CSL Finance Limited (530067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CSL Finance Limited Q2 and H1 FY '25 Earnings Conference Call hosted by TIL Advisors Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sayam Pokharna from TIL Advisors Private Limited. Thank you, and over to you, sir.

Thank you, Lizan. Good evening, and thanks for joining this Q2 and H1 FY '25 Earnings Conference Call of CSL Finance Limited. The investor presentation has been already uploaded on the stock exchange and on the company website. In case anyone does not have a copy, please feel free to write to us. To take us through today's results, we have with us from the management team, Mr. Rohit Gupta, Managing Director; Mr. Amit Ranjan, Chief Operating Officer; Mr. Naresh Chandra Varshney, Chief Financial Officer; Mr. Chandan Kumar, Wholesale Credit Head; Ms. Rachita Gupta, Whole-Time Director; Mr. Deepak Sood, President, SME North; and Mr. Atul Agarwal, President, Finance & Treasury. We will begin with a brief overview of the quarter and of the half year from Ms. Rachita Gupta, followed by a Q&A session. Please note that any forward-looking statement made during this call should be considered in conjunction with the risk and uncertainties that we see. These have been outlined in our annual reports. With that, I would now hand over the call to Ms. Rachita. Over to you.

Thank you, Sayam. Good evening, everyone. Just to make a short note, Mr. Naresh Varshney is not a part of today's call, couldn't join in today. So thank you, everyone, for joining us today for CSL Finance's Q2 and H1 FY '25 Earnings Conference Call. I'm pleased to provide you with an overview of our performance and key developments during this period. Our financial results for Q2 and H1 FY '25 reflect a mix of challenges and opportunities. The AUM growth has been a little slow, standing at 22% year-over-year and 2% quarter-on-quarter in Q2. This performance is primarily attributed to external factors and internal adjustments, which I'll elaborate on. The SME segment faced some headwinds during H1 FY '25. Lower disbursements were observed due to severe weather and heat wave conditions in Northern India, heavy monsoons and partial flooding in some Western markets. Apart from weather-related changes which affected both disbursement and collections, there were some election-related disturbances and internal productivity issues, which also contributed to tepid AUM growth. In the last quarter communication, we highlighted the latest change in RBI policy and booking disbursement, which requires funds to be credited to borrower's account before booking disbursements, while originally disbursements were booked on check issue date, the prevalent industry practice at that time. While this adjustment took longer than we originally anticipated, we believe it will yield long-term benefits by reducing cancellations on sanctions and ensuring more accurate business booking. The team had to be aligned to the new policy, which we now believe is completed. On a brighter note, our wholesale book continues to perform well, benefiting from a conducive business environment and a thriving real estate industry. The deal pipeline for the wholesale book is meeting our original expectations. As a result of these dynamics, our SME retail to wholesale AUM mix has shifted to 39% and 61%, respectively, in favor of the wholesale book over the last 2 year -- 2 quarters. We believe this is a short-term trend. And as the SME retail segment gets back on growth track in H2 FY '25, we will again start moving towards the growing SME retail mix. In the light of the macro environment and RBI's concern about unsecured lending, we've also tightened our credit policies and systems. Our new LOS for LAP is scheduled to go live in November, which will also support this initiative. Regarding provisioning, we have taken a conservative approach. Write-offs for Q2 and H1 were higher, primarily due to Suvidha loan book. We have written off all accounts 90 days past due. A total of INR 3.2 crores has been written off out of the cumulative disbursement of INR 15.84 crores in the Suvidha book. We do expect decent recoveries from these write-offs over the next 12 months as we have demonstrated in the past. It's worth noting that we maintain a healthy provision coverage ratio of 224%. Our total income is in line with AUM growth. However, net interest income growth has been slightly lower due to lower AUM growth and lesser fee income in Q2. Net profitability experienced a 3% Q-on-Q decline, mainly due to higher provisioning in the Suvidha book and higher -- and some higher slippages in the SME retail book. There was also an impact of increased operational expenses on the PAT. These are mainly related to our branch expansion plan. On a positive note, our year-on-year PAT growth stood at 20%. And due to its superior cost control, the company has maintained higher ROA and ROE as compared to industry averages. We have made significant strides in expanding our operational footprint. This quarter, we added 8 new branches following the 5 additions which we had done in quarter 1. It is important to know that our branch count was 29 at the start of the financial year and now stands at 42. This expansion has naturally led to an increase in our stream strength and associated operational expenses, which I alluded to earlier. We've also strengthened our lending partnerships, adding 3 new names in this quarter. These are Bajaj Finance, Ujjivan Small Finance Bank and Capital Small Finance Bank. Our liquidity position remains strong at INR 63.6 crores, supplemented by a INR 100 crore DA line from SBI. I would also like to update on our Suvidha product. Following our earlier communication, we have created a new platform based on learnings from the first pilot launch. However, given current industry scenario and regulatory caution on unsecured lending, we've temporarily put the launch of Pilot 2.0 on hold. Also, given the feedback we've received from our team and the practical challenges associated with the product, we would like to relaunch it once we have full clarity on the behavior of the borrower, associated [ rates ] and a better external environment. Considering the impact of various factors on our loan book growth in H1, we've revised the AUM target for FY '25 to INR 1,250 to INR 1,350 crores from the previous INR 1,350 crores to -- ranging between INR 1,350 crores to INR 1,450 crores. We expect the consolidation in our SME retail book to conclude in H2, and we anticipate improved AUM growth in the coming quarters. In conclusion, while we have faced some challenges, we remain confident in our strategic direction and our ability to navigate the current market conditions. We are committed to maintaining our focus on prudent risk management while pursuing sustainable growth opportunities. Thank you all for your attention. We'll now open the floor for questions.

[Operator Instructions] The first question is from the line of Anil Tulsiram from ContrarianValue Edge.

Sir, in FY '24 annual report, you have given guidance to double the AUM over the next 2 years. My question is more on the availability of funding for this growth. RBI is constantly pushing NBFCs to diversify their sources of funds beyond banks and NBFC. So what are the steps we are taking for diversification our funding source? So that is the first question.

Yes, yes. Thanks, Anil. If you see, as a company in the last 3 years, our number of lenders have grown from 4 to 32 as of now. And we are constantly exploring and increasing our number of lenders, both from large private sector banks and PSUs, large NBFCs and small finance banks and other sources, other -- as you said, that RBI has told especially the larger ones because we have a better ability to raise funds through bonds and external commercial borrowings, so that will be a focus area in coming years as of now. And still, we have a lot of other lenders, which we have still not onboarded. And as a company, being a total secured book, we don't foresee largely a true challenge in the coming next 3 to 6 months in raising funds. But yes, definitely, we have to look for other sources, but being -- raising funds through bonds and other borrowings at this time will be more costlier than the existing lines of credit that we have.

Got it, sir. Next question is on the co-lending partnership. So who are -- how many co-lending partnerships do we have? And what is the plan for the next 3 to 4 years for both wholesale and retail? And what percentage of book we wanted to contribute over the next 3, 4 years?

The co-lending, we have built a lot of relationship with -- on the SME side with the PSU bank, namely with IOB and Tata Capital, so DA, and we have a line of DA from SME from State Bank of India. And there was another DA with [indiscernible]. So we have already built 4 relationships. So either we are being DA or co-lending, I would say one is the same thing for us as a lender. And on the wholesale side, we have built small relationship with [ DSCI ], Kotak, Bajaj Finserv and the NBFCs like Rajasthan Global. So we have a huge relationship with Rajasthan through co-lending also. So we'll be exploring more opportunities on both wholesale and retail. In the retail, we do have a DA line of INR 100 crores from SBI, which we'll intend to use in the next 3 to 6 months. Yes.

Because of the size of the company, do you see any reluctance from the PSU banks to enter into co-lending partnership with you? Because I'm talking co-lending, not [indiscernible]. Co-lending book still remains quite small for us, so can you elaborate more on this?

Co-lending, well, we are also very not keen on co-lending at this stage on the retail because in co-lending, we do a soft sanction and it goes to a lender to approve that and that will increase the cash. And so the segment we are in, it will delay our decision-making. And for us, it is more practical to do co-lending 2. And most of the companies are doing co-lending 2, which is where you onboard the customer on our own book and within 30 to 60 days, we do 80-20 model. So that is the most prevalent model and that, we have done with IOB and where we see a lot of opportunities, even the State Bank is also on the same model. Yes. So most of the companies are working on co-lending 2 and we are already working with -- on co-lending 2, 3 of our PSU lenders.

Got it, sir. And last question is on our credit rating. We used to have ratings from CARE and then we shifted to Acuité. My question is CARE, ICRA and CRISIL are considered the top rating agencies. And from the top 3 rating agency, we moved to someone who is not considered a top one. So what's the reason for the same?

So they do have their own internal, I would say, certain benchmarks, which sometimes as a company, they were saying a very broad board and a certain size of your AUM, which sometimes overlooks the other strong financial parameters of the company, whether on the capital adequacy, whether on the profitability, whether on the ROA, ROE. So based on that, we thought that -- and most of the lending in NBFC is on the rating -- based on the rating. And in due course, definitely in coming years, we'll be approaching these big 4 rating agencies also to get the rating done.

Got it. Sir, I have one more question. Can I ask? Or should I join the queue?

Sir, please continue.

Yes. Sir, in SME, in the presentation, we have products from INR 2 lakh to INR 5 crores. So two questions. First, what is our focus ticket size? And second is what's the thought process in having products beyond INR 15 lakhs? Because given our cost of product, we have midsized LAP also with the ticket size around INR 2 crores. So SFB, NBFCs are already quite active here. So these are the two questions.

If you go through our presentation, Anil, our SME -- micro SME is between a ticket price of INR 5 lakhs, INR 7 lakhs to INR 25 lakhs, INR 30 lakhs primarily. And between INR 30 lakhs to INR 50 lakhs, we are only doing for our school loans, maybe up 'til INR 75 lakhs. But largely now the focus -- one of the reasons for slow growth on the SME was also that we strategically shifted our -- the ticket size from INR 15 lakhs to INR 30 lakhs. That is, we think, is a very good ticket size, where quality of the borrowers, the collateral and the profile of the customer is better than doing less than INR5 lakhs, INR 7 lakhs, though where you are able to get high IRR. But in terms of practically, it is a segment which you can say unsecured on the face of it, though being categorized as secured by large -- most of the companies. Because those properties, the title documents which you are getting and second liens are very marginal, customer in a Tier 3, mostly the rural customers, getting the position of those properties is practically very, very difficult. And neither for companies, for us, SARFAESI is not applicable. And strategically, we have chosen that we are doing a ticket size of less than INR 10 lakhs also, but we have restricted ourselves not to do more than 10% to 15% of our portfolio, and we will see the risk in the going forward, how that portfolio perform. So for us, the quality has been the foremost and that was also one of the reasons that the slippages which as an industry everybody was seeing and we also witnessed certain slippages. We were more cautious of that fact and strengthened our credit policies. And so as of now, our -- the ticket size which we are focusing is on between INR 15 lakhs to INR 30 lakhs on the micro SME and the school loan, still up to INR 75 lakhs. And INR 5 crores, which you are seeing is a medium [ MSL ] loan, which are under the bouquet of SME loan. But that segment is totally different and that is only, I would say, 15% to 18% of the SME bucket. And the ticket size is INR [ 170 lakhs ] and which we are primarily doing in the NCR region only, and we are not doing that product from our branches. Micro SME retail book is less than INR 25 lakhs, INR 30 lakhs, that is where the focus is. And going forward, our focus is between INR 15 lakhs to INR 30 lakhs.

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

So first question is that if I look at our write-offs, net of Suvidha, we have done around INR 3 crore write-offs in H1. I think that's a very respectable number given how the situation on the unsecured side is shaping up on the SME and retail side. So can you give some more color as to how the things are on ground for our portfolio? Are we seeing any stress? And going forward, how should we look at the slippages and GNPA numbers for the retail book?

Firstly, the -- most of the write-offs [indiscernible] that was in second -- full half year is only from the Suvidha unsecured fabricator book, INR 2.0 crores in this quarter and INR 1.5 crores something will be in the first quarter. So roughly around INR 3.5 crores we have done from the Suvidha book only, which was -- which we started just 12 -- 9 months back as a pilot giving loans for purchase of raw material so we just arranged this [ scheme ] with a very large company. But we found that there being an unsecured book largely, you can say that the secured [ somewhere over ] the receivables, but we will treat it as unsecured, very marginal borrower and no control over their receivables. And we have seen that certain wrong ethical practices have also been -- when these kind of products, which 30,000, 40,000, 50,000 kind of products happen with the team, and there are always chances of those unethical practices to get percolated into your segment. So we have completely stopped and completely written off. As of now, we are 100% secured book. And you can see there was a strategic shift towards retail. But in last 2 quarters as the retail was not able to grow that much that we've foreseen, so the focus has been on the -- it has shifted towards wholesale. And so now in terms of what kind of slippages which we are seeing, I think Amit is also there, Deepak is also there, they can give a better outlook. So can we put into Amit about whatever -- how they see this market, which we are in and what kind of slippages as a company. And then Deepak can put on his own view. And if anything, I can also explain. Yes, Amit.

Am I audible?

Yes, please.

So in terms of what Rohit has said, conditions were a little tough for SME and the businesses which we have done has been not at a great pace, which we anticipated because of the reasons he already explained. But in terms of slippages, we don't see much of it. Obviously, it's an SME retail book. There are chances of some slippages, but it will be not of that level that it is going to impact the book because now on, from Q2, which started from October, we are targeting to at least have a good disbursal so that the denominator also increases. By that, we are controlling all the par levels also and the team is totally aligned for business and collections. And we foresee that a lot of recovery we are going to do in coming months. So the slippages will be there, but we will be able to minimize with the recovery, which we are going to do in coming days.

Just to put a point, Anil. As a company, if you have seen that being a secured book and we are very focused on strong collection and through legal and collection team. We are able to recover more than, as we have already shown, that with the lag effect of 15 to 18 months, we are able to recover more than 90% of our NPA, and we are very confident that whenever NPA happens, we are able to resolve within 6 months to 24 months, and the same will be the similar going forward. And there may be certain slippages, but it will be controlled through collection and from the existing NPAs. So Deepak, do you have anything to add?

My only point in addition to what Rohit sir and Amit sir said is that we are continuously monitoring our policies towards credit and collection. And we are tweaking them as per the market requirement because, yes, the situation in next couple of quarters definitely seems a bit tight. So we are working on that. We have a very robust collection model in place. So I'm sure slippages might be there, might not be there. But yes, we are prepared for that, and we'll be able to handle that effectively. Thanks.

Okay. So again, coming back to this. So net of the Suvidha write-off was close to INR 3 crores in first half. So whatever is the gross slippages number, net of that is what we see going forward? Or do we see any incremental numbers for H2? Because Suvidha is completely written off, right? All 90-day DPD, you mentioned it's written off completely.

That was from Suvidha loan. So Suvidha loan book is not there. We will be able to see some recovery. We may be able to recover 50% to 60% in the next 12 months and rest may be unrecoverable. And that is the case of Suvidha loans, not of our core SME division, which is totally secured. And in the secured one, we see what kind of additional slippages that may happen that may be in the tune of, I would say, 2% of the book -- 2% to 3% of the book in the next 2 quarters, but that will be nullified to the extent of 50%. More than that will be nullified through the collections from our legal and collection team. So we don't -- we are not seeing any substantial additional NPA on our SME book. At absolute level, there will be, but it will be nullified by the collection from the existing NPAs and the write-offs.

Got it. Got it. So now coming to the retail book growth. So you mentioned that for various reasons, we have kind of closed down on the retail side of it. So how do you see it from H2 picking up? And let's say, our target of reaching 50-50, again, we will start the journey from 40% toward that 50% in H2? Or you think that you will wait out a couple of quarters and then probably start growing the retail book?

So Anil, I'll answer this. Whatever things which have happened in the H1 is not going to be repeated, and we are very much aligned and we are very much clear that the path from here is to do business, and there is no stopping because whatever things which has happened in the past, we have taken certain steps on the credit underwriting. We have taken certain steps on the geographies, which is not doing great. We opened a few branches, we are going to stabilize that. So hopefully, I don't see any challenges in coming months. And with this month, which is November, and as you also know that the RBI has their own policies in place and then we have to implement each and everything. So we have gone through all those phases in the past 4 or 5 months, and that is the reason the growth was a little slow. Although the team were doing all the businesses, we have reduced the ticket size, the focus was on the micro LAP so that we cater most of the MSME clients. So from there now, eventually, we are gradually focusing on INR 15 lakhs to INR 30 lakhs of loans wherein the volume will also come, the business profile of the client will be a little better from the micro loans client. And there is nothing left where we should be saying that we will be doing less of loan, and there will be a challenge in coming base. I don't see that because this is the last 6 months where a lot of NBFCs or FI do max business. And we are totally ready for that. And we have been -- all the platform's ready. With the new LOS coming, a lot of integration is already done. So the fast processing will be there. And the good thing has happened that we are -- everyone is aligned with the new processes and policies, which we have right.

And I'd like to add one thing that as a company, we always believe that to have a stronger ROA, ROE, if you think both are above par as per the industry parameters, industry peer comparison, if you see in our size with companies from INR 500 crores, INR 700 crores to INR 2,000 crores AUM. So -- and as a company, we are very focused and we have a very robust book in terms of quality also. So we are never into the business of target-based lending where few of the NBFCs, where they are very aggressive lending and compromising on the quality and certain credit parameters. And that is going to play out in next, I would say, 2 to 3 quarters. So definitely -- and our wholesale book is also helping us when the things were a little down on the SME side in the first half. So as a company, we are much more balanced. Though we have reduced our target, we could have easily achieved certainly the higher allocation of the wholesale book, but we thought that our strategic shift has been towards SME and it will remain. And we don't want to increase our book only through the wholesale component and the focus in next quarter will be from the retail part. But at the same time, we will be cautious of what is happening in the industry around the segment that we are in, and if any need will be there to be a little more cautious, as a company, we have been always there, and we will keep on doing it. But now definitely, these 2 quarters are always good. And with more sanity, I think, coming within the micro MFIs and small MFIs, the company is focusing on the micro SME LAP, I think that will also help us in growing our book.

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

Very decent set of numbers given the environment we are in. So sir, my question was on you did mention about that some of the...

Sorry to interrupt. Mr. Gupta, can you speak a bit louder? We're not able to hear you.

Sure. So you did speak about some stress in the unsecured lending also impacting the secured lending side. So is there like overall industry even on the secured side, it's seeing some challenges? But given our strength and our credit assessment parameters, we are not seeing that? So if you can broadly talk about what kind of -- are we also seeing some stress across the industry on the secured lending spend on SME side?

Yes, Ankit. Very frankly, we are seeing what is happening on the MFI. I think that will -- if you see what RBI has been saying, even certain data is saying is that instead of company focusing on the requirement of the actual requirement of the customer, when we start doing targets with lending. And from every 3 customers in MFI, there were more than 5 to 10 lenders in their book with what RBI is in 2022. So as a company, we are always very focused to have a quality book. But at the same time -- and then we are too working with this competitive environment. So we are also in the same environment, and we have always focused to have a quality book, and that has been one of the reasons that in the last 5, 6 months, our growth was a little lesser as we were changing our policies. This is what is happening in the industry. Definitely, I would say stress will be a little larger in MFI than small micro lenders, less than INR 5 lakhs to 10 lakhs, which are also a quasi-MFI segment. And that is why our focus is to do in Tier 2, and I would say, Tier 3 cities rather than going into complete rural areas and doing that less than INR 5 lakhs, INR 10 lakhs, which we have restricted to 15% to 20% of total segment and that we also constantly keep on monitoring the quality of the portfolio. So yes, we may see some stress, but in terms of percentage in absolute level on GNPAs and NPAs, we'll be able to handle it from recoveries from our existing NPAs and write-offs. And I think that should stabilize in the next 2 quarters, these next 2 quarters, where I would say there is a little slippages can happen, what we foresee as of now. And so yes, the stress definitely when it -- the unsecured lending will stop or will be lesser, that can percolate a little bit to SME lenders, especially on the micro SME lenders less than INR 5 lakhs to INR 10 lakh. And in most of our cases, we are doing lending, 92% of our cases are where they're self-occupied residential properties, the primary collateral with us, and we focus on Tier 2, Tier 3 cities and mostly semi-rural segment. We are a little better placed as compared to those in that segment, where the stress will be larger and...

So then given how the...

Can you speak a bit louder?

Sure, I'll do that. So given how the scenario is currently, like we had a very aggressive target on branch expansion. So will we continue our expansion plans in second half also?

Yes, I think Deepak and Amit are there, they can also -- Amit?

Yes, there is no point of holding on the expansion. We have already added 8 branches, and we target to -- as per our target, we are going to add another 4 to 6 more branches. And like I have always believed in organic growth, so the growth on the expansion as well on the business front will be pretty organic. And we will not go by the rat race, which is going on that building up the numbers and later on getting into collections and the books getting eroded. We have a very -- the company has a reason of doing a quality business, quality collateral. We have set our targets in a segment which is a very sweet spot of around INR 10 lakhs to -- INR 15 lakhs to INR 25 lakhs where we are covered through the legalities of the collateral, plus we also know what kind of client we are having. And we have already earmarked places where we want to open, and these branch eventually will take some time to stabilize in terms of manpower as well as on the product. But yes, another 4 to 6 more branches we'll add and then the next financial year, we have another plans accordingly. So expansion as well as business will have a growth -- a decent growth which we foresee in coming 2 quarters.

Yes. In my opinion, I would say a little stress for companies which are in our size of 500 to 2,000. We see that we are a little better placed in terms of capital adequacy, focus on profitability. As Amit told you, we are not in the business of just opening branches, not looking at productivity. And if I would say, some stress will be helpful for us even in the longer term that we're assuming growth without any focus on quality and opening branches and too much of attrition in the industry, that will also stabilize. And that was also the need of the [indiscernible] where the attrition has to come down, especially in the branches, which was very high in all of the, I would say, companies doing business in our segment. So all those things of this consolidation, this sanity coming back, all are good things and with the companies with decent capital adequacy with focus on profitability and ROA and ROE. And instead of only looking at growing AUM without adding any profitability into their books and with huge operational expenses, I think we, in hindsight, think that it will be good for us in the longer term. And some sanity will also prevail in the industry we are in. And it will also help us in our future growth.

Sure. That's very good to hear. And sir, my third question was on some of our fixed costs like employee cost and other expenses. So we have seen the employee expenses and other expenses have continued to increase not just on a Y-o-Y basis, but even on a Q-o-Q basis in this quarter. So like do you think this -- the growth in these expenses will continue to mirror the loan book growth for us or at some point of time, will hit a ceiling where this -- what these costs will not grow, will grow lower than the growth in our loan book?

I think that is also there. But in my opinion, the growth in AUM will be much higher as compared to the growth in the cost. Most -- now we are completely full with the team and only the branch level team is the new additions in branches that will happen. And yes, our effort will be to bring more productivity and rationalize where required, and that action, we have already started. And so going forward, you will not see that our other costs and employee cost growth will be lower than the growth in the AUM. That is for sure.

The next question is from the line of Nirvana Laha from Badrinath Holdings.

Am I audible?

You are.

Sir, this is my first time asking a question on the call. I've been following the business for quite some time, and I'm aware of how the business has developed. I just want to ask a few questions on the SME lending part of your portfolio. So before -- I have three, four questions. But if you can give me an overview of what exactly the underwriting process today that we follow for a secured SME retail loan, that will be helpful, sir. Like what does the person on the ground? What are the parameters that are actually looked at? And then what decisions are made at the branch credit level and what goes to the corporate credit level? So that understanding will be very useful.

I think, Amit and Deepak will...

I'll take that, sir. This is a very -- the question which pertains to how we underwrite in this segment. First of all, I'll just give you an overall idea that these customers will not have been banked or they are not maintaining any financials. So it is very, very imperative to understand their business, what they are doing. So we have a set team at a branch level. So if you see our credit hierarchy, I'll just give you a glimpse of that. At a branch, every branch, we have a credit manager followed by 4 to 5 branches or 3 to 4 branches. We have a cluster credit manager. And above that, we have a regional credit manager and then we have a zonal credit manager. Above zonal credit manager, we have a credit control team, which looks after the cases, which is beyond the -- where we have to see a lot of divisions are there and the case pertains to the credit committee. So this is the hierarchy. And at a branch level, all the customers, not a single customer who has not been visited by a credit team whether it's a loan of INR 2 lakh or whether it's a loan of INR 30 lakhs, every customer has been visited by the credit team. The credit team goes, meets the client, understands their business and tries to make their P&L in terms of what is their daily income, what is their daily expenses, then they look at it at a monthly and a yearly basis. Based on that -- and everything is on a digital platform on our LOS. So everything is inputted on the LOS. And post that, we have not given any authority at a branch level. All the decisions happen at a regional level. So even a case of INR 5 lakhs to INR 10 lakhs, we have metrics in place where RCM, which is a regional collection -- regional credit manager -- and this is in the case up to INR 15 lakhs. More than INR 15 lakhs, the ZCM has a power to approve. And anything beyond INR 30 lakhs or INR 25 lakhs, it comes to credit committee, if it is required. So all the credit team is aligned to the policies and processes. We have our [ trade ] policy in place. We had 3 to 4 products in place. And accordingly, all the schemes are being told and training has been given to all the credit teams on a monthly, on a quarterly basis. So on the underwriting parameters, we definitely see the CIBIL. We definitely see what are their scores, what are their credit behavior in the past 4 to 5 years, is there any loans which is there into the problem. So the CIBIL, we look into consideration. We also look into consideration the business vintage, how many years of business these guys are doing, the client is doing, what is the end usage of the fund, whether they are going to use into the business, multiplication of the business is there or not. And also, we do a [ risk ] check in the market whether these clients -- about the client, how their behavior has been into the past. So a lot of checks and balances are done. Before onboarding a client, we -- the credit manager is supposed to visit the business as well as the collateral also because in 95% of the case, we have our SORP which is self-occupied residential property. They are supposed to meet all the family members also. We also look into the consideration how many dependents are there in the family because if the dependents are much and the income earner is 1, so we have a clear-cut policy how many dependents has to be there. So everything is earmarked into the system. We also see their net worth, what is their net worth, what are their collateral they have or any -- what kind of vehicles they have. So a lot of computation combination is done before onboarding a client. So -- and also, I think none of the industry players do crime check. We also do a crime check of a client so that we can understand their relationship with the NBFC -- earlier NBFC, whether they have been into any litigation or not. And if we find any client which is running into more of 3 to 4 litigation of things, we don't onboard those clients. So that is the reason we have been very cautious on giving loans to any of the client. These are the parameters and all the parameters are duly checked. The integration is already there with various third-party players. And we try not to onboard any fraudulent client, but this segment is very prone to that. And that is the reason all the client has been met by the credit team, whether it is INR 5 lakhs or INR 10 lakhs. So RCM also goes, our regional credit manager also goes and meets the client of INR 10 lakhs, INR 15 lakhs, wherever that is. So the PD is very, very important. The financial assessment is also very, very important in this segment.

We have a very robust technology platform, which do a lot of checks I think.

Yes. So to just highlight more on the technology. So it's an end-to-end, I mean the onboarding is end-to-end and we are having a check-and-balance at each and every point to avoid any fraud or manipulated onboarding of the customer on the platform. And after that, to name a couple of them, we have about more than 15 to 20 integrations from one service provider wherein we do Aadhar, KYCs, PAN cards and GST, ITRs, Udyam Aadhar and so on and so forth. And then further into that, we have also integrated directly with like a bank for analyzing wherein we set the bank statements directly by just taking the number of the customer and pulling all the information, obviously, with customer consent, and analyze all of that, and then we get a lot of detailed analysis on that. We have 2 service providers giving us those information. And like how Amit sir has mentioned in the call that we are using crime check. And it will give you all the litigation details if the customer has been involved in the past.

All bureau checks are there.

All bureau checks are there, CIBIL is there. We are doing CRiS checks, CRiS checks also there. On top of the CIBIL, there is another analysis that comes, which helps our internal credit team to analyze the CIBIL in a much better format than we used to do, than usually, all the NBFCs just look at the basic CIBIL report and then they deduce their own information. Herein, we are giving them a detailed Excel, which tells them a very detailed analysis about how their CIBIL has been behaving for the past couple of years. And there's commercial CIBIL, there's access to commercial CIBIL as well. And also all the communications are being done with the customer on WhatsApp. The moment he is onboarded in our system 'til the time he is live with our platform, every information of any deliverables, any payments, et cetera, all is being done there. People can repay also via all digital modes and platforms. We are available at all the UPI platforms, et cetera. So the visibility is pretty much there.

So 93% of our collections is digital, only 7% of our total collection is happening in cash.

Yes. And all of our collections are happening via eNACH platform. And eNACH are in -- I mean, we don't disburse an account 'til the time in eNACH is not activated in today's date. And eNACH gets activated on a real-time basis. So a lot of strict monitoring at our end is there in order to go about it.

That was very detailed. So I have some follow-up questions. So when we do an SORP, do we -- who does the property due diligence? Is it our internal team? Do we have third parties? And do we ensure that we have sole charge on the property, like no other lender has charge on the property?

Yes. We have our internal team also, like I said in my earlier communication, that the credit team visits, even the credit and the branch team, the RMA is sourcing the case, he is supposed to take pics from there -- picture from there itself and there is -- all the pictures are watermarked and it gives details of what is the RMA, what is his employee ID, what time he is there. So this is one function where we come to know that my people have gone there and stored the pics directly from the client, number one. Number two, the collateral. It is -- we have a policy in place that up to INR 20 lakhs, we will get internal -- sorry, external vendor to do the valuation and more than INR 20 lakhs, we'll have 2 external vendors to do the valuation. On top of it, we have our internal technical team and they are supposed to get each and every valuation. And without their internal vetting, we don't dispose that case. So this team also visit most of the cases prior to disbursal. But since now we have to close each and every cases within the time frame, so we have our regional technical team in place and almost 70% to 80% of the technical team visits the collateral to ascertain whether these valuations are in line with the market standards. In terms of legality, we have our internal team in place. Though we also take external views and opinions from our panel set of lawyers, but we have a very robust internal legal team, which vets all the cases before getting onboarded. And we make sure that the sole charge is of the company once the loan is getting disbursed.

Okay. Okay. And the title deeds, et cetera, is checked by our internal team?

When we do -- we get -- our external legal team is doing that. And in addition to that, our internal team is also getting the report given by the external team. So in both the cases, technical and legal is outsourced, but at the same time, is vetted and cleared by our internal team.

And sir, what is our current turnaround time?

Turnaround time, I would say, 3 to 6 days.

Yes, it is 3 to 6 days. Why I am saying this because in these kind of properties, they do have the recent sale deed or another set of documents, but we also check the past chain of that particular collateral, which takes a little bit of time. So that is the reason the average time for clearance of all the loan between legal and onboarding is 3 to 6 days.

Sir, 3 to 6 days is from the time the inquiry comes to us 'til the time disbursal happens. All this happens within 3 to 6 days. Am I right?

So you're talking about legality or you're talking about from end to end process?

I'm talking about the overall turnaround time for disbursal...

So overall turnaround time is around 8 to 12 days.

8 to 12 days, from inquiry to disbursal?

Yes.

And all those there is required where cases are getting taken over from other NBFCs or banks, then the turnaround time become a little -- creation of registered mortgage takes its own time depending upon state to state and situation. It takes from 5, 7 days to 15 days. And in the case where the BT is happening, the additional top-up check is only being handed over when we receive the documents from the previous lender.

Sure. Got it. And sir, last question is, what is the vintage of this portfolio, the SORP or SOCP-based SME retail? And 'til date how many delinquencies have we had? And for the delinquencies, have we had to take control of any property and try and liquidate it? If yes, then what has been our experience, how easy or difficult was it?

I think now you have a set of 4, 5 numbers. In terms of numbers or in terms of percentages you are talking about, I will be now saying as of date, our portfolio largely now, our pre-COVID portfolio is very small, less than, I would say, 5% to 6% of the total portfolio and whereas 93% of the portfolio has been built post-COVID, post July '21. And secondly, in terms of cases, in NPAs, I would say, as of now, around out of 2,700, 2,800 cases, we have roughly maybe more than 60 cases in NPA. And in terms of our ability to resolve, as I told that whatever we have -- whatever the cases which have become NPA or was written off in 2021 has been recovered to the extent of 91%. And whatever the cases which were written off in '21, '22 has been recovered 63% as on date. So -- and in terms of SARFAESI is a very, very strong, I would say, legal tool with us with arbitration losing it, I would say, the legal fees, what has happened through 1 legal case where a court-appointed arbitrator is required, which is very, very difficult in a segment for us. The cost around involved is very huge and we are working around that also. But SARFAESI is a very, very strong tool, and we have seen that whenever the cases go into SARFAESI, we are able to resolve 50% to 60% within 6 months, and a few of them go into litigation or takes time to get the position. As of date, we have only 4 properties where we have taken possession and we are not able to sell it. And those have been shown under assets held for sale for around INR 1.5 crores. So our ability to resolve cases through SARFAESI and to -- where the valuation is right and the property is saleable, in most of the cases, the customer himself comes and pays for it, either bringing a new buyer or any financier or any relative or friend helping him. It is only in those cases where we are seeing where valuation was lower than the amount outstanding or where the sell ability is poor that this -- the complete resolution doesn't happen where we are left off with the properties which are held for sale. So I think I've answered your question.

The next question is from the line of Anil Tulsiram from ContrarianValue Edge.

Sir, earlier, you mentioned that our focus has shifted from less than INR 15 lakhs to more than INR 15 lakhs because of lack of SARFAESI and other things. But many of your peers who are operating as in INR 15 lakhs, they say once you have the collateral of property, hardly anyone defaults. And if anyone defaults, the moment you send the notice, money comes. So then what is the reason for our shift of focus from less than INR 15 lakhs to more than INR 15 lakhs?

I don't know. I don't know. Only HFC do have SARFAESI more than INR 1 lakh, which we don't have as an NBFC. And I'm surprised if anybody say that we are able to take...

Even the peers who are operating, they don't have SARFAESI. But they say the moment they send the legal notice, the customers come and repay because you have the pledge of property, the papers are with you.

This is fine. I would say that may be working to some extent, but that is not a complete solution where property -- where customers profile is not here and income, he's not left with any kind of income. If anybody would say that they have taken possession or they have been able to sell it or -- I find it very, very difficult to digest that even with serving of a single notice, they are able to recover money and we have not seen in our lending. So -- and I would say a little stress, I told earlier, is very good for this industry and for everyone to fully understand where the risks are and why, I would say, a very, very aggressive growth can be very difficult in terms of when the things will turn a little [ better. ] And our focus has been [indiscernible] as we could see the risk, and we have been much more, I would say, prudent or little -- -try to reduce that risk and we don't follow that route of aggressive lending where we very well knowing that it will be very difficult to get resolution through legal route.

Sorry to press on this point again, sir, I'll take a specific example. Shriram City Union is operating in this field less than INR 10 lakhs for last 10, 15 years. Their credit cost is only 3% in this field, and they are reporting good ROEs. And similarly, there are other companies also. So what I am -- why I am pressing is I'm really trying to understand what is the difficulties that we are facing, which others are not facing? Or what is different is our perspective compared to others?

They are mostly into the secondhand financing. And so getting hold of that, because they have been there, they have been -- they are so old in that segment, they know the full ecosystem, getting hold of those property may be much easier. But for a property of less than INR 5 lakhs, INR 10 lakhs with HFC or SARFAESI not in your side, getting those legal possession or customers, we are becoming too deterrent only with serving of a notice, may be playing out in a certain area, but I don't think so. Legally, it is very, very difficult and customers have also become very intelligent and that we also know that mere service of notice will not be -- it's very difficult to get the hold of that property through possession or through any other means.

Got it, sir. One last question. You also mentioned that you are seeing some sort of stress in less than INR 15 lakhs. So can you elaborate more on what sort of stress you are facing in your portfolio?

Yes. I would say, stress -- as an industry, some stress is there because I would -- and that stress has just only come when everybody was following that hard mentality of target-based lending and where the income growth of this customer has not [ happened]. And here, the customer has been overleveraged in the last few years with aggressive lending. And definitely, in India, the bottom pyramid of 40% to 50% of the population has not been able to participate in the GDP growth that we have witnessed as a country as a whole on the larger basis, having few pockets, where they have behaved otherwise. So -- and that has been the primary reason. I would say now, with this consolidation and some kind of small stress, it is helpful for the industry and consolidation will definitely happen. And we, as a company, are far better placed in terms of strong, I would say, capital adequacy and profitability. And our SME blessing in disguise, you can say maybe only 30% to 31% of our total portfolio and that too being total 100% secured. And we are always very prudent to take corrective actions where we see that stress is building up. And yes, definitely, it is the case of overleveraging the customer. And with the...

What percentage of our book is less than INR 15 lakh as far as SME is concerned?

So what will be for that number, maybe less than 20%.

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

A couple of questions on the branch network side. So I think as per the presentation, almost 2/3 of our branch is more than 1 year old. So how many of them would be breakeven or above? If you can quantify that.

Amit?

Yes. Can you repeat the question because there was some connection...

Yes. So total -- out of all the branches, as per the presentation, 2/3 branches are more than 1 year old, right? So how many of them are breakeven and above, if you can quantify that number?

See, the exact figures will be not there with me currently, but any branch which is able to do more than on a portfolio -- sitting on a portfolio of INR 6.5 crores, they have been broken even. I think Atul will be having that number than...

So that's okay. I think exact number is not important. The point is anything above 1 year, generally, we should consider a break--even branch?

Yes. In the last 6 months, whatever the branches we have opened because of lesser business, they are not able to make breakeven. And as Amit rightly said, branches which achieved more than an AUM of INR 78 crores and with, I would say, NPA of less than 1.5% to 2% and with overall par book of 78%, that is a branch -- and keeps on doing business month-on-month within the range of INR 70 lakhs to INR 80 lakhs with a typical day size of 5 to 6 people is fairly the profitable branch.

Okay. Got it. And another question is that...

Mr. Desai, may we request that you return to the question queue? There are participants waiting.

Sure. Okay.

The next question is from the line of [ Ganesh Rao ] from Rupani Capital.

I have a couple of questions. Sir, is it possible for you to quantify the impact from the RBI guidelines to record disbursements on funds credited date? And can you also impact what is like the impact for you when you have to reverse on the account of cancellation of financing?

Yes, I would say it does have -- it did have an impact. We are at 1.5 to 2 months business [ practical loan ] loss, I would say that pushed -- change in to work in progress. And secondly, a lot of pending cases which were sanctioned but was not disbursed or checks were not handed due to certain, I would say, PDDs in terms of R&D not created or certain documents not received or certain preconditions, not fulfilled. Those cases which we used to take another 15 to 30, 40 days sometimes, now those instances will not be there. And I think this is a blessing in disguise for the whole segment in long term because once cases get sanctioned, it will be disbursed in a much lesser period as compared to earlier in the industry. It will also help the sales team that they are more motivated that the check has been handed over and they also get the incentive. The cancellation, which we were fighting as a company for last 18 months, those instances will not be there going forward. And once the case has been sanctioned and booked, the focus will be to hand over the check and then the -- so by -- in the longer term, yes, definitely, it will help us. The industry has been doing it the way I told you for last few years and that changeover was a little difficult. And now we have already lost that 1.5, 2 months. And now the last 2 months, which was with the new case scenario, I think going forward, it is good for every company and even for us. And yes, I think it's a welcome change. And even there was a -- customer also feels happy that the turnaround time is lesser.

And I will add it here, the type of cancellation is -- we need to understand the MSME segment in a very broader way like it is not only the factors, which is due to the weather or maybe the RBI compliances, we also face a lot of issues in terms of getting registered mortgage done. We are at the mercy of the government agencies also. For example, if you see in Gujarat, none of the case is without registered mortgage. And for that, we need to take a token. So now what we have done and that's the reason our disbursals were a little low because we set up the system correctly, where the token has to come in place before the disbursal has to be done. So with the dependency on a little bit on government agencies also, the disbursal got delayed and a lot of papers, the property papers used to come after getting disbursal. The check is getting made and the customers were missing that they would bring the property papers, the chain needs to be completed, which now doesn't happen. So like sir said, that it is a blessing in disguise that now everything is getting completed on time, and we are disbursing those cases only which are fully complete. We are not even waiting for the -- any PDDs also. So this is a welcome change. And going forward, it will add to the addition in the portfolio only.

Awesome. That is wonderful. The last question that I had was with respect to our retail to wholesale ratio, right, which is at 40% to 60%. And by the end of FY '25, do you expect you will achieve your stated goal of 55% to 45%, which was your target, right? And given the current macro environment, what pockets within retail do you feel confident the uptake will be good for us to achieve our stated target?

Yes, definitely, what we have targeted earlier to do 55%, 45%, that will be difficult in the next 2 quarters because what -- the kind of very slow growth on the retail side. At the same time, wholesale has been able to do beyond or projected. We could have easily done our target to higher allocation towards wholesale, which we strategically thought that we should not be doing it, and it is better to reduce our target AUM numbers what we have targeted earlier so as to have a healthy mix. And from 31%, 45% -- 31%, 61%, we think that we should be able to go up 'til with their numbers maybe anything between 35% to 40% on the retail. 35% to 40% will be what we'll be able to achieve on the retail 'til March and the rest will be from the wholesale. And I would say certain percentage spends from the dynamic, this is all what we thought that retail is very, very good in the last 6 months because of the external factors also like very bad weather conditions, most -- and even the elections and all those. So where the wholesale has helped us. So being a company being in the 2 pockets, we think that we are better off working within both the segments and sometimes certain segments are doing better than the other. But our focus is definitely to build our retail in the longer term.

Just a quick small follow-up. Like, by when do you think you can achieve this target? I mean 1 quarter here or there is fine. But FY '25, as you said...

Achieving targets, we could have done even also, but then we don't want to compromise on the quality.

Agreed, sir. I mean this year, conservative nature, like when do you think you will be able to achieve it?

See, in certain segments, what is the ultimate goal of the company is to see that we are having a healthy profitability and our quality of book is there. And sacrificing quality at that just to maintain that mix is not the line that we as a company follow. And where if everybody -- every, I would say, the analyst has been saying that retail is very, very good in the last 4 years, you please tell and analyze, see those companies even if you are building AUMS, whether they are building profits, such a huge operational cost with high branch expansion, where 50% of our branch is running below productivity, 'til what time they can run with that and with the stress coming out of it. As a company, we have to see, we have to balance ourselves. Yes, in certain few quarters, certain segment is doing better. We as a company are better placed to focus on that and to tighten the other segment. And yes, our long-term strategic focus is to build on SME, that we'll continue to do it, and we will do it. But in the last 6 months, we were a little -- certain regulatory changes and our tightening of our credit policy in external sectors, we slowed down that strategic shift and yes, quality will always be foremost for us. I just want to understand whether you think that the company should follow -- just losing the, I would say, quality and just follow the retail, do you think that and continue to grow aggressively? I'm just asking as a very layman your opinion.

No, sir, no. I mean, that's what I said, based on your conservative nature, when do you plan to achieve this because I've been tracking it...

That is there, but certain sectors are beyond control. And you can't ignore what is happening around you. You're working in a very competitive environment and the dynamics keeps on changing. For us, as a company, we have -- quality of the book is more important.

Ladies and gentlemen, we will be taking the last question. That is from the line of [ Manav ], an Individual Investor.

Sir, what would be your guidance for the ROA and the ROE numbers for next 3, 4 quarters?

ROA -- I think ROE was around 14% to 15%, and we are striving for that. We should be able to maintain it and a slight improvement maybe in the next 2 quarters with the higher AUM. And ROA is roughly between 6% to 7%. And I think we will also be able to achieve that, a little [ 20% ] 50 bps may come down with the higher AUM.

And the leverage ratio is around -- I think, around 2, 2x. So in the Q4, you had told that it would be -- you would increase the leverage. So how much we are expecting to increase our leverage?

With the target of -- what we have targeted this year, INR 1,350 crores, our leverage will be roughly around 1 to 1.45x. So it was a function of both. We could have definitely done it but the wholesale book would have increased. And I told earlier that our strategic shifted towards retail, and that will be there. And though it has reason in favor of wholesale, beyond the point, we don't want to do that.

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Rohit Gupta for his closing comments.

Yes. Thank you, everyone, for sparing your time and coming to our Q2 and first half results for FY '24/'25. And hope to see you again when we complete our financial year. And we are always open to any queries and our investor [indiscernible] can be reached. And yes, so we are always open for if any individual with specific query is there. Thank you, everyone, for participating. Thank you very much.

Thank you.

Thank you, members of the management team. Ladies and gentlemen, on behalf of CSL Finance Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.