Aavas Financiers Limited (AAVAS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aavas Financiers Limited Q4 FY '25 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involves risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rakesh Shinde, Head, Investor Relations of Aavas Financial Limited. Thank you, and over to you, sir.

Good evening, everyone. I extend a very warm welcome to all participants, and thank you for joining us today on earnings call to discuss the financial and operational performance of our company for Q4 and the full year FY '25. The results and the investor presentation have been uploaded on the stock exchanges and are also available on our company website. I hope you have had a chance to review them. Joining me today is the entire management team of Aavas. We will begin this call with the opening remarks from our MD, Sachinder Bhinder; CFO, Ghanshyam Rawat; and CRO, Ashutosh Atre. This will be followed by a Q&A session. With that, let me now hand over the call to Sachinder. Over to you, Sachinder.

Thank you, Rakesh, and good evening, everyone, and a very happy new financial year to all of you. Thank you all for joining us this evening. I truly appreciate your presence and continued support. We are proud to share that during this quarter, we achieved a significant milestone, crossing the INR 200 billion mark in AUM. This is more than just a number. It reflects our unwavering support, guidance and valuable feedback. It also reinforces our commitment to making affordable housing finance and MSME credit more accessible to thousands of families and businesses across Bharat. Quarter 4 FY '25 was marked by strong operational performance. We witnessed healthy traction in customer log-ins and a robust pickup in the disbursement, which grew 27 percentage Q-o-Q. During the quarter, we achieved our highest ever volumes crossing 55,000 in log-ins and INR 20 billion in disbursements for the first time. 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. As we step into the new financial year, our focus is clear to fully leverage the state-of-the-art platforms by strengthening governance, accelerating scale, optimizing cost and enhancing operational efficiencies across the organization. Ladies and gentlemen, with that preamble, I shall now take you through the quarterly performance and our assessment of the outlook. We have delivered AUM growth of 18 percentage Y-o-Y, reaching an AUM of INR 204 billion. In quarter 4 FY '25, we disbursed loans worth around INR 20 billion, whereas in FY '25, we had disbursed INR 61.2 billion, a growth of around 10%. Our net profit for FY '25 grew by 17 percentage Y-o-Y to INR 5.74 billion. Our net worth continues to compound quarter after quarter at a rate of around 16 percentage Y-o-Y. Our calculated spread has improved by 15 bps sequentially to 5.87% in quarter 4 FY '25. Our reported NIMs expanded by 37 bps during the quarter to 8.11 percentage. Our focus continues to underwrite quality business with risk-adjusted return. As a result, our incremental business yield has gone up by 22 bps in FY '25. At the beginning of the financial year, we have guided that we'll bring down OpEx to asset ratio by 25 bps this year. I'm happy to report we have delivered a reduction in OpEx to asset ratio by 26 bps Y-o-Y to 3.32% in FY '25 as a result of our cost optimization strategy. Our asset quality continues to be pristine with 1 plus DPD of less than 4 percentage at 3.39 percentage as of March '25. Our GNPA was 1.08 percentage down 6 bps Q-o-Q. Credit costs improved further to 15 bps in FY '25 versus 16 bps in FY '24. We continue to guide credit costs of below 25 bps on a sustainable basis. ROA remained stable at 3.27 percent and the ROE jumped by 18 bps Y-o-Y to 14.12% in FY '25. We continue to strengthen our distribution network by opening 30 new branches during the FY '25. Going ahead, we aim to accelerate our branch expansion strategy in the first half of FY '26. The required capacity is already in place to support this planned scale up. In addition to expanding our branch network, we continue to prioritize value-accretive partnerships that enhance our digital channels, CSE, Emitra and Ecosystem channel partners, enabling us to tap into new customer segments, particularly new to credit and new to mortgage customers. The new PMAY 2.0 scheme ensures impact in the last mile in a more efficient way and benefit our customers immensely. The scheme aligns well with our mission to provide affordable housing finance, and we expect it to drive higher demand in the products, furthering supporting our growth and expansion across Bharat. We are committed to deliver quality and profitable business growth driven by tech-led operating efficiency 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'll achieve our milestones and deliver value to our stakeholders. With that, ladies and gentlemen, I would now hand over to our CFO, Ghanshyam Rawat, to discuss the financial in details.

Thank you, Sachindra Ji. Good evening, everyone, and a warm welcome to our earnings call. First, to provide update on borrowing side. In terms of liability, we have one of the best well-diversified liability franchise. We have been always borrowing innovative in exploring new avenues for sourcing. This year also, we raised NCD amounting to INR 6.3 billion from our institutional investors. We will channelize these funds towards retail loans for individuals and the promotion of green home constructions, underscoring our unwavering commitment to sustainable and inclusive development. We continue to borrow judiciously and raised around INR 61.8 billion at 8.42% for FY 2025. Our average tenure of borrowing continues to be higher than assets with a positive AUM across the bucket. Total outstanding borrowing as of 31st March, those are purchased stood at INR 179 billion. Overall borrowing mix as of 31st March 2025 is 51% from term loans, 25% from assignment, 14% from National Housing Bank refinancing and 10% from debt capital market. Lender support continued to remain extremely strong as Aavas grow. There is access to diversified and cost-effective long-term financing. We maintain a strong relationship with the development financial institutions. To meet long-term business growth, we have progressed on a co-lending tie-up with the PSU bank. As of 31st March 2025, we maintained sufficient liquidity in the form of cash and cash equivalents and unavailed CC limit of INR 16.52 billion and documented unavailed sanction of INR 13.47 billion. In terms of financial performance, our net profit for quarter 4 FY '25 grew by 8% year-on-year to INR 1.54 billion, led by robust growth in operating income on account of healthy improvement in operating leverage. During the quarter, our spread moderated by 5 basis points sequentially to 4.89% on account of softening AUM yield by 5 basis points to 13.3%, while our cost of borrowing remained unchanged at 8.24%. We have 36% of our borrowings are linked to EBLR such as repo rate, TBill, IBOR and 21% linked to 3-month MCLR, which will allow us faster repricing of 56% borrowing in line with the interest rate trend. Our NIM in absolute terms has increased by 14% year-on-year in quarter 4 FY '25 and 13% year-on-year in FY '25. Our margin NIM as a percentage of total assets during quarter 4 FY '25 stood at 8.1% and at 7.64% during FY '25. ROA for the quarter stood at 3.37% in quarter 4 FY '25 where ROE at 14.4% in quarter 4 FY '25. We are well capitalized with a net worth of INR 43.61 billion and CAR at 44.5%. The total number of live accounts stood at 246,000 plus, translating into 13% year-on-year growth. Now I would like to hand over the line to our CRO, Mr. Ashutosh Atri, to discuss asset quality.

Thank you, Ghanshyam. 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 5% at 3.39% in Q4 FY '25. And gross Stage 3 and net Stage 3 under 1.25% stood at 1.08% and 0.73%, respectively. In terms of geography, average 1 plus DPD and GNPA in our vintage states remained within 4% and 1.25% 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 DPD and GNPA remained well below 4% and 1%, whereas in case of ticket size less than INR 15 lakhs, 1 DPD and GNPA remains below 4.5% and 1.5%, respectively. Our total ECL provisioning, including that of COVID-19 impact as well as resolution framework 2.0, stood at INR 1.01 billion as of 31st of March 2025. With this, I open the floor for Q&A.

[Operator Instructions] We have first question from the line of Renish from ICICI.

Congrats on a good set of numbers. Two questions from my side. One on the asset yields. So sir, when we look at the asset yields, it has been static around very narrow range between 13.1% to 13.15% for last 10 quarters despite we've been increasing PLR rates, et cetera. And now since we are entering easing rate cycle and having a 70% floating rate book, how do you see asset yields settling in near term? And also as you have been highlighting since past many quarters about change in sourcing strategy with more focus on small ticket loan moving to risk-based pricing, et cetera. When do you see this sort of reflecting in yields and ultimately we reaching 5% spread?

Thanks, Renish. I think as earlier guided by us, our constant endeavor has to increase the disbursement yields. And that also structurally by really looking at the risk-adjusted returns. As we have shared that over the last 1 year, we've increased by around 22 bps. And I think it's about more the segment rather than the playout on the interest rates, which is there. We've had a mix of adjustment according to the product mix, the loan category type and using the state-of-the-art BRE engines for getting the risk-adjusted pricing returns in the right format. So Renish, as you would appreciate that the disbursement yields over the last couple of years have been lower than the AUM yield. And a catch-up becomes very difficult in such a loan growth AUM, which we have built over the last couple of years. But our endeavor continues to build across on an incremental disbursement yield. And as we speak, we will take another 3-4 quarters to really build that in a right framework where we try to be around AUM disbursement yield on an incremental disbursement yield as we continue to increase and step up our efforts.

Okay. So I mean, so this is more important from a spread perspective because 70% floating rate book will sort of will continue to impact our yields going ahead. So strategically, how will you address that?

So strategically, I think it is about the disbursement yields to be really sticking out. I think that will actually help across the spreads where in the falling rate interest scenario, it's about whether we'll be able to source the customer at that interest rate. The answer is yes. As a team, as management, we are fully confident about the fact of our disbursement yields, so to say. So I think in that -- even in the falling rate scenario, as you speak, Renish, the lowering of the cost of borrowings -- we will continue to build our disbursement yield, as I spoke across on 3 parameters. One is the product type. Second is the product segment when we say product segment is less than INR 10 lakhs. Currently at around 32%, 33% inch up of around 3centage really gets the metrics right for us.

Renish, what Sachindra ji said, our entire loan book, which is 70% of the floating rate is linked to our PLR basically. And our PLR is dependent on our cost of borrowing. If we see cost of borrowing also 70% liability is on floating rate. Out of that, 56% is a floating rate, which is linked to repo-linked TP link and less than 3-month MCR. And the remaining 20% is linked to 6 to 1 month -- 1 year MCLR MCR. So as we have a positive impact on cost of borrowing, then it will be, let's say, will pass on the floating rate asset side basically. So we don't think in a falling market scenario, there will be any negative impact on the spread. In the past also, we have seen -- in past also, it always help to protect some spread.

Okay. So maybe just a follow-up on that Kham, sir. So as you rightly said, maybe on a blended basis, 25% to 30% borrowing is linked to EBLR and maybe 3-month MCLR. So when we look at the 50 basis points of repo rate cut and when we look at the cost of borrowing, it remains static on a sequential basis. So I'm just wondering why the rate cut is not reflecting on cost of borrowing, let's say, even 5 basis points?

Yes. Let's say, in the first quarter, in the quarter 4, we see only 25 basis point repo cut. My repo borrowing immediately got impacted in a positive manner. In the next month, then reset came in the month of April, we have seen a positive impact there in that. MCLR is the bank yet to reduce in this quarter. They will start to reflect the interest rate scenario in this quarter. So we are very confident going forward, it will have a very positive trajectory on cost of borrowing side.

Okay. Okay. Got it. And just last question on staff cost. We have seen a sharp increase of more than 20% sequentially. So anything specific to read into this?

See, Renish, if you look at it, we have increased 30 branches during the year. The last 25 branches got operational in quarter 4. So that is the one which has increased the branch strength, the consequent employee deployment in that -- those branches. And going forward, we are trying now to get front-loading of the branches in H1. So it's more to do with resource and capacity planning for the branches which we open.

Got it. Got it. So nothing one-off or nothing any...

I think whatever you see OpEx increase, including manpower cost increase in the quarter 4 is an investment in the company for the take care of future growth in the company. In the manpower, the expansion of the branches are the major. But third, importantly, in this quarter, business has grown by around 30% from quarter 3 to quarter 4, which has a variable cost -- variable cost is linked to the business growth, sales team incentive and other variable expenses.

We have our next question from the line of Shreya Shivani from CLSA.

Congratulations on a good set of numbers. My first question is, if you see your Stage 3 provision coverage, incrementally, it has been rising and this time, it was above 32%. So how to look at it, where should this number stabilize or some math, if you can help us understand on this number? My second question is, usually in your fourth quarter, you have a negative net slippage, either your gross slippages are lower or you have better recoveries, which come through. This time, I know it's not a big positive number. It's still an improvement Q-o-Q, but it is still -- it's not a negative number. So am I missing something over here? Or has some recoveries not come through or something has happened on that front? These are my 2 questions.

Thanks for that question. First, I'm taking a slippage part. You refer our Stage 1, we have shown a good amount of improvement, which is coming less than 4%. Our guidance is 5%, which gives us a confidence that in another 1 or 2 quarters, we will come back to less than 1% of our gross NPA. We are confident. I think nothing too much read out of that in the overall gross NPA level. That's one part. Second piece, your Stage 3 increase in the provision. As I mentioned in the last quarter con call, we have moved to new system bolt-on is the international level computation of probability of default and ECL methodology, in which now we moved 2 important change we made in the system. Now the new system take care of every month slippages roll back and roll forward. Early is 3 point of time basically. Secondly, economic changes in the behavior changes in the economic scenario basically, which also got factored in the systems. So after putting those 2 factors in the system, last month also -- last quarter also, it -- it increased a little bit. The balance has increased has made in the March '25 in this quarter. Going forward, we see it will remain in the same range of 32%, 33% of Stage 3 as a provision requirement.

Correct. So okay, yes, that is correct. You had changed the ECL methodology in 3Q. So going ahead on -- it should be at -- sorry, 33%, 34%, did you say, level of the Stage…

You can take somewhere between 30% to 34%.

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

Sir, a couple of questions. So now that we are INR 20,000-odd crores of overall AUM and you also fleetingly mentioned in your opening remarks about scalability focus. So definitely, it's presumed that scalability challenges sort of pan out above INR 200-odd billion AUM. But then if I look at -- and the larger part of scalability is determined by branch expansion network. But if I look at new branches that were opened for the whole of FY '25, they were largely concentrated or rather fully concentrated in your existing states. whereas you had mentioned earlier that there will be focus also on entering into newer territories. And I think that would be the way forward for achieving further scalability. So if you can elaborate on that. Second is, have we benefited more from securitization volumes as far as margins are concerned because that run rate quarterly basis is only climbing. And third question is, A, how is the MSME scenario sort of panning out? Because I remember the micro SME. Because I remember last quarter, you sort of had mentioned some cautious -- you made a cautious commentary that you're monitoring trends and there has been strain on macros per se. And you mentioned you have stayed guarded. So any scenario change, especially in the SME segment? Yes, those are my 3 questions.

Yes. Thanks, Shweta, and thanks. I think it's a great one to have crossed INR 20,000 crore AUM. So as we build our focus is on risk-adjusted returns. And on the expansion side, when Shweta, you highlighted, in the quarter 4, it was within the existing states. Even within the existing states, if you look at it, it was 10-plus branches in Karnataka. And as we have always guided that in a range of 3 to 4 years, we open up a new state. So in the next -- in this current year, we'll have one of another southern states, Tamil Nadu getting opened up with this. And we started one branch last year in Hosur, just to understand the periphery of there. So that's about our expansion strategy as we move forward in the southern states and continue to expand in the existing states. Unlike last year, it was a rare end date, which was in quarter 4, we'll try to front end this time in H1. So that's on the branch expansion side and our confidence to really grow in from scale and reach about INR 50,000 crore mark in the next coming 5 years. And we are confident with our geography strength, with our liability franchise and with our branch expansion and technology implementation, we'll be able to achieve this mark. On MSME and overall HL home loan, I think if you look at it, we have been optimistically -- cautiously optimistic if you look at it. And this stems from the fact that there are certain segments in the industry where we see the rising delinquency in unsecured and rising over leverage of customers and waterfall effects, which can come across because of certain global changes in the tariff form. It's too early to do, but we've been very cautiously optimistic on those segments, and we will watch out for the segments emerging, the areas based on risk-adjusted returns. And then accordingly, what we feel across, which is right from an institution per se, we will step up our accelerator. The case in point, as we highlighted that in the month of -- in the last quarter, we were at 5 -- overall log-in 55,000. But you look at it, we had taken a cautious stance of looking at the underwriting perspective, tighten our credit controls, tightened the segments. Our sanctioned -- log-in to sanction ratios are around 38 percent. So that's an optimistic cautious stance which we have taken, understanding the situation which is there at the local markets and the local geographies. As and when it opens up, we will really like to span out and accelerate in the comm. But we are optimistic on the way we've underwritten, and we will accelerate in the coming months. On the third question, which you had, Shweta, Ghanshyam will answer.

Shweta, assignment is one of the important funding tool. Whenever we have an opportune time in pricing, we do assignment since it helps greatly in the ALM management because the entire tenure all loans are assigned to the banks. If you see on a full year basis, last year, we have a net upfronting on unwinding net was INR 43 crores. This year, it is INR 46 crores just 8%, 9% increase in overall basis on a full year basis, whereas our total income, interest income has grown almost at 18% to 20%. All assignment income is an outcome. And main focus was to get the best deal for assignment from the banks and lending big partners and do manage our funding program as per our ALCO management.

We have our next question from the line of Raghav Garg from AMBIT Capital.

Congrats on this quarter's results. I have 2 questions. One is your home loan disbursements for the quarter are about 3% lower compared to last year. Why is that the case? Is it because you've tightened your underwriting criteria? If that's the case, then can you indicate to what extent have your approval ratios come down? That's my first question.

I was talking that despite the log-in being at 55,000, our conventional log-in to sanction ratio, which you were hovering around 42 percentage. For the quarter, it was at around 38 percentage. So this translated into a lower disbursement despite the fact that we had a write income. And as you said that looking at the scenario which is emerging, we were cautiously optimistic what to underwrite in the segments which we serve. And on your part of HL growth, there has been a growth of around more than 5 percentage on the -- on the full year basis, what you were referring. So I think that's a little if you're...

Sir, I was referring to for the quarter, I was referring to...

Yes, sorry. So we continue to trend in a way which is cautiously optimistic, considering that as you are fully aware about the local scenarios in the geographies and the rising delinquencies in the MFI, we are cautiously optimistic. So we'll continue to trend in that range. And we continue with our endeavor to be around 20 percentage of AUM, that would be our endeavor in the coming time.

Understood. So sir, that brings me to my second question. I think this has been partly answered previously. In the last 6, 7 years, barring COVID year, you've usually seen net recoveries in the fourth quarter, but this time, there was a slippage a minor one. Also when you look at the stock of GNPA in fourth quarter, it's usually lower by about 5%, 10% quarter-on-quarter versus 3Q. This time, it's actually marginally up. Can you please talk if there are any collection issues or repayment issues which you are facing or maybe at the industry level and for what reason?

We -- as I explained earlier, our bouncing trend is in control. It's similar to what we see earlier. And our 1-day past due is already came down to less than 4%, which gives us a confidence our rollback of NPA will happen in the next 1 to 2 quarters. We didn't see any specifically any challenge in any particular state. It's almost a similar behavior in all across the states. And we are very confident it will come back to less than 1% in the next 1 to 2 quarters.

Understood. Sir, my last question on funding costs. So incrementally, I think you're raising at 8.5% versus book cost of about 8.2%. I'm also considering that 70% of the assets are floating rate now. Do you think that incremental cost being higher than book cost and yields coming down because of the repo rate cuts, your spreads could decline further from here on from 8.9%.

Yes, incremental cost in the -- because last year was interest rising scenario in which fresh borrowing cost was definitely higher than my own book, let's say, older liability book which we have seen in the till quarter 4. But we are seeing and observing this trend will get changed in the coming quarters, where the new borrowing will be par or lesser than my total liability book. And older liability book also gets reset in faster mode as we see the repo cut in MCLR rate cut, T-bill rate cuts, that will give a further positive towards my old liability book. I hope that clarifies your question.

Sir, it does, but your assets will also get repriced lower towards what extent.

Yes. As I mentioned earlier, my assets are linked to our PLR. Our PLR is competed based on the cost of borrowing basically. So obviously, there is always a lag impact what we see our change in the PLR and a change in the cost of borrowing.

Yes. So you did mention that your PLR is linked to funding cost, right? Is that -- did I hear that right?

Pardon?

Sir did I hear it right that your PLR is linked to your funding cost?

Yes. Yes, you are very much right.

So eventually, then if the PLR -- if the cost of funds has to come down, then PLR will also come down, right?

And then to that extent... It's not that 100% linkage. There is always a time lag impact in that scenario.

See, Raghav, there are 2 points. One is the time lag impact, which Ghanshamsi was referring. And secondly is the disbursement yields at which you underwrite the business. I think in the earlier conversation also, I guided that we will continue to hold on to our disbursement yield despite in a lowering rate scenario. And that is on account of structural adjustments on the product type and the product segment per se, as we speak about less than INR 15 lakhs, less than INR 10 lakhs where you have the yields which are not so interest sensitive, but it is about how you underwrite and how you manage the risk out with the risk-adjusted returns.

Okay. And just one last question, the total employee count as of , if you can mention that, off-roll and...

Yes. So that is 7,223. And this is -- it is an increase because we had the rear-ended branch expansion in quarter 4 as a result of which this was an addition which was there and the increase in the field force at the front line, which is our RO because we are dependent on the full hog sourcing from a direct source. And that had an immediate impact on increase in our log-ins. For the first time, we saw the quantum of log-in at around 55,000. And as we enter into the -- as we've already entered into the new financial year, the ecosystem tie-ups, which we have done would require the field force to complete and execute the leads which get generated from our ecochannel partners like CSE, Mithras and India Post Bank.

Sir, this 7,200 is total off plus on-roll or just [indiscernible]

Yes, this is the one which is the total employee strength, which is there of ours, 7,223.

We have our next question from the line of Nischint Chawathe from Kotak Institutional Equities.

Just wanted to get a little bit of a sense on growth trajectory. This time, we have kind of come off a little bit versus the 20% growth guidance that we have been talking about. So how should we see the trend in disbursements and loan growth going forward?

So Nischint, it was the quarter 4, we continue to guide around 20 percentage of the growth. I understand there's a certain amount of slippage, which is there from a growth perspective on the AUM. It is about INR 120 crores, INR 125 crores short to reach that kind of level. But we had -- in quarter 4, despite that we had soft, we were very cautious on the kind of underwriting which we have done. As a result of which there was a -- against a normal 42 percentage log-in to sanction ratio, we were at around 38 percentage. So as we stepped into the new financial year, we are confident with the increase in the kind of log-ins and improvement in certain areas where the geographies and overall credit behavior will show off, we'll be able to accelerate our path in this financial year and in the coming quarters, actually.

No. So I was just curious, I mean, how do we sort of reconcile this? I mean I know we need to sort of protect our spreads because of which we are kind of going a little more granular, going a little bit down the risk curve. But at the same time, probably what you seem to be indicating is that this may not be the best time to do it and your login to disbursement ratio has -- sorry, log-in to sanction ratio has come down. And arguably, if you kind of continue to go down the curve or go down lower tickets, this ratio will kind of remain low or maybe come off as well. So how do we really reconcile the conflict between growth and margins?

I think from a margin perspective, we are very clear that we want to -- whatever we've built across in the last year, we want to further scale up on the margins. And herein, when we talk about, we are confident that we will get across to more than 20 percentage of disbursement growth in the current year. I think that will give us confidence to really get back to our guided 20 percentage CAGR, what we've always guided on that path. Again, in that, Nisin, it is about the product segments which we are focusing on. So I think the learning experience which we got in the last year will actually reflect across in getting the quality and getting the customer type right, which was there, which we've learned in the last 1 year. So we are confident based on our underwriting practices, our distribution strategy and our incoming input, which is there, which will more refine, giving us confidence of growth of around 20 percentage plus on the disbursement finally enabling on the AUM growth on the guided path of 20 percentage.

And finally, quite a few of your peers have focused on fee income, insurance distribution, et cetera. So do we see any of those levers that you will be working on?

So we will be -- from a customer perspective on the fair practice cot and what is right for the customer, we will continue to do and play out on that, which is rightfully securing the customer from a perspective of credit insurance in case of any eventually, the financial burden of paying the EMIs does not dovetail on the customer. So certain part of the fee income really gives a little spike when you are there in the less than INR 10 lakhs, less than INR 15 lakh income for sure. So we will try and push what is right for us from a fee income perspective and insurance coverage, which covers the credit insurance for the customer more from a protection perspective rather than being a pure revenue source.

Sure. So fair to say that fee income and other income kind of broadly grows in line with loan growth?

Yes. And secondly, the ones which we've invested in the new states and the last couple of branches and the last quarter 4, which was like rare ended, 24 of them which came across in the quarter 4, which will start firing in this year. So those are rare ended Nisin. So there also, we expect that growth to really coming from the additional 30 in the last year, but quarter 4 was 24. So that also will help us to really build the disbursement and growth momentum.

We have our next question from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, I mean just kind of circling back to the provision cover that we have increased in this quarter for a long time, I mean, this number used to be in that range of, I would say, 27% to 30%, thereabouts, right? And we did share that we have changed the methodology. But my question here is today, when we look at the large housing finance companies who are predominantly operating in the prime segment, they are all maintaining provision covers of, I would say, 40% to 55%, some of them even 60%. But if I look at all the affordable housing finance companies, most of them have until, let's say, last quarter, even you had a provision cover of about 30%. So today, I mean, I see provision cover of about 25% to 30%. And now with this change in methodology, it's increased to about 32%. Do you think there is a case that over a course of time, you as well as all your affordable housing finance peers will have to increase their provision covers towards that 40%, 45% to 50%.

Abhijit, this is -- you know we all adopted ECL methodology. And ECL methodology is based on your past few year behavior basically. In our model, we took a 7-year behavior methodology real time, real -- how the asset has flown even in various bucket of time at different point of time. When assets become NPA, how much days it takes to roll back as a standard asset, how much time take to close that asset basically, what loss we make and when we recover that assets basically. And always also we get considered net present value of time value got factored in this value in this loss report basically. So it's based on individual -- each company. Last 7-8 years, our behavioral book didn't shown more than this result. We already built in. And we don't see it going to be, let's say, any major change we're going to see. Based on behavior, we are confident it will remain between 32% to 34%, somewhere of my NPA provisioning. And on overall basis, it will remain somewhere like overall today, we are at 0.66%, it will remain less than 0.7%.

The second question that I had is, sir, I mean, if I look at, I mean, the runoff in the book looks slightly elevated while you did acknowledge that there is an endeavor to maintain the disbursement yields by strategizing on the product type, the product segment. Just trying to understand, I mean, having seen already 2 rate cuts, maybe a third one in the offering in the near term, has anything changed in terms of aggression of your HFC peers or PSU banks, which would warrant that maybe going forward, there could be either higher pressure or pressure on yields to retain customers?

So I think, Abhijit, there are 2 parts to it. One part is that in the segments which we serve, we do not have PSU and others really competing in. As we speak, we are around 20 percentage of new to credit and 92 percentage is new to mortgage customers. So I think from a segment perspective, from a competition perspective and the market perspective, the PSUs and the bigger range housing finance companies do not really compete in this segment. That's one. Second is the segments which we serve have an average EMI range of INR 12,500 and an average ticket size of INR 11.45 lakhs to INR 11.75 lakhs and that a marginal increase in the EMI doesn't have such a big bearing cost when it comes to the rate increase or being so much of interest sensitive in the segments which we serve. Thirdly, from a perspective of having already been there on the rate cycle and the yields which are already low, I think the chances of probability of the BT actually reduces. That's one. Secondly, I think we work very intensely on our models to really predict the customer behavior from a perspective of the customers' chances of doing a balance transfer. So the customer behavior earlier, the model was reactive, then we got it to a steady-state model. Now it is proactive really giving us a 30- to 60-day period before the customer really thinks about looking at BT. As a result of which, if you look at our BT outs have been steady and not gone beyond 6 percentage.

So in that case, what is resulting in the higher runoff in the book?

I think there may be some gap. Otherwise, overall basis, if we see runoff is -- last year was 17.2% of our opening AUM. This year also, it is 17.4% of opening AUM. I don't think so is there any change in -- obviously, assets getting older. So normal in EMI, the principal component get increases. Beyond that, we didn't see any change in our prepayment behavior in overall book.

Got it. And then the last question that I had, while we have already discussed a lot on spreads. I'm just trying to understand going forward, I mean, are we going to work with the base case spreads of 5%? Or is there at least an internal target to increase it further in the coming quarters and years?

Our first target and first -- our efforts are there to go back to 5% plus spread that we are working around that. As Sachinder mentioned, our disbursement yield has already got improved 25 basis points. We are making continuous efforts there to increase our disbursement yield. And Abhijit, you are doing analyst of this space last so many years, and you will appreciate that in Aavas also, if you refer my earlier falling market interest rate scenario in which in 2019, we were at a 5% spread. When interest rate falling market, we're able to have an increase spread of 50 basis points. I'm not confirming, I'm not committing the same level will be in the coming year falling market. But generally, it gives a positive impact on the spreads that we want to mention.

We have our next question from the line of [ Yash ] from Citigroup.

Sir, on the login to sanction ratio, which you mentioned, which has come down from the 42% to 38% level. So any specific geographies contributing to it? And what trends or indicators would suggest it normalizing up to, say, maybe to 40% in a couple of quarters or something like that?

So on this, yes, these are a couple of states which are in the western part of India, specifically where we see this. And some part where we were cautious on the MFI kind of exposure and where we see the overleveraging happening. So I think these are the broad segments and the states where we felt that it is the time to really to look at it what is right to be underwritten with the risk-adjusted returns. So as we move into the coming months, when we see the behavior to be right, we will accelerate and we will step up.

Okay. Got it, sir. And sir, on the margins front again, just to check, so only about 36% of the book is linked to repo, which would have a faster repricing. But fair to assume the other rest of the almost 50% book will take -- there would be some time lag and yields -- sorry, margins could be under pressure in 1H because of the time lag and eventually catch up.

Yes, yes. Your assessment looks okay. But we have almost 40% borrowing -- 50% borrowing. In fact, 56% borrowing is linked to repo linked, Ting, 3-month MCR, where we see faster impact and then remaining borrowings will eventually when banks will start to translate repo cut in the MCLR cut will have a positive impact on us.

Got it. And sir, lastly, on the OpEx bit, fair to assume that it will again be elevated in the 1H as well. And just wanted to check if you have called out any specific number of branches for the full year or for 1H?

I think it's more or less a stabilization level of OpEx to AUM. And on a full year basis, as you mentioned, there will be growth impact on OpEx side, there will be the technology transformation will also have a positive impact. So on a full year basis, definitely, we will have a saving 10 to 20 basis points.

Okay. So 10 to 20 basis point savings on the OpEx for the FY '24?

On a full year basis.

Yes, OpEx.

We have our next question from the line of Kushan Parikh from Morgan Stanley.

This is more on, again, the margins. Just wanted to understand what is the current differential between the disbursement yields and the book yields? And also, I mean, I understand that we'll probably bridge this gap in the next 3 to 4 quarters, but is there a strategy to increase the disbursement yield over the book yield? And I mean, what would our threshold be? I mean, will we just look for 5% plus kind of spreads? Or can we go even higher than that?

So there are 2 parts to it. We continued our approach to increase our disbursement yield. And as we spoke, we increased by 22 bps in the current year. Again, this is a mix of both risk-adjusted returns on the product segment. the customer type and I talk about less than INR 10 lakhs, less than INR 15 lakhs, that's where we are trying to step up where you get risk-adjusted return at a higher rate. So this inch up on the disbursement yields really to help us to get to a level where we will be nearing our AUM. That's been guided and our endeavor is there. And we've seen that marginal increase by about 25 bps actually happening this year. Now this is aided by, again, we talked about that certain of our BRE-related stuff where we are able to get the pricing risk right based on the customer type and the risk which we are underwriting. So the mix of these 3 things actually have helped us, and we will continue to build on those segments and those areas where we are able to inch up right with the right kind of risk-adjusted returns.

Understood. So that should mean that the spreads will continue to increase even beyond 5% or probably the mix will be stabilized at around the 5% threshold?

So we've guided for the 5 percentage. We will -- our endeavor is based to really inch up our disbursement yield in the right proportion with risk-adjusted returns. Any fallout or any momentum which we get because of cost of boring would be an added advantage, which will be there as what earlier Ghanshyam talked about in the falling rate interest scenario, we had some spikes which happened because of the lower cost of borrowings.

We'll take our last question from the line of Rajiv Mehta from YES Securities.

Just a couple of things. Sir, you spoke about incremental business yield being higher 22 basis points in FY '25 versus previous year. But this will also have a product mix benefit in play. So if I were to ask you about incremental business yield in pure home loan, how much has that improved in FY '25 versus, say, FY '24?

I think sequentially on the different product mix, the product type, we had an inch up. So this average out to really increasing in the overall yield -- so it was around 17 bps if I were to talk about on a normal HL portion, which had an increase in yes.

So the mix -- one is the mix and second is about the incremental increase in the segments of HL, which really helped us to get the yields up.

Correct. And are you seeing right now competition moving down where incremental lending yield has yet either in home loan or LAP? Or do you believe that they will only move down once they see their own cost of funds going down?

I think in the segments which we operate, these are primarily new to credit segments and new to mortgage segments. In these segments, we don't see unlike a prime segments where you have the rate and rate being -- the rate-sensitive customer and being the playout which happens in that market. I think we are -- in the segments which we serve, still we are -- the space is good enough and the segment is good enough that you don't see that kind of competition which you see in the normal prime markets where it becomes interest sensitive or a rate-sensitive customer depending upon the areas where they operate in Tier 1 markets.

So your pricing -- your BRE-led efficient pricing of segments should not mean that you lose some incremental market share if there is an opportunity, right?

No, it will actually further add up. See, it will help us to do the right risk-adjusted return at the right kind of inching up the disbursement yield and building up the momentum on the disbursement with increased disbursement yields.

Okay. And just one last thing. Are we targeting any specific disbursement growth for home loan, just for home loan? I mean you said that you want to grow disbursement by 20% for next year ballpark. But if I were to ask you within 20% ballpark number, what is the target for home loan?

In the entire loan book and the assets and mix, basically, we have endeavored to maintain at home loan between MSME and LAP loan mix is a 65%, 35% ratio at the loan book level.

Ladies and gentlemen, this would be the last question for today. And I now hand the conference over to Mr. Sachendra for closing comments. Over to you, sir.

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 loyalty of our customers has been instrumental in our growth. We aspire to reach a milestone of INR 500 billion in assets under management in the coming 5 years and broaden our horizon as a pan-India player. I express my deepest gratitude to all our regulators, 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. Thanks. God best.

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