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

Ladies and gentlemen, good day, and welcome to Arman Financial Services Limited Q3 FY '22 Earnings Conference Call hosted by Emkay Global Financial Services Limited. We have with us today, Mr. Jayendra Patel, Vice Chairman and Managing Director; Mr. Aalok Patel, Joint Managing Director; and Sir Vivek Modi, Group CFO. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Manjith Nair from Emkay Global Financial Services. Thank you, and over to you, Mr. Nair.

This is Manjith here. Good evening, everyone. I would like to welcome the management team of Arman Financial, and thank them for this opportunity. I shall now hand over the call to the management for their opening remarks. Over to you, sir.

Thank you so much. This is Aalok Patel here and a very good evening to everyone. It's a pleasure to connect with all of you once again, and thanks for joining in. The purpose of this call is to discuss our financial performance for the third quarter and 9 months ended FY '22 and to also attempt to answer any questions that you may have. We have issued a detailed press release and investor presentation as always for the quarter, and I hope you've had a chance to review it. I'll start with a brief overview of the industry and the business during the last quarter. and then we'll move to our financial performance. During the quarter, due to the newly evolved Omicron variant of COVID-19, there were very minor disruptions, which were thankfully very limited and had a very small impact on our overall operations. Although the number of infections were high, the severity was much less, and there was no major impact on the business and the cash flows of our borrowers. The government, RBI and other regulatory bodies are also fully supporting the banks and the NBFCs in all possible ways. These include unchanged interest rates, also includes RBI's accommodative stance in its decision to allow relaxation to the lenders until September 2022 to comply with the new regulations for upgrading the NPAs, which as you know was -- which stated that an NPA can only become standard once post clearing all of their dues. The budget announcements to increase infrastructure and other spending should also make sure that the positive growth momentum for the economy continues. So the overall picture today definitely looks positive or it is much more positive than I imagine it to be 1.5 years ago. Now I will give a brief overview on our financial performance for the fourth quarter, and post that we will touch upon liquidity, disbursements and collections and more details. On the performance of the quarter, it gives me immense pleasure to inform all of you that our consolidated loan book as on 31st December 2021, crossed the INR 1,000 crore milestone, reaching INR 1,045 crores. This was a milestone that was delayed for over a year due to the ongoing COVID crisis. So thanks to all the support received by our stakeholders, we have managed to cross this very important milestone. And with your continued support, we hope to cross many more milestones in the years to come. We registered a growth of 45% year-on-year led by the addition of more than 35,000 new customers with branches reaching optimal disbursement levels, along with the increase in average ticket size in the second cycle borrowers in the Microfinance segment. Segmental AUM for microfinance stood at INR 856 crores higher by 56% year-over-year, and the AUM for MSME's stood at INR 139 crores, which is higher by almost 20%. And for the Two-Wheeler Segment, our AUM stood at INR 49 crores unfortunately, down by 9% year-over-year. Consolidated loan disbursements during Q3 FY '22 stood at INR 296 crores, up by 63% year-over-year. The total MSME and Two-Wheeler disbursements in Q3 were INR 38 crores and INR 16 crores, respectively, while Microfinance disbursements stood at INR 242 crores, higher by 64% year-over-year. This encouraging performance was mainly due to better penetration, the addition of new customers combined with an improved macroeconomic environment. I would like to highlight that as we -- that while we grew our disbursements, our core focus still lies on maintaining the quality of our assets and on enhancing profitability. Our repayment rate of the portfolio created post the first lockdown that is portfolio created post September 2020, 18 months ago is still hovering above 99% despite having the second and third waves in between. The gross total income during Q3 FY '22 stood at INR 59 crores, up by 23% year-over-year. The net total income increased by 9% year-over-year to INR 33 crores. The profit after taxes increased by 140% year-over-year to INR 7 crores, aided by the lower provisioning requirements due to better asset quality of the loans disbursed COVID-19, as I mentioned earlier, since September 2020. Consolidated GNPA stood at 5% and NNPA stood at 1.1% for December 2021. The company has steadily created adequate provisions to take care of the unprecedented impact of the COVID pandemic. And I feel that the worst is definitely behind us in terms of NPA provisioning. Loan impairment cost for the quarter reduced to INR 6.6 crores. The company prudently created extra provisioning of INR 1.9 crores and took an aggressive write-off of INR 4.6 crores in this quarter. Cumulative loan provisioning stood at INR 64 crores as on 31st December 2021, covering 6.1% of the on-book AUM. Overall, provisioning reduced due to the better asset quality and aggressive write-offs aimed at reducing the NPA burden of pre-COVID doubtful assets. The company enjoys a healthy liquidity position with INR 126 crores in cash and in bank balance, liquid investments and undrawn CC limits. The consolidated debt-to-equity ratio stands at approximately 4.35x as on 31st December and shareholders' equity stood at approximately INR 202 crores. We are pleased to inform that the company has crossed -- excuse me, we are pleased to inform that the company has closed 100 crore direct assignment transactions with SBI in January, which represents the largest DA transaction in the company's history. The ALM continues to remain positive and the company continues to have access to resources of funds due to the company's robust balance sheet and prudent lending practices. Coming to the collections, Collections across segments continue to improve since the last 2 quarters with overall collection efficiency of 94% in January 2022. Microfinance collections picked up with the repayment rates reaching 93% in January '22 despite the minor impact of the third wave. Two-wheeler and MSME collections continue to be well north of 95% during January '22. As mentioned earlier, post-COVID disbursement loan book collection efficiency stands at 99%. While the collection seems to be getting back on track, we anticipate that they should return to pre-COVID levels by -- at the very most by Q1 of FY '23, if there are no further disruptions due to the pandemic. Our branch expansion plan is going well on track, and we have opened 24 new branches during the month of December, January and February till date. Our total branch network is expected to reach around 280 to 290 branches by March '22. By expanding our branch network, we will improve our penetration capabilities in geographies that we are already present along with expanding our reach into the new geographies such as Bihar. Going by our asset-light business model, the CapEx required for each branch expansion is fairly minimal, allowing us to reach branch level breakeven quite quickly. The overall picture looks quite positive in terms of better collection efficiencies as liquidities pick up in the credit demand across segments, better asset quality. Nevertheless, there's definitely some scope for improvement, which will be seen in the coming few months and quarters. I strongly believe that our strong borrower base, our resilient business model, continuous customer engagement, growing reach, robust balance sheet, passion of on-ground workforce and experienced management team will ensure sustainable and profitable growth going forward without compromising on our asset quality. And finally, to conclude, I would like to express my sincerest gratitude to all of our stakeholders for their continued support during these very difficult times. And of course a special note of appreciation for the company's field staff who continued to show perseverance during these difficult times that seems to keep on coming. I would like to request the operator now to open the floor for the question-and-answer session.

[Operator Instructions]. The first question is from the line of [ Anish Goel from Goel Services ].

Good afternoon, everyone. Thanks for this wonderful opportunity. So noting that the percentage cost of funds have increased as compared to previous quarters. Can you please give the reason for this?

I'm sorry, I didn't understand what has increased you said? .

I said percentage of funds -- percentage cost of fund has increased compared to the previous quarter.

Percentage cost of funds has increased from the last quarter? The weighted average cost of borrowing you are referring to?

Yes, yes, yes.

That has overall declined, sir. I think what you might be noticing is timing differences of uploading of certain processing fees and things like that, of the increased borrowing that might get recognized right away. But overall, weighted average cost of borrowing is decreasing. But if you compare quarter-to-quarter, there might be some timing differences here and there, which is making it appear to increase.

Okay. Okay -- so micro finance yield is also falling. What are the reasons for the same? I noticed that FY'20...

Yes. Yes. You are right about that part. Microfinance yields are falling simply because of government regulations. So 2 reasons, actually. Number one, the interest rates have been falling in the market, and there is a cap of what interest rates that we can charge to our customers, which is -- and for the benefit of others, I'll just mention what that is, that is either 10% of our overall cost of borrowing or 2.75x of the average base rate of the top 5 PSU banks. So that number -- the latter number has been continuously falling for the last 5 or 6 quarters. And the second fact is that we have accepted a lot of CGS funds under the corporate guarantee schemes...

Pardon, pardon, pardon. Please repeat sir..

We have taken money under the government CGS scheme, the corporate guarantee scheme that was extended to Microfinance institutions, which provides basically a guarantee to banks in case of an MFI default. However, the caveat for accepting those funds is that it has to be done 2% lower than the U.S. base rate by RBI. So in our case we have to do it in about 19.8%. So that's what we are seeing there. That's why the yields are declining along with overall interest expense as well. So the margin remains somewhat consistent. However, the -- that is, by the way, just kind of a little bit of a side note here. Overall, we are sort of anxiously awaiting the new RBI white paper to convert over into an actual regulation for the MFIs. And that will remove all kinds of margin gaps. So there's fingers crossed that it comes out soon, and we can take advantage of that and not only in terms of the increase in margins, but penetration into other areas of operations and, of course, a better competitive environment with the removal of regulatory arbitrage with other enterprise players such as SFD's, a lot of other benefits as well.

Sir, any update on opening of new branches as we are earlier told in con call that in December or January new branch openings will come?

Yes. I think as I mentioned, we have opened up about 24 new branches, mostly in UP, Bihar and Rajasthan. We are planning to open another at least another 15-odd branches by the month end. And of course, Bihar, we have just very recently expanded into just about 1.5 months ago. So now we are operating in 8 states right now.

Okay. Okay, okay. And sir, any updates from the equity infusion from QIP because you have mentioned after 1,200 AUM you will be looking at QIP. So our AUM already crossed 1,050. So any update on that?

No, no. Unfortunately, no update on that. I think I am waiting until this new RBI circular comes out hopefully.

So by then, you will be looking at the net debt to raise funds?

Yes, yes, yes. I mean of course, debt raising is a continuous process for us, I think even right now we'll have at least INR 300 crores, INR 400 crores in the pipeline. So I mean from a debt equity side, yes, the leverage has increased, not to be concerned. Yes, it's gone up to approximately 4.3% or something.

4.35.

For us to be absolutely comfortable on our CRAR and continue to further leverage. And then there are, as Aalok just informed that we've already done INR 100 crores of off-balance sheet transaction with SBI, wherein we sold off a portfolio of INR 100 crores. So while the equity market might take some time, everything will be corrected, I mean whatever is required to be done to ensure that the debt continues to flow and there is no problems [indiscernible] branch expansion is being taken care of .

[Operator Instructions]. Next question is from Savi Jain from 2Point2 Capital Advisors. .

The PPOP growth was -- I mean it was negative. So obviously, there are a few reasons for that. But if you could just again summarize what are the various reasons why despite a 40-plus percent agent growth we had a negative PPOP growth?

Negative -- I mean are you talking about pre-provisioning profits?

Operating profit, yes.

So that's a combination of, as I mentioned to the gentleman earlier, the margins have been kind of falling down. So we are at about legally at 21.8% cap, which is at least 3% lower than what it was about a 1.5 year go or a year ago. On top of that, we are incurring a lot of operating cost for the branch expansions, believe it or not collecting money is also quite an expensive endeavor, as you can imagine, with all the COVID-related stuff going on. So yes, there is pressure on both sides on the income side and on the expenses side as well. But I think what you will notice is -- I'm not even sure if I can say this, but probably next quarter by Q4, all of those things would have been a little bit streamlined, and I think Q4 should be slightly better, at least in terms of those both aspects about the income side and the expense side.

But you would still be operating at those yields because of the absence of that RBI notification, it still hasn't come.

Even if the RBI circular does come out tomorrow there is not going to be any magic wand that will -- unfortunately, all the assets which have already created on my books are at the lower yield. The weighted average will start to increase, of course, but that will still take some time or a few quarters, putting real impact on the P&L. Vivek anything to add?

Yes. So on the pre-provisioning side, what also happens is, as the gentleman earlier was asking, so it's not -- there is -- to an extent there is a pressure on the NIM because of the lower yields that we have to do on MFI, but alongside the funding within this quarter has, in particular gone up and the overall branch cost has gone up for that reason. And overall, as the portfolio growth continues the yield and the revenues should start kind of going up.

So this RBI thing, will it be like again a draft paper or will it be a final notification?

No, it will be a final notification.

And it will be effective immediately?

I wish we could address that.

Based on earlier circulars, which have come for the industry, what do you anticipate?

I think it would not be immediately. I think if it comes today, it might be effective from first April or something like that.

Okay. Okay. Yes. I mean I think a lot of players were talking about this coming through in the last quarter, December quarter, and we are in February and it still not come.

Every industry gets glued to the budget for some or the other reason. I and Aalok were glued to the budget speech for this one only.

I think the government had more important things to take care of.

I was watching the governor's event, what was it called? Anyway whatever it was. [Foreign Language]

Monetary policy.

Yes, monetary policy.

[Foreign Language] So I was speaking to the management of CreditAccess, they are also obviously being the largest player, very anticipating this and they said maybe after this policy it is when they are finally going to discuss this likely.

Second this is pure speculation, but I believe that the go-ahead has been received by the governor and now it's just awaiting some final touches, but that was about a month ago, so that is too many touches that can somebody can give to something, let's see.

In terms of provisioning for the back book, is there something still left? You mentioned from FY '23, maybe it will start normalizing. So do we expect another quarter of higher provisioning.

So the Arman book is completely provided for, in fact, more provided for than -- so there were like write back and stuff also when written off assets were somewhat collected in the last quarter. In the Micro side, I mean I think, as I said, the worst is definitely behind us. There might be some minor level of provisioning which comes in. And as the portfolio keeps growing, anyway you have to provide for 1% of standard assets. So it's not like the provisions will stop. But the COVID provisions have slowed down quite a bit, and I think they'll continue to slow down as it keeps going. But yes, I think that I was mentioning as far as the repayment rate we are expecting the repayment rate to normalize by Q1 of FY '23. So coming up in another 4.5 odd months, unless something drastic happens and I keep jinxing it by saying that, but one thing or other always comes up. But let's hope -- I mean, after the third wave, there was a little bit of a very negligible impact of customers and staff members that were sick for 3, 4 days. So the collection might have come in a little late or something, but nothing crazy happened. I think people are used to it by now, my staff and members and all of us are just kind of used to these minor COVID-related disruptions and they take it in stride. So I think after 1.5 years of this, almost 2 years of this, people have -- you can get used to anything. And I guess we are used to it by now.

And this delisting of NPA, did that notification did not have an impact on our financials this quarter?

Savi, one, generally, what happens is, since we are in the -- largely our loans are unsecured loans. If a customer manages or flows down into the third or the fourth bucket and becomes an NPA, even historically, we've seen that 9 in 10 cases never comes back to a pre NPA or less than 90 days DPD. They continue to be in more than 90 DPD because they might come back and pay us one installment regularly, but that doesn't make them move anywhere into the 60 DPD bucket. So overall impact because of the kind of profile of the customer is not really very, very impactful. But still, it's -- in the longer run, we feel that it could have an impact, at least to the extent of increasing the NPAs in a standard stable kind of a condition by about 0.5%. . The other thing also is that as far as we are concerned, the largest chunk of NPAs are in the old pre-COVID assets, right? So those who are already well into the -- well over the 90-plus DPDs or the newer assets, which were created as you heard me, I mean we have not been facing too many issues. So the overall impact anyway is not going to be very, very large. And now there is a new -- I think they have delayed it until September the implementation of it. But yes, as Vivek said, maybe about 40 bps or 50 bps at the very most.

Okay. Just a couple of more questions. One is are we still doing group meetings or we now moved to like stop giving JLG loans and doing more of individual loans? What is...?

We are still doing JLG. We are doing individual loans as well. I believe that we have done in the MSME side, we are doing about INR 15 crores to INR 16 crores in the micro side, we are doing about INR 4 crores, INR 5 crores. So almost INR 20 crores of disbursements we are doing in individual lending business in a month. But rest of them is JLG.

So yes, the JLG is becoming a smaller proportion of the overall book, is it?

No, no, no. No way, no way. I mean what probably Aalok is trying to say is that MSME is anyway an individual lending book. Microfinance, as during the last call, we kind of said that we already started looking at a pilot model of individual lending book, there we're seeing about INR 3 crores, INR 4 crores of disbursements on a monthly basis.

But are we doing group meeting? Is it -- I mean in this kind of...

Yes. Yes. We are doing group meetings. We are doing the whole JLG thing. Yes, it's not a -- I mean, it's not completely out of fashion or anything.

It still continues to be bread and butter and cheese and everything, whatever you want to call it. Microfinance will continue that.

When I say that the individual loan in the future, what I typically mean is I'm talking about 5 years down the road, today's scenario, I mean, JLG is still the key in terms of loans.

Right. And lastly, Maharashtra, are we still lending there or is it going to become smaller.

That book is shrinking. We are still lending in the branches, which are not that badly impacted. Other branches, we are not -- overall, it is declining. But yes, we are disbursing in Maharashtra not as well as we did before pre-COVID, but we are.

So the new states, like, for example, Bihar is kind of -- is likely may be a riskier state based on experience of some other players. So are you -- obviously, diversification is good, and we are already quite diversified now with 5 states being a large part of the book, so is it really necessary to get into some of these other states, which might not -- which might be slightly obviously costlier also because operating expenses will be higher .

I've been considering opening in Bihar for at least 3, 4 years, 5 years. The outside perception is risky, but I think if you look at the data, the hard data, the numbers from both demonetization and COVID, it would appear that Bihar is one of the best states to operate in India. So that's what really allows me to pull the trigger in a small way to straight away let's open in. Now there are, of course fair share of issues, law and order issues and whatnot, which are there in Bihar. But as far as the quality of the customers go at least on the numbers, I mean, it's much better than even Gujarat or it's much better than even in Madhya Pradesh or any other place. And it's a little bit crowded there. It seems that I'm not the only one who can read numbers. So there are a lot of other players also moving in, so we'll have to do it carefully. We are using -- we are expanding from the border regions of UP to our existing branch network in UP and that is what we typically do. But I think I mean it's -- as Microfinance matures, either you make headways into new places or you'll be left behind.

So can we tackle that by getting into newer products rather than newer geographies, just to ...

We are doing both. We are trying to get into newer products and ...

But in terms of new products, Two-Wheelers, maybe you did a tweak with that rural, otherwise for the last few years, I think we've not really piloted new products per se, maybe something like micro housing or something, which ...

It's not the right time. It's not the right time to get into new things. I understand what you're trying to say. And of course...

No, no just to draw a parallel for example, we had these 2 small financing banks Ujjivan and Equitas. One went through that entire geographical diversification and one went through the entire product diversification. And in hindsight, Equitas seemed to have done a much better job as compared to, say, Ujjivan. So just keeping that playbook in mind I was just asking whether it is better to also look at more products rather than geographies.

In my experience, I think you need a little bit of both. But as far as doing product diversification, which is related to what you know already that is safer to do at a time like this because I mean with like all companies and all people you have limited resources. And my management force and everybody is busy kind of trying to take care of COVID-related issues at this point, right? And with so much kind of unexpected stuff into the future, I don't want to get into something which I don't know exactly how to do. I mean during good times when you have a lot of profits and things are on auto mode, you have a lot of time to concentrate on newer things. Right now is not the right time for me to get into something completely new. Individual loans, all of those things they are distant cousins of what I'm already doing. So that's not really that big of a deal. But this is a whole another, affordable housing is a whole another completely a different segment.

[Operator Instructions]. The next question is from the line of Balkrushna from Axanoun Investments.

Good evening, sir. Many congratulations for crossing INR 1,000 crores AUM. Yes. So I have a couple of questions. As an industry in MFI, like if I consider the period of pre-COVID and the post-COVID period that is going to be afterwards about I mean from, let's say, from 2022. So do you see any fundamental changes in the NPA trend that were in pre-COVID period and from the period of 2020 to onwards. I mean is there any fundamental shift in the industry because the average is going to be higher than pre-COVID?

So what -- I mean -- so once -- so if I understand your question correctly, what you are asking is, has the compared to pre-COVID and post-COVID. So let's forget about COVID-related losses. But as the regular operations resume, will the NPAs on a steady state be higher or lower or same than what they were pre-COVID. Is that your question?

Exactly.

They will be higher, very frankly speaking, not by a very large amount. But they'll be slightly higher as the ticket sizes continue to increase and as micro finance continues to penetrate deeper and deeper. The lower ending fruits kind of go away and we are taking slightly higher risk on other customers and I think people are getting used to credit. They have a lot of different areas to get credit from. So as competition increases it is natural that the NPA's will probably increase slightly as well. But I mean, I've said this often that we were in a golden age for like a good 7, 8 years in MFI, where loan losses were less than 1%. I mean those unless you're doing gold loan or something like that, if I am right even in the secured business, even in Two-Wheelers that was the case. So as an industry rather than probably lying to ourselves that things have been good in the past and they will continue to be good in the future, it's better to be mentally prepared for something a little worse than it was in the past. But if it's the same or slightly less, nobody will be happier than I will be.

And my second question, do we do any kind of or any percentage of loan that you disperse in cash?

No, no. We are 100% cashless in all segments.

And it's almost 4 years now.

Yes, almost for 4 years.

Not a single rupee of cash has gone out in the last 4 years.

Okay. Okay. And you also mentioned in the investor presentation that your collection efficiency of loan book -- post-COVID loan book is around 99%, okay? So when I look at the disbursement of last 5 quarters, so it is around INR 1,140 crores, and total loans outstanding on your balance sheet is around INR 965 crores. So I'm not able to understand the math here because you say your overall collection efficiency is between 92% to 95%. And your post-COVID loan book collection efficiency is 99%.

Yes, correct.

So what...

Yes, go ahead.

No, no, no, no.

Please go ahead, please go ahead.

I mean that's just the way the math works out. It's just that whatever is left -- now that is pre-COVID, right? I mean that has a much lower collection efficiency because the stuff that was good has already been paid off to an extent. And that INR 1,100 crores that you mentioned, I'm sure it's correct. I don't know what the disbursement has been in the last 5 quarters. But that also gets repaid, right? So you can't really compare that in the -- I mean, since inception I have disbursed maybe INR 5,000 crores. But that doesn't mean -- even the good portfolio continues to repay. So that will bring down their overall weightage in the repayment calculation.

So basically, what we are seeing is a good portion of INR 1,140 crores, okay? So basically -- and so you are saying that a lot of loans that you disbursed after September 2020 got repaid before the loan you disbursed pre September 2020, right? So is that a very big -- I mean, so ...

I lend you INR 100 today, right? And you pay me as of INR 2 tomorrow. The outstanding will become 98, right?

Yes.

Now that same INR 100, if I gave it to you 2 years ago, your outstanding might be, let's say, INR 15 and you pay me INR 2, that will become INR 13. So both -- I mean, the overall portfolio weightages will be different than the repayment weightages because both EMIs are INR 2, right? But the portfolio is very different. One is INR 100 -- INR 98 there will be INR 13.

Yes. So basically, there might be a couple of scenarios, right? So wherein the loans you disbursed post-COVID are of shorter period and the earlier loans would be for the longer period. And the second scenario you mentioned would be something of that sort.

Look at this way. That is absolutely not what [ we said at INR 1,100 crores ], the outstanding of the INR 1,100 crores, let's say, out of the INR 10,045 crores of total AUM, we started approximately 70% of the AUM. So out of INR 1,100 crores, about [ 20%, 35%, 40% ] whatever, would have run off in a regular cost of something because we delivered 1.5 years ago in September, would have repaid about 15 installments already. And something, which was disbursed in February and March of 2020 with the moratorium, which would be always close to being cut off. But still, there will be like a few months left on it, but the EMI will be the same. Anyway, will probably let us move to your next question. Maybe you can call Vivek for the mathematical understanding of this.

Yes. All right. All right. And so basically, can you tell me so on your consolidated balance sheet, there is a loan book -- I mean, loan of around [ INR 965 odd crores ]. So what would be the percentage of Pre-COVID and post-COVID loan book in this INR 965 crores?

What is it, Vivek? About 30% -- [ 25% ] pre-COVID and about 75% would be post-COVID. Roughly speaking, we can probably will give you a better answer.

But about 75% is post-COVID, the pre-COVID is less than half of the year. But the repayment would be probably higher than that. Again [indiscernible] a case in point would be say for example, NPA cases, but out of a 3.8% of NPA, there would be hardly any, which is a post-COVID disbursement. The entire NPA would be pre-COVID.

Right. Right. So there even actions demand is there, the collections are not happen. I mean the collections are less than 30%.

[Operator Instructions] The next question is from the line of V. Srinath from Bellwether Capital.

Aalok, just -- you guys can hear me?

Yes.

Yes. Can you just take me through plans for MSME? What are the growth outlook? Disbursements have somewhat kind of come back to pre-COVID, so where are we standing? And then there was a particular line in the presentation that said that you have tightened the cash flow requirements and COVID impact layer. Can you kind of explain that, too? And again, given that we are coming out and if there are customers who have cleared credit screens in the last 2 years ago not defaulted, wouldn't it be better at least to at least leave the norms as is because you would already have kind of clean data coming from the bureaus? So yes, I just wanted to understand broadly how are you seeing MSME over a 12 to 18 months kind of time horizon?

No. I mean we are very -- we love MSME. It's a great business to be in. It's -- the returns are great. The losses, if you compare it with Microfinance are probably say more or less. As I said, [ Arman ], we are already out and we are at a situation that we are writing that. So it's a great business. But it takes a very specific kind of customer to find that customer. And of course, the kind of volumes and the volume gains that you can expect from the Microfinance side, it's -- at least post COVID it's been difficult to keep that up because it takes you to specific -- it takes you and your team to find that specific kind of customer who can afford the rates and you can evaluate their cash flows. And so the rejection rates continue to be higher. With that being said, we are -- I think the disbursement levels are increasing. We are continuing opening branches in that segment as well. So plan of opening about 10, 12 branches. We have already opened about 3 branches in the last couple of months...

[indiscernible]

Rajasthan as well. So geographically, we have expanded into Rajasthan. Areas we found to be good for doing this kind of a business. So overall, I mean, I'm quite bullish on it, but it's going to take its own time. We did have a setback. I mean, we tightened the underwriting norms and it was very difficult to evaluate the cash flows. So it takes a very specific -- as I said, it takes a very specific set of circumstances to disburse the loan to the MSME customers. Well, we are working on it. But otherwise, I'm -- I mean I love the business. There's absolutely nothing wrong with the business. What was your second question on what...

Yes. No, so do you expect a ramp-up there also in disbursements to start probably in the quarter or 2 similar to [ MFI ], it looks like we are firmly on a growth path there. Do you expect MSME also to kind of hit a growth path in a quarter or 2? How are you seeing it?

Absolutely. Absolutely. All our efforts are going towards that only. So I mean, if we did go to that part, then clearly, I mean, we have not succeeded, but our efforts are going towards that part, as you say.

Perfect. One final housekeeping question on MSMEs. For MSME book also the loans given post April, are they like 10% collection efficiency similar to MFI. Is that trend similar?

No -- yes, absolutely. It is 99% plus collections, yes.

Okay. Okay. And the last one is, we've seen kind of ramp up from INR 7 crores to INR 16 crores disbursement. Is this ramp-up coming from rural Two- Wheeler? Or the erstwhile business that we had that we were looking to kind of ramp down?

That's a cyclical kind of a benefit because October, November of this quarter are supposed to be the best month for EBITDA sales. Diwali...

Got it. So what would be the rural to win contribution in the INR 16 crores?

What was the contribution. I think maybe...

Very, very roughly in the rural.

In the rural. About INR 6 crores would be in the rural and INR 10 crores in the urban.

Got it. Got it. So that is scaling up at a slow pace, but it's scaling up.

Yes. In terms of percentages, it's actually in terms of disbursement, especially in the festive season, it would have been upwards of 25% of the overall Two-Wheeler, which kind of is not reflecting on the overall growth of the portfolio itself. But again, as I said, to a large extent, [indiscernible] so much about these successes and also [indiscernible].

[Operator Instructions] The next question is from the line of Sachit Motwani from Param Capital Research.

Aalok, my first question is on the MFI business. Like in your presentation, you mentioned 35,000 average ticket size, but you have been hovering around 22,000, 23,000 for many years now. I think you were at 20,000, 21,000 average ticket size, which is now 23,000 something. So this and the other area of AUM per branch. We've been at around INR 4 crores AUM per branch for quite some time now. So why are we not able to scale these numbers? I just wanted to get your thoughts on that. That was my first question.

On the -- so on the average ticket sizes, I think pre-COVID, we were at probably around 28,000 or [ 36,000 ] on the disbursement side yes 28,000 or so, which has gone up to 35,000. And I mean, there are no better excuse than to say that that's where the trend of the market is going. In the Microfinance segment, you don't really compete too much on the interest rates and things of that sort. What you are competing a lot on is on ticket size and turnaround time and things of that sort. So the trend towards the market is going towards increasing ticket sizes.

Okay. So your AUM average should also at [indiscernible].

To give you a little bit of more comfort around that, you see the higher ticket sizes are only in the future cycles but largely speaking, is on the active cycle, third cycle and so on and so forth. Now when we are lending money, I would take least 15-odd percent of the Microfinance customers for now have been kind of taken away from the market. Because we are not lending money to anybody who has defaulted during COVID, right? So even if they are -- I mean, even if they didn't pay for 4, 5 months during COVID and now are doing okay, we are still erring on the side of caution and saying that, okay, we will not lend money to them. But the customers who are left are like the dream customers, right, even for us. So these are customers who have continued to pay us without any kind of difficulty or any problems during COVID, during first, second, third wave, whatever it may be. So am I comfortable taking a slightly higher risk on them? Yes, maybe -- I mean, I think it would be fair to say, yes. So you're left -- I mean, A lot of these customers, which we are giving higher ticket amounts to have been through like the worst tax that you can imagine, right, COVID? So they prove themselves. So I think it should be okay. As far as the branches go, listen, I think, overall, the branches or AUMs continue to increase, but we have a policy that splits the brand once it approaches a certain AUM. So once it process, INR 5 crore, INR 6 crore AUM, we split that branch into a new branch because that's part of our risk mitigation side. So you'll see that as a new branch, but our policy will not allow an average branch to be more than a certain AUM.

Understood. Understood. How is the competitive intensity? Because you mentioned that you have 15% of MFI customers are now you're not touching and 85% are [ clean ] customers. So is the competitor's intensity relatively lesser benign, especially post-COVID now or during COVID times?

It's honestly as competitive. I mean -- it kind of ebbs and flows in that sense, like during the waves and stuff, nobody's lending anything and then everybody remembers that, oh, we have targets and everybody starts this point left and right? So it's kind of all over the place, if you look at it throughout the year. But let's say, today, like, for example, February or January, I mean, the competition is just as high as it was pre-COVID. I don't see any relief from that. And that is fine. Competition is okay. We can manage competition.

For you, you see it more from the SMB side or MFIs or the universal banks?

It is more from the MFI side. I mean, probably this might be a better question to ask my Chief Operating Officer. But based on my knowledge, it is not so much on the SSD side because SSDs are facing their own issues at least in the area that we operate in I could be wrong on this, but the MFIs are also -- see, there is a lot of funds available. Let me tell you that much also. So people are not facing so much of a liquidity issue, it seems to me. Again, I don't have numbers to back this, but based on different -- the CGI schemes, as I mentioned and other schemes that the government has been running and the overall availability of liquidity in the market, along with PSL guidelines and things like that. The MFIs have -- the good MFIs or at least the decent MFIs have a good supply of money flowing in. So that has not been an issue.

Okay. Got it. Got it. Next question I have was on this direct assignment with SBI. So you would be -- what would be of broader terms, you'd be earning a 10% spread, your margins should be similar as the current business?

So how [ this ] works is that we take the assets that we own and sell it. So there are no like margins to worry about. But the deal we did was somewhere around 10%. I mean -- it's kind of a complex thing, right? But all-in cost would be somewhere around 11% for us after considering the processing fee and the other requirements, the [indiscernible] and things of that sort. The published rate would be somewhere around 10%. So generally [ the rate ] could work in favor of increasing the [ spend ] it addresses the -- so there is no margin requirement or BA, which is what I've always said through the year that if it allows you to get a little bit better margin then I'm all for doing off-book transactions, and this was such an example.

Got it. Just one correction on your slide, actually, on your Slide #13, your reported cost to income is 28%, which I think you've taken the cost to income as a percentage from a total gross income instead of the NII plus other income.

That's absolutely possible. [indiscernible]

The next question is from the line of [indiscernible].

Sir, can you hear me.

Yes. Yes.

Okay. So my first question, Aalok, is you are at I think INR 300 crores of your disbursement in Q3. In quarter 4 of next financial year, can we -- are we all set to reach, let's say, INR 500 crores kind of disbursement [indiscernible]?

INR 500 crores the quarter -- in quarter 4 of '23 that seems a little bit out there, but let us say, somewhere in the neighborhood of -- about INR 450 crores should be doable. -- maybe might be that it -- I don't want to overpromise anything. INR 450 crore kind of per quarter seems quite doable by Q4 of next year. We have 12 months. Disclaimer always that let us see what further disruptions are coming due to COVID.

And then my second question in terms of business decline, so to say, the cost of funds. I mean you have always maintained that MFI is not a cost of funds business. It's more of a distribution business. And you -- I mean you're recognizing you're not finding first-time borrowers or rural borrowers and kind of areas where competition will take some time to come in. That is your kind of your like edge whatever I have observed your business for so many years now. So -- but I mean, you are also saying that 2 things are happening, right? The penetration is going to increase with this [indiscernible] all sort of penetration is going to increase. And the ticket sizes are on an increase in range. These are the 2 trends in the industry. So how long do you see that the cost of funds won't matter to you? Like are you okay for the next 5 years that cost of funds won't become bottoming in terms of your business design?

The cost of mattering as soon as this new RBI circular comes out because once you remove the margin caps, then the idea is -- see, today, whatever cost savings I get from my borrowing cost, I have to pass it on -- by law, pass it on to my customers, right, at least on a rated average. So once that is removed, I have to worry about 3 things instead of 2 things, right? I have to worry about my top line, I have to worry about my interest cost, then I have to worry about my operating costs. So all 3 of those things will matter to the bottom line. And it will be a balance of those 3 which will be -- so it's -- we are in a place right now where it's going to start mattering very soon and hopefully sooner rather than later.

I mean that is still about [ 10% price ] -- but I mean that's probably everybody is looking at as an increased bottom line and more distribution. I think the industry players like you are looking at that margin cap. [ Do you want any this rate ]?

[ Cap ] will get removed. So if I'm able to save 1% on my borrowing cost or if I'm able to charge 1% more to my customer then that will directly impact my bottom line, right, by that...

Yes. Yes. So I mean that's what you're missing. But my question is our -- I mean, our cost of funds disadvantage over, let's say, SSDs or someone like [ London Bank ] will be huge, right? And we have been kind of smart to pick these rural pockets and saying those rural pockets and get kind of yields that we get, right? But I mean, how long that can continue?

Sure. Let me -- a couple of things. So my cost of borrowing disadvantage, so to speak, is far from huge now. It used to be quite huge. Today, I'm at a place and at a scale were I'm able to attract funds at a lower cost. So our rating has also -- I mean we are at A minus at this point as well. So while there is a little bit of a disadvantage, I'm not going to discuss. But I have other advantages that SSBs do, like my operating cost structure. And in fact, a lot of them are not making very much money with their scale or a lot of them are making losses. I have not made a loss in any quarter. So let us put aside the differences between an NBFC MFI structure and an SFB structure because I've always liken these are to their apples and oranges. They might be fruits, but they are different kinds of fruits. As far as other MFIs go, I mean, there are few MFIs that have a distinct advantage over me maybe credit access or somebody like that. So there are companies which are much, much larger than me and I manage borrowing at a lower cost. So it's not just as a function of scale. I think your weightage matters, your rating matters, your overall profitability or governance and a lot of other factors play into what rate that you borrow from. But yes, I don't disagree with you that our -- I mean, our core competency has always gone out to find the new customers and get into the niche areas where there is not a lot of competition and we can service these customers in a way. Slowly, slowly, that might be going away, not by choice, but because the market is expanding, and there are a lot of players and players are expanding and everybody is opening new branches. So that is the reality of competition. I think we've done a good job with the places we were good at, and I think we'll continue to do a good job, hopefully as the market environment keeps changing.

Okay. Okay. And sorry to harp on this, but how about ticket size? I mean do you -- let's say, if you want to land a pretty good customer at 50,000, 60,000, does your business decision kind of prevent it because of your cost of funds? I mean how does cost of funds impact your ticket size may impact say in terms of a good customer or in terms of risk portfolio?

Cost of borrowing is not going to really impact my ticket sizes. Cost of borrowing has 2 advantages. One is it increases your portfolio faster and thereby your potential interest income that you can earn. And the second thing is that it reduces your overall cost or operating cost as a percentage of your portfolio. But it comes with a risk that if you're giving a lot of money to somebody who can't afford it, your loan losses might increase to that aspect. . So this is a continuous balance that needs to take place. Me, personally, I don't like large ticket sizes. If I'm -- if my end is forced due to competition and stuff like that -- of course, I have to run a business and I have to consider practical applications. But in the long term, I mean, there are players right now, which I'll not name, that are doing INR 75,000 Microfinance JLG loans, second cycle loans and INR 60,000 first-cycle loans. I mean that's absolutely ridiculous. I would not do that at all. I mean if you want to do INR 60,000, INR 75,000, do an individual model, go down to their cash flows, right, to understand their business, try to understand what they are doing. And then lend them [ INR 1.5 lakh ] if they deserve it. There's no problem. So if you're trying to give a larger ticket size under the facade of joint liability, which is getting diluted day by day as we speak, then I think fundamentally, there is something wrong with that business model. Now are we -- I mean, are we happily proven wrong, maybe? Maybe the asset size will be completely okay. And 2, 3 years, 4 years down the road, there'll be somebody that tells me that, oh, you should have done the same thing. Look at that bank across the street, we made a truckload of money on doing that. Which is fine, I'll have to make my peace with that if that happens. But today, I think I have to go by my instincts, which to say that you cannot do such a large ticket size under the JLG model, you'll have to do it under MSME or individual loan model where you are actually going down and trying to do a little bit more underwriting.

Okay. Okay. And then my last question, any balance transfer out kind of data in MFI or in MSME, I mean maybe balance answer obviously for you not the right term, but you understand it. I mean if customers go into a different borrower you see with better surveys, better rates, whatever better repayment terms?

So you are saying that somebody getting refinancing from somebody else, and they come with a check of another finance company and somebody takes over. That doesn't happen in Microfinance. That might happen unofficially where they borrow money from somebody and prepay my money. Payments do happen all the time. But no, I mean, I don't have a single instance to share where somebody has bought over debt because I mean that doesn't make sense in unsecured, right? One thing we're trying to do it years ago, and I think I said it -- how do you do that in an unsecured because what's stopping him from borrowing someplace else, right?

So I mean, we might see prepayments happening for obvious reasons that somebody might be getting a lab or a housing loan and want to repay the higher interest -- higher interest or just because the housing company might have said that your EMI servicing is very high, and you will not be able to get a higher loan when you repay this. So that kind of thing leads to about prepayments every now and then.

I mean, it wouldn't be very large [indiscernible] But that does tend to happen. But that trend has not started yet where people are like officially refinancing and they get a demand draft of some finance companies to close their loans off.

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

Yes. So just switching on Slide #18, which talks about your liabilities. So I was just starting to understand some parts of the pie chart. So there is a 2% direct assignment, a 1% direct assignment in the pie chart, am I right? What you mentioned at BE?

Yes. So if you are talking about the [ SBI DA ] transaction, that is in January.

No, no, that I understand. What I'm asking is that you have separately written in the left chart that there is a 581 million direct assignment whereas in the graph, it is only 2%.

[ 581 million and 72 million, INR 7.2 crores ]. So there is a note in the bottom, I believe. Is there some typo? Is that what you're saying, Savi?

No, no, I'm not able to understand. If it is INR 581 million, then it is actually much higher than 2%, which is shown in the chart.

So [ yes ], that's possible. Let us look into that.

I mean I'm not too sure I'm a bit colorblind as well on this one...

No, no, it is -- as on here it was, after the green, there is DA, which is purple.

If it was 58 divided by 766, you're saying it should be 7.5% and not 2%. FY '21 he's talking about, on the last slide.

Similarly on the right one also, which shows 1%, that is still quite close, not that -- that could be still correct. But anyway, my question is that -- so what you are saying is -- so you remember off hand that your direct assignment was like very small earlier. It was to the tune of...

Yes. We do a lot of PPCs. But after NDX direct assignment definition has changed to completely without reports. So while pre-NDX was off balance sheet, we had to re-recognize back on the balance sheet if it had recourse. Vivek, correct me if I'm wrong if I'm getting the accounting terms right. So if you try to compare, let's say, pre-NDX and post-NDX, it will be a little hard to compare. But we haven't done a lot of DA transactions. The SBI on which we just did has been the largest. A lot of the DAs have run off also because the MAX DAs that we can do is maybe about 19 or 20 months because they require, I think, 3 months [ vintage ] and then like another month or so for the [indiscernible] and everything to be the pool to be rated and a rating like that. So the average book tenure will be left will be 17, 18 months. So since we have not done a lot of the year trajectory...

Because SBI is in first half of that. Yes.

So this one seems right to me, the -- it will be about 0.8%.

No, no, no, let me correct -- I mean, to everybody hearing this, I think this book note is incorrect. That's probably not...

The footnote is incorrect. The total [ outstanding ] would have been about INR 12.5 crores at the beginning of the financial year at March 21, which was kind of close to whatever 1% on top.

Yes. 2% or so. [indiscernible] 2%.

So this is -- all of this credit risk is assumed by the bank. You have nothing -- no credit announcements that you've provided to the bank.

No. [ DA structure ] as per the gate policy does not allow any credit enhancement.

So -- but do you need to keep capital as well?

No. There is no cash for that way, if that's what you mean.

So this basically goes out of your book, right?

Yes.

Yes.

That's what exactly it is.

Is it like a profitable given that now you have these limitations and spreads? Does this make sense to do it at 10%, do you make money, ROE on this transaction?

It makes absolute sense to do it. The only problem is that the profit you have to recognize on it right away. So your profit for that quarter might appear to be inflated, well not inflated, [indiscernible]. But while the operating expenses of servicing this loan might be over a period of the quarter 2 financial year 2 financial years. The profit from the same has to be recognized by the way.

So basically, next quarter, there will be an abnormal jump in profitability because of this transaction?

We have been in only accounting side at this point of time. Not that we want to kind of say anything you're adding...

No, no, no, that I understand. I'm saying we need to take it as an extraordinary income and it appears in the new [indiscernible] be to amortize it over the period of the [ load ].

And I agree with you. In fact, amortization is quite weird. Savi, what happens is we'll have to go by what the accounting standards and...

Correct, correct. So the same is not true for securitization. And where does PTC appear in this?

So DA is securitization, which is a true sale. PTC will appear on balance sheet in there. PTC is actually by India standard, not off balance sheet. And in that case, you amortize the overall cost and...

Sir, in this [ graph or interface ]?

So in this graph, it will be bundled up in the bank or the FI, wherever -- sorry, there a securitization. Because there is the [ securitization ], not the blue one.

The blue one -- PTC integration are one and the same thing?

They are different. Maybe for nomenclature, let's understand in our presentation, the securitization here meets the PTC and the DA is a direct assignment, which is a true sale and does not have any recourse to the investor and off balance sheet.

Would the answer include the PLIs also?

No PLI.

So securitization, what is the pre-announcement that you provide to the lender?

That depends on contract to contract. [indiscernible] to specific to address at this level. But largely speaking, there would be a second loss credit enhancement that would happen through subordination, and there could be cash collaterally and there is over collateralization as well. So generally, the recourse kind of being available to the investors could be anywhere between 12% to 25% depending on the overall structuring.

That's quite a lot, actually. So basically, they don't really ever see any NPA on that trend because your NPA will -- your credit losses would be less than whatever 6%, 7% even in the worst-case scenario.

In the cases when the company is completely flat out defaults or at least that case -- but normal asset losses on an ongoing basis, typically, they would not see any losses.

So there the cost would be lower?

Higher.

Higher?

The coupons are generally lower, but the overall cost will go up because you will have a cash collateral, you will have subordination that might happen through credit loss guarantee coming in. And the overall middle opinion, it is that initial setup costs generally is higher.

So cut on the bank's books of PTC is a treasury instrument. The transaction goes directly into their balance sheet at the retail loan or whatever it may be. So there are -- I mean, there are a lot of differences. It took us a while to also get used to read the instruments. And every instrument has for a second, third loss kind of framework. Some of them come with guarantees. I'm talking about the PTC specifically. And so the cost -- the overall coupon to the bank might be lower, but the -- the cost of my [ cost ] will go up because there will be a negative [indiscernible] might be on the cash collateral. There will be a guarantee fee maybe that we have to provide for the secondary losses. So stuff like that.

[Operator Instructions] Ladies and gentlemen, that was the last question for today. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.

Thank you so much.

Thank you.