication in serving customers despite the current challenges. Most of our branches and ATMs across the country are operational, along with the digital channels. Most of our employees, except for those working at the branches and in functions such as operations and technology, continue to work from home.

The Bank's Economic Research Group publishes a weekly ultra-high frequency index, comprising seven high-frequency indicators to assess the resumption in economic activity. The ultra-high frequency index was 94 for the week ending October 25, indicating that economic activity is at about 94% of the pre-COVID levels. Several high-frequency indicators such as power consumption, fuel consumption, e-way bill generation, and electronic toll collections were close to, and in some cases, higher than pre-COVID levels in the first two to three weeks of October. In September, GST collections were about 90% of pre-COVID levels, and there was a sharp month-on-month increase in manufacturing PMI, reflecting increasing production and stocking of inventories ahead of the festive season. Vehicle registrations in September have increased over the previous month. Data released by the auto company suggests a sharp sequential and year-on-year growth in passenger vehicles and two-wheeler sales.

We have also observed an increase in property registrations in the month of September compared to August. A bumper Kharif crop, normal monsoon, and increase in tractor sales points to a stronger rural economy. Even as we keep a close eye on the trajectory of the pandemic, all the above indicators suggest an improvement in the economy for the second half of this financial year. These trends are also reflected in the business and results of ICICI Bank as we continue to steadily grow our business within our well-defined framework. One, growth in the core operating profit in a risk-calibrated manner through the focused pursuit of target market segments. Our approach to risk-calibrated growth in core operating profit is to have a 360-degree customer-centric approach, tap opportunities across ecosystems, leverage internal synergies, build partnerships, and deepen risk processes.

Core operating profit increased by 18.1% year-on-year to INR 77.19 billion in Q2 of 2021. The profit after tax was INR 42.51 billion in Q2 of 2021, compared to INR 6.53 billion in Q2 last year. Two, further enhancing our strong deposit franchise. Deposit growth continued to be strong, with 19.6% year-on-year growth in total deposits at September 30, 2020. During the quarter, average savings account deposits increased by 20.7% year-on-year, and average savings account deposits by 15.4% year-on-year. The liquidity coverage ratio for the quarter was 150%, higher than the previous quarter, reflecting significant surplus liquidity. The cost of deposits continues to be among the lowest in the system. Third, growing our loan portfolio in a granular manner with a focus on risk and reward. Post-easing of restrictions, there has been a substantial month-on-month increase in disbursements across retail products.

Mortgage disbursements during the quarter crossed pre-COVID levels and reached an all-time monthly high in September. Auto loan disbursements have continued to increase from June and have reached pre-COVID levels in September, reflecting the rise in passenger car sales. Disbursements across the rural portfolio crossed pre-COVID levels in August and September. The overall retail loan portfolio grew by 12.8% year-on-year and 6.2% sequentially. The domestic loan portfolio grew by 10% year-on-year and 4.5% sequentially. The overall branches portfolio and within that, the North India Lease Corporate portfolio declined both year-on-year and sequentially, in line with the approach which we have articulated earlier. Fourth, leveraging digital across our business. Digital is core to our strategy of integrating across ecosystems, smooth onboarding and transactions, both reliability and analytics for risk selection. We have continued to enhance our digital delivery with a range of new offerings and solutions.

During this quarter, we launched the iStartup 2.0 program, which enables startups to open current accounts digitally and instantly at the time of incorporation. It also offers startups a range of banking and non-banking services needed to expand their business digitally. We have seen an increase in the adoption of our newly launched services and platforms such as Video KYC and WhatsApp Banking. In September, we introduced new features on our WhatsApp Banking platform, which enables customers to create Fixed Deposits, pay their utility bills, and access details of trade finance statements. We have also introduced Forex on Mobile through our InstaBIZ for our small business customers. Five, protecting the balance sheet from potential risks.

Even as the robust growth in core operating profit demonstrates the strength of our franchise and our ability to capitalize on the ongoing recovery in economic activity, the portfolio trends have further enhanced. Our confidence in the robustness of our underwriting and our confidence in the provisions made in the March and June quarters have completely cushioned the balance sheet from potential credit losses due to COVID-19. Loans under moratorium had decreased substantially from April end to June end and declined further at August end. We articulated these moratorium levels were not conclusive indicators of financial outcomes. This is borne out by the trends in collections across the loan portfolio in September and October, which were either in line with or better than our expectations. Rakesh will share further information on these trends.

The gross NPA additions in Q2 of 2021 were INR 30.17 billion, and recoveries and upgrades were INR 19.45 billion. The provision coverage ratio on non-performing loans increased further to 81.5% as of September 30, 2020. During the quarter, the Bank did not utilize the COVID-19-related provisions made in earlier quarters. INR 14.10 billion of loans were not classified as non-performing, subsequent to the Supreme Court of India interim order stating that accounts which were not classified as non-performing till August 31, 2020, should not be classified as such until further orders. However, on approved basis, the Bank has made provisions of INR 4.97 billion in excess of these accounts. These provisions are included in the COVID-19-related provisions at September 30, 2020, which is at INR 87.72 billion.

As expected, in the second half of fiscal 2021, the banking system, including us, would see higher gross NPA additions, as well as some resolutions of loans as per the framework announced by RBI, given the disruption to economic activity in the first half and the dissipation of the moratorium impact. We would maintain the transparency and strength of our balance sheet by ensuring that appropriate provisions are held against any portfolio under resolution. To summarize on asset quality and provisioning, the collection and overdue trends are close to pre-COVID levels and are in line with or better than our expectations. We are confident that the COVID-19 provisions we have already made will completely cushion the balance sheet from potential credit losses, which may arise due to the pandemic. We expect a normalization of credit costs in fiscal 2022 based on our current expectations of economic activity and portfolio trends.

Sixth, maintaining a strong capital base. During the quarter, the Bank raised equity capital of INR 150 billion with the objective of further strengthening our capital adequacy and improving our competitive position. We thank our investors for their support. As of September 30, 2020, the Bank had a net worth of about INR 1.4 trillion and a CET1 ratio of 16.54%, including the profits for H1 of 2021. The strong capital position does not include the value of the Bank's investments in listed subsidiaries, of about INR 705 billion. Looking ahead, we see wide-ranging opportunities for recalibrated growth in the core operating profit. We believe our high-quality digital platforms and focus on micro-markets backed by our robust deposit franchise, prudent risk management practices, and strong capital ratios put us in a good position to grow sustainably. We will continue to focus on delivering consistent and predictable returns to our shareholders.

With these opening remarks, I will now hand the call over to Rakesh.

Rakesh Jha (Executive Director of the Board)

Thank you, Sandeep. I'll talk about the balance sheet growth, credit quality, general details, capital adequacy, portfolio trends, and performance of the subsidiaries. Starting with the balance sheet growth, the overall loan portfolio grew by 6.4% year-on-year on September 30th. The domestic loan growth was 10.3% at September 30th compared to 9.6% at June 30th. The domestic loan book increased by 4.5% sequentially over June 30th. The retail portfolio grew by 12.8% year-on-year and 6.2% sequentially over June 30th. Within the retail portfolio, the mortgage loan portfolio grew by 11% year-on-year, business banking by 37%, rural lending by 18.7%, commercial vehicles and equipment loans by 10.2%, and auto loan portfolio by 2.4%. Growth in the personal loan and credit card portfolio was 14.4%.

This portfolio was INR 600 billion or 9.2% of the overall loan book at September 30th. The overall disbursements in the retail portfolio have increased substantially in Q2 compared to Q1. Sandeep has already talked about the trends in mortgages, auto loans, and the rural portfolio. While the disbursements in the commercial vehicle and personal loan portfolios have increased in Q2 compared to Q1, they continue to remain below pre-COVID levels. Credit card spends have recovered to about 85% of pre-COVID levels in September, led by increased spends in categories such as health and wellness, electronics, and e-commerce. We expect the momentum in spends to continue on account of the festive season. The Bank has extended the Emergency Credit Line Guarantee Scheme to eligible MSME borrowers based on its credit assessment.

On October 28th, we have sanctioned about INR 160 billion to about 187,000 borrowers under the scheme, of which about INR 106 billion has been disbursed. This is reflected in the growth of the business banking portfolio. The SME business, comprising borrowers with a turnover of less than INR 2.5 billion, grew by 22.4% year-on-year to INR 233.41 billion at September 30th. The growth of the performing domestic corporate portfolio was about 7% year-on-year. In addition, we have made investments in high-risk corporate bonds, utilizing TLTRO funds during H1. The international loan portfolio declined by 32.6% year-on-year in U.S. dollar terms at September 30th. The international loan portfolio was 6.5% of the total loan book at September 30th. We had mentioned in our previous quarter earnings call that we would be progressively exiting our non-India linked exposures in a planned manner.

The non-India linked portfolio reduced by 48.3% year-on-year and 19.6% sequentially at 30th September. Coming to the funding side, we continue to focus on growing the daily average CASA balances and retail term deposits. Average savings account deposits increased by 15.2% year-on-year, and average current account deposits increased by 20.7% year-on-year during the quarter. Total savings deposits grew by 26% year-on-year to INR 4.7 trillion at September 30th. Coming to credit quality, the gross NPA additions during the quarter were INR 30.17 billion. This excludes INR 14.10 billion of loans not classified as NPA pursuant to the Supreme Court's interim order. The gross NPA additions from the retail portfolio were INR 17.49 billion. Corporate and SME gross NPA additions were INR 12.68 billion, of which INR 12.12 billion comprised portfolio rated BB and Below at 30th June. The details are given on slide 25 of the presentation.

Recoveries and upgrades, excluding write-offs, were INR 19.45 billion in the current quarter. There were recoveries and upgrades of INR 6.83 billion from the retail portfolio. The recoveries from the corporate and SME portfolio were INR 12.62 billion. The gross NPAs written off during the quarter were INR 24.69 billion. The Bank did not sell any NPAs during the quarter. The net non-performing assets were INR 71.88 billion at 30th September compared to INR 86.75 billion at 30th June. The gross NPA ratio was 5.17%, and the net NPA ratio was 1% at 30th September. Including loans not classified as NPA according to the Supreme Court interim order, the gross NPA ratio on a pro forma basis would have been 5.6% at 30th September compared to 5.46% at 30th June, and the net NPA ratio would have been 1.12% at 30th September compared to 1.23% at 30th June.

As Sandeep mentioned, the trends in collections across the loan portfolio in September and October were close to pre-COVID levels and in line with or better than our expectations. Demand resolution for the retail, EMI, and credit card portfolio was about 97% of pre-COVID-19 levels in the month of September. Compared to the level of loans which were under moratorium, the level of overdue in the portfolio is substantially lower and more comparable to the overdue levels pre-COVID. The percentage of the performing retail and credit card portfolio, which was overdue at September 30th, was about 4% higher than the normal pre-COVID trend, which we would expect to moderate as collections pick up further. The percentage of the performing rural portfolio, which was overdue at September 30th, was about 1% higher than the normal pre-COVID trend.

The collection trend on the SME and business banking portfolio has been quite good, and the percentage of the performing portfolio overdue is now quite similar to the pre-COVID levels. In the performing domestic and overseas corporate loan portfolio, less than 3% of the portfolio was overdue at 30th September. In August 2020, RBI proposed a resolution framework for borrowers impacted by the pandemic that was classified as standard and not in default for more than 30 days at 1st March. It continues to be classified as standard in the course of invocation of the resolution. The funds based outstanding of corporate and SME borrowers from whom we have received applications for resolution under the above framework till recently is about INR 21 billion. Our current expectation is that corporate loans under resolution would be less than 1% of the total loan portfolio of the Bank.

While resolution would result in asset classification benefits for the borrower on implementation of the resolution, we would maintain the transparency and strength of our balance sheet by ensuring that appropriate provisions are held against any portfolio under resolution. Coming to the P&L, net interest income increased by 16.2% YOY to INR 93.66 billion. Net interest margin was at 3.57% in Q2 compared to 3.69% in Q1 and 3.64% in Q2 of last year. The domestic NIM was at 3.72% this quarter compared to 3.91% in Q1 and 3.92% in Q2 of last year. International margins were at 0.26%. The margins were lower in Q2 compared to the previous quarter, primarily due to higher liquidity in the balance sheet. The cost of deposits was 4.22% in Q2 compared to 4.53% in Q1. Non-interest income, excluding the treasury income, declined by 9.5% year-on-year to INR 34.86 billion in Q2.

The non-interest income grew by 46.5% sequentially, within which fee income was INR 31.39 billion in Q2. Though the fee income declined by 9.7% year-on-year, it grew by about 49% sequentially, reflecting the increase in customer spending and borrowing and investment activity in Q2 compared to the previous quarter. Dividend income from subsidiaries was INR 3.36 billion this quarter compared to INR 3.77 billion in Q2 of last year. In cost, the Bank's operating expenses decreased by 4.6% YOY in Q2. The operating expenses increased by 10.5% sequentially. The employee expenses decreased by 8.1% year-on-year, mainly due to decrease in provisions of retirements and other employee benefits during the current quarter compared to the corresponding quarter last year. This reflects the increase in yields on government securities during the current quarter compared to a decline in yield in Q2 of last year, which impacts the provision for retirements.

The employee expenses increased marginally by 1% in H1 compared to H1 of last year. The Bank had 92,127 employees at 30th September. We expect the employee count to increase during the second half of 2021. Non-employee expenses decreased by 2.2% year-on-year in Q2 due to lower business volumes and administrative and infrastructure-related expenses, partly offset by increase in technology-related expenses. The non-employee expenses increased by 27.7% sequentially, reflecting the increase in business volumes during the quarter. We would expect business-related expenses to increase in future quarters as business volumes increase to the current level. We continue to make investments in technology and in growing our franchise. The core operating profit as a result of the above increased by 18.1% year-on-year to INR 77.19 billion in Q2. The core operating profit grew by 16.5% during H1.

The treasury income was INR 5.42 billion this quarter compared to INR 37.63 billion in Q1. The treasury income this quarter includes INR 3.05 billion from the sale of two businesses in ICICI Securities, which was done towards meeting the minimum public shareholding requirement for a listed company in March 2021. The treasury income in Q1 included gains of INR 30.36 billion through sale of shares of ICICI Life and ICICI General. Provisions other than COVID-19 related were INR 24.98 billion in this quarter compared to INR 25.07 billion in Q2 last year. The provision coverage ratio increased further to 81.5% at September 30th. We have not utilized any COVID-19-related provisions made in the earlier quarters during the current quarter. At 30th June, the Bank held COVID-19-related provisions of INR 82.75 billion.

During the quarter, the Bank made provisions of INR 4.97 billion on accounts not classified as NPA pursuant to the Supreme Court interim order. At September 30th, the Bank held COVID-19-related provisions of INR 87.72 billion, including this INR 4.97 billion. As Sandeep mentioned, we are confident that these provisions will completely cushion the balance sheet from potential credit losses which may arise due to the pandemic. We would utilize these provisions in future periods as required. The total outstanding provisions at September 30th, excluding provisions for NPAs considered in the computation of the provisioning coverage ratio, were INR 147.31 billion or 2.26% of total loans. These include COVID-19-related provisions, provisions held against the non-funding outstanding to NPAs, general provisions on standard assets, and other standard asset provisions. The profit before tax increased by 20.6% to INR 32.66 billion in Q2 compared to INR 43.67 billion in Q2 last year.

The tax expense was INR 10.15 billion in Q2 compared to INR 37.12 billion in the corresponding quarter last year. The tax expense in Q2 last year included a one-time additional charge due to remeasurement of accumulated deferred tax asset at the revised marginal tax rate. The profit after tax was INR 42.51 billion in Q2 this year compared to INR 6.55 billion in Q2 of last year. The standalone ROE this quarter was 13.2%. The consolidated profit after tax was INR 48.82 billion this quarter compared to INR 31.18 billion in Q1 and INR 11.31 billion in Q2 last year. The consolidated tax expense in Q2 last year included the one-time additional charge due to remeasurement of deferred tax assets. The consolidated ROE was 14.2% this quarter. Regarding capital, the CET1 ratio, including profits for the half-year, was 16.54% at September 30th compared to 13.6% at 30th June.

Including profits for H1, the Tier 1 ratio was 17.89%, and the capital adequacy ratio was 19.33% at 30th September. Coming to some information on the portfolio, we have focused on growing our loan portfolio in a granular manner with a focus on risk and reward. Our retail portfolio is largely secured with mortgage loans comprising about half of it. It is built based on proprietary data and analytics in addition to bureau checks. We've well-priced in addition to the risk. Our strong deposit franchise enables us to offer competitive pricing to the selected customer segment. Our personal loans and credit card portfolio largely comprises salaried individuals and has been built up by cross-selling to the existing customer base, which provides liability information for credit assessment.

Adjusted for usual attrition levels, about 99% of our personal loan and credit card customers having salary accounts with us continue to receive salary credits in the month of September. Our growth in the business banking segment is driven by parameterized and program-based lending, digital channels, granularity, collateral, and robust monitoring. With the corporate portfolio, our approach provides a full suite of banking products to corporate clients and their ecosystem of employees and business partners. The average daily credit submissions in the overdraft accounts of the SME and business banking customers in aggregate have now reached pre-COVID levels this month of September. We have given further information on our portfolio in slides 30 to 33 of our investor presentation.

The loans and non-fund-based outstanding to corporate and SME borrowers rated BB and below, excluding NPAs, was INR 161.67 billion at 30th September compared to INR 171.1 billion at 30th June, details of which are given on slide 34. Other than two accounts, one each in the telecom and construction sector, maximum single borrower outstanding in the BB and below portfolio was less than INR 6 billion at 30th September. On slides 35 and 36 of the presentation, we have provided the movement in our BB and below portfolio during Q2 and H1. In Q2, the rating downgrades from investment-grade categories were INR 16.98 billion. These were spread across sectors. There were rating upgrades to the investment-grade categories and a net increase in outstanding of INR 14.29 billion.

And there was a reduction of INR 12.12 billion due to slippage of some of the borrowers into the NPA category and involvement of non-fund-based outstanding to existing NPAs. The total portfolio, including construction finance, Lease Rental Discounting, term loans, and working capital loans, was INR 231.86 billion at 30th September, or about 3.5% of our total loan portfolio. As mentioned in our previous calls, our portfolio is granular in nature, with the larger exposures being to well-established builders. About 12% of our builder portfolio in 30th September was either rated BB and below internally or was classified as non-performing. The total outstanding to NBFCs and HFCs was INR 501.31 billion at 30th September compared to INR 431.62 billion at 30th June, or about 5% of the total outstanding loans at 30th September.

As given on slide 38 of the investor presentation, our exposure is largely to well-rated entities with long vintage, PSUs, and entities owned by banks and well-established corporate groups. The sequential increase in the outstanding to NBFCs and HFCs during the quarter also reflects this. The proportion of the NBFC and HFC portfolio internally rated BB and below or non-performing is about 1%. Coming to our overseas portfolio, excluding exposure to banks and retail lending against deposits, the total corporate fund and non-fund outstanding of our overseas branches, after netting out cash or bank or inter-bank lending, was $5.47 billion at 30th September compared to $6.41 billion at 30th June and $8.35 billion at September 30th, 2019. 66% of the outstanding at 30th September was to Indian corporates via subsidiaries and joint ventures.

17% of the outstanding was to non-Indian companies with Indian or India-linked operations and activities. The portfolio in this segment is generally well-rated, and the Indian operations of these companies are target customers of the Bank's deposit and transaction banking franchise, and we would continue to pursue these calibrated opportunities in this segment. 7% of the outstanding was to companies owned by NRIs or PIOs. 10% of the outstanding was to other non-Indian companies, which is less than 1% of the total portfolio of the Bank. Coming to subsidiaries, the details of the financial performance of subsidiaries is covered in slides 33, 44, and 64 to 69 in the investor presentation. Value of new business of ICICI Life was INR 6.02 billion in H1. The new business margin increased from 21.7% in fiscal 2020 to 26.3% in H1. The new business margin was 27.2% during Q2 of 2021.

The protection-based annualized premium equivalent was INR 2.46 billion and accounted for 19.5% of the total annualized premium equivalent in H1. ICICI Life continued to have a well-diversified distribution mix with distribution channels other than ICICI Bank contributing about 65% of the annualized premium equivalent in H1. The new business premium was INR 44.56 billion in H1. Gross direct premium income of ICICI General increased by 0.2% year-on-year to INR 64.91 billion in H1 compared to INR 64.46 billion in H1 of last year. The combined ratio was 99.8% in this H1 compared to 101.5% in H1 of last year. The profit after tax increased by 35% year-on-year to INR 4.16 billion this quarter from INR 3.08 billion in Q2 last year. The profit after tax of ICICI AMC was INR 2.82 billion in the current quarter compared to INR 3.05 billion in Q2 of last year.

The profit after tax of ICICI AMC on a consolidated basis was INR 2.78 billion in the current quarter compared to INR 1.35 billion in Q2 of last year. ICICI Bank Canada had a profit after tax of CAD 5.1 million in the current quarter compared to CAD 4.8 million in Q1 of 2021 and CAD 14.2 million in Q2 of last year. The loan book of ICICI Bank Canada at September 30th declined by 3.8% year-on-year and 2.7% sequentially. ICICI Bank U.K. had a net profit of $4.9 million this quarter compared to $11.9 million in Q2 of last year and $5 million in Q1 of this year. The loan book of ICICI Bank U.K. at September 30th declined by 14.6% year-on-year and was at a similar level compared to 30th June 2020.

ICICI Home Finance had a profit after tax of INR 0.02 billion in the current quarter compared to a profit after tax of INR 0.01 billion in Q1 of 2021 and a loss of INR 0.61 billion in Q2 of last year. With this, we conclude our opening remarks and we'll now be happy to take your questions.

Operator (participant)

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask questions may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue is populated. If you wish to ask questions, may press star and one on the touch-tone telephone. The first question is from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.

Nitin Aggarwal (Head of BFSI Research and Senior Equity Analyst)

Yeah, hi. I'm from the opportunity. Congratulations on the results. Firstly, on the NPA formation which we suggested during the second half, do you think there is a probability that it will swing over to one edge and some restructure and can push over before the first quarter of 2022, or we'll largely see the flexibility getting completed in third quarter or fourth quarter mainly?

Rakesh Jha (Executive Director of the Board)

With the moratorium period having gone over on August 31st, of course, this quarter had only one month of payment which was there due during September. So to that extent, December and March quarters definitely have a higher addition to NPAs for the banking system.

Whether that can spill over to the next year, quarter one or quarter two, that is a possibility if the restructuring happens and some of those loans do slip after restructuring. But our own sense would be that given that the stress has kind of initiated from March of this year onwards, a fair bit of additions will happen. A large part of that will end up happening in the current financial year itself. In any case, the provisions that we have taken on related to COVID, we have assessed the impact through the period. So it's not that we have taken provisions only for numbers to be added, or likely numbers to be added up to this year-end. So to that extent, we are extremely comfortable. The actual additions, we'll see how it plays out.

Nitin Aggarwal (Head of BFSI Research and Senior Equity Analyst)

Okay. Specifically, when we mentioned the efficiencies across the different years, again, can you also consider that the portfolio level and if you can share some credit details?

Rakesh Jha (Executive Director of the Board)

Yeah, so I talked about the demand resolution for the retail EMI and credit card portfolio, which was about 97% of the pre-COVID levels in the month of September. We have not shared any kind of split between secured, unsecured, and all of that. I think generally speaking, we have talked about it earlier that, for example, a portfolio like commercial vehicle, that was under some stress for banks even prior to COVID-19. So it would be logical to expect that the demand resolution in that segment could be a bit lower than the average. Otherwise, across the portfolio, it's pretty similar.

Nitin Aggarwal (Head of BFSI Research and Senior Equity Analyst)

Okay. And lastly, the quarter we have closed nearly 30 branches in the metro region. So any color around that? And how do we see the cost-income ratios spanning over the next 10-24 months given the sizing usage of the channels?

Rakesh Jha (Executive Director of the Board)

Yeah. So I don't think there is much to read in the number of branches. I think it's an ongoing exercise that the business teams do on a regular basis to kind of look at branches, look at the profitability, look at whether you need to realign, relocate, or re-energize branches. I think it's part of that process. Going forward, like I said, we do expect to add employees, add branches, and invest in technology and the franchise for growth. We don't have any particular outlook on cost-to-income ratios. I think all our metric internally are aligned towards risk-calibrated growth in core operating profit.

But just like I covered in my remarks that given that some of the business-linked expenses have come off because of lower level of business, those expenses will definitely go up into the second half of the year as business picks up even more from the current level. And we would continue to invest in technology. Those expenses will come in. On employee expenses, I highlighted the fact that in the quarter, we had some benefit on the lower provision for retirees because of the movement in interest rate, because of the dearness allowance assumptions that we make for our pension computation. So the H1 numbers would be more reflective there.

Nitin Aggarwal (Head of BFSI Research and Senior Equity Analyst)

Okay, sure. Thank you very much. Thank you, sir.

Operator (participant)

Before we take the next question, we'd like to inform participants that in order to manage to be able to address questions from all participants in the conference, please limit your questions to two per participant. If you have a follow-up question, we request you to rejoin the queue. The next question is from the line of Dhaval Gada from DSP Investment Managers. Please go ahead.

Dhaval Gada (VP of Investments)

Hi. Congratulations on good performance. I had two questions. First was related to the normalization of cost in FY22. I just wanted to clarify pre-COVID, our normalized level of provisioning was expected to be 25% of provision operating profit. Is that still the objective? And if you could also help the understanding on restructuring on the retail portfolio and overall confidence on this credit cost number. So that is the first question.

The second is related to if we see data on the downgrades to the BB and below portfolio on a four-quarter rolling basis just to eliminate volatility, average comes to around 3.5% of the corporate loan book. I just wanted to understand that based on is this the normal level or based on past experience that this number can be much lower in the coming quarters, somewhere around that? And lastly, if you could just a data point, if you could repeat the overdue numbers in each of the products, I think you had mentioned 2% and 1%. Just if you could repeat that, that would be quite useful. Yeah, those are the three things. Thanks.

Rakesh Jha (Executive Director of the Board)

Yeah. So on the provisioning, you are right, Dhaval, that our objective is to be around 25% of core operating profit. That is the risk calibration that we look at.

That number can obviously vary a bit through a cycle. It can vary a bit based on the portfolio composition. That is what our objective will be. And when we talk about normalized credit cost, that is what we typically look at. On the restructuring part of it, I talked about INR 20 million of corporate and SME loans in respect of which we have received application for restructuring. On the retail side, I think it is a bit too early to talk about this. I think over the next couple of months, we will have a complete sense on that. But when we talk about our trends and our numbers, we are considering all of that when we talk about the comfort that we have on the provisioning. On the BB and below portfolio, Dhaval, yeah, one can compute a moving average of last four quarters.

But given that it is not a granular portfolio like retail, it is difficult to have a specific estimate around there. I think for the current financial year, from the very beginning in March, we have been seeing that there could be higher slippages into BB and below because of the current environment which is there. For example, going forward, there are some restructurings that happen that could also result in some increase here. So difficult to kind of talk about what the number or an average could be for slippage into BB and below. I think I'll just reiterate that our focus on new business has largely been on A- and above categories from which the slippages down to BB and below generally in the past have been low.

So we would expect going forward once we are beyond this COVID period, BB and below composition to be pretty low. On the overdues, the numbers that I mentioned, one was to say that on the retail and the credit card portfolio, the portfolio which was overdue at the end of September, it was about 4% higher than the normal pre-COVID trend, and we do expect this 4% higher number to moderate as collection picks up further into the December quarter. On the rural portfolio, the same overdue number was about 1% higher than the normal pre-COVID trend. On the SME and business banking portfolio, there we are pretty much back to overdue level being pretty similar to the pre-COVID level. In the performing domestic and overseas corporate loan portfolio, less than 3% of the portfolio was overdue at September 30th.

Dhaval Gada (VP of Investments)

Thank you and all the very best. Thanks.

Sandeep Bakshi (Managing Director and CEO)

Thanks.

Operator (participant)

Thank you very much. Next question is from the line of Mahrukh Adajania from Elara Capital. Please go ahead.

Mahrukh Adajania (Analyst)

Yeah, hi. I have a couple of questions. Firstly, on collection efficiency, you said overall book 97% of pre-COVID level. So what was the pre-COVID level? Was it 97, 98? What was the figure? So it's 95% of what? And this collection efficiency is as of 30th September, right? The numerator of September and denominator of September. Is that correct?

Rakesh Jha (Executive Director of the Board)

Yeah, Mahrukh. So that is correct. It is for the month of September, like I said. And as we call it, the demand resolution in terms of what was the total billing which was there and against that what the collections were. We gave the number as a percentage to say that this number for the month of September was 97% of the pre-COVID level which would have been there. While we have not given the pre-COVID level, Mahrukh, you can definitely assume given the low NPLs on the retail portfolio, on a typical basis, that number of demand resolution would be closer to 99% plus on a normal basis.

Mahrukh Adajania (Analyst)

Okay. My other question is more on the sector. Two things. That in the beginning of the lockdown, everyone was worried about collection efficiency, but the outcome of most lenders, including those financing secondhand truck operators, have been very good. So what went wrong on our overprocess approach or on our assessment in the beginning? Because collection efficiency numbers are turning out to be very good compared to fears. That's one.

And the other one on the sector is that a lot of lenders, including ICICI Bank, raised capital. And coincidentally, that followed RBI's comments that the sector should have a good capital buffer. But after capital raise, most lenders have not done much incremental COVID provisioning. So, one thought that a part of the capital will be used to beef up provisions and keep the outcome that it could be right back. Your comments on both these?

Rakesh Jha (Executive Director of the Board)

Yeah, Mahrukh. On the first one, I think if you go back to March, April, there was clearly a lot of uncertainty. No one had seen this kind of pandemic or this kind of moratorium which RBI introduced, which was there for three months and extended for a further three months.

So, I think given the entire uncertainty around people in general would have been conservative. I think it is too early to conclude for everyone for the system. I think we still have to see the second half of the financial year. Like I said earlier, indeed, the NPA additions for the second half will be higher for all the banks because there will be no moratorium benefit. Some of this Supreme Court instruction on NPA documentation, all of that would come into the NPA numbers in the second half of the year. But I think especially the private banks in general have taken provisions on a conservative basis. And we certainly, when we took the provision in the June quarter, we clearly mentioned that our objective was to completely cushion any potential impact of COVID.

And the capital raising, just to spend 30 seconds on that, I think we were very clear at that point of time to say that the purpose of raising capital was not to make higher provisions on our existing portfolio. It was raised from two points of view. One, of course, is that we do believe that we will have a good opportunity for growth once the COVID is behind us over the next whether it is six months or nine months, one has to see how that plays out. So that is one. And the second was that there is always a tail risk in such an event which is there because we don't know how the COVID actually kind of continues to spread. While it is not anything specific to our bank or our portfolio, on a generic basis, that tail risk was and is definitely there.

And that is the reason we thought that we should be at a very strong position in terms of our overall capital adequacy. And as you saw during the quarter, we have seen a near 3% increase in our core Equity Tier 1 ratio. So I hope that answers your queries, Mahrukh.

Anup Bagchi (Managing Director and CEO)

If I can comment, because I think there will be a recurring theme of collection efficiency. There will be a recurring theme of what happened when everybody was thinking that it's going to completely sort of go down under, but it hasn't gone down under. There is a positive surprise there. If you just remember, Mahrukh, in Mr. Bagchi's comment, he said that our ultra-high frequency index is also showing that we are at 94% of the pre-COVID levels.

It basically means that on average, if he was to just take an index, 94% should be there as collection efficiency if one were to be exposed to exactly identical ultra-high frequency exposure to those sectors. Few banks, including ours, we are slightly will have better exposure perhaps to those sectors. And thus, many of us will have a collection efficiency which is higher than that. From our perspective, we certainly look at cash flows very carefully. Solvency and collateral comes later. And from a cash flow perspective, we are seeing that business loans or smaller retailish SMEs, both in the rural and rural, one sort of intuitively understands the rural is doing better there anyway. It is doing very well.

But even for the business loans which are smaller sized, 1.5%, and which are fully collateralized, we are seeing that the credit submission of that is now in most cases above pre-COVID levels. Third is if you look at toll collections and GST where we have a very high market share and dominant market share there, we are seeing that the toll collection is already above pre-COVID levels, which also is a good proxy of the economic underlying activity that is happening. Having said that, if you look at the passenger vehicle movement and the toll collection there, it has still not reached COVID levels. It is still in 80s. It basically means that from a passenger vehicle movement, that is from a normal you and me movement perspective, we are at mid 80s.

But certainly on a commercial vehicle side, commercial activity is above 100%, which perhaps explains some of this mental construct that are things really moving the way things should move. Our ultra-high frequency, as well as other things, are do is certainly pointing towards the fact that things have come back quite rapidly. Earlier, people did dip into their reserves that they had to pay off, and that has been our experience as well. People who had moratorium but who went out of moratorium, we were able to collect overdue and whatever overdue they had by way of interest or by way of whatever overdue they had quite easily, and it was not so much of a trouble.

Also, what has happened in the last few years is that the mode of collection for us, certainly, but I would reckon that it is for the most of the system, has gone largely digital. In our case, as you know, we also run a very, very highly developed PDM model, which is a pre-delinquency model. So we are able to also put resources appropriately using that pre-delinquency model as to where should we put our resources, where do we get the fastest fingers first, with the cash flows that we are seeing on the accounts, etc. And as you know, that in our case, most of them do have. It's a cross-sell. So they have their accounts with us. So that is where we get a slightly incremental shift towards the system.

We don't know how much of it is pent up, how much of it is going to be sustainable. But when we speak to the OEMs, etc., it looks like July, August were more pent up. Now it looks like more sustainable. If you look at mortgage, where we have done lifetime high in the month of September, we must not sort of take away one important thing that has happened in mortgage. And that is if you look at the EMI in the last two years, it has moved down by at least 23%. So EMIs which were in 900s now have gone to 700s. So that is a 25% dip. Then you also have the prices dipping by around 10%-15%. So if you multiply 0.75-0.85, you'll see that actually there has been a reduction of 35% in the overall outflow of a consumer.

So that is a big positive that has come. Also, one more thing that has come is WFH and work from home and all of this requires a larger home. But one must not take that big driver into account that you are getting a thing which is at 35% cheaper of a thing that you anyway require. And in an uncertain environment, roof over home is very critical. And people want to go over roof over home, and they don't want to stay in rented apartment. So not just our disbursement, but when you speak to the large builders and large builder results also come out, you will see that the frequency of sales has actually increased quite substantially in Q2 over Q1, and it continues. And things are moving towards better branded, completed inventories and better getting sold. It is the same thing for four-wheelers as well.

Because of physical distancing, social distancing, etc., people are buying four-wheelers. Also, it is a fact that EMIs have come down and new models are also coming up, and people, when they see that the risk has receded, they also like to feel good, and so they want to spend, and they want to live well, so I would say that combo of any of these things plus banks like us, we have also come out with festive offers, etc., where we are also creating desire and discounts to customers where they should buy, plus the need for feeling good, plus the fact that the salary account uploads, etc., haven't come down at all year over year. Plus the fact that if you are taking a larger asset, the EMIs have come down by 20%-30%. Asset values themselves have come down by another 10%-15%.

So I would say net net, there are fair amounts of positives that are there. But we must keep our fingers crossed. We don't know whether what is going to happen in Q3, Q4, or in future on this pandemic. But at this point of time, as we speak, if you see the retail asset growth of our bank, notwithstanding the fact that we did have some support of the credit guarantees, so had other banks, it has been very, very positive. I would reckon that it is almost lifetime high asset retail asset growth that we had on back of very, very solid mortgages, very solid secured business loans, very solid SMEAG, or very, very high-quality clients where we are able to see credit submissions which are past COVID levels.

The other thing that is happening in the COVID levels is that the weak are becoming weaker and the strong are becoming stronger. And so the market is moving towards stronger and stronger players across the thing. And this we are seeing even in SMEs as well, that the strong are becoming stronger, weak are becoming slightly weaker, etc. So positioning of the portfolio, how do you build your retail underwriting? How have you built retail underwriting? And going forward, how much are you cross-selling? How much of additional underwriting parameters you have over and above just a bureau? I think will be determinants of the asset quality that we have. As far as opportunity is concerned, we certainly see opportunity being there with competitive pricing. What has happened is that the prices of mortgages, etc., they have gone in quite substantially.

You get it at around 7% now, which is very, very competitive if somebody wants to really create any assets, so this is what is happening on the ground, so while we are positively surprised, I think we should reasonably expect that it will mimic and it will mirror and it will hug the ultra-high frequency number that we have, which is at 94 at this point of time. Sir, on your website, there is a Personal Flexi Loan product. What is that? What is the Flexi Loan all about, so Flexi Loan is a product, and we can take it offline. But very quickly, you give us an asset, we will check your profile, and we'll give you a credit line against your profile, which is the income and the asset.

And we'll pull it in, and we'll give you a line of credit against it, which is flexible in nature.

Mahrukh Adajania (Analyst)

So it's like a product of interest only?

Anup Bagchi (Managing Director and CEO)

It's an interest loan, but very flexible for the client.

Mahrukh Adajania (Analyst)

Oh, but is it an interest-only loan like Bajaj Finance does, or how is it structured?

Anup Bagchi (Managing Director and CEO)

So no, we don't know what Bajaj Finance does, interest-only, etc. We do normal banking, which is if it is of a working capital nature, then we collect interest. We do have a term loan nature, then we'll collect interest plus principal.

Mahrukh Adajania (Analyst)

Okay, sir. Thank you so much. Thank you.

Anup Bagchi (Managing Director and CEO)

Thank you.

Operator (participant)

Next question is from the line of Sameer Bhise from JM Financial. Please go ahead.

Sameer Bhise (Managing Director and Co-Head of Research)

Yeah, hi. Thank you for the opportunity.Just looking at the emergency credit line guarantee disbursements, would it be fair to presume that large part of it has gone towards business banking?

Anup Bagchi (Managing Director and CEO)

It will be spread across. Business banking will be there some part in SME and some part on the commercial vehicle, even on the housing side. It will be spread across. It is for all small businesses, and that's a part of various portfolios.

Sameer Bhise (Managing Director and Co-Head of Research)

Okay. But any specific segment, it should be large part of this?

Anup Bagchi (Managing Director and CEO)

No, it is quite spread out. It's quite spread out. It's quite spread out. It's not specific to any segment. So it will be across all places where there is commercial activity at the back.

Sameer Bhise (Managing Director and Co-Head of Research)

Okay. Okay. I'll let you call my friend. All the best. Thank you.

Sandeep Bakshi (Managing Director and CEO)

Thank you.

Operator (participant)

Thank you very much. The next question is from the line of Manish Karwa from Axis Capital.Please go ahead.

Manish Karwa (Executive Director)

Yeah, hi, Rakesh. Thanks for the opportunity. So on the restructuring indicator number that you gave, is it largely coming from the BB and below group, or that is over and above the BB and below group what we will see?

Rakesh Jha (Executive Director of the Board)

There will be, I guess we'll see where we end up. But there will be some overlap between BB and below. And there would be some loans which are currently in the BB family as well. Because as you know, even on the restructuring side, it will be the kind of restructuring would also vary. Because in some of these cases, it could just be a postponement of payment by 6 months or 12 months where we don't expect any kind of haircut at all. So we will see. Right now, only applications have been received.

We don't have yet the details of how the restructuring would happen. But it will have loans outside of BB and below also. Okay. Would you say that that will be a larger proportion of that 1% number that you're talking about? It's tough to say that as of now. It is difficult to say because it is not that we have the listing of that 1%. But I'll confirm that it will have loans which are BB-rated as well.

Manish Karwa (Executive Director)

Okay. And again, would the provisioning that you will need to, would you draw down from the provisioning that you've already made, or how do you think about the provisioning requirement that you will think of this quarter?

Rakesh Jha (Executive Director of the Board)

No, sir. I think over the December and March quarters, we do expect the NPA additions to be higher as all the loans would be out of moratorium, and there will be a four-month period to service till December, seven months till March. And there will be some of this restructuring also that will happen. So we would expect to draw down and utilize the provisions that we have created for this specific purpose in the future quarters. That will definitely be there.

Manish Karwa (Executive Director)

Okay. As of now, we do not think that we will require more provisioning of the likely NPA pressure.

Rakesh Jha (Executive Director of the Board)

No. So we have assessed that I think we have the exercise that we did in Q2 at the time of our results, the exercise we did at the time of our capital raising exercise.

And when we look at it right now, as I said, I think the trends are either the same or slightly better across portfolios. But like Anup mentioned, it's too early to call on this. So we'll see how it plays out. But we are very confident that the provisions that we have taken would suffice in terms of the requirements which are there over the next few quarters.

Manish Karwa (Executive Director)

Okay. And my second question is on your margin and the margin outlook. In the context of two things. One is that when do you think you will be okay to work with lower expenses, which will be positive for margin? Second, is there further room to cut rates both in terms of savings and savings deposits?

And third, the international margin continues to be going down despite a very easy rate environment globally and getting weaker and weaker out of that. So how do you see that trend? How do you see trends going on?

Rakesh Jha (Executive Director of the Board)

So Mahesh, I think on the last point, when the rates are low, banks don't really benefit. We don't get the benefit of free float on current account deposits, savings deposits. You can't reduce the rate beyond a point. Your free float on capital is lower. So that is a significant trend which will always be there when rates are at a low, and that's what we are seeing currently. On liquidity, it's not completely by choice that we are having this level of liquidity in the balance sheet.

I think our assessment is that from December quarter, we should start seeing some drawdown from some decline in the excess liquidity that we have. But whichever scenario, we still look at having a substantial surplus liquidity even till March to be there in the balance sheet. And that's something that we are factoring in. But the level of liquidity should start to decline from here on is what our best guess is. On the rates itself, on the deposit rates, we have been, I guess, as proactive as we can be on reducing deposit rates. The retail deposit rates in the 12-18-month bucket, we are at 4.9%, pretty much the same as where SBI is and lower than many of our peer banks.

I think below that rate, it does become somewhat of a challenge to reduce rates unless, for example, if RBI cuts repo rate and all of that happens, in that scenario, one can definitely look at it. But otherwise, once you are below 5%, the retail rates do become a big sticky. And the banks which have a large retail franchise at these points of time will have somewhat higher costs because the wholesale rates are much lower. So that is only a positive time thing, and we are focused on growing our retail deposit franchise. We'll keep the rates competitive there. I think there is hope to reduce rates, but to my mind, it will only be if the benchmark rates or system rates go down.

Manish Karwa (Executive Director)

Thank you.

Operator (participant)

Before we take the next question, we would like to request participants to please let me know questions to keep up with participants. The next question is from the line of Anand Dama from Emkay Global. Please go ahead.

Anand Dama (Head of BFSI)

Yeah. Thank you for the opportunity. So, in terms of assets, we have made the already preferred book. And in our case as well, it looked at an already somewhat over INR 16.6 billion. So certainly, it is more than what we expected.

Rakesh Jha (Executive Director of the Board)

Can you be a bit louder? Cannot hear you clearly.

Anand Dama (Head of BFSI)

Yeah, sure. Yeah. My question was about the corporate downgrade that we have seen in this quarter. So we have seen INR 15-16 billion of downgrades in this quarter. So is there a chance that as we get the hands-on financials of the customers, we can see more downgrades going forward? And if yes, what will be the level of downgrade that we might see in the BB and below quarter?

Rakesh Jha (Executive Director of the Board)

About the BB and below downgrade in BB and below category, I suppose.

Anand Dama (Head of BFSI)

I'm seeing that strongly upon the BB quarter year. What is the downgrade for BB?

Rakesh Jha (Executive Director of the Board)

Yeah. Line is not too clear, but so we do expect to see more downgrades into BB and below going forward. I think at the beginning of the year itself, we had said in the current environment, there would be downgrades into BB and below. To a previous question that I was answering that on the restructuring, there will be loans which are currently not BB and below and which could get restructured. So to that extent, one would expect the BB and below category of loans to increase over the next couple of quarters.

And that would be in line with the current environment and our expectation.

Anand Dama (Head of BFSI)

Sir, are there any numbers that you can put?

Rakesh Jha (Executive Director of the Board)

It's not possible to have a number there because it's not specific loans that we are aware which would kind of go into that bucket. So we have done various kinds of scenarios, not based on specific borrowers per se, but overall numbers. And based on the NPA additions that we think may happen based on the restructuring that may happen, downgrades that may happen, that is the COVID-related provision that we hold in the balance sheet and which we believe is quite comfortable to cover all of this.

Anand Dama (Head of BFSI)

And secondly, on the pro forma NPA, so we have made provisions. Have you reversed the interest without the interest on the pro forma NPA?

Rakesh Jha (Executive Director of the Board)

Yeah. So what we have done is that these loans, while technically not classified as NPA, for all practical purposes, for the financial statements, we have done as-if NPA treatment. So based on the bucketing of overdue and the NPA provision as per our policy. And we would also not accrued income on this unless continuing cash. So there could also be a change in contract in the margin that you're seeing in the current quarter. But if you look at the 10-12 basis point decline in margin, a larger piece in the current quarter would have come from the surplus liquidity. Because into the September quarter, we had even higher liquidity than where we were in the June quarter. There would be some impact of the interest reversals also. But the larger impact would have been surplus liquidity.

Anand Dama (Head of BFSI)

Thank you.

Operator (participant)

The next question is from the line of Anup Kulkarni from CLSA. Please go ahead.

Anup Kulkarni (Associate Director)

Yeah. Question on the loan spread.

Operator (participant)

We can't hear you very clearly. If you're on the transmitter, use hands-free.

Anup Kulkarni (Associate Director)

Yeah. Sorry. Question on the loan spreads, the NIM obviously is affected by liquidity. Could you talk about how loan spreads have behaved broadly and what's the expectation over the next 12 months in equity, EBITDA, corporate, BB, AWM, HFC money? So just want to understand what's happening with loan spreads and what would be the outcome for?

Rakesh Jha (Executive Director of the Board)

So on the loan spreads, I think at least till now, we have been able to reasonably manage in terms of bringing down the cost of funds also in line broadly with the yield on the advances side.

We have seen a fair bit of repricing downwards with the MCLR coming down, repo rate coming down. Plus, the new lending is happening at lower rates as well. But till now, we have been able to reduce our term deposit rates on the deposit side, even the savings deposit rates we had reduced earlier in the year. The approach would be to try and ensure that on the loan spread, we are able to manage to maintain that going forward. I think in the second half of the year, practically speaking, there would be some impact that will come through the fact that there will be higher addition to NPAs, and there would be some interest reversals that will happen because of that. And on an overall basis, we expect to see the liquidity levels coming down, and that should have a positive impact as well.

So those will be the two moving parts in the near term.

Anup Bagchi (Managing Director and CEO)

Rakesh, let me share a little bit on the liability side because I think those questions are also there underlying. So on the liability side, first is in general, when the interest rate regime comes down, your low-cost liabilities, they don't remain as attractive. Because suppose the interest rate comes to, let's say, 3%, then your CASA will only give you 3% spread, and CASA will also, if you don't bring it down, it will not give you that much spread. So in general, for banks, low interest rates is not a very, very positive thing. That is one part of the thing. Second part of the thing is that in general, at this point of time, if you see the 10-year spread of corporate bond over government security is quite high. Five-year spread is lower.

It is also because of the kind of players that are in there, which also speaks to the fact that at this point of time, in the short term, liquidity is essentially driving a lot of the questions that are happening. And naturally, it is hugging the reverse repo and repo rate, depending on the activity that is happening. Now, what are the choices for banks? If the balance sheet is very small, one can have a mix-up on the deposit side. Term deposit side, one has a mix of wholesale deposits or you can have bulk deposits or you can have the retail deposits. Now, the market for bulk deposits is not very large. One cannot put a very, very large balance sheet on bulk deposits. And we have seen that in the past.

With different years, it becomes very risky because the rates shoot up whenever there is a lack of liquidity. And it is not within control, and there is not that much of supply of this kind of deposits. And so it is very important that large banks must focus also on a mix of retail and wholesale deposits. At this point of time, whenever there is a large liquidity, the wholesale deposits come at a much lower rate than retail deposits. Having said that, the retail deposit franchise has to be nurtured carefully because in a cycle, when the rates move up, it is retail deposits which come at a much cheaper cost, in a less volatile cost, and in a predictable manner than wholesale funds. And ALM issues are then mitigated if you have a good retail franchise.

At this point of time, we are meeting the rates on the retail deposit franchise, but it has come below five. While it has come below five on the banking system side, on the other side, it's not that the rates have come down drastically, very, very low. So at this point of time, the time will come when consumers will also start to hint and hurt and move on towards slightly higher yielding products. And it would come by way of equity because equity is rising, and so you will see a lot of equity traders, direct equity traders coming into the market. So it will make a little bit of allocation, not a little bit of allocation towards that, a little bit of allocation again towards bond savings and other things where the rates are very, very high.

If it stabilizes here and it starts to move up, one will see how this whole wholesale versus retail deposit plays out. I think Rakesh has done a great job in managing the balance sheet in a way that we have surplus liquidity, and so if one takes a stance that one can absorb a little bit and then perhaps margin goes up because on the asset side, it's not a cost-plus regime as it is a different pricing mechanism, and that is dependent on the demand supply of the credit and the supply of credit and the ability to price it well, so we can absorb a little bit of liquidity, become more aggressive like we have on the retail term deposit side, and manage it in an overall context that we are able to manage the needs, so far, so good.

We have been able to manage it well. On the retail asset side, we certainly have a stance is to do more and more secured given what is happening in the environment, so we would want to go towards mortgages and fully collateralized kind of loans and open up the unsecured as and when we see more stability, we see more or less volatile markets there, but stability is returning on the unsecured side as well. As you know, on the Amazon card side, I think these are the fastest million cards that have ever happened in the credit card history, and I would recommend that it would be so in most other places outside of India as well. That is doing quite well, and it also does well on our affluent strategy, so on the liability side, that is where it is.

Last quarter, there was more volatility on the mutual fund side, but we see now stability returning on the mutual fund side as well. But the returns are not as attractive. So it will sort of increase with the deposit, but not quite that much. So we will see how it comes. We have extra liquidity which we can absorb in case we feel that stability of liquidity is there and volatility is low. Because on the liability side, we only look at three things. We don't look at the CASA percentage. We look at volume of deposits. We look at overall cost of deposits that is delivered, and we look at volatility of deposits. And within each process and kinds of deposits, that's how we take ourselves out.

Operator (participant)

Thank you. The next question is from the line of Suresh Ganapathy from Macquarie. Please go ahead.

Suresh Ganapathy (Managing Director and Head of Financial Services Research)

Yeah. Hi. Just one question, so Sandeep, Anup, the market is not sufficiently ready to find appropriate investment venues. If that's the case, why can't bank retain its strategy of offering traditional products FD and non-FD for its customers? Because at the end of the day, this is one core gap that bank customers have. And can it not be done through ICICI and have a more open approach? Because at the end of the day, you're just giving what the customer requires, right?

Sandeep Bakshi (Managing Director and CEO)

Here are two things. From a product perspective and then from a customer perspective, I think from a product perspective, it is a good product provided you have 100% persistency. So if you have 100% persistency, it's a good product from a customer perspective.

But then because it is finally a reflection of the underlying investment to do, one cannot be beyond a particular point of time. One can't be very competitive there because otherwise you are either taking higher risk on the asset side or you are taking an ALM risk. Okay. So from a product concept, but that is the lookout for the solvency ratio and others of the bank insurance companies. That is not sort of a subject matter of as a distributor hat of ICICI Bank. Now, from a distributor hat of ICICI Bank, the reason why we don't sort of offer this product to the consumers is because we have seen that the persistency levels in the industry are not very high, and the persistency levels drops to 60% and below over five years, one month, which is 60 plus months, etc.

Which basically means that for 50% of our customers, they will really lose a substantial part of the principal. Now, if that is the product concept, and I must be honest that can we sell it in a manner or offer it in a manner that we can guarantee 100% persistency, I'm afraid the answer is no. I don't think we can. I don't think there's anybody can. Now, just look at the situation of a bank where this is not the only product that we offer to the customers. In fact, the revenue from this is a fraction of the revenue of our other banking products on the retail banking side, fraction. But if 50% of the customers lose a large proportion of their principal because of this product, what will happen is our all other relationship with the product will go bad for sure.

And if that is the case, then it is better not to offer this product from a customer. But again, I will say that if the life insurance company is good and solid and solvent, and we can manage the risk and give a higher return, a fixed return, to the consumer, and as a distributor, we can almost underwrite 100% persistency, it is not a bad product. But unfortunately, that's not how our experience has been. That's not how the industry experience has been, both of the life insurance industry as well as the banking industry.

Suresh Ganapathy (Managing Director and Head of Financial Services Research)

Thank you.

Operator (participant)

Thank you. We'll be able to take one last question. The last question is from the line of M B Mahesh from Kotak Securities. Please go ahead.

M B Mahesh (Executive Director)

Good evening, sir. Can you hear me?

Operator (participant)

Yeah, Mahesh.

M B Mahesh (Executive Director)

Yeah, sir, just a few questions.One, it's kind of sick for the quarter at about INR 1,000 plus the INR 14 billion, which is also. Any reason why this is on the high side? When we compare this to some of the banks, we see they have taken quite the benefit of calculus has been benefiting them there. I don't understand.

Rakesh Jha (Executive Director of the Board)

So, Mahesh, you are not very clear, but I got the question. So in terms of this slippage for the current quarter, if you look at the fact that at least from our portfolio, what we have seen, one is, of course, the corporate and SME side, the addition that we have seen. As you saw, it's come entirely from the BB and below portfolio. And there we have taken a prudent stance in terms of categorization of some of these loans as NPA.

On the retail side, I think from our expectation, at least, it is in line. We have seen higher NPA additions across portfolios as customers have come out of moratorium. And the payments were due. So wherever it has crossed 90 days at August 31st, we have categorized those NPAs. And then if you add the INR 1,400 crores of the other loans. So from our point of view, it is broadly in line. And Mahesh, I must say that in the second half of the year, one will see higher NPA additions. And that's the reason we have the provisions that we have created. There is an impact on the portfolio in terms of some of the customers who have got impacted. And that will reflect. So it's fair to assume that NPA additions will be higher in the second half of the year.

M B Mahesh (Executive Director)

I just want to elaborate this point a bit. When you say high, what is high? Because you say on the bank selection to the customer service. Then how should we look at this?

Rakesh Jha (Executive Director of the Board)

No, sure. Mahesh, I think that is why what we thought we would give is the overview position. Because that gives you a much clearer picture instead of looking at moratorium and all of those things. So like we said, on the retail side, it is higher by about close to 2% of loans which are overdue. This is including one day overdue as well. On the rural side, the impact is less, so it's only 1% higher. SME banking is pretty much back to normal. So I think those are the indicators which are there.

M B Mahesh (Executive Director)

Okay. Just a question for you. Just the clarification, the tax rate that you are showing today, how should we read it with because it's been on the inside?

Rakesh Jha (Executive Director of the Board)

Mahesh, I could not get that at all.

M B Mahesh (Executive Director)

Just tax rate that you have from this quarter and last quarter, how should we read it with?

Rakesh Jha (Executive Director of the Board)

The tax rate, you're saying?

M B Mahesh (Executive Director)

Tax rate. Yeah, tax rate.

Rakesh Jha (Executive Director of the Board)

No, so on the tax side, again, other than the fact that on capital gains and dividend, we get the tax break which is there. So the tax rate around slightly below what the marginal tax rate is, a couple of percentage points because of the benefit that we get from dividend and all. That should be a sustainable tax rate going forward is what we believe. So this quarter, the tax rate is not much off if you look at it. It's around slightly below 20%. It would, on a normal basis, be slightly above that.

M B Mahesh (Executive Director)

My last question to you, is how should we look at the corporate loans finally? Because you've been using them for a very long time. But when we look at a lot of corporates and this kind of relationship that ICICI has compared to one of the largest banks, it still appears that there is still a fair amount of opportunity. What's stopping you to take that chance with the corporate on it? And the share of corporate loans continues to remain very low. This is against something which you guys had mentioned earlier. You would expect to loan on the retail side to come to.

Rakesh Jha (Executive Director of the Board)

Yeah. Vishakha, could you take that?

Operator (participant)

Vishakha has dropped off.

Rakesh Jha (Executive Director of the Board)

Okay. So, Mahesh, I'll just take that since Vishakha is not there right now. So in terms of the corporate loan book, Mahesh, like we have spoken in the past, I think we are focused on the corporate business, not just as a term lending kind of a business. We are looking at it from a 360-degree point of view, from an ecosystem point of view. And to that extent, we are all focused on growing the core operating profit from this business and improving our ROEs there. On the lending side, in this particular quarter, September quarter, we had a fair bit of prepayments that we saw during the quarter. Otherwise, if I look at the new business, the disbursement that we have done was a pretty high level. Of course, a lot of it was short-term kind of loans at pretty fine pricing.

While we have done some of the transactions, AAA, AA, PSUs, which is finely priced, we have not been very focused on that because we believe at that kind of pricing, picking up 10-year, 15-year loans may not be an appropriate call. So we have done that on a more selective basis. And internally, Mahesh, we don't have any specific loan growth targets per se. But we have done a fair bit in terms of increasing our current account deposits, have shown a very high increase. Commercial banking revenues have gone up. FX, again, we have seen an increase. So all of those things are doing well. On the loan book, it's a call that we have to take in terms of pricing. Like you rightly said, we pretty much look at all the deals which are there in the market.

A lot of the deals that I'm talking about are most kind of bid out. And to the extent that we are keen, we are doing that. To the extent we believe it's not good from a long-term perspective, we are not doing that.

M B Mahesh (Executive Director)

Perfect. Thanks a lot, Rakesh.

Rakesh Jha (Executive Director of the Board)

Thanks, Mahesh.

Operator (participant)

Thank you very much. That's the last question. I would now like to hand the conference to the management team for closing comments.

Sandeep Bakshi (Managing Director and CEO)

Thank you, everyone, for joining this Saturday evening, and wish you a happy recovery in advance on behalf of ICICI. Stay safe and healthy. Thank you.

Operator (participant)

Thank you very much.