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

Ladies and gentlemen, good day and welcome to the Arman Financial Services 3Q FY '25 Conference Call hosted by Equirus Securities. [Operator Instructions] I now hand the conference over to Mr. Shreepal Doshi from Equirus Securities. Thank you and over to you, Mr. Doshi.

Thank you, Sagar. Good evening, everyone. I welcome you all to the earnings call of Arman Financial Services to discuss the 3Q FY '25 financial performance and business update. Today, we have the senior management team of the company, represented by Mr. Jayendra Patel, Vice Chairman and Managing Director; Mr. Aalok Patel, Joint Managing Director and Mr. Vivek Modi, Group CFO. I will now hand over the call to Mr. Aalok Patel for his opening remarks post which we can open the forum for question and answer. Over to you, Aalok, sir.

Thank you so much Shreepal and good evening, everybody. On behalf of Arman, I would like to welcome all of you to our Q3 and 9 months ended fiscal 2025 earnings call. So, joining me today is actually just Vivek, the Group Chief Financial Officer and our Investor Relations team. I hope you had the opportunity to review the results, the press release and the presentation, which are available on the stock exchanges and our website. So, apologies. I don't think normally we provide at least 24 hours this time due to scheduling conflicts, there was a very short interval between publishing the results and the concall. So anyway, I'll walk you through the results. So, I would like to begin with an overview of the industry developments highlighting the key trends in business followed by a financial and operational performance of Arman. Over the past few quarters, the microfinance sector has faced several challenges including overleveraging, weakening of the centre meeting discipline, deterioration of the joint liability group or JLG model and rising employment attrition. Furthermore, the post-COVID euphoria experienced by microfinance institutions and in particular, non-MFI lenders in the retail unsecured space combined with a favorable regulatory environment has significantly increased household indebtedness. This has occurred despite limited real income growth, placing considerable strain on borrowers' ability to meet their repayment obligation. As a result, we have witnessed high delinquencies and the corresponding rise in impairment cost across the industry for the past two quarters. These challenges have directly contributed to an uptick in the default rates, further exacerbating the financial stress within the sector. In response, both Arman and the broader industry have made concerted efforts to strengthen underwriting standards and mitigate risk of overleveraging. Naturally, these measures have led to high rejection rates and as a consequence lower disbursement. Additionally, the increased focus on collection has also stretched the field bandwidth, further impacting sourcing efforts and contributing to staff attrition. This in turn has led to a decline in both disbursements and AUM. These evolving macroeconomic conditions have intensified pressure on microfinance institutions, making it necessary for us to strategically recalibrate our business models. The industry-wide AUM degrowth has also resulted in liquidity issues for the microfinance borrowers and it is essential that these challenges stabilize before the cycle reaches a state of equilibrium. In response to the above highlighted challenges, Arman has taken a cautious approach by prioritizing portfolio quality and collections overgrowth. While this has resulted in lower disbursement and AUM contraction, we believe that this long-term strategy will strengthen our financial resilience in the long run. As on 31st December 2024, our consolidated assets under management stood at INR 2,280 crores, reflecting the year-on-year decline of 6.5%. Disbursement for the quarter amounted to INR 338 crores, while the 9-month disbursement stood at INR 1,170 crores, down 28% from the previous year, of course, due to the reasons mentioned previously. Our gross total income for the quarter was INR 164 crores -- almost INR 165 crores, down 2.4% year-on-year while for 9 months it grew by 10.9% to INR 530 crores. Pre-provisioning operating profit or PPOP stood at INR 69 crores for Q3, down 4.7% year-on-year but grew by 13% to INR 231.6 crores for the 9-month period. Now moving to the segmental performance. For the Microfinance business our wholly owned subsidiary Namra Finance reported an AUM of INR 1,768 crores as of December 31st, 2024, a decline of 13.6% year-on-year. Disbursements for Q3 FY '25 stood at INR 214 crores compared to INR 459 crores in the same quarter last year. The cautious lending approach along with aggressive provisioning has impacted short-term profitability with Namra's Q3 profit after taxes at INR -- well at a loss of INR 17.2 crores due to increased impairment cost of INR 67 crores this quarter. However, despite these headwinds for Namra Finance we continue to maintain a strong capital adequacy ratio of 45.7%. Our gross NPA for the Microfinance business stood at 4.4% while net NPA was only at 0.56%. MSME, Two-Wheeler and LAP, which is part of our standalone Arman entity. This business delivered an encouraging growth. AUM for this segment grew by 30.9% year-on-year to INR 512 crores. This segment's gross total income for Q3 FY '25 stood at INR 44.9 crores growing at 32.4% year-on-year while PAT increased to INR 9.9 crores, which is about 5.7%. As of 31st December 2024, capital adequacy for the standalone Arman entity stood at a healthy 39.45%. From an asset quality perspective, GNPA for MSME stood at 3.43% and for Two-Wheeler stood at 4.03%. Despite industry challenges this segment remains resilient and continues to support the company's overall growth trajectory. The new loan against property or micro LAP segment introduced last year, although it is at pilot stage right now, has gained encouraging traction. Presently, the product is offered in Gujarat and piloted in Telangana and MP. It's about 1% of the AUM so far. The focus of this product is on Tier 3 and 4 and rural locations where we are expecting a good growth in the coming years. The average ticket size of LAP loans currently is about INR 4.5 lakhs. Now coming to the liquidity and borrowing. Our liquidity position remains strong with cash and bank balances, liquid investments and undrawn CC limits amounting to INR 262 crores. Additionally, we have INR 120 crores in undrawn sanctions from existing lenders, ensuring continued financial flexibility. Total borrowings stood at INR 1,765 crores with a diversified funding mix. Of this 34% was from banks, 11% from NBFCs and financial institutions, 20% from NCDs and direct assignments or off-balance sheet liabilities contributed to about 30%. The rest is borrowed from DFIs such as NABARD and SIDBI and others. This mix reflects our ability to maintain funding access despite industry headwinds. On the collection efficiency side, collection efficiency for the month of December 2024 stood at 95.3%. The segment-wise collection efficiency for the 9 months FY '25 stood as follows: Microfinance, 95.2%, MSME, 96.2%, Two-Wheeler, 95.7%. Before we open the floor for questions and answers, I would like to take a moment to highlight some of the strategic initiatives that Arman has undertaken in response to the current challenges. We have reinforced our underwriting standards to ensure stronger asset quality and have expanded our collection team to improve borrower engagement and repayment discipline. Additionally, we have introduced a dedicated credit department at the branch level, which focuses exclusively on maintaining credit quality. In a sense, we have now completely separated credit from sales in microfinance. Encouragingly, early indicators from December and January show improving trends in the credit cycle with 0 DPD flow forward rates stabilizing. While it's a little too early to tell whether we have reached the bottom, should these trends continue, we will adapt our business strategy accordingly. Although we have experienced a temporary slowdown in AUM growth, we remain confident in our ability to navigate these challenges in the industry and position Arman for long-term sustainable growth. Thank you very much. And now we can open the floor for questions and answers.

[Operator Instructions] Our first question comes from Apoorv Singh from Panchratna Investors.

Just wanted to understand what are the green shoots you are looking for to understand the cyclical turnaround and what measures you have taken for recovery?

See, as far as green shoots are concerned, typically, what we look at to judge whether we are coming out of it is 0 DPD flow forward rates. This means new people who were previously paying regular who have now crossed -- who have become 1 day overdue at this point. So normally in the MFI segment, we would experience that at about 99%. So there would be 1% flow forward. Now again, just because something has flowed forward, that doesn't mean it will get written off. Obviously, at every bucket, there are repayments that happen. But we typically track flow forward rates quite closely at every bucket. Now this will be too much details to get into. But until the 0 DPD flow forward rates return to 99, I would not say, this is over or this is behind us. Now that being said, we have seen at least for the last 2 months, 0 DPD flow forward rates have been 98% plus. So I think it was 98.03% in December and 98.15% in January. This month in February, 0 DPD flow forward, again, I think till now, we are about 35 to 40 bps ahead of previous month on a month-to-date. So again, I'm not superstitious but in days like this, you become a little superstitious. So I don't want to jinx anything. But obviously, there is minor improvements in the 0 DPDs in the last couple of months. Now as far as the initiatives we have taken, I mean, there are many, many initiatives, obviously, on a day-to-day basis, we work on all of them. Some of the larger ones is -- see, people who follow microfinance will know, there was always a bit of a conflict of interest between credit and sales, where at the operational level, at the branch level, microfinance principle was that the guy who does the disbursement does the collection. And so while there was obviously a credit mechanism at the HO level and at the regional level, it was not at the branch level. We have completely separated that now. So at least so far about 120 branches. By March, we will reach most, if not all branches. And the idea being is that if you cannot rely on JLG or JLG culture anymore, which -- again, it's too early to tell whether it's completely gone or if this is just a blip in an otherwise very successful model, which we have been following. Arman has been following for 15 years, but the market has been following for -- or the industry has been doing for a better part of 5 decades almost, right? So that is one initiative. Another is that we have started with CGFMU, so that is -- I don't know, Vivek, if you want to...

That kind of -- the CGFMU is the guarantee cover being provided through the government NCGTC, the national kind of credit guarantee cover scheme. So that is available for microfinance borrowers. So we're probably one of the few microfinance entities which have already enrolled. And as of quarter 3 disbursements, which, let's say, about INR 200 crores of disbursements that have taken place in quarter 3 have a guarantee cover through the CGFMU. Yes.

So the guarantee is and it's a little complicated like all of these things get. But essentially, what it covers is about 72% of your principal in default, ignoring time value of money. So let's say, your default is INR 100, they will give you INR 72 and INR 28, the company has to eat it for which we pay a premium. It's sort of a default insurance. And basically, how the math works is that considering time value of money and all those other things, if your overall static pool losses at this point with what we are paying them crosses about 3.5%, you'll make money and -- or you will come out ahead and less than that. But again, let's not get into -- this is not a profit-making venture or anything. It is to buy me better sleep if that makes sense.

I think, the focus is clearly visible.

No. And again, I'm sorry for the long-winded answer but I'm sure, something similar to these questions were there in probably most of the people's minds. So that's why I took my time on this question.

Next question comes from Shubham Jhawar from Dexter Capital Advisors.

I had a couple of questions. The first one being, sir, on what DPD do we write off the loans?

So I think right now, we are writing off quicker than -- so the policy is...

The policy is anything, which has not paid us for the last 6 months once the account turns 180 plus. So essentially, anything which is over and above, let's say, INR 300 is automatically written off. But as of -- I mean, right now, we are writing off anything which has not paid us after it has turned NPA, that is 90 DPD. So essentially, anything which is 250 days or 240 days plus will get written off.

So we are being slightly more conservative and everything over about 250 days, if we see no hope of any recovery is written off.

All right. And sir, basically, I wanted to understand basically for customers who are flowing from the DPD bucket, right, for example, DPD 30 to DPD 60 plus, what action do we try to take to stop that net forward flow?

So there are a lot of initiatives. So first of all, we have an RO mechanism, recovery offices that now we have about 350 of those and that will continue to increase. So those takeover at the FO level, we have various schemes. We are using bot calling, we are using auto calling, we are issuing legal notices, that will be 90 or 180 plus. So everything that you -- under the sun that you can think of we are doing. But again, I'm open to ideas. So if anybody has any clever ideas, I'm all here, so anything to increase the collections.

You have to be careful. You have to be careful with these customers. I mean you cannot use high-pressure tactics because the kind of customers that you are dealing with, that is obviously not something that I would encourage.

Sir, my other question was I wanted to understand more on overleveraging, right? So as I understand, the first guardrails had been announced somewhere in August of 2024 and the second guardrails were announced in November 2024, right? I wanted to understand since before these guardrails were announced, what were our internal guidelines that we followed, which ensured we weren't exposed to any overleverage the borrowers? Like what were our internal guidelines before the first guardrails itself?

So we were using FOIR like everybody else. So this will require a bit of a history lesson. But prior to April 2022, there were hard coded overleveraging what you call it rules that were issued by...

It could be the third lender whatsoever. I think you could be the third lender, fourth lender or something. So no more than 2 MFIs or no more than 3 lenders. The 3 lender norm was by MFIN more than anything else. But again, this only applied to 2 MFIs. Now there was a time where MFIs were controlling 80%, 90% of the market. Today, we are probably controlling 40%, -- at the most 40% of total household debt of rurals. Obviously, MFIs, although our portfolio has increased, now there are many, many players that are servicing rural segments, right now in April -- after April 2022, all of those in a deregulation by RBI, a lot of changes, including removing those caps and what cap they imposed was a 50% FOIR. So you assess and their installment should not be more than 50% of what they are earning, right? So all in all, that hindsight is 2020. But all in all, that seemed like a good measure, right, that you look at their household income and they could not cross more than 50% of that. So largely, a lot of people were not looking at this plus 1, plus 2, plus 3 or anything. We had numerous underwriting standards, which were in place. So first of all, we were looking at all loans, not just MFI loans because MFI was losing ground in terms of market share. We were looking at husband buy, we were looking at default rates, we were not even entertaining a customer who was day overdue anywhere else. So there were various measures, which were there in hindsight, yes, I mean, the number of lenders is something that we found a close correlation. But let me tell you even right now, 46% of our customers have an exposure of less than INR 50,000 total, excuse me, 68% of our customers have a total loan exposure, including all loans of less than INR 1 lakh, right? So I don't want to put overleveraging as the only problem here. I mean there are a lot of -- see, problems like this rarely occur due to one issue. I mean there are always multiple issues. And it's like the Swiss cheese model where it has to pass through a lot of holes to get here. I acknowledge [indiscernible] of the issue is definitely overleveraging but there are many other issues, debt has increased, aspirations have increased, culture has changed, GLG got diluted. And I'm willing to accept my share of the blame for whatever has happened. But I will not completely say it is due to overleveraging or weak credit. There are many, many aspects here. And honestly, right now, the biggest issue is credit has stopped, right? Credit is rural. Disbursements are like half of what they used to be. When you stop liquidity, obviously, things are going to get worse before they get better.

Yes, sir, last 2 questions and then I'll again quickly join back in the queue. The first was, is there any -- like what is the standardized process for income assessment both at the industry level and that we follow at Arman? And the second question was, what are our loan officers and collection agents? How are they incentivized is what I mean? These 2 questions.

So to answer your first question, we have completely revamped how we are assessing income. So I mean, that will be...

When did we do that, sir?

So I think we started the initiative in August. And so with the new BCM structure that I was mentioning earlier, the threat -- earlier, again, that conflict of interest, right? The guy who was disbursing the money was assessing the income. Now today, there's an independent person whose bonuses and everything depends on asset quality. Our rejection rates are like 80%, 82% right now, right? And that's not something to be proud of. I mean very few lending businesses can run with that kind of rejection rate, so something or another has to change. But anyway, that's fine. Like I'm not too concerned about AUM declining. During demonetization, it had declined by 1/3 during COVID. Once things are over, things catch up very quickly. So that is not my concern, my concern right now is simply on asset quality and 90% of our time goes towards that. Management bandwidth is stretched, field bandwidth is stretched on collections and repayments. So disbursements will come back to normal in due course of time. But that is not my priority at this point. Now how are we incentivizing, see, field officer incentives, I mean, on average, they are like around INR 2,500. So that's a mix of a lot of things. But nowadays, with attrition and everything the way it is and every month being different from others, we rely a lot on R&R kind of incentives. So we'll have certain 0 DPD targets or collection targets and those things or they'll have multiple contests. The actual incentives ourselves have gone down significantly overall in exchange of base salary. And this is what the field officers are demanding and given the attrition, we kind of have to deal with that. Collection people, on the other hand, obviously, their incentives matter on what buckets they are collecting. So the harder the bucket, the more money they get. It's a standard system that pretty much everybody follows, including HDFC Bank and banks and NBFCs and whoever else.

Right. Sir, my apologies, I couldn't understand the income assessment rate. Could you please elaborate that once again?

So the income assessment, a lot of it is based on judgment. We'll try to get evidence as much as possible depending on the kind of occupation that they are doing. So the simplest way to explaining is that if they are in -- a large part of our portfolio goes into cattle depending on the number of cattle they have, it's easy to guesstimate what kind of income they'll be having. Other occupations, it really depends on a case-to-case basis.

Largely it's also depends on a lot of self-declaration that the customer might do.

Yes. But nowadays, we are not really paying much attention to the self-declaration.

That's wherein the VCM or the credit evaluation becomes more independent and assessment by the company.

Over and above that, there's also a lifestyle assessment that we do. So there are -- what kind of house they are living in, in comparison to people who are their neighbors, and what kind of facilities do they have? Do their children go to school, or do they not go to school? So there's a whole form that is there. I mean, if you're interested, we can -- Vivek will walk you through it in a separate time. But unfortunately, I don't think this is the right place to kind of walk through it right now.

Sure, sir. Sure, sir. And sir, what is our loan write-off this quarter out of the total impairment?

It's about INR 45 crores, if you're talking about Namra.

Namra and total as well, the consolidated.

Total, I think I'll have to refer to the presentation but we'll carry it somewhere there.

Sorry, sir.

Carry somewhere in the presentation but INR 25 crores Namra and about INR 4-odd crores in Arman. So INR 45 crores plus or about INR 50-odd crores.

The next question comes from Narendra from RoboCapital.

So sir given that we're in position give any...

Sorry to interrupt, Narendra. Your voice is coming very low. If you're using speaker phone, may I request to use handset or something, please.

Not only low but it's cutting off. So I am missing some of the words.

Is it better now, sir?

May be, go ahead.

So my question was given the situation that we are in currently, are we in a position to give out any guidance regarding AUM growth or credit cost for the next year?

Of course, I cannot even give you guidance for next month.  So I mean, I'm joking but the fact is, any guidance is meaningless at this point. I mean we don't know how the next quarter is going to look like until things stabilize, unfortunately, no. I'm not in a position to give any guidance.

The next question comes from the line of [indiscernible] from Aurum Capital.

I wanted to understand since the JLG model has suffered. So are we moving more toward a secured mix? And will our AUM growth be mostly towards...

I'm sorry, are we moving more toward what did you say?

Mostly secured mix for LAP and Two-Wheelers and MFI disbursements will be low?

So LAP is a long-term play. I mean, just as we started MSME in 2018, about like 5, 6 years ago, and now it's INR 500 crores. I mean we are not the kind of company that moves very quickly. We're sort of boring in that way. So LAP is a long-term play. And yes, you are right, we would like to get into a more secure kind of book. But I don't think the secured book is going to be meaningful for at least 2, or 3 years. And secure is a whole other beast really. I mean, if I open up a shop to give unsecured loans, it's very easy to sell those loans. If I open a shop to give secured loans, then it's not that easy. I mean you've got to find customers who are willing to mortgage their house for their business and stuff. So it's a different business in many ways. But I guess one way to answer your question, if I could, yes, definitely -- I would. But today, I don't see it having a meaning, I mean definitely, we can target a 5% to 10% over the coming 3, 4 quarters. But to say, the majority portfolio will be that, I wish it was the case.

And Microfinance is kind of here to stay, we are through right now in the middle of a bit of a crisis if you can put it at a sector level. But Microfinance, I mean, it's not going out of pocket.

All you have to ask is, is there a need for this product? And I don't think 99 out of 100 people you asked is going to reply yes. So there is a need for unsecured small ticket loans in the rural segment. I was saying this to even people at RBI, I think I said it last time also but I'll say it again. Since the 60s, Indian government to their credit has been trying to push the financial inclusion agenda, right, starting from farm credit to PSU banks to PSL banks to cooperative banks to RRBs, to bank linkage, NABARD, SFGs, MFIs, I mean, you name it. To their credit, they have done it all. Everybody has been so concerned to make sure money reaches at the bottom that nobody was too concerned about too much reaching the bottom, right? So in many ways, if it helps you sleep better at night, this is a success. And it's a success of the financial inclusion agenda, at least the reach part. Now all we have to worry about is how to assess them better and convince the customers to repay us better. Incomes -- real incomes have not really increased since COVID. I think if you look at real incomes in the rural, they have increased by 0% to 1%. A lot of these guys in hindsight, again, I've gone to the field myself, were supplementing inflation with loans, one way to put it. So I acknowledge that there were a lot of things broken. But the first step of solving a problem is, first of all, admitting there's a problem and b, finding out what that problem is. And I think all of us, and I'm not just saying the company, I would say the industry at large has grasped both of those things, has acknowledged that there is a problem, and now we are aware of what those problems also are. So give us some time, we'll fix them.

My second question would be like don't you think MFI as a sector, our business model is quite fragile because if you look at general, our cost of borrowing would be very high? On top of that, we need to carry a very high number of field forces for collections. And because of that, our costs are going to be very high as compared to a fintech or maybe a bank. So don't you think generally, our business model as a whole industry is quite fragile?

I mean exactly 12 months ago, people were calling it very resilient. So I guess the flavor of the month will change every quarter. No. But I mean, I'm not exactly sure how to answer that. I mean if you are comparing us to fintechs, let me tell you that is not the right comparison to make. Fintechs in this -- operating in rural, unless they have a good method to collect the money is a ticking time bomb according to me. But again, what the hell do I know? As far as banks, I mean, they've had a good 80 years to do it, and they have not managed. So if banks were in a better position to do what I do, then why haven't been? I mean, they clearly had adequate time to do it. So again, I'm not exactly sure how to answer your question.

Okay. My last question would be like what would be our cost of borrowing?

So marginally, I would say it's about 11.25, if you include everything else in it.

For the quarter -- for the 9 months turning out to be about 12.86.

So all in.

The incremental, the marginal cost, as Aalok said, is under 12.

Next question comes from the line of [ Aditya Pal ] from MSA Capital Partners.

Sir, just wanted to understand from you that, say, 4 to 6 quarters, the disbursements that we have originated, how have they performed on a cohort basis, quarterly cohort basis? So if you look at last 12 months?

Better. But in Microfinance, first 6 months, you don't really see a lot of defaults. So it's hard to judge at this point, but...

No, because just trying to understand the momentum where we are at, right? Because...

I understand. So if you are saying the stuff, which we have, let's say, dispersed between April and -- April, May, June, right?

No, let's say, let's say -- let's take December '23 onwards, right? Because that will give a good base for you.

I mean, obviously, that will be -- that will not look good. I mean this was -- I would say the peak of the bubble, if this is what it was, was Q4 of FY '24. So that's when the most amount of overleveraging would have taken place. And so your -- after all said and done, if you do a static pool analysis, that will be the worst quarter all considered.

And the last -- at least the last 9, 10 months, the book that has been generated, they have been performing adequately in your...

I mean, yes, if adequate is a word. I mean nothing to write home about, to be honest. It's not....

I mean, largely what you want to compare it with, I mean if I were to compare it with pre-COVID kind of a scenario, obviously, these last 9 months performance may not kind of compare with the pre-COVID kind of because the behavior of the customer has changed. But is it performing then the rest of the book at INR 1,800 crores of total AUM, INR 600 crores in the last 9 months or 6 months, are this INR 600 crores doing better? Obviously, they are doing much better.

See, what makes this current crisis that we are facing very different than what we have faced in the past is that in the past, we could essentially buy ourselves out of whatever trouble or the industry could rather buy themselves out by dispersing good quality customers, which were plenty available, right? So post-COVID, post demon, we grew substantially by the time you got into taking care of the bad customers, the good customers are displaced. In today's scenario, when the portfolio is falling, obviously, the denominator effect works both ways, right? So that is why on a static pool today, my numbers will look better than what it is right now because the portfolio is declining. So again, everything is all relative, I understand. So let's not get into nuances of what ifs and whatnots.

No, not getting into nuances but just trying to ascertain where the momentum is heading, right, because...

No, no. I'm not talking to you, I was talking to myself. I'm sorry. So no, so yes, the portfolio that we have created in the last 6 months looks much better than what we have otherwise to answer your question simply. But it is not like pristine or anything like that, what we experienced on a post-COVID.

Understood. And there has been a sharp increase in our 31 to 90 as well, it is specifically speaking about MFI. So it has gone up from 4.4% to 7.1%. How to read...

4.4% was in March, I believe, and 7.1% is current right?

So how to read into this? And what will be the flow forward? Do you see that you can adjust this over here rather than it flowing deeper into our NPA buckets?

I mean it's -- there isn't much to read from it. It's not like hieroglyphics, certainly not good. I mean I have no -- I have nothing good to say about it, except to say it is what it is. We are working on it. Flow forward rates, if it adds -- if it gives a little bit of comfort are improving at every bucket. So -- but yes, I would say that we are watching those numbers very closely. All buckets we are watching very, very closely. And we are trying to do everything that we can.

So on a consol basis, we've done INR 175 crores of credit cost, which INR 150-odd crores is for the 9 months, how bad do you see this entire worsening of asset quality or higher write-offs being pushed to FY '26 because we should start growing now, right, at least from this quarter onwards or maybe from FY '26, we should start having some growth. Not just growing, but even the base effect will kick in, right?

No. So I think disbursements will improve. We are seeing improvements in disbursements in Q4. So disbursements will improve. As far as growth goes, again, I don't think that will happen until Q1. What was your -- I am sorry what was your...

So when does it -- how should percentage...

If your question is, are we pushing anything forward for FY '26. The simple answer is no, absolutely not. So I think people who have known us in the past will attest we have not done any top offs, not done any restructuring, not done any net off type things. And so far, we have not done any ERC type transactions either, which is not to say I'm about doing those, but that's -- we have not done it yet. So whatever needs to be taken care of has been taken care of.

Sir, the reason I'm asking all these questions is just to surmise quickly, is that on an average, an MFI loan is anywhere between 18 to 22 months, some players also do 24 months. But on an average, industry is 20, 22 months. Now if we see when the crisis started, if we say that if we call FY '24 as peak, so we are already 50% inside through the journey of that entire credit cycle being weakening, worsening. So now things have to start to...

If you see that the crisis started in April, we are 9 months into it. So by your logic, we still have about 15 months to go, 24 months loan in auto.

24 months. That is a fair assessment to make.

You have to consider that the first quarter, there were no like real changes. I mean people just started seeing an uptick in the Q2. I mean, people just started seeing uptick in repayments. Then there was heat waves and elections and stuff, which I openly said, this is India, it's always hot. There's always an election. So anyway, I think we wasted the first quarter in just saying, okay, this is a temporary blip and it will recover. So really, the -- I would say until August, nobody really took it seriously. Now post August, obviously, everybody has kind of been, I don't want to say, panicked or anything like that, but taking it very, very seriously including the industry and everybody. So I think -- listen, I think my estimate, which I gave 1 quarter ago remains the same that we will see the bottom by March. Already, I feel that we have probably reached the bottom but I'm refraining myself from that conclusion because I don't have the data available with me to call it yet. So -- and then from Q1, I would say you should start seeing an improvement. But improvement also to get back will take about a few quarters, right? So it's not like it's going to happen overnight.

Definitely, In lending business.

Aditya sir, may I request to return to the question. [Operator Instructions] The next question comes from the line of Nidhesh Jain from Investec.

Sir, can you share par plus data for the Microfinance book?

Par one plus data Vivek, you have that.

No. Par 1 data may not be there in the presentation but you can go on the second question if you have, while we can kind of pull that out.

So the second question is what is your assessment of the stress in your book on the Microfinance side, given that there will be a certain percentage of customers who are stressed. And once those are identified as GNPA or stress, then ex of that, the book should perform reasonably well, right? So what is the assessment of stress on the book on the Microfinance side in your view?

I'm not sure I understand, you're not very clear. What is my opinion on the stress of the Microfinance book? Is that what you're asking?

Yes, probably, let's say, 10%, 15% customers are stressed, once those customers have recognized as Par 1, then the rest of the book should be behaving reasonably well, right? So what is your assessment that this number is 10%, 15% in your view?

So I would say that -- again, please don't quote me on this, although this is recorded. I would say about 20% of the customers are stressed in the industry. And why I say that 20% number is that 80% of my customers pay me on dot on the second that it is due, the money, right? So about 20% of customers will be late by an hour, 2 hours, 5 hours, 5 days, whatever or don't pay me at all. So if I were to extrapolate maybe 20% are under stress.

One to 30 you were referring to was about 3%.

Yes. People have skipped one installment and they stable or not, you have 2% 0 DPD flow forward and another one will be stable at one.

And in your assessment with all these guardrails coming into force, industry becoming much more conservative, do you think this overleveraging problem will be solved? Or we expect further cycles, let's say, 3 years down the line, 4 years down the line because industry will again go overboard and again overnight?

No, I don't think so. Believe it or not, I have experienced a lot of overlending and overleveraging in my career, including many bubbles. So see, if it was only the MFIs who are controlling the industry, I would say, no, it should not happen again. But we are now controlling -- NBFC MFIs are controlling INR 4 lakh, give or take, INR 4 lakh crores of an industry which is INR 10 lakh to INR 12 lakh crores. If you consider rural lending, right? I mean you have INR 2.5 lakh crore SFGs, 1.5 lakh in retail to the customers, another 2.5 lakh or so to the spouses. And again, these are estimates. So these are nothing -- you won't find this hard data available on the net. So now it has earlier on, every Tom, Dick, and Harry was coming into rural lending because they thought it's high returns, high margin. Even people who had nothing to do with lending money, the only way that could monetize their business was through lending, a lot of technology companies and other ones, I'll refrain from using names or anything. Now all of that euphoria has gone, right? I mean companies who had no business being in this industry post-COVID and post deregulation came in droves. Now I think MFIs never waste a good crisis. So I think we kind of pick ourselves up, make the adjustments and move on with their life. But until everybody else kind of sees that, I'm not exactly -- I don't know, I don't know. And maybe I'm being too pessimistic, but the fact is Indians have a very short memory. -- everything will be done and dusted and 2, 3 years later, people will forget and life will go on. That's the way it should be. Life is too short to keep dwelling on the bad days alone. So again, to simply answer your question, I hope so.

Next question comes from the line of Bhavin Shah from Sameeksha Capital.

So what has changed in the last 2 or 3 months where so that flow rates are decreasing. So is it a structural change or let's say, due to the crop season, people are earning the money and paying back and then again, this issue may come up again?

No, nothing like that. We are just running out of stressed customers.

Okay. But there is a liquidity issue. So let's say, borrowers who had 3, 4 loans. So what is your assessment? Are they paying only one MFI? Or are they letting go up 2 other 3 MFI because they are not getting any other money for the new loans.

An excellent, excellent question. And see, there's about 8% of cases that we have that people are paying us and not paying others or vice versa, people are not paying us paying others. But in my opinion, this thing about, oh, I'm a bank, they'll pay me and they won't pay other. I mean it's a myth. Practically speaking, it really does not happen. Most of the defaulters, and I would say 90% plus, if they stop paying one, they stop paying others. So that is number one. Number two, in our BI team, I mean, we look at a lot of data now that we have business intelligence also. We have noticed that whether you are Arman plus 1, 2, 3, 4, 5, 6, whatever it may be, the lowest defaults are amongst the customers who have remained stable at the number of MFIs. So let me explain that better. What we have found is that, let's say, when I originate the loan, suppose, right, which today for some reason, everybody is tracking plus 1, 2, 3, 4. Honestly, I think people are paying too much attention to this. But anyway, I'll hold my thoughts to that. Let's say, somebody that I lend money to that I thought was a good customer at origination but he was -- I became the fourth lender. The lowest defaults are those that remained at 4. The person who was at 4 and became 3 default increases, who was at 4 and became 2, it slightly increases more. And the reverse also who was at 4 and became fifth, obviously, in that case, the default rates skyrocket. But the lowest ones are the ones that remain stable with their outstanding and number of lenders. This is what is true in my portfolio. I don't know if it's true in others. And so you see, right, like -- I mean, the only thing that you can kind of judge from that is to say that people who need money, but don't get money also will become defaulters. So it works both.

The next question comes from the line of Ronak Chheda from Awriga Capital.

Aalok, I have 2 questions. One is on the CGFMU. You just mentioned that your rejection rates are upwards of 80%, 82%. Given that, the industry has gone through a cleansing of your customers or the industry per se of whatever the rotten apples were. And then at 80% rejection rate, how are you thinking of going ahead and getting one more layer of security on the disbursements, which we are doing and at what cost? Because you are stepping up on your underwriting staff, you're stepping up on your collection staff. And now if you were to pay this premium, how does your economics work? If you could just highlight that?

I mean -- so the CGFMU cost for us right now is about 1% a year for the principal outstanding of the customer, right?

So for a period of time...

Let's say 2% will be the cost of that. So -- but when I said 3.5%, that -- basically, that calculation comes in because they're not covering 100%. They are covering 72%. And also there is some time value of money also.

The first claim that you can really do is going to be almost 24 months from now kind of.

Right. Now that 2% kind of a cost theoretically can go up if your default rates are -- so this is like the 1 year and obviously, depending on the default rate, they will reset it as time goes on. But that is what it is right now. So -- but the first claim, I don't think will come until 2026. So it's a long game. I mean, it's a long play. So I would not -- but if I understood your question correctly, I think -- are you asking me that am I being too conservative? Is that -- did I read your question correctly?

Yes. I understand when the first game will come in. And I'm just asking where your rejection rates have gone up. We've gone through 9 months of cleansing of the industry. And then we are adding one more layer of insurance. So just wanted to understand…

No, you are right. You're right. I mean, that is definitely possible that I'm being too pessimistic and everything like that. So as I said in my speech also that I'm happy to -- we are happy to change our strategies, even consider them every month or every week if need be or every day. So -- but until I'm comfortable, I don't think I-- this is not a casino, I can't take crazy bets. I mean, theoretically, if CGFMU is ensuring 72%, I should go nuts, right? Just start lending. Let's not -- I don't think that's how it should work or can work.

No. Got it. And my second question is on MSME. So your AUM last quarter was also around INR 400-odd crores, and this quarter is at INR 410 crores. You did allude that management bandwidth is towards collection. But how should we think because your GNPA, et cetera, asset quality numbers are in line, what is happening here? Why are we not stepping up? Is there a concern in this segment also, which worries you?

So obviously, MSME credit costs have gone up. And really, you are just dealing with a different subsegment of the same customers. They are cousin brothers only of MFIs, right? So it will be surprising if there was no impact. I mean then that would definitely mean that something is a miss overall. But there is just so much pressure in the market that you cannot push disbursements right now. So whatever is happening naturally is happening. Rest of the time, we are concentrating on quality. So we're not pushing anything. Let this year end, there's about 1.5 months to go. This year has been a wash. I don't think it's probably one of the worst years of my career, to be honest. But let this year get over. Come April, we'll take a rethink and restock of things, including policies on MSME and everything and whether we want to push growth or not push growth or whatever it is. So I don't think that we are going to achieve much in the next 1.5 months, even if we change our strategies right now. We'll take a few more questions.

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

Aalok, just wanted to find out how has the experience been in the MSME business? Would it be possible to share X-bucket 0 DPD? How has been the credit experience in balancing growth as well as collections in this particular product because I remember both being handled by the same person.

Yes. So last month was 98.8% was 0 DPD. So not quite 99% plus but better than MFI for sure. And yes, I think NPAs and stuff look similar but you have to understand that you cannot just look at NPA, you have to look at NPA along with the impairment cost and provisions and everything. So whatever is written off is not going to come in NPA. So by that respect, as Vivek said, in MFI, we have written off about INR 45 crores, while in MSME, we have written off INR 5-odd crores or INR 5 crores, INR 7 crores maybe. So yes, I think Vivek, if you want to share MSME specific numbers, happy to share it. But...

Generally, I cannot -- I mean, in terms of the Par numbers that we were discussing earlier on some of the questions and also in the presentation, the Par 31 to 90 is about 1.9%, so under 2%. And the NPA for MSME is about close to 3.5%. So overall, comparatively, the stress is lower. If you compare it with what it was last year, obviously, it has a 2.2%, NPA has grown to about 3.4% already, and there have been much bigger write-offs that we've seen in MSME and Arman standalone. So that's where the stress in the unsecured can be felt in the Arman book as well. But on a kind of apple-to-apple comparison, the overall credit -- stringent credit process that we followed over the years is, I mean, kind of giving better returns.

Got it. And given that the product has had a little better credit experience, are we looking to kind of -- what is the growth plan here from a say, branch growth perspective, team addition because disbursements have -- growth has kind of flattened out quarter-on-quarter. So are we looking to like take this to INR 100 crore disbursement somewhere mid next year or something like that? Just want to get a broader understanding, Aalok.

So we have grown by about 30% on a same quarter previous year to now. But yes, in the past couple of quarters, it has flattened specifically due to the microfinance stress. So I mean, obviously, that has led to rather the rejection when it comes to...

Would automatically be felt here as well because if let's say, there is an overlap customer who has defaulted on microfinance loan or the some other place, the impact is going to be felt here in terms of microfinance payout.

Yes. So we are definitely not where we should be even in MSME. But I think, honestly, I would have expected sort of a disbursement run rate at this point of being at least around INR 50 crores to INR 60 crores. But clearly, we are not there yet. We are at more around INR 40 crores or so. So let's say, by first or second quarter, we can reach somewhere in the neighborhood of INR 60-odd crores of disbursement...

This is per month, right? This is INR 60 crores per month or per quarter?

Per month, mainly per month. We are not reducing branches. We've got to keep the OpEx down. Obviously, OpEx has gone up in an effort for this collection, income is going down. So everything is out of whack. I cannot afford -- the P&L and my balance sheet cannot afford right now me going crazy and opening branches. And just— -- as I said, management bandwidth is also stressed trying to deal with these issues. So I understand MSME is doing better than micro but there is no compound wall also sometimes. I mean, whatever problems MFI is facing, some of it will creep into MSME as well.

Got it. So at least it's fair enough to assume that on the way out, probably sometime mid-next year, this would be one of the first businesses to start growing, right, like where you go to like INR 60 crores a month, so on and so forth, just a fair understanding, right?

Yes, I agree. See, right now, it's very difficult for me to put pressure on anybody to disburse money. Let me be very frank with you. I cannot go to my business head and be like disburse targets, this and that. Whatever is naturally happening is happening. But yes, I call them three times a day about collections. That's for sure.

Got it. And last question is on LAP. How is the pilot in Madhya Pradesh, Telangana? What has been the broad feedback? Again, there, what is our branch growth? How many branches are we in Gujarat, outside Gujarat? What is your broad thinking on putting up new branches? And if there was a kind of file-per-branch vague number in your mind, is that also going to improve, or largely, are we looking at growth from just a branch perspective, moving away from the slightly more sad topics to something more interesting?

Yes, yes. So thank you. So overall, in MP and Telangana, it's too early. So we have just hired a team yet. Telangana—have we disbursed anything in Telangana? A few files. Overall in micro LAP. I think you'll get a better idea. So we had not disbursed till Q3. I know that. In January, we have started disbursing. We've just hired a new guy who has some experience in secured and LAP loans also. So right now, we are disbursing out of 15 branches, if I'm not mistaken, and we'll probably expand that to at least 25 branches by next...

People have set up there to about 19-odd branches as of December.

Got it. And how do you see 12 months like again, what are your broad plans on branch rollout and the team setting up and broader architecture or thought in your mind for that business?

For the micro LAP side?

Yes, LAP.

So we are -- so we have reached a run rate of around INR 3 crores a month. The target was to reach around INR 5 crores by year-end. And obviously, that did not happen. But overall, the good part about micro LAP is that it does not run down very quickly, right, because the tenures are longer. While the disbursement run rate, I don't expect it to cross INR 5 crores, INR 7 crores in the coming three, four quarters. But the portfolio will increase faster than the monthly disbursement run rate because it's a longer tenure, obviously. The rollout started there. So we have a LAP guy there. We have hired people in Telangana, MP, Gujarat is obviously there. But I think, as discussing with others also, that probably Gujarat is not the best market for this product. Telangana will be slightly southern markets are more favorable for the products. MP, again, there is good feedback we are getting for this product as well. But this might not be a product for all states because, again, the paperwork and all of those things are very important. So while you must find customers who are interested, whether these are mortgageable properties, at least to a reasonable extent. I know that we are not going to get like 100% executable mortgage or whatever you call it. But as long as we can get it to a point where we are comfortable, I'm okay to do it. But a lot of places in rural and in Tier 4 cities will not be there. The paperwork is just not there.

The next question comes from Anant Mundra from Mytemple Capital.

Sir, what is the provision cover that we carry on our Stage 2 bucket in Namra?

We can move on to second question, we'll just pull out the figure.

Cover on Stage 2 bucket. So that is 30 to 90. Yes.

So what I'm trying to basically understand is our current book has reached a 98.1%, 98.2% kind of X-bucket collection efficiency. So do we at least make a breakeven on the current book and whatever credit cost that has to accrue in future is only mainly going to come from the bucket that has already like the Stage 2, current Stage 2 bucket. That's what I'm just trying to understand. And is that understanding correct? Like do we at least make a breakeven at 98.1%, 98.2% bucket efficiency.

I mean, ballpark, you can make your calculations but I cannot comment on this. But what is...

The provision cover will be about 42% on the Stage 2 cases.

Sir, any comments on— do we make a breakeven at least on the current book at 98.2% kind of collection efficiency?

Frankly, I don't know. I can do the math but I'm not sure at this point. Vivek any...

I mean, I'm not too sure whether I got the question right.

He's saying -- I mean, a lot depends on flow forward rates of other buckets but he's asking at 98.2%, are we at a breakeven stage? See, there are too many wheels. There is OpEx, there is credit cost, there is lending cost -- I'm sorry, borrowing cost, and there is also interest income and many, many factors.

So again, I mean, just to kind of keep it to your question only specifically, 98.2%—, let's say, is one part of the entire bucket. This probably might account for 95% of the revenue for me but then the balance side is equally important. So the flow forward, when we talk of the current bucket, it probably has the largest impact. But flow forward at all the buckets is equally important. I mean, if I've written off, let's say, INR 100 crores in the last 4 quarters, it doesn't mean that I've forgotten about them. The collection, even if, let's say, 3% collection has to happen for them, that's revenue for me. Even two-wheeler, it's like 20%, 25% 0 DPD bucket, right? But you collect it by the month end. So -- but current bucket collection, as Aalok said earlier also, if it kind of 99%, that's good. Given the situation, that's probably the best thing to have.

Yes. That's probably as it's like if you are going to a temple and paying for something, don't ask for a private jet, ask for something reasonable. So like 99%, is it amazing? Probably not but I'll take it at this point. I can manage easily with that.

Got it. Got it. Got it. And sir, just I missed it, how much are we paying as premium on the CGFMU insurance that we are awaiting?

1% a year.

Thank you. Ladies and gentlemen, we would take that as the last question for today. I now hand the conference over to Mr. Shreepal Doshi for closing comments.

Thank you, everyone, for being part of the call, and special thanks to the management of the company for giving us the opportunity to host this call. Thank you, sir, and have a good weekend everyone.

Thank you.

Thank you, everyone.

On behalf of Equirus Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.