Arman Financial Services Limited (531179) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Arman Financial Services Q4 FY '21 Earnings Conference Call, hosted by Emkay Global Financial Services. We have with us today, Mr. Jayendra Patel, Vice Chairman and Managing Director; Mr. Aalok Patel, Joint Managing Director; and Mr. Vivek Modi, Group CFO. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jignesh Shial from Emkay Global Financial Services. Thank you, and over to you, sir.

Yes. Thank you, Mallika, and good evening, everyone. On behalf of Emkay Global, I would like to thank the management of Arman Financial for allowing us this opportunity. And we have with us, Mr. Jayendra Patel, Vice Chairman and MD; Mr. Aalok Patel, who's joint MD; and Mr. Vivek Modi, Group CFO. I'll hand it over to Mr. Aalok Patel, joint MD, for the opening remarks and then we can go ahead for question and answers. Over to you, Aalok.

Yes. Thanks a lot, Jignesh. Hi, and a very good evening to everybody. Thanks for taking the time out of your busy schedule to join us over this call to discuss our financial performance for the fourth quarter and the year ended March FY '21. We have issued a detailed press release and investor presentation for the past quarter. Hopefully, all of you had a chance to review it. If any of you are watching the FM speech just a few minutes back, some big announcements for MFIs with regard to a credit guarantee schemes to the MFI customers. So a little early to get into the details at this point. But at least, I'm glad to see that MFIs are continuing to be recognized as an integral part of the overall financial sector, especially the rural sector of India. Anyway, to start, I hope that all of you and your loved ones are keeping safe and healthy and doing well during these unprecedented times. Despite FY '21 starting off on a challenging note for the microfinance industry as a whole due to the pandemic and subsequent lockdowns in the first half of FY '21, the company's performance has been more resilient in the second half of FY '21. In the final quarter of FY '21, it seems repayments and disbursements were both edging towards normalcy. The company enjoyed adequate liquidity and a strong balance sheet position, which makes it well positioned and agile to achieve growth over the medium to long term. The demand from the market remains strong. We also welcome RBI's announcement to harmonize the regulatory framework for various regulated lenders in the microfinance space, which would stop the regulatory arbitrage amongst the non-NBFC MFI, microfinance practitioners and create a more robust industry to prevent over-leveraging among the microfinance customers. The removal of the pricing caps will allow us to price the product according to risk and competition and also allow us to service previously underserved areas in the underserved districts of India. Now I will give a brief overview of our financial performance for the fourth quarter and post that, touch upon collections, liquidity and disbursements in a little bit more detail. At the end of the fourth quarter, our consolidated loan book stands at INR 814 crores, lower by 5% year-over-year as the repayment rates, combined with lower disbursements during the year, led to a rundown in the loan book. As you all know, that being a very conservative lender, we had essentially stopped disbursements during the moratorium period and slowly started disbursements from August. In the microfinance division, we initially focused on renewal loans for our existing customers who had completed their previous loans. From the fourth quarter, we have started servicing new customers as well. In the previous quarters, it was risker to service new customers as a lot of the credit bureau data was stale. In the Two-Wheeler and MSME segments, we created more stringent underwriting processes. As a policy, we did not indulge in any top-off loans in any of our products to prevent ever-greening of our portfolio and to ensure good credit discipline. Loan disbursements for the quarter stood at INR 275 crores, up 51% Q-over-Q as compared to the third quarter that is. The total disbursements for the year was INR 510 crores, 42% lower compared to the previous year, for obvious COVID pandemic-related reasons. The pace of disbursements again slowed down in the first quarter of FY '22 due to the second wave of the pandemic. Disbursement levels are expected to reach pre-COVID levels and even exceed pre-COVID levels in the coming second quarter as the second wave situation seems to be normalizing. The disbursements in the microfinance segment reached a peak of INR 90 crores in March 2021 as a result of branch openings and recovery -- economic recovery post-COVID lockdowns. The company primarily focused on renewing loans of existing customers and starting to disburse new loans to new customers as well. The MSME segment had reached average disbursements of pre-COVID levels in March, while Two-Wheeler segment is yet to reach pre-COVID levels. Our Microfinance portfolio stood at INR 643 crores and while MSME and Two-Wheeler portfolio stood at INR 171 crores at the end of Q4. So the Microfinance portfolio was higher by 4% and MSME and Two-Wheeler portfolio combined was lower by 28% Y-o-Y, respectively. In the urban Two-Wheeler segment, our performance was impacted by the decline in two-wheeler sales in the last -- well, for the last many years, but more severely in the last 1 year, given the challenging macroeconomic environment in the Two-Wheeler segment. The sales in the two-wheeler industry have yet to recover. However, our pilot two-wheeler rural product has demonstrated a relatively slightly better performance, reporting a year-on-year AUM growth of 4%, despite the disruptions caused by the COVID-19 pandemic. The portfolio has reached about INR 10.1 crores at the end of March 2021 with plans to further expand in this lucrative segment. The two-wheeler rural book now constitutes of approximately 22% of the total Two-Wheeler portfolio. Gross total income during the quarter declined by 20% year-on-year to INR 44.3 crores, and net total income during the quarter decreased by 18% year-on-year to INR 25.1 crores. This is on account of the decline in the average portfolio during the year and also softer yields on post-COVID disbursements -- sorry, average portfolio decline during the quarter, excuse me. Including the additional provisions recognized during the quarter, cumulative total provisioning at the end of Q4 stood at approximately INR 52 crores at the consolidated level, covering approximately 6.3% of our total loan book. At the stand-alone level for Namra, cumulative loan provision stood at INR 33.1 crores at the end of March '21, covering 5.3% of the total AUM. At the Arman level, the cumulative total provision stood at INR 18.4 crores, covering 10.8% of the total AUM. Our net profit stood lower at INR 90 lakhs for the fourth quarter. The consolidated profit after tax for the fiscal year '21 stood at INR 10.6 crores compared to INR 41.5 crores the previous year. This is largely due to the increased provisions in relation to numerous factors related to the pandemic, which I'm sure all of you are aware of. Our GNPA and NNPA stood at 4.6% and 0.6%, respectively, as on March 31, 2021. Liquidity wise, we are in a comfortable position right now. As of March 31, we had cash reserves of approximately INR 132 crores, including the undrawn CC limits. Liquidity position has improved, driven by the pickup in collections and incremental debt capital base during the year. In the previous quarter, the company had also accelerated repayments of high-cost borrowings and replaced it with lower-cost borrowings. Now to give a little bit more granular breakdown on the collections. In the Microfinance segment, particularly the improvement in the collection has been encouraging, as repayment rates have jumped from 91% in December to 92% in January, 94% in February and 95% in March '21. However, due to the COVID second wave disruptions, the repayment rates fell to 87% in April and 75% in May '21. Repayment rates have bounced back quickly in June with easing of lockdown restrictions in most geographies. The collection efficiency in MSME and Two-Wheeler segment continued to be healthy at 94% in March '21. The sudden spread of the second wave of COVID-19 pandemic is again creating a challenging -- has created a challenging operating environment for us. The collections experienced a temporary decline in Q1 FY '22, on account of several intermittent lockdowns and restrictions being imposed across various states. The situation impacts the customers' ability to manage their activities as well as our ability to conduct meetings to recover our dues. Based on our month-to-date experience in June, the repayment rate seems to be recovering a lot faster compared to COVID 1.0 lockdowns. COVID 2.0 was unexpected and disappointing in many ways. It is with great sadness that I report that COVID 2.0 resulted in the death of 5 of our team members and untold numbers of family members of our staff. Overall confirmed infections in our staff members was about 180 people apart from, again, many hundreds of the family members of our team that were impacted. In light of the human tragedy across India, it seems improper and even impolite to discuss the impact on the business. However, our business itself is very resilient. As I mentioned, the prepayment recovery has been very steep during June, and we expect it to reach manageable levels starting from July. Disbursements were negatively impacted during Q1 of FY '22, and therefore, the volumes will be lower than the approved business plan decided in March. It will be imperative to be extremely cautious in disbursing loans to customers with weak cash flows and having exposure to impacted sectors, which is not always easy to evaluate in the Microfinance segment and relies greatly on the judgment of your ground level people. On the flip side, our confidence towards our customers who have managed to remain regular in their payments and have shown greater resilience to withstand downturns during both phases of the pandemic may be able to absorb higher exposures. Significant effort from MFIN has ensured MFIs to be listed as essential services in many states, which helped a great deal in many areas to continue our operations. This also reinforces recognition by the government on the importance of MFIs in enabling financial stability at the bottom of the pyramid. We shall closely evaluate the business impact of ongoing disruptions and derive our experience of FY '21 to stabilize our business. We shall evaluate and support our borrowers using various measures available to us. Our strong balance sheet, adequate liquidity and capital, stable credit ratings, and strong relationship with our lenders should enable us to receive continued funding access over the coming months. Further, our demonstrated capability of managing asset quality stress, as witnessed multiple times in the past, backed by a resilient business model and coupled with highly experienced and stable management team, should give comfort and confidence to our lenders, investors and various stakeholders. Finally, to conclude, I would like to express my gratitude to all our stakeholders for their continued support during these very difficult times, and a special note of appreciation for the company's field staff, many who juggled between infection risk and their duties. Now I would request the operator to open the floor for question-and-answer session, please.

[Operator Instructions] The first question is from the line of Sarvesh Gupta from Maximal Capital.

Sir, first question is for the June month, how has been the collection efficiency with respect to Microfinance and other divisions?

Yes. So guys, we expect the -- I was anticipating this question to be the first one to be asked, honestly. So it has improved quite a bit. So from last month in the Microfinance segment, it was about 75%. Still another 3, 4 days -- 3-odd days to go on this month. We are expecting to close the month anywhere between 87% to 89% repayment rate in the Microfinance segment and 90-plus in both the Two-Wheeler and the MSME segments.

So similar to May. And -- I mean, you said that you are expecting July to be sort of a normal month. So you are expecting July to be similar to, let's say, a March month? Is that a reasonable...

No. It was similar to May, but it's -- not similar to -- May was only about 75%. So this represents almost 12% to 14% increase from the previous...

Similar to April, I meant. You're expecting June to be similar to April, right?

A percentage more than April, but yes. So a quick, very V-shaped curve as far as recovery is concerned. And frankly speaking, I don't think the -- this time is as bad as last time, given the short nature of the lockdowns. And it wasn't as -- it wasn't on a nationwide level. There were only certain areas that were more locked than others, for example, Maharashtra or Rajasthan and that too more so in some districts than others.

Understood. And given the situation, sir, any -- while we have saved a lot of money on the other expenses, so you would expect a lot of that to come back, right?

We have saved a lot of money on other expenses that we would -- I'm not sure I understand your question.

You would expect the cost of income to normalize for most of the part of this year compared to, let's say, in FY '20?

Yes. I mean, yes, that is at least generally the plan. Let us see how this year progresses. We've made a lot of plans only to kind of have it go out of the window. So we had pretty large plans and detail plans for FY '22. And now it has -- of course, we'll have to go back on the drawing board and work out what FY'22 will look like. So -- but in generally speaking, yes, we expect them to remain in comparison to FY '20.

And sir, on your two-wheeler financing book, can you split up the gross NPA for two-wheeler financing? And secondly, what is the expectation going forward? Are you seeing some better indicators on that front?

So the NPAs in the two-wheeler group is slightly higher. So two-wheeler, Vivek, you have those figures, the two-wheeler NPA figures?

Two-wheeler NPA is about...

Sorry to interrupt, Mr. Gupta, sir, there is a slight disturbance coming from your line, request you to mute your line while the management answers your question.

8.3%.

And net NPA is about 1.9%.

Net NPA of 1.9%.

The next question is from the line of Savi Jain from 2Point2 Capital.

Why is -- I just wanted to know what is your restructured book right now? What percentage of your book is restructured?

That's less than 2 -- about 3% that will be on the books right now. Yes. So after December, we have not done any restructure. That being said, as long as you brought this topic up, I think there might be some restructures that we do in the form of just plain moratoriums for the people who might have missed April and May's repayments. So we might just push the tenure forward by 2 months. And these will only be customers who are completely regular on March 31. So generally, that is the plan, and that is what we discussed during the Board meeting.

So what is the collection on your earlier restructured book? How is the collection there?

So collection went as high as about 40% in March. During May that number came down to about 7% on the restructured. In June, I would have to look it up. To be honest, I don't have that on top of my mind -- on my head.

Okay. So as far as the first phase goes, including provisioning and write-off, I think you almost taken more than 9% -- 9% of the book is provisioning or write-off. So -- is that right?

No, I don't think 9%. I think it will be about 6%, right?

Including write-off and provisioning book?

Including write-off, yes, you can say...

No, I don't think so, Vivek. I think including write-off and provisioning, it was something like INR 54 crores last year.

No, what -- if I'm getting your question right, the existing -- the provisioning that is available for the future is 6.3% and the write-offs that have taken place is approximately INR 16 crores, which would be about 2%. So about 8% related to that, in that way.

And that will take care of -- you believe there will be no further requirement at least for the first wave. Second wave, obviously, you're still probably evaluating...

Yes. So that -- it is our belief that, that amount was adequate to take care of COVID...

Yes. Because I think in the beginning of the wave, I think there was a lot of discussion about what will be the credit cost due to this event and in at least the industry, a lot of players are saying it will be less than demonetization, but it seems to be clearly significantly higher than demonetization. And even in your case, I think it is much higher?

I think for the record, I've always said...

Yes, yes, yes. No, so that's why I said other players. And so for the second wave, what do you think will be the incremental credit cost? I mean you now that -- assume that this is over, so what do you think can be the credit cost because of this?

Well, yes. Really, I think it's a very good question. I wouldn't want to comment on it right now. All we are -- a lot of the things we are seeing is that customers who are facing a problem during 1.0 and after a lot of struggle, we got them into some semblance of normalcy where they were at least starting to make repayments. Now again, these guys have, probably most of them through no fault of their own, have slipped back into kind of overdues. So how that will be managed converting them again to having some kind of back into repayments, I would hope so. But really, I mean, there are too many variables and factors at play. I really won't be able to comment for at least another couple of quarters on what the credit...

Yes. But -- I mean just to get a sense of the magnitude, it will definitely be much lesser than the first wave, right, the credit cost?

Yes, yes. It will be much, much lesser because -- see, our team is much better. Very surprisingly, as I said, we expect to end this month at about maybe 87%, 88%, maybe even if we are lucky, 89%. So very quick recovery. I think during COVID 1.0, when we -- repayments in June when the lockdowns are over, it started at about 60%, and then it took us 5 months to reach 90%. So this time, hopefully, the way things are, it never dipped to such low levels. And from May to June itself, it should be a good -- almost a good U-turn there.

Sir, I'm looking at the April-May numbers significantly better than the industry. Is that because Gujarat was probably much better placed at this time around? Or I mean looking at other player numbers, it's more in the range of 60%, 65% for the April and May. So...

I heard -- I don't know which players you are referring to. I think most people were in the early to mid 70s as far as my market knowledge is concerned. But of course, flow and probably track this even more than I do as far as the competitors go. But at least the unlisted players and people that I have a regular conversation with, we are probably slightly above average, but not by that big of a margin.

Okay. And your disbursement, what are -- what is the status now? Have you resumed or are you still waiting and watching how this will evolve? What will...

As you can see, we are disbursing. But -- see, there is a different form of strategies you have to use as far as disbursement goes during times like this, that way you don't want to pressure your people, you don't want to give them harsh targets and things like that. As I said in my speech, it's very imperative that we at least -- in microfinance, there is not a lot of paperwork available to formulize a system about cash flows and things like that. So I think it's very imperative that you don't push our people too hard and you tell them you can do less business, but make sure whatever we are doing is of a higher quality.

Emphasis on collections.

Yes, yes. So much more emphasis on collections also is what we are telling our people, so that gives them a little less time for disbursement. That being said, we are expecting this month around a disbursement of maybe about INR 50 crores in the Microfinance book and maybe around INR 12-odd crores in the other books, so total INR 62 crores to INR 65 crores, somewhere around that neighborhood. So compared to March, that would be about 60%, 70%. So not too bad overall. But it will take us maybe another month or 2 months to get back on March levels.

Okay. And but -- even if -- I mean, obviously, not many people expected the second wave to be of this intensity. So will you be now much more conservative, maybe expecting a third wave or something in your disbursement and growth?

Well, I think we were already quite conservative to begin with even post-COVID 1.0. I don't know how much room I have to be even more so, factors that I can create an underwriting that will -- might -- would accept. So the answer is, of course, yes and no. We want to keep your eyes and ears open, but senses -- I don't know I think -- I don't know if we can continue doing business by keep expecting the third wave and the fourth wave and the fifth wave. We can take them on as they come.

You mentioned in the presentation about declining -- you're replacing high cost liabilities with low cost. So what is your cost of funds right now? And also I wanted to understand the impact of this base rate reduction, the 2.75x base, I think that is applicable now and because of that, will your NIMs decline going forward? Obviously, with the harmonization guidelines, that will be taken care of, but that has still not been notified. So in the interim...

Yes. So I think if you noticed in our presentation, they have already declined. Our average yield have also declined because of that 2.75%. The good part is that we have managed to offset it mostly -- partially or mostly by reducing our cost of borrowing. So today, the blended rate is about 12.25 all in as far as Microfinance. So while we are probably not getting the full 10% margin, we'll be closer to 9.5% or 9.25% or something. So not as bad as a lot of our competition because we have managed reducing the rates. But of course, once the rules harmonize, I think that will be some much needed breadth of comfort to the entire segment because all of a sudden, it opens up the industry to price it according to risk and price the product according to competition. And really, that's the way it should have functioned from the very start. So you started with the Malegam Committee report almost 10 years ago in 2011 and everything kind of took a full circle back 10 years later. So very well...

So when do you think this will come into the effect? What is the timeline you think this will happen?

No idea. No idea I have.

Do you consider it will...

Yes. 3 to 6 months. I mean, it's a minimum. I have no idea.

No idea because I think there is no specific deadlines in terms of how fast would they want to turn around. But yes, for sure.

So do you think the players will start again, lending at -- like you'll start lending at 26%, 27% and make some really high NIMs and ROEs there because to compensate for so many bad years that you've had in the last 5, 6 years? Will that -- is that where the industry will move at least on the NBFC MFI side?

So overall expectation is that we will increase their rates to try and offset some of the losses during the COVID era, so to speak. I would hope that we don't go back to the pre '80 kind of situation where people are charging 30, 32-plus. I mean, that won't happen. There is too much competition right now for that to happen. Earlier on, it was different story where the industry was like 1/10 of its size right now. But anyway, let us see. I think there's a lot of things to consider. It's really now a Microfinance 3.0.

Okay. And I think, lastly, I just wanted to know, I think you would have just emerged from the first wave, I'm sure discussing already with funds, funds for an equity raise and then the second wave hit. So where are we on the fund raise? Are you again starting to -- starting dialogues or what is the thought there?

I would really probably wait till things are stable enough before going after equity. And right now, we are quite comfortable with capital. We have enough equity raised for most growth funding for FY '22. Thanks to the second wave, it seems like things are stable enough, let's see, I think not at least for 1 or 2 quarters.

The next question is from the line of V. Srinath from Bellwether Capital.

Aalok, the MSME business had a very good swing in wave 2 also on collections. So just wanted to kind of understand where we stand on this business? Yes, there is significant amount of rejection rates, so it's the kind of labor-heavy model, but given the fact that it continues to show significant better performance, are we kind of listen to scale this to that kind of INR 50 crores, INR 60 crores disbursement per quarter over this year or next year? Just wanted your views on this. See, last time around, Gujarat had that a little better performance, but this time, the wave 2 seem to hit most of the western states quite similarly. So would it be fair to say that assessing is income actually showing a better asset quality performance?

Yes. I think if you kind of -- MSME did record significant better recovery rates compared to MFI at least from -- in the starting, then it somewhat stabilized faster while the MFI repayments were continuing to increase. I think I believe in March, MFI repayment rates crossed MSME repayment rates. But that being said, I think if you compare it from a geographical sense, the difference slightly becomes lower in that case because MSME was primarily in Gujarat. And if you compare Gujarat MFI versus Gujarat MSME, it was slightly better, but you won't see that significant difference. Now as far as the growth side in MSME is concerned, I think I've said this, that it takes a special kind of customer it takes -- to find a special kind of customer for the MSME and therefore, growth is not as, call it, easy I guess, or I don't want to call it easy, but not as difficult as it is in the Microfinance segment. But we are still committed to it. I think we have seen -- I always said I was waiting for one downturn to come before I really expand on this segment. And there were plans to expand into Rajasthan and further expand into MP during FY '22. The second wave put a hold on those branch openings, but we have a target to maybe open about 20 to 22-odd branches in the current fiscal year in MSME. So yes, I think we should continue the growth in the MSME segment. And in the long run, I think even if you look at the new RBI white paper that I was discussing, nowhere in the entire document is the term group loan mentioned. So overall, I think the Microfinance segment in the long run is moving towards the more individual side loans rather than the group loans. And that's exactly what we are doing in the MSME. So we are a little bit ahead of the most people there, and we should be able to turn that into our advantage.

So the MFI individual products would be very similar to the MSME product, firstly against the new kind of these intermediatory groups over a period of time, would we kind of do this kind of cash flow analysis?

Yes, yes...

Sorry to interrupt, Mr. Srinath, there is a disturbance coming from your line while you are speaking. I request you to mute your phone now.

Yes, that is -- Srinath, that is the plan overall that as time goes on, you'll have to rely more on technology and more on -- while Microfinance, the JLG model, you could have relied on the group loan and you could have relied on the smaller ticket size to sort of offset your risk. Now you will have to actually go on the ground level and develop some mechanism to evaluate the customers. And with these new guidelines, the FOIR rule has come up. So you can only give them 50% of their overall monthly income, the household income. Their EMI should not be more than 50% of that. So -- now they've also put the onus on the boards of the companies to develop strategies for assessing their income level, the household income level. So I think over the next couple of years, there's going to be a lot of changes, a lot of innovation and a lot of exciting new things coming. If it wasn't for COVID, I think...

Are you -- have you been able to run some sort of pilot in -- could you share some insights on that?

We have already started the pilot in the Microfinance side. I think we already have some 44-odd customers and probably going to increase that by another 100 customers this month. And the idea is, in that case, is we are trying a cashless model of collections. We are still using the income assessments, but for the customers who have been with us for 3 or 4 cycles, at least for the last 5 to 6 years, if they have matured enough to a point where we can assess their incomes a little bit better or at least estimate their income similar to what we are doing for MSME and if they are in an industry that we understand well, then we are disbursing money on an individual basis, on a pilot basis through our MFI segment alone. And we are attempting that we recover the money, at least majority of it, through cashless models. So right now, we are doing e-NACH. We are trying a couple of other things as well, like auto UPIs and things which are coming up. There are numerous different methods to get it on a cashless way. I think pulling it out of their bank account will be better than waiting for them to transfer it like using the UPI apps and things like that. But that being said, I think the important thing is that they should have money in their bank account. I mean all these cashless models of payment will rely on them having some cash in their bank account, which the rural segment doesn't seem very, very enthusiastic to give up easily. But we'll have to give it time.

So as per putting the new regulation into perspective, so over the next 3 to 5 years, do you see a large part of the book migrating to an individual model given that you anyway have to income assess every loan post the harmonization?

Yes. That is correct. So that is going to be expensive to do, and that is not going to be 100% scientific because you can only do an estimate of it. So there are a lot of things, honestly, that we still haven't figured out, if I'm completely honest with you. But we will, and there is enough time to do it.

Perfect. A couple of hygiene questions. I just want to understand that the INR 400 crores incremental loan book than we built in MFI, is that showing significant better collections than the stock book, that would be about INR 200 crores, INR 250 crores? That would be one. And two is, if you could give any regional understanding of collections, there is one Maharashtra collection was significantly lower and you had kind of shared it and kind of given us understanding that say, 50% [Technical Difficulty]

Hello?

Mr. Srinath, your voice is not audible, sir.

Incremental loan book...

Yes. Hello?

Yes, on the incremental loan book, how has collections been?

So -- okay. So on the incremental loan book, they drop down to -- or they were at about 99.85%, 99.87% in March. So they were performing extremely well.

I mean to that extent, probably better than the pre-COVID scenario.

Much better than the pre-COVID scenario also. I think in the month of May, they dropped down to 90%. And that was solely because most of them we could not collect it. This month has increased again. The last I checked was about a week ago, and I think that was at about 94% level. Hopefully, by the end of the month, we should be back to at least a 98-plus kind of a method in those loans. But I would have to really check the status of those loans, what happened in the last 1 week.

Perfect. So largely, the stress is in the stock book and not in the incremental loan book. Is that a fair assessment?

It's a fair assessment. As I told a previous participant also, the people who are already facing problems during post-COVID 1.0 and we have finally got them from like -- got the repayment levels high enough where the repayment rate was 95%, those guys have slipped back. So how long it will take them to take them back up, that remains to be seen.

The next question is from the line of [Balkrishna Vaghasia] from Accent Investments.

I have a couple of questions. Sir, do you think that your current high interest rate in MSME segment can damage or dampen your long-term growth approach or long-term brand? I mean they are significantly higher than your peers, right?

Well, I don't think in the MSME segment, we have a lot of peers. But whichever one we do, our pricing is somewhat similar. Overall, our customers are not very, very price sensitive. But if you look at the last quarter yields also, I think we have reduced the rates in the MSME side as we have reduced our cost of borrowing. We have passed that along to some of our customers. Reducing rates further is not so much of an issue. As I mentioned, on a pre-COVID level, that was our highest ROA product, and we were very conservative as far as pricing this product for the risk involved or so-called additional risks that we thought we would have to bear. Now on a post-COVID scenario, it's offsetting previous losses faster than, let's say, MFI book. But if it's competition that is reducing our growth, I really don't have much of a problem of reducing the MSME rates if it ever needs to be reduced.

So on a clarification note. So are you saying that since this particular segment or ground where you are lending MSME loans, you don't have much competition. So you are trying to reap the benefit considering credit risk as well as non -- I mean, limited competition?

It's a free enterprise system that we have accepted, sir. If the market demands that we reduced the rate, we will definitely be the first one to reduce the rate. But the thing has not reached at that level or that point, so we have to look at that level. Whatever that we decide, whatever the quantum that we have decided, we are in a position to disperse as far as MSME is concerned. And my collection record is also good in MSME. So it's not something that we are collecting the second-class citizens, so called. So I don't see any issue as far as the reducing the rate is concerned. If in the future, if it demands, yes, we'll definitely look into it, sir.

Okay. Okay. And my second question is related to your medium-term plan. Where do you see yourself in terms of AUM and business -- all the business segment in the next 3 to 5 years, sir?

No comments on that, sir. We'll have to rework the projects and then plan based on the COVID 2.0.

And sir, last question. In the long term, do you see or would you like to unlock the value of Namra Finance by listing it?

No, we have no plans to dilute at a Namra level. So for the foreseeable future, Namra Finance will remain a wholly owned subsidiary of Arman. And that way, it provides the most amount of value and transparency for all of our products, the -- for both the companies rather. So right now, it's a wholly -- complete pass-through entity. And I think it will just confuse the valuations of both companies if you like dilute at the subsidiary level. The entire purpose of creating Namra as a subsidiary was not for any business reason. It was purely for a regulatory perspective because RBI came up with a rule that said that if you want to do microfinance, then 85% of the assets had to be in the nature of qualifying microfinance assets. So we were essentially forced to demerge it into a wholly owned sub. Otherwise, there was no other good reason to do it.

The next question is from the line of Shrishti Jagati from Emkay Global Financial Services.

Congratulations on good set of numbers. I am sorry, it's a data-keeping question. Can I get the disbursement numbers for April, May and June, past 3 months?

Okay. So April month, we did Microfinance INR 38 crores. I think we did MSME about INR 42 crores on a consolidated basis was in April. During the month of May, we did about INR 20 crores.

A shade less than INR 20 crores.

A shade less than INR 20 crores. And during the month of June, as I said, we are expecting to do somewhere maybe about INR 60 crores, INR 62 crores.

All right. All right. Okay. That is one. And sir, just 1 more question. When you mentioned that you're renewing loans for the existing customers, do you -- so is there -- have these customers fully repaid their previous loans? Or have they seen any foreclosure of loans as well?

No, no. So our condition itself is that they should have a clean credit history. Now they could have been late during...

Let's talk...I think she's talked about the renewals. So renewals would be our own customers. That gives us a lot of comfort, and they would have to be completely clean on our books to be eligible. So I guess there are no top-off loans or anything like that or no ever greenings or -- so they would have to be completely clean. As far as the other customers are concerned, see, there are a lot of customers that had overdues starting in August or in September or even in October. We are -- if the customer has had a past overdue, but they have settled that overdue and that customer is clean, so to speak, today, on a case-to-case basis, we will approve that loan depending on our credit evaluation of the customer. But it's important to know any overdue amounts as of today.

The next question is from the line of Avadhut Joshi from Newberry Capital.

I would like to which states were affected much more in wave 2? Because as I remember, in wave 1, Maharashtra was much affected. And it has been reflected, if I refer to the Slide #35 of the presentation, our MFI mix has declined in Maharashtra from 21% to 18%. So I would like to know whether it was a conscious decision and what we're going to do in further depending upon the repayment rates we have in different states?

No, it was definitely a conscious decision. During COVID 2.0, I think your first question was which states were more impacted. During COVID 1.0, I think Maharashtra was probably one of the worst impacted. And by impact, I think, I don't know the COVID figures, but at least from a repayment standpoint, based on lockdowns and other factors, the repayments were mostly impacted. I don't want to comment on whether they were facing more COVID cases or less or more deaths or less deaths. To be honest, I don't even know or remember that data. During COVID 2.0, I think one of the most stringent lockdowns was probably in Rajasthan, followed by Madhya Pradesh, certain districts of Madhya Pradesh and certain districts of Maharashtra. Now I think Maharashtra has been in and out of lockdown for so long that both my staff and the customers are fairly used to it by now, wherein kind of life goes on. But yes, I think that answered -- I think Rajasthan was going okay for a while and then they had a very stringent lockdown starting from the 8th of May.

I think 8th of April. Literally from April...

Yes. Sorry, 8th of April.

So from -- literally for 60 days, Rajasthan was probably on one of these more stringent lockdowns from the last 15 plus, which state has seen. Fortunately, our exposure in Rajasthan is a single digit.

In fact, restrictions, thankfully, were not very strict this time.

Again, in Rajasthan, just to clarify, I think we're still fairly young there in terms of our initial stages. We gotten there in '18-'19 only. So I think the bouncing back in Rajasthan is much faster.

Correct.

Okay. And I think there were no -- like because I heard that MSME sector you want to expand in Rajasthan and MP. So there are no much impact about collection efficiency in these 2 states?

No, no. It has -- both of those states have bounced back. I wouldn't call it that they are back to normal, but there was a very V-shaped recovery as far as repayments in both those states. But we'll see. I mean if there are any individual areas which have not recovered, we might be cautious to open a branch there. But our confidence on the entire state has not wavered in either one of those 2 states.

The next question is from the line of [Dhruvish] from Mirabilis Investment.

Just 1 quick question. I wanted to know the lock-in for elevation capital, lock-in period?

Lock-in period for?

Elevation capital.

Yes.

Lock-in period.

What? Pardon me?

There is no lock-in -- what do you mean by lock-in period?

There could be...

They are free to exit.

Are they free to exit?

They are free to exit.

Their lock-in period was 18 months, and I'll have to call my company secretary, so don't quote me on this, but I'm 90% confident it was 18 months, which are long past. So there is no lock-in period.

The next question is from the line of Siddhant Bhandari from Highwest Global Management.

I just had a quick question. Assuming that sort of business operations normalize and there's no wave 3, by when do you think you'll be able to comment roughly on what the credit cost impact of sort of wave 2? Is that -- do you think you'll have visibility by August? Or do you think it'll take normal flow and you'd be able to provide an accurate picture?

Well, If you recall in the last COVID, I never really provided an accurate picture even after 2, 3 quarters. I don't think that I would be -- I'm not talented enough to give an answer for this. So I don't know what to say. I mean if the repayment rates recover and bounce back within a couple of months, I can tell you that, okay, this is not going to have any impact. If they don't bounce back, then it will be difficult for me to say whether they'll ever bounce back, not bounce back, whether I'll manage convincing the customers. These are really very unprecedented times. Nobody in my entire management team has any experience dealing with situations like COVID. And I don't think any manager does in the entire world. So fairly speaking, I don't know. But maybe we can have a better understanding in the next quarter.

Right, right. No, no, I was not looking for some guidance or explicit numbers. I was just asking sort of when do you expect to have more clarity, maybe a few months out of when it might be the right time to even ask this question.

I think if you wait until next quarter, let us see how the repayment rates behave, and then we'll get to the...

The industry is a very resilient industry.

Yes, yes, yes. I think one thing we have learned what Jayendrabhai is also saying is that the industry and our customers are very resilient. So everybody tends to bounce back. So you have the worst kind of predictions and then you wind up getting surprised yourself, right, of the positivity of the entire segment.

Money is always green, sir.

The next question is from the line of [Debasish], an individual investor.

I just defer from what you said to the previous question that you're not talented enough to comment. I personally feel your -- you and Jayendrabhai are feet-on-ground people and your projections are far better than the industry. You, for example, when first wave happened, I think the entire industry was saying that credit cost will be less than de-mon, but you and Jayendrabhai always said that it is not going to be so. So this is a difficult time for MFI industry and for you, and I'm sure this is very frustrating with all these lockdown, start-stop, start-stop. In spite of that, March collection was very good. So from that perspective, 94% is good, one of the best in the industry. And now again, second wave have hit. So when you feel we'll be back to that 94%, 95%, is July a fair assumption? Or it'll take more time than that?

No. I think it will take probably maybe August, roughly speaking. See, the -- it's -- from my -- anyway, thank you for your compliment. And to be fair to others, I don't think anybody expected loan or loan losses to be less than de-mon. But sometimes what you say is different than what you think. So anyway, but I don't know, normally speaking, what tends to happen is that when the recovery starts, the first few months, they are very quick. And then the last percent or 2, you have to struggle month by month, like even if you look at, let's say, January, February, March, to get it from like, I think, 92% or 93% in January to 95% in March, that was only 2% increase.

So the change is -- the amount of change that you can create in terms of percentage basis will keep on the becoming difficult as I go therein.

So right now, you target the lowest hanging fruits, right? The people who have no intention not to pay, but you couldn't reach their house. So those are the easiest ones. Then the ones are slightly less impacted by the overall. And then the last page will be people who are -- whose incomes had been completely disrupted during 1.0, 2.0 everything, and you keep in touch with them, you follow up with them, you sympathize with them, you do whatever it takes and get them to start paying. This is just the nature of the beast. It's just we constantly have to follow up with the customers. And that's all we can do in these cases, right? I mean this is microfinance. There is no collateral or there is no vehicles to repossess or anything like that.

So Aalok, it's -- from 2015, something or the other keeps happening. It was de-mon; then IL&FS crisis; then COVID 1.0, 2.0; then there were natural calamities, which keeps on happening in different geographies with respect to floods or otherwise; then there is government intervention, which keeps happening, which spoils the credit discipline of a particular state. So given all these, do you think that you need to tweak something in your strategy in terms of, say, new product more on the secured side because 3 years back, you had talked about house loan -- housing loan, which you got, you are trying to prototype that? Or in terms of penetration strategy with respect to geography, do you think there is -- you need to think through some tweak in strategy?

No. I mean I do agree with [Debasish] that we've had our fair share of unexpected calamities in the form of de-mon and COVID both and that too in a back-to-back succession. To think that is exclusive to the microfinance industry, I think barring maybe 10% of the industry, probably 90% of the industry has faced some problem or another during demonetization and COVID. As far as natural disaster, see, if you are large enough and spread over large enough geographies, national disasters kind of happen all the time. There is always too much rain or too little drain somewhere or another that we operate even during the last years. And we were more than capable of dealing with it because it was isolated in certain branches or in certain districts. It was never a nationwide thing. So having those kinds of things are really priced into our product only that every once in a while, there will be some natural disaster or another in some isolated area. Now as far as government intervention goes, it's a two-edge sword, right? I mean there are good interventions and bad interventions. We've had our fair share of good interventions in the past few months. Assam was going to kind of blow out and there was positive news there. Of course, we are not in Assam, so it doesn't impact us. But at least for the Assam players, it was good news. This new RBI white paper that has come out is very good news. I think it will be a game changer for industry as a whole. I was mentioning in my comments that the Finance Minister just made a credit guarantee scheme announcement exclusively for the NBFC MFIs. So all in all, I think it's a two-edge sword. Overall, as far as the central government is concerned and most of the state governments, we -- I don't foresee much of an issue because while that was during '80 crisis, I think most of the people understand that we are an integral part of the overall lending business, overall financial inclusion business. And now you find local level corporators and those kinds of guys creating issues all the time. But again, these are isolated incidences on a normal year. But yes, I guess that sort always the main hanging that there is something very serious past in terms of recognition from the central government that could have a very material negative impact on us. But that's just -- I don't know exactly how to offset that risk. That can happen in any industry, right? Even in a gold loan, they can be like, well, you can charge more than a certain amount of interest. But that could happen to any industry.

My last question, Aalok, is given -- it's very difficult to get a sector and company consistently delivering 25%, 30% ROE, okay? And there's a huge headroom for growth. You have been delivering 25%, 30% ROE for a very long period consistently and there's headroom of growth, where you're not penetrated in most of the states. So when do you expect and now given some support is also coming, the RBI new regulation or today, what the Finance Minister have said on INR 7,500 crores guarantee cover. So when you'll feel that you will be able to hit that 25%, 30% ROE? Is it a couple of years away or is it much before?

I think we should be back on track by FY '23, I would hope. So I mean, I would have assumed that we would be back on track by like the second half or the last quarter of FY '22 itself, that was the original plan. Now with COVID 2.0, I'm not exactly sure. But definitely by FY '23, I don't expect this to be like a huge, huge disaster. And now that we've gone through COVID 1.0, we kind of know what to expect, right? Earlier, the expectation was very -- it was very wall cracking because again, you didn't know what to expect. But today, we have a better idea of what to do exactly and if certain customers and certain areas are behaving in such a way, what exactly worked last time, did work last time. So we have a lot of knowledge at our disposal. Now as far as our ROEs and NIMs are concerned, I mean we've had our fair share of good years and we've had a fair share of bad years as well. Luckily, none of them were -- I would like to think were our fault. But then again, as ours, that's anybody's opinion, I guess. So I'm not exactly sure how to answer it, [Debasish]. It's very easy to get impatient in this business. I think we experienced some level of impatience last year, and we had pretty good -- pretty solid target set for FY '22. In relation to that, we opened up some 20-odd branches in microfinance in March month alone. And I think we were planning to disburse somewhere between -- about INR 1,200 crores of disbursements is what we were planning in microfinance alone. So -- but best laid plans are always -- sometimes don't work out. And nobody expected COVID 1.0, nobody expected COVID 2.0. And now everybody is expecting 3.0 and hope it never happens.

I mean just to add to what Aalok has said, the uncertainties around this make it even difficult to immediately kind of commit to the original plan because, let's say, if you have a setback because of your own faults or something going wrong, then maybe you can course correct. Here, there's nothing that has gone wrong in terms of how we would foresee the future without a COVID 2.0. So patience is the keyword here.

If I can add a few lines because of my age would be this that one thing that you remains committed is not because of these natural disasters and the government getting poking their noses into it, but because of the trust that you can repose in these kind of people that I have dealt with billionaires and I have dealt with so many HNIs. But these are the people that I deal with, both -- these are the people who have taken money from you and they believe in paying you back. Now COVID 1.0 or 2.0, yes, they might put you a few months behind but their intentions are not bad. And that's what keeps you going. Instead, these people are believe -- they believe [Foreign Language]. That's all there is to it.

Yes. And that's well said. I think most of these people are not willful defaulters. They have genuine issues. And you know, it's such that they're not repaying you back, but at least you can sympathize with them. And as a business owner and people who deals with the bottom of the pyramid, I think it's very important to maintain that trust and that sympathy towards them rather than making it all about dollars and cents. And along with what he said, if you're driving a car in patience to reach your destination, but you are driving in a fog right now, and it's always dangerous to accelerate. I mean there might not be a truck in front of you, but there might be. And so you want to take that risk. I for one don't want to. So let's go a little slow. I think in the grand scheme of things, a few quarters here and there don't matter too much.

The last question is from the line of Parth from Prudent Broking Service.

Sir, I wanted to understand the MSME vertical a bit better. So I had 3 questions on this part. Now what's the difference between a microfinance and an MSME client? Second being, what's the difference in credit appraisal process between a microfinance and MSME client? And third, what are the rejection rates in this vertical?

So the first question is -- so typically speaking, microfinance loans are lower in ticket. They are backed by joint liability. And usually speaking, in microfinance, you are lending to a woman borrower to supplement the household income. So in the MSME segment, usually, it can be male or female. There is no joint liability. And the ticket sizes are slightly higher than microfinance but not by a huge margin. However, they are still not large enough to have secured -- to have it be secured. And primarily speaking, these guys are involved in whatever activity we are lending them money for, that's usually their full-time job or their primary source of revenue. Yes. So our -- in our case, our MSME loans range from like INR 50,000 to about INR 2 lakhs. Average is only about INR 70,000. In the microfinance, the average will be about INR 30,000. So the -- we are trying to cover different slices of the pyramid. So while the microfinance might be the bottom of the pyramid, our MSME can be more aptly called microenterprise loans, which is tailored to the rural segment, and that is supposedly one step above the very bottom of the pyramid. As far as the credit appraisal, I think we are at about 20 minutes over -- maybe you can call the Investor Relations people, because this will take a little bit longer to explain the differences. The rejection rates have varied very significantly pre and post COVID. I think overall, on a pre-COVID level, the microfinance rejection rates were about 40% to 50%. Right now, they're about 65% [Technical Difficulty].

The line from the management is disconnected. Kindly, stay on line till I reconnect them. Ladies and gentlemen, we have the management line reconnected to the call. Thank you, and over to you, sir.

Apologize, everyone. I think we got disconnected. I was saying the rejection rate varies widely. Currently speaking, the rejection rates are very high. Microfinance, they are close to about 65%. And in the MSME side, it is about 70% to 75% because a lot of rejections are happening due to the credit bureaus, customers showing as overdue, et cetera. So I think we have time maybe for 1 more question, and then unfortunately, I have to be at some place, all of us have to.

Okay, sir. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

I think I keep forgetting to write closing comments, but thanks, everyone, for joining. Take care of yourselves. And we'll see you, I guess, this time a lot sooner because this time we got delayed by a month. But thanks, everyone, for your participation, and our apologies that this ran a little bit longer than...

If anybody has a serious question, they can call directly.

Yes. I think we have Investor Relations people. Their contact information is in our press releases and stuff. You can always shoot them a question and one of our team members will be happy to answer it. Thank you, guys.

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

Thank you.

Thank you.