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

Ladies and gentlemen, good day, and welcome to Q4 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 Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand over the conference to Mr. Manjith from Emkay Global Financial Services. Thank you, and over to you, Mr. Manjith.

Hi, 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 opening remarks. Over to you, sir.

Thank you -- thank you, Manjith, and good evening to everybody. This is Aalok Patel here, and it's -- as always, it's a pleasure to connect to all of you again, and thanks for taking the time out of your very busy schedule to join us over this call and to discuss our financial performance for the quarter and the year ended March '22. We have issued a detailed press release and investor presentation for the quarter, and I hope you've had a chance to review it. The presentation was uploaded with a minor delay today morning, so my sincerest apologies for the delay. I will start with a brief overview of the industry and the business during the last quarter and last year, and then we will move into our financial performance. The year gone by had its fair share of challenges, starting with the second wave of COVID-19, with the Delta variant during the first quarter and then the third wave with Omicron variant in the third or the fourth quarter. However, with several COVID waves and lockdowns in the past 2 years, we have managed the third wave with very minimal disruptions. The second wave, however, proved to be highly disruptive, as I'm sure all of you are aware. That said, the situation is a lot different today. For now, it seems that COVID is behind us and things are back to normal. With the normalization of the macro environment, the demand for credit is also back to normal. However, if another wave is hiding around the corner, we feel a lot more confident in our ability to deal with it. In fact, the disbursements made post the initial lockdowns have a repayment rate of 98% despite facing the second wave and the third wave. With the new RBI regulatory framework for microfinance loans, the NBFC-MFI will have a level playing field with other microfinance players and also allow us to price in risk for different microfinance loans. Although the new regulation is targeted more towards bringing different categories of lenders, that is banks, NBFCs, SFBs, et cetera, under one regulatory umbrella, it seems that the NBFC-MFI stands to gain the most from the new regulations. I'll now give a brief overview of our financial performance for the fourth quarter and the year ended March '22. And post that, touch upon liquidity, disbursements and collections in more detail. Coming to the brief overview of our financial performance of the quarter, it gives me immense pleasure to inform you all that despite the challenges of our consolidated loan book as on 31st March 2022 -- excuse me, our consolidated loan book as on 31st March 2022 stood at a record high of INR 1,233 crores, led by expansion in branch network which helped cater into new customers in geographies along with pent-up demand from existing geographies. Our active customer base this year has crossed pre-COVID levels at over 4.6 lakh. Segmental AUM for microfinance stood at INR 1,022 crores, higher by 59% year-over-year, and AUM for MSME stood at INR 165 crores, higher by 32%. For the 2-wheeler segment, our AUM stood at INR 46 crores. Consolidated loan disbursements during Q4 and FY '22 stood at INR 337 crores and INR 1,023 crores, respectively, up by 23% and 101% year-over-year. The total MSME and 2-Wheeler disbursements in Q4 and FY '22 were INR 58 crores and INR 183 crores, respectively, higher by [ 27% and 99% ] year-over-year -- excuse me. While microfinance -- excuse me, I'm going to start again. I was just got distracted. While microfinance disbursement stood at INR 279 crores for Q4 and INR 840 crores for FY '22, higher by 22% and 101% year-over-year, respectively. This encouraging performance was as a result of our consistent endeavor to remain in close touch with our customers and provide them with timely delivery of credit. I would like to highlight here that while we grew our disbursements in AUM, our core focus will always remain and always lie on maintaining the quality of our assets and on enhancing profitability. Gross total income during Q4 and FY '22 stood at INR 67 crores (sic) [ 75 ] crores and INR 235 crores respectively, up by 68% and 20% year-over-year. Profit after tax stood at INR 16 crores and INR 32 crores for Q4 and FY '22, respectively. FY '22 PAT grew by 3x year-over-year, aided by growth in disbursements and especially lower provisioning requirements due to better asset quality of the loans dispersed post-COVID-19. These are loans dispersed post August 2020. The annualized ROE for the fourth quarter has also crossed 30%. Consolidated GNPA stood at 4.1% (sic) [ 4.8% ] and NNPA stood at 0.7% for 31st March 2022. The company has -- the company has steadily created adequate provisions to take care of the unprecedented impact of the COVID pandemic. Loan impairment cost for the quarter stands at INR 10.8 crores. Cumulative total provisions and write-offs for the year was INR 37 crores as on 31st March 2022. The total provisions on the book stood at INR 65 crores as on March 31, '22, covering 5.73% of the total on-book AUM. The company enjoys a healthy liquidity position with INR 150 crores in cash, bank balance, liquid investments and undrawn CC limits, aided by pickup in collections along with incremental debt capital raised. The company has, of course, duly repaid all debt obligations that were due in Q4 '22 and last year, with debt equity ratio of 4.65x on 31st March 22, and while shareholders' equity stood at approximately INR 213 crores. ALM continues to remain positive, and the company continues to have access to new sources of funds due to the company's robust balance sheet, long vintage and prudent lending practices. Coming to collections. Our consolidated collection efficiency saw further improving trends during the quarter and grew from 92% in Q3 FY '22 to 95% in Q4 FY '22. Collection efficiencies for the month of April crossed more than 98%. Robust collection efficiencies were a result of passionate on-ground workforce, continuous customer interactions and a customer-focused approach. We have successfully completed our branch expansion plans and added 30 new branches in the MFI and MSME segment. Our total branch network as on 31st March '22 stands at 292 branches. The expansion has not only given us deeper penetration by tapping into newer districts in existing states, but also given us an opportunity to explore new geographies. Due to our asset-light business model, the CapEx spent on branch expansion was very minimal, allowing us to reach branch level breakeven quite quickly. Finally, to conclude, I would like to say that our company remains dedicated to serving the most underserved and unserved population of India. Our endeavor is to make them part of India's growth story by making them financially independent. Today, India has a massive growth potential in the microfinance lending landscape. Financial inclusion remain the key goal of government of India. With the new RBI guidelines, the outlook for the sector remains very much positive. I'll also conclude by saying that in September of this year, Arman will be celebrating its 30th year in operations. We have seen a lot of ups and a few downs as well. None of it would have been as enjoyable or meaningful without the relationships we have built along the way with our employees, customers, lenders, investors, the Board, our peers and all the other stakeholders. So a big thank you from our side for your constant support. Thank you. And I would now request, Michelle, the operator to call -- to open up the call for the question-and-answer session.

[Operator Instructions] The first question is from the line of Amit Mantri from 2point2 Capital.

So just first a couple of questions on this quarter's results. So the yield has increased a lot this quarter, and even the provisions are fairly -- continue to be elevated. So what is the reason for both of these things?

The yields have increased because for the number, Amit, the yields have, in particular, have gone up because we've done a portfolio transaction, a securitization transaction of INR 100 crores being offloaded to State Bank of India. And under the Ind AS requirement, the gain on transaction -- on first transaction needs to be booked upfront. So there is a gain of INR 5.8 crores on this transaction in this quarter, and especially in Namra's balance sheet -- in Namra's P&L, which obviously flows into the consolidated as well.

But even if I exclude this 5.6...

Yes. So that's one. And overall, in the quarter 3, when we talk of -- if we were to kind of compare quarter 3. Quarter 3, if you remember, was a quarter wherein the fresh disbursement had to take place at a lower yield because of the CGS corporate -- or rather the central government guarantee scheme in microfinance. So those were at a lower yield of 2% at that point of time. So on a comparative basis from Q3 to Q4, the delta would be slightly higher.

Slightly -- slight due to timing differences and due to an overall increase also in the yields over the last quarter.

And then maybe I can just also add a bit on the 2-Wheeler side wherein, again, the yield has been moving up. Primarily, what is happening is about 30% of the books are now rural 2-Wheelers, wherein our yields have been higher. And as that component keeps on increasing [indiscernible].

Provision side, I think we are pretty much done. I think overall, we had -- I think I keep saying this. On the Arman side, I don't think the provisions were very, very high. On the Namra side, we were doing a lot of cleanup kind of an exercise. Can you hear me?

Hello?

Amit, you are audible.

Am I audible?

Yes.

Okay. So yes, I think the provisions were just a lot of the cleanup exercises and the write-offs that we were doing, Amit, and it is what it is there, I mean. Besides that, I don't know.

So generally, Amit, what has also happened in Arman, if you see, the overall provisioning requirement for the last couple of quarters anyway has been very fairly stable or rather on the decline. In Namra, because of the basic, completely unsecured quality of the book , we've kept on providing as far as possible and required and at a consolidated, since we continue to have about 5% provisioning on the overall AUM. I think if we -- largely, if we can say we are well provisioned. And hopefully, I mean, I hate to say this because every time we say this something goes wrong, maybe. But largely, it seems that we've seen a few of the worst quarters that COVID had to show us.

Yes. So I mean, a lot of this -- you are seeing is related to the second wave, specific. Not so much the third one, but the second wave.

Mr. Amit?

I think we can continue. He might have dropped.

Yes, probably. [Operator Instructions] The next question is from the line of Savi from 2Point2 Capital.

Yes. I think Amit dropped out. So I have a couple of questions. One is on the -- I think there's some loss that you have taken through the other comprehensive income. What is that?

Savi, on the Ind AS side, since you need to kind of mark to market the portfolio, and the -- under the new rate of interest that we are charging in the future, the overall interest rate -- average interest rates have gone up. And based on that, the OCI will turn out to be a notional loss, if you can put it that way. It's more like an Ind AS adjustment.

This must be a loss on your bond portfolio, but I presume that will be low duration, so...

It's not a bond portfolio. This is for the entire portfolio that -- the entire portfolio under the Ind AS.

This will be a liquid fund, right?

No, it's not related to liquid funds. It's a little bit complicated to explain. It has not nothing reality, if I want to put it that way. Basically, the market rates have moved up, and the portfolio that we have created in the past has a lower interest yield. So Ind AS requires to take a notional loss to OCI, but it has nothing to do with the cash flows or anything like that. So...

This will reverse over time? Is it expected to reverse?

Yes, it will automatically reverse. Let's say, if the interest cycles kind of come down -- I'm sorry, fundamentally, why this happens is that Microfinance and MSME and even 2-Wheeler, so all our 3 segments, the lending is done at a fixed rate. It's not a flexi rate, which adjusts. Hence, if the interest rates were to rise, we will have a notional loss. And if the cycle reverses, then we might have a notional profit. Over a period of time, either as we keep on building the book, our average yield might increase, and hence, the loss will become -- the notional loss will become a bit smaller. Or if there is an interest rate reversal in a couple of quarters, then again, it might lead to a notional gain.

Even I don't completely understand it myself Savi.

Sir, on the net NPA number, have you knocked off all the provisions, including floating provisions, while calculating that number?

When you say floating, what are you trying to mean on that?

Like, this is net of all kinds of provisions that you have taken till date? Is it -- is this number net of all, or only net of the specific provisions?

No, net of all the provisions, because if my gross NPAs are let's say INR 10 as against that, it's...

Sorry to interrupt. Mr. Savi, you'll have to join the queue again, please? There are participants...

We'll answer. We'll finish answering this question.

Okay, sir.

Yes. So eventually, this covers -- I mean, to cut the answer short, this includes the total provisions against the specific loan accounts.

Sorry?

This includes all the provisions, including the floating provisions, specifically associated to that particular account of the NPA accounts.

Okay.

So there is no -- I mean, there is no additional separate NPA floating provision apart from what has been already deducted from the gross NPA to arrive the net NPA.

Okay. Okay, I'll be on the queue for further questions.

[Operator Instructions] The next question is from the line of Piyush Jain from Hansraj Virendra Capital.

Sir, many congratulations for a good set of numbers. Sir, can you just throw some highlights on the new geographies where you are expanding? And second question would be, in the new geographies, how do you see the market with respect to the home state, or I would say, the Gujarat market, with respect to either the loan disbursal or the collection? Is there any process improvement? Or after seeing the market, are we doing something different to perform better over there? Or let's say, what's the performance over there, if you can throw some light?

No. I mean -- so I think we expanded into Haryana late end of last year, early this year. So we have about 15 branches there, and we have opened up around 12-odd branches, I believe, in Bihar. So these are new geographies for us. Both of them, as far as performance -- as far as NPAs go, they are practically 0 at this point. But that is not atypical whenever you move into a new area because you start very, very cautiously to begin with, and you have a lot of management bandwidth there to begin with. Both of them are slightly different areas. So Haryana, the scope is probably just to open 15-odd branches. So being a smaller state and with areas relatively being richer, if I can use that term, the growth -- there is no potential for a very rapid growth in Haryana. But it's still an extremely good area to operate into as far as our experience is concerned so far. Bihar, on the other hand, is a very concentrated area. But if data proves anything, it is one of the best areas in India to operate. Considering that if you look at demonetization data and you look at the past COVID data, one of the best performances has come out of Bihar as far as the repayment [indiscernible]. But that being said, it is a bit crowded. And if we were going to expand into Bihar, it is better to do it sooner rather than later to gain market share. So far, I mean, we are not -- I mean, the disbursement volumes are average, a little early to tell. So I would say we'll have to give it at least another 6 months to a year to kind of give you a real kind of a feedback on how that state is turning out to be. And if I have -- if I can -- I think your question was how does it compare to my state? Well, every state is a little different, and you have to approach it little differently. But the good part about microfinance is that it's replicable across state lines as well, so you don't have to begin from scratch. 90% of what you do in Gujarat is the same as what you do in Bihar or any other place. The trickiest part is managing the people. Otherwise, the business is, so operationally its quite intense. But from an understanding perspective, it's a very, very difficult. I don't know if that answers your question.

Yes, sir. That's all from my end.

[Operator Instructions] The next question is from the line of Kuneh Ghelani from Vivriti AMC.

I was going to understand how you guys are going about reacting to the [indiscernible] that are coming from RBI on...

Sorry to interrupt. Mr. Kuneh, there is a lot of static from your background. Can you please adjust your mobile?

Sure, I'll try again. Hopefully, I'm audible now.

Yes, you are. Please go ahead.

Yes. I wanted to understand how is it that you guys are reacting to changes which RBI has come up with for MFI guidelines, both with respect to the yields and also on ground processes, practices and underwriting norms as well?

Yes, so that's an excellent question. So first of all, of course, the yields have gone up as far as we are concerned. So our yields right now are between 24% to -- 24% to 26% depending on different geographies we are charging to the customer. Over and above that, the ticket sizes have gone up slightly as well. And thirdly, we have begun some level of income verification from our customers, at least, to the household verifications are concerned. So a lot of it is work in progress, both from a credit bureau side and our own internal working side, wherein -- as far as credit bureau data is concerned, we have to capture the entire family's credit bureau data. So right now, there are auto algorithms which are pulling the member and the spouse's data as far as credit bureau is concerned. But anybody else, our system is not consolidating it. What's going to wind up happening is in the next 1 or 2 quarters, there is going to be a holistic credit bureau report generated for the entire family. But a lot of complications. I don't want to get into it. It will take the entire basically session to talk about it. But -- but yes, there are definitely challenges in evaluating the entire household's indebtedness, both in terms of micro finance and any other loans that may have and both in terms of the income. And when you talk about the income of the rural segment, by far and large, a lot of these guys are involved in multiple activities and their earnings are also variable throughout the year, right? So whether -- there are always questions that come up, whether you want to count it at the low end, which makes more sense, or do you want to average it or go for a bit, count it on the higher end as far as the monthly incomes are concerned. So these are all -- these all remain very unanswered questions. But on the other when the RBI talks about INR 3 lakh household income as a limit for a micro loan, that pretty much broadens the market quite a bit for us. If you consider that the vast majority of Indian households will make less than INR 25,000 a month. So it's quite inclusive of what is considered as a micro loan. But yes, margins have definitely increased, and we are evaluating the customer both on a household income level and on household indebtedness,.

Also just a follow-up, right, because you mentioned margins have gone up, and hence, you are able to potentially recycle equity method right? So to that extent -- within the MFI book itself, right? So to that extent, how do you look at capital allocation between the 3 products? The 2-wheeler, the MSME is also a high-yielding product, but now MFI also, you were able to seize an extra bit of margins, right? So both from a capital allocation point of view, between these 3 and the overall capital that you have, the leverage that you are at this point, what is the sort of run rate that you're looking at with those sort of capital levels?

Yes. So as far as the product mix itself is concerned, see 2-Wheelers has become sort of negligible, so let's put that on the side for now. A lot of the lines which were drawn between what I had called MSME versus microfinance have today now started to blend. So when you talk about MSME versus microfinance pre-regulations, you were talking about, on one hand, a JLG-based product with very minimal underwriting. And on the other hand, the MSME product was doing an income evaluation on a household level and using FOIR to give a loan. But all of a sudden, that includes microfinance as well. So the lines have sort of merged to an extent, and so what's going to wind up happening in the MSME side is that the valuation will increase and the ticket sizes will have to probably increase as well. Now, as far as the product mix is concerned, as I said, I'm very keen to do more. As I've said in the past, I'm very keen to do more MSME, and we have been growing that book well, at least in the last 1 year. I think from a percentage standpoint, the disbursements have increased and the AUM has also increased. I think that AUM increased by about 32%, 33% -- 35% over the last year. So -- but microfinance today is still the dominant segment for the company. That will probably likely change in the next 3 to 5 years, but today microfinance will still remain at about 80% of the book. Anything further?

I just had one follow-up, if I can very quickly squeeze it in. Just trying to understand from an overall [indiscernible] perspective as well, right? So on balance sheet, we are at 4.6% or so, if we add -- we manage this well, we go over 5%, right? So to that extent, how is it that you're looking at leverage at a consol basis and possibly the equity as well? What sort of runway are we looking at right?

Yes, ratio is approximately at about 24-odd percent.

On a consolidated basis -- on a consolidated kind of normally, you don't need to look at the consol basis because these are 2 different entities. In Arman stand-alone, it's about 29%, and in number of weeks to maintain something closer to 20%. But hypothetically, if we were to look at the consol and it was about 24%.

And so wholly-owned subsidiaries. So basically, whenever the subsidiary needs more capital, historically, has asked for it from the parent. Now from a leveraging perspective, I think your question is that how far can our equity push us? So right now, as Vivek said, we are about [ 24 CAR ]. We have taken steps in the past quarter to reduce that or increase this year percentage even further by putting some of the off-book kind of transaction, which is the [ DA ] transactions. And we are, of course, looking for equity as well. So -- but for now, we are comfortable. We are -- there's not much of a concern at this point.

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

So my first question is pertaining to what other large industry peers are seeing that post this new guidelines April, May has been very slow, so I just wanted to understand if you guys have also seen a similar trend in terms of April and May disbursement?

No, in fact, it's been the opposite for us. The disbursements are quite high. It seems that the demand is quite high as well. So yes, operationally, it has been challenging. But luckily, we had a lot of practice with income evaluations and things through our MSME, so that helped us quite a bit of -- from an intersegment kind of a way, to take our learnings from the MSME segment and put them into microfinance. So that -- I think that's probably what you are referring to. I don't particularly know which years that you are referring to, but a lot of the peers were facing issues with income verification and evaluating indebtedness and stuff on a family level. So I think we have done -- if I can toot my own horn a little better, based on the unique skill set that we had from the MSME division.

Further, if I can add, I think in my -- within microfinance, we also started something which is called the Individual Business Loans, which were individual loans. So that is still in a pilot phase, but since it was set into almost 70 branches at one go in pilot phase itself. Though a very small book there, about 2% only, but still, that kind of prepared us in income assessment in Namra itself at each of the branch levels.

[ IGL ] Was a product that we had started doing in microfinance to graduate the customers into an individual loan with a cashless repayment methodology and a higher underwriting. So -- so yes, that's basically what we did [indiscernible].

Got it. But your MSME would also be on similar lines, albeit with a slightly higher ticket size?

Correct.

Okay. My other question was on the securitization that you've done. So now, the gain is booked of INR 5.8 crores. Is there any future credit loss or any guarantee that Arman had -- Namra had to give, or any collateral or FLDG?

By definition, a DA transaction cannot have any recourse, Vivek correct me. So there cannot be any guarantee or any cash collateral, or anything of that sort. Otherwise, it would not be considered as a direct assignment transaction. Vivek, has anything to add there?

So ideally, what is happening is as to the definition under Ind AS, a true sale where there is no recourse on the percentage of the cash flows which are assigned, there cannot be any additional security in the nature of FLDG or any enhancement structures. So to that extent, there is no additional provisioning requirement on those assets. Something similar to that are being done through PTC transactions, which remain on books only because overall, the credit enhancement crosses about 10%, 15% or 20% at times. So those are anyway on balance sheet and are covered under the provisioning that is required for the entire asset class.

Got it. And after this INR 100 crores securitization that is done the fourth quarter, are you looking at more such deals coming in the coming financial year?

Yes, absolutely. We are -- I mean, it's kind of a win-win situation because these are -- I mean, the rates are also quite competitive on DA transaction, number one. And number two, it helps us with the CAR ratio, as I mentioned earlier, because the asset is completely removed from our balance sheet. So yes, I think given that there is enough market interest, we are open of doing more such transactions in the future.

Got it. And even without the securitization income, if I looked at your cost to income, it works out to be 40%. So obviously, you are targeting some branch opening and all of that, but the scale that you are, can we expect this to further moderate down the cost-to-income ratios?

I think for sure, now that we are charging higher interest rates and the operating cost will not increase to a large extent. I mean, it will take a few quarters probably because all the stuff that we have created in prior quarters was at a lower interest rate, so the weighted average interest rate will take some time to catch up to the current quarter where we are charging levels. But yes, there is definitely a lot of scope for improvement with the new RBI regulations.

Got it. Got it. And so -- in other words, even without the DA transaction, the other income was a bit higher this quarter. So any particular reason for that? So you had about INR 9.2 crores, of which securitization was INR 5.8 crores. So remaining, what is the reason for the remaining other income? Was it that high liquidity that you were setting of...

Basically -- yes, you kind of answered it for us. Basically, it's been that the liquidity has been generally high, and that has resulted to it.

So going forward, what liquidity would you be comfortable at on the balance sheet?

I mean, as much as possible, really, because we have pretty decent growth targets. Ideally speaking, I would like at least 1 month's worth of disbursements, worth of liquidity. Not been always the case for the past couple of months. The first quarter is always light in terms of lenders, but yes, I think it's just nice to have the liquidity available in India. And there's been so many incidents in the last 4, 5 years has [indiscernible] and DHFL kind of crisis and COVID and stuff, where that extra liquidity has really helped us. So it does come at a cost of negative carry, but I think it's well worth it to have it. So we really want to work in a just-in-time kind of a system. So what has really helped us in the past is having large CC limits. But as the -- we are in a sort of a minority where NBFCs are concerned. Most NBFCs did not have very large CC limits. Most of the funding was done through term loan kind of structures. But the debt portfolio increases more and more, the CC limits become less and less meaningful from a percentage basis for us also. Negative carry will continue to impact us from a P&L standpoint in the future.

Okay. Okay. And lastly, on the 2-Wheeler side, like, though it has become like below 4% of your AUM and as well as meaningless that at this point of time, but you were at INR 100 crore plus AUM in this 2-Wheeler book. So I just wanted to get your long-term thoughts on this? Like, are we looking at scaling this up toward INR 200 crores, INR 300 crores AUM at some point of time?

So right now, it's -- the market conditions are such that it's kind of on ice at the moment. As the conditions improve, we'll make a call whether we want to kind of re-enter this segment on a substantial level or not. We are doing rural 2-Wheelers, which is generating pretty good aggregate generally and that is essentially a tag-on product for our MSME book. So it does not require a whole another operation to do it, it's being done to our -- a lot of it is being done through our MSME franchise itself. But I don't know, I'm a little bullish on the EV side. I think it's a little too early to start it, but definitely something to consider down the road. And let's see, I think 2-Wheeler has been our bread and butter for a long, long time through very tough -- or when we were much, much smaller than we are today. So also, there is a bit of a sentimental attachment to it as well. But of course, sentiments have no place in running a business. But still, we don't want to completely shutter the doors. We want to keep some little open, when we can get into it in the future.

Got it. I have some more questions, but I'll come back in the queue.

Yes, no problem.

The next question is from the line of Yash Mehta from Steinberg Asset Management.

On your MSME business, we have seen obviously a couple of quarters ago, there were elevated slippages. That has obviously normalized to the current levels are, let's say, around 8% or so of the NPA. How do you see, let's say, the traction on this business? And any guidance that you would like to give on the scale up of your...

Scale up of which segment, are you talking of? What are we talking of?

MSME.

No, I mean we are trying to scale up. It takes kind of a unique customer, so it's not a simple. I don't want to say microfinance is simpler, but it takes a specific kind of a customer in a specific occupation to do a MSME kind of a load. Of course, the margins that we enjoy in MSME are far superior as well, so there are no complaints there. But yes, I mean, it's very difficult to grow the MSME book at microfinance levels of 50%, 70% a year. Still, we are managing to grow at about 35% to 40% on a year-on-year basis, and I think you should see that continuing for the years to come.

And so let's say, obviously, on our current base of the MFI business that we have, what share of customers would you say actually qualify for some of these MSME loans? Like, they must have had some credit history with you, and you would like to kind of upgrade them to becoming these MSME customers, right?

No. I mean, these are not upgraded customers, these are completely different segments. So we don't approach MSME like a lot of our peers do that you've been with us for 4, 5 years, and here is a higher ticket size loan and enjoy, so it's not like that. I mean, we are trying to target customers who are one step above the microfinance customers, right? So these could be male customers. For example, microfinance is purely a concentrating on DLCC male customers, it could be male customers. And their businesses would be at sort of a higher level than a simple, like a household income generating activity, right? Like a tailoring machine or a -- buying one cattle or something to sell milk. So it would be at a higher level, and so we are not relying on our microfinance customers to do our MSME book.

So, sir, can you give some broad use cases for which you've been giving MSME, like in terms of, let's say, your buy of the mix?

Say that again?

I'm saying that, let's say, this is obviously not for just buying cattle. I'm saying in terms of the broad use case for the MSME book.

Kiranawalas, it could be scrap dealers, it could be people in the spice trade, it could be people who supply textiles, do embroidery, job work. And even if they are dairy, then they are a larger number of cattle -- larger cattle on the dairy side. So primarily, I think one thing is that the MSME in Arman are completely different branches and segregated areas, and they do not kind of generally overlap with the Namra's geographies, except for a few branches here and there. But generally, these are absolutely different geographies, and these are absolutely different dedicated branches for MSME and microfinance.

Understood. And my last question is, let's say, we've seen our yields now obviously, currently at 22%, they're going to 24%, 26% in that range incrementally. Then the question is, would you like to -- would you go deeper in terms of, let's say, a customer that you've not approached before? Because now your ability to price that customer also is much better? Clearly left out a particular customer segment earlier or at a certain yield level?

Yes. Correct. Yes. So geographies, we are definitely evaluating, so let's put it that way. So not on an individual customer level, but there were certain geographies that were more riskier than others or certain geographies that came at a higher operating cost than others, so we would be looking at those for sure.

[Operator Instructions] The next question is from the line of Amit Mantri from 2Point2 Capital.

Sorry, I got disconnected earlier. So just again on the same question, just a bit more understanding. So as of now, in the new regime, so you had mentioned that, one, you're doing region-specific pricing of interest rates. Is that the only criteria right now? Or are there other factors also that determine the interest rates, be it -- says, with cycle, the borrower is -- or anything else?

Yes, so there are numerous ways to divide it up. One is by ticket size, one is by geographies. The plan is to add a level of sophistication on the interest side. Of course, stuff like competition would also play a factor into the equation. But right now, we are just doing it on geography because there is not to concentrate on as far as.

I mean, Aalok, if I can add. Geography plus ticket size. Now, ticket size is, Amit, a function of cycle also. So as you give larger ticket sizes, you are basically going to the same customer who will be third or fourth cycle upwards.

Correct. And -- but with ticket size come higher risk.

So to that extent, it might sound counterintuitive. But as we've kind of always said, generally speaking, the unsecured loan borrower is interest rate agnostic, which doesn't mean that we kind of charge them anything that way. But generally, if a customer, in the third or fourth cycle, was limited to INR 40,000, and now we are kind of increasing it to INR 50,000 and INR 60,000. So the timely delivery of credit and the higher ticket size, there is a room for better margin then.

Sure. Understood. So there is a ticket size increase, basically, that --?

That means that in terms of criteria that it can use. But one is, of course, ethics that we shouldn't really take advantage of a situation. And so the Board has set a hard limit on what -- that we cannot process certain interest rates. But other than that, there is demand and affordability and competition and operating cost and risk premiums. Tenure also, you can do a loan cycle at the age of the branch. As the number of customers increases, your operating cost in a branch decreases, so you can price it according to that. There is also a rated credit cost, what profit margin and what peers are charging. So there are numerous possibilities for pricing. A lot of it is being evaluated as time goes on.

Sure, sure. Understood. And on this -- so currently, there are INR 65 crores of provisions on the book. So can you give a breakup of that? How much of it is, say, standard provisioning and how much of this is NPA-related? And how much if there is anything else apart from that, of the INR 65 crores?

Just to give a breakup. Between Arman and Namra, it's about INR 47 crores for the microfinance book, and the balance INR 18 crores is on the Arman for the 2-Wheeler and MSME book. In terms of...

I think INR 18 crores is on standard assets. NPA is about INR 30 crores.

Yes, I'll -- just give me a second. So the overall NPA, as far as the Namra book is concerned, is approximately we have provisions of INR 28 crores there for the NPA specific provision. And as far as Arman is concerned, we just add INR 21 crores total, and I think it's half and half, so about INR 13 crores there as NPA provisions. So overall, about -- about INR 48 crores of that INR 65 crores, the NPA provisions.

INR 48 crores is NPA provision, the rest, INR 17 crores, would be standard asset, sir.

Yes. Standard asset. Correct.

Yes. that would be correct. Did we lose him again, or are we lost?

Yes.

Okay, let's move on.

Moving on to the next question. The next question is from the line of Savi from 2Point2 Capital.

Yes. So I think, again, Amit was lost. But on this -- the standard provisioning has been netted off, right? It's the net debt of the net NPA will go to 0, right?

No, no. The standard NPA provisions, let's say, the gross NPAs -- the gross NPA for, let's say, just help speak for a minute about -- for Namra. Namra, the microfinance, the gross NPA is INR 34 crores, INR 34.5 crores. And in that INR 34 crores, there is a INR 28 crores NPA provision, so the net NPA will turn out to be 34 minus 28, which is about, let's say, INR 7 crores. So that is the net NPA there. And similarly, for Arman, the gross NPAs on Arman that we would have -- let's say, to give you a segment-wise breakdown, the gross NPA numbers for 2-Wheeler is INR 3.17 crores, against which we have a provision of INR 2.23 crores of specific NPA provisions. So my net NPA is INR 0.94 crores in 2-Wheeler segment. In MSME, our gross NPA is INR 12.89 crores, against which we have a provision of INR 10.67 crores, giving a net NPA of INR 2.2 crores. So in Arman, the net NPA is about INR 3.15 crores, which means about 1.79%. And in Namra microfinance side, it will turn out to be whatever -- something like less than the 10.6%.

Yes. But again, if you also knock up the standard provisioning then?

No, okay. So what you're saying is in terms of the provision coverage, just a provision coverage? Because..

Yes. Yes.

Yes. I mean, that's one way of looking at it. So if you look at it that way, probably the overall provision for microfinance book would be much bigger. It may be about 130% and Arman will turn out to be almost 100% -- 150%. But again, more specifically, I think..

We have 100% provision on IP interest also. ECL has really -- I mean, the -- the ECL has really kind of confused matters on what is standard and what is not because there is arbitrary method of calculating, there is the ECL method of calculating, and you have to kind of take whatever is higher, which is always the ECL. So I know where you are coming from, from the [indiscernible]. Typically speaking, pre-Ind AS, we reported standard as a separate and then NPA provisioning separate. Now, it is just kind of one big, blended number, so anyway.

We have to...

Again, Savi, just to further clarify. What happens is, generally, we have seen this practice, which [indiscernible] ratio. Now, typically, when you're doing an expected loss calculation, then I think -- generally speaking, it's a board ratio to just show, but it probably does not really mean too much because I require provisions against standard assets as well. And against the NPA assets, there has to be a specific provision. So I think the specific coverage is rather more important, so my NPA gross assets have a coverage of roughly 80-plus percent. So that's, to our understanding, a more important thing to be prepared for because if my NPA assets are, let's say, INR 50 crores. And against that INR 50 crores, my NPA specific provisions on the specific assets itself is INR 40-plus crores, which is almost like 81%, 82%. Rather more definitive way of gauging losses, rather than saying that against the INR 50 crores of NPA, I have a provision cover of INR 65 crores with 130%.

No, got it. So this quarter, what was the reason for increasing provisions? Was it to increase the coverage ratio on the NPA or -- I mean, sir, collections are pretty good, right? So what was the reason? I mean, Q-o-Q also there's not been a decline.

It's all the past up. Now first wave, second wave, all of that stuff, which is finally kind of -- just have to clean up. So I mean, something which is like pre-COVID and still not an NPA bucket but is in, say, 30- to 60-day bucket, or what we call as the Stage 2 assets. We'll continue to have a higher coverage provisioning requirement because what is also happening, honestly, is that a lot of these are moratorium interest disputes as well. So a lot of the microfinance customers, when they took the original moratorium or we gave it to them, there was an interest that was accrued during the moratorium period. However, that -- now it's disputed. A lot of customers don't understand moratorium interest. I think most people didn't before this full COVID crisis came. So they say that we have paid as per the regular schedule, and what is this extra money that you are asking us? So a lot of that was clean up exercise as well, where there would be couple of thousand rupees spending per customer, and that was disputed. And the cost of recovering that small amount was far exceeding any big term cost would exceed any recovery effort that we would make. So the option was to just essentially write it off or provision or provide for it.

So this year in FY '23, will we have a normalized credit cost which is equal or near to the pre-COVID levels?

Yes, I don't think it's ever really going to go back to pre-COVID levels. This is my humble, pessimistic opinion. The days of 1% credit cost in microfinance are behind us. They were behind us even before COVID. Now, I think the loan losses, you'll have to expect a slightly higher number. I don't want to give you any numbers. I mean, I'm not going to say it's going to be 5% or anything ridiculously large like that. But definitely, it's going to be higher than 1%, maybe slightly less than 2% even on an ongoing basis, and so that's the way it is. But thankfully, with the new RBI regulations, I can pass that on, right? So it's not going to impact me too much.

But anything specific to the COVID waves, all of that has been cleaned up in this quarter now, nothing extra that there?

By far and large, it has been cleaned up plus provided for.

Yes. Yes, I meant that only.

The reason why I say by far and large is that we won't know completely until August of this year, because you'll still get into those interest disputes and things like that towards the end of the loans. So by far and large, it's behind us.

And on the outlook for growth, can you give a number for FY '23?

Unfortunately, we are not giving it, but we are expecting a pretty good year. We are used to growing at 40%, 50%, so at least that much.

But that would lead to a significant increase in leverage unless you do direct assignment transaction. So what is your thought on that? Are you comfortable with even higher leverage from here on?

And so we are evaluating different options, one of obviously raising more capital. Second, doing more DA transactions. Third is Tier 2 kind of structures as well. So we are -- but if we can raise further equity, nothing like it.

It will also affect your it rating, right, if you continue to increase your leverage?

So we will not go beyond like 18% CAR or anything like that.

And last question is on your diversification. So there has been some significant progress there, and now, MP is almost equal to Gujarat and UP even larger than Gujarat. So, I mean, it looks like a conscious decision for you to diversify across states. But what is the implication in terms of cost to income and asset quality? And what is the experience in the newer states in terms of asset quality? How are you looking at that?

Say that one more time?

So geographically, is -- it's a conscious decision to kind of de-risk ourselves in our existing geographies of let's say, Gujarat and MP that we had been historically present. And slowly, but surely, we've moved into new geographies, including UP and Haryana, Rajasthan and so on and so forth. UP definitely is a large state, and we've seen over the last 5 years that we've been there. Generally a good...

UP has performed -- I mean, touch wood has performed extremely well during COVID. Probably if you discount the newer states that we opened, it's probably been the best performing state. The worst has been Maharashtra, so the plan is to not open branches there at least for the time being. And Madhya Pradesh is after that, with specific districts, Jabalpur and areas like that. But rest of the other states have performed well. I would say between Madhya Pradesh and Maharashtra, that should be over 2/3 of our credit cost. So largely, what we're trying to do is what we've been always saying, at least to our situation, that where each of the States kind of represents less than 25%, and then slowly represents less than 20%.

And in terms of hiring, you've been hiring a lot of people at junior level, but are you also looking to hire people at the senior level now that you've become a large?

I mean, in that junior, senior and middle level all the way. So I think we just hired a Chief Risk Officer as well, so he comes with 30 to 40 years of expense in the banking sector, banking and NBFC both. So we hired a good IT person as well, so -- at a higher level on the software side, hardware we already had. So at all layers, we are higher.

Got it.

I think we'll have to call it. I have some obligations, which -- so I think Michelle, probably make one last question, if there's anybody else, or.

Ladies and gentlemen, we will take that as the last question. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

Thank you.

Thank you.