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

Ladies and gentlemen, good day, and welcome to Arman Financial Services Q2 FY '25 Conference Call hosted by JM Financial. [Operator Instructions] Please note that this conference call is being recorded. I now hand the conference over to Mr. Mayank Mistry from JM Financial. Thank you, and over to you, sir.

Thank you, [ Sindan ]. Good afternoon, everyone, and welcome to the Q2 FY '25 earnings conference call of Arman Financial Services. First of all, I would like to thank the management of Arman Financial Services for giving us the opportunity to host this call. From the management team, we have Mr. Jayendra Patel, Vice Chairman and MD; Mr. Aalok Patel, Joint MD; and Mr. Vivek Modi, Group CFO. I would now like to hand over the call to Mr. Patel for his opening remarks, post which we can open the floor for Q&A. Thank you, and over to you, sir.

Thank you, Mayank, and to JM for hosting this call. Hopefully, I'm audible to everybody. And on behalf of Arman Financial Services Limited, I extend a warm welcome to our Q2 FY '25 earnings conference call. Joining me today is, of course, Mr. Vivek Modi, who is the group CFO; and also the Investor Relations team. I hope you've had the opportunity to review the Q2 and H1 FY '25 results, the press release and the presentation, available on the stock exchanges and our website as well. I apologize those were uploaded with a slight delay this time. So my apologies on that. Today, I wish to start by addressing the key developments in the industry and discuss our performance in the context of the significant challenges currently facing the microfinance industry. As you may know, the industry is experiencing a substantial rise in impairment cost. This increase is largely due to overleveraging in the rural retail unsecured lending space, impacting both microfinance institutions and non-MFIs alike. Overleveraging has strained borrower repayment capacities, leading to a rise in delinquencies and higher default rates. Additionally, high attrition rates among the field staff across the industry have affected collection efficiency as turnover disrupts the consistency and effectiveness of borrower interactions, which is a crucial component for timely repayments in microfinance. In our past interactions with capital market participants, we have briefly discussed and anticipated as well an increase in the credit cost from overleveraging, and I think this discussion was since early last year. However, the severity of these challenges have been much greater than expected, at least for me personally, and compounded by an evolving macroeconomic and regulatory environment. Given these conditions, we have opted for a cautious growth strategy, emphasizing collections and portfolio [ holdover ] expansion. This conservative approach is crucial to preserving the quality of our assets and maintaining a stable financial position and has also worked well for us in the past credit cycles. For H1 FY '25, total disbursements were INR 832 crores, down from INR 1,068 crores in H1 FY '24. This reduction reflects our decision to prioritize asset quality and to focus on collections rather than growth. Our assets under management as of September 30 stood at INR 2,465 crores, while gross nonperforming assets, or GNPA, stood at 3.74% and net nonperforming assets, or NNPA, stood at 0.64%. At least today, that level remains manageable in the broader industry context for us. Our pre-provisioning operating profit for the period was INR 163 crores, an increase from INR 133 crores in first half of FY '24. This improvement in PPoP highlights our commitment to operational efficiency and disciplined cost management despite the challenging macroeconomic environment. The impairment costs were at INR 99 crores for the first half of FY '25, reflecting the current risk environment's impact on our financials. We recognized that these impairment costs are a natural consequence of the increased risk, and we are taking or at least trying to take all necessary measures to manage and mitigate them. Both the industry and Arman are actively implementing strategies, both big and small, to address these issues. The MFIN guardrails have been introduced to manage overleveraging, and we are currently in the process of also establishing an independent credit teams across all branches by the end of this fiscal year. These teams will strengthen our credit assessment processes, enhance oversight and quality control at the branch level. This initiative is designed to improve our risk management capabilities and better equip us to assess and respond effectively to borrower needs. Once again, our focus remains on quality over quantity as we navigate the current challenges in the rural environment and await the end of this down-cycle. We believe that by prioritizing quality, we'll be in a stronger position once the industry environment stabilizes. Now let me run through the key financial and operational numbers for the quarter and half year ended September 30, 2024. Consolidated for Arman, the gross total income for the quarter stood at INR 182 crores, registering a growth of 13% year-on-year, while gross total income for first half stood at INR 366 crores, registering a growth of 18% year-on-year. The net total income for the quarter stood at INR 116 crores, registering a growth of 25% year-on-year, while the net total income for the first half of FY '25 stood at INR 235 crores, registering a growth of 32% year-on-year. Profit after tax for the quarter stood at INR 15 crores, registering a de-growth of 63% year-on-year, while profit after tax for the first half stood at INR 47 crores, registering a de-growth of 42% year-on-year. The lower PAT was obviously on account of higher impairment cost. Consolidated yields for the quarter stood at 25.4%. Cost to income for the quarter stood at 33.3%. Collection efficiency for the month of September 2024 stood at 24.9%. Total borrowing stood at INR 2,019 crores, which includes off-balance sheet transactions such as direct assignment, DA, and other off balance sheet debt. As on September 30, 2024, the company has a healthy liquidity position with INR 281 crores in cash and bank balances, liquid investments and undrawn CC limits. In addition, the company has INR 157 crores of undrawn sanctions from existing lenders. Now moving on to Arman's stand-alone business, which includes our MSME, two-wheeler and the newly formed LAP business. Assets under management stood at INR 483 crores, registering a growth of 35% year-on-year. Total disbursement stood at INR 206 crores in the first half, registering a growth of 35% year-on-year, while disbursement for the quarter stood at INR 104 crores. The total gross -- excuse me, the gross total income for the quarter stood at INR 43 crores, registering a growth of 24% year-on-year, while the gross total income for the first half stood at INR 86 crores, registering a 32% growth year-on-year. Net total income for the quarter stood at INR 31 crores, registering a growth of 35% year-on-year, while the net total income of the first half stood at INR 64 crores, registering a 52% growth year-on-year. Profit after tax for the quarter stood at INR 8 crores, registering an 11% de-growth year-on-year, while profit after tax for the first half stood at INR 21 crores, registering a growth of 21% year-on-year. Segment-wise, collection efficiency for the first half stood at -- MSME which was 96.8% and Two-Wheeler at 96%. Gross nonperforming assets for the MSME business stood at 2.54%, while the NNPA stood at 0.57%. GNPA for Two-Wheeler business stood at 4.79%, while the NNPA stood at 0.87%. On the microfinance side, which is managed by Namra Finance, the wholly-owned subsidiary of Arman, assets under management stood at INR 1,981 crores. Total disbursement stood at INR 625 crores in the first half, while the disbursements for the quarter stood at INR 269 crores. Gross total income for the quarter stood at INR 138 crores, registering a growth of 9% year-on-year, while gross total income for the first half stood at INR 281 crores, registering a 14% growth year-on-year. Net total income for the quarter stood at INR 84 crores, registering a growth of 19% year-on-year, while the net total income for the first half stood at INR 170 crores, registering a 23% growth year-on-year. Profit after tax stood at INR 6 crores, registering a de-growth of 81% year-on-year, while profit after tax for the first half stood at INR 25 crores, registering a de-growth of 61% year-on-year. Collection efficiency for the first half stood at 95%, GNPA stood at 4.03%, while NNPA stood at 0.65%. Now to conclude. We do acknowledge that the challenges encountered in the first half of FY '25 have impacted our performance. However, these issues are industry-wide and not unique to Arman. The rural sector, in particular, has faced significant pressures from various factors, including unpredictable weather, election-related uncertainties and disruptions, broader economic headwinds, all of which have contributed and affected borrower repayment capacities. Despite the near-term challenges, we are confident in our long-term strategy, which we believe will support future growth. With a 32-year legacy, Arman is no stranger to credit cycles. We have navigated similar situations in the past and emerged stronger each time and also more resilient. Our experience and prudent management practices give us the confidence to continue our long-term path. We remain steadfast, well-capitalized and prepared to manage these headwinds effectively. Supported by a dedicated team and a clear focus on risk mitigation, we are well-equipped to overcome current challenges and drive sustainable growth for our stakeholders. Thank you very much, and we will now open the call for any questions.

[Operator Instructions] Our first question comes from the line of Ashlesh Sonje from Kodak Securities.

Sir, firstly, if I look at...

Sorry to interrupt, Mr. Ashlesh, can you please be a bit louder? Your voice is not audible.

Can you hear me better now?

Yes.

And sir, firstly, if I look at Slide #31, where you have presented a PAR of 31 to 90 book, there is a sharp increase across the MSME and Two-Wheeler segments as well. So can you talk about what is causing this increase? And you can -- if you can also share the overlap between your customers across these segments with MFI?

What slide did you say?

Slide #31, the PAR 31 to 90 book which you have shared.

Yes. So the -- yes, the MSME also has seen some increase. So I mean our MSME book is, relatively speaking, in the same area and are essentially 1 step or 2 steps above microfinance customers. So it wouldn't be fair to say that this is a company...

Sir, can you please come a bit closer to the speaker? Your voice is having an echo.

Sorry. Is this slightly better?

Yes, yes, sir. Please go ahead.

Okay. So it is not fair to say the MSME is completely different than microfinance. These customers will be 1 or 2 steps above microfinance customers, but -- that said, of course MSME does have a little bit pressure, but it is much better than [indiscernible]. Now as far as overlap is concerned, obviously -- as far as our books are concerned, there is very little overlap or no overlap. Some microfinance customers do graduate to MSME, but there is no cross-sell. So essentially, it would be one loan, one customer. So we do not do multiple loans to the same customer. But whether -- if your question is more asking how much overlap would there be between the MSME that we service and the microfinance industry, obviously there will be some level of overlap.

Understood, sir. And secondly, when it comes to implementing the MFIN guardrails, do you see all the lenders now implementing this in letter and spirit?

It's hard to say. All I think is disbursements have been down sharply for all industry players. And my guess is that, like us, people have increased underwriting. And self-preservation is an innate human instinct. And so I -- everybody is following guardrails. And to be honest, going beyond the guardrails, right? So the guardrails is one thing, but I would say that you need something more than guardrails as well. I mean guardrails will not get you all the way where you need to go.

Understood. Sir, at least in the recent underwriting, is there -- can you infer that the quality of at least the recently originated book has now improved? Or is it too early to say that?

Too early. It's too early. There is very little, like, nonstarters in microfinance. So we do get like -- it will be less than 1%. But instinctively, I would say that, yes, it has created an impact, but probably not as much as I would have liked. But again, it's early to tell as far as data is concerned.

Our next question is from the line of Karthik from Unifi Capital. Mr. Karthik, can you please be a bit louder?

Is this better?

Sir, your voice is not audible. If you can [ use ] your handset more.

Is it better now?

Yes, yes. Please go ahead.

So I have just two questions. So -- sir, on the regulatory front, what are we seeing as a headwind? Because post this circular from RBI, directing a few NBFCs to stop disbursements, how are we taking it? Like is the directive in terms of the interest rates? Or is it in terms of NIMs? Or what's the RBI's call for all the MFI, sir? That's my first question.

So it's difficult for -- so I only heard part of your question. The quality of the audio is not very clear. But I got the gist of your question, I think you are asking about the -- basically the RBI circular regarding interest rate and other factors and stuff like that. See, it would be very difficult for me to comment on such matters. All I have to say is that RBI is the regulator. So if they say -- if they ask us to jump, all we can say is, "How high?" And to an extent, RBI had been issuing a lot of notice -- I mean they're both publicly and privately had been discussing with many MFIs and other institutions about many things such as transparency and interest rates and NIMs and other factors. I was surprised, to be honest. Again, I don't know the internal matters. If it was just about interest, then I was a little bit surprised this was what the outcome was, considering that, to a certain extent, the punishment has to fit the crime. And in certain of the NBFCs, I can -- I know the rates were -- again, it's not fair for me to comment on this. I'm not exactly sure what is appropriate. But the rates were clearly on the higher side, whether you call that usurious or not, I don't know. At least on the MFI side, I'm just not sure whether is 25% usurious and 24% not or is 26% usurious and 24% not. It's very difficult to judge what is going on. In this stage -- in today's context, obviously, we are discussing the matter at great length internally with our Board, with RBI as well, we are engaged with them as well. And whatever steps are required to protect Arman particularly and Namra particularly to -- risk, we are taking all measures which we feel are prudent. So again, I really [ don't want to specifically comment more than this.

Sure. That was helpful. And my last question. So what would be the proportion of Namra plus 4 in our current portfolio, sir? Namra plus 4 -- like the customers who have...

I know people have been reporting this number, and I've been seeing it as well. I'll give you that number because I figured somebody would ask that, and we do have those numbers ready. But before we give you that number, I want to specifically give a disclaimer here, that there is no standard way to report these numbers. And whether -- this was the status of a particular customer at origination? Or did you do a scrub analysis from the credit bureau? Did you do it at a customer level? Or did you do it at the household level, for example, including both the customer and the spouse? Did you do it for MFI loans, MFI plus retail, or all loans? Again, there is little clarity on this. So the disclaimer here is that the numbers that Vivek will just tell you right now are numbers that we had during origination at the family level for all loans. So what that means is the customer, their spouse, whatever loans they had and whatever the outstanding of those loans added up to before the disbursements that we made, that is the status available to us. As far as scrub analysis goes, we have done it on a limited basis on a state-to-state level, but we have not done it at the household level. So I don't think it would be very prudent for me to share those numbers with you. Anyway, sorry...

To answer your question more specifically, the lenders at the time of origination, at household level, I mean, was 20.8% which is Namra plus 4 or more. And Namra plus 3 would have been about 18%. Okay. And basically, if you look at the outstanding, practically none of the customers at the household level for us had an outstanding of more than 2 lakhs. So that was the underwriting that we used. I think it was less than 2% of customers who are at more than INR 2 lakhs outstanding.

So again, when you are looking at household numbers, that 22% might seem quite high. But you have to remember that, at this house level also, there is a lot of these ACC-type loans and other loans that are sometimes not very, very large. So many customers may have multiple lines. But what we were largely concentrating on was total outstanding and total EMI burden over and above a number of loans that a customer had. Vivek, do you want to just read out what it was for Namra alone, Namra plus 1, Namra plus 2, 3, 4?

So Namra alone was 21.8%. Namra plus 1 is about 16.9%. Namra plus 2 turns out to be 19.9%. Namra plus 3, 18.6%, and Namra plus 4 or more was 22.8%. And along with that, with the outstanding when we gave the loan, excluding our loan, the outstanding at the time of giving the loan being less than INR 50,000 being 47%. Yes, 0.50 lakh to 1 lakh was 25%. 1 lakh to 1.5 lakh was 18%, 1.5 lakh to 2 lakh was 8%, and customers with more than 2 lakh of outstanding when we gave out the loan was 2%.

Our next question is from the line of Amit Jeswani from Stallion Asset.

Aalok, how are things looking in October and November now that we've finished 45 days in the quarter?

Well, not -- I wish I could say it was good news and things are looking up, but unfortunately that is not the case. But November has been fairly disrupted due to the Diwali festival. So as far as availability of customers and everything is concerned, that became an issue. So right now, obviously, it's covering up and covering up very quickly. So that is good news at least. But yes, I don't think this down-cycle has ended. And neither can you expect it to end so quick as well, to be perfectly frank with you. But I would say, I guess, if you want to count the silver lining, the rate of descent is slowing down significantly. So at least that is -- we'll take that win, I guess, if nothing else.

Got it. And I was just seeing at COVID, we peaked around 6% GNPA. What do you think would be our GNPA at this time? Sorry, sir, sorry, we peaked at 7.9% GNPA in March '22. What do you think this GNPA will end at this time? Your best guess. You're seeing data...

So Amit, there are -- it's -- I understood your question. I understood your question. The problem is with COVID -- and this is not very, very comparable, because during COVID you had a lot of different schemes available by RBI and Finance Ministry and a lot of -- first was the moratorium. So you could kind of delay recognition of GNPAs until the moratorium got over. After that, there was a restructuring available, and a lot of other things were available. So I'm not saying that was done maliciously or anything like that, but there were a lot of different things available during COVID. Now if you look at the credit cost today, we are nowhere close to what COVID cost us, for example. So you can take that as a silver lining to an extent. But what is different this time is COVID was like a heart attack and then like a quick recovery period, right? So the problem this time is it's like an extended edition. It's a headache, not a heart attack. But it's a bad migraine. Sorry, maybe not a very good analogy, but -- so your NPAs, as long as you keep writing off assets and taking them as impairment in your P&L, it's possible that this GNPA may never rise to more than what it is today also, as long as you stay on top of it and keep either providing for it or writing it off. I don't know, Vivek, do you have anything to add to that?

Largely -- I mean just adding to Aalok's comments, one, the differentiator between COVID and today is obviously the environmentally, during COVID, there was a lot of supports that came in. In this, I think we will have to kind of internally ring-fence as much as we can do in terms of improving the collection efficiencies and the monitoring and so on and so forth for whatever has already been disbursed, and put into place a much superior underwriting processes to ensure that the forward lending or the future lending is far more ring-fenced to that extent. Having said that, I think going down to a specific number may not be a great idea at this point in time.

Got it. Sir, my other question is, how does the problem solve itself? Just by we lending less and people are getting deleveraged? Or the only way to come out of a bubble is to create an even bigger bubble, and basically lend more so that liquidity improves and everything becomes okay?

Well, Amit, you kind of hit the nail on the hammer here. The -- see, one of the bigger problems, which -- why things are continuing to go down is the fact that lending has stopped, right? And whenever you stop credit, or at least slow down credit to any economy, that is going to have worse effects. So in effect, to prevent people from getting overleveraged, you are also stopping credit to people who may really need it, right? And if they don't get it, they are also defaulting. So it's a two-edged sword. A lot of people say that, oh, it's evergreening, which -- I don't know. I think like evergreening term gets tossed around quite a bit, and I'm not saying -- I'm not denying its existence. But Arman, itself, we borrow every month, like -- is that evergreening? I don't know. Again, it's just business for us, right? A lot of the borrowed money might be going into repaying also for us, but we are running a valid business. So I don't want to toss around a term like evergreening and other things, fully acknowledging that it does happen. And of course, we are aware of it that it happens as well. But yes, I think one of the bigger problems is that credit has stopped. And until the credit resumes to a meaningful level, it will be even more difficult to get out of it. And so you are stuck in sort of a Catch-22 situation. And so ideally speaking, I would want everybody else to start disbursing, and I would be conservative. But unfortunately, that's not how the world works. So -- but -- I don't know. I'm not exactly sure how to answer your question, except the fact that during both demonetization and COVID, lending did resume slowly, slowly, and it did get up back to what its previous levels were. Does that answer your question?

Yes, the line for the previous participant seems to have disconnected. We'll move on to the next question, which is from the line of Pranav Gupta from Alonios Alpha Investment Management.

Just a few questions. A lot of my questions have already been answered. But when we look at collection efficiency, and your collection efficiencies haven't really fallen for us when you compare 2Q or 1Q, but how are you seeing the collections in next bucket? Because that is what will give a sense to us -- to see -- to understand as to when things are actually going to start improving. That's the first question.

So I would say things will not improve until the 0 DPD bucket repayment rate goes up to at least 99% -- 98.5% to 99%, which is what -- typically, what we are used to. But even if it gets back up to 98.5%, I'm confident to say, okay, okay, the worst is behind us and things will progress forward. Now as far as the other buckets are concerned, 1 to 30, 30 to 60, 60 to 90 and so on and so forth, honestly, I don't have any set formula for that. One bucket -- 1 to 30 bucket range is anywhere from 40% to 70% on a month-to-month basis, and it goes down from there. Obviously, even in write-offs and other cases, there is some level, in basis points or in small percentage terms, collection obviously keeps trickling. But a major strategy that people follow is -- to arrest the problem -- is to concentrate on 0 DPD collection and ensure that remains pristine. The rest of it will take care of itself.

No, absolutely. That's the question I was asking. Are we seeing 0 DPD collections improve even though slightly? Or is there still some time to go before we see an improvement?

There is time to go. There is time to go. Listen, I think before anybody asks me this question, people have been asking me a lot off-line and other times also, when I think that this will get over. And so before anybody asks, let me first say, I'm not a guru. I'm not an expert. People have predictions. People in the stock market have predictions, which are wrong all the time. I have no idea. But that said, in my experience, once a credit cycle starts, it takes at least a year for things to start getting back on track. And so if I say that this credit cycle started in April, which is when it really kind of started surfacing very, very quickly, that would mean that by Q4 end, we should start seeing things getting back on track or improving or getting better. Again, I have no basis or evidence to give that prediction, except sort of a gut instinct maybe.

So just the thing that you mentioned, right, that once the credit cycle sort of kicks off again, that is when we start seeing things getting better. But say, if you look at the last 18, 24 months, and possibly the last 12 months starting -- ending April, that is where we've seen a huge buildup of new lenders lending to multiple borrowers and the number of borrowers per lender going up, right? And if you sort of take a lot of anecdotes from multiple companies that are not trading in [ the rural sector ], it doesn't really seem like incomes have been hit in big way. And then to see leverage go up per borrower in such a big way, it just indicates that most of this incremental credit has gone towards consumption rather than using for working capital or business.

That's a fair assessment.

In that case, the question arises that does this really need the credit cycle to start going up again for these customers to start lending? Or is this just a pure case of most borrowers have been purely overleveraged? I mean lending more to these customers might not really solve the problem. That's the thing I'm trying to understand.

No, I understand. And I fully agree with you, and that was along the line with my previous answer that, okay, if we stop lending, will that create an issue? And as I said, it's a two-edged sword. There it will be -- I mean we have 7 lakh customers. There will be customers who are using it for income generating and need more money, and they are not getting it either from me or the industry or whoever else. And there will be others that are purely using it for consumption or evergreening or other things, and they might manage finding it, might not also. So it's like -- it's very hard to distinguish the genuine needs versus the non-genuine needs. And so people like me, sitting where I am, we always err on the side of conservatism and say just stop lending. Of course I know, okay, not everybody I reject is going to be a bad customer, but that just -- it is what it is, right? When I'm not able to determine whether somebody fits my risk profile or not, it is prudent of me to just simply not give the money, at least at a time like this. Go back to your earlier question about -- see, what is -- what started this crisis? And everybody becomes a guru in hindsight. Obviously nobody, including myself, were predicting this. And of course, I think I've been talking about overleveraging for a while. But I do -- as I said during my initial comments, that I don't think anybody expected things to get to this level as quickly as it did. So really [indiscernible], first of all, whenever things like this happen, there's never one thing. I mean there might be one big thing, which is overleveraging, but it's never one thing. It's multiple things that cascade together and kind of the whole Swiss cheese model. And so first of all, as you or somebody else correctly said, that people started more and more trickling, using money for consumption rather than -- excuse me. So people started using it more, maybe more for consumption, maybe more for aspirations. I think availability of loans just became so easy. 4, 5 years ago, the people lending to these people were just MFIs, 80% of them were MFIs. And we were a close-knit group, we kind of knew -- so like -- when things like COVID and stuff happened, obviously, we got into some bit of trouble. But otherwise, it was fine. And it just seems that the world is crazy offering loans. Even the companies who have nothing to do with loans monetize their businesses with giving out loans as a supplementary business. And so I said this before: this is not an MFI business. Everybody who has lent money to this, people are getting their hands burned. It has -- so obviously, I mean, look at -- I'm assuming today you get cold calls from people -- how many people are trying to sell you refrigerators and air conditions? Very few. Most of the cold calls you'll be getting will be, you need a car loan or a personal loan or whatever, right? Like it's a little crazy. So -- and so I don't want to blame competition or anything like that. But people who had no business going into rural lending went into it very, very quickly. And -- so that is one aspect, just oversupply. The second part happened -- and before I say this, I want you to understand that I am not blaming RBI or the regulator. But when the deregulation happened in April 2022, where they removed pricing caps and also removed overleveraging caps, RBI assumed that the industry was mature enough to manage these things. And that was really the right thing to do. But unfortunately, people thought that they could price away the risk of giving out more loans, and that never works, according to me. So anyway, there are many, many other factors at play, but what I feel is this is probably the larger issues.

Understood, sir. And just one last question. Assuming that -- is it fair to assume that given that [indiscernible]...

Sorry to interrupt you, Mr. Pranav, we request you to get back to the question queue for any follow-up. Our next question is from the line of [ Sukriti ] from Laburnum Capital.

Aalok, I just want to understand a little bit more about the MSME -- the INR 400 crore MSME book. Now I'm looking at this, it's typically the same ticket size or a little less than what I see MFIs do in their individual MFI loans. Now that you run this, I understand it's a separate network, different branches, and there's a credit underwriting layer that you have. I'm actually a bit surprised to see the yield there, 35%, 36%, when the individual MFI loans that I see are much, much lower. So I have two questions on this. And I think earlier in this call, also, you did mention that this customer is a little MFI-plus customer, right? So why is this guy coming to you when he could get a 1 lakh individual MFI loan from, let's say, G1 at 22%? And second, on the regulatory aspect, given the yields, what is the risk on that? So those are the two questions on MSME.

Typically, our interest rates in MSME are between 28% to 32%. And as far as this segment goes, this is a little par for the course because the operating costs in MSME are much, much higher than what they are in MSME. As you said, you require a separate credit. The rejection rate is very, very high. And largely, this is what the market has determined that -- what the cost is of giving money to these customers. So it's a little bit individual level collection.

Yes. So it's individual level doorstep collections. So it's -- in a [ GLG ] group, you have to go down to the group level and collect from maybe 5, 6, 7 customers. Here, you are -- it's individual door-to-door collections. So that gets expensive very, very quickly.

Aalok, I understand from your perspective why this makes sense. And this is probably the right yield. But the question is from the customer's perspective. Why is he who is an MFI-plus customer coming to you at 36% for a INR 80,000 loan, when he will probably get a INR 1 lakh unsecured loan at 22%, 23% without having to move through this credit underwriting?

Yes, I mean, this is a rabbit hole that really I don't want to get into. I mean, eventually, it will always lead to, okay, why does an MFI customer come to me? Why don't they go to SBI and get a loan at 8% or 9%? I mean there is no right answer for this, except the fact that there are many other things except interest rates we are providing those types of customers. The customer doesn't have to find the loan. We find the customer to give them the loan, right? So that is one aspect. Second aspect is that I have a very, very quick turnaround. And I'm very paper-friendly. I don't ask for 30 different documents. You need [ 30 months ] to get a result and stuff. So clearly, the customer is seeing some advantage in paying a higher yield with me versus going for maybe a more complicated but a lower yield. I've always said this, that a customer who's extremely price-sensitive, I've probably lost that customer. That's not who I'm really servicing. They'll probably wind up going to HDFC Bank or whoever else. When I'm in the market for a car loan, I make 20 calls because I'm in the business. And even 2 basis point difference, I'll go with that person because for me, it's kind of an enjoyable experience of trying to get the lowest possible rate that I can manage. But I'm not a microfinance customer or I'm not an MSME customer.

So yes, I think -- largely, if you look at it, the market is pretty huge even in that case. And we're talking here about INR 400 crores of AUM with us. So I would probably look at your question also as an opportunity. I mean that -- we could probably go into those customers as well. But having said that, most of the SSBs technically push customers with e-matches. So that could be a single, larger differentiator, because even today when we try to push e-match with the customers, it's not as forthcoming as we would all want to believe it.

I mean, until we stopped it earlier, we used to take for MSME PDC checks. The number of rejections we would get because people -- not that they were unwilling to give it, but they just didn't have checks. [indiscernible] doesn't issue checkbooks. So they would have to go to the bank, apply for it, get it mailed there, it would take 30 days, blah, blah, blah, and I would lose the customer. So it's -- I don't think that these guys really compare interest rates or yields, they are more looking at the EMIs. And convenience -- and really like a difference between a 25% and a 30% is maybe $80 a month. Some people don't care about that.

Got it, got it. And on the regulatory scrutiny at these yields -- I know you partially answered this, that you don't think it's entirely yields, but do you...

[indiscernible] question properly. I just heard regulatory scrutiny. Can you repeat yourself?

No. The same -- we've seen a little bit of crackdown on higher-yielding loans. I know you partly answered this question, but the 36% book...

It's not 36%. I think that will be probably with processing fee and a lot of other things also put into. So it's not really 36%. But anyway, let's call it x% is good.

[indiscernible]. But earlier -- line dropped?

No, I'm here. [indiscernible], that was the question.

So on the regulatory risk, just to kind of address that, to a certain extent, since Arman with this entire AUM is still in a base layer. And second, at least the kind of telescope inspections that we've gone through in the last 2 or 3 years, the rates have been similar and there have been no major changes in that. And I think that has not been specifically been pointed out by the regulator. Given the overall situation there, the kind of servicing that it entails in terms of doorstep recovery process and the impact evaluation mechanism and other things, that, at least at this point of time, we are kind of confident that that doesn't seem to be a major concern from the regulator's point of view, at least at this point in time.

Got it, got it. Can I ask -- yes.

It's getting -- honestly, it's getting a bit difficult to kind of predict what is in the regulator's mind at this point. And so there's a lot of guesswork involved about what they want, what the intent is. I think the intent is quite clear: don't charge more than you want or than you should. But like -- so when it's like a difference of 5%, 10%, obviously, it's easy to determine. But if it's 1% or 2%, I don't know if it becomes that easy. But again, I think if you look at ROAs, ROEs, NIMs, yields and other factors, and if you look at the complete picture, as long as you are able to justify it in some mechanism, given the risks which you are taking and other factors, I think RBI is largely reasonable. The second thing which I just want to say is that, typically speaking, RBI does not do any knee-jerk. And I'm not aware of the specific 4 companies that they have come out against in the past few weeks. But I know for a fact before they come out with anything public, there are many months of discussions and other things that go on. Even in the case of Paytm and other things, discussions happen not over months, but over years. So I would say RBI is largely reasonable. And I would assume that if something like that -- this is coming for Arman or Namra, hopefully I should be able to see it coming and take corrective actions whatever is necessary. Today, I don't -- again, don't blame me if I turn out to be wrong. Nowadays, I'm also scared to make predictions, because it seems like I'm getting more superstitious as time goes on, but we need to see. We'll monitor it very, very closely.

No, no, absolutely. It's a point well taken. Can I ask one more question?

Yes, please go ahead.

On the point about credit having stopped in the industry in this cycle, again, how much of this is companies being cautious and saying, look, my customer's overleveraged and the industry as a whole after Sa-Dhan guidance and MFIN guidance, and how much of that is a definitive regulatory push that no evergreening, no netting off?

That's a good question. I'm not sure how to answer that. As far as I'm concerned, I would say that, as I said earlier, that self-preservation will always trump greed, right? And so if there was fear versus greed, most people would err on the side of fear. And that said, I would say that most of the disbursement which is loaned in the industry is in an interest of self-preservation and not wanting to get into something that they don't know yet to how it will evolve. So -- rather than something that RBI has been preaching about lowering unsecured lending and other factors. So -- but I'm sure it's some combination of both, but I would probably weight the former more than the latter.

[indiscernible] the lender being cautious?

Lender being cautious, yes. Even inquiries -- you would be surprised, but even inquiries have gone down from the customers. Even customers are being cautious now, which is a good sign.

We will take our last question from today from the line of Amit Mantri from 2point2 Capital.

Aalok, my question is on the provisions that you have taken and might need to take going forward. So on the GNPA side, we seem to be adequately covered. But given that we have a large PAR book of 30 to 90 days of almost 8% in microfinance. And you mentioned that that number continues to see increase because X bucket collection efficiency is still low. So how are we provisioned on this PAR book which is non GNPA but will probably flow through in the next few months?

I think the simple answer is that we are probably not -- I don't want to...

So Amit, the management overlay has been kept high. The overall provision that you see there is about INR 114 crores for the consol, and of which largely about 50-odd percent would turn to be the GNPA provision and the balance kind of scales towards the 31 to 90-day bucket kind of a period. So at this point of time, with the management overlay, I think we feel fairly confident that that should be a good provision number. But again, if need be, there would be sufficient action that can be taken to kind of pad up the provision if situations would go further down from here. But then that's something in the future that we have to see. Second is, when you're talking of these soft buckets, let's also kind of look at how the soft performance buckets have performed historically also. There are -- I mean every challenging period may not be very similar to the past, but still -- in the past, be it COVID, be it demand earlier, we've seen customers, especially in the softer bucket, which just means who are overdue for 1 to 4 installments, generally have come back much faster once the kind of cycle starts to improve.

But -- so yes, I think, Amit, if our margins and profits allow, we'll definitely bump up that overlay as much as we can. But that does not seem -- I don't see impairment costs coming down in the next quarter or anything like that. So we'll just have to take it in good stride.

Ladies and gentlemen, that was our last question for the day. I would now like to hand the conference over to Mr. Mayank Mistry for closing comments.

Thank you all for joining the call today, and thank you to the management team of Arman Financial Services for giving us the opportunity to host the call. Thank you, everyone.

Thank you, everyone.

Thank you.

Thank you. On behalf of JM Financial, that concludes this conference. We thank you for joining us, and you may now disconnect your lines.