Fusion Finance Limited (FUSION) Q3 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Fusion Finance Limited Q3 and 9 Months FY '26 Post Results Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Mr. Smit Shah from Adfactors PR. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and thank you for joining us on the Q3 9M FY '26 earnings conference call of Fusion Finance Limited. We have the company's senior management team with us today on this call. Before we begin, I would like to remind that certain statements made in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available in the Q3 and 9M FY '26 investor presentation that has been uploaded on the stock exchanges and the company website. I now hand over the call to Mr. Sanjay Garyali, MD and CEO, Fusion Finance Limited, to begin the proceedings. Thank you, and over to you, sir.

Good morning, everyone, and thank you for joining us for Fusion Finance's Q3 and 9-month FY '26 Earnings Call. As we begin the new calendar year, I wish you and your families a very happy and prosperous new year. Before moving to performance, I would like to acknowledge 2 important leadership developments that significantly strengthen our platform for the next phase of growth. We recently appointed Mr. Krishan Gopal as CFO, effective January 17, 2026. Krishan brings over 2 decades of experience and adds strong financial leadership as we scale the business. At the Board level, we have welcomed Mr. Brahmanand as an Independent Director, a veteran founder with deep operating expertise in MSME and rural financial ecosystems. His founder-led perspective and grassroot understanding of small enterprise lending will materially strengthen our strategic direction as we expand our MSME and semi-urban franchise. I would also like to place on record our sincere appreciation for Amandeep Singh, who served as interim CFO during a particularly critical phase for the company. Q3 represents an important inflection point for Fusion. The business has now entered a phase of controlled stabilization and disciplined execution. I'm pleased to share that we have returned to profitability this quarter, delivering a PAT of INR 14 crores. This was supported by broad-based improvements across asset quality, collections, credit cost and disciplined disbursement growth. Importantly, our auditors have reviewed the company's financial position and confirmed that the earlier emphasis relating to going concern is no longer relevant, reflecting the strengthened stability and resilience of the business. The quarter also marks our third consecutive period of improvement in asset quality, collections and credit cost. Importantly, this progress has been achieved without relaxing underwriting guardrails, reinforcing the durability of our recovery. Let me begin with disbursements. Q3 disbursements stood at INR 1,594 crores, up from INR 1,298 crores in the previous quarter. This growth was driven by 2 focused initiatives: first, reducing operational friction for our front-end teams; and second, leveraging a preapproved base of high-quality clients where approval rates are significantly stronger. Approximately 30% of our new disbursements now come from this preapproved base with approval rates close to 50%. As we highlighted last quarter, our credit framework is increasingly anchored at the branch and district level. Our top-performing branches categorized as A and B demonstrates significantly lower portfolio stress and superior collection efficiency. These branches account for 82% of our network and contribute 91% of fresh disbursements. Our credit guardrails remain stronger than industry standards and extend beyond traditional bureau-based assessments. We are also seeing a strong traction on the MSME portfolio, particularly in the INR 7 lakh to INR 15 lakh ticket size segment. While this is an evolving journey, we have built scalable processes and tools that position this business for meaningful growth. Momentum in disbursements in both MFI and MSME has continued into January, where we have already crossed INR 670 crores between more than 1 lakh customers. For the past 3 months, new additions have hence exceeded repayments, setting the stage for sustained book growth. Turning to our most important metric, current bucket collection efficiency. Through continued emphasis on ground-level discipline and strong guardrails, collection efficiency now stands at 99.4% in December and 99.7% within that on the new book, which currently represents 80% of the portfolio. We are also seeing strong discipline in center meetings reflected in improving collection behavior. Approximately 94% of collections are realized on the same day, most of it from the center meetings with a further 4% collected within the same week and the balance 1.5% within the same month. We have also seen a sharp reduction in borrower leverage with clients having exposure to more than 3 lenders now drastically reduced to 7% of POS, down from earlier levels of 16% to 17%. Our net flow forward rate in the current bucket stands at 0.25%, translating to an effective collections efficiency of 99.75%. This performance gives us confidence that credit costs in a stable state are expected to normalize in the range of 3.25% to 3.75%. On recoveries, our in-house collection team continue to deliver improving results. We are currently averaging over INR 12 crores per month of 60-plus DPD recoveries in cash, with approximately over 85% driven by internal teams. We continue to invest in strengthening this capability and are targeting INR 50 crores in quarterly recoveries. On the technology front, we are pleased to share that most of the work related to our enhanced LMS and LOS platforms is complete. We expect to begin UAT in the coming weeks with phased implementation targeted for completion by May this year. These upgrades will modernize legacy processes, improve front-end execution and provide real-time visibility into operational gaps. Finally, a brief word on our people who remain the foundation of our execution. The branch manager role, core to our JLG processes and field culture has stabilized meaningfully with annual attrition at around 30% and firmly under control. Over 75% of our branch managers now have more than 3 years of vintage. This deep experience at the frontline is critical to sustaining operational discipline and consistent execution. Looking ahead to FY '27, we have outlined a detailed road map to cross INR 10,000 crores in AUM. We are confident that on the stable book, the credit cost will be in the range of 3.25% to 3.75%, and we will continue to optimize the operating expenses. With a strengthened leadership team and solid capital backing, we are confident in delivering on this plan. With that, I would like to hand over the call to Krishan for his introductory analyst call and take you through the financial performance in greater detail.

Thank you, Sanjay, and good morning, everyone. As this is my first earnings call with Fusion, I would like to briefly say that I'm pleased to be addressing you all this morning. Over the past few days, I have worked closely with the management team to ensure continuity in the execution and financial discipline, and I'm encouraged by the strength of the people, balance sheet and the progress made by Fusion across key financial matrices. I'll now take you through the -- our financial performance for quarter 3 and 9 months of financial year '26, starting with our capital and liquidity position. The liquidity remained comfortable at about INR 1,783 crores as of December, and our capital adequacy stood at 38.8%, providing adequate headroom over regulatory requirements. In addition to the liquidity of INR 783 crores, company has sanctions in hand of INR 1,825 crores, which we can draw at any point of time. The first and final call of the rights issue received a robust response, and we got INR 390 crores subscription, that is approximately 99% from the issue size of INR 400 crores. Fusion is indebted to its lenders for their continued support towards liquidity supply and supports extended to the company during the recent times with the challenges around the going concern and covenant breaches. We are glad to share that the support has continued and going concern challenge is behind the company now. The company has significantly strengthened its funding profile through diversified borrowings across banks, financial institutions and development-focused lenders, reducing concentration risk and enhancing funding resilience. During the quarter, we raised INR 2,127 crores, comprising term loans of INR 1,347 crores, direct assignment transactions of INR 434 crores, NCDs of INR 310 crores and PTCs of INR 37 crores, totaling the total debt raised in the first 9 months till December '25 to INR 3,940 crores from our lenders. This ongoing confidence is reflected not only in waiver approvals, but also in fresh credit lines extended to us, underscoring the resilience and credibility of our company within the financial ecosystem. Importantly, several banks have freshly opened up to Fusion and lenders who were earlier in wait-and-watch mode have now started to actively reengage with Fusion, underscoring the improving lender sentiment towards the company. This expanding lending universe, combined with healthy liquidity and sustained profitability positions us well to support our growth plans in a prudent manner. During my early interactions with our lending partners, it is clear that relationships remain strong and constructive. Waiver coverage for covenant-related matters have improved further with approximately 97% coverage achieved as of date, reflecting continued lender confidence. This confidence is also visible in the continued availability of funding lines and renewed credit limits, reinforcing Fusion's credibility within the financial ecosystem. Moving to funding and margin performance. Our average cost of funds remain broadly stable at 10.3%, while marginal cost of funds moderated to 11.8%. Net interest margin for the quarter stood at 11.3%, supported by a favorable portfolio mix, improving asset quality and lower income reversals from Stage 3 assets. Going forward, we are confident that with the diversity of sanctions in hand and availability of liquidity and profitability, we would like -- we would be anticipating our marginal cost of borrowing to continue to improve from current levels. We expect that our credit rating agencies shall take cognizance of the developments at Fusion, reflecting the strengthening of our funding mix, lender confidence and overall financial profile. Turning to the expected credit loss and asset quality. The company has maintained a strong emphasis on portfolio hygiene and constructive provisioning -- conservative provisioning. Asset quality matrices improved further during the quarter with gross NPA declining to 4.38% and net NPA remaining contained at 0.60% with write-off recovery at INR 14 crores and net credit loss impact to the profit and loss for Q3 stood at INR 65 crores, equivalent to 1% of the average on-book loans. ECL provisions as on -- as of December stood at INR 353 crores compared to INR 440 crores in the previous quarter. Stage 3 coverage remained strong at 86%, while combined Stage 2 and Stage 3 coverage stood at approximately 80%, reflecting a prudent approach to recoverability and focus on minimizing P&L volatility. During the quarter, there was a write-off impact of INR 170 crores on the portfolio, and we released INR 15 crores of management overlay based on the management analysis, including asset quality matrices, the reduction in delinquency and the conservative provisioning approach under ECL, supported by higher provisioning coverage across stages. On operating performance, the focus on cost discipline and productivity improvements continues. The cost-to-income ratio for the quarter stood at 69%, while overall operating costs were nearly flat quarter-on-quarter. Any sequential movement in operating cost ratios is largely attributable to portfolio normalization and is expected to stabilize as growth resumes. Despite a calibrated approach to the balance sheet expansion, pre-provisioning operating profit for the quarter stood at INR 94 crores, demonstrating the underlying earnings strength of the franchise and the benefits of operating efficiencies. During the quarter, there was also a onetime charge to the P&L towards the new labor code, which resulted into an impact of INR 6.91 crores. Excluding that, the pre -- PPOP would have been about INR 100 crores and the profitability would have been above INR 20 crores. To conclude, Q3 and 9 months FY '26 mark a period of continued strengthening of Fusion's financial profile, characterized by the stable margins, strong provision coverage and healthy liquidity. As I take on this role, my focus will remain on sustaining financial discipline, strengthening lender relationships and supporting calibrated well-guarded growth. With improving asset quality and robust capital buffers, we are well positioned to deliver steady progress in the coming quarters. Thank you. Thanks, everyone. We can now open the session for the Q&A.

[Operator Instructions] The first question is from the line of Rajiv Mehta from Yes Securities.

Congrats on good performance. So sir, while you have already communicated January's disbursement numbers, but can you also talk about the net flow forward trend in January and so far, how it is shaping up in February? And also, if you can share the first bucket, 1 to 30 DPD bucket, as of September and December?

Yes, Rajiv, sure. So on disbursements, we have explained that the disbursement trend continues, and this is despite stronger guardrails. On the flow rates, I can't tell you exact numbers because we don't publish like that. We give you only quarterly numbers. But I can give you a confirmation that January is better than the quarter 3 flow forward rate on the X bucket, net flow forward rate on the X bucket. Yes. So -- and this is very secular. So this is across states, and there is no particular state -- and we also share state-level collection efficiency, so this is across state. There is no state where we see any dip. The second is on -- the first bucket is approximately -- so what we ended total is about INR 48 crores, is what the first bucket is.

And that would have come down, right, from September?

Yes, that's come down by about INR 15 crores from September. So, so far -- yes, that's come down from actually about over INR 75 crores from September.

Correct.

Just to give you an exact number, September end 1 to 30 was close to about INR 87 crores, and now it is INR 44 crores.

Great. Yes. Okay. And sir, when you talk about this preapproved eligibility and then that is how we approach growth and which is also helping you. You said that, that pool of customer where you have figured out there's a preapproved, you can do some preapproval-based lending. How exactly you approach the customer? I mean this is all group, right? This is not -- nothing is individual when you talk about preapproved opportunity in a certain client, say.

Okay. So I think the -- so the question that you're asking is that how do we -- how are we utilizing the preapproved base. Now...

Yes, you said it's 30% of disbursement for Q3. Yes.

So the -- so just let me explain to you. The preapproval happens at an individual level. It happens within the group, but not every customer would I preapprove. So let's say, there are -- my average center meeting size is, let's say, 7, and 5 of those customers are, let's say, eligible for the next stage. Not everybody would I preapprove. So I'm preapproving where my -- on a certain base of customers where I see the propensity of taking that to be very high. And I'm keeping -- in the preapproved base, I'm keeping the leverage even lower than what my guardrails are. So essentially, what I'm directing my sales team or the front-end teams to focus on this because our data says that the approval rates and the behavior and the power of the preapproved base is far better than even rest of the customers that we are acquiring. And so the preapproved base essentially operates at an individual level, but it addresses the group. The customer is not acquired as an individual customer. The customer will be -- so there will be more than...

A part of the group. Yes.

Group. In a preapproved, there will be at least 2 customers in the group which I will give a repeat loan to for that center meeting to be eligible.

Okay. So would you introduce another loan or you would enlarge the size of the loan if he is eligible for a larger amount of loan as per your analysis? So will you do that to that customer? Or you'll wait for the cycle to get over and then you offer him a larger loan?

Correct. So we do not have 2 loans for the same customer in the system. We just have one loan for one customer in the system. Now the pre -- while the normal cycle is after 14 months, the preapproved is after 19 months. So the vintage of the customer with us is much higher. So the customer who's ended -- who's had a vintage of 19 months with us -- you know all our guardrails. One of the critical guardrails is that the customer should not be delinquent currently. Whatever bucket, the customer should not be delinquent currently. We do not fund delinquent customers even in the first bucket, whether of competition or Fusion's. So for -- to qualify for a preapproved base, the customer has to be 19 months of vintage versus 14 months, which is our normal guardrail.

The next question is from the line of Viral Shah from IIFL Capital.

I would say congrats for now finally the first quarter of profits after this entire stress. Sanjay, a few questions for you. One is with regards to, first of all, the profitability itself. Now that we have turned the profit, do you intend to recognize the DTA in 4Q? And if my calculations are right, what would be that quantum? Would it be roughly around INR 400 crores, INR 450 crores in 4Q?

So is that your only question, Viral? Or is there a...

No, I have a couple of -- yes.

So if you can put down all your questions, I'll answer them together.

Sure, Sanjay. My second question was just a clarificatory with regards to the current collection efficiency. So I think on the executive summary, the number is a bit different from on Page 17. Is it a change in the methodology that we have done in this quarter? And if you can just touch base on that, what is that change? And thirdly, basically, I wanted to understand how has this net forward flow rate -- there is a sharp decline from 60 bps to 25 bps from 2Q to 3Q. If you can just help us understand this reduction basis the forward flow rates that you have given across buckets? Because I see an improvement, of course, in the first bucket, but the second and third bucket largely, the forward flow rates seem to be stable. Probably could be a function of the net write-back, but that would be helpful to understand.

Okay. Sure. So Viral, first starting with the DTA. So see, the overall quantum of DTA is close to about between INR 380 crores to INR 400 crores. Now we are not -- and you understand that DTA is not necessarily an operating profit. So we are not very pushy about when to claim that DTA. We will let it happen in the due course. I'm not pushing whether we will do it in Q4 or next year or we will do it in a staggered manner, and we are also not focusing on it. But just to give you a quantum, that's close to about between INR 380 crores to INR 400 crores. So that's one.

Sanjay, just on that piece, the only reason is that, see, a lot of lenders would typically look at an annual financial, and it just helps your -- the balance sheet matrices much better from a rating standpoint. So that was just the only thought process behind this.

No, I completely agree with you. I understand that. And we are in -- we give a monthly update to all our lenders on the complete P&L, including our collection efficiencies and matrices. And if you see, that's where the confidence is coming from, and there are some PSUs also which have opened their wallets for us in the last quarter. However, we don't want to be pushing this because of this reason. So if it happens in due course, that's fine. We will not push the DTA. But yes, we are evaluating that. So I won't say anything further on this. On the collection efficiencies, the figure that you see in the executive summary is 99.14%, which is at a POS level. This is average for the quarter, this is average for the quarter 3. What you see is 99.41% in December, that is 99.41% for the month of December, that's like quarter ending. The difference between previous and now on collection efficiency, what we have done is we have put it on pause because that is a meaningful way, that's how the market does it. However, in the annexure, we have also put on numbers. So in case you want to refer to the previous, that is also there in the annexure. So that's the difference between the 2. On the net flow rates, the -- there are 2 areas where we have seen improvements. See, on the first bucket, which is 1 to 30, when we were evaluating ourselves against competition, our flow rates were close to about 35% to 40%. Now we were much better against the industry on this. So we were doing a better job on the 1 to 30. We realize that where we need to do better is on the gross collection efficiency. So that -- there's a lot of focus that we have put on the center meeting discipline. The same-day collections, like I have told you, 94% of our entire collections is happening on the day of the demand. So these are the -- essentially, the flowback is more or less the same as before. The gross flow forward rates have drastically come down, because of which the net flow rates are far better. On the second and third bucket, if you see -- so there is an improvement on each of the buckets over the previous quarter, on second and third buckets as well. I'll just give you a-- on the graph, if you see, there is 5% to 7% improvement on each of the -- just give me a minute, Viralji. Yes. If you see the collection efficiencies or the flow forward rates, in November and December in the 30 to 60 -- now we are in the range of 65 to -- 65 and 57 for December. This was averaging about 70 in the previous months, if you can refer to Slide #13. And 60 to 90 has remained more or less same because we think that by 60 to 90, I think we have juiced out everything from the customer. But 1 to 30 and 30 to 60 is where you see improving trends over the previous quarter by at least 5% to 7%. I hope this answers your queries.

[Operator Instructions] The next question is from the line of Ashlesh from Kotak Securities.

Two questions from my side. Firstly, if I look at this net forward flow rate number for 3Q, which was at 25 basis points, where do you eventually expect this number to end up, let's say, when most of the bad loans have been cleaned up? That is one. And secondly, if you can share what is the outstanding pool of bad loans which were written off over the past couple of years in this cycle? And how much recovery do you eventually expect from that pool?

Okay. Yes. So first, on the net forward flow, so -- this has nothing to do with the bad book. This is only -- the net flow rate is on the current book, as we all understand. So -- and the biggest change that has happened is that the leverage on the current book has drastically come down. You are seeing that greater than 3 lenders on the overall book is close to about 7% or less than 7%, greater than 3 lenders. So one, this has distinctly come down, and this will help us get better and better on even the current bucket collection efficiency. For January, I have already told you that we are better than what the average that you see for the quarter. Now I think the way I'm looking at it is that even if we continue at about 0.25% of net forward flow and assuming everything else flows forward -- so in a stable state, the way we should look at it is 0.25% translates into approximately annualized credit cost of about 3%. Add another 25%. And 80% to 90% of whatever flows forward will eventually flow into 90 plus. So take about 85% of that. That is about 2.7%, 2.65%. For a -- so 2.65% is the credit cost that should be there in decent times. Add about 50 to 60 basis points when there is a tough scenario. So that's where I said that -- which is about 3.3%, 3.4%. That's why I said that the credit cost will range between 3.25% to 3.75% in a stable book on a stable environment. I hope this answers...

Understood, sir. Yes. Second one was -- sorry, second one was a different one, the outstanding pool of bad loans.

The outstanding on the -- so the total write-off is close to about INR 3,000 crores. We have done a -- I have explained in the previous calls we've done a bureau run and we have done multiple propensity checks. About INR 800 crores to INR 900 crores is what we see recoverable, which means that these are the customers where there are some of the other transactions happening in the bureau or we see some trade lines, which gives us a positive sense. We are expecting about INR 50 crores of recovery in the entire 60-plus. Why I'm saying INR 60-plus is because most of the provisioning in our case happens in 60-plus itself. So I'm looking at about INR 50 crores every quarter. So over the next 4 quarters, I'm looking at approximately INR 200 crores of cash collection which will come from the entire 60-plus, of which about 85%, 90% -- 90% will come from 90-plus, which will be divided between 90 to 180 and the write-off. So you can assume that from this quarter, which is quarter 4 onwards, for the next 1 year, we are targeting close to about INR 200 crores of recoveries in the entire 60-plus.

Understood, sir. Sir, and just lastly, and just your opening remarks today, if you can -- if you have given the guidance for loan growth for next year?

Yes. Which I have already given. You want me to repeat that?

No, sir.

The next question is from the line of Sohail Kanalil from ULJK Financial Services.

So congratulations on a good set of numbers. So I had a couple of questions. So first one being what is the attrition rate in this quarter among the field officers? And the second question was how many of the customers of Fusion Finance still have more than [indiscernible] lenders as of Q3?

Okay. Sorry, Sohail, the second one was Fusion+3, greater than Fusion+3.

Yes.

Okay. Okay. So I've answered the second one, but I'll, okay, repeat again. The first one -- first, I'll address the attrition. So I have given you attrition figures at a branch manager level are close to about annualized 30%. 75% of branch managers are greater than 3 years. The question you are asking is field officers. Now the way we measure is field officers greater than 6 months is close to about -- a little around 50%. It's less than -- just a little less than 50% and greater than 6 months. On the -- which is how we measure because a lot of people less than 6 months are trainees and the book allocation doesn't happen. On the Fusion+3, I've explained to you that at a cost level now we are sub 7%. You remember, we used to be hovering around 17% to 18%. Now we are at 7%. So 7% of the entire book at a POS level is greater than Fusion+2. And the new disbursement that we are doing, we have shared with you. About 80% is just Fusion and Fusion+1, not even Fusion+2. So that is also important to keep in mind.

The next question is from the line of [ Maitri ] from Sapphire Capital.

Could you repeat the disbursement number that we mentioned for January [indiscernible]?

Sorry, [ Maitri ], your voice is broken. Did you say disbursement numbers?

Yes, for January...

So Jan -- yes. Any other question you have? I'll answer them collectively.

Yes. So for '27 [indiscernible] AUM, any ROA, ROE target do we have for this year?

Okay. So I think the second question you are asking is that against that AUM, do we have an ROA, ROE target? Is that what your question is?

Yes.

Okay. Okay. So is that all? Can I start?

Yes, [indiscernible].

So Jan disbursement numbers are a little over INR 670 crores for Jan, which has come from over 1 lakh customers, I think approximately 1,10,000 customers. The second -- and 80% -- and in MFI, 80% of these customers that we have acquired -- okay, 76% of these customers at a POS level are our existing customers and 24% are new. On the ROA, ROE, see, we don't give an exact guidance on ROA, ROE, but I've given you -- you know our NIMs. You can clearly figure out what is the -- we have shared with you our margin analysis. You know the income streams that we have. We've given you a sense of credit cost to look at in a stable environment, 3.25% to 3.75%. So the only metric that you would want is OpEx. I can tell you confidently that OpEx at a percentage level will significantly keep coming down. The call that we have taken is that -- see, 85% of our OpEx is people. Now it doesn't make sense -- in a falling book, it didn't make sense to cut down on people, and then we would again require people later on. So the call that we took was that how do we utilize our existing people into more productive areas, one of them being collections. We have a INR 3,000 crore written-off book, and that is why we -- so there is a significant number of people we have put behind collections, at least for the next 1 year. So the compensation of, let's say, a little higher OpEx against, let's say, a normal OpEx that you would want to see is about 5% to 6%. We will obviously be higher than that. That will be -- that will be, to some extent, compensated by the recoveries that we get in the 90-plus or the write-off pool, at least for the next 1 year.

[Operator Instructions] The next question is from the line of Viral Shah from IIFL Capital.

Sanjay, just with regards to your collections and the write-off that you mentioned, you mentioned that INR 50 crores of recovery per quarter, this is on the 60-plus portfolio. I'm sure part of this is basically your normal, I would say, the recovery of an overdue book roll back, all those things that happen. Out of this INR 50 crores, what is the exact, I would say -- or not exact, I would say, but more likely proportion of recovery from the write-off portfolio of INR 3,000 crores? If you can help us with that? And secondly, also with regards to your credit cost guidance of, say, 3.25% to 3.75%, does this kind of take into account, say, the use of the residual management overlay of around INR 30 crores, given we have used another INR 15 crores this quarter as well?

So the second question, I'll let Krishan take on. I'll just answer your first one. On the INR 50 crore breakup, like I already explained, while this is 60 plus, 90% of it, which is approximately INR 45 crores, will be 90 plus, which is 100% provisioned. Right now, we are averaging 13 -- of which of these INR 45 crores right now, about INR 13 crores we are averaging from the write-back for the quarter, which we will be taking close to about INR 18 crores to INR 20 crores. So of INR 45 crores, about INR 20 crores for the quarter will be write-back and the balance INR 20 crores, INR 25 crores will be 90 to 180 recoveries. For the second question, I'll, yes, pass on to Krishan.

Viral, on the credit cost, irrespective of management overlay reversal, there is an improvement, and that should continue. As far as utilization of that management overlay is concerned, that is based on the improved flow rates and asset quality. So as we have communicated earlier, there is a plan to utilize some bit of it every quarter. And -- however, every quarter, we take an assessment of this and we'll take a call. However, our stand is we should utilize this over next 1 or 2 quarters gradually, the way we have utilized in last 2 quarters. Having said so, there should be -- there is a clearcut improvement in the credit cost removing the management overlay, and that should continue in the next quarters as well.

The next question is from the line of Rajiv Mehta from Yes Securities.

So Sanjay sir, when you talk about doing a INR 10,000-plus crore book in the next year, it's a big jump in terms of where we are right now. So from a funding point of view, how confident are we of funding this kind of growth? And if you can also talk about now at what cost? I mean, your marginal cost of funds is running pretty high and it has to come down now. So where do we see our cost of funds broadly stabilizing as we get the benefit of coming back in terms of the overall P&L?

So Rajiv, I'll just partially answer your first question, and the financial aspect of it I'll leave to Krishan. See, we don't look at -- while you are -- while -- technically, let's say, we end this year at about INR 7,200 crores, INR 7,300 crores and you're looking at it, let's say, from INR 7,000 crores to INR 10,200 crores, that's close to about 40% growth. But I'm saying we should not look at it like that because this is something that the current infrastructure anyway supports. So if you look at our customer base of over 25 lakh customers, 1,600 branches, 1,450 MFI branches -- technically, we should be just MFI. We should be about INR 12,000 crores of AUM, just MFI. So with the branches that we have -- maybe we need to just add people at a front end, nothing else -- we should be at about INR 12,000 crores of AUM only on the MFI book. So I think the -- while you see it as growth, I look at it like reinstating or utilizing the existing infrastructure because we have not let a lot of people go, we have not caused any huge anxiety amongst people. And it is -- hence, I realize maybe in hindsight, while we were being -- internally also we were anxious of the fact that we are carrying a high OpEx. I think in hindsight, we did the right thing, because, for example, you see 2 quarters back, we were averaging INR 250 crores. I'm telling you we are at INR 670 crores. That's 2.5x. But we're not feeling like that. The pressure is not like we have gone up 2.5x, because it's just the people were there, the muscle memory, the way people were operating. And we let people be there and I think that's worked in our favor. So -- however, you'll see a significant buildup on the MSME side. The book that you see, about INR 700 crores -- about 15% of this INR 10,000 crores will be MSME, which means that the MSME will be almost double. Now this is where we are creating a right to win. And we are into completely secured. We are only into self-occupied residential and commercial. And we are very confident that we will be able to offer at a lower credit cost a right to win, which will differentiate us from the market. So 15%, like I said, of the INR 10,000 crores will be the MSME AUM. The rest of the -- I'll just let Krishan do the...

So on the capital front, as you can see, our leverage stands at 2.2x and capital adequacy touching about 39%. And this 2.2x is on the back of like extra liquidity of about INR 1,800 crores. So this number should continue till March when we come to the normal level of liquidity. So these 2 matrices clearly show that we have a good headroom of growth, the number we talked about, next year and one more year. And this is based on the current levels. And I'm not even talking about DTA. Someone of us talked -- touched upon DTA. So that is also -- now we are profitable, and this is just a matter of time. So that way, we have enough capital for growth without that DTA as well. And when DTA comes, there is a straight addition of about INR 400 crores. And as I said, that is just a matter of time. So we are not worried on that front. And as we have mentioned, on the debt side, we are already getting sanctions. We have liquidity of INR 1,800 crores, sanctions in hand of about INR 1,825 crores. So the focus is on the business and the growth, and we are getting good support from the lenders. Plus, as I mentioned, we have a good headroom. Our leverage is -- have very good headroom plus capital adequacy as well.

Just one last thing I want to check on was that the government-sponsored credit guarantee scheme which was supposed to come, any thoughts? Is that coming, signed or something on that?

So I will let -- see, conceptually, we have agreed that Alokji, who is the CEO of MFIN, he is representing us and he's sharing that. So anything pertaining to that, I think it is -- I would deem it fit and proper for him to do the talking. But obviously, if it comes, it's great for the industry. And what, when -- I think he's the spokesperson for the industry and he should do the talking on this.

The next question is from the line of Sonal from Prescient Cap.

This is Sonal Minhas. Sir, you were talking about recoveries of the order of INR 200 crores in the foreseeable future. What is -- if I see Slide 25, I think the recovery rates are much lower than that on a quarterly basis as we see right now. Am I reading the data right? Just want to understand the numbers first and how that is going to be enabled going further to meet those numbers. Just wanted to understand that, yes.

Okay. Great. Yes. So there are 2 part of recoveries. So like I said, INR 50 crores is the total 60 plus. And I gave a breakup of that. That INR 50 crores, about INR 5 crores is 60 plus, and the balance, INR 45 crores, is 60 to -- okay, sorry, 90 to 180, and the balance, about INR 20 crores, is write-off. Now the write-off, that -- let's say, I'm positioning right now. So this total number that you see right now against INR 50 crores is about INR 36 crores, INR 37 crores, right? And between this, the write-off is INR 13 crores for the quarter, which I'm positioning at INR 20 crores. There are certain changes that we have done on how we were -- there's some experiments that we were doing in certain set of branches, and we've been extremely successful and the results have been encouraging. There are some technology changes we have done. We have taken advantage of propensity. There are some AI calling that we have done because reaching out to -- you would understand this is like 10 lakh, 12 lakh customers, so reaching out to them would have been very expensive manually. There are...

Manually not possible, yes.

Yes. So there are multiple -- so we have also taken help of AI. And actually, we were amazed. We were thinking that the rural customers' response to AI would be weaker as compared to urban. We were pleasantly surprised. And all of us have listened to a lot of those calls. I think if we choose the right partner and if we do this right, there is a significant upside that we can get rather than burning money on hiring people on contact center and warm bodies. So there are -- and that's one of the reasons why the overall cost of collections even in the write-off has been hovering around 20%. Otherwise, in the market it's close to about 35%, 40%. So this is what our sense is that the INR 50 crore breakup will come from. And we are -- so if I were to give you the January number, against this INR 50 crores, we are very close to, let's say, INR 14 crores -- we are about INR 12 crores to INR 14 crores in Jan. So from a -- and my previous average was INR 11 crores. So I'm -- basis that also, we are getting confidence that this will be -- I'm not saying a cakewalk, but INR 50 crores, we should be able to target in about 1.5 quarters' time. And for the -- and this is the average per quarter for the last -- for the next 4 quarters, so that we will be at INR 50 crores. So that I'm pretty confident on.

Got it, sir. Sir, going further from a prudence perspective, and in microfinance, the cycles are -- the up and down cycles are there after every 2, 3 years. Just want to understand like -- there is C-DAC, which has early provisioning policies. Just taking them as an example, but there will be other more who are basically more conservative in terms of provisioning much ahead of time compared to peers in the market. How should we see Fusion going further, going ahead from a 2-, 3-year perspective? Like is there enough buffer you want to create in provisions from the profit pool so that whenever the next down cycle comes you're ready and that secures the institution for the next cycle as well from a down cycle? Just want to understand from a risk perspective how things are going to be different for Fusion, not from a regulatory perspective?

Yes. So I think a very, very apt question. So from a risk perspective, the way we are looking at it is that -- there are 2 ways of managing, let's say, a tough situation or a market or a cycle, is that during the good times, you take lesser risk, you build your guardrails much stronger, and you don't get to -- so there are -- all this challenge happens because of the fringe customers or customers who are on the bench, and those are the customers who move to, let's say, a delinquency during the bad times. So one is that guardrails have to be much tougher. We have already explained that our guardrails are at least 2 to 3 times tougher than what the industry guardrails are. And we're not using just simple bureau as a baseline. So that's one. The second thing, if you look at our ECL model, it is extremely aggressive. In fact, most of the analysts have come back and said that you are overprovisioning. We didn't want to change all this during the year. So you are absolutely right. I think -- should we between provisioning and ECL -- let's say, creating fresh management overlay and provisioning, should we be creating a buffer? Absolutely, what you're saying is right. And -- but what -- but both the things cannot happen at the same time. We cannot take a very high provision -- we cannot take a very high ECL and then also provision and create a management overlay. So we have taken a very aggressive provisioning, and like -- and this was because we had a very tough time last year. We did not want to change it during the year. But I think as a team, we will sit down. There are 2 people who are working on the ECL model. There's an external consultancy also we have hired who gives us a very fair and an unbiased view. So we will, I think, at the beginning of the year look at both, whether we need to build more management overlay or we need to make the ECL provisioning a little more fairer. But you are absolutely right. So we will take this call in Q1, the moment we are done with Q4. Krishan...

And sir, how do you tie this -- so just want to ask on this. How do you tie this with growth because you have given a growth guidance which is fairly aggressive? So basically, just want to understand from a growth-cum-the risk perspective, is that growth something which you feel is reasonable enough for the risk that you want to play with?

Okay. Great. So I think let's break this down. The growth is coming from -- where is the growth coming from? One, we are saying that the MSME book will almost double. Currently, INR 720 crores will go to INR 1,500 crores.

Which you mentioned, yes.

Yes. Is that risk -- obviously, the risk is much lesser. Why it is lesser? Because it is completely secured. The LTVs are far protected. Our book LTVs are close to 55%. We are not -- and we are very, very clear on what kind of properties and what kind of risk we will take. We are not taking any cash flow risk there. The only risk that we are taking is on marketable properties. So will we create -- so INR 1,500 crores of book -- let's say, INR 700 crores to INR 1,500 crores will be a far less risky book. The second part is that MFI going from, let's say, INR 6,500 crores or INR 6,400 crores to INR 8,600 crores. Like I said, I don't -- we should not see this as real growth because we did not cut down on branches, we did not cut down on people. And I'll just give you a number. We did INR 670 crores, out of which about INR 35 crores is MSME, INR 630 crores is MFI. If -- now the question that you have to ask is that for next year if I have to do, let's say, INR 8,000 crores of disbursement from MFI, INR 650 crores -- my this month number or INR 630 crores will take me to INR 7,500 crores. Do you think going from this number to, let's say, INR 720 crore average for next year, is it really growth? Is it an aggressive growth? I think that's the -- so maybe it is sounding growth to you because the first 2 quarters were like really -- first quarter was like really down. We were less than INR 1,000 crore disbursement. And there was a huge runoff because of the book quality or the previous book that we had acquired. That's why you saw the book deterioration happening very quickly.

The next question is from the line of Abhijit from Motilal Oswal.

Sir, please let me know in case these questions have been answered. Firstly, I mean, could we -- do you see an increasing propensity of [indiscernible]. So our thoughts around that. I mean, is there a portion of our portfolio which is guaranteed [indiscernible]? If yes, what is the proportion? If not, how are we thinking about it? The other thing is incrementally we have seen MFIs talking about taking some hike in lending rates. So what are our thoughts there? And lastly, sir, today [indiscernible] MFIs, right? We see a [ fertile ] acknowledgement that in MFI while the group lending will continue -- basically in JLG the group base will continue, but joint liability is something people don't sound very confident about going forward. So if you could just share your thoughts on these 3 questions, sir.

Okay. Great. So credit guarantee, we are evaluating, but we have not yet enrolled. None of our book is right now on a credit guarantee as and when we close that. But we are evaluating it. So as and when we close, we will come back to you. On the lending rates, you're right. I think most of the industry has increased lending rates by 100 to 125 basis points. We have not increased lending rates in the last 1 quarter. We are evaluating the situation, and our audit -- there's a pricing committee which clearly has put about 75 to 100 bps, which is a window available for us to increase. The decision is on the table, not taken yet. But there is a play of about 75 to 100 bps on the interest rate which is available to us if we compare against, let's say, whatever the industry or the market is. When do we do this? We will -- we are evaluating this. This decision is on the table. I think there are 1 or 2 more external things that we are looking at, basis which we will eventually take a call. But yes, we will take a call by end of this quarter. On the JLG, I think the group never had a liability. However, if you look at it, there was a nudge by the rest of the lenders, and they would support her, whoever -- let's say, any one person in the group, he would support her. I think the thing that we are observing is that depending upon how we acquire the group, the group will stay together versus not stay together. So let's say, the center members, how close are they to each other from the -- where the center meeting is happening. So we have kept a certain distance of -- let's say, less than a particular distance from the center meeting. Are we getting homogeneous customers on board? In a center, are there customers with very different leverage backgrounds? How is the entire center being looked at? Is there some reward the center is getting for, let's say, a center attendance discipline? So there are multiple things that we are working on, and I think it is getting complex and complex. But I don't see -- and when I talk to some of my peers, mid and large both, they also see significant value in the JLG concept continuing. But I think with the use of technology -- and I explained to you that our entire LOS and LMS, we are upgrading to a very modern system. It will be operational by May of this year. I think that will support a lot of JLG, which is right now too much of dependence on the front end. So that heavy lifting that the front-end person has to do, that will move on to technology and system. And I think we'll be able to give you a clearer picture on this in -- by end of the quarter. We are already undergoing implementation in certain set of branches. I think we will be ready with progress when we talk about in the next quarter.

Just one last follow-up. When I look at this thing that you've put out on the Slide 11, the book composition, what is Unique to Fusion, Fusion+1, Fusion+2, do you think given that the propensity for you as well as the industry now is to come out with preapproved loans, right? Try to see that if you have a good borrower, you try to take care of most of her borrowing needs. You think this proportion of Unique to Fusion and Fusion+1 kind of going up in the coming quarters?

So I think Unique to Fusion will definitely continue to grow. So right now, we are at about over 40% Unique to Fusion. There are a lot of initiatives we have launched around this customer. You're absolutely right. I think this is very similar to any other NBFC or bank that you look at. There's a certain loyalty around existing customers. Anybody who's, let's say, catering to just one customer. I think the only thing that we have to be aware that there can be an overleverage on getting -- let's say, lending too much to your own customer also. So there is a challenge. And hence, the selection criteria is very critical. But you're absolutely right. I think -- and we are working around how we can use technology to give more value add to this customer, because if she is relying only on Fusion and, let's say -- the criteria that we set are, let's say, similar to Fusion+1 and Fusion+2, then we are doing a gross injustice to her and not giving her enough reason to continue to stick to only Fusion. However, if we take the entire risk, something happens in the family, the entire risk will be borne by us. That's also a challenge. So there's a -- this is not an easy thing, and that is why I said that I think this is as complex as any retail finance. And I think all of us are realizing that the involvement of credit in the entire JLG and microfinance is very different than what it used to be even, what, about a year back. So you will see significant focus on this. I don't know what this percentage as a number should be. But yes, we are very cognizant of the fact that certain set of customers should only rely on Fusion for everything.

Ladies and gentlemen, that was the last question for today. I now hand over the conference to management for closing comments. Over to you, sir.

Yes. Thank you. So I think first, at the outset, with great humility, I would like to thank all the stakeholders, each one of you. I think we've been through the entire industry and Fusion had been through a very challenging time. While the internal teams have been rallying around to get Fusion to this level, I think each one of you on this call, your involvement, your guidance, your inputs have helped us hugely and we will continue to bank upon you for advice. So with that, I would like to thank each one of you. I think it's been a very -- an amazing 2-way communication with each one of you. And I'm absolutely sure that the Fusion that we are building from here on will be able to take bigger challenges than what the industry has witnessed in the past. So thank you so much.

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