IIFL Finance Limited (IIFL.NS) Q3 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to IIFL Finance Limited Q3 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to management. Thank you, and over to you, sir.

Thank you very much. My heartiest welcome to all who joined the call, ladies and gentlemen. On this call today, we are joined by Mr. Nirmal Jain, our Founder and MD. We also have Mr. R. Venkatraman, who's our Co-Founder; and also Mr. Girish Kousgi, who is the MD for our Housing Finance -- MD and CEO of our Housing Finance company. We also have Venkatesh, who is the MD and CEO for Samasta Microfinance. Through this call, we want to run you through our performance for quarter 3. And before we go into the details of our financial numbers, I hand over the call to Nirmal to give you a perspective on the entire macroeconomic situation and the company's strategy going forward.

Good evening, everyone, and thank you for joining the call. Before we get into our quarterly performance, I want to first address the income tax special audit under Section 142A -- 142(2A) as this has clearly caused concern and anxiety in the market today. I understand that the term special audit can sound unsettling when taken out of context. So the direction under Section 142(2A) is a procedural step in our ongoing income tax assessment for a multiyear block period. After the search, there's always a block assessment for 6 years together. So this is not a finding. There's not an allegation and not an adjudication. Such procedural audits are not uncommon for large diversified financial companies with large transaction volumes and multiyears of data and complex operating structures. This provision allows the income tax authorities to appoint an independent auditor to assist them with verification and reconciliation of data. The audit report is an input to the assessment process. It is not a conclusion. There's no tax demand, no penalty, no determination against the company pursuant to this direction. And at this stage, there's no financial impact that can be ascertained. And we'll fully cooperate with the special auditor. But again, I reiterate that there's no impact on our operations, our capital positions or growth plan. With this clarification, let me turn briefly to the macro backdrop. While markets have been -- have seen some near-term volatility, the underlying Indian macro environment remains supportive with stable growth, comfortable liquidity and improving credit conditions, and particularly in our core businesses of gold and mortgages. Now against this backdrop, let me turn to what truly defines the quarter and our underlying trajectory. Quarter 3 and 9 months FY '26 reflect consistent execution of our strategy with strong growth, improving asset quality and materially strengthened balance sheet. Loan assets grew 9.1% quarter-on-quarter, driven primarily by gold loan. Asset quality has improved across the board with significant reduction in GNPA from 2.14% to 1.6% and also NNPA going below 1%. And you'll also notice that Stage 2 and Stage 3 are also trending down, indicating further improvement in asset quality going ahead. Our provision coverage is at 92%, well above the regulatory requirements. So over the past few quarters, we have consistently reset the portfolio, exiting high-risk segments such as digital unsecured MSME, Micro LAP under HFC and select MFI geographies. This is now clearly visible in numbers, more resilient portfolio, lower volatility and better risk-adjusted return. From a financial standpoint of view, we remain well placed. Our ROE is 2.1%. ROE has been moving up and 11.3%. Our consolidated capital adequacy is 27.7%, liquidity of over INR 9,400 crores, net gearing of just 3.6x. Our funding profile continues to diversify. Cost of borrowings are trending down, and our ALM is comfortable, surplus across all buckets. Operationally, our AI-led risk governance and early warning system combined with digital network of 4,800 branches, servicing 4.6 million customers continue to be our core strength. And this strength is also reflected in S&P, international rating agency, reaffirming our rating and revising the outlook to positive. With this context, the fundamentals of the business remains strong, stable and improving. I'll now hand over to our CFO, Kapish, for granular details of our financial results.

Thank you very much, Nirmal. So ladies and gentlemen, for the quarter, the consolidated profit after tax before noncontrolling interest was INR 501 crores, which is up 20% quarter-on-quarter. We recorded pre-provision operating profit of INR 1,075 crores, which is up 101% Y-o-Y and 4% quarter-on-quarter. For the quarter, the consolidated AUM grew by 38% and 9% quarter-on-quarter at INR 98,336 crores being at the cusp of INR 1 lakh crores, largely driven by gold loan, which crossed the pre-embargo level at INR 43,432 crores, supported by a healthy gross NPA of 0.036 (sic) [ 0.36% ]. If I further dissect the AUM, the leading core products of home, gold, MSME loan and microfinance, they collectively grew by 46% and up 11% quarter-on-quarter to INR 93,767. Gold in particular, grew by around 26% quarter-on-quarter and around 189% on a Y-o-Y basis. The core segment now collectively comprises of 95% of our total AUM. As Nirmal mentioned, our gross NPA touches around 1.6% and net NPA is around 0.8%, which is down 82 basis points and 26 basis points, respectively, from the same period last year. The company does maintain a cautious stand on the unsecured and MFI segments and clearly focusing on recovery and collection, which has been showing good resilience and been performing well every single quarter as we progress over the last few months. With the implementation of the ECL, the provision coverage ratio stands at 92% with our strategy to partner with banks and downsell our pristine assets. Our assigned loan book stands at around INR 21,373 crores, which is up 71% Y-o-Y and 15% on a quarter-on-quarter basis. Besides this, the co-lending assets stands at around INR 13,176 crores, which is up 43% Y-o-Y and 11% quarter-on-quarter, taking the aggregate off book at around 35% of our AUM. On a quarterly, average cost of borrowing increased by around 8 basis points on a Y-o-Y basis and decreased 14 on a quarter-on-quarter basis to 9.24%. To briefly update on our liquidity, our liquidity stands at around -- sorry, we raised around INR 20,007 crores from term loan, bonds, commercial paper during the quarter and around INR 7,774 crores of our assets were assigned to various banks. And our liquidity stands at around INR 9,433 crores, adequate enough to not just meet our near-term liabilities, but also adequate to support and fund our growth momentum, which stands quite positive. ALM, as Nirmal mentioned, is positive across buckets and our net gearing stands at around 3.6x. While the 9-month ROE is what Nirmal talked about at 11.3%, annualizing the last quarter ROE, our ROE stands at around 14.3% and ROA was at 2.5%. Our basic earnings per share stands at around INR 10.9 and book value as of 31st December is around INR 306.85. Capital position remains to be healthy with the strategy. The capital adequacy at a consolidated basis stands at around 27.7%. For individual companies, NBFC is around 18.9%, HFC is 47.7% and Samasta stands at 30%. We did touch upon the revision in outlook from stable to positive by S&P. We also declared an interim dividend of INR 4 per share, which was approved by the Board of Directors and will be paid in due course. With this, I come to the end of the session and leave the floor open for Q&A. Thank you very much.

[Operator Instructions] The first question is from the line of Nischint from Kotak Institutional Equities.

Just before the questions on the business, this tax audit, this will be for which financial year or how many years? And any sense in terms of how long this continues?

So this -- if you are aware -- you must be aware that last February, we had an income tax search under Section 129. So after the search, there's always a block assessment of 6 years. So this tax audit -- it's not a tax audit, it's a special audit based on their findings during the search, which will be -- which will cover the block period of 6 months. This is supposed to get over in 60 days' time.

And this is for -- I mean, like financial year or what?

No, this is -- on the certain areas, what they want to verify is for 6 financial -- for the block period. When the income tax search has happened, so this is an ongoing process. This is ongoing income tax assessment. So this is always for a block period. So wherever searches have happened, the assessment happens for 6 years together. And for the block period that we have filed our income tax revised return in which we have paid another INR 1.29 crores of tax or something.

And any specific items that you want to call out because of which the tax liability went up?

This INR 1.29 crores you're saying? No, this is insignificant amount. I mean it's just a recomputation based on whatever decision, as you said, for 6 years.

Okay. Okay. Got it. Just on the business front, I was looking at your secured loans and the stand-alone business, which has a ticket size of somewhere closer to INR 2 crores and earns almost like a 14% IRR. So any texture on who these customers are? Because as we understand, typically, there is a linkage between risk profile, ticket size and IRRs. And for such a large ticket, the IRR looks a little bit on the higher side. So just curious who are these customers and what are these properties or some texture of the business would be helpful?

So these are SMEs and these are priority sector lendings, and these are from smaller towns. And in fact, this is a new -- so if you really remember our historical portfolio had 18%, 19% yield. So we recalibrated our entire business portfolio. And so I think the average ticket size is about INR 2 crores, is it?

Yes.

Okay, this must be including the historical data also. Okay. So these are typically between INR 50 lakh to INR 1 crore or maybe can go up to INR 2 crores also. And because they are from smaller towns and segments that we cater to through our branches, average yield is around 13.6% to 14%. That's what we're getting on a continued -- ongoing basis. And until now, in this portfolio, we don't have any delinquency as such.

Got it. And the secured MSME that's done from the housing company, what is the ticket size over there? Because I think that's sort of missing in the presentation?

That secured MSME ticket size is INR 14.1 lakhs. That's on slide -- Slide 23.

I know, it's just missing. Anyway, I got it. And just final 2 questions. Any status update on the SRs? Any time line that you're looking at for cash receipt?

Last quarter, if you see Slide #17, then they have fallen from INR 3,500 crores to INR 3,000 crores. In next year 2026 calendar year, I think we'll see significant drop. Maybe most of these SRs will get redeemed.

Got it. And finally, any plans on capital issuance at this stage?

No. At this stage, I mean, we haven't announced any capital raising plan. We are monitoring the situation very carefully. But whenever appropriate, we'll raise capital.

But there is any particular leverage level in mind, any particular capital issuance? I mean if one has to sort of model it, at what point of time would be so?

Our situation is such that we are very comfortable on the subsidiary companies because if you look at our capital adequacy of home loans is almost 46%, 47%. And even microfinance is 27% -- 30%, 30% is our capital adequacy. Now as far as the stand-alone company is concerned, the gold loan has grown very rapidly. Typically, if you see our strategy has been more of a bank partnership where we do co-lending and direct assignment. Co-lending was on a hold for the last few months because RBI's new guidelines of CLM1 have come into force from January. People are doing the integration. Once that gathers momentum, then we'll be very comfortable again on our capital adequacy, but we are monitoring it very carefully. We are open. But at this point in time, no, I don't have any time line that I can -- I mean there's nothing that Board has decided and what I can tell you at this point in time.

Got it. But I mean, I'm just curious if I have to model growth going forward, at -- any particular ratio that you would kind of urge us to see saying that beyond this, we'll probably have to look at capital adequacy?

I think your point is fair. Growth -- our leverage will keep it around 4%, 4.5%. And capital adequacy, we would like it to be closer to 20%. Right now, it's slightly lower. So we are monitoring it.

[Operator Instructions] The next question is from the line of Digant from GreenEdge Wealth.

Sir, first question is on gold loans, that in the tonnage, have we reached the past peak tonnage? Like have we crossed the tonnage? AUM, I understand we have comfortably crossed and moved beyond.

Yes, Digant. Yes, so I'll address this question. So I think our tonnage has been growing up very quickly, very rapidly, much faster than industry, but we are at around 60 tonnes. We are still a little short of what our tonnage was at the time of embargo. March end was around -- it was 57.39 tonnes. We have crossed that and now we are at 59.4 tonnes.

Okay. So I wanted to know...

We have crossed our peak tonnage before the embargo.

Okay. Okay. That's good to know. And my second question is that now that the tonnage, we have got all the low-hanging fruits, those clients who had gone away from us, we would have got them back. We would have given them LTVs in relation to the new gold prices. But going forward now, in terms of new branches, new customers, what's our strategy like because it's just that markets are getting a little competitive on the gold loan side?

I think markets are very strong because loan-to-value has gone up -- the addressable market capacity to borrow has gone up significantly because of gold prices, one. Two, there has been a climb down on unsecured MSME and personal loans and many of these customers are also basically moving towards gold. The awareness has increased. So what I see at the ground is a strong momentum. I mean the underlying factors, what I tell you are what I would -- I think they are. But I think if you talk to the industry, then there's a very, very strong environment -- momentum in the business environment looks positive. So when we talk about competition, there's -- I mean, there are number of players that come in, but market is very large, and we have a network of more than 3,000 branches catering to gold loan. So in our distribution catchment, I think we see significant potential to scale up. You should look at this way, that our average loan per branch is around INR 12 crores, INR 12.5 crores, which is maybe half of the market leader.

Right, right. No, no, perfect, perfect. And then last question is just on numbers that I see that non-Samasta or non-microfinance provisions are steady at around INR 300 crores. They used to be around INR 100 crores in the past. But now they are close to INR 250 crores, INR 300 crores a quarter. So when does this particular part stop bleeding? I think it's because of the unsecured MSME that this portion is slightly elevated.

You see, our discontinued businesses portfolio in 1 quarter only, it has come down from roughly INR 4,000 crores to INR 3,000 crores. And that is like short-term 3-year loan that we had given for -- in some digital partnership in personal loan. Now I mean, there's some flow from that, and that has caused the provisions or the losses other than microfinance. But if you see, we are in line with our guidance because this quarter's loan losses provision otherwise are around close to, I think, 2.5%. And the last quarter, if you remember, we had given guidance for full year at 2.8% to 3%. Next year, it will be less than 2%. So I think we are on track for that.

Right. No, no, perfect. I was just wondering the gold...

Yes, we are on the guided path. And then next year, we'll see a significant improvement as this book really runs down to a much lower number.

Perfect. Perfect. And then just this quarter, the OpEx seems a little higher. Is it because we pay incentives on the gold loan originated at the start or -- because the whole AUM has grown wonderfully, but it's not translated into the pre-provisioning profit in equally strong way. So just wanted your thoughts on that. That's the last thing from my side.

Your point is valid, but this is a onetime charge that we have taken for the new labor code. So I think INR 23 crores additional cost has come for that revision in measurement of gratuity and leave. I think that all companies are basically getting this, which is the new labor code has come in force and the employee liability, particularly for gratuity and et cetera, has gone up. We have put that in the summary slide note also actually, that INR 22.5 crores.

Yes, yes, correct. That number, I saw, sir. I just wanted to know that, apart from that INR 23 crores, the OpEx was a little higher. So that's...

I think if we adjust that, then it's pretty much in line with -- so OpEx has gone up by INR 50 crores, and that is -- maybe half of that is because of that. And then there's normal inflationary growth.

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

Again, just going back to that IT special audit, which has been commissioned. So sir, thank you for the clarification. But I'm just trying to understand, this does not have any business and regulatory risk, if I understand this right, right? Because if at all, after 60 days, whatever special audit happens, there could be a certain tax implementation and which you can naturally contest. But beyond that, I don't think there is any other business or regulatory risk, right, with regard to this special audit?

No, no. The income tax department will have limited resources that we need. So this is just an input to them. I mean this has absolutely 0 impact on our business or operations or there's 0 risk to that.

Got it. And then, sir, I mean, the second thing I was trying to understand is on the housing business, you also put out one point in the notes to the accounts where you have said that as advised by NHB, you have restated your March '25 NPAs and GNPAs, which is more in line with show the collections only after you realize. So just trying to understand until the point -- that point, right, which is March '25 when NHB said that "Hey, both disbursements as well as collections should be done based on a realization basis." Until then, the entire housing industry was working on the cash received basis?

So I don't know about the entire industry. But what happens, supposing the checks which come in the last 1 or 2 days or last few days, they don't realize till the end of the quarter of the month. And basically -- so this is like -- okay, maybe I don't know about the existing thing, but this could have been the practice of the industry, which NHB has advised us that this is not correct. We have restated, we have done that. But important thing is that if you look at our December results, that they are in line with the check -- on the realized money and not based on the checks received but not realized. So we are now following NHB's guided practice. And in fact, with that only, the [ RPs ] are significantly better.

Got it, sir. This is useful. And then on the housing bit again, I mean, we're still seeing that book is largely flat or a minor decline. I mean -- and Micro LAP anyways, we have discontinued and put it in, I think, the discontinued AUM. Now when is it that we think that -- I mean, the cleanup is done and we can start accelerating even in our housing business?

I think this quarter cleanup is done. So from next quarter, we should see acceleration in the housing -- or the growth in the housing portfolio as well with a very clear strategy on focusing on certain segments that we are comfortable with from a long-term point of view.

Got it. And sir, have we done any PLR changes in our housing book? Basically, have we passed on any PLR?

No, no, we have not done anything. No changes.

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

So I just had one question. Today only, your Chief Information Security Officer, Sameer Gadve, resigned. Any reason for the sudden resignation? And what will be the impact of that?

No, there's no sudden resignation. I mean it's a normal sort of churn that happens. People find their opportunities and will go abroad. So there's nothing -- and then we have very competent second line and very competent set of people that take over. So it's very normal business.

The next question is from the line of [ Vedant ] from Nirmal Bang Securities.

Congratulations on a great set of numbers, sir. We have seen a tremendous growth in our gold loan portfolio. So going forward, at the current gold prices, how we are seeing the growth in gold loan portfolio?

I think the prices remain at current level. Even if they don't go up from here, but they consolidate, then we'll see very strong growth in the gold loan portfolio.

25%, 26% growth on Q-o-Q basis?

Should be -- yes, I think that should be a very comfortable target.

The next question is from the line of Bhaskar from Jefferies.

Just one question regarding the ARC transaction during the quarter in the housing finance business. Could you give some texture on how much of that was Micro LAP and how much was pertaining to the affordable housing book, that INR 900 crores kind of ARC which you did this quarter?

So Girish is here with me. Maybe he's our new CEO. Maybe I'll just give a little bit of backdrop to this and then hand it to -- I mean, Girish can add if you have something. So I think with the new CEO and the Board based on the experience and whatever we have done in the past, we reviewed our entire portfolio of housing loan LAP. And obviously, there are certain segments that we had indicated last time also, which is like BLC or -- which was that benefit linked construction -- beneficiary linked construction, that is BLC, and then Micro LAP that we exited completely. So all these segments, profiles of customers or geographies or areas that we have discontinued, Girish took a view, which Board has agreed with him that we should basically dispose of that portfolio once to ARC. And there, the collection can be joint effort, and then we can focus on our continuing businesses on a strategic way. So almost about INR 900 crores or something -- INR 874 crores -- INR 875 crores of total portfolio deal has happened. And I think that cleans the entire thing. And that's why if you see, our GNPA in housing has fallen from 1.4% to 0.5%. That is a level that we would like it to be. Maybe Girish, do you want to add something?

Yes. So basically, what we've done is we've reviewed the entire portfolio. And we also have a vision for next 3 years as to which all segments we need to operate given the opportunity and in terms of what is the kind of risk that we can take given the yield. So we have identified certain pools, which we think is not fitting into our line of strategy when we think of building the book for the next 3 to 4 years' time. So we thought we should do onetime cleanup exercise so that we can focus on energies towards segments where we can then build the book, and that is why we have done this ARC. Our focus, I think, going forward is going to be in terms of segments broadly on emerging and affordable. Affordable largely will be is a priority for us, which can give us yield and emerging to a certain extent which can help us in terms of growth, which will be in line or maybe slightly better than the industry growth rate. So this is one. And number two, in terms of products, I think predominantly, we'll be focusing on HLs and LAP. So this is our focus. So we found that certain products, as Nirmal mentioned, and also in certain geographies, the product mix; for example, in certain locations where we need to focus on HLs predominantly and less of LAP and stuff like that, I think that is what we had identified. So we thought we will just clean up so that the path will be clear for us to grow in the next 3 to 4 years' time. That was the extent what we get.

Got it. So just to clarify that BLC portfolio, I think, which was about INR 400 crores, INR 500 crores, I think that has entirely moved out now?

Yes. We see that for Micro LAP, that portfolio entirely moved out.

Okay. And so now the discontinued asset, which is there primarily refers to unsecured, Micro LAP was the other area where you were kind of discontinuing. And I think whatever there is...

Micro LAP also has more or less gone to the ARC in this HFC's portfolio. So Micro LAP was part of HFC portfolio.

Right. So the discontinued now refers to mostly the unsecured business...

Unsecured business was a personal loan portfolio, which is part of the parent company, yes.

The next question is from the line of [ Adarsh from Enam Capital ].

Sir, a follow-up question was on your -- this IT thing. Just wanted to clarify again that the block years that you mentioned, is it routine that after every raid, you would tend to have a block or it's specific to us that we've got a block of 6, 7 years of...

No, no, it's a part of Income Tax Law that after the search, there's always a block. Search -- okay, it is very, very well defined that the search can pertain to up to 6 years. The search is typically never for the current year. And then once that's done, then the assessment is block assessment always without exception.

Understood. And just to clarify here, this would pertain to, in their view, tax evasion and nothing to do with authenticity of the accounts. Is that -- like how would you answer that?

So when the search happens under 129, which happened February last year, so that happened as a suspicion that there's a tax evasion. And then -- but it's a suspicion. It's not a conclusion or not an adjudication. With the suspicion, they come in a surprise way, collect a lot of documents, evidence, statements of the people and everything. Now the way the Income Tax processes, so the search department is supposed to collect facts and evidences, but they're not supposed to analyze or come to any conclusion on that. So then that goes basically to the assessment department. And then they are supposed to analyze and ask the company that, "Okay, these are our -- based on our findings, what do you want to do? We give you an opportunity to file a revised return, and that has to be for a block period." So that is what we did. And when the data collected from search or whatever evidence data document they have is something where they need some external help for reconciling, verifying, that is when they appoint special auditor.

So which means -- no, what I'm trying to understand is this is not like audit specific or checking the authenticity of the accounts. It's more to do on verification.

No, no. Not at all. Special audit word, to that extent, may be a misnomer. It is not anything to do with accounts. It's more to do with what they found in their search needs to be verified or reconciled. See, many a times in the search, they can take certain documents. They may not get -- okay, even if they get access to all the data and all the accounts, they can analyze in their 5, 6 days that they are there.

The next question is from the line of [ Ranjit from SIB ].

Congratulations for your better results this time. One thing which I wanted to ask is what -- any scope is stipulated for the special audit? And the second thing is any preliminary assessment has been done by the company with regard to the maximum possible impact on this -- on account of these tax issues?

No. Sorry, first part of the question, can you repeat, please?

Yes. Can you just brief about the scope of the audit? Any scope of this audit is being given by the tax audit -- tax department?

No, I think the scope of audit will be restricted to the search findings. So that report also is not fully shared with us. Whatever -- when the income tax search happens, they collect certain documents and statements. We would know what -- I mean, from our point of view, whatever they've taken, they've given. But then -- actually, the scope is always limited to that.

Okay. One more thing with regard to that, whether the special auditor has been already appointed or is it under the process of appointment?

It has been appointed.

Okay. Okay. Sir, second point, with regard to the preliminary assessment about the maximum possible impact on account of these tax issues. Anything company has ascertained?

No, there's no way to ascertain. But what we ascertain is based on that we file our revised return so that we already done. Based on whatever findings and everything, we are supposed to file our revised return, that we have done for 6 years block assessment together. But there's nothing much in terms of that revised return that we have filed. So that is company's preliminary assessment and now they have to verify it.

The next question is from the line of [indiscernible].

My question is on the credit cost. For this quarter, our credit cost has come down to 160 basis points odd. How should we think about the fourth quarter and also next year?

Sorry, [ Gao ], I think your voice is not clear. Maybe can you pick up the receiver and speak please.

Yes, am I audible now?

Yes, go ahead. You're a little bit audible, but there's some disturbance, but yes, I can hear you.

Just on the credit cost, we have came down to 160 basis points this quarter. And how should we think about fourth quarter credit cost and also next year credit cost?

So credit cost has come down and will continue to remain low. And so it's around 2.5%. For the full year, we had said that we'll end at anywhere from 2.8% to 3% because first half credit cost was higher. But this last 1, 1.5 years, our credit costs have been unusually higher because of the turbulence in microfinance industry as well as in the micro LAP. But going forward, next year, we expect our credit cost to be even lower, maybe further 50, 60 basis point decline and should be less than 2% on a steady-state basis.

So, next year credit cost we're expecting less than...

Another 50, 60 basis point decline in the next financial year from the current 50 -- from this quarter level, yes. So it should go below -- so if this quarter if it is around 250, we should go below 200.

Got it. Sorry, just a follow-up on the tax audit. Is this a normal standard SOP. Whenever there is a raid, the double checking or reassessments...

Sorry to interrupt Mr. [ Gao ], we are not able to hear you properly.

Am I audible now?

Now your voice is cracking in between. Can you...

There's a lot of distance, sir.

Am I audible now?

Yes, please repeat.

Yes. I just want to understand on the special audit. Is it a normal standard operating procedure after kind of siege and search? Is it part of a normal SOP for the tax department or this is not typically done?

So when income tax search is done, and the subject of the search is fairly large, complex because our operations are really vast. We are almost more than 4 million, 5 million customers. And if you look at 6 years, the number will be even larger. And in such cases, it's a normal thing. But the income tax search itself is not something -- I mean, that happens exceptionally. It's not that it happens on a regular on every company. But when that happens and the operations are large and complex, then this is normal.

I see. So for a large complex search, special audit is typically a normal procedure?

Yes. Again, if the search is -- or the documents and the accounts that they have are relatively simpler to understand, then they may not need a special audit. So this is not something which is automatic process. This is done only when needed. So to that extent, it is my exception. It's not something which is automatic.

The next question is from the line of [ Ansh ] from Capital One Partners.

Sir, my first question is regarding the net gain on derecognition of financial instruments. So as we've seen since FY '26 -- since the start of FY '26, there has been some movement in that line item. So going ahead, how should we model that? And what could be the strategy for this?

So this is something which is dependent on how -- what assets we are able to sell to banks by way of direct assignment. And the way it happens is that you basically have certain yield on the assets, certain cost of funds or certain price at which you have sold to the bank. The difference basically you can take NPV and reduce it by operating cost or service cost and the probable early repayment. That is how it is. So maybe the simpler way to look at it is that it may vary from quarter-to-quarter a little bit, but maybe it will be linked to the portfolio of off-book assets that you assume in your model.

Okay. And sir, the assumption is that it is calculated on an upfront basis. Had we amortized this value going ahead, what would be the...

It will automatically -- so -- yes, it automatically gets amortized because -- so every quarter, the asset which is repaid, to that extent it gets amortized and -- because the net amount which comes to profit and loss account.

I'm sorry, sir, it was a bit unclear. Can you just repeat it, sir?

No, no. it keeps getting amortized as the loans are repaid. So what you see is the new assignment minus amortization. That is what you see in the profit and loss account.

So this can be the steady state number, right, going ahead?

Yes, yes.

Okay. Sir, my next question would be regarding the home finance GNPA. It has reduced considerably in this quarter. So can you give us some color on that?

No, it's primarily because that certain NPA -- actually as Girish also spoke about this, that certain categories of assets where we have significantly higher NPA and delinquency is higher that we have sold to ARC. So that has gone off our book in the HFC.

Okay. And sir, regarding gold loan, sir, our AUM has grown considerably very -- had grown very strongly, but keeping in mind the borrowings have not grown so strongly. So when I try to model it on an average AUM basis and when I try to get total income on an average AUM basis, I mean, I'm trying to understand as to how should we model this going ahead? Should this growth -- if this growth continues and there is no movement in the borrowings, is there any other way we are looking at that?

It's a good question. So whatever growth we can fund either by borrowings or by selling assets to banks, in both cases, our income or our NIM will be similar, 6%, 7% or whatever, which will come either by their net interest income or will come below this off-book income or income from assets which are off-book DEO and co-lending. So what has happened, whatever you assume, you assume 60-40, 70-30, so that percentage of income will go above the net interest income line and the remaining will come below the net interest line, broadly in a similar range.

Okay. Sir at -- and these gold loans, sir, at what average gold price we would have booked them?

No. So our gold price is at all gold prices, but gold price gain or loss is not to our account. Customer will take the gold back, only pay us interest.

No, I understand that, sir. But -- I understand that, but this movement we've been seeing in gold since the past year now. I was just trying to understand as to in this quarter, what price you would have booked that loan at?

So right now, our LTV is just about 61%. So obviously, part of it is contributed by gold prices also going up, which reduces LTV. And so every day, the price varies. And generally, we keep it sometimes below the 75% price just as being conservative. So there's a weighted average of everything. So maybe you can look at LTV, which is 61%, maybe a good indication of what prices it is booked on an average.

Okay. I think, sir, we can take this offline. I think there is a bit -- some -- there is some unclarity on this. So I guess you can take this offline, sir.

On [ LTV ] you're saying?

On the gold price, sir. There's some unclarity here.

Okay. Maybe I'll try to explain once again. So every day, we have a gold disbursement and there are certain repayments. Every day, gold price comes. RBI has already indicated that where do you take gold prices from. So then your maximum loan amount is 75% that we can give to the customer. Typically, we may end up giving a little lesser, say, 70% or whatever. And then on this gold, as the gold prices go up, our LTV will go down. So at quarter end, LTV was only 61%. But because there are millions of transactions, so it's very difficult to say that if there's any particular loan booked at what price because they are booked at different point in time, partly repaid, repaid renewed. So there's a continuous process.

The next question is from the line of [ Bhavin ], an individual investor.

Post embargo by each passing quarter, I think the operating performance of the company has only been improving. My only request to the management is to -- if it is feasible, the management can issue a clarificatory note and file it with the exchange on this income tax because the special auditor word has poked the nerves of many participants in the market, and that is the reason we have seen large correction in the stock price. So while I do not have any question, but I have a request to the management, if a clarificatory note on this can be issued and filed with the exchanges.

Sure, we'll do that, [ Bhavin ]. But also this analyst call, a transcript will also be put up on the website. So in the beginning itself, I've explained. But yes, I think your point is taken, we'll do that.

Yes. It's my earnest request, sir, if any separate filing can also be done because not many people go through the transcripts and all, but anybody would go through 1 pager or 2 pager related to this clarification. So there is no downside to this, but it may protect the interest of many investors.

The next question is from the line of [ Shreya ] from Nomura.

My question is on the MFI IIFL Samasta business. So it's to do with the liability book. One can see that the bank -- or the term loans or probably the bank borrowings was declining till last quarter. Now that mix has sort of inched up. Though the cost of fund movement between the quarters has been volatile in a way, it was 9-point something, 9.7% last quarter, it's inched up this quarter. There were certain media articles which mentioned that the NBFC MFIs equation with banks have not been at the best terms and probably whatever new money that they are able to raise from banks are coming at an adverse cost of fund. So I just want to understand -- while it may not specifically be for -- that article may not be for IIFL Samasta, but I just want to understand what's the ground reality for us? And how are we viewing our liability mix on this book?

So it's a slight decline in the total borrowings. And the refinance basically, the earlier loans get repaid, so that also get repaid. So if you really look at it, it looks like 44% to 46%. But if you go back 6 months, it was 52% of our total portfolio. So I would say more similar level. There is no significant change in that. And our cost of funds has -- if you see the Slide 31 again, has gone down for microfinance also by 10 basis points. So I would say that there's not any significant change there. I mean, similar. But given [indiscernible] for banks and also the parent, we have been getting new loans from banks also. The entire fear is more about stand-alone small microfinance companies, which may or may not be able to survive the turmoil that happened last year. But otherwise, we find liquidity comfortable.

Right. So for us, the lines and the limits continue to be available from these banking partners, right? I mean there are no new challenges or -- okay, okay. Fair. That's fair enough. If I can squeeze in one more question, again, on the NBFC MFI performance. So in your 2 biggest states, I mean, second and third largest states, Karnataka and Tamil Nadu, can you help us understand if the -- probably the 30-plus book or 30- to 90-day book, has that performance -- how is that performance versus precrisis, maybe versus June of '24? Has the trends reversed back or things have normalized? Or how has been your experience in these 2 states?

Venkatesh will take this, who is the CEO of Microfinance.

In the month of November and December, the strongest comeback, I can say, was in these 2 states. Though the portfolio of Tamil Nadu overall for the industry also has dipped a little, but the collection efficiency has considerably increased. And in both the states, considering that Karnataka came out of the ordinance, what was their last -- MFI Act of last year, it's much better than the thing. So we are back in both the states at around 99.5% plus.

Right. And that trend pretty much continues in January. Would that be a fair assumption?

Yes. The trend continues in January, too.

The next question is from the line of [ Abhishek ] from HSBC.

Congrats on [Technical Difficulty] pretty strong. So one question on this gold loan growth. And now if I correlate that to the Tier 1 of 12.8%, how much can this growth continue with this kind of a Tier 1? Or does it need to necessarily now slow down or you can find something else, which allows you to grow fast in gold loans?

No, [ Abhishek ], now I think it more depends on our ability to do co-lending and DA. So that is what probably will sustain growth and if not, then we have to raise equity. So I think that's a very simplistic answer to your question.

So is it urgent now to get equity or can still go, say, 2 quarters or 3 quarters without raising any...

No, it depends. If we are able to do co-lending and DA, then we can continue. We'll be on the edge, but we'll continue and we have a strong capital adequacy in our subsidiary companies. But for the time being, I think the co-lending engine has to start quickly and strongly and appropriate [indiscernible] which we can do at any point in time. But alternate strategy is to work with the co-lending and DA.

Understood. I have one question for Venkatesh. So what is the disbursements last quarter? I mean, especially if you can break it down into October, November, December?

In October, we would have done around INR 500-odd crores in this -- November, we would have done around INR 700 crores and -- INR 600-odd. In November, we -- in microfinance alone, we would have done INR 700-odd crores. Overall, we would have done INR 800 crores in December for all products put together.

Okay. Okay. Got it. That is helpful. And then I have another question for Girish. So you used the words affordable and emerging when you earlier made a comment. How do you define it here? Is it different from your previous form? Or how -- what do you classify as affordable? What is emerging for you here?

So I think if you look at the market, basically, there are 4 segments. One is super prime, second is prime, third is emerging and fourth is affordable. So when you talk about affordable, typically, this is a business where we would be focusing on -- starting from Tier 2, Tier 3, Tier 4 kind of cities and towns. So this is where we have an opportunity for affordable. So this segmentation is quite standardized across the industry. So these segments are pretty much standard. When we talk about affordable, these are basically on the salaried side, income level of let's say INR 20,000 to -- INR 20,000 to INR 25, 000. And on the self-employed also, it will be on similar lines. The ticket size will be about INR 14 lakhs to INR 15 lakhs. And this also covers under PMJAY Interest Subsidy Scheme, where the loan is up to INR 25 lakhs and the property cost INR 35 lakhs. So this is typically the affordable segment. If you talk about the segment within this, basically, this would be pretty...

Yield would be what? That yield would be what?

If I talk about, most of the companies will be focusing on yield of 12.8% to 13%. So this is the affordable business. When we talk about emerging, this is a level up where the yield should be in the range of 11% to 11.5%, both focusing on salaried and self-employed, both formal and informal. So this is the differentiation between these 2 segments.

And ticket size should be?

Ticket size should about INR 20 lakhs, INR 21 lakh. Affordable is INR 14 lakhs to 15 lakhs; emerging is INR 20 lakhs, INR 21 lakhs; and the next is about prime, INR 26 lakh, INR 27 lakhs; and then we have super prime, which is INR 50 lakhs and above. So in terms of geography, I would say top 10 probably could be super prime and prime and the next 30 cities would give -- would be emerging markets and the next 200 would be affordable.

Okay. So when I look at the yields and the average ticket size for the home loans part that you sold, that's actually the -- the blendeds are around 10.5%, 10.6%, whereas the incremental target that you are -- that you have is maybe 11.5% and say, 13% -- 11% to 13%, let's say. So should we expect that going forward, the portfolio yield -- or at least the disbursement yield should be higher and then that should translate into portfolio yields going higher over a period of time?

Yes, you are right. I think the plan is to ensure that in the next few quarters, the onboarding yield is going to go up because predominantly, our focus is going to be on affordable and emerging, which I spoke about in terms of customer segmentation, property type and the expected yield. So this would aid in the overall portfolio yield going up. But this will take some time, maybe another 2 to 3 quarters because we started this already. Our focus will predominantly be on affordable and then emerging.

And the INR 32,000-odd crores AUM that you have in affordable home loan, as you reported in IIFL, that is actually affordable and prime rather than -- or rather emerging and prime rather than emerging and affordable as you described. So I am just wondering...

So basically, if you look at these segments: one, city would give you an opportunity of doing or being in 2 or 3 segments. It is those pockets in a given city, which give the opportunity. So the exceptions are when you go to Tier 3 and Tier 4, predominantly 90% of business, what you do is going to be from affordable. So every city would give you a mix -- let's say, top 50 to 60 cities would have an opportunity of doing 2 or 3 segments within the given city. So our new strategy going forward would be in terms of trying to increase yield and therefore, the overall yield on the portfolio goes up. So our focus is going to be on different segments, different type of collateral, different kind of profile within the given city. We are today presenting about -- we have about 315 branches. Our focus in this would be on emerging and affordable. I hope I have answered your question.

Yes, yes. No, that makes sense.

For example, to make it very simple. Suppose, if you take, let's say, Chennai, Chennai is a large city, we all know. So in Chennai, there are 3 segments available, which is prime, emerging and affordable. So there are companies -- affordable companies in Chennai doing only affordable business, which is basically catering to outskirt areas where the property ticket size would be about, let's say, INR 30 lakhs, INR 35 lakhs and the loan could be about INR 18 lakhs, INR 20 lakhs. Similarly, slightly away from city center would have an opportunity of emerging and core city center would have an opportunity of either prime or super prime. So some of the large cities would give you opportunity. The minute you go to small towns and all, I think predominantly, it is affordable, which comes at a higher rate.

Sure. So what I was trying to understand that from current portfolio we got INR 32,000 crores, average ticket is more or less in that affordable segment you described, but the yield is lower. So was it just that underwriting was aggressive, focus on that? Or what is the difference between the -- why is the yield lower than typical affordable, which would be 12.5%, 13%?

So today, if you look at where we are present, we are present in top cities, which includes affordable, emerging and also a little bit of prime. So it is basically focused on certain segments and certain good clients. So there has been a new strategy, which is now laid out. So going -- so I think your question is that we have a book where the yields are quite low, even though we are into affordable and emerging. I think that's the question. Now what we have done now in the revised strategy is that going forward in these locations, we're going to focus on the segments which we want to focus on. For example, predominantly, it's going to be affordable and then followed by emerging. So there is a change in strategy to a certain extent. This does not require [Technical Difficulty] in terms of geography because we're already present in many locations, which can cater to these 2 segments. And within those geographies, within those cities, our segment focus will be a little different, which will get us a higher yield.

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

We are at housing. What is the housing book growth that we are looking for from next year onwards?

Housing growth -- housing book growth.

Yes.

Yes. So on the book, we plan to grow by about 15%, 16%. And on disbursement, it will be 24%, 25%.

Okay. So disbursement is 24% to 25%.

Yes.

Got it. Then a few other clarifications that I had. Nirmal sir, just trying to understand given that we received that special audit letter yesterday. And like you mentioned earlier, they have 60 days to complete the audit. So suffice to say, right, that in the next 60 days, this audit will be done with?

Yes, they do it and they will submit it to the income tax Department only. So the report goes to the assessment department.

Okay. And then this audit is only with respect to certain points where the IT department might have a different opinion, right, versus what we would have filed earlier in the returns?

So this audit is only related to the findings of the search. So search also was in certain specific areas where they had suspension. So they collected data documents and whatever information and the statement that they wanted, and they compile and it is restricted to that. See this has nothing to do with audit of accounts or whatever. Our auditor name is generic and can capture lots of things. But here, their purpose is to verify the things which are found in search or related to certain findings.

Got it. And then this amount of INR 1.47 crores, right, that we have paid, right, based on our own assessment, I mean, the only thing is after the special audit is complete, maybe the IT department comes back with a final amount, right?

Yes, and they can raise the demand and you can dispute and appeal kind of thing.

Got it. And then lastly, sir, we said earlier that maybe from next year onwards, there could be a 50, 60 basis points decline from current level of credit cost of about 2.5%. But suffice to say, given that, I mean, like you mentioned earlier, the cleanup in the housing business is complete, the gold loan business is doing well. And then MFI also, what we are hearing from others, there's no further deterioration at the margin, the collection trends, the PAR accretion trends are looking better. So even next quarter, directionally, right, you should see credit costs coming down, right, to get to that less than 2% for next year that you guided for?

Yes. So I think the glide path has already started. So you will see further improvement -- should see further improvement quarter after quarter.

The next question is from the line of Anusha from Dalal & Broacha.

Congratulations, sir, on a very good set of numbers. Sir, on the gold loans, we have seen a very strong growth of around 26% on a Q-on-Q basis. What has been tonnage-wise increase there in this quarter?

Yes. There's about 7% increase tonnage wise also.

Okay. And also on this special audit, was it the case that this special audit was supposed to follow after the RBI embargo which was there a few quarters back?

Yes. So there was a special audit done by RBI also, very thorough and detailed special audit. And that was only related to gold loan and for 3 years. Now although this name is similar, but this is very different. This is for certain areas of search document where they want to do and it is for a block period of 6 years.

Okay. And sir, if you can just give us some color on the overall AUM growth. Like you said that for home loans, we are anticipating a growth of 15%, 16% in FY '27. So some color on how gold loans we are anticipating growth there in FY '27, even on the MFI side and on the business loans. So how do we expect overall AUM to grow over the next 2 years' time? And also on the MFI side, I mean, I believe that asset quality, isn't that should have been much more better relatively because if I just compare the GNPA numbers, the relative improvement for the peers have been much more sharper. So what are thoughts on that?

So in last 2, 3 quarters, we have been thinking our portfolio. We've been very cautious to completely realign our strategy. So our denominator has not grown, has actually shrunk. So that has exaggerated the impact of asset quality and that also reduces our profitability. We'll be cautious, but now portfolio -- as the industry environment has become more sanguine, so we'll see our portfolio also growing and things getting better.

Okay. But otherwise, on ground, you're seeing improvement on the asset quality behavior on the MFI side?

Yes, yes. On ground, there's significant improvement in asset quality, credit culture and even the leverage of customer has fallen and the risk is much lesser. And if you see our slide on microfinance, which is Slide 32, you'll see that the primary, the 0 bucket, which is due today, how much you collect out of that? And that indicates where we stand and that is at all-time peak, is much better now, at 99% at present.

Okay. And how do we see overall AUM growth, say, for FY '27 across the segments?

I would rather talk about -- because see we have a little bit of diversified business model, not very widely diversified. And we are seeing that sometimes some segments do much better than expected, some segments do a little lower than expected. On the whole, I think you should see about a 20%, 25% AUM growth next year.

Okay. Okay. And on any internal targets for ROA, ROE in the near term?

So our ROE was in the range of 18% to 20% in normal times. So we would endeavor to reach towards that. So that is our internal target in the next 2 to 3 years.

The next question is from the line of [ Gaurav ] from HSBC.

Sir, a couple of questions. First is on the gold loan Stage 3 provision. I have seen that we have declined our provision Q-o-Q from 42% to 19% in 3Q. So I just wanted to know the reason for the same. And going forward, should we maintain at this level only? And second, in response to one of the questions, you mentioned that you're comfortable with growing gold loan book at 24%, 25% Q-o-Q. So was that guidance for like 4Q FY '26 or beyond that also we can maintain the same run rate? These are my 2 questions, sir.

So pace has been significantly higher. I mean, of course, quarter-over-quarter, probably the pace will slow down over a period of time. Now I can't say that what will happen this quarter, but longer term -- okay, in the recent past, we have seen that there are 2 factors that are working for us. One is gold prices have been moving up. And two, in our branches, we are getting back our old customers and getting our productivity level back. Whatever impact was caused by embargo, we are just trying to undo it. But it's very difficult to give any guidance on that going forward. Now you said that the provision, we have reduced. What is he saying?

Stage 3.

Stage 3 losses are always, again, dependent on gold prices as well as your historical -- so the way ECL is computed is based on empirical data. And what we have seen is that our losses have been negligible. And that is why this number probably was much higher than what it ought to be. This number could have gone up during the embargo period when the NPAs appeared higher because many customers could not roll over. And 3 months interest backlog, it becomes NPA. But on a steady-state basis, gold loan business typically will not have any losses. And also the percentage that is there in Stage 3 is also very low. So it doesn't make any much impact actually.

The next question is from the line of [ Pranay from Kirin Capital ].

Sir, just a clarification on the previous participant's question where he was talking about the derecognition -- net gain derecognition. Sir firstly, like what is the purpose like we have started doing in FY '26 as opposed to FY '25? And second, is it that a better way of raising your borrowing book as compared to a borrowing which we have a 9% yield -- 9% cost of fund. So is it a better way of -- it's a less cost effective way of doing this?

Yes. So this is a better way because it releases your capital. And secondly, I think we have always been doing this. I mean, obviously, with the volume, it has gone up. And in the COVID crisis and after that, after IL&FS crisis, after COVID and after this -- when the liquidity became very tight, that's the time we started doing it more aggressively. And then we realized that maybe long-term strategy also it makes a lot of sense because it can allow you to grow faster without really having to raise equity and dilute very frequently because you can -- the assets go off the balance sheet along with the risk.

Got it. So what is the delta, sir -- if you can say on the ballpark, what is the delta between our cost of borrowing versus the -- we are selling the book on the onetime cost. So what is the delta we get on this?

No, again, it varies from transaction to transaction. But it may be about 100 basis points more cost, but that's pure risk and capital and everything else. But again, it varies. Very difficult to -- because every -- again, there's a demand for PSL, there's the demand for retail assets by the banks. It's like a market where the prices fluctuate.

Understood. So sir, this will be purely on which segment? This will be probably on the gold loan book?

Both, even microfinance for that matter.

Okay. And so once you are saying it reduces your capital, so basically, it is -- so you had mentioned it is amortized, but once -- if you're saying it is releasing the capital, so it is not an amortized basis, [indiscernible] basis, right?

Yes. So once you have sold the asset, they are off your book. So basically, you'll keep getting income on the difference of interest, whatever we agreed. Then if you take NPV, provide for some cushion and then take it as upfront. Then what happens when the actual loans are redeemed, that is the time then you get the actual interest income and then you amortize this against that. So actually, it will not be cash flow negative whenever -- over a period of amortization. So supposing you have sold loan for gold loan for 2 years and there's a, say, 5% extra interest cost, so 10% is what you've taken upfront. Every quarter it amortizes, so you're getting interest income and you are reducing this that way.

Right, right. Understood. So what percentage -- just to -- so we assume that in the current quarter, what percentage of that amortization would be there are of the Q1, which is part of the Q3?

No. So there are a number of assignments and some of them -- so everything keeps getting. So I mean I won't be able to give you one data for that because over the last 5 years, 2 years, 3 years, tens of such transactions would have happened and everything is amortized at a different pace. So every transaction actually is monitored by the bank as well as by us. Every customer...

Correct. Sir, an interesting thing to see on the home finance where we have significant improvement in our asset quality, basically on the gross NPA and NNPA. And so which you recently mentioned that the future plan of growing the AUM book over there. So at what level of NPAs do we expect we'll be comfortable in this book?

You are saying in home loan?

Yes, in the home finance segment.

So I think the current level what we achieved in this quarter will be a comfortable level.

All right. Even in the growth, which you will be expecting a 15% AUM growth and 25% disbursement growth in that is justified?

I think home loan, Girish, 15% to 20% is what we are? 15%, 18%?

Yes.

So home loan is slightly slower, but these are long-term assets. So...

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

Thank you so much. And if you have any more queries, you can always get back to [ IR ].

Yes. Thanks very much for joining this call and for your patient hearing. For any further queries, you can reach out to our Investor Relations desk, and we'll be more than happy to clarify any further questions that you might have. Have a wonderful evening.

Thank you.

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