MAS Financial Services Limited (MASFIN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the MAS Financial Services Q4 FY '20 Results Conference Call hosted by Motilal Oswal Financial Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Alpesh Mehta from Motilal Oswal Financial Services. Thank you. And over to you, sir.

Thanks, Ayesha. Good evening, everyone, and welcome to 4Q and FY '20 Earnings Conference Call of MAS Financial Services Limited. To discuss the earnings and the business strategy, we have with us Mr. Kamlesh Gandhi, Founder, Chairman and Managing Director; Mr. Mukesh Gandhi, Co-Founder, Whole-Time Director and CFO; Ms. Darshana Pandya, Director and CEO; and other senior management from the company. Now without much ado, I hand over the call to Mr. Kamlesh Gandhi, and post which we can have a positive Q&A session. Thanks, and over to you, sir.

Thank you so much, Alpesh, and good evening to all of you. I would like to start on a positive note that this quarter we completed the 100th quarter, 25 years of operations. And what a time to be tested? So this was an ultimate test, may -- God forbid, nothing more than this. And we'll be presenting to you that how exactly we are navigating and what exactly the position is of the company, of this -- of this pandemic and all this challenging situation. So as you heard, that over the last 25 years, we have grown very steadily. We have followed the fundamentals. And as clearly mentioned in the presentation, you can see a very steady and a calibrated growth over all these years. And as I'm aware that besides the number and the performance for the year and the quarter, the much focus will be on how we are navigating the present crisis and what is our outlook going forward. So I'll start with how are we managing it. So as we know, I mean, I'm not going to much dwell on the various problems because they are -- I think there's an overdose of discussion of all those problems. So I'd like to be very objective on how exactly we, as a company, are understanding this and how we are navigating this. While we are a 25-years-old company and have navigated through various crises in the past, this is unprecedented. But at the same time, we have the confidence that this shall also pass. And that confidence comes from our 25 years of working and few of the things which I will discuss with you what makes us confident. To start with, the first thing is the fundamentals on which we have been working so far. If you see -- if I start with the basic for any of the lending activity, that is the capital adequacy, that is what is the capital the company is having, and that stands at around 28.87%, one of Tier 1 capital. And that puts us in a very good stead to absorb any sort of shocks. Then second, the very important and the most discussed thing about this crisis, especially for NBFCs, was liquidity. And let me share with you that remained our strongest point during this crisis. As I talk to you, we have available funds of close to INR 1,400 crores, another limit of close to INR 1,000 crores sanction on hand. Despite of the fact that we can give -- we are giving moratorium to our customers and not taking it from our lenders, we are through for more than a year to serve this -- serve the debt and the operational expenditure, and that has been the key differentiator as far as MAS is concerned, accompanied by a very robust quality of portfolio, especially looking into the fact that the customers will be served, the informal, the MSME at 1.14% of the net stage assets and accompanied by a very prudent provisioning of 0.61% of our asset on book at INR 20 crores. So these are the basis on which we are going to magnify. I have talked at various forums that we will be magnifying the possibilities, meaning while we should understand the problems, we are not going to dwell on the problems but dwell on the possibilities and magnify the same. And under this, we are starting with few of the basic things, that what about the asset and the portfolio quality, what about the liquidity management, what about the operational management, what about the HR management, what about profitability, and what -- how we'll be going forward -- taking it forward, what we think. So the first one was on the strong fundaments what we have. And if I take you to the assets and the portfolio quality, if you see, that we are close to INR 6,000 crores on assets and we missed around INR 325 crores of disbursement in the month of March. I was discussing with Alpesh before that we have forgotten another crisis against this pandemic, that was the YES Bank moratorium which started as early as the 6th of March. And you know that in financial services, there is always a contingent effect. So right from the month of March, we had to be very, very circumspect on how we conduct ourselves in terms of disbursement, in terms of keeping the liquidity on hand as we have learned, especially from IL&FS crisis, that sufficient liquidity on hand is very vital for NBFCs to survive and then later on thrive and grow. So we lost around INR 325 crores of the disbursement. And we took a very cautious approach of not doing any disbursement in April and May, so to say, there's no opportunity since we're almost in lockdown. Post this -- during this month, we will take a fresh guard while taking the various inputs from our borrowers and from the other stakeholders as to how we can really calibrate the credit screen, understand the customers in a better way and restart the disbursement. And very important thing I'm coming to you is now on moratorium. Now on moratorium, I'll start with the basic understanding. We have been serving this sector for -- since last 20 years. And in our presentation, we have very clearly manifested what we understand on moratorium, that especially this forbearance given to the clients whom we serve, MSME, that is in terms of moratorium, if we give any forbearance, it does not signify a weak credit prognosis. This is what we all need to understand. Because if I step in the ball -- in the shoes of any SME and if I'm in this position, I will not think twice to take a moratorium irrespective of my liability position unless I'm very comfortable paying it or I have a fair idea of new liability coming to me. So with this, we are trying to manifest to the borrowers that we don't only extend credit where it is due, but we also give all the facilities within our capabilities. This is very important point to be discussed on moratorium is not how many customers took moratorium, but the very important point over here is this, that how many companies were in a position to give the moratorium given their liquidity position. So if we talk about MAS, we are in a position to give a moratorium for the first 3 months. We will evaluate the situation for next 3 months. But on a static liquidity analysis on a stress flow basis also, we'll be in a position to serve all our debt for the complete year, including our operational expenditure, irrespective of whether we give moratorium or not. If we start receiving money, that will add on and -- to our liquidity, will give us more room to disburse, but it will not affect -- even though if we extend the moratorium for another 3 months, it is not going to affect our liquidity at all, and we would not have to go to a lender that since I am giving moratorium, I also need moratorium. I think this is what a company having this much vintage of 25 years is expected. As far as I'm concerned, I expect this type of working from the company. Coming from the -- giving you the data on moratorium, we gave our -- we had -- we were more than happy to give moratorium to everybody who wanted it. All the eligible borrowers were given the moratorium. And we were constantly with the customer, engaging with them that if your liquidity and if you are comfortable, you should pay the installments to save on interest costs. And that resulted into a 49% [ and a ] 45% recovery in April and May, right? We have given the moratorium for March, April and May. I'm not talking about March because there was only 4 or 5 days lost in terms of recovery, whereby we had recovered more than 97% of the installments in March. So I'm not factoring in that in the numbers as far as the receipt from the moratorium customers is concerned. So we got 49% in April and 45% in May, which translates into 51% in April and 55% in May by the value -- on the basis of value the customers have availed the moratorium. So 51% of our customers by value in April have availed moratorium and 55% of our customers in May have availed moratorium. And I will repeat that we don't link the credit prognosis to the moratorium taken. While there is a lot of discussion on it, there can be a lot of analysis, but at the end of the day, it will -- the time is going to judge that how we should judge the customers, whether they have taken the moratorium is a weak credit prognosis or a normal credit prognosis. And to add to this, we -- as I discussed in the beginning that we have made a special COVID provisioning of 0.61% of our total books -- total on book assets of around INR 20 crores. So this was on the asset and the portfolio quality. On the liquidity, the management, I think I have told you in a nutshell that we have sufficient liquidity, sufficient sanctions on hand. We have put various stress flow analysis on our liquidity, and we continue to be in a very comfortable position, which makes us capable to extend moratorium to our customers. And as I told you, I'll repeat that it is not about how many borrowers are taking moratorium, it is very important what are the competencies of the -- and the capabilities of the financiers to give moratorium in the time where forbearance and giving liquidity is of paramount importance. Coming to operational management. If I share, out of total 105 branches we operate, 96 are operational currently with minimum staffing, which will be scaled up gradually. And we have 100% banking-based platform for disbursement and collections. While you know that disbursements were not done in March -- in April and May, but we were completely functional in terms of collection, reflecting from the collection what we do it in April and May that the banking-based platform helped us a lot in collecting the amount from the customers who are willing to pay. And as far as the cost is concerned, if you see that our operational costs at around close to 1.6% or 1.7% is already very efficient. But still, automatically, there will be certain lesser expenditure on less travel, less marketing expenditure and other than that, company will endeavor to work on all the areas, whereby we can save on the cost, which can compensate for other credit costs, so that our ROAs are not affected in the short term. We used this opportunity to reskill our employees to the best possible manner. I'm very happy to share with you that the management team at MAS worked harder than what they would have worked under normal circumstances, they were more busier at home than they were -- we are at office. And they deserve my heartiest thanks, and I'm very proud of that. On the profitability front, in fact this year, we have maintained a post-COVID PAT of 17% on a year-to-year basis. And there was a contraction of 14%, mainly because of the COVID provisioning being done in the last quarter only. So the right way to judge will be pre-COVID PAT and -- for the year and the quarter, which stands at around 27% and 22%. That is as per our normal working. The same in the case of ROA. And we presume that ROA in the short run might be affected. But we firmly believe that we take a medium- to long-term view. So in the medium- to long-term view, I don't think that the ROAs will be much affected, but in the short run, it might be affected. But we will try our level best to maintain our ROAs in the range of 2.75% to 3.5%. Going forward, we will continue to focus on extending credit where it is due. See, the fundamentals you follow over all these years really differentiates you in this type -- such type of crisis, and that is what has happened to us, that we were very comfortably placed on capital adequacy, very comfortably placed on liquidity. We don't foresee a very high loss, even default, given our credit analysis and the credit underwriting during the normal times. So we'll continue with our dictum of extending credit where it is due that translates automatically into a calibrated growth because we all understand that the lending is a business of leveraging high. So there is a lot of stake of other people who have given you the money. So right from beginning, so all these 25 years, we have focused on the fundamentals, and we'll continue to do that. And I would refrain giving a very short-term view because if you have a very short-term view, your actions will be short term. So once again, we have maintained right from the day we went to IPO and before that we would like to grow anywhere between 20% to 30%. But in a situation like this, the growth will be a number derived after we get the opportunity of lending, keeping the portfolio quality and the profitability intact. So this will -- the growth will be the numbers that is derived. So in short run, might be, the growth may be 5%, 7%, 10%, I think we should not all be worried about all such growth in the short run. Medium to -- in medium to long term, we see that structurally nothing much has changed. MSME will continue to play an important role. There are tough few quarters, maybe 2, 4, 6, 8, it is anybody's guess. But let us be optimistic, to be optimistic is our best bet, that the SME will also strive with number of schemes from the government to whatever extent they can help them. They will also strive to -- at first to survive and then to grow and thrive. And NBFCs are inevitable, especially for the efficient last mile delivery of credit and the companies like us who are in niche expertise, we definitely get the opportunity to grow in future, provided you have the patience, provided you have the wherewithal to go through this tough time, provided you don't have to take any urgent decisions based on the things which are out of your control. So I'm very happy to share with you that all the fundamentals followed for all these 25 years, having a calibrated growth, we started -- I've shared with you a number of times, there is a very humble beginning of INR 2 crores in 1995 to 25 years to reach INR 6,000 crores. But it gives us satisfaction when under these trying times, you can prove that, okay, you are 25 years old with the position you are in, especially in terms of liquidity, capital adequacy and the quality of assets. So this was from us in terms of the COVID presentation. I'll be happy to take any of the questions. But once again, I would like to repeat that we are fundamentally strongly placed to face the situation. We are thankful to the borrowers that despite of giving them the moratorium, more than 50% are paying. We anticipate the same thing to go -- to continue going forward, maybe in June, July, August, while we are more than happy to give moratorium to them because we personally believe that moratorium will stabilize the liquidity position and does not necessarily signify a weak credit prognosis, given our underwriting practices. While I'll request Mukesh bhai to join, I'll just give you a very brief outline on the performance. So for the performance for the March 31, it is around INR 6,000 crores of AUM, with around 11-point -- around 12% growth in AUM and around 17% growth in PAT. And if you'd see pre-COVID, it can -- it translates into 27%. Whereas on a quarterly basis, it is contracted by 14%, but if you see pre-COVID, the profit have risen by 22% with Stage 3 assets at 1.14%, which is stable. And the additional provisioning done is not netted off from these Stage 3 assets. That's a floating COVID provisioning done by us. So we have not accounted for net Stage -- we have not accounted for this INR 20 crores when we make -- when we talk about 1.4% (sic) [ 1.14% ] net Stage 3 assets. On the product-wise, under detailing, I would request Darshana to take you and speak briefly on the performance. So this is from my side, that we -- this is the 25th year. We stand very confident and very optimistic. While we know that these are unprecedented situations, but we think that we have the wherewithal to navigate through this and this shall also pass. I will request Mukesh bhai to share his thoughts with all of you, and then I will request Darshana and Ankit to take you through the detailing. Mukesh, if you can, please share your thoughts.

Thank you, Kamlesh bhai. Thank you all for participating in this analyst meet. See, basically, as Kamlesh bhai already told you that we always keep on following fundamentals, be it is asset side or liability side or liquidity side. Because of this, our approach, we could sail through all the difficult situations. When we were on 99 quarters, we were planning to celebrate this 25th year, but we never know that it will be in a different way. So this is -- as Kamlesh bhai told you that this also will pass it on. And because of our fundamental approach, we always come through all this type of the crisis, even in past, and this crisis will also be -- we will be through because of our approach. And we continue to take our approach in the same fashion, so that we will have a moderate growth, but we will be on very solid footing. So this is what I want to tell you. And then I request Darshana and Ankit to crunch the numbers. Thank you.

Thank you, sir. So if I take you through the numbers in detail, our assets under management has gone up by 11.76%. And last year, it was INR 5,338 crores. This year, we have closed at INR 5,966 crores. Our total income has gone up by -- on Q-on-Q basis, it has gone up by 11.10%. And on Y-o-Y basis, it has gone up by 19.30%. Profit before tax, if we look at on a year-on-year basis, it has almost remained same. It is 0.23% up. And on a Q-on-Q basis, it has contracted by 25.15%. If you look at profit after tax, on year-on-year basis, it has gone up by 17.16%. And on Q-on-Q basis, it has gone down by 14.24%, and that is mainly because of the special provisioning of INR 20 crores. And if we look at the numbers before COVID provisioning, our profit -- PAT would have been -- gone up by 27.16% on Y-on-Y basis and 22.32% on Q-on-Q basis. Gross Stage 3 asset is 1.42%. Last year, it was 1.39%. And net Stage 3 asset is 1.14%. Last year, it was same. Regarding AUM, there is a growth of 8.12% in micro-enterprise loans. SME loan has gone up by 31.36%. And two-wheeler loan has gone down by 14%. Commercial vehicle loans has gone down by 2.23%. And overall portfolio has gone up by 11.76%. If I take you through the numbers of our housing finance company, MAS Rural Housing & Mortgage Finance Limited, our AUM has grown by 6.03%. Last year, it was INR 270 crores. This time, it is INR 286 crores. Total income has gone up by 23.06% on Y-on-Y basis. And on quarter-on-quarter, it has gone up by 7.01%. Profit before tax, on Y-o-Y basis, it has gone up by 0.16%. And it has -- on Q-on-Q basis, it has gone down by 91.79%, and that is mainly because of special provisioning of INR 2 crores. Profit after tax on year-on-year basis has gone up by 21.89%. And if we look at profit without COVID provisioning, it would have gone up by 39.3% on Y-o-Y basis and 94.44% on Q-on-Q basis. Our gross Stage 3 asset in our housing finance company is 0.334% and net Stage 3 is 0.25%. Last year, it was 0.36% gross Stage 3 and 0.26% net Stage 3. So this was all about the numbers. Now I'll request Ankit to take you through the liability management.

Thank you Ma'am. So good evening all. To further elaborate on the liability side, in the last quarter, company did around INR 810 crores direct assignment transaction with various PSU banks. And the company further has INR 1,200 crores sanction on hand, which we'll be utilizing in the first and the second quarter. Company has also -- has available cash credit facility of around INR 1,800 crores, out of which we maintain utilization level of 65% to 70%. And [ rest ] portion is always kept as a liquidity buffer. We were able to roll over around INR 1,250 crores short-term working capital loans, which is a sublimit of total cash credit limit in the last quarter. Company further raised INR 300 crores long-term loans in the quarter, including INR 25 crores sub debt. This helped the company to further strengthen the asset liability maturity pattern. The unutilized sanction of long-term loans as on date is around INR 250 crores. So as on 31st May 2020, the company had liquidity buffer as cash on hand of around INR 700 crore and unutilized CC sanction limit of around INR 700 crores. Further, sanction on hand of INR 1,450 crore. Also company has also applied for fresh sanctions from its existing lenders as well as under the various schemes run by RBI and Government of India, like refinance from SIDBI under the TLTRO scheme as well as plans done to raise fund under PCG arrangement. So just [ -- and ] the company is well placed with a capital adequacy of 30.96% with Tier 1 capital of 28.87% and debt-equity of 3.01%. Thank you. So I hand over the call to Kamlesh sir.

Thank you, Ankit. Now we are open to take questions.

[Operator Instructions] The first question is from the line of Rahul Jain from Credence Wealth.

And Kamlesh bhai, surely very tough times for all of us. I have a couple of questions. One is, sir, with regards to our customers, if you can give us some color in terms of what kind of businesses our borrowers are on the micro-enterprise loans and SME loans, in terms of whether a certain percentage of them are into essential services, essential goods, if we can understand from that perspective. Secondly, with regards to the -- we have crossed almost 2 months, and I'm sure that you've been all talking to most of your borrowers. But any assessment with regards to the situation as we speak today, what kind of credit cost we can see for this year? And lastly, you did mention on the operating cost side in terms of reducing operating costs. If you can try to quantify what kind of reduction in operating cost is possible for this year, that could be helpful.

Coming to the customer profile, 66% of our funding is to the very small entrepreneurs spread across more than 250 various business categories. So they are into basic activities like they may be plumbing, primary plumbing, electricians, small petty shops of various kinds or they might be into manufacturing or services. So -- and where the ticket size is approximately INR 40,000 to INR 50,000. So that constitutes 60% of our business profile. And where we understand that these are the ones who will require minimum time to recapitulate and restart their businesses. And we are seeing all of them doing it right now in many of the places of our operations. In SME, our main -- in SME, we mainly work in 2, 3 clusters, mainly engineering, plastics and so on. And there also, they are mid-sized entity -- they are midsized companies. And there also, we think that they will take relatively more time than the micro-entrepreneurs to start. But once the lockdown is lifted, they'll be in a position to start sooner than the ones who are in -- of big size manufacturing units. When we talk to our borrowers, this is a very evolving situation because it is very difficult to judge for them also as to what will happen to their supply chain, what will happen to their businesses. But as I told in the opening remarks that when we extend credit under normal circumstances, we put a lot of stress on their cash flows, on their earnings and the businesses they do, the type of entrepreneurs we deal with. I think that should help us during this period. So while many of the businesses might face stress, there will be various time periods during which they can start and during which they can get their cash flow back. But ultimately, they have the capabilities to recapitulate within a given period of time or within some period of time. That is what we are confident about. In terms of the credit cost, you see our credit cost ranges in the range of 1% to 1.5%. Very difficult to guess a number, but depending upon all the situation and knowing our underwriting practice, that might from 1-point -- from 1% to 1.5%, it might range between 1.5% to 2%. And in terms of credit -- in terms of operational costs, we might be in a position to reduce our operational cost on a static basis because operational cost will be the function of the growth we take. So -- and at what part of the year we get the growth. But we believe that in terms of percentage, we might be in a position to shrink our operational cost by 0.25% to 0.35%. So at the end of the day, while maintaining a NIM of around -- close to 7%, which is right now 7.25%, if you take a ballpark figure of 7%, we foresee return on assets after credit cost and operational costs to be in the range of 2.75% to 3.25% as against 3.34% currently.

Sure. Any challenge in tracking some of our microfinance borrowers, whether on the urban side or the smaller towns?

See, as I - as we know, challenges will be there unless they work full-fledged and they have their normal cash flow back. So challenges cannot be denied. So what we are talking about is about when they start operations, start doing their activities and start getting their cash flow back. So everybody -- I think none of -- none in the economy is not facing challenges because lockdown is a stop block. Everybody stopped working. Now slowly they have started to work, which is, they are into basic activities. My point is that they will be in a position to restart their activities faster than the ones who need a lot of support in terms of manpower and capital to restart.

The next question is from the line of Bharat Shah from ASK Investment Managers.

Kamlesh bhai, you just now mentioned that your credit cost [indiscernible] typically has ranged between 1% to 1.5%, post-COVID could be 1.5% to 2%. So may increase by about 0.5%. You already have provided 0.61% of COVID provision. So are you saying, in addition to what has been provided in advance, there will be a further 0.5% or thereabouts increase in the credit cost or this is included in that?

See the COVID provisioning what we have done is, what if -- is to be seen over a period of time because we see that this COVID effect and the effect on the portfolio can be lagged. So it all depends whether we use this provisioning during the next year depending upon the situation, while we will like to use that provision very conservatively. So if we use that provision, you are right that it will come from that amount. But if we continue to maintain the COVID provisioning or a floating provisioning on a conservative basis at the rate what we are doing it right now, then it will be an additional cost. It all depends upon how situation evolves and how we think that what we should keep as provisioning. If you ask me, I would not like to use the COVID provisioning right in the first year, would like to use the COVID provisioning over, say, 1 or 2 years and account for a new provisioning.

The COVID provision, I suppose, is kind of a macro provision. It is not a specific provision of that INR 20 crores, which is identified name by name and account by account. I suppose it's a macro provision, right?

Right. It's a floating provision, yes.

Okay. And you said your ROA will -- probably may range 2.75% to 3%. Did I hear that right?

Yes, yes.

Okay. One last thing. Nothing to do with your business, but it would be interesting in -- I'll be kind of interested in hearing your comments on procedures with respect to the morat. You might be aware that Supreme Court, there is some petition filed whether during the morat period, interest should be charged and whether it should be waived. And that there should be interest -- even interest which is supposed to have fallen due should not be charged. And Supreme Court in its own wisdom has made some very telling remarks. I don't know how they make such remarks. But they seem to say that should economy be a liability or whether human angle, et cetera. Meaning, that whether it is fair to charge interest or not. But whole lending business is founded on a contextual arrangement of recovering both [indiscernible] and the cost has to be recovered. So I know it has nothing to do with MAS, but I would be keen to hear your comments, if you have any.

See, the comment made by Supreme Court has nothing to do with the implication or an application of the law. It's -- they're asked what they feel. And secondly, it will be the endeavor of the government, the Finance Ministry and I think we had a comment -- we had a statement by Mr. Uday Kotak, the newly appointed CII President that we have to safeguard the interest of the depositors. This is a chain reaction. If I don't take interest, I cannot safeguard the interest of the depositors. I think while this is an -- I call it, an emotional feeling of the Supreme Court, but I don't think commercially it is tenable and sustainable. And all the stakeholders, including the government, RBI, Finance Ministry and all the concerned will make their earnest endeavor to drive this home -- this point home to Supreme Court and less this is published better it is because we don't want people to misunderstand this. So my view is that this is not tenable, they will understand. But this should not be much published because we don't want confusion among the borrowers.

Sure. No, that's exactly what I intended because this creates certain confusion among borrowers. It kind of gives wings to the people to believe that they are not supposed to be liable to pay, which is essentially their liability to pay.

If I share -- Bharat, if I share our experience with the borrowers, we have seen that over a period of time, even with the people whom we are working, informal and small-scale borrowers, they might have a lot of information, but they're quite smart to understand the financial implications. So even when we talk to them on moratorium and repayment and we give them the metrics that this much interest he will pay more, that many of them will, by reflex, say, "No, no, I will pay off. I don't want the moratorium." So they are all businessmen. They also understand there is no free lunch. But at the same time, the situation is already challenging. We don't want any more challenges currently at least from the highest authorities of the country.

Yes. That's right [indiscernible] free lunches, that's where it gets not just for housing, but it gets a little bit more. There is some insidious, you know? One last question. Typically, of your asset book, half the book comes from the NBFC and the other half is the direct lending. So I presume that your record of NBFC being 0 NPA record is expected to be maintained. Therefore, entire increase probable credit cost you are anticipating on account of the direct lending?

I think, look, we -- when we anticipate, we have anticipated from both the businesses because the situation is very unprecedented. But if I talk to you currently, the capitalization level of the NBFCs whom we work with and the way we have exercised control, we don't foresee much of the losses coming from that business. It will be mostly from the individual borrowers we serve.

Right. So there is some small cost from the NBFCs, but a larger part is going to be direct book?

Correct.

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

Congratulations to the team for completing 25 years. Sir, I wanted to know, since in this -- in the current month and in the May -- in the month of May, how has been the collection efficiency of our NBFC customers to whom we have lent and most of them are in MFIs. So if you can just share your experiences of what these companies are telling you about how has been their collections?

They are -- when this lockdown happened, through [ MFIN ], all MFIs have decided not to approach the customers and not to create confusion at the ground level. So they were not very active in major part of April. But the collection what they see is anywhere between the range of 5% to 30% now. And they are engaging with their customers and telling them that while moratorium is legally available, it is at the discretion of the lenders. And as I told you, it is about the capability of the lender to give the moratorium. And secondly, it comes at a cost. So if the same trend continues from 5% to 30%, it might increase to around, say, 50% in coming months. This is what the basic feedback you are getting, but it is different from company to company and geography to geography, but the range is like this.

Sure. Because we have been reading through reports that in the month of June, in the past few days, the collections have picked up for MFIs. So any such experience from your MFIs, what they'll be sharing with you?

Same, same. So they're telling they're just picking up. And they are educating the customers. And now they are on the field and educating them. These are the ones who need liquidity, they need liquidity by fresh disbursals or by holding on the installments. Now all the NBFCs are telling them that it is prudent to pay our installments, be regular and avail a new loan rather than just going for forbearance continuously. So -- and most of the MFIs' branches also started working from the -- in the range of 60% to 90%.

Okay, okay, okay. And sir, secondly, on the direct lending to SME and MSME segment that we have, what will be the moratorium availed by these customers? I think most of the moratorium which our customers that are paying you on a regular basis would be from the NBFC space. So can you talk about -- talk a bit about how has been the moratorium from your direct lending customers, especially in the MSME segment?

It has been the same. [Indiscernible] With the NBFCs -- with the smaller NBFCs whom we work with, we had a very detailed discussion with them that even though they have collected some amount from the ground or they have some liquidity, they need to preserve it for their operations. I had a very interesting discussion with one of the NBFC, MFI. He told that, "I have this much amount. Shall I pay you or keep it for my operations? If I pay you, it will take care of 1 month of installment. If I keep it for operations, it will safeguard your complete exposure." Because at the ground level, they have to maintain so much of staff and the operational cost is high. So for the smaller ones, we have very voluntarily given them the moratorium. So it is 50 -- roughly 50% among the class of customers, that is our NBFCs whom we lend, for lending to the customers who will be served directly and to the individual customers.

Sure. And sir, just on this MSME and SME segment. Since you will also be talking to many promoters of these companies, any broad thinking and any timelines when they expect that they'll come back to a normal situation or almost, let's say, come back to 70%, 80% of the normal pre-COVID levels where they were operating in those, let's say, capacity organization for a manufacturing company or the normal operation for the rest of the companies?

It depends upon the clusters they are into and depending upon the geographies they're working. So there are -- the different clusters, the different geographies have different challenges. And let me tell you everything -- every information what we get right now is purely assumption and there are psychological impact also. I was discussing with few of my colleagues that all the surveys what we do and then we derive and extrapolate it on an industry and a national basis is not right. So this is an evolving situation, very difficult to predict when it will be 70%, 80%. But let me tell you, it is like that, that we are -- we are worried for our 5% to 10% exposure in its overall balance sheet. That person is worried, interested and concerned to -- for his complete balance sheet. So he is going to do everything at his disposal to restart. If it will take 3 months, he will not take 3 months and 1 day. That is the basic faith you need to have on them. And during that period, you have to understand them, not be unrealistic in your demand. That is where all the lenders who have the capabilities of forbearance and giving liquidity will navigate through it and will emerge more stronger. So for example, you are SME. I said that, okay, I can be with you for another 3 months and when you restart your operations, I will reevaluate you and I have the capacity to fund you more because you -- I trust you as an entrepreneur, I trust your business model and your new cash flow can accommodate this much borrowing, I think that will be the right thing to do. And not many lenders will be in a position to do it. But the ones who are having the strong fundamentals will emerge more stronger if they do this.

The next question is from the line of Shubhranshu Mishra from BOB Capital.

A couple of questions. First one is the NBFCs that we on lend to, how many of them have asked us for a moratorium? And how many -- have we taken any moratorium from the bank? So that's the first question. The second other question is, industry experts believe that the assignment volumes will come off drastically because of the moratorium that -- and the present situation. A large part of our borrowing comes out of the direct assignment. So what is our sense on direct assignments going forward in FY '21 and FY '22. And if you can walk us through a few -- key line items where we think that the OpEx can come off drastically or the way you're guiding, if you can give us some absolute numbers and line-by-line description? So these are my 3 key questions.

Around [ 60% ] of the NBFCs by value, we have given the moratorium. As I told you, we have not taken moratorium from our lenders. We are paying our obligations on time. So now, we -- we have sufficient liquidity to serve for a year and more than that. So we have not availed moratorium. In terms of assignment, we have INR 1,200 crores of assignment limit, as Ankit told you, on hand. And while qualifying assets can be a problem when you've given a moratorium, but since 50%, 60% of our book is on time, so we will have sufficient pool on hand to assign. While the credit offtake at the banks is all-time low, the portfolio which we assign is in great demand, that is the MSME portfolio, there is a lot of pressure on the banks from all the firms to increase lending to this segment. So given all these things, maybe for a quarter or 2, the assignment numbers might not match the last quarter. But I think overall, on a year-to-year business, we'll be in a position to maintain these assignment levels given our track record with various banks. We have a track record of more than INR 10,000 crores or INR 12,000 crores cumulatively with an immaculate quality. And the banks are more than happy to buy our portfolio. So I don't see this as a problem for the whole -- for the year as a whole. And...

Are you 100% sure on this, sir, because naked transactions like assignments should fall drastically. I think the investors would come off drastically in this particular environment for naked transactions like assignment. Are you very sure of this sense for assignments.

We have -- we do bilateral assignment transactions with public sector banks. It is a bilateral assignment transaction. It is not through securitization or PTC. So it's a bilateral transaction where one bank will give us a time channel, we'll be assigning the portfolio to them. So these are all bilateral transactions. So this is what our gauge is currently. And with the [ sequence ] on hand for 2 quarters and our track record and the segment whom we sold serve because for banks, there are a lot of limitations to create the portfolio directly, that through -- that too within the given credit losses. If you see the CIBIL data, that SME funding through NBFCs has a credit loss of around, say, 5% to 7%, whereas banks have a credit loss of 18%. So they are more than happy to generate this business through us. So I personally believe we should not find a problem for the amount what I want to do. Maybe on an industry as a whole from INR 2 lakh crores, it drops to INR 1 lakh crores, but I should not find problem for my INR 2,000 crores, INR 2,500 crores. This is what I understand.

Sure, sir. And on the OpEx, sir?

On the OpEx side, on a line by line, it will be difficult to give you that numbers. But the understanding comes from the reduction in variable cost. When the business is less, the variable cost will be less, certain fixed expenditures will be less. So there is -- there are various ways of reducing it, transform -- changing the metrics of fixed and variable to more on variable to fix. And if you see, we don't have to work very hard because we have to reduce our operational cost marginally because beyond a point, you can't reduce it. We are at 1.61%, and we are talking about a reduction of around 0.25%. So deduct -- amounts to around 15% to 20% of reduction. I think various all the -- among all the constituents of expenditures, we can work on that and reduce it.

Right, sir. And just one data keeping question, sir. What is the provisioning that we have done specifically for COVID-19, sir, on the standalone book?

INR 20 crores.

INR 20 crores, sir. And what is the SMA-2 number as of 31st March?

Must be close to INR 82 crores, SMA-2.

All right, sir. So that's roughly 25% of the SMA-2 book. That's the correct understanding, sir?

Yes.

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

Congrats from my side. Sir, first is in the chain scenario, if you have already started disbursement or you -- when you start disbursement, how do you think your credit assessment process will change because a lot of...

I'm so sorry to interrupt. Anil, could you speak a little louder. We are unable to hear you.

Is that enough?

No, voice is cracking actually.

Hello?

Yes.

You can hear me?

Yes, carry on.

Yes, yes. So...

We can -- I can make out, yes, yes.

So sir, my question is that as and when you start the new disbursement and -- how do you realign your credit assessment process because a lot of parameters that we used to use for our analysis may not be very relevant or accurate at this point of time. So is there any kind of a realignment in your assessment process that you are kind of discussing or thinking about? That is my first question. And second question is with respect to the moratorium, so the people who have opted for moratorium would have to kind of pay back the amount which has accrued in this 6 months along with the compounded interest. So the capacity utilization for their own businesses will ramp up gradually. So do you think that repayment for the moratorium due would be a much more elongated process than kind of paying it off after 6 months?

[ If we take ] your first question on credit screen, if I summarize it, that we have a dictum of extending credit where it is due, which means that we take -- we are mainly into cash flow-based assessment and the business model and assessment of the entrepreneur. So with the changing situation, that will be evaluated depending upon the geography clusters and that will be once again recalibrated on all the levels. So that is a continuous process, be it COVID or no COVID. So we have a credit screen assessment done every -- very regularly at very regular intervals, depending upon the quality of the portfolio we have. So this is a very continuous process across products, across geographies. In terms of the people who have taken moratorium, I think there are 2 ways of doing it. But if they might increase their installment, they want to pay if it is within their means to pay that increased installment, they will keep the tenure fixed or if they want to keep the installment fixed, they will increase the tenure. So we will give both options within the regulations and within the permissions given by RBI. So it depends upon the borrower. We'll give them options. Usually, we have given the option to increase the tenure so as not to burden the borrower. But if he wants, if he wants to pay lesser interest and doesn't want to pay more interest over a period of time, he can pay more installments over this tenure and don't increase the tenure. So this is what currently the things are. This is how the things are.

The next question is from the line of Kaushik Agarwal from Haitong Securities.

Sir, so I just have one question. On Slide #51 of the presentation, there is some assignment income reconciliation being shown for Q4 and for the full year FY '20. I just want to get the understanding on how this amount is being calculated? And plus, is there any correlation between this slide and the Slide #42, where our off book AUM has increased considerably, which is now 44% as compared to 39% last year?

I think Ankit can answer this in greater detail. I think you'd like me to take it to the concept. What we have done here is that formerly, under IGAAP, we were not supposed to book the income upfront. Now since introduction of Ind AS, we are supposed to book the income upfront. So what we are trying to tell that what is the income upfronted versus what would have been the normal income. So that is what we are trying to project. So the increase in assignment does not necessarily mean that increase in income because my earlier income is being reversed. So I think Ankit will be in a position to take you through the numbers and explain you as to how it has been done. Ankit, if you can explain him how the things are?

Yes. So if you see the first point, that is upfront spread, so what, now Ind AS, what we are to do is what all income -- interest income which we'll be generating over the years, previously in IGAAP, we used to amortize it. But under Ind AS, we have to upfront it. And that too upfront on the present value. So this is -- this amount is a upfront value -- upfront income booked at the present value, which amounts to...

Okay. So the...

Yes.

Yes, go ahead.

Which amounts to INR 107 crores. So suppose, this year total, we would have done around INR 2,500 crores assignment transaction, on that, the upfront profit is around INR 107 crores. Now because we do present value, there is a gap between the actual value and the present value. So suppose the income which would have -- we would have earned is INR 100 and the present value happens to be INR 90, then there's asset created of INR 10, on which we, again, have to -- we will be booking the interest every month as per the income received. So that is the second item. Because at the end, the interest should tally.

Okay, okay. Understood. What is the rate you -- yes, yes...

And third is the, if we would have gone as per the IGAAP model, then what -- because, see, now since the income is upfronted, but we are showing AUM off book is around INR 2,500 crores or INR 2,600 crores. On that, we have to reverse the income from my interest income. So that amount is INR 1,075 crores -- INR 107 crores. And net is the net gain which we have earned over the years -- over this year.

Okay, okay. Understood. So one -- just one follow-up question on this. The reference rate which you use for computing the present value of the loan assigned, what is that reference rate which you used?

The deal -- the reference rate is the rate which we have done the deal. So suppose we have done the deal at 8% or 8.5% or 9%, that reference rate is used for the present value.

The last question is from the line of Sarvesh Gupta from Maximal Capital.

Hello?

Sarvesh, the line is in talk mode.

Yes. Sir, first of all, congratulations to you and team for completing 25 successful years. Now coming to the questions, sir, one thing, if you can help me is that we can see there is a clear movement in the asset category in favor of even the SMEs over the micro-SMEs. So what particular outputs that you are getting from your model, which is leading you to do this wherein you're favoring more of SME loans over MSME loans, so -- since you were mentioning about financial screens, which are being continuously changing with respect to whatever the feedback that we are getting, if you can throw some light on that?

See, historically, we have been working with the informal class and the advantage what we get is to grow along with the customer whom we sold. So over the years, we have a very large base of the entrepreneurs whom we have sold on a lower ticket size. So we continuously engage with them and see to that, that how we can increase the ticket size going forward. As they grow, we also grow with them. And secondly, we do not have a very concentrated effort to -- within MSME to increase a particular portfolio. It is all about the opportunity we get from time to time, which passes the litmus test of credit and risk-adjusted returns. So you might see sometimes in some quarters, we might see a growth in the micro-enterprise loans or sometimes the growth in the small and medium entrepreneurs loans. So these are the 2 factors that guide us. Number first is which suits the litmus test in terms of risk-adjusted returns and the basic credit screens. And number second, we get an advantage to grow along with the borrowers. Because as we grow in our AUM, we also intend to grow our ticket size with the customers whom we are having a long experience in terms of their operations and their relationships with us as a borrower. These are the 2 factors which will guide our product configuration within the MSME space.

Understood, sir. And in terms of your overall book, if you can help me with some split between your rural, semi-urban and urban exposure, your split of the kind of industries or kind of services that they are exposed to? And if you can also tell us what is the difference in collection efficiency or any other numbers that you are seeing when you dissect this portfolio?

Rural and semi-urban forms around 65% of our assets. So we have been working in Class B, C centers where we really think we add value in terms of last mile delivery of credit and credit dispensation is required there. So around 65% is from semi-urban and rural. And the rest 35% is from urban. I think I will share exactly the repayment pattern based on rural, semi-urban and urban with you in detail. But as I understand, that it will be skewed towards the rural and semi-urban because they were less affected. So it might be the portion of around 60% in semi-urban and rural and 40% in urban because urban is more affected. This is what I understand, but we will have to do -- I'll share with you the numbers on that.

And sir, if you can help us with the split in terms of the industries or the nature of the work that your ultimate end borrower is focused with? And one more split was the split between your red, orange and green zones, if you have that?

See as far as -- we can share the data point, but just to share with you, we have more than 250 categories of customers whom we [ serve ]. So that will -- I'll ask my team to share that with you. And red, orange and green is evolving. What is red will be orange tomorrow and what is orange can be red today. So we also don't go strictly by red, orange and green. I can share with you on a given date that as on 31st March or as on 31st May, the color of the city is red, orange or green, but it is evolving depending upon the cases and all. And now just to share with you the -- it is on a micro containment. It is not on a red, green and yellow. If Ahmedabad is red, but we are working because all the places where we are not in micro containment, we can work. So now the approach of unlock 1 is micro containment. In Ahmedabad, there are 17 pin codes which are under micro containment, so they cannot work. The rest of the 60 can work. So it is not about the city being colored red, green or yellow, it is about the micro containment within the city. So that is more relevant.

Understood, sir. So I'll get the data off-line.

You can get in touch with Ankit Jain on that.

Sure, sir. Sir, just one final question, if I may. You are saying that net-net, you feel that given things where they stand as of now, your ROA can likely be between 2.75% to 3% as opposed to around 3.34% for the year, which means around -- and given this situation, maybe our loan book growth, if you can help me with that. So this is -- if you can help me with the AUM growth or [ degrowth ] expectation for this year?

I think -- I'd like to step in your shoes and understand that giving a loan growth projection right now will not be fair to receive because it is an evolving situation. I can give you a number of situation. If the things are okay by September, okay, this can be this. If the things are okay by October -- so for a lending institute, I think the right thing will be to derive the growth number rather than decide the growth number. Derive the growth number by the virtue of the opportunity you get which stands the litmus test of credit and risk-adjusted return. So I would not like to decide it, we will derive it. This is what we have done over all these 25 years. We are -- we are never afraid to say 5% growth, and we are never afraid to do a 25% growth, provided we get the opportunity. So I think this will serve the interest of the investors, lenders, all the stakeholders, if this is the approach.

That's all right, sir. But are you disbursing right now, like what are your disbursements right now, if any?

No disbursement currently. I think I shared in the opening remarks. We will be planning to do it from June onwards.

Okay. So you haven't started from 1st of June, sir?

We will start. So it is -- we have not drawn it. But in this month, it will start. So the things are at place, policies are being framed, understood. The state -- all the senior team is working on it. So we are very hopeful that we will be in a position to do something in June.

I now hand the conference over to the management for closing comments.

So thank you so much, everybody. And I think, as discussed earlier, we'll continue to -- as we complete our 25th year, we are at a very strategic inflection point. I've shared this a number of times whenever I meet you personally that now we're at a strategic inflection point, steady growth from here over next 5, 10 years. This year is evolving on a greater asset size as far as the AUM is concerned. And we remain committed to our vision of excellent endeavors. Thank you so much. Thank you, everybody.

Thank you.

Thank you. On behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.