How do you see the quality of your assets changing in the future?
Q3 was a pretty good quarter and we’ve been very focused on continuing to focus on collections in Q3 as well and it’s really delivered good results. The raw NPA slippage is among the lowest in recent quarters and, of course, the GNPA percentage also fell to 4.35% from 4.65%. Delinquencies in the 1-90 range also decreased in the third quarter compared to the second quarter and our cost of credit for the quarter was significantly lower compared to the first and second quarters.
I wouldn’t say it’s back to pre-Covid levels but it’s very close to that. So going forward we believe our clients have really overcome the pandemic stress and we believe that going forward asset quality should return to our normal pre-Covid levels. Before Covid, our cost of credit was around 1.1% to 1.2%. This year it could hit around 2.5%, that’s what we’ve been guiding and it seems likely. But as of next year, we should see our cost of credit return to normal levels.
Your cost of funds has decreased for the third quarter. Do you expect this to continue as the bank grows and what do you think is really leading to this?
Our cost of funds has come down over the past few quarters and we expect it to continue to come down a bit more, although we are all aware that the interest rate cycle is on the rebound today and everything the world expects interest rates to start rising in perhaps the next two to three quarters. But in our case what happened is we have a lot of old fixed deposits that are at a higher rate and they are revaluing at a lower rate and that’s why we see our rates go down, the cost of funds go down although we could also join the party and increase the deposit rate to some extent.
But even then, the old depots being repriced should continue to help us, and even our revised pricing will still be significantly lower than our pricing we used to offer about a year to two years ago. We should continue to see a slight moderation or decline in our interest expense over the next two to three quarters.
In terms of your main growth verticals – small business lending – what have you planned for that and what kind of trend do you see on the ground?
Small business lending is our flagship program and represents approximately 45% of our total portfolio. Basically, small business loans are given to various small businesses that operate a store or a gas station for cell phone repair or two-wheeler mechanics or those kinds of very small businesses. That’s basically where we finance and they’re all secured by ownership of the house as a mortgage.
We’ve been doing it now for about 10 years and we have a lot of experience and it’s been our fastest growing product for the past few years. During the pandemic and after the pandemic as well, we see that this portfolio continues to do very well and the NPA and performance have been very strong.
So that’s our priority area for growth going forward. Commercial vehicles, which represent around 25%, should continue to hover around this level of 20-25% in the future as well. The commercial vehicle cycle should accelerate in the coming quarters. Early signs of recovery are very strong, freight rates have increased over the past two to three months and we see commercial vehicle continuing to perform well in the coming quarters.
Our target should remain there and it should continue to contribute around 25%, which is the case today. Microfinance is around 18% of the book and this could moderate to around 15%, which is what we expect over the next two to three years.
The recovery in microfinance has happened very strongly over the past two, three, four months – not just for us but across the industry. Today, at 18%, we are very comfortable with the contribution of microfinance to the total portfolio, although it could drop to 16% or 15% over the next two or three years. Overall we have a very good spread of lending products and all products are aimed at informal economy customers, unmet demand continues to remain very strong and so we expect to be able to return to our levels of pre-Covid growth which was about 30% more. We should be able to return to this level next year.
Another key segment for the business is affordable home loans and given that in the era of the pandemic we have seen a lot of traction in the segment, what are the growth prospects you expect?
We started this pre Covid and we started it first in Gujarat. After the first six months of Covid, nothing could be done, but thereafter the momentum gathered pace and this year we extended it to Maharashtra and the south. We are therefore expected to launch affordable housing loans in Tamil Nadu, Karnataka and Andhra next quarter.
The initial traction of affordable housing has been very good and at present affordable housing contributes about 4% to the book, but we expect this to touch 10% over the next two to three years.