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

Ladies and gentlemen, good afternoon, and welcome to the MAS Financial Services Limited Q3 FY '22 Earnings Conference Call hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pritesh Bumb. Thank you and over to you, sir.

Hello, everyone. We, on behalf of DAM Capital, would like to welcome the management of MAS Financial Services represented by Mr. Kamlesh Gandhi, Chairman and Managing Director; and other senior management from the team. We will have opening remarks from the management and then move on to the Q&A. Thank you and over to you, sir.

Thank you, Pritesh. And good evening to all of you. And I trust all of you are fine. And fortunately, the third wave has not hit us hard, and I hope it has played out now. And it's a good sign for the economy and all of us to come back to track on normalization and hence, economic growth. The way we will do it is that I'll take you through the strategic intent of the company, how we managed this quarter and how we'll manage throughout this tough time and how we've been managing since last more than 2 decades, will be followed by my colleague, Darshana and then Ankit will give you the detail in numbers. Now as shared with all of you through our press release, I'm very happy to share that we have crossed the INR 6,000 crores mark on our consolidated AUM. And AUM at the parent company at MFSL grew by close to 15% on Y-o-Y basis, fueled by the rise in disbursement to INR 1,598 crores as compared to INR 1,031 crores the corresponding quarter and INR 1,476 crores the previous quarter. Our profit on quarter-on-quarter basis, on corresponding quarter basis increased by 11%. As you are aware that since last 2.5 decades, we have always been focused on calibrated growth, which brings about a win-win situation for all the stakeholders. And for a lender, maintaining the quality and profitability is a prime importance along with the growth. Coming to the quality of the assets, as you have seen that even after implementing the 12th November circular, we have seen a very robust quality at around 2% gross and net stage 3 assets at around 1.76%. And had we been doing the way we were doing earlier, it would have been around 1.63%. So this only marginal rise is a function that at MAS, we have never followed a rollback once accounts slip into 90. And in fact, what we are seeing right now is a function of the real-time recognition of NPA, which usually was done at the end of the month by a majority of the lenders. If I take you to another very vital is the fact on capitalization that we remain very strongly capitalized at 27.4% to aggregate capital adequacy with around 24% in Tier 1 and 3.42% in Tier 2 capital. And as you can see that from this quarter, we are coming back to our normal trajectory of almost 20%, 25% growth, which we have demonstrated throughout all these decades. I would like to draw your attention to a slide on growth, where we have shared our motto and dictum on growth, that consistency and steadiness is the fastest way to reach where you want to be. And while we always said a 30 years or a 25 years journey, this time, we have also endeavored to share the journey right from our first capital raise. That is a long period from 2007 to 2021. And I think all of us are aware that this has been the toughest time. 14 years is a very long time, and there are a lot of headwinds during that time, right from a global crisis, to NBFC liquidity crisis, to demonetization, to IL&FS and then a few of the other institutions failing and then the COVID. Despite of all those headwinds, we would register a growth of close to 25% be it on AUM, be it on PAT and corresponding growth in net worth also. This is where we gain our confidence. And this is where we are confident that if you have a strong balance sheet, the way we are having right now with a capital adequacy which is a very enabling factor for the growth, accompanied by our quality which we've maintained throughout the period of crisis, you can grow once you get the right opportunity. And I must say that, that has come now. So we are very confident going forward to come back to a trajectory of around 20% to 25% of growth, which translates into doubling our AUM every 3 to 4 years. A few of the things, what we have done to achieve this growth is to strengthen our distribution network. We have increased our centers reached from 3,500 centers to 4,100. And it is likely to touch 5,000 by March, which has been managed through 114 branches, which is likely to be anywhere around close to 125 branches plus as we approach 31st March. This will be a great enabler for us along with our NBFC partnerships and our partnerships with fintechs to achieve the growth that we are targeting at with keeping quality and profitability intact. In terms of technology, we have always seen that technology serve the purpose of, number one, is not compromising with the dictum of extending credit where it is due. At the same time, it should improve efficiencies and it should result into customer delight. This is what we aim at adoption of technology and this is what we mean by fintech at MAS. That nothing should be done at the cost of assessment on credit, nothing should be done at the cost of extending credit where it is due. But at the same time, using the latest technology available, we should see to it that we improve on efficiencies and that results into better experience for the customer. And we are in that process resulting into more efficiency, and we see that improving forward with onboarding of customer or with decision-making or with operations or with collections once the disbursement is done. And in terms of our tie up with fintech, we are very cautious in how we tie up. We are very cautious on how we extend credit to the marketplace and see to it that we really create an all-around value for all our stakeholders. On the product configuration, we continue to focus on our prime product that is microenterprise, small and medium enterprises, accompanied by a portfolio of two-wheelers and commercial vehicles. In microenterprise, the loans which we do directly and along with the NBFC MFIs of the country, we are happy to share that there's a lot of improvement in terms of collections that NBFC MFIs have started attracting more capital and more debt. Their collections have also improved. But at the same time, the microenterprise players will still take more time to reach to the full scale, whereas we have seen a good growth in our SME portfolio. So if you see our SME portfolio has registered a very robust growth of around 45% this quarter-on-quarter basis, whereas our microenterprise loans has more or less stable or slightly depressed by around 4% or 5%, being a very cautious approach on the part of the company to wait and watch once the real economy really picks up. We are working hard to improve on the wheels portfolio also and that there also we are registering a decent growth in two-wheeler as well as commercial vehicle portfolio. Two-wheeler, we all know that it's facing a lot of headwinds. But even though, it had growth by around 13%. And our commercial vehicle portfolio on a lower base registered a growth of around 27% in that. So overall, growth was close to 14% on AUM. Coming to the housing subsidiary. There also, we have always maintained that housing is going to play a very important role going forward. And we have started getting encouraging business there also where the AUM has grown by around 11% and with a very strong capital adequacy and very high quality of assets. We see no reason why it cannot come back to the growth of anywhere between 25% to 30% on a lower base, and that should meaningfully contribute to the parent company. So during this time and during this time of intense severity in terms of headwinds because of COVID and that too on a prolonged basis for around more than 2 years, what we are focused was to strengthen our balance sheet, see to it that the quality of the assets are maintained or are intact. And at the same time, we have taken this opportunity to improve our distribution strength also, all ready to capitalize on the opportunity that we'll be getting now onwards, once again to come back to our normal growth rate as we have demonstrated over decades. So with this, I will hand over to Darshana to take you through the numbers in detail, which will help you to understand the performance better. Over to you.

Thank you, sir. Good afternoon, everybody. So I'll quickly take you through the numbers. If we look at our AUM, so as shared by sir, the growth in AUM is around 14%. And regarding the configuration of the AUM, microenterprise loans are contributing around 50%, SME is 40% and the 10% is coming from our wheels portfolio. And regarding the growth percentage, SME book, we have grown by 47.53%. Two-wheeler is up by 12.24%. So earlier, the portfolio was around INR 323 crores. Now the two-wheeler portfolio is INR 363 crores. Commercial vehicle portfolio has increased by 47.16% from INR 156 crores to INR 230 crores. And microenterprise loan, there is a de-growth as shared by that was a cautious approach. So there is a de-growth of around 5.23% from INR 3,033 crores to INR 2,874 crores. SME book stands at INR 2,274 crores. And it has grown from INR 1,541 crores. Now coming to the total income on a quarterly basis. So there is a rise in income at around 21% from INR 142 crores to INR 171 crores. PBT has increased by 11.37% from INR 48.38 crores to INR 53.88 crores. And profit after taxes increased by 11%. That is INR 40 crores from INR 36.18 crores. On 9-month basis, total income has increased by 4.9% from INR 454.74 crores to INR 477 crores. PBT has increased by 8.4% from INR 143 crores to INR 155 crores. Profit after tax has increased by 7.74% from INR 107 crores to INR 115 crores. As far as quality of the portfolio is concerned, our gross stage 3 after considering revised guidelines, it is 2.35%. And net stage 3 assets is 1.76% as compared to 2.3% and 1.8%, respectively, the last year. And if we would have considered it normally then it would have been 2.18%, gross stage 3 would have been 2.18% and net stage 3 would have been 1.63%. Now coming to our housing numbers. Here also, we registered growth of around 11% in AUM. So now the AUM is around INR 307 crores. It was INR 277 crores last year. Total income has increased by 3.02%. Profit before tax has increased by 121%. And this is mainly because of lower impairment cost. Last year, we had to provide more because of the COVID. Profit after tax has increased by 126% from INR 46 lakhs to INR 1.04 crores. On 9-month basis, PBT has increased by 22% from INR 3.51 crores to INR 4.28 crores. And the profit after tax has increased by 24.65% from INR 2.68 crores to INR 3.34 crores. Regarding the quality of the asset, our gross stage 3 is 0.69% and net stage 3 is 0.49%. And it was last year, it was 0.65% and 0.46%, respectively. Here, I would like to mention that in our housing finance, we were following the practice of not upgrading the account unless it comes under 0 risk weight. So this is just because of the, this is the normal, so this was all about the performance of the book of the company. Now I will request Ankit to take you through the capital and liability management.

Good afternoon all. In the current quarter because of the effective liability management, we were able to maintain liquidity buffer of around INR 1,000 crores on the book. And the unutilized cash credit facility of around INR 700 crores. In addition, the company has sanction on hand of around INR 900 crores in the form of term loan, direct assignment and co-lending. In the last quarter, company did around INR 300 crores direct assignment transaction with various PSU banks. The company further has more than INR 350 crores sanction on hand which will be utilized during the current year as well as the next quarter. The company aims to maintain around 20%, 25% of AUM as off-book through direct assignment transaction and other off-book transactions. Also, we tied up with 2 of the PSU banks for co-lending to MSME sector, and we executed the transaction during the quarter of more than INR 50 crores. The company has available cash credit facility of more than INR 1,900 crores, out of which company maintained utilization level of around 65%, 70%, and this portion was capital liquidity buffer. The company raised around INR 450 crore term loan during the quarter from various PSU and private banks, which helped us to further strengthen the asset liability maturity pattern. The company further have more than INR 500 crores sanction on hand, which we divide during the current and the coming quarter as well as the next year. The company raised around INR 100 crores through market-linked debentures during the quarter. Also with the subordinate debt, which qualifies as Tier 2 capital to the tune of INR 100 crores from private placement during the quarter. We have assessed our structural liquidity for the period. And based on the assessment, there is no negative impact on equity, and the cash flow in all the cumulative buckets remain positive. We remain adequately capitalized whereby our total capital adequacy is around 27.41%, with Tier 1 of 23.84%, and adding the sub debt or Tier 2 capital during the quarter of around 4%. Our debt/equity ratio is around 3.41x. And we were able to maintain the cost of borrowing during the quarter, which was stable at around 8.80% on the entire book. So this is on the capital and liability management, and I will request Kamlesh for the closing remarks. And then we will open for question-and-answer round.

Before we start the question-and-answer round, I missed out on one point that the Board in its meeting yesterday have approved the dividend of INR 1.25 per share as an interim dividend, and that has been approved yesterday. But that is what I wanted to add in my opening remarks which I missed out. So now with this background, we are open for any query or any question and answers that anybody wants to ask.

[Operator Instructions] The first question is from Hitesh Gulati with Haitong.

Sir, I have a couple of questions. Firstly, sir, what is your view on credit costs? Credit costs have obviously come up this year. But how should we think about it going forward over the next couple of years? And secondly, sir, I observed that our on-book AUM has kind of increased to about 18%, which is kind of highest in the last few quarters. So what is the thought process there?

I think our credit cost has been around 0.8%. And we see that as a normal credit cost. And we already have a buffer over and above that of around 0.95% of our on-book asset. And we continue to maintain that buffer. So we see that things are normalized and we don't see the credit cost going higher. On the contrary, because we follow Ind AS and ECL, we might have to claw back from our buffer, which we'll do it gradually and slowly. In terms of our assignment, we would like to share that we'll keep it range bound between 20% to 25%. And the very reason for lower assignment was not lack of sanctions, but our conscious effort to reduce liquidity on the balance sheet. If you see that over last 2 quarters, we have been maintaining very high liquidity and that cost. And that cost the company. So if we sell the portfolio despite of having sufficient other lines of credit then we have to draw it at that time when we sell the portfolio. It was a conscious decision to limit that to around 18%. We are further in the process of reducing the liquidity because the things have normalized. We did not carry very high liquidity on the balance sheet, which affects the profitability. So I think this year, we'll be in a position to maintain anywhere between 18% to 20%. So there's a policy, it will be range bound anywhere between 20% to 25%.

The next question is from Gurjot Ahluwalia with AG Capital.

If you can just explain 2, 3 P&L line items. So one is on the interest finance cost. I see that is up 30% year-on-year, but the cost of funds have actually gone down before this. So if you can explain why finance cost has gone up higher than the AUM growth? And secondly, on the fees and commissions, this area declined substantially both year-on-year and quarter-on-quarter. So where do we expect the fees and commissions to stabilize? Like last quarter it was INR 8.5 crores versus INR 4 crores Q2 and then INR 2.7 crores last year. Where do we expect to stabilize as a percentage of revenue or asset level?

Yes. So on finance cost, it is also related to my book or direct assignment transaction. So if you compare with the last year, my direct assignment transaction was around 33%. And when we do a direct assignment transaction, the net income is booked on the gross income. So whatever costs are incurred or finance cost, that will not be falling into finance effectively and net income in the gross income. So this year because it is at 20%, therefore, the effect of on book borrowing led to increase in the borrowing finance cost during the quarter.

And on the fees and commission, there are 2, 3 things which will lead to the increase along with the increase in the business. And along with our change in the policy of doing the business with the partners. Whereby first, we used to share the revenue and each one will take the revenue. Now for better control, we have moved the complete revenue in our books and then we would give them the commission, what we need to give to them. So the better control, this is being practiced. So as and when we have more and more of such arrangement with the partners whereby the complete income has to come, first come in our book and then we will share from there, that will be reflected in fees and commission.

Got it. And then my second question is just, again, based on what you have given in the presentation, so you mentioned the leverage ratio on the balance sheet is 3.41, the debt to equity. And then you, going forward, will maintain this leverage at optimum level. So again, can you just quantify this optimum level of debt to equity in the next 2, 3 years? And also the growth trajectory of 20%, 25%, is this AUM growth, PAT growth, again, if you can just define both these things.

Starting with the last query. When we talk about 25%, it implies both, the AUM growth and corresponded by the PAT growth. If you see, as I shared in my opening remarks, if we even see the last 14 years of working, the AUM growth and growth in PAT corresponds to each other. So that will mean AUM, PAT growth, both. And in terms of leverage, I think anywhere between 3.4 to 4.25 should be ideal leverage as we think currently.

The next question is from Madhuchanda Dey with MC Pro.

I have 2 questions, one on the asset side. As you mentioned that SME growth was healthy and you also had certain partnerships with banks for co-lending. So what was the percentage of origination in the quarter that came from this partnership? And a related question is, we have seen in this quarter banks have gone very aggressive in the SME and SME space. So what is your reading on the same? I have a question on liabilities, which I'll ask later.

See, as Ankit said, the partnership has newly started. So it will not be in percentage of the disbursement done in this quarter. We have done close to INR 50 crores of partnership business, and we will scale that going forward as we synchronize our systems and operations with both the banks which we have tied up. As such, there are ample of opportunity for partnerships, but we are taking one by one. As we season, one partnership will move to the other partnership. So there is no dearth of getting into partnerships with the various banks, but we will gradually move funds as we scale up with a particular bank. So that was INR 50 crores, and our current partnership is with Bank of India and Bank of Maharashtra. In terms of banks becoming very aggressive in SME funding, I think while optically it looks like the banks are very aggressive, but there's a lot of market differentiation in the marketplace that a customer who we serve and typically which bank would like to serve. And the USP, what we bring to the table, along with now adoption of technology at our end with a lot of API integration and a lot of software updates, I think we once again are better in customization of credit as compared to bank. And we see a lot of traction in giving credit to the SME sector the way we have been doing. So while banks have expressed their desire to be very aggressive, but all said and done with the best of their efforts. But when it comes to customization, it is where people look up to NBFCs. And as I said, along with technology, has helped us to scale up this business. And we see this traction going forward.

My question on the liability is very simple. There seems to be a sequential increase in the cost of funds. Any particular reason? Is it because the assignments have fallen so much? Can that be one of the reason or what is it?

It entirely depends on the mix of borrowing because in the last quarter, we did subordinate debt, which is a Tier 2 capital. And because it's unsecured subordinate debt, it will be costing higher than the normal cost of borrowing to the company. And also gradually on the, and other stuff is when we borrow a long-term loan, it will be always higher costing than the short-term loan. So when the mix changes, there can be slight increases in the cost of borrowing or it can be other way, it can reduce also. But it will remain in a bucket of 8.75% to 9% going forward also.

[Operator Instructions] The next question is from Rahul Maheshwari with Ambit Asset Management.

Congratulations on the good set of numbers. I have 3 questions. Can you give a little bit more color on the co-lending partnership that what kind of products you are doing? What is the kind of arrangements and whether how much ROE accretive it's there as compared to the traditional business in your own books which you were doing earlier? And you talked about many such more partnerships there. If not giving the names, at least you can give some kind of color or insights on what type of products or what the kind of in terms of number of partnerships you are planning as such.

Sir, in terms of partnership, if I start from the latter part of your session, we'll be introducing a few more products such as housing loans, and we will have different types of products with different banks because when you talk about MSME funding, we have various types of credit screens. And the screens which suits the bank, there we enter into a partnership, maybe a secured loan, somebody will be happy with a secured SME, some will be comfortable with the unsecured SME where we have the complete area of products to offer to the banks. So the partnership with the banks will depend upon the convergence of our product lines with the banks, in the bank's product line. And there, we initiate a process with them to partner and then we'll try to convert as much as we can. And that conversion had happened with Bank of Maharashtra and Bank of India, both for secured and unsecured MSME. And going forward, one second, Rahul.

80-20 ratio. I'll come back.

It is 80-20. And in some places, we also prefer to go up to 70-30 also, depending upon what are the terms we get from the bank. So it can be 80-20 is the minimum. But in some places, we can also be doing 70-30, then the risk and reward are shared pari passu. In terms of ROA, we look at partnership as one more model of liability raise. So we see that the ROAs are maintained as if we have raised the liability on our own balance sheet. While we get the advantage of sharing the risk with the bank. Because what happens then for our partnership is not because we are not in a position to raise liabilities. But partnership is because we can have a better diversified relationships with the bank, where we already have other sort of relationships like normal assignment or normal term loans or normal credit. And how it operates is that there are 2 models. There can be an online disbursement or that can be a reimbursement model. But for the operational convenience, RBI recently amended maybe in 2 quarters back, Ankit?

Yes.

Two quarters back, they amended that it can be reimbursement model also. So first, we'll move with the business as per the mutually agreed credit screen, and then the bank will reimburse after they are convinced that it is as per the agreed credit screen.

So then in this co-lending model apart from the 80-20 in terms of the disbursement and risk sharing, what kind of fee generation is also being taken by you?

See, what happens is that a particular IRR is decided at the customer level. And from that, the bank will charge their part and then we will charge our part, which will include the fees and the services amount that we have to do for the complete 100%. So for us, it is as good as a liability raised at around 8% to 9%. And then the lending done at anywhere around, in the range at an average IRR of around 14%. So we have a 6% spread, so to say.

Yes. That's very helpful, Kamlesh. The second question I want to ask is that very phenomenal asset quality, I would say, looking at how the peers are doing. How come MAS, looking at what you are lending to the partner NBFCs, can you give some color on it that how it has remained so benign and where others have actually faced any issues irrespective of the products, whether it was CV loans or SME or et cetera so. And also, can you give color on how the end customer or NBFC partners asset quality has behaved?

Coming to the overall strategy of extending credit where it is due, right, that over the years we have been a very patient organization. We were not sleepy because when you double your AUM every 3 to 4 years, it's a phenomenal growth by any standard. But we have taken a lot of time to reach to this size from a humble beginning of INR 2 crores in 1995, have sticked to our niche expertise. If you say that in 2000, we were reckoned as an MSME financer. In 2021, we are reckoned as an MSME financer, along with a small portfolio of wheels. So over all these years, we are focused on gaining the niche expertise grown in a calibrated manner. But in such a manner that a very healthy growth is registered and at the same time, always being cautious at the opportunity that the market offers. Say, for example, during COVID, in one of the year, we decreased our AUM also by 11% to 12% because we thought that it's not an opportune time to increase your AUM. So the policy of not growing at any cost, putting quality and the profitability or prioritizing them along with the growth, I think there are a few simple things what we have followed over all these years, and that is what has helped us to maintain our quality. In terms of our NBFC partners, we are very selective with whom we work. The risk-sharing arrangement is such that it is with complete recourse on the partners we work. So their capital and their spread works as a buffer for us in case of any eventuality and that has worked very nicely for us for more than a decade. So this has been our business model. The simple formula is that we stick to a particular product, all of these expertise had been patient and had grown at an opportune time.

[Operator Instructions] The next question is from the line of Bharat Shah with ASK Investment Managers Limited.

Yes. Good to see the kind of results yesterday. Two questions. Given a lot of water is long under the bridge over the last 2 years and an unprecedented situation the whole country has faced. And if broader consensus appears to be that things are headed more to normalcy rather than disruption and there can be occasional some trouble here and there. But broadly, I think things are moving towards normalcy. So if that assumption is right, are we back to the game of long-term growth of typically 20% to 25% and more like 25% to 30% that we have done in many periods. Are we back to that kind of a compounding growth rate in the business?

Yes, Bharat. So given the opportunity and once the things are back to normal, our customized style of underpromise, overdeliver, our endeavor will be to be anywhere between 25% to 30%. But once again, prioritizing, as shared with all of you that it will be quality, profitability and growth. But you are absolutely right that we would be trying to say to that, how we can recoup the lost ground once the thing stabilizes. And we still have a scale whereby few percentage growth more can be taken. And there's a full-fledged endeavor on that count. And internally, we are geared up that way. But when it comes to commitment, we always try to give the commitment in such a manner that we don't overpromise. So on a commitment basis, the endeavor is, it is on a 20%, 25%. On endeavor basis, it will be definitely anywhere between 25% to 30%. And I hope that we might exceed that expectation of 25%.

Right. And Kamlesh, secondly, how do we see our, once again, if we're to revisit our ROA tree, the return on asset tree once again. So from a conceptual point of view, let's say, what kind of a spread between our cost of borrowing and the lending rate, effective and net interest margin, other income including assignment income and then the expenses, then the likely credit cost and then the profit after tax margin and leverage. If we drop the schematic kind of ROA tree again just to revisit, can you help me with that as to how to conceptualize the way our businesses will be modeled overall?

See, broadly, on an AUM basis, we target NIMs on a range bound basis from at around 6.75% to 7.5%. And historically, we have credit costs from 0.8% to 1.2%. And then the operational cost of, say, around 2%, should leave us at around 4% of NPM and post-tax ROAs of close to 3%. This is what we always targeted. And our experience is that a 3% ROA on a 7% NIM renders us more competitive also in the market to choose and pick our assets also. Because if we target higher ROAs, it will come at the cost of quality. And you can never control that once that deteriorates. So on an ROA tree, we would like to stick to around 3% ROAs and 7% NIMs. And then between the credit cost and the operational cost at around 4%.

And what kind of leverage do you think, structurally?

Structurally, we would like to, on-balance sheet leverage will be at around 4x. But if we take the assigned portfolio of 25%, the leverage will be anywhere between 5 to 5.5x. That will take us closer to around 16% to 17% ROE.

Sure. On-book about 4x and total book basis about 5 to 5.5x.

Right. Right. Right.

Yes. That will be leverage. So net worth will be separate, right?

Sorry?

Meaning INR 1 of net worth and INR 5.5 on that off-book leverage or totality of INR 5.5.

Totality. Maybe it will be 1 is to 4. I'll tell you what the debt to equity. So 1 is coming from equity, 4 is coming from debt. This gives us our on-book balance sheet. And another 1 will come from, 1 to 1.5 will come from assignment. So it is 1 is to 5 to 5.5. And 3% to 3.25% of ROA should take us at close to around, anywhere between 16% to 17% of ROE.

No. That should then take us to 18% to 20% ROE because on-book INR 1 and INR 5 to INR 5.5 on-book and off-book.

I'm sorry. That will be, so that will be 18% ROE.

18% to 20% ROE.

Yes. Right.

Okay. So thematically, this is a picture we can imagine on a generally more rugged and sustainable basis?

Yes. And that is, if we take last 2, 2.5 years away, that is what we have usually done that created ROEs in the range of around 18% and maintain NIMs of around 7% and ROAs anywhere between 3% to 3.25%.

And one last question. Given that now things are looking back into the stable. We have gone through a difficult challenging experience of pandemic and managing situation. And if things are opening up and hunger is coming back in the system, the probability is that instead of 2025, we may grow at 25% to 30% because India at the end of the day still remains materially credit efficient society. And the CapEx cycle, the export performance, commercial credit, consumer credit, all seem to be opening up in a nice way, including the corporate credit. Therefore, supposing we are able to grow based on our model of 25% to 30%, keeping the hygiene, quality of the asset in calibrated, measured growth that we typically follow, with 18% to 20% ROE, that will leave some amount of gap in the capital. Will it mean that we may leverage more or we may have to raise some capital?

Okay. As far as capital is concerned, I think we will have to leverage if we take a 30% view. We will have to raise the capital. So it all depends upon the extent, possibilities, on the availability of the liability and the liquidity at that point of time. But as a policy, we would like to stick to this. And say to that, that if we really want to grow at 30%, then we'll have to raise capital. So when we talk about a self-propelling model, one of the ideas of keeping the growth at between 20% to 25% was also that this is a self-propelling model. But having said that, we will not lose an opportunity if we have one only because we have to raise capital. So we will definitely balance between the opportunity available without compromising with the quality of the assets. And if we can grow at 30%, maybe with a slight capital raise, so be it. But we might increase the leverage marginally but not very high.

Okay. But like 18%, 20% ROE, what kind of growth rate do you think can be sustained within in a self-sustaining base?

See, as you know, like currently, we are at an excess of capital of around 24% Tier 1. So we have some room to draw from that capital. So if I talk about the next journey, say, from around INR 6,000 crores to INR 10,000 crores through our internal accrual, we will be in a position to maintain our Tier 1 capital anywhere close to around 18% to 19% and add another 2%, 3% of our Tier 2 capital. I'm talking about AUM. When I'm talking, I'm talking about the total AUM. And that will result into, say, if I'm maintaining 18% Tier 1 capital and with around 20% on assignment, that will be a statutory capital adequacy of close to 23% and a leverage of close to 4.25x. And on a INR 10,000 crore balance sheet with around 18% Tier 1 capital on AUM and then derisking to 20% to 25%, I think will be a self-propelling model and it can go on accordingly, going further also.

So about 18% to 20% ROE and about 23%, 25% asset growth can be self-sustaining, self-propelling model?

Yes, self-propelling model.

Beyond this, capital may need to be raised?

Yes. Then you might need to raise the capital.

The next question is from Harshvardhan Agrawal with IDFC AMC.

Sir, just wanted to understand a bit on the fintech tie-ups that were mentioned in the PPT. So what was the quantum of disbursement that you have done during this quarter through these tie-ups? That is one thing that I wanted to understand. Another is, what is the target disbursement for this business that we expect from these fintechs over the next 12 months? And lastly is how the collections work in these tie-ups? So these are the 3 questions around the fintech tie-ups.

See, the fintech tie-ups, what primarily we will aim is around catering to the MSME customers. This is with a preferred fintech one. And during this quarter, we, on a trial basis, had undertaken a disbursement of around INR 200 crores. And going forward, we see that if we get the fintechs who are converging with our idea of extending credit where it is due and if we are satisfied with their systems and operations so that we can onboard the customer base on that technology. We see that business around 25% to 30% coming through such fintech tie-ups. In terms of collection, it is directly being credited to our account and the fintechs will get their share of origination and servicing. And it is through an escrow mechanism. And they get an agreed spread for origination and servicing and to an extent, taking the first loss guarantees.

Right. So sir, when you say currently it's an escrow mechanism wherein the money comes into your account. So my assumption is, like just in case if a borrower is not able to pay or delay the EMI, so is it like in that case the collection means MAS will do the collection work or is it the fintech will do the collection on behalf of MAS?

So what we do whenever we tie up with a fintech, there's a common credit screen device. Area of operation, the fintech works throughout the country. Our area of operation is limited only to the PIN code where we have the reach. We will not be doing across the country. The preliminary responsibility will be on the fintechs to collect, but we have a fallback arrangement that failing which we can step in their shoes very easily because it is only within the area where we operate, by and large. And it is as per our agreed credit screen. And there is a back-to-back credit appraisal done. No disbursements are done continuously without our credit appraisal. So it is just using their platforms, whereby due diligence and everything is done through us.

And then sir, one last thing around this is on the disbursement number that you shared. You said like INR 200 crore disbursement is done through fintech during this quarter. And maybe the target is around 25%, 30% through these platforms. So if I were to assume like INR 1,500 crores of disbursement in a quarter, so maybe somewhere around, say, INR 400 crores of disbursement we would expect to come from these tie-ups. Is that understanding correct?

Yes. Going forward, if we converge on the operation, systems and the experience is good.

The next question is from Rahul Jain from Credence Wealth.

A special mention for the management team for a decent balance sheet and also decent asset quality in extremely tough times. Coming to my question, so we are coming back somewhere near to the normalcy. As what we understand from various company concalls, rural has faced problems, rural economy has slowed down. And also given the scenario in the last 2 years, what we get to here is, even at the urban level somewhere, the larger have become more larger or more stronger and some headwinds are being faced by the smaller guys. So given the set of customers to whom we lend or the segments to whom we lend, what is your view on the same in terms of normalcy being there to what extent and which segments, where do you feel there are still stressed pockets there and it will take some time for normalcy? Accordingly, your growth targets of around 20%, 25% over a period of next 3 to 4 years compounded, do we see that this would be more back-ended rather than seeing that kind of number in next 12 months?

Okay. Coming to your first question, if you see our asset configuration is more, not exactly rural, but Tier 2, Tier 3 cities. So they do not fall under the classical definition of rural. That's why they are more agri and animal husbandry or some petty occupation-oriented income. So whereas we work with the ones which are a few notches above the rural. So it is not typically that rural economy we serve. And secondly, on the stressed pockets, as you see that in the last 2 years, there were hardly any pockets that there were no stress. So it was all pervasive. But it was only up to the lenders to see, but then how you choose and pick your borrowers in terms of how you select the segment, how you select the demography. And over and above that, what are your credit assessment techniques. And that is, once again, the function of your growth plan. So if you have a balanced approach there, that is the way we have navigated. And I think that is a good way to navigate through any of the stress, not only COVID stress. But as I said in the opening remarks that since last, all this year, we have navigated through various stresses in this way. In terms of the growth of 20%, 25%, by and large should be on an equal trajectory, give or take a few points here or there. That one year we have grown at 22% and the next we grow at around 27% might be practically possible. But the idea is to grow steadily anywhere between 20% to 25% over this period of time. We have done that way in the past also that we grew steadily, not so much of a lopsided on a, if we will take a 3 to 5-year time period. It's not so that it's lopsided in the last 2 years on a 5-year time horizon. It is more or less steady. So with normalization, our endeavors, as I replied to Bharat's query that our endeavors will be to have a steady growth.

So can I assume that within the segment which you are lending to, normalcy is more or less done. Is that what you're trying to infer?

Yes. As we talk today, yes. The way we are seeing the traction and since last, almost 1.5 quarter, we have reason to believe that we are almost normal.

Sure. And sir, my second question is, currently, what percentage of your AUM is by partner NBFC? And given that you are aggressively putting up more centers, you mentioned already you're at around 3,500 and aiming to be 5,000 by March. Does that proportion change in next 1 or 2 years or 1 to 3 years? Is that what you're targeting or trying to do?

In fact, this has started changing. As we said last quarter, the concentration was 58-42. Now it is 50, that 58 is reduced to 52 in terms of NBFC distribution and 48 through our direct distribution. And by March, we might see that being 50-50. And as I've always said since many quarters, that over a period of time, while we have no issues through NBFC distribution, but the only fact that our distribution strength will increase at a faster pace than our NBFC partnership, the ratio will be skewed in favor of our retail distribution, which can be going forward 60-40 or maybe going at 70-30 in favor of our direct distribution.

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

So in terms of product-wise breakup of your AUM, we are almost like 50%-plus into microenterprise loan, and that's where we're still not able to grow. And even the commentary has been cautious only. So we are not sure how things will unfold. And given that, how do we see this 20%, 25% sort of a growth trajectory? Because if one large segment is not growing or not growing at a rapid pace, then how do we compensate for that? Do we see enough buoyancy in the SME loan market to be able to pull the overall growth to that level? And if that will be so, then would we not end up making any mistakes given that, that segment also has been facing some challenges of late and it's been like that for a few years.

See, while we give bifurcation on microenterprise loans and small and medium enterprise loans, but when we take this as an MSME segment, it is SME and microenterprise both. And when we talk about microenterprise loan, the cautious commentary maybe was, and maybe for a quarter or 2, but it's not so that it is going to remain there forever. It's a very huge market to be served and we have a very strong presence there. But having said that, let me take you to the fundamentals that once you grow your balance sheet size and as a practitioner overall this is the case, we personally feel that you have to commensurate your ticket size also with the same in order to get the growth. So if you see, as mentioned in our press release, that we are focusing more on SME loans. And last quarter, we grew SME loans to the tune of 47%. So we are seeing, and we are not new to SME loans. The only thing is that, that we are increasing our SME loans in consonance to our balance sheet size. So as we grow our balance sheet size, we'll be increasing the portion of SME loans. SME loans at a particular stage, a quarter or 2 back, was not a function of lack of origination or lack of our capabilities to originate that, but a cautious decision to limit that looking to our balance sheet size. So as we grow our balance sheet size, we will be more focused on SME loans while focus on microenterprise will continue. So when we talk about 25% growth coming from this MSME sector accompanied by wheels, the formula will be to focus on SME, micro and wheels in priority.

Understood, sir. And the other way to grow probably is to have more of a geographic expansion. Now while you are increasing your distribution points, are you also planning to sort of put in more new geographies in the coming, this 12 months or so?

I think we are already into, we have operations into 6 states. And we are exploring, we are trying to explore north also for, especially for SME business, and a few more geographies in south. So that will be a continuous exercise depending upon our requirement for business. But for the next quarter, as I shared, that our 4,100 reach will be 4,500 reach, mainly within our 6 states of operations. And we will be simultaneously exploring more centers in south and exploring north also.

Thank you. Ladies and gentlemen, due to time limit, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

So thank you so much, everyone. We are happy to share the performance of the company for this quarter. And we are confident that the way we shared with you, it will be a good growth journey going forward, looking at the normalization of situation and accompanied by very strong enablers that we have in terms of capital adequacy, niche expertise, capability to raise liability and to manage asset quality. We think that coming back to the normal growth of around 20% to 25% is given, which presents a very strong compounding growth of doubling the AUM and the profitability every 3 to 4 years. So at team MAS, we continue to focus on our mission of excellence to our endeavors, which can create value for all the stakeholders. And we'll be in touch and please feel free for any further query. Thank you. Thank you so much.

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