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

Ladies and gentlemen, welcome to the Q2 FY '22 Results Conference Call of Arman Financial Services 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 would now like to hand the conference over to Mr. Manjith Nair from Emkay Global Financial Services. Thank you, and over to you, sir.

Hi, this is Manjith here. Good evening, everyone. I would like to welcome the management team and thank them for this opportunity. I will now hand over the call to the management for their opening remarks. Over to you, Jayendra.

Thank you, Manjith bhai. Jayendrabhai here, Managing Director of the company. And I would like to, first of all, say good evening, everyone, and thanks for taking time out of your busy schedule to join us over this call to discuss our financial performance for the second quarter and half year ended FY '22. We have issued a detailed press release and investor presentation for the quarter and I hope all of you had a chance to review it. I will start with a brief overview of the industry and business during the last quarter and then we'll move to our financial performance. The quarter was marked by a rebound in rural economy, along with the improving consumer sentiments and unlocking of most geographies post the second wave of COVID-19. Our cautious approach and conviction, along with the experiences gained during the 2020 lockdowns helped us navigate smoothly through the challenging times. With the vaccination programs organized by the company across locations, majority of our employees are vaccinated which will enable smooth running of operations in future and more closer customer interaction. As I have said in the past, our customers have a tendency to bounce back fast, which was clearly seen during the last quarter with the rise in collections and improved disbursement on the back of pickup in demand. Moreover, continued government support towards NBFCs and various relief packages for the revival of economy in the form of loan guarantee schemes, ECLGS and MSME revival schemes will surely bring the economy back on track. I will now give a brief overview of our financial performance for the second quarter and post that, touch upon liquidity disbursement and collections in more detail. Coming to the brief overview of our financial performance for the quarter. Consolidated loan book as on 30th September stands at INR 908 crores, higher by 29% year-over-year, substantial reduction in COVID-19 cases and unlocking of economy across most geographies led to higher AUM growth. Segmented AUM for microfinance stood at INR 742 crores higher by 42% Y-on-Y and MSME stood at INR 125 crores, higher by 5%, while 2-wheeler stands at INR 42 crores, down by 33% Y-on-Y as 2-wheeler sales declined in the last 1 year, given the challenging economic environment that coupled with higher repayment rates led to a rundown in the portfolio. Consolidated loan disbursement during Q2 FY '22 stood at INR 267 crores, up by 425% Y-on-Y as the COVID situation started getting normalized and even the rural economy business witnessed an uptick in demand. The total MSME and 2-wheeler disbursement in Q2 were INR 35 crores and INR 11 crores, respectively, while microfinance disbursement stood at INR 220 crores higher by 469%, mainly due to back end rural economy post second wave and our increasing effort with the performance of the post COVID disbursement asset quality. Gross total income fell down marginally by 2% Y-on-Y to INR 51 crores, and net total income declined by 6% year-on-year to INR 31 crores. Fall in gross income, mainly due to the fall in interest margins on microfinance portfolio as the yield on that portfolio is regulated by the Reserve Bank of India. Portfolio after tax increased by 220% Y-on-Y to INR 4.9 crores aided by lower provisioning requirements due to better asset quality of loans disbursed post COVID-19 since September 2020. Consolidated gross NPA stood at 5.6% and net NPA stood at 1.1% for the September '21. Loan impairment cost of the quarter reduced to INR 8.7 crores. The company prudently took extra provisions of INR 4.1 crores and took write-offs of INR 4.6 crores. Higher provisioning coverage will help the company deal with potential asset quality risk arising on account of COVID-induced disruptions, while addressing write-offs are aimed at reducing the NPA burden of pre COVID doubtful assets. Cumulative total provision stood at INR 62.1 crores as on 30th September '21, covering 6.8% of the book AUM. The company enjoys healthy liquidity position with INR 147 crores -- INR 147 crores in cash and bank balance, liquid investments and undrawn CC limits. The company has repaid all its debt obligations that were due in Q2 FY '22 with debt equity ratio of 4.05x as on 30th September '21 and shareholders' equity stood at about INR 194 crores as on 30th September '21. ALM continues to remain positive and the company continues to have access to new source of funds due to company's robust balance sheet and prudent lending practices. The company recently received a rating upgrade of A- from Acuite with a stable outlook despite strong headwinds. I repeat, we are now into an A level of credit ratings, which I'm absolutely proud to announce that most of the NBFCs, most of the MFIs are not facing such a favorable wind. We are lucky to have our rating upgraded from BBB- to A-. So coming to the collections. Collections in microfinance business, which was impacted during Q1 FY '22 due to second wave has recovered consistently during the Q2 FY '22. Collections were severely impacted mainly due to COVID second wave restrictions since our collection executives were not able to visit door-to-door for recovery. However, with easing of restrictions, there is steady recovery in collections in Q2 FY '22. Post COVID, disbursement to -- disbursement loan book collection efficiency stands at 99%. I repeat again, post COVID disbursement, loan book, collection efficiency stands at 99%, which I'm very proud of it. I must say that whatever disbursement we have made post COVID, we are enjoying absolutely 99% recovery rate. Collections picked up as the repayment rates reached 92% in October 2021 from 89% in July 2021. 2-wheeler and MSME collections continued to be well north of 95% during October 2021. Keeping in mind our long-term growth plans and to enhance the customer reach, we have planned expansion in our branch network from 250 branches as on September 21 to 291 branches by March '22. The company has already initiated recruitment process for the branch expansion going by our asset-light business model, the CapEx for the same will be minimal. We believe that we are on a strong footing looking at the buoyancy in the economy, coupled with our strong balance sheet, adequate liquidity, capital improved credit rating, along with stronger relationship with our lender places us in the forefront to drive growth. We stand guided by our long-standing commitment of reaching the most underserved sections of the society in making a difference in the lives of those who need it the most. Our focus will be on scaling up disbursements in a calibrated manner to maximize revenue growth going ahead while keeping a closer watch on building profitability and maintaining the quality of our loan book. Arman, over the period, has faced many challenges in external environment in form of regular challenges, demonetization and COVID and every time we have managed to emerge stronger. We thus see that with the worst behind us, we are well poised to achieve a growth and harvest the benefits of fairer weather. We are optimistic about our future growth and earnings potential and believe that we are well positioned and have a stronger foundation for the future, which can provide sustainable and profitable growth for the long term. Finally, to conclude, I would like to express my sincere 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 who continue to show perseverance during the difficult times. I now would request the operator to open the floor for the question-and-answer session. Thank you very much, all. Thank you.

[Operator Instructions] The first question comes from the line of [Deepak Mehta], Individual Investor.

Good set of numbers. Sir, my question is around the SME segment. So how is the traction in the recent quarter? And how do you see growth in the coming years and coming quarters?

The disbursement has, of course, picked up in the last quarter compared to the previous 3 or 4 quarters. So we have a run rate of about INR 15 crores of disbursement in a month. Of course, our target remains much, much larger. However, the underwriting has been kind of tightened since COVID and we have not relaxed it. Probably in the fourth quarter, if we relax it, it will go up another 20%, 25%. But generally speaking, a lot of the growth for the coming quarters or year, I should say, will be through brand opening. So a lot of -- I think as Jayendrabhai said, a lot of -- we are opening some 40-odd branches in the micro finance segment in December, January and February time frame. In about February and March also, we should be opening a lot of the MSME branches as well. So that disbursement hopefully should at least increase by 30% to 40% by Q1 of next year.

Okay. And my second question is around -- so a lot of companies -- new companies here, especially fintechs are coming in the SME segment. Yes. So if you see recently, Paytm has also tied up with SBFC Bank. And in the long term, in the con call of Paytm, they announced that they are willing to get into the lending business through the route of SBFC Bank. So how do you see these specs? Or do you have any plans to tie up with fintech or to launch any fintech kind of business?

I mean we are not -- I think they sell different product altogether, although -- I mean, I always say this that MSME is a very, very broad term. It includes loans of INR 1 lakh and it includes loans of INR 10 crores also, sometimes. It includes urban loans and rural loans. We are servicing the completely different market segment. The customer service are not -- I mean, not the target segment of the fintechs. The fintechs are more targeting the urban kind of higher educated, more formalized segment. So we don't really look at that the emergence of the fintechs as much of a threat on our model. But as far as tie-ups or anything, I don't see how exactly that will be synergies, but if something does come up, I'm always open to any kind of a tie up.

The next question is from the line of Amit Mantri from 2point2 Capital Advisors.

So just on the credit costs. What has been the percentage of trade costs that Arman has incurred in the MFI and MSME business due to COVID so far?

On a percent-- I mean, you mean on a static pool, you mean on the current pool?

Pre COVID, so March 2020 book basically.

So it will be, I think, a about -- the overall write-off that we would have done unless for the welcome book already, which has been taken off or written off will turn out to be about 3.5%. And probably -- and then we have another 6.5% of provisioning but that is on the current note book. I mean it includes both the current as well as the pre-COVID book, which is part of the NPAs. So I mean to more get to the numbers again. So about 3.5% has already been written off. The provisioning that lie in terms of INR 62 crores has approximately INR 40 crores of NPA provisions. Now NPAs, typically almost 70 -- almost 90% of the NPAs that we have on the books are the pre-COVID book NPAs, which have become regular in terms of paying the installments over a period of time, got a setback in November 2020, and again, maybe the second wave again. So these people have shown the resilience but have also what -- the consistency of the repayment has got hampered due to various circumstances. And they continue to be on the books and they kind of are an equity provider at this point in time if we can put it that way.

Okay. And we have done some restructuring. So how big is the restructured book? And what is the provisions against that?

Yes. So restructured book compared to today's portfolio will be very smaller. It will be about less than 4% The book will be. Not even 4%, Amit, the restructuring predominantly was for the microfinance book, where the restructuring was about INR 26 crores, that is in December 2020. I would not have the exact number, but a large component of that has already been repaid or part of the NPA books and adequately provided for.

Okay. Also this was in December, Amit. So -- and there was no further restructuring. So anybody who didn't start repayment will already be in NPA, right?

So with regards to second wave you have not done any significant restructuring, is it?

No, there was no restructuring. There was for the ones that we could not reach out to in the micro finance segment. And those who are standard assets. So as on May 1. So those were like completely clean accounts as on March 31, we did provide moratoriums ranging from a month to a year. Exactly. And that also limited only to the micro finance board. As far as the MSME and 2-wheelers are concerned, there were no moratoriums or restructuring given to them in the second wave.

Or the first wave.

Or the first wave, yes.

Okay. Okay. And in the MSME book, the collections have been fairly good, strictly greater than 90%. But yes, that's the resegment of the book where the GNPAs have been rising. So can you explain that?

So a couple of reasons. One is what I think Vivek already said is there was no restructuring. There was no moratorium or anything given on that book, partly because there was officially kind of profits and stuff available to just kind of take all of that upfront. The second reasoning also is that if you look at the micro finance segment, there was a bit of a denominator impact where the portfolio has gone up significantly. And the MSME has been a little bit slower to move up on a percentage terms, it appeared to be a little higher. We are still around pre-COVID levels when it comes to the overall portfolio. The AUM of MSME vis-a-vis the March 2020 is still at about 10% lower than March 2020. So the denominator is always lower.

Okay. And now that you've started growing again and already debt-to- equity is 4x. So within the next few quarters, you might touch maybe 5x debt to equity. So what is the plan now on raising or supporting this growth?

So we are obviously -- I think, as I keep saying, it's no big secret. We are open to some liquidity kind of a dilution given the right opportunity. Right now, we are -- as you said, about 4.05x debt-to-equity ratio. Basically, if you work yourself forward, we are good till about INR 1,200 crores worth of AUM. If you offload some of that as the DA transaction in that case and which there is at this point, substantial interest to do that, maybe you can delay that a little longer. But -- so on September, we had an AUM of about INR 908 crores. So we have a few quarters before we absolutely need equity. So it's not in a rush. But yes, in the next 3, 4 quarters, probably some transaction or another will come along especially once the sentiment improves around microfinance and that new white paper that comes out, I think that will add a lot of valuation kind of support towards an equity raise.

And sir -- and on the -- now the credit cost of provisioning has started coming down quarter-on-quarter basis. So is there further provisioning required pre-COVID book that was a challenge?

There will be some. But as you said, it will continue to trend down. I think the worst is behind us. Overall, the trend you will see in the coming quarters is -- well, I don't want to give out any indicators, but let us say it will continue to go down in the coming quarters. As long as we can maintain the new book that we have created at 99% repayment, which that would hopefully we should be able to I don't foresee too much. It's not going to be 0, let me put it that way, but it will continue to trend downwards.

The next question is from the line of [Mihir Desai] from [Desai Investments].

One -- my question would be on branch banking, sir. As you have mentioned that you are planning to add some 40-odd branches in March -- by March '22. Sir, can you throw some light on the road map of this? Like can we see some few branches coming in quarter 3? Or can you please throw some light on this?

Yes. So it's a little premature. But overall, about approximately around 20%, we are planning to open in December. And then about another 30-odd percent, 30-30 and 20 more in January, February and March. So by March, we are hoping that all the opening will be completed. But that being said, in next week, we are having like sort of a management retreat over 3 days to kind of decide which areas and what areas we want to expand on. So it's a bit premature to give you a definite on where -- how many will exactly open, where -- what parts of India will we tend to open it. 40 is basically an indicative number. But if we are -- if you don't find that much potential, it might be less than that. If we find more, it might be a few more. So let's see.

Sure. Sir, a follow-up on this. As the banking industry as a whole is looking at a digital growth where many NBFCs and banks are planning to cut down some of the strategy -- some of the branches which are not performing and add more towards digital digitalization. So sir, how will it make sense over your expanding a couple of new branches. So I just wanted to know a strategy of your -- on this part.

Yes, branches are very light specifically. I mean the operating cost largely speaking, is employees, right? I mean, the branch rent and the CapEx that goes into a branch is not very, very high. In fact, we shut down branches or combine branches and stuff all the time. You are right. The new buzzword is digital, fintech, AI, machine learning, all of that stuff. Whenever, of course, we are very much technologically driven. We continue to expand on technology. Right now, we have a project running for MSME and 2-wheeler to convert it completely into a digital-driven paperless, all the other fancy terms you want to add behind that, we are going towards that microfinance, we had about 1.5 years project to convert it into profile-based cloud-based kind of driven. But largely speaking, we are an MFI, we are a micro finance company. We are servicing customers who are not able to go digital. If they were sophisticated enough to take a loan from their mobile phone and pay their EMIs through cashless mode and all that other stuff. Frankly speaking, I would be out of a business, right? I mean, my job is to serve the segment who cannot do that. And believe it or not, that is the majority of India. So urban India is different than rural India completely. And us sitting in Bombay or in Ahmedabad or in all the metro cities. It's largely -- it's a different world altogether. So I don't see that as much of a threat, as I said earlier. But yes, digital is obviously there, but I don't -- I mean, frankly speaking, the fintech term has become quite a bit buzz. I have studied a lot of fintechs. I mean, at most, we are being -- the companies coming up are fintechish. A true fintech I have not seen yet, at least not a successful model yet. But anyway, I'll hold my further comments on that.

Sure, sir. Thanks for a very detailed answer, sir. now coming towards provision. Sir, currently, just looking at our provisions, are the current provisions sufficient for a write-off in the near future? Or are you planning to increase the provisions going forward?

No. So as I answered Amit also, I think the tendency was for the provisions to be quite high for the last 6-odd quarters. This quarter, they have come down. I cannot exactly tell you what the future will look like, except to say is I expect strongly expect it to trend downwards. So -- but I mean, obviously, I would be completely remiss if I said that we have done and dusted. And obviously, it's not going to be 0, but it will be lower and will continue to get lower as time goes on.

Understood. Sir, lastly, on the industry front, as I have heard recently that the you were seeing and we were eyeing that the retail loans can go bad in this cycle of NPA. So sir, just wanted, branches from [indiscernible] being in the business. How do you see this kind of portfolios or -- are they doing good payments and repayments and all are good as of now, right?

Probably A lot of people on this call will have a better answer than I do. Largely speaking, the loans that I have made post COVID that is when I started disbursement again in August or September of 2020 about a year ago. Those are behaving extremely well, surprisingly even better than I expected. But we were very picky. So we tightened underwriting, as I said, only people who are absolutely clean, we gave out loans to them. So we sacrifice disbursement and exchange of trying to build a better quality. So far, it has seemed to work. I don't know if it was overkill or not or anything, it's early to comment. We are not facing any large issue like that. I would say the worst is behind. The first lockdown was bad. The second lockdown was in some ways, shorter, but in other ways, worse than the first lockdown because of the heavy human casualties and the sicknesses and all that other stuff. But I'm ready to be done and move forward, and everybody in this room is kind of ready to move forward. So let's hope at least that the worst is behind us.

Next question is from the line of V. Srinath from Bellwether Capital.

Just want an update on, I want to understand our growth momentum of what are we looking at in the MSME space. And also I want to understand if MSME is also on incremental loans post first wave at 99% collections.

So the second answer is easier to answer, which is yes, that is also behaving about the same. I think that is at 98.8%, so about almost 99% in the MSME side. As far as the growth is concerned, see, I think my answer is pretty similar to what I gave with the first question -- first question I got. I'm committed to grow it out. We have tightened the underwriting norms. It seemed that the disbursement pickup has been a lot slower than it has been in the micro. And it's always been the case because it takes the right -- it takes the right kind of customer to disburse on the MSME side. But we are planning to open some branches. We are probably going to not step back completely from the tighter underwriting, but maybe meet it halfway. And I expect the disbursements to pick up by at least 30% to 40% in the coming couple of quarters. Few branches in...

Already come up.

Yes. So a few branches in Rajasthan, we have already opened as kind of a test. Those are doing well. Overall, collection causes a huge amount of distraction also on the field. So MSME, as you know, is also a go-to door collection. So is the MFI and I don't know. I don't have any better answer to give you about the growth side except to say that...

Just on the growth side, I just want to understand because you've tightened the loans, rejection rates have gone up. Lead pipeline itself is not filling up because they're not enough business opportunities on the other side because they say the disbursement trajectory in MFI has been significantly better.

Yes. So it's a combination of a couple of factors. One is the rejection rate is quite high. So almost 70% plus is the rejection rate. The pipeline also is kind of slower to come in, and that has to do with your branch efficiency when they are spending a lot of time on the collection aspects, obviously, the time which they can spend on generating leads becomes lower. So it's a combination of a lot of different things. But in the fourth quarter, we are going to -- we manage -- I don't want to say solve, but we have managed improving the disbursement of micro finance by quite a bit in this quarter. I think next quarter we will concentrate on the MSME side that work out of the whatever things that are there to -- on the disbursement aspect.

Perfect. Perfect. On the 2-wheeler, the INR 42 crore book, now what would be the size of the rural 2-wheeler here? I'm guessing the INR 11 crore disbursements are largely in the rural 2-wheeler sphere?

So the rural 2-wheeler is almost 25%, about INR 10 crores there. And in terms of the disbursement, I think that would be, again, in the same ratio of 75%, 25%.

Got it. And how do we see this business kind of going forward in the sense of like are we looking to build a rural 2-wheeler book over a period of time to like INR 50 crores, INR 60 crores. Is there an opportunity or depth of opportunity there? Or are we looking to kind of slowly get this division wound down over a period of time?

No. There definitely is a desire to do that. as you said right before, COVID, we kind of started it as a pilot, if you recall, grew that book, but due to whatever COVID disruptions were there, it created so many distractions for other stuff that these kind of pilot projects were left in the sidelines. As we continue our growth and as we continue getting out of this COVID-related disruption, I think there is room for other products also. So hopefully, we'll be picking up the rural 2-wheeler through our MSME branches and also maybe higher ticket loans on that side as well. So my guess is that at least over the long run, you'll see a lot of product innovation on that division.

Perfect. Perfect. Just the last one is these branch expansions we are having, any kind of broad geographical feel you can give is in which other states you're looking to expand and what's working for you?

So a lot of areas in UP we are considering, Bihar as maybe another geography, certain areas of Bihar as another geography to expand. Not going to expand in Maharashtra or largely speaking, with MP. Maybe a few branches more in Haryana and Rajasthan. But again, we have a huge list of areas to consider. And I'm not an expert. I think my field people are better experts, but usually, we -- as I said, we have a management retreat where a large portion is discussing the areas of expansion and where the opportunities lie. So once we get those, we'll do surveys, we'll get reports from the credit bureaus of how that behavior has been. Largely speaking, a lot of those reports will not give a true picture because -- yes, the High Mark report, exactly. So -- but because of the COVID-related overdues and stuff, it will be very difficult to kind of assess the numbers exactly. So we'll have to use a combination of numbers and experience to kind of narrow the list down.

The next question is from the line of Balkrushna Vaghasia from Axanoun Investment.

Yes. As you mentioned earlier that collection efficiency of post-COVID loan book is 99%. So I wanted to understand this post-COVID loan book is the post first wave or post second wave?

Post first wave. So starting from August 2020.

Okay. And my second question is related to consolidated P&L, where in other costs, there is -- I mean, almost everything is same, except 2 things. I mean credit cost and the other cost. You have an increment of around INR 3 crores earlier, it was around INR 2.5 crores and now it is INR 5.5 crores. So can you throw some light on the attributes of those increment, I mean what does it relates to or something like that?

I think you're talking about what the other tier versus past year or the other exposure...

Quarter-on-quarter.

So Q2 FY '21 provisions and write-offs were 18.6%, and this quarter, it is 8.7%. So there's a 54% reduction, correct? And am I looking at...

No, no. I think what he's asking is for the other expenses, which the move to INR 5.5 crore from INR 31 crore (sic)[INR 3.1 crore]. So primarily, if I can address that when you're looking at H1 2020, there has been literally more disbursements during that 6-month period. So your credit cost, it depends on credit bureau cost, the disbursement costs, the travel and conveyance kind of expenses were very low. As compared to that FY '22, quarter 2 has been largely business as usual kind of a quarter. And hence, these costs have come into play again.

Correct. So it's directly related to the disbursement costs.

The next question is from the line of Debashish Neogi from Digitian Investments.

To your answer to the previous question of Amit, I just want to have a try. The provision is 6.8% of value and already write-offs of COVID loans has been 3.5%. So 3.5% has been written off and 6.8% is the provision?

6.8% is the total provisioning out of that NPA approval. So we are under ECL. So under ECL, the NPA provisioning will be what about 40% -- INR 40 crores for approximately the NPA provision out of the INR 62 crores in absolute numbers. That's why I think the difference will be there.

Yes, yes. Okay. The second question, Aalok is I'm asking this question as an industry player given that you are grounded, you work in the market and to know what is happening around. This 90% collection efficiency optically appears low, but when you compare other players -- against other players, most of the players, we are better off, but there are some who are taking much better than 92% collection efficiency. For example, CreditAccess Grameen Limited is reporting 94%, 98% for the way their presentation shows. So there would be some who are reporting much higher. So the disparity is so large. So what do you think the reason for this? Is this the way they are or some of the players are treating the NPA [indiscernible] collection efficiency?

You're absolutely right. And that is a bit of an anomaly. A couple of things that -- I don't have an exact answer. A couple of things I can add and then maybe Vivek can give his opinion as well. A, it depends on how fast you are growing so you can have a denominator effect there; b, if your strategy is doing top of or net of loans that might have some bit of an impact; c, you could be doing a restructuring; d, there is no standardized way to calculate collection efficiency rates. And in fact, I don't particularly care for it as well. This is the first time people have started using it post COVID. I think even in [indiscernible], there was not a big concentration on collection efficiencies because a lot depends on the tenure of your loans and how quickly maybe there might be -- contractually the loan might be over, but there still might be an overdue and stuff. So I don't know. I'm not sure. I think maybe a better comparison would be looking at par numbers or NPA numbers and stuff like that. Because it could be also that people, once you provide for an asset that maybe they don't include it in collection efficiency as well. Vivek, anything?

Largely, Aalok, I think you've covered majority of the variables that could be taken into account for calculating a collection efficiency for any organization. Additionally, we've also seen that within the NBFC space, there have been various different methodologies for providing moratorium or restructure. So there are organizations which have moved on to only interest recoveries. So as long as the interest recovery has happened, they've kind of taken it as 100% collection efficiency. Some have restructured or were given moratorium March 2022. There are -- and it is very much -- it's actually quite anomalous also. I mean, I'm not going to name any competitors, but there are competitors who are reporting worst collection rates, doing better than we. There are ones that are reporting better NPAs, better collection efficiencies but reporting huge losses. So you guys will know those much better than me. I think collection efficiency can be whatever you want it to be, if you are really motivated. There's no set formula. There is no RBI formula or anything like that. So...

And if you were to break the collection efficiency of ours between the regions? Is it still Maharashtra still pulling it down?

I think your voice is not clear. Say that again.

What I'm saying is, Aalok, if you had to break the collection efficiency between states, is it still the Maharashtra because of the...

Yes, Maharashtra will be the worst. Correct. Maharashtra will be the worst followed by Madhya Pradesh, followed by which one will it be.

To a certain extent, Rajasthan has always been consistent, but Rajasthan was impacted in the second wave back to the pre second wave kind of collection efficiencies. So ranking from worst to best would be Maharashtra, then MP, then Eastern UP for that matter, I think it's earlier. UP is doing the best. But UP, western UP and eastern UP is worst. Then Haryana would be the best with 100% collection, but we just went into that. So...

How much is Maharashtra now? Is it -- is the trend improving? How is it now?

So Maharashtra is actually the one pulling us all the way down. So it's about 84%. Otherwise, every other state is much more than 90%.

And that you see Maharashtra moving up in terms of as a spread?

It's moving up by about a couple of percentage points every month. But we are not disbursing a lot there. So there is not a lot of new portfolio to kind of offset the bad portfolio. Largely [indiscernible] Maharashtra side, what happens is when we went into COVID, Maharashtra was about 22% of the portfolio. Today, it's stands at 15% and in terms of disbursements accounts for about 10% only. So largely the Maharashtra impact will keep on diminishing. And hopefully, the collection efficiency can keep on improving over a period of time, that will add up to the overall.

Right. No, Maharashtra has been a bit of a thorn in our foot for some time. If we could reverse time and I don't remember who decided to go into Maharashtra, most likely, it was myself, but I deserve a big kick in the back for that one.

[Operator Instructions] The next question is from the line of Sumit Goenka from M3 Investments. As there is no response from the current participant, we'll move on to the next question from the line of [Dana Sabnis] from [Sabnis Financials].

I have a question around our disbursements. While seen over the last few quarters, the trend is actually improving. And so what is the current plan to expand the branch network? And how does the disbursement level increase with the increasing number of branches? And for FY '22, what will be the closing branch count?

FY '22 closing branches will be, I think, 291. As far as the branch expansion, I think I'll give the same answer as I gave earlier, that we are not sure exactly. We have kind of a figure in mind of about 40 branches in micro finance. In MSME, it might be more, but we have not decided that. So we'll take it up after this planning is complete. And as far as disbursement goes, it will not add a lot. See opening branches, there's a lead time of about 3 to 6 months. So once you open a branch, it takes like about 3 months for it to start adding to your disbursement. Otherwise, in the initial first month or 2, it might be only some INR 10 lakh or INR 15 lakh. So this is more planning towards FY '23 than anything else. But this year also, disbursements are improving month-on-month. I think last month, we did about INR 100-odd crores taken all together on a consolidated basis. And every month, we are increasing it by about 5-odd percent. So I think we are very -- will be very close to INR 1,000 crores, if not this month, next month from an AUM side. So yes, that will be kind of a big milestone for us.

Great. Just a follow-up, a very broad macro type of a question. You see that question across most industries is already up. And even on the retail side, down to increase, maybe over the next few quarters. So in the customer segment, which we added. So do we see or foresee that we may have or disbursement rates, faster disbursal growth because of [indiscernible]?

Because of?

Because of inflation affecting a lot of people.

Inflation. As you mean as far as the ticket sizes go?

Yes.

I don't expect ticket sizes to increase at least for us for at least another 8 -- 9 to 12 months. So we have already increased the ticket sizes enough. We'll take it up again in maybe the second or third quarter of next year.

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

Just 2 hygiene questions. One was, could you give the state-wise breakup of AUM percentages so that we can understand how that's moving? And the second question would be, out of the INR 908 crores of assets that we have, how much of that is originated post COVID and pre COVID that we'll be able to segregate the good book and the bad book?

Vivek, you have the geography.

So yes, geographically, I probably may give you a segment-wise answer. So for microfinance, between Gujarat is 27%, MP will be about 24%, UP and Uttarakhand kind of add up to another 21%, 22%. Rajasthan has now grown to almost 10%. Maharashtra add up to 15%. So that kind of adds up to the entire cake. And Haryana has just started, so it's about 3% now. In terms of the 2-wheeler, it's completely -- Gujarat book there is -- I mean, it's completely Gujarat centric. As far as the MSME book is concerned, about 85% is in Gujarat. 80% is in Gujarat, about 15% in MP and the difference spread between Maharashtra, 4 branches and a couple of branches that we just started in Rajasthan.

Got it. And the good and the bad book? The pre and post.

About 60% is microfinance in the post COVID book, about 40%. I don't know the other one on top of my head. But I know about 16% is that. But that will not match up with the collection efficiency because the demand of the new and old will be different than the portfolio, right? Because the EMI will be the same, but the portfolio of the newer originated loan will be higher than the older originated loan.

Got it. That's the runoff, yes. So 60% of the assets at least from MFI would be coming from those COVID disbursements?

Correct.

The next question is from the line of [Manish] from [Entrance Capital].

Congrats for good set of numbers. I would like to know that are we having some digital risk strategies to reach out to new customers or any developments which we are doing in digital field?

Yes. So in microfinance, we just [indiscernible] it has been about a year that has worked out quite well. Obviously, there is something that is going on one-to-one mini projects. But [indiscernible] we want right now, converting our legacy software into a newer one. I think you can look forward to it, probably next quarter, we'll probably put it in the presentation of what we are trying to do. But again, LMS, LOS system, paperless and with geotagging and that we are trying to improve efficiency and data decision processing. I think a lot of future decisions will be based on things like what occupations and what areas and stuff that there is. So it's important to start selecting all of that data too in the future, start making those, relying more on the numbers rather than your field intelligence or field people's experience goes. So that we are doing right now. As far as reaching out to the customers via digital mode, we don't have anything in the works right now. if there is some opportunity there in the future, we'll be happy to take it up. But as I keep saying, we are serving basically the rural households. They are not -- we are basically serving people who are not dependent on digital or might be even illiterate in many cases. So it's not our target segment.

The next question is from the line of [Deepak Mehta], Individual Investor.

Yes. Sir, my question is around the disbursement and around the underwriting. So post pandemic, has it changed any -- have we made any changes in the underwriting? And are we prudent on the side that maybe X, Y, Z that the person has taken loan from another NBFC or bank. And he is trying to take more loan from our company for -- to repay that loan, are you getting my point.

So you are talking about evergreening?

Evergreening in the sense, the loan taker want to do it. So not the company.

Say he is asking in order for him to pay one loan he has borrowed probably another MFI.

That does tend to happen. I mean, largely what happens, Mr. [Mehta] is that the High Mark would anyway give you the lending details from other borrowers. So if we are tending to be third or the fourth lender, we are -- anyway those cases go detect. So that likely -- I mean, as Aalokbhai just said, yes, that would be happening in the marketplace. You cannot deny that. But the system is kind of enabled over the years, and the team is enabled to kind of be with such customers out to the maximum extent possible through the process itself. So many people -- see there are no working capital loans available to these customers to begin with. So basically rolling over term loans would be the only way that they would get working capital as well. So it does -- I'm sure it does tend to happen, but I don't think it's a large enough problem where it's affecting our repayment rates or things like that. Of course, we'll have those few bad apples. But mostly in the industry also, it's very unlikely that somebody is going to take a loan from me and prepay another person. Once the cash goes in their account or in their pocket, that gets mixed with everything else. So are they using some of that cash to repay their other borrowers? Yes, of course.

But we do that as well. But then again, Aalok, we must draw the attention to the fact that there is a limit that's set by the Reserve Bank of India and until that limit, he can definitely borrow. And from that borrowing, he can take care of the another MFI as well as he is within limit, which is set by the Reserve Bank.

Correct, which is -- I mean, INR 1.25 lakh as of now for borrowers.

Okay, sir. INR 1.25 lakh.

From all the lender of all the MFI. That's why our maximum loan ticket size in microfinance is just -- is just INR 50,000. That too is very rare. That will be very rare when for kind of cycle plus customer.

Well, to add more complication to this answer is that this INR 1.25 lakh might go away too with the new RBI circular to harmonize the microfinance practitioners. What they are talking about is shifting from an overall debt cap to an FOIR. So anyway, not going into too many details, but stay tuned for that change as well.

Yes. Got it, sir. And my last question is around the -- do you see in the near the coming quarters, the cost of capital is going down for our company?

Cost of borrowing?

Yes, cost of borrowing.

Yes, it has gone down significantly. So I think Vivek will add more -- but I don't think it will probably continue to go down with all the key funding available that RBI was prompting due to COVID. I think it is probably be as cheap as it gets right now. If anything, it will remain stable or maybe go up a little higher in the short to medium term.

Yes. I mean I think that's about it. The cost of funding has definitely come down in the last 18 months. But I think to a large extent, it bottomed out because the benefits or relief that government was to offer has already come into play in the last 18 months, and we don't see that going down any further from here.

The thing is also that whatever benefit we get from cost of borrowing by RBI law, we have to pass it on to our customers anyway. So I mean, of course, there is always an endeavor to reduce the cost of borrowing or increasing it. But to a reasonable extent, we can pass it on or supposed to pass on any increases or decreases that we manage through in cost of borrowing.

Okay. So I think right now, the margin should be not more than 10%, right?

That's for micro finance.

That's for micro or 2.75x the average base rate of the top 5 PSU banks.

Okay. So we can assume that the -- our company has reached the optimum level of the cost of borrowing. So it should not be going below this rate? Right, sir.

I think, in the short term, I don't want to say that. I don't have to say that. I mean they never will always be to reduce it. And I think as we keep growing and the ratings keep increasing and all the other stuff. I think I don't want to say that this is the lowest it will get. But given where we are today, I think it is -- I think Vivek has done a great job of reducing it as much as possible.

Additionally, as I just pointed out, the grading upgrade has just happened. So rating, it will surely help us in some of the other way as we move forward in the next couple of quarters too because that's what rating is supposed to do, and that's what the differentiator largely is between the A and the B category companies. So that should definitely help us. And...

Yes, sir. This is why I asked this question because of rating relating to credit rating. So thank you for honest answer and straightforward answer and best of luck for the coming quarters.

I think last question, probably.

Yes, sir. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

As always, we have no closing comments. Hopefully, everybody had an enjoyable Diwali in a good break with family. I guess it's back to work for all of us. Take care and have a great evening.

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