Aavas Financiers Limited (AAVAS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aavas Financiers Limited Q3 FY '25 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectation of the company as on date of this call. These statements are not guarantees of future performance and involves risks and uncertainties that are difficult to predict. [Operator Instructions] I now hand the conference over to Mr. Rakesh Shinde, Head, Investor Relations of Aavas Financiers Limited. Thank you, and over to you, sir.

Thank you, Steve. Good evening, everyone. I extend a very warm welcome to all participants. Thank you for participating in the earnings call to discuss the performance of our company for quarter 3 and 9 months' FY '25 and the business outlook going forward. The results and the presentation are available on the stock exchanges. We have also uploaded the fact sheet along with our results on our company website, and I hope everyone had a chance to look at it. With me today, I have entire management team of Aavas. We will start this call with an opening remark by our MD, Sachinder Bhinder; CFO, Ghanshyam Rawat; and CRO, Ashutosh Atre, followed by Q&A session. With this introduction, I hand over the call to Sachinder. Over to you, Sachinder.

Thank you, Rakesh, and very good evening, and happy 2025 to everyone. I'm delighted to welcome you all to our Q3 FY '25 earnings call, and thank you for joining the call today late evening. Quarter 3 FY '25 has been a good quarter, where we saw a strong traction in our logins and decent pickup in our disbursement, which grew 23% sequentially and 17% Y-o-Y. In terms of AUM growth, we have maintained our growth run rate of 20% Y-o-Y. We have completed upgradation of all major tech platforms, which are now stabilizing. This was one of the fastest tech implementations in the industry. We believe we have set the foundation for sustainable, scalable and profitable growth. We are now focusing on leveraging the state of our tech platforms by strengthening governance, driving scale, optimizing costs and boosting operating efficiencies across functions. Ladies and gentlemen, with that preamble, I shall now take you through the quarterly performance and our assessment of the outlook. We have delivered an AUM growth of 20% Y-o-Y, reaching an AUM of INR 192 billion. In quarter 3 FY '25, we disbursed loans worth around INR 16 billion, a growth of 17% Y-o-Y, with the cumulative disbursement of INR 41 billion for 9-month period FY '25. Our net profit for the 9 months FY '25 grew by 21% Y-o-Y to INR 4.2 billion. Our net worth continues to compound quarter after quarter at the rate of around 16% Y-o-Y. Our calculated spreads have improved 4 bps sequentially to 5.72% in quarter 3 FY '25. Our NIM is expanding more than 10 bps Y-o-Y during the quarter to 7.75%. Our focus continues to underwrite quality business with risk-adjusted returns. As a result, our incremental business yields have shown a growth of 25 bps across products. At the beginning of the financial year, we have guided that we will bring down our OpEx-to-assets ratio by 20 bps every year to reach a level below 3% in our continuous endeavor of cost optimization strategy. I'm happy to report a remarkable improvement in OpEx to asset ratio by 42 bps Y-o-Y to 3.21% in 9 months FY '25 as a result of our good cost optimization strategy execution. Our asset quality continues to be pristine with 1+DPD of less than 4% at 3.85% as of December 2024. Our GNPAs were at 1.14%, which is quite seasonal in nature. Our endeavor to maintain the pristine asset quality continues. Credit costs improved further to 15 bps in 9-month period of FY '25 versus 19 bps in 9 months FY '24. We continue to guide credit cost of below 25 bps on a sustainable basis. ROA improved by 4 bps to 3.26% and ROE improved by 61 bps Y-o-Y to 14.06% in the 9-month FY '25. During the year and the quarter, we have opened 6 new branches during 9 months FY '25, and we are opening another 20-plus branches in this quarter, predominantly in the states of Karnataka and Uttar Pradesh. We will be accelerating our branch expansion strategy by opening more branches in the calendar year. The new PMAY 2.0 ensures that impact the last mile in a more efficient way and benefit our customers immensely. We expect more budgetary allocation and supply of affordable housing in the upcoming union budget, enabling faster and deeper penetration of housing for all. We are committed to deliver quality and profitable business growth, driven by tech-led operating efficiencies and cost optimization. I'm confident that with our strong risk management practices, diversified distribution reach and execution capabilities of our time-tested team, we will achieve our milestone and deliver value to our stakeholders. I will now hand over to our CFO, Ghanshyam Rawat, to discuss the financials in detail.

Thank you, Sachinder ji. Good evening, everyone, and a warm welcome to our earnings call. To provide update on borrowing first. In terms of liability, we are one of the best well-diversified liability franchise. We have already been innovative in exploring new avenues of sourcing. And I am happy to share that we have successfully raised NCD amounting to INR 6.3 billion from IFC in quarter 3. This is the largest NCD raised by company till date. This achievement will enable us to channel these funds towards promoting individual green homes construction, reinforcing our unwavering commitment to sustainable and inclusive development. We are a unique housing finance company where our tenor of liability is higher than behavioral tenor of assets. We continue to borrow judiciously, raised around INR 46.2 billion at 8.41% for 9 months FY '25. Total outstanding borrowing as of 31 December 2024 stood at INR 172 billion. Overall borrowing mix as of 31st December 2024 is 50.3% from term loans, 24.8% from assignment and securitizations, 15.9% from National Housing Bank and 9% from debt capital market. Lender support continues to remain extremely strong as Aavas evolves. There is excess of diversified [indiscernible] long-term financing. We maintain a strong relationship with developing financial institutions. To meet long-term business growth, we have progressed on co-lending tie-ups with the PSU banks. As of 31 December 2024, we maintain a sufficient liquidity in the form of cash and cash equivalents and unavailed cash credit limit of INR 18.95 billion and documented unavailed sanction limit of INR 22.8 billion. In terms of financial performance, our net profit of Q3 FY '25 grew by 26% year-on-year to INR 1.46 billion, led by robust growth in the net income, coupled with a sharp improvement in operating leverage. Our spread improved by 5 basis points to 4.94%, driven by 14 basis point expansion in the AUM yield to 13.8% (sic) [ 13.18% ] on account of 25 basis point increase in the BPLR in quarter 3 FY '25, whereas our cost borrowing increased by 9 basis points quarter-over-quarter to 8.24%. We have -- 32% of our bank borrowings are linked with the EBLRs such as treasury bill, repo, MIBOR; and 19% are linked with 3-month MCLRs, which will allow us faster repricing of 51% total bank borrowing in case of rate cut scenario. Our NIM in absolute terms has increased by 16% year-on-year in quarter 3 FY '25. Our margins, NIM as a percentage of total assets during quarter 3 FY '25 stood at 7.75% and 7.54% during 9 month FY '25. ROA for the quarter increased by 31 basis points year-on-year to 3.37% in quarter 3 FY '25, whereas ROE improved by 115 basis points year-on-year to 14.21% in quarter 3. In terms of other parameters, we are well capitalized with a net worth of INR 41.97 billion and capital adequacy ratio is at 45.56%. The total number of live accounts stood at 236,000 plus, translating into 15% year-on-year growth. Employee count grew by 6% year-on-year at 6,284 as of December 2024, as against disbursement grew 11% year-on-year and AUM growth 20% year-on-year, which indicate our productivity enhancement by various efforts taken by company. I would now hand over the line to our CRO, Shri Ashutosh Atre ji, to discuss the asset quality.

Thank you, Ghanshyam ji. Good evening, everyone. I am pleased to share the key portfolio risk parameters with you. Asset quality and provisioning. Aavas is strongly positioned to continue delivering industry leading asset quality. Our asset quality remains within the guided range with 1 day past due below 4% at 3.85% as on Q3 FY '25. The gross Stage 3 and net Stage 3 under 1.25% stood at 1.14% and 0.81%, respectively. In terms of geography, average 1 plus days past due and GNPA in our vintage states remained well below 4% and 1% of AUM, respectively. Whereas other emerging states, 1+DPD and GNPA remained well below 3% and 1% of AUM, respectively. Similarly, in terms of ticket size of more than INR 15 lakhs, 1 plus days past due and GNPA remained well below 4% and 0.8%, whereas in case of ticket size, less than INR 15 lakhs, 1 plus days past due and GNPA remained well below 4.5% and 1.25%, respectively. Our total ECL provisioning, including that for COVID-19 impact as well as Resolution Framework 2.0, stood at INR 1.01 billion as of 31st of December 2024. As per our quarterly exercise of bureau scrub analysis, we have only 6.7% customers having overlapped with MFI exposure. And out of this 6.7%, only 2.2% are into 90-plus days past due. With this, I open the floor for Q&A session.

[Operator Instructions] The first question is from the line of Renish from ICICI Bank.

Congrats on a good set of numbers. Sir, I have 2 questions, one on the asset quality. So though 1+DPD have fallen, but at the same time, there is a marginal increase in the GS3. So just wanted to understand, it basically implies higher forward flows in the delinquent bucket. So how does the underlying health of the portfolio look like, and does this sort of possess (sic) [ pose ] risk to our near-term asset quality and credit cost guidance because of higher forward flows in this quarter from the delinquent pool?

Thanks, Renish. I think if you look at the 1+, we continue to be at less than 4%, which is at 3.85%. Seasonal jump is a part of the seasonality of the increase in the GNPAs which are getting reflected. I think it was a mix of a certain part of seasonal, festive in the last quarter. But I think we are confident at this period of time to deliver -- continue to maintain the pristine quality. So nothing as far as any alarming or any disturbing parts of concern. So I think that's...

So sequentially, increase in GS3 is pure seasonal and it will sort of come back in Q4, right?

Right. That's right.

Okay. Okay. Sir, my second question is on the...

And you will see again -- again, to reiterate that if you look at the 1+, it's at 3.85%. So I think that's another one which is a good indicator for us.

Sure. Sure, sir. Yes, sir, so second is on the AUM by ticket size. So what percentage of our AUM is more than INR 15 lakh ticket size. I know, in terms of number of active loans, it is 15%. But in terms of AUM, it would be higher, right? So would you like to share that number? And also the yield difference between more than INR 15 lakhs and less than INR 15 lakhs.

Renish, it becomes a little quite secular. But as I was to put across, we would be in the range of around 40% when it comes to less than INR 15 lakhs. And that is where we continue to build our yields and the yields are around 200 bps higher than the normal bucket. So that is the bifurcation between less than INR 15 lakhs and more than INR 15 lakhs.

Sir, can you please repeat that share in terms of AUM? I'm so sorry.

Renish, our 80% book is less than INR 25 lakh, where we focus, and less than INR 15 lakh, we have around 45% book is less than INR 15 lakh. This is on amount. And the volume, we have already given in our presentation where 85% book is less than INR 15 lakh.

You can refer to the Slide #17 on the investor presentation.

Yes. But sir, that number is in terms of active loans, right? So in terms of AUM, it will be higher. So I was just wanting to know that.

No, no. Active loan and AUM is the same thing. Renish, active loan and AUM, I updated you. On count, we have already given in our presentation, where 85% loans are less than INR 15 lakhs; and in value terms, 45% is less than INR 15 lakhs and 80% is less than INR 25 lakhs.

Okay. Okay. Got it, sir. And 200 basis points is the yield difference?

Yes, you're right.

The next question is from the line of Shweta from Elara Capital.

Sir, couple of questions. Sir, are we changing our guidance on growth plan, or is it that 20% is now a new normal? And also just a related question there. Sir, if we aim for 20% even for this current fiscal, so that would mean almost adding up INR 700-odd crores of book in next 1 quarter. I mean, of course, seasonally, second half has been very stronger. You have demonstrated that earlier as well, but still INR 700-odd crores of run rate is slightly on the higher side vis-a-vis our historical run rate. So how do you sort of -- if you can throw light on this. That's #1. Question #2. So I remember you have always been very articulate and impeccable in terms of BTs, restricting them to below 6%. Now in the current scheme of things, wherein many of the NBFCs, AHFCs, et cetera, I mean, the competition is quite gaining strength and intensifying. So how do you see this BT out cases picture going forward? And whether the current set of measures will sort of continue to help us curve below 6%. And one last question. Sir, you mentioned last quarter and this quarter in the opening remarks as well that you are opening branches in Karnataka and U.P. Now I understand, a larger part of our portfolio is below INR 15 lakhs and below INR 25 lakhs, but one of our peers which has a portfolio above INR 20 lakhs has been facing tough cadence as far as Karnataka is concerned, especially because of E-khata and other such challenges. I mean, ours is a contiguous model. I remember you explained how we are expanding to Karnataka from Tamil Nadu in the last quarter contiguously. But still, are you facing any challenges considering the fact that you are sort of now moving into Karnataka belt?

Yes. So you have 3 questions. I will address it one by one. First is about the growth on the AUM. We continue to guide on a 20% to 25% of AUM growth. I think the traction which we got in the Q3 and the numbers in Jan really give us confidence of delivering the guided AUM growth of 20% to 25%. And as we speak, we are expecting January to be at around 15% to 20% on the growth trajectory. So that's one. Second, on the BT out, as you reflect, and we've been talking about our predictive models where AI has really played out very well. We are happy to note that the BT out percentage is at around 5.4%. So I think this is one of the best-in-class when it compares to the industry peers. And a couple of factors really go into this. One is aided by our predictive models, which we are able to predict what is the probability and chance of a BT out, and I think that is what is perfected. That is second. Third is on the branch expansion model, I think what you reflected is E-khata. As we see and as we speak, I think we are minimal at this period of time what Karnataka is. But going forward, as we talk to the people across, I think that easing out of E-khatas are actually moving across. It started now really getting stabilized actually. And as we go forward, we would see that really becoming stable over a period of time. So I think we are confident with that environment. By the time our branches open up, this would be fully stable. And then the government supply. The other part which is very initial part to really note is we have a lot of affordable supply which is there, where Aavas is one of the strong bearer in that state. And these are the properties which are directly allotted by the government authorities. And as we speak, Aavas has quite a good amount of presence in there. And Karnataka has a good amount of stock as we speak across the various districts and places, and we'll be able to maintain that along with the time the time this stabilizes as an initial output really to deliver good volumes.

Sure, sir. Just I'm squeezing in one allied question. So any geographic challenges are we facing? I mean, this is outside MFI, and what is happening, the noise around, but any geographic challenges in the markets which we are present?

As our CRO mentioned, he described about the 1+ ranges. Nothing as glaring or anything which is alarming at this period of time, that's what we've seen in our 1+DPDs, and neither in the GNPAs. And what we are doing is we are cautiously optimistic and watching out wherever we feel there is a slight thing, we actually tighten our credit and underwriting norms.

The next question is from line of Yash from Citigroup.

Just one question on the provisioning front again. So we've seen some increase in -- margin increase in provisioning on GS3. However, on GS2, it has increased sharply. So any change in policies there? Or how do we see it moving? And sir, just to add on that, even our ECL provisioning is around 65 basis points of total AUM. So would we see it increasing as well? That's the question on provisioning.

I'll have Ghanshyam ji to answer that on the ECL model comparison, how it stands out and what is the difference which I have made on that. Over to you, Ghanshyam.

Thank you, Sachinder ji. On ECL, I think there are 2 questions on the ECL provisioning change between Stage 2 and Stage 3 and overall 9 months to 9 months. If you -- during this quarter, we have moved our entire ECL provisioning model from our historical model to the bolt-on. It's a very universally accepted [indiscernible] model basically, wherein when we go live under this, we have made 3 major changes in our provisioning norms. First thing, in earlier model, there used to be point-to-point NPA slippage to consider in the earlier model. Now in the new model, we consider every bucket flow of NPA, Stage 1 to Stage 2, Stage 2 to Stage 3. So every bucket movement, the model considers. Earlier, we used to consider, at the point of time, quarter end to quarter end or year end to year end, when we do revisit our model basically. Now this new model, every month we reconsider the fresh data, how much in this month case has moved, how much case has gone backward basically. So in the real time, the modeling flow rate approach is adopted in this new model basically. Third important, I think in the earlier model, it was very difficult to adopt macroeconomic factors basically. Now in new model, we adopted Vasicek model, which is a macroeconomic factor where it got tested various economic factors basically. The ultimate model has found that 2 factors are very important for us, which he has adopted in the Vasicek model basically. Now after doing these changes, initial provisioning is what Ind AS described in their detailed guidance note basically. So everything got now adopted, and it's one of the best ECL model we adopted here. There is one more question, 9-month-to-9-month ECL in the volume provision. Last year, in the 9 months, there was a few one-off items basically, which was -- there was one-off item was there in the last 9 months. One was that we have the one subsidiary, where -- because subsidiary was difficult to -- we applied to close that subsidiary. So we had done onetime write-off of whatever the balance was there. It was around INR 1 crore was there. Secondly, we have certain assets acquired for sale under SARFAESI, which we have provided in the last 9 months. So both items put together had around INR 4 crores extra provisioning in last year 9 months, which not during this 9 months. I hope we clarified that.

Yes, sir, that's helpful. So would we also see this 65 basis points of provisioning on the overall portfolio also going up eventually?

No. It's -- I think when we went to model, it considers the entire portfolio basically. So based on the current assessment, it will remain at the same level.

Got it. sir. And sir, second is on the margins. So we understand this BPLR hike taken in October for 25 basis points. So is that now completely accounted for? Or would we also see some impact in the fourth quarter?

It got accounted.

Entirely?

It got accounted, but if you see sequentially, we are making a better yield on our new disbursement quarter-over-quarter, quarter 1, quarter 2, quarter 3, every quarter, yield is improving on our disbursement year-on-year basis. So that's the positive note, which will have, let's say -- not positive, but there's now less difference between new business and the old business.

Right. Got it. So sir, the disbursement yield which was around 30 bps lower than the AUM yield. So has that difference narrowed now?

Yes, it is narrowed down, Yash. And as Rawat ji pointed, across various product segments and various parts, we continue to focus that. In the previous first question, when I referred to around 40%, I was referring to less than INR 10 lakh focus area of 40% of our loans, so there I stand corrected. So our focus continues to be there on that where we get the risk adjusted return yields. And we've seen uptick quarter-on-quarter. And with the same endeavor, technology and those things are also helping us to really improve it in a right and scientific way.

The next question is from the line of Raghav Garg from Ambit Capital.

Congrats on the results. My first question is, I wanted to understand...

I'm sorry to interrupt, Mr. Raghav. Can you speak a bit louder? The volume is coming very low.

Yes. Is this better?

Yes, yes. Please go ahead.

Okay. I had my first question where I want to understand a bit more on sourcing part. So has your DSA sourcing gone up? Or if you can give us a number, say, compared to last quarter or last year. The reason I ask is that after several quarters, the number of loan files disbursed per branch, that has registered a positive growth rate. Otherwise, if I look at last few quarters, then it was mostly a declining trend. And at the same time, when I look at some of the cost economics metrics, such as OpEx per new file disbursed, that has also declined. So what is leading to such improvement. Is it because of higher sourcing from DSA channel?

Raghav, I think it is multitude of factors which are there, but it is not -- some of the digital channels which we have embarked on, which is typically the Mitra, eMitra, our CSE tie-up, and our acquisition through the WhatsApp chatbot and the web -- from our own website, I think that as a percentage of the digital part has actually started contributing and firing. We continue to be a predominant direct sourcing franchise. And as we speak, I think, on the employee count also when we see, the employee count, whatever addition has happened on the ROs, which is our relationship officers at the ground. So we continue to be a dominant direct sourcing part. A certain part of digital channels which have actually started firing actually also have resulted in that mix shift. We continue to be at 80%, 85% of the direct sourcing part.

Understood. So I think, say, you're about, I think, 12 files per branch per month. Is this a run rate that one can assume going forward at least for the first 9 months of a fiscal? I know Q4 generally tends to be higher, but at least for the first 9 months, is 12 files disbursement per branch, is that something that we can work with?

Raghav, I think if you look at -- we are wide spread across 373 branches. So depending upon our understanding of the market, depending upon our location strategy, depending on what are the risk metrics, and the kind of deployment of our resources and the market which we would like to really hold on to, I think those risk metrics really contribute to that. The positive side in the last 9 months to report is that we've seen an increased RO productivity per file. I think those are the metrics we monitor. Because this direct averaging out becomes a little -- very different model altogether. So we divide it in a much micro detailed one on the market size, looking at the geography, state, our vintage in the state, the credit portfolio behavior, and then really deciding what is that we really want as an output.

Understood. No, fair enough. The only reason I was asking is basis the data that's made available to us. Of course, you would have a much more nuanced view of how it works. But anyway, my last question is on the ticket size. When I look at the ticket size per quarter -- sorry, for this quarter on disbursement, for last 2 quarters, that has increased at about 4% to 6% in each of the last 2 quarters on a quarter-on-quarter basis, not Y-o-Y. So that's a pretty steep increase in ticket size. Why is this the case that the ticket size is increasing, say, at an average of 5% for each of the last 2 quarters?

I think if you look at the real estate inflation, it is not even meeting the real estate inflation. And if you talk about the kind of growth which has happened in the land rates in the states which we work across, that is higher than this. So if you adjust by that, I think it is below whatever is the retail real estate inflation which has got into the land pricing and the pricing which is prevalent in the markets which we operate. That's one. Secondly, some of the portions where we are present, where cost of construction is higher than what the normal one. And it has actually really inched up considering the kind of rural ability to spend and rural ability to really build good, better and bigger houses actually. So I think these 2 things have really contributed to one. It is output which is there, which is not a determinant of what we really drive for or we focus for. So our focus is clear cut on the input which is there. And whatever comes across in the output and rightfully so in the risk-adjusted matter is what we really monitor for.

Sir, let me ask this in another way. So your, I think less than INR 15 lakh by value, the AUM mix is about 45%. What was this last year against 45% currently?

It's not much change. I think if you see on 9 months to 9 months, our ticket size is just increased by 6%. If you see last year, December 9 months or this year December 9 months, there's a 6% increase in the overall ticket size, which we feel is the inflation in property prices, rising income levels, all our factoring are there basically. And as far as the combination of ticket size is concerned, we are 1% to 2% here or there, doesn't make a big change in our business model.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

So the first thing is, again, coming back to provisioning and asset quality, while Ghanshyam ji did explain about the change in ECL model that we have done and which is there, maybe it could have led to a onetime change in the PCRs across these 3 stages. What I wanted to understand is if I look at the last 10 quarter data, our Stage 3 provision cover has very slowly and gradually been inching up. So while I understand this is an outcome of the ECL model that we have, but inherently, what is it kind of telling us about the risk metrics?

Abhijit, it generally remains between 27% to 29% in our ECL model for Stage 3 provisioning. And as you know, company is -- if you see last so many quarters, the aging of portfolio was 6 years, 7 years, 8 years, 10 years. Now today, we have a 12-year, 13-year business operation basically. So in ECL modeling, aging of the portfolio, aging of, let's say, NPA assets is also increased certain level of your provisioning also basically. Apart from that, I don't see any sort of, let's say, any variation or disturbing factor in the ECL model.

Got it, Ghanshyam ji. Sachinder sir, the second question that I had was obviously around the demand environment, while you did say that looking at trends in 3Q and Jan, it gives us that confidence that maybe we can be at the lower end of our guided range of the AUM growth. But I'm just trying to understand more and more NBFCs and AHFCs, as the report, they have been talking about a weak macro environment, and given the fact that we also have a presence in the MSME segment. I'm just trying to understand how are you looking at basically the risk environment today? I mean I recall you and Ashu sir have called out that at least looking 1+ and GST, you're not seeing any significant increase in risk, but how are you looking at the broader macro environment today?

Yes. So Abhijit, there are 2 things. I think important to note is we are there in the part of MSME which is micro MSME. It is the one which is backed by our understanding of risk and doing a cash flow-based underwriting, and backed by self-occupied residential property. I think that's one very big differential when it comes to the very base of risk management practice. So the Tier 3 to Tier 5, wherever we are operating, we have seen those demands really being coming up. And as we speak about on a risk management framework, we cautiously monitor as to what are the trends which really show up. If we find anything on the segment-wise strain because of the macro environment having a waterfall effect on those economies or on those segments of customers, we actually hold on to that. So at this period of time, what we speak, I think we are well guarded with a cautious approach of underwriting and continue to do that in a long-term period. And that will be our continuous basis of a robust risk management practice. That's one. Secondly, when you talk about the home loan demand, I think you have to look at it from the perspective of 2 parts. We are into Tier 3 to Tier 5, where it is self-construction individual house. Again, a certain part of -- you would have really looked at PMAY 2.0 in 2 parts, which is the ISS, which is the interest subsidy scheme, where we've already received around 4,000 plus of applications to us, and the affordable piece where it is the ULB-led supply, which has really come in post all the elections being over. So the strong self-construction individual consumption is continuing to grow. Second is the government's focus on housing for all and the PMAY 2.0 really helping in the segments which are really focused at economically weaker section where Aavas operates. And third is the urban-led supply from the affordable housing, again, a part of PMAY. I think these are the 3 strong factors for us to say that there is the real demand coming and flowing in.

Got it. So incrementally, if you look at the last maybe 3 to 6 months after the elections have been over, you would say the demand has improved barring the seasonality?

Yes. Demand has started -- yes, we see an uptick in the demand and specifically in certain segments and verticals as I speak of the PMAY-led affordable supply, which is there. The other question which was there on the Karnataka, we say that as we are present in there, there is a supply which is there from the urban-led bodies available. And we are confident -- having done that business for more than -- we have 20,000 plus of customers in that and we've done that business right from the time when we started off and when the supply really came in, we are confident of doing that because that's a hard work of having the liasioning with the urban local bodies and building that business. Since there's a specific vertical which focuses on that, we will be able to cater to the inventory supply which is really coming up and source it in a much more faster, granular and quicker manner.

Got it. This is useful. And I just wanted to squeeze in one last question, while this has partly been addressed earlier, on yields, where we did take, I think, a 25 basis points PLR hike in October and that has reflected in our yields. Just trying to understand, in the past we have seen all these PLR increases that you or other HFCs have taken. They're not really reflected in a sustained yield expansion, so as to say. And again, I think maybe that is because the disbursement yields kind of remain below the book yields. What's the sense now you think these yields can be absorbed, or given the competitive intensity, over a course of time, they will drift down?

I think you will have to really look at the PLR increase was in line with our cost of borrowing really increasing to size up on that side. And that was the market scenario which was there really to have had the increase which is there. I think as I've been talking earlier that we continue to increase our disbursement yield on product metrics and, again, with risk-adjusted returns. So our endeavor really continues to do that. And as we speak on the 9-month period, we are above 25 bps compared to what we were there. And every quarter-on-quarter, we see that impact really on the disbursement yield coming. And secondly, on the PLR impact, what you were really referring to, we have a book which is 30 percentage fixed. So implication comes only on the rest of the book, which is a floating rate book which is there. So I think it is important to really build in a right risk-adjusted manner to increase the disbursement yields to really inch up. And we've seen that trajectory well in control and inching up as we progress on quarter-on-quarter basis. And again, with the scale of business what we really aim for.

The next question is from the line of Rajiv Mehta from Yes Securities.

Congrats on good results. I have a couple of questions. Sir, this 30-odd percent moves to productivity from a reduction in log in to sanction TAT. So have you raised business targets for ROs and branches since they can execute much higher volumes now? And on the same lines, can one expect that disbursement growth be much higher in FY '26 than the usual run rate of 17%, 18%?

Rajiv, can -- you are referring to which data, if you can again rearticulate the question? You're referring to the TAT or you're referring to the...

So sanction TAT has come down, right, from 10-odd days to 7-odd days. Yes. So the efficiency and productivity has gone up.

Yes. Yes, that you see and they reflect in the metrics also from a perspective of disbursement coming up. [Technical Difficulty].

Okay. And on asset quality, typically, in Q4, we generally pull back 1+DPD substantially every year. Are we confident of doing that this year as well? Because see, the business and liquidity backdrop for some of the delinquent customers could be challenging this year versus the preceding year. So are we looking for a very similar pullback that we generally deliver in 4Q?

I think if you look at, Rajiv -- from a perspective of quarter 2, quarter 3, I think 1+ is already at around 3.85%, which is well below our guided range of 5%. We are below 4% at 3.85%. I think that's a good indicator for us. And we continue to be [indiscernible] and our endeavor is to really control and maintain the pristine quality considering the way we underwrite and the way we really collect that. And I think a couple of things there work across where technology actually has helped us to really predict the part of bouncing, to predict the part of customer behavior and the part. So I think it gets front-ended when it comes to our collection efficiency to really have the right kind of predictive models by our AI, which is proprietary led internal development. So having perfected that, that becomes a good one. And you will be happy to know that we even use voice bot and others to really go across collect. And we are very, very clear as to what is the range and what is the method of even the collection it would happen. So I think technology on that side really plays a part. So it's a mix of the right kind of technology, right kind of risk management practices and the efficiencies which we really bring in to counter and deliver the pristine quality as a franchise.

Okay. And one last thing is on the comment that you made that the incremental business yield has been improving every quarter and across products. So how is this being achieved? I mean, are we slightly pushing on rates or some other kind of pricing efficiencies we are tapping here?

I think, Rajiv, as I said that, again, it is risk-adjusted returns. I think therein we've gone for -- we've implemented loan origination system by SFDC. And I think therein, there is a clear visibility on the risk metrics, which really gives us a pricing input, which is because of that it is really helping us to price it right according to the risk metrics. I think that's actually really played out in helping us to be much more predictable in the output which we are able to deliver. Again, segmental focus of focusing on less than INR 10 lakhs, which is where you get good yield, a focus on inching up where you find that you get the right risk-adjusted returns by pricing it right. I think these are the 2 things which are very important, and we've seen that moving across quarter-on-quarter. And our endeavor will continue to grow that, again, cautiously with risk-adjusted returns.

The next question is from the line of Shreepal Doshi from Equirus.

Sir, my question was on RM level target. So in newer geography, what sort of RM level KRAs we set in terms of business sourcing versus matured branches? And the level of disbursement that we have done this quarter, do you aspire to maintain it going ahead, like the revival in disbursements?

No. As you know, Aavas, when entering the new geography, we take our own time to understand that market, people behavior, geographical behavior, the local population behavior, legal and technical titles. So immediately, in the initial few quarters, we didn't give as such any large target to them. The major focus was that there should not be any delinquencies in the initial quarter. There should not be slippage in the initial few quarters in any bucket. So we, as a company, don't have philosophy initially in a new geography to give targets in those markets. But wherever we have the strength, where we have maturity, there definitely we strengthen our branches through process policies, through understanding, through flowback learning. And then accordingly, we ask them the returns also by giving targets basically. RO has a different maturity, RO who has done 1-year, 2-year plus in the system, they definitely have better targets. The RO comes who new in the organization, they have a lower target in the system basically.

So sir, especially for states like Karnataka versus Rajasthan and Gujarat and Maharashtra; I mean, even in Karnataka also, we've been there for almost a couple of years now. So what would be the differential in terms of branch level efficiencies in terms of business?

Karnataka has now come up -- we are in the fourth year business operation. So branches which have completed 3-year plus, they are at par with our mature states like Rajasthan, MP, Gujarat. And the branches which we opened in the last 1 year branches, those branches are showing the progress as we desired.

Got it. Got it. And sir, on disbursement front, like will this run rate continue, or...

Yes. Karnataka as a whole is doing a disbursement growth better than our overall company growth. Much better growth, much better. As well as performance also, quality front also, Karnataka is doing fantastically well for us.

Got it. Got it. And then just the second part of the question was on disbursement side. So will we be able to continue with this disbursement momentum, because in the last few quarters, there have been some like ups and downs. So will we be able to continue now incrementally?

Yes. So on that part, if you look at it, when we refer to ups and downs, it has always been an upward trajectory. And every quarter-on-quarter, we've seen that traction really moving across. And as earlier guided that we see a good uptake and green shoots in January at this period of time, and we are confident of pushing that every quarter and build at scale with quality.

Next question is from the line of Shubhranshu Mishra from PhillipCapital.

So what is the yield on book for home loans, LAP and MSME? And what are the onboarding yields for these products?

Home loan versus, let's say, non-home loan, which is MSME or LAP, there is always difference of 250 basis points between home loan to non-home loan. Yes, MSME businesses give us another 75 basis points better pricing than the LAP portfolio. Out of non-home loan, we do around 75% business as MSME business, which is our focus area on the MSME.

So what is the home loan yield?

It remains in the range of between 11.5% to 12%.

This is on AUM. And what is on disbursement for the same?

As we mentioned that the difference between the new business versus our old business AUM, difference is 30 to 35 basis points as of now.

The next question is from the line of Chandra from Fidelity.

Could you just share maybe the percentage of disbursements that you had this quarter below 10% yield and maybe what it was for the previous quarter. And directionally, I think you are trying to reduce it. So if I had to look at it maybe a year out, would you think it's a reasonable chance that the amount what you're disbursing below 10% yield or in single digit essentially would drop? That's one. Second is, this business-wise, after declining for a while, the spreads have finally inched up a little bit. Do you think it's reasonable that at some point in time, you'll cross 5% and you settle back to maybe 5.20%, 5.30% at some point in time? Is that a realistic possibility? And just lastly, what would you think you're capacitizing sort of the business for in terms of next year, just in terms of disbursements? I mean, obviously, first half was a little weak because we had some issues. But I mean, are we capacitizing for maybe a growth of disbursements of maybe 17%, 18% on the base of this year? How should we think about it?

Yes. So you have 3 questions. First is on the yield, but we look at it from a ticket size perspective. I think that is the input which we really look at it. On a ticket size of less than INR 10 lakhs, our endeavor continues to be in the range to cover up at around 35%. As we speak, we are in the range of 30% to 35% when it comes to a ticket size less than INR 10 lakhs. And this has real right kind of risk-adjusted, yielding up good spreads as well as the yields. That's number one. Number two...

So that means 30% to 35%, towards 35%, you're saying. You're saying, gradually you want to increase the share below INR 10 lakhs.

Yes. Our aim finally is to get to the 45%. Currently, we are hovering between 30% to 35% of the loans which are less than INR 10 lakhs in ticket size. So it's not on yield, it's on ticket size, okay? That's one. Secondly, on the part of we are capacitized and we are looking at again on a guidance level of continued AUM of between 20% to 25%. So we'll continue our guidance on AUM of 20% to 25%. And as we speak, I think our concentrated efforts to really get in the yields improvement quarter-on-quarter basis, we will continue that in the next financial year also, again, with the risk-adjusted return metrics and robust risk management practices.

Sure. And on spreads, do you think that getting to 5.20% at some point is a realistic possibility?

See, Chandra, this is, I think, an outcome of the cost of borrowing. And if you would have seen that is one part is there. I think we work on the input, what is that we will get. Whatever the difference between would be really the ones which -- and we've always guided that we will really look at the kind of spread which was at around 5%, which we've guided across. It all depends upon how does the economic environment on the macro side really spans out. If the rate comes in, I think we will have the benefit. And as what Ghanshyam ji really talked about, we have EBLR, repo-linked, T-bill linked kind of borrowings, which will have an immediate impact on our cost of borrowing. I think that is a differential which will come across really spanning out on the increase in the spreads.

The next question is from the line of Bunty Chawla from IDBI.

Congrats on a good set of numbers. Sir, during this quarter, we have seen there is an inch up in the cost of borrowings. Although you have shared that we have raised the INR 600 crores IFC at a competitive rate, which I believe it should be lower than the borrowings at the book level for you. So what is the reason behind increasing the cost of borrowings? What we have observed that there has been a minimal or no MCLR hike from the banks as such during this quarter. So then also there has been an increase in the cost of borrowing during this quarter. And how should shape up this cost during next quarter and FY '26?

Yes. In this quarter, overall cost of borrowing is increased by 9 basis points. Yes, you are right, INR 800 crores -- INR 600 crores we borrowed for IFC, which is much lesser than what is average cost of borrowing. But as you know, we borrow a lot of money from banks, which is a 1-year MCLR, 6-month MCLR basically. So what money we borrowed a year back at, let's say, SBI MCLR, which used to be 8.3%, 8.4%, today that same MCLR has reached at 9% basically. So that impact is passed on when the liability is reset in that quarter basically. So I think by the next year, most of the liabilities are getting repriced what we borrowed earlier in different points of time basically. So more or less we are seeing a stabilization in cost of borrowing side, few basis points here and there, basically. Because we hope if some cut comes, so that will be a positive note for us.

That's very helpful, sir. And previously you said, because of the rate cut, we will be getting benefit. Any rough sense, if there is a 50 bps rate cut, what kind of positive impact we have on the spreads or the margins? Any rough sense there?

As I mentioned, our 50% borrowings are marked-linked borrowings, which is repo-linked, T-bill linked, and less than 3-month MCLR. So we hope that, that should be a positive impact within 3-month time frame. But it's difficult to predict how it will get translated once the rate cut starts.

Ladies and gentlemen, due to time constraint, this was the last question for today's conference call. I now hand the conference over to the management for the closing comments.

Thanks, ladies and gentlemen. As we conclude today's earnings call, I want to express my heartfelt gratitude to each one of you for your participation and engagement. The dedication of our team, the trust of our shareholders and the loyalty of our customers have been instrumental in our growth. We aspire to reach a milestone of INR 500 billion in assets under management in the next 4 to 5 years and broaden our horizon as a pan-India player and continue our cost optimization strategy. I express my deepest gratitude to all our regulators and stakeholders, whose constant faith and support have been the wind beneath our wings. We remain optimistic about the future and are confident that our strategic initiatives will continue to drive sustainable growth and shareholder value. If you have any further questions or require additional information, please feel free to reach out to Rakesh, our Head of Investor Relations. Thank you, and have a wonderful year ahead. God bless.

On behalf of Aavas Financial Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.