CSL Finance Limited (530067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CSL Finance Limited Q2 FY '20 Earnings Conference Call, hosted by Antique Stockbroking. We have with us today the management from CSL Finance, represented by Mr. Rohit Gupta, Managing Director; Mr. Akash Gupta, Legal Head and Company Secretary and Mr. Gaurav Sud, Advisor. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Digant Haria from Antique Stockbroking. Thank you, and over to you, sir.

Hi, a very good afternoon to all of you. Thanks for taking out time. Just one comment on this unusual timing of the con-call, so it's a con-call for the Q2 results. It was mainly because CSL is transitioning to IND AS that the results came late in December, and because it was December and we thought it's most appropriate to do it when everybody is back. So yes, that's it from my side. I'll hand over to Rohit Gupta, who's the MD. He will just take us through how the Q2 was, how the environment looks like and what the company is trying to do in this tough environment. So over to you, Rohitji.

Thanks, Digant. So a very warm welcome to the CSL Finance Quarter 2 Investor Call. I will just like to discuss this. I'm being joined by Chandan, who is our Head of the Wholesale Credit division, along with Akash, who is our Legal and Company Secretary, and myself. So to start with, the last 6 months has been a period of consolidation for our operations. Overall, we feel our performance in first half year for financial year '20 has been good despite the liquidity challenges faced by NBFCs during the period. On a 6-monthly basis, our revenue was up by 10% to INR 30.52 crores in the first half year financial '20. Profit after-tax was up by 18% to INR 13.78 crores in this financial year and this first half year. On quarterly basis in quarter 2 financial '20, our revenue has increased by 8% year-on-year to INR 15.13 crores and PAT has increased by 30% year-on-year to INR 7.26 crores. Our AUM as of 30th September 2019 was INR 318 crores, a growth of nearly 1.41% year-on-year. This was largely an outcome of our cautious approach towards lending in the wholesale markets. In spite of our wholesale book performing well, we were impacted by the adverse market perception towards loan in the real estate sector. Many NBFCs were impacted by defaults in this space and that drove risk aversion among the banks and the rating agency towards loan in this space. In our books, such loans have performed reasonably well and we were able to manage our wholesale lending book well. Given the adverse environment, we chose to be little more cautious and slowed down incremental lending in the wholesale book. We used the cash flows from the wholesale book to fund the growth in the retail SME book. The AUM of the wholesale lending book was -- as on 30th December was INR 249 crores, a degrowth of 11%. However, we continue to grow the small ticket loan in the wholesale segment, which was INR 18.45 crores as on 30th September, a growth of 8%. Given the decline in the AUM of the wholesale segment, cash flows from our wholesale segment remain robust, which were partly utilized towards funding the growth of our SME retail segment. We maintained capital adequacy ratio of 70%, which is one of the best among the smaller NBFCs. We will continue to grow our retail SME loan book using the fund flows from the wholesale loan book till the time we are able to borrow at competitive rates. Our SME segment continues to perform well and our AUM increased to INR 68.62 crores as on 30th September 2019, a growth of 101% year-on-year. We have expanded our presence to Delhi NCR, Haryana, Punjab, Uttarakhand, Gujarat and Rajasthan. And our branch network grown to 18 branches as on 30th September 2019. Our strategy of building out the SME is working out well. As on 30th September 2019, the SME loan book is 22% of your AUM and was 11% last year. This is a good validation of our diversification strategy that we set rolling 2 years back. We will continue to grow our SME loan book and expect this growth to accelerate as the Indian economy rebounds and the stress that you've seen in certain sectors. We remain committed to our strategy of focusing on profitable growth and are working towards making our branches profitable. Win rate into retail SME segment, we had limited experience in running retail branch-driven operations. With the time, we have learned the ropes and used this period to build our internal processes and domain knowledge. As part of this exercise, we have revamped the North Indian retail operations, especially in Punjab and Haryana, and we have hired a new cluster head and are driving branch-wise productivity improvements to make the branches profitable. The tight liquidity and lack of debt availability for smaller NBFCs continues to remain a significant challenge for the industry. Since the IL&FS group default crisis in September 2018, we have decided to maintain a minimum level of liquidity in our books. This means that any given time, we have large reserves of idle cash or unutilized limits than we historically used to maintain. This will allow us to scale up our SME business in terms of any short-term disruption in the market, but at the same time with the negative carry cost, it will impact our bottom line marginally. We think it is a prudent strategy in the current macro environment. We'll continue to review this every quarter. We expect a moderate growth in the coming year. The loan book has performed quite well in the stressful period of last 1 year. We expect the lenders and the credit rating agencies to take note of our performance and start lending again over time. In the interim, we continue to fine-tune our operational metrics and focus on building branch-wise profitability in our retail operations. So that brings me to the initial update from our side, and we are open for our question-and-answer session. Thanks.

[Operator Instructions] The first question is from the line of [ Ankit Gupta ] from Bamboo Capital Partners.

Rohit, just wanted to know your strategy on the wholesale book. I think we per se haven't faced any challenge in terms of delinquency or any issues there, but because of more pressure from rating agencies and lenders, we are not growing much. But from a medium- to longer-term perspective, how do you see this business shaping up for us, let's say, a year or 2 years down the line and the liquidity situation in this?

Yes, definitely. First, we have to understand we are little different from the larger NBFCs in the real estate play. We have only focused on 3 sides. First, the group housing, where it was a last man kind of a funding. The project was complete or was nearing completion and was in the affordable size and where the end consumer demand was there. That was our basic parameters while choosing for any borrower in this segment and that you can say was one of the reasons that we have been able to perform ourself. The another segment which we are and which we have expanded reasonably well during last 1.5 years is the affordable housing segment. When we say affordable housing segment, the ticket size is less than INR 20 lakhs and where we also see that the location is good and the builder is good. So in most of our projects where we have funded on the affordable house, the projects are 90% to 100% sold from day 1. So the challenge of cash flows is not there, who knows this whole affordable housing segment, if the project is sold, the cash flows is very strong and are very predictable. So the challenge on the execution does not come. And as a lender, we were not less than 2, 2.5x covered. So we rate when the project is 60%, 70% complete. So we have a lot of cushion even in the affordable housing segment as a lender when we enter into those projects. And thirdly, has been our builder-flow segment, which has been very, very stable in terms of pricing. And even though demand/supply situation is not -- the mismatches are not great because it's a low-gestation project, typically 12 months to 18 months and demand and supply correct accordingly. So we have been doing in very stable markets of South Delhi and Gurgaon. Where, if you see, our portfolio has even increased little bit. So what is that general perception around the market that real estate is very bad. No doubt, the industry is not doing good. So people who have overleveraged themselves, the -- they are in lot of difficulties. So because of that, we have even become very aggressive during last 1 year because whenever we meet any of our lenders or rating agencies, they are very, very susceptible and the perception they take about real estate industry is that it's extremely bad. And that's why we have slowed down there and we have focused during last 9 months to grow our SME side of the business and where we have done lot of efforts in improving our processes and system and certain -- where revamping of team was required we have done in the states of Punjab and Haryana. So going forward, your question that where the wholesale is definitely in 2 segments primarily, that will be the affordable housing segment and the builder-loan segment. When the perception improves then the market improves, we'll be growing in that segment. It is the group housing segment which we see that going forward, we may not see too much business on that side. So that is what we see the future there. In the builder-loan segment, it's very stable. And the only issue in that segment is that overall the margins of the industry has come down. So as we are doing at a little higher IRR, so the borrowers are little choosy at this point of time.

So -- but as like when the liquidity situation improves from a strategy perspective, this will also remain one of our core focus areas? Or now we'll majorly focus on growing the retail side of our book -- loan book?

Our priority will always be the SME side, but that has also been the -- in last 6-month, our disbursements side we were little slow because we were revamping our existing teams and fine-tuning our internal processes around that segment. Now most of the things have been done with, the first phase of that. And hopefully, we should see that we'll be able -- we will be filling up SME little faster as compared to what we have been able to do last 6 to 9 months. And along with that, definitely where we will see the -- in these 2 builder-loan segment and the affordable side, we'll be growing it, if the liquidity position improves. But going forward on mix, mix will definitely move towards the SME.

Okay. Okay. Okay. Second question was on the borrowing profile. If you think last loan that we took was almost, let's say, 2 to 16x and then it's back from -- in August '18. So what is the main issue that we are facing in getting bank borrowing? In this type, what are the key challenges do you think that you're facing in getting the borrowing from banks?

There's 2, 3 challenges after IL&FS episode we had roughly sanctioned are in principal approvals for INR 40 crores to INR 50 crores even from companies like HDFC Bank also. And -- but they -- all lenders stopped that we will be a little cautious at that time and they all hold up the disbursement. After that when we started looking for borrowings in, I'd say, last quarter of this year, so the kind of rates were offered, we were not ready to borrow at those rates. Typically, the rates were coming between 14% to 16%. And micro MFI companies were little aggressive on borrowing at those rates. We thought, see as we -- where we'll not be growing our wholesale business in the current scenario and our collections has been very, very strong. Even if you see in our investor presentation, where we're doing collections of INR 55 crores to INR 60 crores every quarter from -- are mainly from wholesale side. And as a strategy when we have stopped -- thought that because then the lenders and rating agencies are a little more susceptible and their perception is not good. So we thought of not growing our wholesale business and so we found that there's no reason we borrow at 14%, 15%, sit on cash, do a negative carry because in the last 9 months to 12 months, if you see we have been sitting on healthy unutilized and cash equivalents, roughly between INR 20 crores to INR 30 crores in each and every quarter. So prudently, it doesn't make any sense that we borrow -- if we will borrow, either it has been utilized only towards wholesale, and so that was not perceived to be a segment to be in, in the current scenario. So we strategically thought that not to borrow in that -- the last 6 to 9 months. But at the same time, now we are looking for borrowing. Building new relationships. We are telling our lenders, start with small amounts because even if to fund our SME business, which are our focus, so our cash flows have been very, very strong. We still visualize that we'll be having INR 150 crores to INR 180 crores cash flows in coming 12 months also. So that will help us to improve our mix towards the SME. And now we are also going for -- our review is going with the CRISIL in spite of few of our people, so they go for little less-known rating agencies, we thought we'll go with the best one, even if they are more conservative. So we are testing ourselves and we want to start going little more aggressive in the SME in the sense, after building a good platform and definitely there were few lapses when we just started SME initially. And since 12 -- last 10 months, I'm seeing personally along with the new team, which we have for our help, the senior team. So we have improved lot of processes there. And so we were -- first, our strategy is to improve our mix and we go up to at least 30% to 40% on the SME side and then we will start growing the wholesale along with that.

Okay. Okay. Okay. And Rohit, just one question on the SME side only, so can you briefly talk about what are the -- what are our key credit appraisal process when -- while sanctioning a loan for -- on the SME side? And what is the average yield on the loan from the SME side?

I will just pass on this question to my -- Chandan, who is our Credit Head. And IRR, we are basically working within 18% to 20% and for IRR we are working. The segment and the 3 credit parameters, Chandan will explain little more broadly.

Well, while -- so whenever a credit SME file is sourced to us, the credit screening starts with the proper due diligence. That login settles into you, the basic parameters that is the application form, KYC and other, that is that we are generally into a kind of unorganized sector. So we don't believe on getting too much of financial docs from the customer itself, right? So we have kept our login documents very simple. That is the application form, KYC and their basic banking, whatever it is, whether it is a 6 months available or the best possible way that we are getting. And the other judgment part that is included into the login part itself is their business as well as their residential facts. Once the file gets logged into the system, then the credit manager starts the appraisal process by pulling out all the due diligence reports like related to its KYC, that is a kind of a PAN check, their Aadhaar check, that is a KYC check, that is done from the system and also the CIBIL in pulled then and there. We -- as Rohit has mentioned that we have recently taken Hunter as an additional application for the fraud check itself. So Hunter could be an application that would be controlling the fraud part that is applied with the other lenders too, right? But all these details are available to us. The credit manager makes an initial tele PD with the customer who understand the all requirements. Post that, a kind of initial like the judgment has made that whether the customer falls into our segment or not. Over that physical PD, that is the kind of a face-to-face PD or a kind of business meeting is done at business premises of the customer and the residential verification is also done sequentially by the credit manager itself. If everything goes in line like while assessing any business, he understands about the business model that from what is the cash in, cash out cycle how much is the profit and everything he relates to the industry itself. Once he satisfies all the doubts that customer is eligible for that much of loan amount, he applies that much in a kind of a net reported form that accesses income eligibility. Based that he applies all that formula and derives his eligibility and finds out that how much customer is eligible for, for paying any loan amount and decides on the loan amount itself for -- to going or to go with the customer or not go with the customer. Yes. It normally -- also covers the collateral due diligence. That is also a very important part. We generally -- the income eligible part, we keep our floors, that is kind of a general accessibility. That is 50% of its monthly income that is assessed by the credit manager and the LTV ranges between 40% to 50% at max.

I think your question was as Chandan has explained, so then in our segment, which is an unorganized segment, where you can't have too many data to fall back because we do much of the business from banking. ITR returns are negligible. We'll not give you any kind of -- for you cannot make out from that. So you have to just make out while doing a personal discussion with the meeting, the business meeting with the customer assessing his business, assessing what he has made during last 10 to 15 years or rather what he has built during last 10 to 15 years, what kind of assets he has built, what kind of business he has grown because all that -- if he has made some money, he has -- it has gone into his making of his business or his personal assets. So that is where we get a clue from -- we see what kind of business he is doing and the kind of collateral that is being offered because -- and the one area which we are focusing too much and it's been extremely good for us, has been educational -- education loans, 2 small schools in Tier 3, Tier 2 cities, where we can get little more data about this number of student strength, how long the school has been running, the stability factor, the affiliations with the board and all those, so -- and we get a little more reference check from other customers. So -- and as of now we have roughly around 1,150 to 1,200 accounts. And out of which, school is roughly around 280 school accounts. So school as a component is growing big and I'll give you, average ticket size is also bigger as compared to the SME one. So that is the -- where we are.

So what kind of collateral do you take from these SME customers?

Collateral, in most of the cases, is primarily their residential property and in few of the cases maybe their business property. And we are only doing secure business. So we are not doing unsecured, which is little more easier to scale up and grow, but still we are doing secure business and only a very small percentage of unsecured is there. That is only due to schools, where we see the school is very good, but either it want some amount which we cannot give because we don't want to go beyond INR 25 lakhs to INR 30 lakhs and average ticket size in school is INR 10 lakhs to INR 12 lakhs. So we want to start our relationship with that school. We give them unsecured loan up till INR 5 lakhs. Even that is also cash. That unsecured business is, I think, less than 10% of the total SME book. And on the total AUM, I think it will be less than 1% to 2%.

The next question is from the line of Ravi Naredi from Naredi Investment.

Sir, what is the GNPA level or net NPA level?

I think we have also given into our presentation, our net NPA is 0.3%, and the gross one is around 0.9%, I think.

That is this 0.2%.

0.2% and the gross is less than 1%, 0.9%.

And what is the reason to make the con-call after so long time?

Frankly, we were in the transition period from -- otherwise we have always given -- when we have started making con-calls that we'll be doing after 6 months. So for last 2 quarters, we were transitioning from Indian GAAP to IND AS. And for that we also appointed BDO as auditors -- or not, as our consultants to us to help us during that transition. And the existing version of -- in one -- on one or two sectors were not able to give us those numbers. We have to work on certain numbers manually to arrive for those IND AS numbers. So we will -- so it took time for last 2 quarters to work out on the basis of IND AS. So that we finished -- I think by 15th December, we came out with our results. So then there was the holiday season coming for the Christmas and the New Year, we thought we must maintain our -- and coming back to our investors every 6 months, so that was the only reason.

The next question is from the line of [ Siddharth Agarwal ] from [ Prudent Value Partners ].

Rohit, my first question is for the financial year next year, what is our target for the SME segment, AUM target?

I'm -- with our mix, we just want to improve our mix. So our target of -- in the long term next 3 to 4 years is moving our mix 50% to 60% towards SME. That is our strategy overall. And the AUM will definitely -- will depend on funding our SME business. Our collections are very strong from the wholesale, so that is not a challenge for the next 6 to 9 months to fund. It is only -- till now we have been able to do not big, we're between INR 3 crores to INR 6 crores per month. And we have targeted that we -- on the existing branch network, we are able to do anything INR 8 crores to INR 10 crores per month. That is our target. And we don't want to increase our branches till this -- end of this quarter. And we want to improve our productivity of the existing branches. That has been the focus for last 3 months. There are a lot of revamping that has happened in North. Because of that, the people joining and becoming productive, it will take time. And now that the process has been complete, hopefully the target which we have, we should start receiving those in next 1 or 2 months.

Okay. So basically, if you are going -- if you -- if we aim to do roughly INR 10 crores disbursement per month and so in a year from the audit any book could be roughly of the size of maybe around INR 120 crores to INR 140 crores, something around that size, right? So from INR 70 crores...

No, but it will be bigger than that and it's also a factor of that if we start opening more branches. So our first target is to make existing branches productive and then we will start opening more branches. We have planned for opening more branches every year, so that's from the next year onwards -- so from next financial year onwards. So that will be happening. So one thing is very clear, we are very cautious about the fee. And now we have done with few things internally in terms of our processes, systems are revamping. So we are geared up for improving our disbursements. And hopefully, we should be doing that.

Okay. So overall as of now how satisfied we are from our strategy of moving away from wholesale to SME? Is the transition as per what we expected?

I would say, what we thought of we were little -- it was not to our expectation. There definitely we lagged in terms of the numbers we have thought. And very frankly, for us and very open and frank in my answers, so our focus was more on the wholesale because that was the larger cake and the larger revenue, which was coming on. And I also, as management, was more focused on that. It is only during last 10 months, my total focus and my senior team is towards on building on SME. So we focus on that. And I always believe that unless until we start with the strong platform, where our internal processes, policies are fully in place and the right kind of team is there that exercise took little longer and now that has been done and going forward we should be doing better. But the way we have been able to do till that, we -- I would say, we'll act in terms of what we thought we should be doing.

So it's good that we have been able to utilize this phase for getting our processes in order, but are you comfortable now with the processes, the operational processes whether it is credit or collection or reviews or operationally, how we run the different branches from the urban scoop?

Yes, definitely. As just during the first phase, as it's an ongoing process, yes, the first -- the initial platform which we want to build, now we are fully done with that. And so now we are much more confident, so of course we're gearing up the SME side.

Okay. And sir, on this educational institute lending, this is a niche area for us where the performance has been good and we have been able to scale up our book as well. So can you talk a little bit more about our competition in this area, how is the competition and yield in this particular segment?

So definitely, we are looking for yields between 18% to 20%. Yes, definitely, there's competition from companies like Indian School Finance, Ratna, even now AU Bank has also started doing it, even ICICI in certain pockets is doing it. And Manappuram has also opened a new division for focusing in this segment. Yes, definitely, now few of the companies which were not there have also started looking at this segment, but still I think there is still lot of space. And when you are present in few of the areas as we build a certain domain knowledge about the area and those build your relationship with your -- the people there. So yes, definitely, competition is there in every space. And yes, in last few months, few of the companies have come up in this space also.

Okay. And sir, lastly sir, in this environment where we keep on hearing that the confidence is going down. So the general view is that SMEs are facing a lot more business pressures. So in an environment like this, how are we handling our slippages? Or how are we managing our assets?

Yes, definitely. It's no doubt that the economy is not in the best of the health. And this unorganized and small SME players are facing problems. And it is only by improving your credit policies by strengthening your collection, you can gear up. And as a company we are cautious. And that is why, if you see in the last 1 year, our focus has been to consolidate ourselves. And we always think that if we are able to survive and improve our systems in the period when things are not doing good in the economy, so that we are utilizing ourselves in that phase. So that, as a company, we have been cautious. And hopefully, we should not be losing on that parameter going forward, and we have to -- the dynamic as per the economic situation in the segment we are. So there is no doubt. And I would say, on the ground level, the -- none of the heavy segments are impacted, some may be a little higher, some may be a little less. But overall, the company economy is not in a very good shape.

Sir, the line for the other participant got disconnected. Can we move to the next question?

Yes, please.

The next question is from the line of Dhwanil Desai from Turtle Capital.

First of all, congratulations for a very decent performance in a tough environment. Three questions from my side. So on the wholesale book, I think if I read your presentation correctly, we are planning to unwind the wholesale lap book, right? So I think of the total INR 250 crore AUM, around INR 25 crore, INR 30 crore AUM is what we want to wind up. So anything other than that, that we want to unwind in our wholesale book?

No. That is, we have also indicated last year also, the wholesale lag as a segment will come down because what we are seeing is that though we may be having a very good collateral, but the cash flows are not certain. So our focus during last 2 years on the wholesale side is to fund those businesses where cash flows are predictable and where we have control on the cash flows. And it's only opportunity based however we -- sometimes and we come across any good opportunity there, we may be doing it depending on our liquidity position. So that is not a target segment for us going forward in the wholesale segment.

So is it safe to assume that out of INR 250 crore wholesale book, around INR 220 crore book is something which we don't want to unwind? And as and when we have an opportunity, we will try to focus and grow a part of that book. Is that a right understanding?

Yes, you're absolutely right.

Okay. Okay. And second question is on the SME segment. So can you give me some conduce about the typical SME loan yield tenure ticket size? That would be very helpful.

Yes. Our average yield on the SME is between 18% to 20%. And tenure, we are restricting ourselves between 5 to 7 years because there's a lot of pressure and demand from the customer side and the industry. We are still doing between the tenure between 17- to 15-year kind of a product. But seeing what has happened and going forward, we don't want to go beyond a tenure of 7 years. And going forward, our -- we want to be within 5 to 7 years tenure. And -- so I think...

I mean the end use for this SME loans when the tenure is 5 to 7 years, is it to kind of put up some kind of a CapEx for the business owners? Or is it something else? I mean what is the end use for the money that you disburse to SME?

First of all, we are not typically SME -- we are micro SME. So you have to understand our -- profile of our customers. They are small kirana stores, maybe garment stores, small restaurants, dabhas, workshops, fellow -- wholesale vegetable provider. So these kind -- these are the kind of profile of our customers. Definitely, whenever we disburse and short -- it is for their business use, but you are not able to control the end use. So partially, it goes towards their business expansion and partly it goes towards maybe paying off their unorganized loans from the unorganized sector or maybe creating any additions in his existing house or purchasing some other residential piece. It can be mix of both. So everybody will see that we are giving for business purposes, but nobody is ready to take in tranches. Neither -- none of the industry player is giving tranches. So whenever you give a single disbursement of INR 3 lakh, INR 5 lakh, INR 7 lakh, you can't control. There is no mechanism where you can control. We definitely monitor those end use, but the control can neither happen if we group milestones or tranches lending. So that doesn't happen in this industry. So to say -- companies can say -- we can say it goes toward business purposes. But practically, even if we think that 40% to 60% is utilized for business, it is good enough for you. Even if he is paying off his higher cost debt informally, that also is helping you.

So I think if you don't have a control on the end use of the money that you lend, how do you derive the comfort on the repayment side? It is the cash flow-based assessment that helps to derive comfort on the repayment of that money? I mean how do you think about that?

Definitely. I will just after give the line to Chandan also. Definitely, we derive our comfort only from this cash flows, from the existing business he has, what he's proposing to use additional money which we are lending from only the cash flows. We are very, very cash flow-based lender. We only first and prime most are what we see the cash flows from existing business. And collateral is the additional comfort which we take and that is mostly a residential property. So -- and I think Chandan will explain a little more on this side.

Look, if you talk about the comfort, that -- the end use, right? The end use that Rohit has rightly mentioned, that is tough to monitor, but most of the -- by our assessment, we generally propose that most of the end use go towards the business itself and 10% -- maybe 90% of the cases. And in 10% of the cases, we assume that it could be for other purposes too. But the main purpose is to getting our EMI back, that is based on the cash flow itself, whether it's a business purpose or for other purposes itself, the main flow or main thing is that, that you are getting enough cash flow from the business that would suffice to service your EMI liability.

And none of in this segment who was doing INR 3 lakh to INR 5 lakh kind of a loan, nobody can control the, I would say, end use through their lending process.

Yes, yes. I get that point. No -- so I mean, that is how it happens in microfinance and a lot of other micro SME segments. So almost -- and almost everybody equals what you are saying.

Specifically, we are a micro SME lender. We are not an SME lender because SME is a little too big definition. Even a company doing up till, I would say, INR 5 crores, INR 10 crores can come into that, but our segment is micro SME customer borrowers and based in Tier 2, Tier 3 cities and that too on the outskirts of the cities. So because of the IRR where we are. So that is where we want to create our domain niche and our domain knowledge, while keeping ourselves into only one segment. So we have chosen ourselves to be into this micro SME state and the educational loans only. So a lot of discussions happened that why don't we move ourselves and move into a lender which is you get much more data who are GST compliant. So we thought as a smaller company, we have to build our niche and our domain knowledge in one or two segments only. And for us, if we are able to prove ourselves that in the high IRR segment if we are able to build our domain knowledge and niche in that segment, so I think we will be a little different. And -- so cautiously we have chosen this space.

Sure. Sure. That's very helpful. And lastly, any kind of a warming up you are seeing in the lending environment in terms of lenders' willingness to start the talks of kind of disbursing more money. And you have, I mean, done reasonably well in terms of your credit quality and everything, in all your collections, everything. So any kind of green shoots are you able to see from your discussion with lenders?

Definitely, we have been getting, I'd say, feelers from a lot of lenders during last 3 to 6 months. Just 2 primary things. First, the cost of borrowing. What we were getting in the last 1 or 2 months, now, I think the liquidity position has improved. Earlier, what we were being offered, our cost, including other all expenses which is not less than 13.5% to 14%. Now we are getting feelers that we may be able to borrow between 12% to 13%. And now we are looking for those relationships. Secondly, we wanted to go for a rating review also that is happening. And I think by the end of this month that will also come from CRISIL. We thought that will also add value to our prospective lenders. And thirdly, we wanted to improve our SME mix. So people -- lenders see real estate from outside and say it's -- no, it's a very tough segment. And in spite of we showing our -- all our books and every account, still they have a little -- they say we have been cautious on this segment. So all those 3 things that -- this mix will also improve in 6 to 9 months. At the same time, we will start looking for new relationships even with a smaller amount. And for us, if we want to improve our mix towards SME, we don't need funds for the next 6 to 9 months. Otherwise, what we'll be doing, we will be just keeping that fund idly and having a negative carry. So that has been the reason. And definitely, we are able to improve and grow our SME business and come on to the metric which we have planned. So raising funds for us in future should not be a challenge. For us, we are sitting on a very, very strong capital adequacy, which is 70%. So we raised INR 145 crores, out of which we have repaid more than INR 40 crores. And given that still we are sitting on unutilized limits of around INR 25 crores to INR 30 crores. So our cash flows are between INR 15 crores to INR 20 crores every month. Wherever our SME disbursement has not crossed INR 4 crores to INR 5 crores during the last 6, 9 months, which has been a little -- not a good one weak point, which we are not -- where we were -- feel ourselves that we have not performed good. And going forward, our focus is to improve that disbursement with the existing branch network of INR 8 crores to INR 10 crores. And the day we start doing those targets, we will be increasing our branches also. So that is our strategy.

[Operator Instructions] The next question is from the line of [ Ankit Gupta ] from Bamboo Capital Partners.

On the SME strategy front, we started from north and then we moved to Rajasthan and Gujarat. But in our presentation, we have maintained that we want to grow majorly only in the -- only in Gujarat primarily. So any reason why we don't want to grow much in the northern part of the -- northern India?

So therefore -- very frankly, our pain point has been north, maybe due to certain -- in the starting, we started our operations from north. And the 2 senior people who were there at that time, we may started 2 things, our policies were not formalized fully. Or secondly, maybe, there, maybe, the team was not good. But as a whole, we see that credit culture is little weak in north as compared to our portfolio is very good both in terms of Rajasthan and Gujarat. And the second strategy which we have changed in our SME business during last 10 months is to grow in a cluster form. Because as a smaller company, we may not be so big to increase the presence from day 1 in the whole of the state. And our product is more meant for Tier 3, Tier 4 cities or small towns and tehsils and outer part of the Tier 1 cities. So we want to grow cluster. See, we are in a district, we go into tehsils and cover that full district, then go into the second one, which we have started doing hub and spoke location. Where the spoke location will mature and see certain size, we will open a full-fledged branch there. So instead of our earlier, say, strategy by the previous which we had initially by opening branches in bigger cities, now we will be moving into smaller cities and a cluster approach. So cluster approach sometimes helps if some attrition happens in any certain branch, the immediate branch which is 25, 30 kilometers away helps us as a strong support function. So with that strategy in mind, your presence is felt in that district also, if you are present in that district and tehsil. So we are able to create more presence than having one branch in a bigger city where you will -- your presence will not be felt. So that is also one thing which we want to correct ourselves, which were a little initially the business had done those days to open branches in bigger cities. Now we are correcting ourselves by opening spoke locations, maturing those spoke locations and forming a cluster within a district.

Sure. Sure. Sir, in this segment, we will also be competing with microfinance companies because they are also looking beyond micro loans and are also getting into INR 3 lakhs to INR 5 lakhs, INR 5 lakhs to INR 7 lakhs kind of lonely category. So in terms of competition intensity, how do you think -- like, what are the major competitors in Tier 3, Tier 4 cities that we operate in?

The major competitors, HDB, you will always find in few of the pockets. AU also coming up, but definitely, they are not in that segment. We are -- in Rajasthan, we are having competition from Finnova and in few of the pockets, it's maybe IIFL. So that is our major competitors. So through loan's way, we have competitors from [indiscernible] Finance, Barsana and ICICI also.

Sure. Sir, is the microfinance companies are not competing in this segment -- in this INR 5 lakh to INR 7 lakh or let's say no, this is relatively larger ticket size loan for them?

No. We do not feel any competition from the microfinance company. Reason being that they have a different kind of business model that they are operating. Actually, the microfinance company is majorly focusing on the SHG or JLG kind of loan structure.

Here also -- he is also coming into the bigger ticket size.

Now if you talk about the retail loans, we are majorly focusing on secured retail loans. Microfinance companies generally don't. SHG, JLG were kind of unsecured retail loans, right? We are giving INR 1.5 lakhs to INR 2 lakhs or maybe up till INR 2.5 lakhs, INR 3 lakhs to a person who was their existing microfinance borrower, so that who borrows in that segment, they are giving a little higher limits. So it is unsecured. And -- but unsecured is a little more easier to grow, but we see that there are a little more challenges where we have -- in the unsecured space as compared to the one we are. So we only just want to remain. The -- our unsecured space will be only on the educational side, but SME will be totally secured one.

Okay. And just last question on this issue of loan against security. Can you just briefly explain what is the major issue in that loan that they have given?

Ratio of -- the LTV is not more than 50% in any case. Normally, we remain at 40%. In the case if profile of the customer is very good, we may go up to 50%, 55%, but an average will be less than 45%.

[Operator Instructions] The next question is from the line of [ Shankar Dutt ]. He's an individual investor.

Sir, it's good to hear that we have been able to get our relationships with other lenders and we are getting some encouraging response now. So have we got any of these loans and will it be sanctioned even for smaller amounts in the last few months?

[ Shankar ], we have just started looking up. We have few proposals working on and we are waiting for our rating thing. And so after getting rating, we may be shortlisting or may be finalizing 1, 2 or 3 deals. And even our -- we have also started looking for scrutinizing of our existing book which we are in discussion with 1 or 2 lenders. So the first thing which we are looking at is our rating, which should happen within next 10 to 15 days. And after that we may brief. So we are thinking that it may help us to negotiate a little better rate. So that has been the reason that we have been waiting for -- not borrowing during last 2, 3 months.

And sir, second question is regarding the builder flow segment. So this segment, as I understand, is relatively stable that the collateral values are -- which may be stable. So why does the segment -- why it is difficult for this segment to borrow directly from the banks? Also, why are the banks not interested in lending to this particular segment?

So the banks are always reluctant because in that segment part we lend from the perspective of the project. We see that project has a certain value. He has put his x amount of equity into it, which is normally 50% to 70%. So we lend only 25% to 40% of the project value. Whereas, the bankers will see his personal data, his personal balance sheets, his incomes, which may -- they may not be showing in their books. They may be having loans from friends and relatives which the bankers may feel -- they think is -- normally it is the, you can say, borrowings from very close -- may be borrowing his own money from his family and friends, which bankers perceive them as loans. So our charges on the project we see from that side and now 2 or 3 companies have also started looking into the space, which we are in which were not there, like European Corp, DMI. They are also looking at the same space. The only factor that why we are not able to grow or increase our AUM dramatically, 2 things. First, this segment is little rate recessive as we are doing because you don't have too much liquidity and we are getting transactions. We want to do few transactions, which we are getting our own rate. If we just want to be little more aggressive, we come down as I have told this thing in last 1 or 2 conference call also. The moment we want to grow and we -- the liquidity position improves, we reduce our rates by one to two notch to the 100 to 200 bps. We can increase our market share and the AUM. And secondly, overall the margins have come down, which hopefully when the thing -- economy improves, the margins on the builders will also improve and that will also help us to grow a little better. One thing is very good in this segment that even if the loan goes into technical NPA, it will not be lost account because we have a very strong and stable collateral to fall back. So where loss of even in trust will not happen, even if we have to go through the recovery process.

Okay. Great, sir. And sir, finally, the last question that I have is regarding the operation of our branches. So we have 18 branches open till now, so how many of them are profitable? Or in other words, sir, how long does it take for a branch to become profitable in its own price?

Normally, we have planned that the branch should become profitable after 6 months from the date of opening, which normally where we plan that every branch with a typically 3 to 4 SMs should be doing INR 60 lakhs to INR 80 lakhs kind of a business, but that has not been the case still. We were not able to achieve those desired productivity levels which -- and there were few -- you can say, there was few gaps in that which we have tried to improve and fill by improving -- building our policies and procedures around that, the operating system has become stable and we have revamped our certain teams in certain pockets of our North India. So till date, our productivity level was not what we desired. And hopefully, those levels should come in next 6 to 12 months. And till now, barring few branches, the other maybe at breakeven or maybe small and almost nominal losses.

As there are no further questions, I would now like to hand the conference over to the management for closing comments.

I think I would like to thank all of you. And so maybe few people were surprised that why you are doing a con-call at this time. It was just to contain that we'll be coming back to our investors after 6 months and wish you all a very happy new year. And hopefully, we'll be seeing a little better times what we have seen during last 12 months as an industry and as a company, also. So thank you very much.

Thank you. On behalf of Antique Stockbroking, that concludes this conference. Thank you for joining us and you may now disconnect your lines.