Arman Financial Services Limited ($531179)

Ladies and gentlemen, good day, and welcome to the Arman Financial Services Limited Q4 and FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now hand the conference over to Mr. Aalok Patel, Vice Chairman and Managing Director from Arman Financial Services Limited for opening remarks. Thank you, and over to you, sir.

Thank you so much, and good afternoon to everyone, and welcome to the Q4 FY '26 and Fiscal Year-end '26 Earnings Conference Call of Arman Financial Services Limited. On behalf of the company, I would like to extend a very warm welcome to all the participants joining us today. I'm joined on the call by Mr. Vivek Modi, ED and Group CFO, along with our Investor Relations team. I hope all of you have had the opportunity to review our financial results, investor presentation and press release which have been uploaded to the stock exchanges as well as on the company website. On a broader level, the Microfinance industry has gone through a challenging phase over the last several quarters. driven by a combination of macroeconomic pressures and sector-specific issues, which were discussed in great detail in the previous calls. However, with the beginning of the second half of FY '26, we saw a perceptible shift, the collection efficiency trends improved meaningfully, borrower behavior showed signs of stabilization and demand across the Microfinance products, particularly in the rural geographies begin to revise. While the operating environment is yet to fully normalize, we believe that the industry has moved beyond the most difficult phase and is now entering into the stable and disciplined growth cycle. That said, we must acknowledge that the broader economic environment remains uncertain. Domestic stress in pockets of the economy persist and there continues to be global uncertainty including disruptions caused by the West Asia conflict. These factors continue to create headwinds and require careful monitoring. However, the financial inclusion imperative and the underlying credit demand remains intact. Against this backdrop, I'm pleased to share that after many quarters, Arman's AUM crossed to it's record AUM [ 27,280 crores ] crores in FY '26, representing a year-on-year growth along with its highest-ever quarterly disbursements of INR 951 crores. This growth, of course, has not happened overnight. Rather, it has been achieved through consistent execution and disciplined efforts will started many quarters earlier. Over the last several quarters, we have taken important structural and operational steps and decisions to strengthen the business and improve portfolio resilience. One of the most significant changes is complete separation of credit and recovery from the branch operations. This realignment has now been successfully implemented across most branches and has delivered measurable improvements in accountability, monitoring, execution, discipline and collection efficiencies. This change has also allowed branch teams to focus more effectively on customer engagement and business sourcing. With dedicated recovery teams, we have better visibility into emerging portfolio stress and can intervene earlier, which has meaningfully reduced loan losses across the portfolio. As a result, loan losses across the portfolio reduced meaningfully -- reduce -- leading to a moderation and write-offs and provisions and some improved profitability. Consolidated profit after tax for the quarter stood at INR 41 crores, registering a growth of 85% sequentially and 120% year-on-year -- excuse me, 220% year-on-year. For FY '26, profit after tax stood at INR 57 crores, reflecting a year-on-year growth of 9%. In parallel, we also strengthened our portfolio protection framework. About 90% of our Microfinance portfolio is now covered under the CGF scheme. This provides an additional layer of protection and demonstrates our commitment to prudent risk management, especially considering the macro level uncertainties at this stage. Along with this structural realignment we also fundamentally strengthened our underwriting approach. We moved away from traditional group-based JLG credit assessment model, which has inherent limitations in assessing individual repayment capacity and shifted towards a more individual level credit evaluation. Under this new model, each customer is evaluated more closely based on his or her prepayment capacity, household cash flows, credit history and overall financial profile rather than relying solely on group behavior dynamics. But these improvements have not come without cost. To be completely transparent about the trade-offs we have made first, the rejection rates continue to remain elevated, our quality of the disburse portfolio has improved significantly. Second, operating costs significantly, as I'm sure you have noticed, the new credit model requires a larger team for detailed overwriting and better monitoring capabilities. These, I believe, are necessary investments to build a stable business in the long run, bringing these costs under control while maintaining the integrity of the credit process will in our key focus area for FY '27. Despite these near-term pressure, we believe that the investments are essential to position us for sustainable growth in the next phase of the cycle. Moving on to the performance of our Microfinance business, the AUM stood at INR 1,999 crores, that's INR 1,999 crores, registering a growth of 19% on a year-on-year basis. Disbursements for Q4 FY '26 stood at INR 738 crores, reflecting a growth of 88% year-on-year and 62% sequentially. Business momentum improved significantly during the second half of the year, resulting in a full year disbursement of INR 1,798 crores. Gross total income for Q4 FY '26 stood at INR 117 crores, while for the full year, it stood at INR 433 crores, supported by the improving operating environment and lower impairment cost, operating profit improved to INR 41 crores for the quarter and INR 143 crores for the full year. Profit after tax for Q4 FY '26 stood at INR 29 crores, while full year tax stood at INR 13 crores. Asset quality trends improved gradually throughout FY '26. Our G&P stood at 3.4%, while our NNPA reduced to 0.95%. These metrics reflect the benefits of our separated credit and recovery structure, disciplined credit assessment and stronger monitoring and collection efforts. On the stand-alone front, MSME Micro LAP business has continued to witness steady traction during the year, supported by healthy demand across our operating geographies and consistent execution by our field teams. During the year, we expanded our footprint into Uttarakhand, that is for the MSME portfolio, strengthened our lab fee teams and launched a pilot for solar loans in Gujarat. We expect these initiatives to contribute meaningfully to the AUM growth over the next 2 to 4 quarters. Stand-alone AUM grew by 30% year-on-year to INR 730 crores with MSME segment contributing 76% of the overall portfolio, followed by the LAP and 2-wheeler businesses. Disbursement momentum across all segments has remained healthy with quarterly disbursement standing at INR 213 crores, while full year disbursement stood at [ INR 636 crores ]. Asset quality across these portfolios remain stable with GPA for the MSME segment at 3.84% and 2-wheelers segment at 3.95%. Collections are also strengthened across these segments. In Q4 '26, collection efficiency for all segments stood above 96% and while zero bucket or ex bucket collections were 99.5% plus for the whole quarter, reflecting delinquencies returning back to normal pre-cycle levels. Lastly, on the liquidity and capital position front, the company continues to remain well capitalized with capital adequacy ratio of 27.86% for the subsidiary number of finance and 41% for the stand-alone business as of 31st March 2026. The company continues to maintain a healthy liquidity profile with available liquidity of INR 229 crores, comprising of cash bank balances, liquid investments on CCs, FOB limits, et cetera. In addition, we have undrawn sanctions of INR 275 crores from existing lenders as of March end, providing adequate financial flexibility to support future business growth. As we look ahead to FY '27, our approach is to remain focused on responsible and disciplined growth. While we expect disbursement momentum to continue improving, growth will be pursued within clearly defined risk parameters and strong emphasis on total quality over growth. Maintaining collection efficiencies and monitoring asset quality metrics will continue to remain key priorities for us. At the same time, we will continue investing in our credit recovery and monitoring infrastructure to build a stronger and more resilient operating framework. Improving operating efficiencies and rationalizing cost structures without compromising underwriting discipline or portfolio quality will also remain an important focus during the year. We believe the structural improvements undertaken over the past every quarters position us to strengthen our market position and capitalize on growth opportunities in the evolving industry landscape. With that, we can open up the floor for questions. Thank you very much.

[Operator Instructions] We take the first question from the line of Rohan Meta from Fycom Family Office.

Am I audible?

Yes.

Perfect. Congratulations on good set of numbers. I have 3 questions. So firstly, how should we think about your cost of borrowing trajectory for FY '27. And what is your outlook for the same? If you could also quantify it because a meaningful part of our book is on a fixed rate basis. So is there a near-term NIM compression risk if borrowing costs rise or do you mean elevated.

So borrowing costs have been steadily declining, I think.

Look, the cost of borrowing for the past 6 months or so. The marginal costs have been declining. Average cost of baking continues to be approximately 12%. While the marginal cost in the past 2 quarters would have been 11.75. What you're referring to is the likelihood of the MCLR going up and on interest rates. I think it that will really start happening in a bigger way. We can say that we're not completely insulated on that. But having said that, you must also kind of look at the Microfinance for the last 2 years, including Namra which is a larger contributor to the entire AUM. Performance was not probably the best that you would, that one would expect. And now as things improve, I think there's a reason for us to also look at advantages in terms of also borrowing going down from that aspect. So in that 2 ways, one thing let me pull it down, the other in terms of our performance having improved likely to kind of Q3 cost of borrowing at the same levels or probably looking at a lower level. I think we seem to be pretty comfortable addiction, not really making any major changes from that.

Got it. Got it. And from the presentation, I see that yields have come off in Q4 versus the last quarter. So I'm trying to understand, over the last 1 to 2 months, have you taken any repricing on both the -- and what is your sort of stabilized NIM outlook for FY '27? I'm talking on consolidated level.

Yes. So as the product mix is changing, you will find some -- obviously, you will find some level of distribution because, for example, if you look at the stand-alone business, the LAP products are at significantly lower cost than, for example, the MSME products. So the product mixes will affect the yields As far as the Microfinance products are concerned, the products are priced differently for lower customers, individual levels versus customers versus different kind of customers. So that mix will continue to change. We have not adjusted the interest rate since the last quarter, although we did in the previous quarter, the quarter before. In Q3, we did modify marginally. But what you are probably seeing is some timing differences and the the product mix changing.

Got it. And my final question is with the consolidated ROE at approximately 2.3%, what is your outlook or aspirations on ROA for FY '27 given that your margins now appear to have stabilized. So where do you see that incremental improvement in ROA. Is it -- should we think about it from the lens of expansion or operating leverage from OpEx or lower credit cost?

All 3 of them notwithstanding any major global disruptions, which is not just a Microfinance problem or the NBFC problem but largely for the whole economy. So notwithstanding any disruption cost to that. We expect healthy growth in the ROA. I don't want to place an exact figure, to be honest, but definitely 3.5%, 4% plus is sort of easy to expect, all things considered, if our growth projector remains consistent.

Got it. And for ROE?

ROE, I mean -- is a function of leveraging as well. So again, I don't want to put exact numbers, but probably if you annualize -- I mean...

So largely, I guess that I think the leverage in the last 2 years have been pretty low. The leverages are likely to move upward as the disbursement and the overall micro finance and unsecured lending picks up, as we've seen in the last 4, 5 months. The leverage should help the overall ROE to move up.

I mean we have numbers that we are targeting a little hesitant to say it out loud.

We take the next question from the line of Ronak Chheda from Awriga Capital.

Yes, congratulations team for the results. My first question is on the OpEx. You did touch upon in your opening remarks. Now that, that transition to a more sustainable OpEx is largely done. How should we think about cost to asset for the year? And then at what scale of AUM do you think it goes to a steady-state number. If you could just talk about how you think of OpEx to asset ratio.

Yes, definitely can talk about that. A lot of people asked about cost to income, which I'm not very familiar with, but yes, cost to assets definitely. So right now, we are at one of the highest levels. So if you look at Microfinance, we are probably around 9% or so, which is higher than it has ever been. I think at our lowest point, probably we were, Vivek, probably close to 4.5%, 5%.

5%.

Is 5%. So quite a bit of a jump and that jump happened due to multiple reasons. Number one portfolio was declining but we will not see the number of employees going down. In fact, the number of employees increased significantly, even in a situation where the portfolio was declining and that is for 2 reasons. Number one, we needed, obviously, people to go collect them during the credit selling, so that was the recovery officers. And second was the separation of the credit people, which is the BCM, the branch credit managers. So all of that added substantial cost on the OpEx side. And previously, people had asked me this and I said that right now is not the time to worry about operating costs. There will come a time to worry about it. And frankly speaking, that time is now. So we are luckily manage sorting out the asset quality issues. And now we will concentrate on bringing the OpEx under control. Largely speaking, naturally as AUM grows as a percentage terms, when the denominator increases, the OpEx will come down. The -- I don't -- again, I don't think that we will ever manage going back to our previous It may be possible to bring it down to, let's say, around 6% in the short to medium term. This year, we are probably targeting to bring it around 7-odd percent. That is the target that we have set ourselves. So from 9% to 7%.

Perfect. My second question is on your products like MSME and LAP now that they have kind of attained a sustainable size. How should we think of the growth, especially on the MSME side now that you're running it at a sizable amount in terms of growth what are you picking up in terms of on ground reality because this book comes with a lot of underwriting effort all -- so can you talk about...

No. So LAP side, I mean, we reached breakeven this year. So started seeing some money there on the LAP side. And that portfolio is relatively stickier because it is long term, as you are aware, the technique was much larger. So all in all, happy with the LDAP product. Obviously, it's not like Microfinance, it's a competitive environment. A, it requires specific type of customer there cash flows to match, a person willing to secure the resistance or commercial property or what have you. And dependent on the paper work being clean as well, so there are a lot of conditions. So definitely, we can expect it to grow by 20%, 25%, but not like a huge jump or anything like that. And MSME as well, we are targeting somewhere around 25-odd percent growth in FY '27. Can we push it more? Of course, we can. The question that when we were deciding the targets and everything with the team, the question was that things have improved, why have improved is the ground level situation much better than it was selecting better. And I think overwhelmingly, the answer was that we are simply selecting better. But the ground level situation remains -- I don't want to say complicated, but there's a lot of questions, there are a lot of uncertainties. It's very hard to predict what tomorrow or next month, next quarter is going to be like with all these disruptive global elements and other things going on. So this is probably not the year to push growth or push growth hard at least. But of course, we will keep recalibrating as the months and quarters go on.

Perfect. And my last question, Aalok, is we've already crossed our should F '27 now actually in F '27, can we cross our peak profitability also?

I wish I know that. I don't know.

That's almost a direct and I wish we could say yes or no there are uncertainties that...

Unlikely, but we'll get it close.

We take the next question from the line of Keshav Karwa from White Pine Investment Management Private Limited.

I wanted to know on the asset quality front, how the April and May collection efficiency trends were? And going forward, could you please provide some color on how are you seeing the trends in MFI and MSME, given the inflationary pressure arising?

So as far as disbursement volumes in April and May, predictively they were lower than Q4, but that is always the case in financial services. Q1 is always lower than Q4. But surprisingly, the asset or 0 DPD and everything has been stable. So there has not been any drop there despite a very, very hot summer and lot of other issues, petrol running out and LPG issues and all of that stuff. So I mean, it's a good surprise, but it is a surprise that we have not seen much of a drop in that in the at least early delinquencies. Let's hope it's not a delayed effect.

We take the next question from the line of Srinath V. from Bellwether.

I just wanted to check on how collections are coming in the delayed buckets, given now that DPD 0 is settled down. any charge later this year that we'll start seeing some level of interest reversals as some of the older customers are getting collected?

I mean a lot of write-backs are already happening. So I don't -- did we disclose that.

In the presentation, probably, annual report in other ways, we kind of gross write-offs -- sorry, the net write-offs. But what we're seeing is write-off connections are fairly good. And as we move forward, I think the collections and the buckets should consistently improve as obviously, customers are also getting for fresh credit, and there is a reason for them to kind of also clear up. We keep on having customers coming up for more settlement than we've seen in the past. So flow order rates are -- if that is your question, yes.

Yes. Normally, the second year after the problem is sold because of the interest reversal, sometimes credit cost even goes to like 0 and negative, you get less write-back into So just wanted to check if you guys have seen that kind of situation somewhere, especially given on a starting book over the last few years, the NPAs were really high, right?

Right.

On loan against the disbursements have kind of flattened out in the last 6 months. How are we seeing that particular business. We did want to fore in South India and get some business from Andhra, Telangana, how's the progress there? How is the progress on distribution of the product I'm aware that it just takes a lot of time to entice customers, but I want to understand from a growth perspective, how we are looking at this property.

As one of the previous callers, but it's not -- I mean, growth and disbursement in this business, as expected, it's not like Microfinance, where you open up a shop and we typically will get customers when it's unsecured. This is secured and it's competitive and everybody is kind of jumping into the product. So that's why you are seeing a little bit of that flat, increased competition, a lot of NBFCs are coming to this product. A lot of the MFIs are also trying to come into this product. And so competition is fine, and we will work with it and happy to have a competition problem than quality problem, honestly. And -- but yes, that is ground reality.

On distribution of this product, where are we in South? Have we been able to open some branches?

So we have penetrated. We are doing at of volumes in Telangana also, but it's a very mature market and there is a lot of competition. So it's hard to, again, not very easy to break into those markets. As you know, the South markets are much more saturated, especially in terms of LAP and secured loans and gold loans and other types of loans than let's say Western India, and Northern India.

And last one, I'll be looking at tapes for NEP. Have we been able to open up that particular bucket.

So right now, we are just expanding MSME. So we have opened up a few branches will open up more this quarter. Once that stabilizes, we'll more than likely go into that market as well.

[Operator Instructions] We take the next question from the line of Rumen Shah from Experience AMC.

I just wanted to understand, in individual micro loans, which we are scaling does the final supply or is it out of the pursue of

So if you're classifying it as a retail, it is outside the purview. If you are classifying it as a than it is within the purview.

So how are you treating this?

[indiscernible]

Sorry, your voice was -- Can you repeat.

Yes. Yes, I'm sorry. It depends on customer profile. If it's a 2 micro customer, which needs its meeting the [indiscernible] RBI as a qualifying asset then that automatically becomes a loan and therefore, [indiscernible] applied following. If it does not meet it, then it becomes a retail loans on our books, and that falls as a nonqualifying asset. Guardrails may still be -- in many cases, the guardrails are still -- I mean they might be only valid under the guardrails as in you are still meeting the criteria, but it depends largely if it's a retail or micro finance.

Okay. So do we have filters as compared to launching Arman 1, Arman 3 what are our internal sales for this kind of low spend?

Any filters. So we are not relying on the simplistic one-size-fits-all credit policies. Largely, we are GMs are in place to evaluate our customer based on their occupation that says cash flows are. And based on those cash flows, we offer a loan. So arguably, I would, at the expense of sounding arrogant or system is far superior than the so-called on-site time that.

So we've also kind of internal way excited because when we're doing the which are probably outside the purview of the guard. We're also only said that the capitals are not new to credit. We are seeing customers in terms of the euro cost of, let's say, [ 700 ] plus. In terms of their standard collection contract -- or mandate. Yes. So those are additional that you might call it winter in terms of reconnection efficiencies that we want to build up. We're taking those necessary steps will be.

[indiscernible] but let me honest with you that the MFI industry has take or [indiscernible] it was, as I said, a set policy where aris today, if you are a borrower in a year large and complicated as India, good customer are 2 lakhs, but [indiscernible] you become bad. It were borrowed from whatever, 2, 3 MFIs you're good. Anymore you become bad. If you have an EMI of [ INR 2,500 ] you're good, [indiscernible] you're bad. I mean it's too when we want that school in Gujarat or Kerala or behind happened all the same. So I'm not saying that guardrails are bad there. I voted in favor of the guardrails. I've said earlier as well because that is what was required to deleverage the overleveraging that had occurred. But in the long term, we have to use past these kind of tailored the credit to customer. There might be many customers who can afford a much higher market and 12,500 and there will be many that can't even afford 6,000 who's to judge what is what is absolutely correct for everybody, right?

Okay. Got it. And other question is assuming that FY '27 is the normalized year, how should we look at the credit cost? Should it be in the range of 2.5%, 3% or more than that?

I think that's a ballpark a good number of 3%. Yes, I think we should be able to pull that off. the macros...

Okay. And last question is...

I would request you to please join back the queue for follow-up questions. We take the next question from the line of Rudraksh Raheja from ithoughtpms.

Am I audible?

Yes.

Yes. So sir, first question on the OpEx side, since you have said that we have changed, tweaked model a little bit, so could you help us understand like what are the levers that we have in our hand to get that cost under control, like what could we do from our side?

Well, in the finance industry, the easiest thing to do to solve all your problems is to grow the book. So whether you are facing asset quality issues or OpEx issues the best way -- I mean the easiest way to do it is to increase the denominator. The more complex way is, of course, to drive efficiencies harder. So we plan to do both, get more work out of people in a more efficient way through the use of technology. Obviously, high volumes are achievable as proven by my team during Q4, where it was probably a record quarter for us, both in terms of volume and growth. And so just execute that properly. And over and above that, if you do that properly, then the AUM will naturally grow and the denominator effect will cut down cost. But Definitely, we are not planning any layoffs or anything like that to cut costs. So we've never done that. I've never done it in the last 16 years. And definitely, we don't plan to do that.

Got it, sir. Currently, sir, it's at around 8%, if I look at consolidated level for FY '26. So what are the aspiration levels that we would aim for to bring it down?

On the side, it's probably closer to 9% or so, if I'm not mistaken. You probably get -- try to get that down to 7%. I mean, at our peak levels, we are probably at about 5%, whether that is achievable now. I don't think so. But 6% is definitely achievable in the medium term for this year, probably around 7% sounds like a good figure, achievable figure.

Understood, sir. Understood. And sir, LAP products has seen a little bit spike on par 30 to 90 and GMP. Is there any reason that we should be concerned about that?

I mean, yes -- I mean, it's the same spike, what do you need to understand that, it's a relatively new portfolio. So yes, we've seen some few cases getting to the 90 in that LAP product. and I didn't think we had much of a problem. No, no, we -- I mean, I guess, every NPA is a problem, but then it's -- the GNPA is up 7.7 -- GMV [ 7.7 ] okay. So probably 4 or 5 cases there seems.

Understood. Sir, what would be the levels of NPAs and credit costs that we would be comfortable in this portfolio as we scale at 20%, 25%.

I don't know. I don't have enough experience with this portfolio. I don't know what is standard. People have told me it's anywhere between 1% and 5% depending on the time of customers and what type of cycle you are in? But in any lending product, it's never going to be 0, secured and unsecured and your security is only as good as your ability to repossess it and also to liquidate it. Now this product, we are not really getting on the fact that you will manage repossessing and liquidity. So it's definitely not going to be 0% or 1%, probably 2% is a good -- is something that good long-term number that we should be happy with.

Understood, sir. Understood. And sir, what could...

Rudraksh, I would request you to please join back the queue for follow-up questions. We take the next question from the line of Vinit Sharma from Param Capital.

Just a quick one on the operating expenses for this quarter. Does it include any one-offs? So like, for instance, the SMU premium or anything which is particularly coming in this quarter...

It does include CGF new premiums, but that is no longer a one-off. I mean at least until the program is active, we are going to cover everything 100%. So that will be a part of the overall cost.

There are coming on a quarterly -- this would be an annual recurrence, right, or a quarter 1?

This is an annual component and a quarterly component as well. So quarterly will be the new the annual one. But I do understand we capitalize those.

Okay. So the annual becomes payable or applicable for FY '27 has covered equally for all the 4 quarters of '27 and there would be a quarterly component, which would be applicable to the new disbursement that we do. So that is dependent on the amount of new disbursement And that would also be capitalized actually. So it's -- so that's only for the quarter for the new disbursement for that first year, it's a prorated amount and hence, it's only applicable to that quarter.

Okay. Got it. yes. I guess one of expansion is also not just to answer this question. There was some costs related to that new labor core in everyone.

So if you're referring to that, I think for both the coming taken together, there is a labor cost impact, which is gratuity about [ INR 1.5 crores ] something like that.

We take the next question from the line of Amit Mantri from 2Point2 Capital Advisors.

Aalok, just on the business, I had a question. So we are seeing a fairly healthy disbursement there. but the book growth is not significant. So for example, over the last 2 quarters, there have been INR 35 crores of disbursements. The loan book has grown by only INR 5 crores. So what is happening here?

So Amit, there was -- the loan book has not grown significantly because there was this INR 10 crores of...

So there was some...

A couple of large ticket loans that we've done, which has seen some early payments loss.

Secured loans were there, but were closed earlier. So the disbursement was higher, but then the AUM decline.

But so these loans are all small ticket loans, right? So in the....

Again, there were a couple of loans -- which were large-ticket loans, and these were kind of less than 6 months and what we did.

Okay. Got it. And what's the...

In the AUM in a particular quarter because they were there on that quarter. But...

Propably should have let them out of the reports and -- we'll probably adjust it next time.

And the OpEx for this year was around INR 15 crores on the consolidated basis. What kind of OpEx are we budgeting in for FY '27?

Yes. So referring in absolute term?

Yes, absolute terms, kind of what kind of growth on OpEx front?

Amit, probably, be slightly upward to will depend on how many branches eventually open up and how things panel. But largely, as saying, we targeted to maintain it or bring it down to about 7%.

We take the next question from the line of Prit Nagarsheth from Wealth Finvisor.

Yes. One is, you mentioned that April, May so far is looking on track and not seeing any worsening in quality. My question is worsen, given that there is a CSM protection for at least 90-odd percent of the Microfinance book, wouldn't that give a lot of protection in the case, the quality gets back?

Absolutely. Yes. Correct. As long as you get the claims, it should cover about 75% -- 72% budget. So yes, that is -- that risk hedge is always there in the form of CGM.

Right. So the reason I'm raising that is in the past cycle prior to the CGFMU guarantees there was a large in the last of higher NPAs. So should we assume that now the NPAs will not go beyond the certain threshold?

Without getting too technical here, actually, the percent NPA should increase because until you file the claim, you're not allowed to write it off. Is that correct, Vivek? Am I saying right.

The net EPS was the ordinance would be lower. -- your provision coverage will remain intact, but let's say the customer wants to go bad, then obviously, they will be sitting on your books to kind of get the claim.

Understood. Okay. The other question I had...

Sorry, excuse me, I'm glad you asked that question because I was just thinking about that maybe a few weeks ago that given how the framework of CGFMU works...

More important.

The gross NPA will unfortunately go up because I'm not allowed to write off the assets until the claims are done and that might not happen at like a year until they become NPA.

Okay. Got it. Aalok, the other question I had was regarding elevated capital. So there seems to be -- I think elevated capital seems to be exiting their position and they still have an 8-odd percent stake left. Do you have a sense by what had or within how much time will they exit their entire position?

I mean I think they are making choice trades, I guess, in the market. There is no pressure on their side to exit as quick as possible or no pressure from us or anything like that. So I don't believe that they have given me a time frame. It could be quarters, it could be years. I don't think they're in any bit of a rush. But that said, I think all investors eventually need to exit that is just industry works. They came in, in '2016. It's been about 10 years. They've been great investors. And we are quite happy with them overall, 0 complaints. And I believe the guy who was a nominee director in Arman Board had resigned in anticipation of exiting event smoothly. That was about 2 years ago, I believe. And so yes, it's not big secret that they are slowly exiting. But as far as the time frame is concerned, I don't believe they are in any rush.

We take the next question from the line of Jaiprakash Kumar from Gorman Capital.

Sir, I have a question regarding -- it's going up quarter on part of item from 0.7% to 0.8%. I think you commented about it, but I missed a comment I couldn't see it. So if you can just give your view why MMPA is increasing and why we are not providing.

Why NMPA has increased by 20 bps.

So as you see right now, the NMP might look slightly higher 1 simple reason that for the last 2 years has seen a lot of early-stage write-offs given the overall asset quality concerns. And based on the performance of individual loan accounts, not just with us but vis-a-vis a lot of others because when we write off, we are kind of look at how we have been performing at this point of time with other lenders as well. And hence, whatever NPA actually sits on the books might be of no agents, leading to a lower provisioning requirement based on the expected loss on those states. Hence, a bit of increase rate, we -- again, if some of these loans are covered under the CDS that kind of comfort would also sit in for a lower provisioning requirement. And hence, changed, you might see, but still, it's kind of across all segments, continue to be lower than 1% for all of them.

And do we see that there is a need to providing for these NPAs coming quarters? Because as of now, seeing that the service cost is low, I think provisioning, maybe there might be some like the recovery or write-offs. But it seems very low as of now, do we think that provisions be increased in coming quarters tests for NPA?

Credit costs that you were seeing in this quarter is a function of many things. There will be certain provision reversals. There will be certain cases which are covered under CGFM, which might not require a full provisioning there will be certain buybacks as well, assets which were previously written off but collected. So as one of the previous callers also said, in many cases, you see a negative sort of a impairment as well, which unfortunately is not the case with Arman. So it's a function of many, many things. But yes, a lower figure is definitely side, especially after so many quarters of sweating over it. So let's see, I think, as I said, it's a function of many things. It's not like let's just provide more. I mean it looks too low, let's make it higher. There's enough profit, let's do this. I mean it's not not the accounting standards are not that simple anymore where a lot of things are in our control to do that. There are ECL models, there are CGFMU requirements, there are many, many factors.

We take the next question from the line of Harit Joshi from Aqualia Securities.

Most of my questions been have answered.

We take the next question from the line of Ronak Chedda from Awriga Capital.

I just wanted to check with you. You said the rejection levels continue to be very high, especially on the underwriting side. So just wanted to take with you in terms of how is your sales team kind of absorbing this kind of pushback when there is so much of a reversal on crown in terms of your ex bucket being at 99.5%, there's parity on the ground. So how do you think of your sales teams motivation kind of in the new environment where there is a credit officer sitting?

Yes. So so personally speaking, it went better than I expected. And largely it is for, I would say, selfish reasons. The ground team largely went through a sort of a hell in the last couple of years. And so any initiative that means their life simpler in terms of collecting money is welcomed by them as long as the memories of the past 2 years remained fresh. So I would imagine once things get better for the next 6 to 12 months. You are right that pushback may start coming from the sales team saying that, "oh, of every 100 cases, if I bring in at 75% that I rejected, then what's the point?" So -- but I think all of these things have a lot to do with culture and tones than any magic formula. And so at the expense of putting our own horn, our culture is very, very good in terms of the ground level team, being on board with risk measures as long as it makes sense to them, whatever they're doing, right? And we take a lot of feedback from them as well. Anything that is not adding meaningful value in terms of risk assessment, we try our best take it out. So if it doesn't make any sense of doing it does because we did it in the past. That doesn't mean that we should keep doing it. For example, I'll tell you that the loan for 30 years in Microfinance that was that third cycle customer is better than second and fourth cycle customers is better than third. It's numerous cycle that I have for new evidence of that. And so while it's important to -- from a customer retention perspective, we don't put so much emphasis from a risk perspective anymore. Just because somebody has been with you for 4 cycles that does not automatically make them. Now we did get pushed back that this is a full cycle customer, why are you rejecting them or why you're not approving a higher loan amount. And so those kinds of pushback comes quite often, and that is up to us to educate them, train them or communicate with them that these are the specific reasons why that is happening. But yes, you are right. It is -- I mean, nothing is simple. Definitely, there are challenges to convince them. And in the finance business, little bit of fights between sales and credit is not necessarily a bad thing.

Yes. And lastly, on your aspiration of INR 5,000 crores of AUM, which we had spoken about a couple of years back. Now that we are past the difficult period in the industry, is that path now clear for Arman as on a consolidated basis to achieve in the next 18 to 24 months?

The last cycle as a bit superstitious, so I'm not going to say anything. That aspiration amount still remains, but when and how we achieve it in...

It's always we better talk about it at some point of time...

Let this are in LPG, petrol and all of these things get over and then probably we'll have a better discussion around INR 5,000 crores.

We take the next question from the line of Bumi Shah from Experience AMC.

Sir, I just wanted to understand what is our provision of write-off policy for the [indiscernible] 90-plus basis?

Provision and write-off 90-plus...

A simple answer our provision coverage ratio on an asset, provision coverage ratio is about 92%.

But that is based on the...

So I'm provisioning requirements on what is the property of -- and the other aspects or because in when the customer comes into default in terms of the age or the tenure of the loan will make somebody -- let to give a case somebody before on a 24-month loan, defaulting in the third month itself will probably require provisioning percentage -- are certified -- are being recertified and that that they scare off those kinds of things what we will not pay that.

We take the next question from the line of Vine Jayprakash, an individual investor.

Am I audible?

Yes, Vinay.

I just wanted to -- if you could throw some light on what is the on-ground competitive scenario that we are seeing? You briefly touched upon it saying that you would rather have competition pressure than price pressure. But generally, what has typically happened after that cycle is that people have burned their fingers, withdraw from the market. And unfortunately, they come back towards the peak. Right now, in the -- are we seeing lesser competition due to withdrawal of the large NBFCs or the multi-asset NBFCs in specifically in MFI. So that was my first point to understand.

Yes. So I'll answer the first point, otherwise, I'll forget it. So the competition now is referring to one of the previous callers was regarding Micro LAP. Competition is always in flux. So there was a time 6 months ago where everybody was talking about diversifying, reducing MFI book and many other things that I think -- I'm not sure if I said it in one of the con calls, but it's like that's music to my ears, that when everybody is jumping into a business that is where we should be more cautious and when everybody is talking about getting out of something, that is something that is a great thing for a businessman to seek a way of paying less competition. On the converts, when people were talking about diversifying, they were talking about getting into Some of the other segments that we have, like MSME or Micro LAP. So in that sense, there was much increased competition in the sort of individual MSME small ticket loans that everybody seems to be doing now calling in different names, but in a sense, it remains a similar product. And a lot of people, including SSBs and everybody started going into these small ticket lap loans as well. So there is much higher competition there. In the MFI space, yes and no. I think unfortunately or fortunately, I think there's a defense mechanism I've always said that people have very short memories. And that includes myself as well probably that few good quarters and everybody says, it was COVID or it was demon or whatever this was and life goes on. And so while people were talking about giving up or getting out of MFI. Many people are putting up volumes back to precrisis level now. There are significant competitors who are facing some issue and other, whether it's liquidity or capital or other things. So from that side, there is much lower competition, but I don't know, I mean it's -- and it's another thing to do. At least in the fourth quarter, I did see a lot of larger players increasing their volumes quite a bit.

Okay. Because if I just zoom out a little, assuming that the total addressable market remains more or less same or it has in fact grown over the last few years. And the total NFI book has actually shown from INR 4.5 lakh crores, INR 5 lakh crores to less than INR 4 lakh crores. And we are now talking of circumspect growth numbers of like anywhere between 20% to 30%, where in the past, we have grown at upwards of 50%, 60%, 70% also in some quarters. So the thought was that this lends some longevity to the business if lending is done prudently. So is this -- and you think about it from a structural perspective on these lines?

Yes, 100%. I think there were many lessons to be learned. And I think, hopefully, people have absorbed them, I know I have. And I think all said and done, we are perhaps slightly better off for it in a strange sort of way. So yes, I mean, I'm not exactly sure how to answer that, Vinay, but things better than they were 100%, things better than ever were I mean it's relative depends on what you are -- what is your comparison threshold.

Sure, sure. Just to round that point of what I was also thinking is that we are being hit by externalities very often till now. And while having accidents at companies in institutions, at an industry level, what has happened in the last year too is kind of self goal by everybody. And now that all of them have learned from that, probably internally, there are stronger mechanisms in place. And then we will go back to business as usual where we work with more externalities and then hope some unknown externality doesn't hit us. So that's my comment on that.

That's good detail, prepared as well.

And my second point was, can you just throw some light on how we are thinking of the solar vertical? What -- which customers are we targeting? What products are we financing some color around that?

Yes. So the solar sort of venture started with -- there is a government program in place wherein you get -- for there is subsidy in place. depends on what state you are in can be as high as maybe 7,750 subsidy that we get from the government for putting rooftop solar. I believe it's up to 30 in the most ideal ratio to get your thing. And so looking at the numbers, it's sort of an easy to convince a customer that listen, you're EMI will be equal or less than your electric bill and then 3 years or whatever, you'll get free electricity And while there is a lot of competition in the urban spaces, I did not find that there was enough distribution or enough competition in the rural spaces, right? And so that's beginning of the pilot. But overall, it's -- I mean, it's too early to tell. So I'm not sure if I want to add anything to that besides the reasoning of why we started the filing.

Sure, sure. Okay. But the yields continue to be in line with our other products and our underwriting practices continue to be similar to other products...

Just if you think about it, what is the profile of customers who would voluntary invest money for a rooftop solar, right? I mean this is not like unsecured personal loan where clearly, the people who want to do it in the rural side will automatically be slightly a bit more responsible, be slightly better off, we have the ability to see long term, right, and many other factors. So we concerned about the asset quality itself. However, it's more the finding the customers that is probably going to be the biggest issue, finding the distribution of dealers because I mean, all of these different manufacturers, you have and Wari and many, many other players. They don't do it themselves. They have a whole distribution channel in place. And there's a lot of confusion. There are thousands of these small to large players. And so sorting them and in working with them will probably be the biggest challenge.

Okay. Okay. Like you said, maybe a couple of quarters down the line, you may have a better discussion around this.

We probably need a couple of quarters, please.

Sure, sure. And my last point was regarding employees -- because again, about a year back, we are talking about some pressure on the employees when they go to collect and then life is generally tough for them. Are those kinds of pressures still continuing? Or have they abated to some extent? There were a lot of journey organization also with employees leading us and all that.

Correct. No. So obviously, that collection pressure, especially the PDX bucket has come down significantly. As far as later bucket collection, now we have recovery officers. So 100%, that pressure has come down.

The digital itself has moved about 35%.

So digital collection itself has moved to 35%. For the individual loan portfolio, 70% plus. So all in all, that's much better in terms of incentives and bonuses and R&Rs the lot is relative, but they need much more money than they have before better volumes and better collections and otherwise meeting targets and other things. So yes, I think it's fair to say that it's much better for them now than it was, let's say, 12 months ago or even 6 months ago.

Very good. And like you said culture is very important, and that is something that we have maintained over several years in the past.

But as far as culture, it becomes more and more difficult to maintain with such high attrition because it doesn't a chance to permit.

Ladies and gentlemen, we take that as the last question and conclude the question-and-answer session. I now hand the conference over to the management for their closing comments.

Yes. Thanks to everyone for joining this call, and please reach out to us or Investor Relations team directly, should you have any further queries. So thank you for joining this call, and have a great evening ahead.

On behalf of Arman Financial Services Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.