Edelweiss Financial Services Limited (EDELWEISS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Edelweiss Financial Services Limited Q4 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being ordered. I now hand the conference over to Ms. Ramya Rajagopalan. Thank you, and over to you.

Good afternoon, everyone. Thank you for joining our Q4 earnings call. I hope you and your families have been safe and well. We have with us today Mr. Rashesh Shah, Chairman and CEO of the Edelweiss Group; Mr. Himanshu Kaji, Executive Director and Group COO; and Mr. S. Ranganathan, CFO. During today's discussions, we will be referring to the Q4 investor presentation uploaded to the exchange and on our website. You may wish to have it handy. I would like to state that some of the statements in today's discussion may be management estimates or statements that are forward-looking in nature. Please take a minute to read the safe harbor statement in our results documentation as well. With that, I would now like to invite Mr. Rashesh Shah to begin the proceedings of the call. Over to you, Rashesh.

Thank you, Ramya, and good afternoon to all of you. Thank you for being here and giving us this opportunity to present our results and the plan going forward. But first of all, as Ramya said, we hope that you are all safe. You, your families, your colleagues are all staying safe and managing the situation well. This has obviously been an unprecedented environment globally, not just in India, and I think all of us are doing our best to finally get through this, and I hope that we all come out of this strong and healthy. Friends, today, I want to talk to you about 3 parts in this: first is our results, second is the current situation and our response, and the third is our plan going forward. On first, this has been a challenging year, a challenging quarter. I think that goes without saying. For us, this quarterly results have been a big challenge. It's been a tough time. But first of all, I think our organization strength, our diversified business model has helped us to navigate this well. And as we speak through that, as you would have seen in the presentation, there are a lot of things we have done to be able to manage this current environment. On results and profitability, the actual -- you have the actual presentation, my colleague, our CFO, S Ranganathan, will take you to the minute details of the financial numbers, and also, but I think the biggest decision for us in this quarter has been the impairment that we have taken. We have put a lot of thought into this. All of us have grappled with this. It also has resulted in our first loss in our 25-year history in Edelweiss. But we have done this with a lot of thought to see this as maybe an investment into a future to make the organization, our balance sheet and our businesses stronger. A large part of this impairment has been obviously because of the concerns around asset quality. A lot of you have been sharing concerns around asset quality. I think India, the credit environment in the last few years, and especially for NBFCs in the last 2 years, has been very challenging. While in the last 2 years, we've been focused a lot on liquidity and just going through this particular environment of crunch liquidity post-ILFS, we have also been focusing on asset quality. And as we announced in the last quarter, there was pre-COVID in February when we announced our last quarter results. We had said that we are revising the credit loss model we have in view of the revised environment, in view of the new India's guidelines, and we have worked with an international consulting firm to look at our wholesale book and basically recommend what the impairment should be, not only current but also taking future cash flows into account. So in a way, this is not an NPA approach where you provide over the quarters. The impairment approach we have taken is to estimate the future cash flows and mark down the value of those credit assets as of now, so that it's more like a preemptive impairment. What we also did is estimated the COVID impact. I think you would have seen in the presentation, there is almost INR 900 crore number, which is our COVID impairment. Our COVID impairment, as we look at the environment, different banks and NBFCs are following different approach. Some have chosen to wait because it's still not clear, especially people with large retail portfolios may wait because retail impact because of COVID is still evolving. And I'm sure a lot of you are also following this closely, and I would love to hear from you how you see the environment for retail asset quality because of COVID. On wholesale side, I think last 2 years, we have seen a lot of stress testing. And with COVID, we feel fairly confident that whatever estimates on impairment we have to make, we've been able to make. And my colleague, S.R., will share more about this approach to you. The second challenge for us has been liquidity. We have been grappling with liquidity for the last 18 months. But as you have seen over the quarters, we have been amassing liquidity. And slowly and steadily, we reduced our borrowings and increased our liquidity on hand as the liquidity environment kept on getting tougher and tougher in the last 18 months. So in March, we were fairly okay, and we always have a 365-day horizon on liquidity. That is where we were in March. But then COVID happened. And because of the one-way moratorium for NBFCs, we did offer the moratorium to our customers as required. And since we didn't get automatic moratorium from the banks, we had estimated that our COVID shortfall in liquidity and cash flow will be about INR 4,000 crores. Close to about INR 600 crores a month over 6 months is what we estimated. And we immediately got to work on that. We immediately triggered off all projects, all activities. And we have got about INR 1,000 crores from TLTRO scheme of RBI. We are also banking for another INR 1,000 crores through the partial credit guarantee scheme. Though, from eligibility point of view, we are eligible for more than INR 4,000 crores. As you know how the partial credit guarantee scheme is designed, it is mainly for non-AAA-rated borrowers that the government guarantees, the exposure of the banks through NBFCs. And your eligibility amount is 1.25x your outflows for the next 6 months. Our outflows for the next 6 months are about INR 4,000 crore so our eligibility is close to INR 5,000 crore. We are being very conservative in saying we'll definitely raise about INR 1,000 crores in this. We will use INR 1,000 crores from our existing reserves and INR 1,000 crores from asset sales. So we have a fairly good plan that this liquidity shortfall has been an immediate requirement, and we have managed to come up with a plan that broadly handles that so we come back to normalcy. Our idea was on liquidity to come back to normalcy as fast as possible, and last 3 months have gone in that. And the third challenge has been the business continuity because of COVID. I'm very glad to say that our businesses like Asset Management, Wealth Management, even ARC, we have done quite a few recoveries in the last few months. Insurance, all of them have done well. Credit, obviously, has been impacted across the board for -- on both counts on asset quality and on liquidity. So outside of Credit, our diversified business model has really come of age in this quarter, and it has allowed us to showcase that we have a strong customer franchise. Our fee income has been strong. And I think what has allowed us to navigate this fairly well has been, first and foremost, what I call team Edelweiss. Team Edelweiss in this quarter has come through. Everybody has gone over and above the call of duty for internal project management, for coping up with the situation, for reaching out to clients, all of that. And it, obviously, everybody came very suddenly. But the way team Edelweiss has navigated this, whether it's liquidity, whether it's asset quality, whether it's customer connect, I'm truly very glad that we have been able to manage it. I call it, this was our Atma Nirbhar quarter. This is a quarter we showed that team Edelweiss can be Atma Nirbhar, and we've been able to demonstrate that. Also, as I said, our diversified business model has been a key one. Our -- as you would have seen in the presentation, about 1/3 of our capital is used up in Asset, Wealth Management and ARC. They also have 33% of our headcount, and they constitute 38% of our top line, so which it is underscores the diversified business. But even in this Asset Management, Wealth Management and ARC, the INR 2,000 crores of fee income that we have, we have almost INR 100 crores of fee income in Asset and Wealth Management, and another about INR 800 crores a year in ARC. So we do clocks very good fee income across the board, and we have done this for the last 3 years, '18, '19, '20. If you look at all these years, our fee income has been fairly consistent across Asset Management, Wealth Management and ARC, and that has been underscored the free franchise and the customer faith that we have had. And lastly, as I said earlier, we have taken a conservative approach to impairment. We would love to hear from you on what your views are. There are always questions over the last few years. Whether you are a bank or an NBFC, asset quality and impairment has been top-of-mind issue for everybody. We have tried to be -- get ahead of the curve. We tried to say that let's estimate as much as we can, and we were in a fortunate situation of having excess equity. As you would have seen, even after the impairment, our capital adequacy is robust because we have not only raised equity in the last year, in the last 1 year between EGIA, the deal with Kora, Sanaka and in NBFC, the investment from CDPQ, we have raised more than 1,400 crores of cash already and expected almost another INR 1,000 crores to come in the next few quarters. So in a way, INR 2,400 crores of equity raised, INR 2,400 crores of impairment taken, so at least our equity raise has offset the impairment taken. Though as we will see, we are planning to raise some more equity in EGIA going forward. So we have taken a conservative approach to impairment, a, because we think we should do that; b, because we can afford to do that. We have excess equity. Our NBFC has ECL finances, capital adequacy of more than 21%. Our housing finance company is 28%. Our ARC is 32%. So what has happened in the last 18 months, fortunately, unfortunately, because of ILFS, as borrowing has got crunched and we have raised equity but we also degrown the balance sheet, we have excess equity. And since we don't intend to be very capital-heavy in future growth, a lot of this equity, either we can just use it for something new or we can dividend it out or we say, let's keep it in the business and build a cushion on this, so that our future balance sheet becomes stronger. So our approach has been that let's do everything right now to make the future stronger and make sure that we are able to take that. As you would have seen, our wholesale book in ECL finance has come down by 43% from the peak. Anywhere at a group level, 2 years ago, our borrowings were INR 50,000 crore at a group level that has come down to INR 33,000 crore. And I expect that by end of the year, we'll be at INR 25,000 crore. So effectively, in about 3 years, we would have reduced our borrowing from INR 50,000 to INR 25,000 crore as a response to the liquidity environment and the unprecedented post-ILFS environment and the COVID environment. So I think that has been a key feature for us in the last few quarters but in the last quarter. We also want to make sure that we continue to manage risk. The last quarter has been very volatile, and we have continued to manage risk for ourselves and our clients, and we have come out fairly well. It's been a very, very, very volatile environment. And we have also strengthened our technology. I think the digital transformation of Edelweiss was underway, but last 4, 5 months has been really taken a leapfrog, and this work from home has been a big catalyst for the digital transformation of Edelweiss. And lastly, amongst the action that we have taken that we are very gratified is EdelGive has -- and we have also shown that in the slide, EdelGive has worked very closely with its NGO partners and to make sure that we continue to invest back in the society. I think because of COVID, a lot of parts of the economy, a lot of the people of India have been disadvantaged in a huge way. And whatever little bit we can do through EdelGive and through our NGO partners, we have gone out of our way to do that. Our total commitments through EdelGive in this year have exceeded INR 100 crores with impact across 109 districts in 14 states. So this has been actually the best year ever, FY '20, for EdelGive also in its more than 10-year history. So going forward, friends, we will continue to focus on asset quality management and recoveries. I always say that impairment is only the first step. Impairment gives comfort to investors that you marked it down, you have been conservative in that, but you ultimately have to recover. And since we have a lot of ARC experience, our culture of recovery is very strong, and I remain confident that on this wholesale book and the projects we have, we will complete those projects. Part of the asset sell-down we have done is via funds where part of the money is being used to complete the project, so that we can make sure our recoveries are very robust and very strong. We will do some capital raising this year. As you know, all organizations are getting ready for future growth. And I think given COVID and the lingering effects of COVID, a strong capital base and a strong balance sheet will be fairly useful. And lastly, going forward, our focus is going to be on cost rationalization. We believe that degrowth of balance sheet is inevitable. It's already happened. It may happen for the next few quarters, but degrowth of cost is in our hands. So we should not only reduce the balance sheet but also reduce costs. We have set a target of 18% to 20% of cost rationalization. And the team Edelweiss has taken up the challenge to say that between now to the end of the year, we will bring down our cost and become more efficient, more productive and build a business structure that is very cost efficient, which we can use to create value for our clients. Lastly, friends, we have to all get ready for a post-India COVID. We do believe that this is an inflection point. I think for us, for Edelweiss also, after 25 years, this is the most important inflection point. But as we think about Edelweiss post-COVID, we want it to be more retained, more granular, more capital-light, huge focus on Asset Management, Wealth Management and with a strong and fortress balance sheet and liquidity profile that we've been focusing on, and we'll continue to make sure that we achieve that at this inflection point and then leap forward into the future because we believe that post-COVID India growth will be there. The world will also come back post-COVID. I think it's been a big shock to the world, to all of us. But humanity, all of us have handled crises in the past. India has gone through many crises. In fact, India's story has always been that crisis has always been an opportunity for reform, for getting a lot of things out of the way. And for the government also, crises are a good time to get the political capital to make some deep changes. We do think that will happen in India. The green shoots have started. I think April and May were really dark days. I think for all of us, it was really unknown, unknown. June, we have started seeing things improving. Even our customer connect, when we have connected with customers, the moratoriums have come down. Customers have been a lot more sanguine. People have started a resumption of business also. So we do believe that we have to plan for the future. In fact, even this impairment that we've done is, in a way, an investment for a better future because this impairment should make our balance sheet stronger, so that we can make the right decisions going forward because all decisions we make today have to be for a better future. And we are thinking not the next 3 months, in fact, the next 3 or 6 months may be still very uncertain as COVID plays itself out. But I think the next 3 years and the next 25 years for Edelweiss are going to be very important. So along with that, once again, thank you, friends, for being here. I will now hand it over to my colleague, S. Ranganathan, our CFO, to just give you key highlights on the numbers. You have got the presentation. And then I'll be happy, my colleagues will be happy to answer any questions that you have. Over to you, S.R.

Thank you, Rashesh. Good afternoon, everyone, and thanks for being on the call. Today, I wish to speak to you on the following 4 things: financial numbers, impairment, liquidity and capital adequacy. On the financial numbers for FY 2020, the total revenue for the year 2020 stands at INR 9,603 crores, and the net revenue reported at INR 4,810 crores. Operating expenses for the year was INR 3,705 crores versus INR 3,936 crores for the financial year '19. Reported PAT in the negative of INR 2,045 crores, largely on account of impairments that were taken during Q4. Our fee income from the Wealth and Asset Management as well as asset reconstruction business remains strong and steady at roughly INR 500 crores per quarter, even in a weak, COVID-impacted environment. Overall, our balance sheet size as of 31st of March 2020 stood at INR 43,864 crores as compared to INR 53,932 crores for the previous year, largely driven by the decrease in the credit book, coupled with reduced points. Net worth as of 31st of March 2020 stands at INR 8,541 crores. Borrowings stand at INR 33,754 crores, down from INR 43,201 crores in March '19, a decrease of INR 9,447 crores year-on-year. If you look at the last 18 months, borrowings have come down sharply by almost INR 17,000 crores. Our debt-to-equity ratio stands at 3.5, which is significantly lower than 4.4 at the end of financial year '19. Effectively, given the actions taken, we are moving towards the fortress balance sheet. Let me now move to the 2 big areas of focus for this quarter: one is asset quality, and the other one is liquidity. Impairment. As announced in Q3 FY '20, we reviewed and revised our ECL model. To this end, we have also commissioned an international contracting firm to review the expected credit loss model, particularly on the wholesale portfolio. The forward-looking forecasting methodology required under IAS 109 factors in macroeconomic variables and was subjected to further vigor. The loss given deferred was also updated based on our own experience of recoveries with cash flows discounted appropriately. This model threw out a number of INR 1,200 crores. In addition, we applied a conservative management overlay and chose to carry a higher provision of roughly INR 500 crores on a conservative basis to facilitate sell-down. We also assessed the impact of COVID-19 on our wholesale and retail portfolio, including an assessment of the potential prolonged business slowdown, resultant liquidity pressure and took a COVID-related provision of roughly INR 900 crores on a conservative basis in Q4 FY '20 itself. This is a one-time provision on this account. Therefore, the total impairment stands at roughly INR 2,600 crores for the quarter, and the key elements of impairment are brought out in our Slide 18 of the investor presentation. It's also important to note that these impairments mentioned and that I spoke about are not actually cash losses. It's just an accounting provision that we have paid upfront in the current macroeconomic environment. Moving on to liquidity. Available liquidity on March '20 was INR 8,150 crores, which accounts for roughly 24% of our borrowing. So on that trend, we are pretty comfortable. As we started financial year 2021, our top priority of managing the COVID impact on liquidity, we estimated the continued moratorium impact on liquidity to be in the range of INR 4,000 crores. Resource raising from banks, including under the various government initiatives, has been extremely favorable, and we have a strong pipeline of proposals lined up with the banks. We have since been able to raise funds close to INR 1,400 crores in the form of LTRO, PCG, term loans, et cetera. In addition to this, we expect another INR 1,000 crores of bank lines under the PCG and cash flows of roughly INR 1,000 crores from asset sell-down. These steps have helped us address the COVID-related liquidity concerns. Strategically, we are also looking to raise equity of INR 1,000 crores to INR 1,500 crores in our EGIA business. This is expected to close in the next 6 to 8 weeks. In addition to this, we also had the Board approval in place to raise the equity of INR 1,000 crores to INR 1,500 crores in EFSL as a holding company, if required. Therefore, the ALM continues to be strong across all denotes. This is further strengthened by our current borrowings, which are largely in the 3-year out bucket. I would also like to highlight the key capital adequacy ratio, which continues to be strong across all the key entities. The capital adequacy at a consolidated basis stands at 20.8%, which is significantly better than 18% reported at the end of last year. As you can see on Slide 11 of the presentation, our NBFCs are well capitalized with ECL Finance with a capital adequacy of 21%, Edelweiss Retail Finance Ltd. at 29.4% and Edelweiss Housing Finance Ltd. at 28.6%. In addition to this, our Life Insurance and general Insurance business have sound solvency positions with solvency ratios of 232% and 236%, respectively, on these 2 entities. In conclusion, all our business continue to be well capitalized and have adequate liquidity. Overall, we are confident that we are well placed to see through this COVID pandemic and face the challenges in the macro environment. In the post-COVID scenario, we expect to emerge stronger. We have taken and will continue to take all measures to build up a strong, long-term growth trajectory going forward into FY 2021 and beyond. We'll now open up the forum for Q&A, and thanks to all of you once again.

[Operator Instructions] The first question is from the line of Anand Laddha from HDFC Mutual Fund.

I have a couple of questions. I just wanted to look at now how one should look at Edelweiss as an entity. You have now covered different verticals for each of the businesses. And if you can give some color how one should look at the growth path for each of the verticals as well as the fact that how much will be the equity stake of Edelweiss in each of these verticals would be. And where we are looking to raise capital and post capital, how much stake will we own?

Yes. As you can see, we have now -- actually, after a lot of change, we have now structured ourselves in 4 business verticals across 10 entities because entities like in Credit, which is 1 business vertical, there are 3 entities in that. So I think the first is Credit. The second is Asset and Wealth Management. The third is ARC, and the fourth is Insurance. Now in Insurance, there are 2 entities. ARC is one entity. EGIA has got broking, investment banking, asset management, all of that. So I think there are -- these 4 verticals are the building blocks of Edelweiss. In Credit, we have more than adequate equity. As you can see, our capital adequacy, even after this impairment, is fairly high. And as we continue to degrow the wholesale book, our wholesale book today is still about close to INR 10,000 crores. And as we release that equity, in 2 years, by '22, we want wholesale to be 0 in the NBFC business, in the Credit business. We will do it as an asset management in AIS as we've been doing. We have more than INR 21,000 crores of assets under management in credit strategies because we have realized that a lot of this project finance and housing finance and construction finance and all has a lot of uncertainty around cash flow, though the returns are good. If you do it in a fund format, then you take the ALM risk and the NPA issues out of the way, and it is actually better for investors because they also get a higher yield. So I think Credit, we are more than adequately capitalized. We actually have release of capital over the years because for the retail business also, we don't want to be very asset-heavy. And we expect that our retail Credit business should not require more than INR 1,500 crores, which is currently broadly the equity in EHFL and ERFL, which are the 2 retail entities we have. So I think slowly and steadily, the idea is to bring wholesale down. So Credit, no more equity is needed. We will -- approximately 80% of credit will be owned by us, 20% will be CDPQ. They have a convertible structure. So around that broadly is the holding structure. In our Asset and Wealth Management business, we have Kora and Sanaka as investors. They have put in first tranche. The balance 2 tranches are yet to come, and they will end up owning about 14%, 15% of that. We will end up owning 85% of that. For their 14%, 15%, they would have invested about INR 800 crores in total across 3 tranches. But I must remind, only 1 tranche has come. The other 2 will come in the future. So we will own 85% of Asset and Wealth Management business. ARC, we already own 60%. As you remember, we started at 49%. We have gone up to 60% of ARC. And Insurance, in the Life Insurance, we own 49%. And in the general Insurance, we own 100% as of now. Our idea is going forward, slowly and steadily make all these businesses independent and keep them stand-alone, maybe also demerge them into stand-alone entities because they're all getting scale like our Asset and Wealth Management business makes close to INR 300 crores of profit after tax a year. Our ARC makes INR 300 crores of profit after tax a year. So all these are good stand-alone businesses. And our idea would be that going forward, there are business models globally available for each one of them, like alternatives business, there are entities like Blackstone abroad; ARC, there are entities like Oaktree and all abroad; in things like Wealth Management, Schwab and all other models. We think each one of them has a lot of scalability. And now the time has come, and we're going to use this to start making them more and more independent. That is why we have got investors in that. We have ring-fenced the equity. The governance is ring-fenced. All these are actually independent businesses already in Edelweiss. And our idea would be that as we release, we also would like to distribute the shares to the investors, so that Edelweiss doesn't want to be a holding company in the long term, but we want to have these 4 parts and slowly and steadily make sure we unlock the value and give it to shareholders. Because one of the good things about Edelweiss is more than 45% of the company is held by insiders. The insiders have a lot of skin in the game. So as we want to unlock the value for everybody by building these businesses and making them independent, we will think through that. I think this will be the plan for the next 3 to 5 years, but that seems to be an opportunity because each of them are very strong business. The foundations are very strong, and we can now build on those foundations.

The next question is from the line of Chandra Govindaraju from Ashmore.

So my question is regarding the equity release that you are mentioning. You intend to sell wholesale book, and you are adequately capitalized on the Credit side. So I mean, what do you want to do with the excess capital that you have? Is there any buyback in the card?

Not immediately because I think the release of capital will take time. And given the uncertainty that is there, I don't think it will be prudent to release any capital as of now. But on a long-term basis, as I said, in 2 years, we want wholesale book to become 0 in our NBFC. And we think the recoveries will also start because we have taken impairment, but as you don't know what happened with banks, when they took Essar Steel, they took complete impairment, but a lot of flowbacks and all that come back. So we think over the next 2, 3 years, we would like to release equity. And if that excess is available, as we said, we are very focused on capital allocation and buyback. I mean even today, we are trading below book value, so buyback is always a good idea if you're trading below book value. But for that, I think we have to navigate through this environment. Our current commitment is that for the next 18 months or 2 years, we use whatever equity we have to make sure the business has become stronger and we take care of all the stakeholders. So I don't think in the short term that should be an idea. But in the long term, if there is excess capital, that will always be a good idea.

The next question is from the line of Jeetu Panjabi from EM Capital Advisors.

So one, just one simple, the same question, my understanding throughout was that the ARC was going to be part of EGIA. But if I see Page 7, I see the articulation of capital is separate. Can you just explain, is there a change in mind? Or what's the thinking behind this?

Yes. The change in mind has been earlier, we were seeing that as part of Asset Management business and all. But given the short-term uncertainty, because I think COVID is going to impact recoveries and all that and we have said, that's why we have taken an impairment on ARC also, ARC portfolio, so we have taken an impairment. And given that there are business equivalents available, which are listed outside, like IIFL wealth and ISec and others are available outside, the Board decided like let's keep it a very asset-light model because an asset-light model has then -- it's more like an FMCG business, which is not capital hungry and doesn't need to raise capital all the time. And what is happening is with ARC, EGIA was becoming partly capital-light, partly capital-heavy. Our ambition in EGIA is to keep it very, very capital-light. The only capital it will be using will be margin funding. But even those we think will be converted into Asset Management and AIF products going forward. So our idea in EGIA has become very clear in the last 1 year is to keep it very, very asset-light, very, very franchise FMCG kind of business. So it's high ROE. It's not equity dependent, and it should actually throw out equity, and that is what has been all over the world. I mean, if you look at large companies like Capital International and Fidelity, they are also private companies. They throw out capital all the time. So idea is, I think last 1 year, we have learned that it's good to have businesses which are not dependent on forever raising capital. So by keeping ARC out of it, we are ensuring this business remains capital-light and, in fact, capital-easy.

Okay. And is there -- are you optimistic on the ARC as we move ahead? I mean you've had a few good successes, the Bhushan and the Essar and stuff. Do you see evolutions continuing?

I think so. I think ARC is looking good. So I have to be careful because, currently, the environment, everybody is very careful about it. What we also found is investors, especially retail investors or global investors who are investing in Asset Management, Wealth Management, found ARC very hard to understand. Because I must admit, ARC is a very Indian concept. It's an LP-GP model. It's partly balance sheet, partly skill-based. It's a very specialized business. I think it will continue to do well. Even now on a INR 2,000 crore equity after impairment, it has made INR 300 crore profit after tax. So even pre-impairment, it would have been a 20%, 22% ROE kind of a business. We are seeing a lot of banks are coming back. A lot of banks are also doing Essar structures again. And as COVID plays out, I think the impairment across the banking industry will go up. And as that happens, we have always seen that banks are more and more open to using the services of ARC to recover. And what used to happen, ARCs were also, in a way, competition to NCLT because in the last couple of years, banks had a choice: go to NCLT or sell to ARC. Now with NCLT also being in suspension for a year, banks are coming back to ARC because then they want to get something off their books and they want somebody to solely focus on recoveries. I think an ARC model works very well, especially when there is a consortium and there are multiple borrowers. So it's early days. But I think after 3, 4 months, we will see again a scale-up in the ARC business. Even now, I think we have very good recoveries. June was a good month for recoveries also for us, as we have shown in the PPT. So I think I remain confident of the ARC business. But it will be chunky. It will be volatile as compared to an EGIA business, which is very steady.

The next question is from the line of Aditya Singhania from Enam Holdings.

I had 2 questions. One was the presentation format seems to have changed a little bit in the last few quarters. I just wanted to understand from a starting point of FY '19, if you could just sort of take us through the change in the loan book mix because I see a sort of 43,000-odd kind of number in FY '19, and now it's kind of disaggregated into 4 different verticals. So if can you just explain because there's a substantial reduction. And so just trying to understand how you've managed that, what you sold, and are there any residual risks left in what you've sold. That was one question. I'll ask the second one once we are through with this.

So it's a request that has come from a lot of people. I have told our IR team, Ramya, to, in a day, put an addendum to the PPT, which gives the comparison from March '19 to March '20 in terms of how all the components of the loan book have moved. I think broadly, our loan book has come down by about INR 14,000 crore in the last 1 year, broadly, approximately INR 13,000 to INR 14,000 crore. Half of that, I would say, is in the wholesale book. About INR 6,000 crores is a wholesale book. The loan against shares book is another INR 3,000 crores, and the balance, INR 3,000, would be in the retail book. So I think INR 3,000 retail has come down, INR 3,000 LAS has come down, and about INR 6,000 wholesale has come down. These are only approximate numbers. But just to compare apples-to-apples, we will put out an addendum to the IR PPT, which we'll give 3, 4 other investors have also asked us. What we have done, Aditya, is we have moved to entity-wise reporting because that was another need, a lot of investors, not just equity investors, but even banks and others were asking that they would like to see entity level. And we thought since this is end of the year and for the -- for FY '20, we now move to entity level. Because as we are restructuring the businesses into different groups, I think entity level has been very important because now we have investors in each of the groups. So anyway, we operate internally by entity-wise only. When CDPQ is investing in ECL Finance, they are only focused on that. There's a ring-fenced governance out there. A year ago, a lot of this was fairly fungible across the group. But now each entity is very stand-alone, very ring-fenced. So I think what we need to do is to build the bridge between entity-wise and what we used to give, which was earlier business-wise. And that's an easy one to do. We have it already ready. You should have it in a day's time. But as I said, the book has come down by about INR 12,000 crores approximately.

Got it. And just as an addition to this, is there any debt at the parent company level?

S.R., we have a little bit of debt. Over the years, we have reduced, we have not given too much debt. We have not had too much debt at the parent company level or the EFSL holding company. S.R., is there -- how much is the debt or the borrowing at EFSL?

Debt's at about INR 75 crores or INR 100 crores of CP [ short term ].

I think we have ensured that holding company, we have not had too much borrowing because we didn't want to do multiple-level averaging. We have seen a lot of Indian companies have holding company average and operating company average, it all adds up. So we have -- so we -- Edelweiss Financial Services, we have tried to keep it. In fact, the good has been Edelweiss Financial Services has not had any borrowing. The bad has been we have not kept any extra cash at Edelweiss because -- Edelweiss Financial Services because that is idle. We have invested in our entities to make sure they are all well-capitalized. So as you can see in the presentation, ARC has INR 2,000 crores equity, more than enough. EGIA is about INR 1,200 crores equity, more than enough, and we will raise more. Credit has, across the 3 entities, close to INR 5,000-odd crores of equity, more than enough. And Insurance has got enough equity. So we have ensured that our operating entities are well-capitalized.

Right. The second question I had was sort of more in terms of employee remuneration and how you're seeing that going ahead. The specific question I had was that historically, as the earlier participants also noted, there are more of 1 single entity. And as far as I understand, I think you've given employee stock options of the holding company, and that's been fairly generous. So we see a large percentage of your company owned by employees and management. Now that you have multiple entities with multiple stakeholders, how are you thinking through that, and along with that conversion from, if any, from the current situation? And if I might sort of also throw in, given the rather painful correction the stock price has seen, does that in any way sort of -- I mean how do you think about that in terms of retaining your very good quality talent?

Yes. And actually, that's an important question. And we are in that transition phase where like, for example, in the insurance business, which is a JV with Tokio Marine, so they may or may not get listed. We have rolled out a long-term incentive plan, LTIP, like other insurance companies. So we are slowly replacing ESOP for those employees with an LTIP. In our asset and wealth management business, we are doing a shadow ESOP for our employees. The same thing we'll do in credit and all that. So our idea is slowly and steadily because we have 11,000 people, and it's very hard to have everybody aligned to 1 single entity. And as you said, the good thing about being diversified business model is that there are some parts always growing and doing well. But the bad thing about a diversified business model is there are some parts which are always struggling. And what we have seen in last 2 years, the challenges of the credit business has actually overshadowed our strength in our asset management, wealth management, ARC, even the insurance business. In fact, in April and May, our insurance businesses have been the fastest-growing insurance business in the industry in spite of the lockdown. And we are very small players. We don't have a big brand. But still, our insurance business has done well even in this environment. So that franchise and all is getting overshadowed. And our idea is we are now 25 years old. The next 25 years of Edelweiss should be developing these different parts and aligning employees of those parts with those businesses. So we have started rolling it out from this year for insurance, for EGIA. And in the next 1 year, our dependence on Edelweiss ESOP will slowly come down.

Okay. And if I may sort of be permitted to ask just a follow-up on that. So what you're suggesting is that for each individual business, that entity's employees or management will get further stake by way of shadowing ESOPs or whatever. Is that a significant dilution we are looking at? And I mean is there any quantification of the same? Because I think you mentioned certain percentage ownerships of each of these businesses. So if we are looking at further dilution, which probably is necessarily given the sort of current situation, but is that a significant number or...

So as I said, when you do things like LTIP and all, there is no equity dilution. Even a shadow equity is effectively an economic reward, but it is linked to either stock performance or assumed stock performance. So there is no dilution per se, but obviously, it will go through the P&L. But nowadays, even ESOPs go through the P&L under IndAS. But to give you an idea, our idea of a broad rule of thumb for ESOP has been between 1% to 1.5% a year over 5, 7 years. So if we -- let's say, if you look at 5-year ESOP, then a 4% to 5% ESOP dilution, if you really are a listed company and there is going to be listing and you want to align employees with that, that is generally a good rule of thumb to have. So I think going forward, we have seen ESOPs are very good, but they also can be very procyclical. So our idea is to have a combination of ESOP and long-term incentive plan, which also puts cash in the hands of people, but is linked in some way or the other to the equity stock price performance.

The next question is from the line of [ Mahrukh Adajania ] from Elara.

I have just a few questions. You've given a detailed table on inflows and outflows, which is asset sale of INR 2,200 crores in H1 and then probably INR 1,000 crores in H2. And then as well in the presentation, you talked about close to finalizing of INR 4,000 crores sales and INR 3,000 crore more later. So how do these 4 numbers tie in as in was in the fund flow statement and that in Slide 19?

So the way it works, [ Mahrukh ], is like the INR 4,000 that we are selling, we are taking a haircut on that, almost INR 800 crores, INR 900 crores there, which is the impairment already built in. So what we did in March, we have taken the impairment though the actual sale has happened in June. We have taken the impairment first because that makes sale easier. And even if you do more portfolio still, whatever impairment is required on those particular assets, we have already taken that so that when we sell, it becomes easier. We don't have to take an impairment at the time of sale. And that is why this entire ECL model and the pre impairment that we have taken. Now what -- so this INR 4,000, if I give you a broad estimate, out of this INR 4,000, about INR 1,000 is the, let us say, the impairment. So effectively, INR 3,000 crore is the sale price. Out of which, about INR 1,200 or INR 1,300 will be kept in the AIF for completion of that projects. These asset sell-downs we are doing is not only for raising liquidity, it is also for making sure those projects have enough liquidity to complete that. So a lot of these projects need about INR 1,200 crores so that those projects can get completed because in real estate, asset quality is directly related to completion of the project. So by doing this -- we did that last year with the South Korean company, Meritz. And even in that out of INR 2,000 crore deal, almost INR 700 crore has been kept aside inside that entity, the AIF, to complete those projects. So in this also, out of INR 3,000, we expect that about INR 1,200, INR 1,300 will be kept for that, another INR 700 will be kept by us out there as part of our investment in that. And we get about INR 1,000 to INR 1,200 crore of net cash flow out of this. And that is how the structures usually work because we also want the upside because we think there'll be a clawback on that. There'll be an upside on that though we have marked it down. And we are the manager. So this AIF also is managed by us. We get a fee on this also. So as we manage this AIF and we recover the money, it also comes back to us. So we want to keep the upside out there. But by doing it, a markdown, taking it off our books, putting it in an entity which has liquidity which can fund the closure of these projects, and what we find is a lot of these projects are well done in a fund structure because then you don't have this quarterly NPA and technical NPA issues. You can restructure them, you can really get last-mile funding, you can change the collateral package. You can do all of that. So I think the broad rule of thumb is whatever you sell, about 30% to 40% is the cash inflow you get in wholesale. In retail, you get almost 80%, 90%, about 10% you keep there. What you see out here as the asset sell down, which is there, is about 2/3 from wholesale and 1/3 from retail because we will also sell something from housing finance, and that will also be used to grow that book again. And that is part of like any other NBFC does, we will sell INR 200, INR 300 crores every quarter in retail. So about INR 500, INR 600 crore of retail will also get sold.

Sorry. That's so helpful. And just a clarification. So this INR 4,000 crore deal has been done, is it?

Yes. We have signed the deal. And I think the first tranche has happened. The second tranche has happened. It's in multiple tranches because there's a lot of paperwork and approval and all that required. So the first 2 tranches have happened, which is about 2/3 of the deal. The last one tranche will get completed in this month.

The next question is from the line of Vikas from Carnelian.

First of all, I send my compliments to you, Venkat, Nitin and the entire team from bringing down the borrowing in this difficult time. I have a couple of questions. One, I think on the entire liquidity management of the total borrowing program, how do you see over the next 12 months, by estimate, March '21, that timing out -- that coming out? And that's one. And secondly, on the asset quality side, we have obviously taken a huge amount of that and largely cautious provision, conservative provision, excessive provision. So do you -- what -- is it fair to assume that large part of the provisioning on the wholesale book is behind? And I think going forward, the credit cost will be business as usual or fairly nominal. So that would be one, and I'll come back. I mean I have a few more questions, but if you can just...

Yes. I think on the first part on liquidity, as you know, our total borrowings, if I look at the partial convertible and all our -- the participating in ARC and all that is about -- total borrowing should be about INR 30,000 crore and the average tenure is about 3.5 years. So repayments every year are about INR 8,000-odd crores, INR 8,000, INR 9,000 crore. And if you see for the next 2 half years in the Slide 60 we have given, we have INR 6,000 crore in the next 6 months and then INR 4,500 in H2. So we have about INR 8,000, INR 10,000 crores of repayment every year. And our inflows are also about INR 7,000 to 8,000 crore on a conservative basis. Out of which, about half is retail and half is wholesale. Retail, we get about INR 200, INR 250 crores every month. So about INR 3,000, INR 3,500 comes from retail, and the balance comes from wholesale. So usually, we think the gap per year should be about INR 3,000 crores per year. And obviously, when COVID happened there, that became INR 3,000 plus another INR 4,000 that we have overcome. But going forward, if you look at our cash flow, this thing, we are -- we will have a natural gap of about INR 2,000 to INR 3,000 crore, and that's why we hold about INR 5,000 to INR 8,000 crores on an average. So our idea is that our liquidity should -- in a very conservative basis, at least for 1 year. So even in a 1 year, our inflows are only INR 5,000 and outflows are INR 10,000, we should have at least INR 5,000 crores of liquidity. In March, we had INR 8,000. And we'll continue to maintain that. So that's our approach, and that is usually about 20%, 22% of our balance sheet. So I think COVID created some palpitations obviously because in April, when the moratorium got announced and we started calculating it, we suddenly saw that what was a INR 3,000 crore gap for 1 year could become a INR 8,000, INR 9,000 crore gap for 1 year. And we had INR 8,000 crores of liquidity. But obviously, we don't want to have no reserves at the end of the year. So we have fortunately managed it. I think the last few weeks have been very fortunate. Banks have been very helpful. LTRO has worked. PCG is working. So I think the government response worked slowly, but eventually has got worked for NBFCs. So I think on that count, the COVID-related impact is out. And post -- and outside of COVID, we were okay in March and we will continue to be that. It's not great liquidity environment from a growth point of view, but it's enough to make sure you are able to meet your obligations. And since we anyway want to degrow, for us, this is not a bad time to continue to just focus the way we are focusing. On impairment, I think wholesale, last 2 years have been very, very stressful, and we have seen all kinds of stress. It started with demonetization, then GST, then RERA, then ILFS and all that. So we think we have also taken COVID impact, and I believe COVID has gone over -- is going to have an impact on both wholesale and retail. I think retail might be higher than wholesale because wholesale, last 2, 3 years has been stressed. People have not grown wholesale, like we haven't grown wholesale for the last 2 years. So there is no new wholesale that is -- that was done under some assumptions which have changed. So I think wholesale, it's easier to understand the impact. And I feel we have taken whatever has to be done on wholesale as an impairment. We don't expect any further impairment of wholesale even because of COVID. I think retail is uncertain. We are very small in retail and a lot of our -- is home loan book. And even that, we have estimated an impact to that. But I do think there is, for the environment as a whole, uncertainty around retail asset quality impact. And when I talk to banks and all, they all think post August and September, you will start getting an idea of what kind of retail impairment will happen, and that is why you see all the banks are proactively raising capital because what happens is, if you think you're going to take impairment, you will need equity. Now in our case, we had excess equity because our capital adequacy last year was 19%. ECL finance, that went to 29% and now with impairment has come to 21%. Even with 21%, we are higher than the 19% equity capital adequacy of March 2019. So having excess equity is a good thing if you want to take impairment. And I think a lot of banks are raising equity to just be prepared for that. So I think there is uncertainty on retail. We don't see a lot of issues on that. Wholesale, I think we have all been able to estimate what is the -- that is why we also got an international consulting firm to do future cash flow stress test, all the assumptions and all, and the impairment has been worked out on that basis.

And, let's say, on the EGI business, obviously, there's a statement that you're planning to raise further capital, INR 1,000 to INR 1,500 crores. So I'm assuming all these businesses are stand-alone. So an -- in any unfortunate scenario, like if there's any credit even in any of the entity, easier if business remains fairly sort of insulated and stand-alone, right?

Actually, India, by law, all businesses are insulated and stand-alone because when SEBI allows you to form an asset management company, that asset management company has its independent capital Board, all of that. Like to give you an idea, insurance is also independently capitalized and stand-alone, mutual fund is stand-alone, EGI is stand-alone, even ARC is stand-alone. Even within credit, EHFL, ERFL are independent, like EHFL has got about INR 750 crores of equity and has about INR 5,000 crore of book-only retail. It's a good stand-alone housing finance company. It doesn't have anything to do with ECL Finance nor does ECL Finance have anything to do with it. So I think in India, by law, because there are different regulators for different entities and all these have their own Board, like EHFL has its own Board and NSB looks at it, the Board meetings and all that. So in India, good thing is that the regulators also force you to be ring-fenced both on capital, governance, balance sheet, all of that. And that has been the case. I think it's never been highlighted but that has been -- so even today, our insurance company has got INR 700 crores of cash. But we can use that cash. Even ECL Finance have got ample liquidity. It's got more than INR 4,000 crores of liquidity. But the holding company can't use that liquidity. If you want to do a stock buyback, we can't just take that liquidity. We have to dividend the money up and then we can do that. So that has been the case for the last many years. You can't just take money from 1 entity to another because each one is independent. Covenants are there. The banks are monitoring what is happening in ECL Finance. So ECL Finance can't give money to ARC. ARC can't give money. Our ARC has got INR 400 crores of cash. So that cash that you see is also split across various entities, and they are all ring-fenced. And what we have achieved in the last 18 months is become self-sufficient on liquidity, on entity level also.