IIFL Finance Limited (IIFL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to IIFL Finance Limited Q2 FY '24 Earnings Conference Call. From the management team, we have with us Mr. Nirmal Jain, Managing Director, IIFL Finance Limited; Mr. Monu Ratra, CEO, IIFL Home Finance Limited; Mr. Venkatesh N., CEO, IIFL Samasta Finance Limited; and Mr. Kapish Jain, Chief Financial Officer, IIF Finance Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kapish Jain. Thank you, and over to you, sir.

Thank you very much. Good afternoon, ladies and gentlemen. Thank you very much for joining us for the second quarter earnings call for the company. I would request Nirmal to just set the ball rolling and give a perspective on the current macro environment, more particularly for our businesses and his outlook on how things look like from our business performance in quarter 2 and strategy going forward. Yes, Nirmal, if you can start?

Thank you, Kapish, and good afternoon, everybody. So as we know, globally, growth is slowing down and most steeply outside U.S. and maybe a few countries like India. And interest rates are expected to remain higher for longer. And in this environment, India stands out in very good safe and a sweet spot. So all macro parameters in India show healthy trends, inflation is in control, growth is holding up, demand for credit is strong. Interest rates upward movement seems to have paused. Financial systems is robust. Tech collection is buoyant. Infra and CapEx cycle is seeing tremendous growth. And services, in general, are also doing very well, too. So coming to IIFL, there's no change, except in our strategy. So we remain focused on retail lending and that too targeting customers under-banked and geographies underpenetrated by banks. And that's why we make such good partners with banks for co-lending and sale of our priority sector and small ticket retail assets. Only one bit of change or move in our strategic direction, and that is our -- maybe the need and therefore, our resolve to accelerate investment in digital technology and artificial intelligence or AI. And we are poised to make some rapid strides in leveraging technological capabilities and digital capabilities riding on one hand unmatched digital infrastructure that has been created by the Government of India and exponential growth in artificial intelligence and machine learning. Our AUM crossed INR 73,000 crore mark in this quarter, and we are on track towards our guided AUM of INR 1,00,000 crore by end of next financial year. ROA is close to 4% and ROE has been above 20%. Gold loan, home loan, LAP, all these core loan assets grew by about 5% to 7% in the quarter, quarter-over-quarter. Digital loans grew at a faster pace on a small base and similarly microfinance also witnessed a very strong growth in line with the sector trends. Interest yield has improved across asset categories, again, in line with the market trend. But contrary to market trends, we've been able to contain and keep our cost of funds stable. In fact, bring down by 10 basis points, benefiting from low-cost funding from multilateral agencies and National Housing Bank for refinance for affordable and housing for economically weaker sections. Also, the full impact of repayment of high-cost dollar bond that we did last quarter, we saw in this quarter and our improved credibility with banks and other institutional lenders, which give us leverage to negotiate our rates. So with time-tested strong underwriting standards and collection process, asset quality has improved across the board again, with exception of gold loan, where despite reported numbers being stayed higher, the actual losses or actual risk of loss is very minimal. We are taking shareholders’ approval for capital raise anytime during next 1 year and enabling resolution to tap the capital markets at appropriate time. With this, I hand over to Kapish to take you through the financial numbers in greater detail. Thank you.

Thanks a lot, Nirmal. So before we go ahead for the Q&A, I will just give a highlight and a snapshot of how our performance has been for the quarter. So for the quarter, IIFL Finance at a consolidated level before noncontrolling minority adjustment was INR 525 crore, which is up 32% Y-o-Y and up 11% on a quarter-on-quarter basis. We recorded a pre-provision operating profit of around INR 922 crores for the quarter, up by 41% Y-o-Y and 16% on a Q-on-Q basis. For the quarter, our consolidated loan AUM grew by 32% to INR 73,000 crore. On a Y-o-Y basis, this reports a growth of 32% and 7% on a Q-on-Q. Further dissecting the AUM, our core products of the loan AUM is driven by gold, housing finance and microfinance. And then the growth here has been around 34% Y-o-Y and 7% Q-o-Q from INR 69,740 crores, which largely comprises of all our retail portfolio and currently now comprises of 95% of our total AUM. As highlighted by Nirmal, our gross NPA stood at around 1.8%, which is still marginally lower than our guidance to the market of around 2%. And our net NPA is around 1%, which is significantly lower and down by 58 basis points and 20 basis points, respectively, when compared to the same period last year. With the implementation of the expected credit loss under IAS, the provision coverage ratio on NPAs stands around 159%. In continuation of our capital optimization strategy, 40% of our AUM is either assigned or under co-lending arrangements with financial institutions as of 30th of September 2023. And going forward, we will see a larger share of co-lending emerging in December like what we have highlighted in the previous quarters. The assigned loan book, therefore, stands at around INR 18,429 crores, which is up by 19% Y-o-Y and 4% Q-on-Q. And more particularly, the co-lending asset book crosses a critical milestone of INR 10,000 crore and stands at around INR 10,576 crore, which is 125% up Y-o-Y and 18% on a Q-on-Q basis. In spite of the rising interest rate scenarios in the last 1 year where we saw cost in MCLRs and the bank repo raising from around 150 to 250 basis points with a more dynamic operations, we could reduce -- we could get our cost of borrowing -- got a muted growth of around 40 basis points Y-o-Y. And sequentially, it went down by around 6 basis points, led by some of the multilateral borrowing that we did. And we also got a very lumpy check of borrowing that could -- we could get from the National Housing Bank and a housing finance company. Not to mention the high cost MTN borrowing that we paid off last quarter, which had a full impact this quarter as well. From a liquidity perspective, we are fairly healthy. We stand a liquidity of around INR 9,000 crore, INR 9,078 crore to be precise. And during this quarter, we raised around INR 5,502 crores through a mix of term loans, bonds and refinance and INR 4,288 crore was run through a direct assignments of loans to various banks. As I mentioned, some of the key highlights of our borrowings this quarter has been a $50 million of volume that we did from U.S. International Development and Financial Corporation for financing affordable housing loans and $100 million from IFC World Bank, with 50% earmarked to promote women borrowers and 50% towards greenhousing under the underserved category and around INR 1,500 crores that we have already drawn from National Housing Bank. We have a positive ALM, whereby inflows cover exceeds and the expected outflows across all our buckets and with the net gearing at a healthy position at around 3.3x. Our annualized ROE for this quarter has -- is around 20.1%, supported by a healthy ROA of around 3.9%, which moves up our earnings per share to around INR 12.5 for the quarter, up 25% Y-o-Y and 11% on a quarter-on-quarter basis. Our capital adequacy stands firm at around 20.5% for the housing finance company. HFC supported by the capital inclusion that we got, it stands at around 47.6%, and Samasta is 21%. Our CRR is, of course, well above the minimum threshold requirement of 15%, clearly suggesting that we are able to grow ourselves without impacting hugely on the capital position through the on-book, off-book strategy, which has been holding for as well. And not to mention the healthy internal accrual, which is coming from the NIM, which we have been maintained -- able to maintain over the last few quarters. With this, I open the floor for question-and-answers, ladies and gentlemen, and thank you very much.

[Operator Instructions] The first question is from the line of Shweta Daptardar from Elara Capital.

Congratulations for a great set of numbers. I have a couple of questions. One is, sir, most of the NBFC management have been calling out concerns on small ticket lending or personal loan segments. You being been -- Mr. Jain, you being a veteran, what are your inputs, especially in light of IIFL Finance portfolio on the digital loan book and asset side? That's question number one.

Yes. So I think personal loan, maybe the fears are not completely unfounded, because there has been very aggressive personal loan portfolio built up by some of the new fintechs and new NBFCs and banks have to become aggressive. But banks probably will have more established credit underwriting practices. As far as we are concerned, this is not a trust product for growth. Our personal loan is more limited to our known customers in the cross-sell, but our digital loans are more focused on MSME and business loans. But in personal loans, well, I won't have the details, but -- I mean, the -- many of the fintechs, the new account -- new practices for underwriting that they follow can have risk and those risk manifests more in the down cycle and then the economic activity slows down. I'll be cautious.

Noted. My second question budding specifically to gold loan portfolio. So how are the LTVs ticket size and customer segmentation working for us on the gold loan side? Have there been any shifts given the current market scenario?

Not really. I think our gold loan portfolio and the customer profile, because there are millions of customers, they remain broadly the same. In terms of our average ticket size, there's a little increase, but that is -- so which used to be, say, around INR 70,000 last year, is around INR 73,800 in the last quarter. So I mean, that is basically inflation and the increase in gold prices, but broadly, the customer -- the target customer segment remains the same.

Next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Yes. Am I audible?

Yes.

Yes. Sir, the first question, again, I mean, I have 2 questions, one on gold loans, the other one on home loans, both pertains to strong growth that we are seeing in both the segments. Just wanted to understand, first, on gold loans, what would you attribute this strong momentum in gold loan growth? Is it predominantly the distribution that we had built? Or would you kind of attribute it to the fact that you're also doing a fair amount of co-lending in gold loans, which perhaps allows you to offer very attractively priced gold loans to customers despite being an NBFC? So if you could just help us understand that while I mean, checks seem to suggest that in this quarter...

So I think gold loan -- growth in the gold loan asset, loan assets is primarily driven by, one, the distribution that we have built over the last 2, 3 years; and two, our really customer-centric and friendly practices that we have. I don't think that co-lending in any way helps because, in fact, if you really notice co-lending costs are higher than the cost of borrowing. So that doesn't allow us to price the product cheaper. And in fact, it's primarily because of the distribution strength that we've built. So if you see the number of branches than the way we have grown over the last 2, 3 years has been very significant. In fact, more than 50%, 60% growth in number of branches alone. And still, if you look at our branch -- our productivity per branch, is around INR 8.5 crores compared to, say, INR 12 crores of the leading player in the industry. So it's more -- I would say that the primary reason is the distribution that we have built over the years and then the customer goodwill that we are building and getting repeat business also from the customer.

Got it, sir. Sir, and a similar question on home loans as well, different industry experts kind of seem to suggest that there is some slowdown that you're seeing in urban affordable housing in ticket sizes between INR 15 lakhs to INR 25 lakhs, INR 15 lakhs to INR 30 lakhs thereabouts some slowdown being seen. Different reasons being articulated, some of them say that there is a supply constraint, which is there when the CLSS was withdrawn for the developer community. But if I kind of look at our home loan franchise continues to do very well, continues to grow from strength to strength. Do you think it is predominantly was our business model, as I understand it, also leverages this developer APFs extensively, which most other at least listed HFCs don't? Do you think that is a moat that we have kind of built in our home loan franchise today, which is helping us when there is more of a narrative of a slowdown that we are seeing in smaller ticket markets?

Yes. Abhijit, in fact, we have Monu who is the CEO of our Housing Finance company. He is there on the call, then probably he can take this.

Yes. Thank you, Nirmal. So Abhijit, you rightly said that we have been seeing the reports that in the metros and the hubs, there has been a constraint in the supply in the affordable housing. But if you look at our expansion of our distribution, which we have done in the last about 2 years' time, this is playing out to offset us any slowdown in the Tier 1 and the metros. The constitution of our -- which we call as expansion branches as a percentage of the overall disbursement has -- monthly disbursement has increased. So whatever marginal slowdown we are seeing, which is absolutely correct, we have been able to offset by the distribution. If you will see the kind of manpower we have added and the distribution we have added. Currently, we are present in about 370-plus locations. So Abhijit, that is offsetting it. Secondly, as far as the APF thing is concerned, yes, we have decent relationships, which continue to thrive. But majorly, this growth continues because of our expansion branches, which we have worked on for the last 2 years, and we hope to see carry that momentum forward.

This is useful. And just in the interest of time, one last question. Nirmal, sir, I mean, when I look at Samasta, obviously growing at a very, very strong clip. I mean do you think going forward you'll kind of look to slow down here or are we still looking at close to 50% kind of Y-o-Y growth for the next 2 years?

I think maybe for a year or 2, it may continue at that pace. In fact, in the COVID, the things have slowed down. So there was a bit of catching up with the natural trend line. But as the days becomes larger, the growth will slow down in percentage terms.

[Operator Instructions] Next question is from the line of Anusha Raheja from Dalal & Broacha.

Congrats on good set of numbers. Firstly, you said that you might require a capital over the next 1 years’ time. So that is for the subsidiary or for the parent company?

So the approval that we have taken is for the parent company. And in the subsidiary, we can -- like in housing finance, we have raised private equity. So we have both options available. We can actually raise capital either in parent or microfinance and/or both or -- but that way, in terms of our gearing in terms of our capital adequacy, we're fairly comfortable. So we'll have to wait for the opportune time. Otherwise, we can wait. So we don't have any pressure to raise capital in terms of a requirement of capital for growth. We can grow with the current capital as well.

Okay. So the requirement is more specifically from the -- I mean for the parent and for MFI because I think...

Yes, in the housing finance, we raised capital from ADIA and still our capital adequacy is very high, is around 40%, 45% or so. So that's more than adequate for the next few years, yes.

Yes. And secondly, on the gold loan NPLs, if I see there is a sequential rise there to 1.2% odd levels. So what explains that?

So gold loan, in fact, gold jewelry and ornaments, they are emotional assets of the customer, and we generally are a little careful before we just put them into auction or -- so even when the NPA, the customers are regular sometimes if the gold prices have fallen, customers may take some time. So we just put up with that. But historically, if you see the loss given default in this asset class has been minimal or negligible. And I think it's the festive season in this quarter and many people released the jewelry. So I mean it's a small temporary aberration, but I don't see any risk in terms of the product class.

Okay. And what was the NHB borrowing during the quarter, I missed onto that number?

Borrowing?

NHB borrowings.

No. So okay, what we are saying is that if you look at our cost of funding on an average has come down by 10 basis points in the quarter and primarily because we get a low-cost funding for our affordable housing and the economically weaker section housing finance that we do. So there's a refinance from the National Housing Bank, NHB, where the interest rate depends on what kind of customers we are lending to. So that has been at a lower rate. And similarly, we've got some funding, which is at a consistent rate from multinational -- multilateral agencies. Yes, so that has basically helped us control the cost of funds.

Okay. So far, I think this quarter, we have managed the margins quite well, I mean, contrary to other NBFCs where they are facing the margin contraction. What is the outlook, say, over the next 2 quarters, how do we see margins panning out?

So actually, we are focused only on 4 -- primarily 4, which is mortgages, MSME lending and gold loans and microfinance. So in all these -- and affordable housing, affordable home loans is a significant part of mortgages. We have the power -- I mean, we have the pricing power in the sense that market is not so sensitive to interest rates, and we are typically able to pass on the increase in interest rate that happens systematically. And on the other hand, in the last few years, we have been able to improve our financial position, our credibility through the cycle and also the high-cost dollar bonds that we had, which we raised during the times of COVID, we have repaid. So going forward, I think we should be able to maintain our margins, so our NIM will give me at around 7.5% or thereabout, yes.

Yes. And just lastly, on the growth side. So far, we have seen a quite strong growth across segments like home loans, gold loans and on the MFI side, see, over the next 1 to 2 years, do you -- are you seeing on the ground level any slowdown in any of the segments or where the growth is a concern or you would prefer to grow at a slower rate or you feel that the current momentum can continue?

So as of now, the demand for credit is very strong, and India is still grossly under-penetrated market in terms of credit to small businesses as well as the retail customers. So at this point in time, I think the momentum for credit demand is strong and the growth trajectory will continue. Having said this, I'll caution on a couple of things, if the economic activity slows down or if you see some significant pressure on the interest rate, which can happen for multiple reasons, then one has to be cautious for that, but other than that, if the economy remains strong, the way it is today, then I don't see any slowdown in the demand.

Next question is from the line of Renish from ICICI Bank.

Sir, just 2 questions. One is only our IIFL stand-alone profitability. So if we look at the first half '24 ROE/ROA or, in fact, in the absolute PAT number that has been far lower than what we have reported in '22 and '23. So what explains that profitability hit in first half, sir?

So in stand-alone -- okay, one is that we have -- actually you would have noticed that we have moved significantly from direct assignment where the excess income or excess interest used to be capitalized to co-lending. And if you see our co-lending book has crossed INR 10,000 crore milestone in this quarter which is very significant. So I think this -- if you -- when you compare to last year, there's a significant component of upfronted assignment income. And on the other hand, co-lending book as it keeps building up, you'll see the co-lending interest income also keeps growing.

Right, right. But is...

Sorry?

So it is fair to assume that, let's say, the shift from a direct assignment to co-lending is actually hitting the profitability at standalone entity level?

Yes. And see, another thing that happens in the direct assignment, many at times, if the assets get repaid faster, then obviously, you have to take the upfronted income as a reversal also. So -- but what we're saying is right, the primary reason is that co-lending is basically taking over. So it's a transition phase. And secondly, because of digital finance and one account in our CRE being restructured, the provisions are higher.

Okay. Okay. Got it. Got it. And sir, secondly, at the entity level, if you look at the nonfund-based income this quarter, it has actually gone up by 23% sequentially. But when we look at the incremental assigned plus co-lending pools that remains static around INR 2,000-odd crore. So what explains that? I mean it is fair to assume that because of the higher interest income of the assigned portfolio, the spread on the assigned pool might have gone up this quarter?

One second. See, what is assigned income growth? The assigned book -- okay, assigned book also, I mean, it has grown slowly, but there's still a growth.

Yes, yes. So that's what, actually, sir...

You're saying quarter-over-quarter or Y-o-Y you're saying?

Quarter, sir.

Yes. So the banks basically have a reset based on their MCLR. Just give me one minute.

Yes, yes. Sure, sir. Sure, sir.

Okay, sorry. And then this quarter, we had an assignment in Samasta for the -- I mean Samasta normally we have not assigned earlier, but there was a loan assignment of Samasta this quarter.

Okay, okay, okay. So basically...

So what is happening in microfinance still the co-lending is -- I mean, most clients are not willing to, but we are able to assign the assets.

Got it. Got it. Got it. So basically, in this quarter, we might have assigned higher under Samasta, which is a higher leading book, that's why there is a high nonfund-based income. Is that right?

That's right. So in the Samasta, I think assignment will continue.

Got it. Got it. Okay. And sir, just last thing. At the consol level, what should be the AUM growth over the next couple of years we are factoring in?

25% is what we should -- we have guided and I think we should achieve that.

Next question is from the line of Abhishek from HSBC.

So just a few questions. First, on MFI. When I look at the gross Stage 3 assets, they have not gone up, but the credit costs have gone up sequentially. So have there been any write-offs because of which the credit cost is higher?

Yes, there will be some write-offs in Samasta.

Can you quantify how much it was this quarter versus last quarter?

No, the provision has grown up because of -- as the book grow, Stage 1, Stage 2 also has gone up. And the write-offs are INR 98 crores this quarter vis-à-vis INR 88 crores last quarter in Samasta. But the provision that we are seeing because when the book grows, your Stage 1, Stage 2 provisions also grow significantly. So I think that's why provisions are higher. But there's a write-off increase of INR 10 crores also.

Exactly. That's the driver. Okay. Got it. And when I look at the yields, right, the data that you've given on the yields, in gold loan, the portfolio yield has gone up, I think, by about 1% in the quarter. So I mean, can it be so sharp in just 1 quarter, does this have any kind of one-off?

No, this is -- actually, gold loan portfolio churns very fast. The average life is 90 days, 120 days also. And gold loan yield has started improving from quarter before last. So maybe we are seeing impact in this quarter. But I mean, I don't see another thing that happens in this is that the average book is a little different from the quarter end book. So the -- now I don't have those numbers with me. But when we reconcile the average book, then probably that will explain the story better.

So this yield is based on the average book?

So what happens, the yield that we give in the financial results is based on the partner and -- no, I think so the yield difference -- how much is the yield difference in a quarter-to-quarter? 100 basis points. Yes, yield has gone up as the market, the competition has eased, yield has gone up. In gold loan, the impact can be quicker compared to the other asset classes where the assets are much longer term like home loans. But in the gold loan, yield can move very fast.

So the yield hike was taken when in gold loans? The last rate hike...

Actually, we started taking from April because in the last year, in the last 2 quarters, there was very intense competition from banks and from NBFC. So this year, this financial year from April, we started taking -- I mean, we got back to the normal rates of interest. And we had quite a few teaser schemes and a low interest scheme that we withdrew in most of the places.

Got it. And can you share the tonnage in -- for gold loans for this quarter and last quarter maybe?

Just one minute. There's a 6% tonnage growth. It's there in data book, Abhishek, 63 tonnes now.

Yes. I'll pick it. Sure, sure. One last question on cost of borrowing. So actually two things. One, when do we see this cost of borrowing start showing the upward trend? Because the market rates are stiffer, you would have some back book repricing. So when does it start moving up?

I think we should be able to maintain at 9%. I don't think under the -- now -- okay. My personal view is that the interest rates in India at least have paused and they peaked out. I mean they may not fall, but they might remain at these levels. In that situation, I think we should be able to maintain at the current level. 10 basis points here and there it can move around, but not beyond that.

Next question is from the line of Nischint Chawathe from Kotak Institutional Equities.

Congrats for a great set of results.

Thanks. Thank you, Nischint.

So first question is on the operating expenses line. Now if I really look at your loan growth, you have been growing fastest in microfinance and probably followed by gold loans. Now both these businesses have lower tickets and in that sense, tend to be sort of slightly more OpEx intensive, and probably home loans and the wholesale businesses have lowest OpEx. But I think despite that, your OpEx growth is lower than the loan growth. So you seem to be kind of getting some benefit somewhere. So just trying to understand what's happening there?

So Nischint, we have slowed down the growth in our branches. So significant part of OpEx comes when we you are setting up new branches. So if you really look at it we are driving our growth by making our existing branches more productive and taking the productivity of a branch up as much as possible. And also with the -- our digital loan business is primarily end-to-end digital and there, the manpower requirement is lower. So in fact, OpEx is still at a much higher level, and we have maybe room for savings over the next few quarters. In terms of OpEx or cost-to-income ratio because as I said that if you look at our gold loan branch productivity INR 8 crores, INR 8.5 crore, whereas the leading player is at INR 22 crore, now this is a very significant difference. So if we keep the branches at whatever we have, so the same set of people, same set of branches if they can originate more assets and build up obviously then our OpEx should come down.

But microfinance, I mean, practically, I guess the geographies would be different, right? So you can't share branches, gold loan again sort of...

No, they are -- no. Even in microfinance, we have 1,100, 1,200 branches, so there's also network that we expanded in the recent time. So if you look at our manpower cost from a quarter-to-quarter basis, that has gone up actually. And there will be some savings in our other cost, which is -- just give me one second. So manpower cost has gone up from INR 384 crore to INR 427 crore. Operating cost is just -- operating cost also has gone up by 7% in the quarter, which is very significant. And that is primarily because we're expanding the microfinance network.

See, other expenses, which is ex of employees and depreciation, it's up around 15%, which is like less than half the overall loan growth. So that's I think where my question was.

No, that is basically because the new branches are not being set up. But the existing branches, we add people and -- so the new branch addition has been very minimal.

On the digital loan side, I mean this is a small business but growing very rapidly. So what is the tenure of these loans?

Now tenure of these loan varies from 6 months to 2 years, typically.

In the NPLs in this book, and I think the ratios may not be very accurate representation because we've been growing very fast. But over the last 6 months, the NPA in this book has grown by almost like 25%. So -- and I would believe that 6-month lag ratio is a fair ratio to look at given the fact that probably somebody may not default in 3 months, and we have a 3-month NPL that we would have envisioned. So are you kind of worried? Are you seeing -- and you've been growing very fast. So are you kind of seeing any concerning signs because of which you would slow down? It's a small proportion of the book, so it matters less, but nevertheless, it's a very fast growing...

Nischint, you are right. So if you see our Stage 3 provisions and this is 73%. So what we are trying to understand -- I mean, okay, our strategy here is that the risk is priced in because interest rate also is higher on these kind of loans. And we are prepared that through the cycles and as books mature, they can be higher losses. So we want to keep aggressively providing for it. But even risk adjusted return is quite attractive.

Now it appears -- I mean, your sense is that you'll continue to grow this rapidly?

We will continue to grow. At this base, it will grow faster. When the base becomes larger, the growth may slow down. And the GNPAs, NNPAs in this book will be higher than the rest of our other loan books and that we priced as we go -- to the customer.

This is netted in-house, right? There are no partnerships in this?

No, we have partnerships to source. We don't -- and we have a few partnerships, but a significant part of business is organic. So we do have partnerships, including Airtel and G-Pay and others also, but by and large businesses -- but -- so okay, many partnerships are for lead. There are very few partnership where the loan is sourced as such. So our primary partnerships or our focus for growth is to have digital partnerships where we can get lead and we pay a fee, but we do underwriting and we take the risk.

Hopefully originated, let's say, by a partner and that has kind of picked up by you. It's something that you just -- they'll just pass on the lead...

What happens in partnership model is that -- okay, there are 1 or 2 small partnerships that we have which is on FLDG. But there, normally, your interest rate and your income is also capped. So many of the players that have done partnership, they might give 15%, 16% and then a bit of a first loss. But our primary -- our strategy is that we want to have full access to data. So we do underwriting, we keep learning and we have full control of the credit quality as well as who we are lending to.

On the yield side, your home loan yield is marginally down on a sequential basis and -- so is there anything that we should be reading in?

Monu, you want to respond to this?

Hello? Yes.

Monu, Nischint is asking...

Yes, yes, I saw that. So it's a very -- Nischint a very, very marginal change is I think if you just look at it, pretty marginal change, and it's primarily to do that how the -- where we are playing out, how the areas are panning out. So there is nothing very significant in the yield change if you see rather the portfolio yield has a shade gone up only.

It's at 11.2% to 11% in the quarter-over-quarter. But this 11.2% was also a bit on the higher side because historically, it has been 10%, 10.5%, Nischint, so I think there is a bit of tapering off this quarter.

Yes.

Hurt rates in any cohorts or is it just competition that's just driving this?

There's nothing in the cohorts, but it's just the competition which is played out a bit.

Yes. This is a competitive segment of the business.

Segment to be in. Otherwise also, overall -- still overall, I think 11% is pretty much okay, in line with our strategy.

Corroborates with, I think, the general industry view. Just on the LAP side, interestingly, the trend is very different. Your pricing cost seems to be pretty strong, although -- so is it something that it is a very different segment, I guess the ticket sizes. I mean how should one really think of it? Because I think that was also a reasonably competitive segment.

Yes, yes, yes. So for the last about 2 years, like primarily earlier, we have been focusing on LAP only in our hub places, but as we had experience of expansion in branches, so we -- for the last 2 years, we are doing a bit of LAP business in our expansion branches where the expected yields are better than the hub locations, which is a very competitive market if you try to give LAP loans in the Tier 1 and the metros. So the one which is we are able to source through the smaller towns, we have better yields.

But this LAP yield is -- so this is in line with the industry. So even the competition which had similar yields. And the primary reason is that this business has significant operating costs as well. And it's not -- in terms of the physical collection of the installment as well as processing and in smaller location for a small ticket LAP of INR 4 lakh, INR 5 lakh, INR 7 lakh, INR 8 lakh, the cost of title, valuation, everything is significant. So when the industry rates are also higher because there's the cost structure of this segment business as well.

Final question, if I can, and that's on the microfinance side.

Yes, please, go ahead.

On the microfinance side, there have been some concerns in the industry that delinquent customers tend to get refinanced by -- basically get refinanced by the finance companies or they move from one company to the other. So I think in this regard, what is the policy that you follow at Samasta?

Actually, delinquent customers credit score and there will be bases. So all the customers in microfinance are reported to Bureau. So this is not very likely, but Venkatesh, you are there on the call?

Yes. Yes, Nirmal, I'm there the call. Yes, with aspect of the policy in terms of our lending, we don't lend to any customer who is more than 30 DPD and who's got an outstanding of more than 4,000. See, a couple of companies don't report to the credit bureau on a very daily basis. So we give them a levy of 4,000 maximum, which could be 1 EMI in some ticket sizes. So ours is very restricted into that, we don't give to any customer more than 30 DPD.

Period which means that if the customer has been an NPA, comes out of NPA, you would lend him after a particular period or something of that sort?

No, no. I'm talking about -- no, no customer is not in a NPA. I am talking a regular customer.

That's right. But I'm saying that customers who sort of come out of an NPA, is there a cool off period for re-disbursement?

Yes. That naturally applies. We also have a track record of -- once we look at the credit bureau, we have a track record of the customer, and if he/she is coming out of the NPA, we definitely will not lend.

[Operator Instructions] Next question is from the line of Deepak Poddar from Sapphire Capital.

Hello? am I audible, sir?

Yes.

Yes. Sir, my question revolves around your ROE. I mean -- now this quarter also we have seen a very good growth and accordingly, ROA is 3.9%. But what sort of sustainable or steady state or aspirational ROA as a business we are looking at going forward? Now considering also because you told that your co-lending share will increase, right? So that will be ROA accretive. That's what I presume, yes. So some color on it would be helpful, sir.

As what Nirmal mentioned -- this is Kapish here. So if I can just pitch in, as Nirmal mentioned, in spite of the rising interest rate scenario, we have been able to pass on our rate hikes to our borrowers. Our spread across quarters have actually moved up. We have done our investments in regard to branch expansions, which means that there wouldn't be any more incremental investments coming into to meet the growth targets from an operating expense perspective. All these attributes should help us in maintaining our overall our NIMs, and with better optimization on our costs, we believe that we should be able to maintain our ROA in the range, which could be between 3.7% to 3.9% touching towards 4%. So we believe that we should be able to maintain our ROA at the levels where they are today. And there could be some more shoot spots as well there.

Understood. And my second question is on your credit cost. I think I believe that could also help your ROA because ideally, your credit cost in the range of 2.25% to 2.5% is a little on the higher side, right? I mean, considering the kind of...

Yes, it should be -- on the more longer-term steady-state basis should be within 2%, yes.

Within -- I mean, why not below 1.5% by 1% higher?

That's right.

No, no. So I was trying to understand why it can't be below 1%. I mean is it because of the MFI business that you expect...

No, okay. I'll tell you what. Over a period of time -- so microfinance business historically prior to COVID used to have much lower NPA. But now most of the industry people expect longer-term credit cost in microfinance business to be around 2%-or-so. Similarly, in digital loan, it can be a little higher than 2% also. And -- what we are saying is right, that at least if you look at home loans and gold loan, it should be much lesser. But I think as things stabilize over a period of time, then again, it depends on the relative share of the unsecured loans in microfinance and digital loan but it can be lower. It should be lower than what -- if not 1% at least, maybe closer to 1.5%, 1.5.

Yes, because that straightaway adds 0.75% to your ROA, right?

Yes. It should.

So a trajectory, which is a 3.5% to 4%, can inch towards 4.5% if our credit cost comes below or closer to that 1% mark that...

Yes. That is there. But at the same time, Deepak, there will be a little competitive pressure on the margins also over a period of time. So -- I mean, what you're saying and one scenario it can happen, and at least the credit cost should go down and that should straight away add to the ROA. But there will be many other variables there and there are many other moving parts.

[Operator Instructions] Next question is from the line of Prakriti Banka from HSBC Mutual Fund.

Can you hear me?

Yes.

Just have one question. I don't know if you've already addressed, sir. But how did your yields -- how did you manage to increase the yields in the gold loan book in this quarter?

So gold loan yield, across industry I think would have improved because last year quarter 3 and quarter 4, there was sort of intense price war kind of a thing because some people started teaser and some larger players started following up. Many banks also got into this with a lower rate of interest. But I think many banks also now discover that if they do the separate profit and loss accounting of gold loan, then the operating cost is much higher. So it's not something which is -- because when you're doing a INR 50,000, INR 60,000 loan for a shorter tenure then the cost is higher. So I think it is -- actually, the yield is going back to the earlier level, the normal -- is getting normalized, in between, there was an aberration when the yield came down.

Okay. So you think there is still some scope for this to go up further or this is much...

No, I think they'll remain at these levels.

It will remain. Because even I thought like Q1 itself things had sort of normalized, which is when you were at 17.5 and this quarter is showing even higher than that.

Yes, impact comes actually with the lag of 1 or 2 quarters actually because as the earlier loans get repaid because they are at a contracted rate which can be lower. So it always spreads out over a couple of quarters.

Next question is from the line of Jigar Jani from B&K Securities.

I just wanted to quiz on the fund raising, although it's a unlikely provision. Now considering we are moving largely off book, which is co-lending and DA at 40% is what we are at, I think, for that book, and we are guiding for 25% growth. I think then 60% of that 25% only needs to be funded through internal accruals or equity because even if I consider the co-lending part of 20% probably, it will push to 17%, 18%. And we are already making kind of 20% ROEs overall, and we are expecting ROEs to remain stable. So won't this additional equity of INR 3,000 crores be a drag on your ROEs, whereas you can easily fund your estimated growth of 25% through internal accrual itself, considering we are moving more and more off book?

So it's a good question. And -- but as -- okay, so whether if you don't do this, then probably the ROE can move up further as our profit keeps adding to the pool. But as -- we are in a finance business where from a rating agency point of view, from the banks that are partnering with you, they also want to see your balance sheet becoming stronger as your total assets grow. I mean it's not necessary that we will raise INR 3,000 crores, but we said up to INR 3,000 crores. But whatever equity addition happens, which can be to our network, 20%, 30%, which maybe in the next 12 to 18 months, we can catch up in terms of ROE. And that will also help us grow a little faster than what we've been growing till now.

So there might be a chance that your growth trajectory might move higher post the equity fund raise? And any plans to go inorganic in terms of growth post this fund raise?

So we are open to opportunity, but it's not something which anything is in -- nothing is on the engine or nothing in the pipeline. But yes, if there are good opportunities, we can always look at them.

[Operator Instructions] Next question is from the line of [ Adarsh ] from Enam Holdings.

Sir, broadly, if you can break up the assignment assets in the categories and same for the co-origination. And can you explain the economics of both these routes, both for you and for your partner?

So assigned assets, we had INR 18,429 crores as on Q2 FY '24. And co-lending is INR 10,576 crores. Most of these will be home loan and gold loan. But if you want to breakup, just give me a minute. Okay. So roughly INR 7,500 crores is mortgage, INR 8,500-or-so is gold and the remaining is the microfinance in the assigned book. And the co-lending book, again, primarily is gold, LAP, and housing.

Got it, sir. Just from an assigned -- from the co-lending book, can you just explain the economics, like how it works for you and for the partner?

For every product like LAP, home loan and gold loan, the interest which bank will retain is negotiated separately, also based on the credit policies, the region and geographies that we do. So supposing I'm doing the gold loan at say 16% and I agree with bank and they said it's a 9.5%, then what happens in every quarter, whatever interest is accrued that comes into the escrow account, 9.5% goes to them and the remaining comes to us. So that is about co-lending. In case of assignment, we take the total income, make an NPV based on the probability of that income accruing, reduce the cost of servicing from that and that is upfronted.

[Operator Instructions] Next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, going back to the personal loans, again, you yourself said that...

Sorry to interrupt you, your audio is not clear. Can you speak through the handset, please?

Is it better now?

Yes, sir.

Yes. Sir, again, going back to the personal loans, again, you yourself said that you'll kind of remain cautious in personal loans while given the small base, it can kind of continue to grow strongly even from current levels. Just kind of trying to understand while the risk adjusted returns are good at least at an industry level, there have been discussions happening around small ticket personal loans where the ticket size is less than INR 50,000. Have you had a chance to see what proportion of your customers or what proportion of your digital loans have ticket sizes below INR 50,000?

Yes. So below INR 50,000 -- no, no, okay. Personal loan is happening in all sizes like the BNPL, INR 5,000, INR 10,000, INR 3,000, INR 20,000, all kind of things. So we'll have a reasonably good number of our loans less than INR 50,000. But primarily, our loans are to self-employed professionals or the small shopkeepers, the businessmen and the micro enterprises. I think the difference -- another thing is that even personal loan as a category, as an asset class, we can't paint it with one brush. There are many banks that do it very smartly and very cautiously. So when I said my worry is more about the new players where they are still moving up on the learning curve in terms of credit underwriting and they are trying to achieve aggressive growth. So there is a class of lenders or the segment of customers that they're targeting is more risky. And -- but the market is very big and the type of loan that gets categorized as personal loan again is very wide variety. But in our case mostly now our focus -- there can be a small part of it as a personal loan, sometimes people like sole proprietors, they run the entire thing through their personal accounts, right, because the blurred line between personal and business loan, but our focus for growth is more on MSME and business loans. I think the credit risk is different when people are borrowing for consumption and people are borrowing for business or income-generating activity.

Understood, sir. Sir, just one follow-up here. I mean, have you seen any divergence in terms of delinquencies, collections, asset quality when it comes to MSME business loans originated organically versus ones originated through partnerships? Any divergence in collections asset quality between organic sourcing and one originated through partnerships?

So we have had multiple partners and our experience has been different. So I can't reveal the names, but some of the partners where our experience is not good, then we realized that the profile that they target is different. So we slow down or discontinue that partnership, but it varies across because the whole segment is so heterogenous and so wide, it's very difficult to bracket. But you are right that our experience with different partners has been different, and we keep taking corrective actions where our experience is not good.

Got it, sir. This is useful. And just one last question. While you've taken an enabling resolution for equity inclusion in your subsidiary, Samasta as well, there, are you kind of looking to bring a strategic investor on board? Or is it more like the parent infusing capital into the microfinance, et cetera?

No, It's not strategy, but we will get a private investor, or parent can infuse. So either way, we have to see what kind of opportunities or what kind of investors we have and we take a call on that. So it's like is open. There's nothing which has been done till now.

Next question is from the line of [ Vidhi ], an analyst.

Sir, I just wanted to ask, today our branch count is 4,596 versus 3,700 last year. So how many -- and so when do these branches start contributing at the operating level? And how much time does it take to breakeven?

So branches -- okay, in microfinance when the branches grow above particular a size, you split it. So the cost structure in microfinance is much lower compared to, say, gold loans where we need to put a vault, IP camera and security and everything. So typically, branches breakeven, I would say 80% to 90% of our branches breakeven between 18 to 24 months. There will always be some exceptions which take longer and some exceptions, which can be much quicker.

Sir, we don't have anyone in the question queue.

Thank you so much then. We can...

Would you like to give any closing comments?

Yes. Thanks. Kapish?

Yes. Thank you very much, ladies and gentlemen. It was quite an intriguing session, and we really -- we welcome in case you have any further question, you can drop an e-mail at [email protected] and we'll be happy to connect and give you any further details that you might be looking for. And let's stay connected. Thank you very much.

Thanks, everybody, and season greetings to the festive season to everybody. Thank you.

Thank you so much, sir. Thank you, everyone. On behalf of IIFL Finance Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.