Muthoot Microfin Limited (MUTHOOTMF) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Muthoot Microfin Limited Q3 and FY '25 Earnings Conference Call hosted by JM Financial. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mayank Mistry from JM Financial. Thank you, and over to you, Mr. Mistry.

Thank you, Ranju. Good morning, everyone, and welcome to the Q3 FY '25 Earnings Conference Call of Muthoot Microfin. First of all, I would like to thank the management team of Muthoot Microfin for giving us the opportunity to host this call. From the management team, we have Mr. Thomas Muthoot, Chairman and Non-Executive Director; Mr. Sadaf Sayeed CEO; Mr. Praveen CFO; Mr. Udeesh Ullas COO; and Mr. Rajat Gupta, AVP, Investor Relations. I would now like to hand over the call to Mr. Sadaf for his opening remarks, post which we can open the floor for Q&A. Thank you, and over to you, sir.

Thank you, Mayank. Good morning, everyone. Thank you for joining the earnings call for Muthoot Microfin for Q3 FY '25 results. First of all, I would like to give an overview of the macro environment that we are operating in. So, quarter 3 was expected to be a little bit better quarter because of the festive season, but there were a number of challenges which came around in this quarter as well. As you know that previous 2 quarters, there have been challenges of macro nature, which microfinance industry has been facing. In Q3 also, that got exasperated because of floods and cyclones. So, we faced cyclone Fengal in Tamil Nadu. And we had issues which are brewing up in Karnataka because of which the portfolio was getting affected and the quality of the asset was getting affected. But having said that, Muthoot Microfin has always outperformed the industry, has continued to operate with a better risk management policy. So, we have the natural calamity insurance. So, damage from the Fengal cyclone was minimized. However, since the cyclone happened in the last end of month of the quarter, so part of the benefit that we have received from the insurance companies, would be taken to effect in the final quarter, Q4. Part of it has already taken. I'll go about that in detail in the presentation and when we do the discussion. But overall, to lay the summary, during the quarter, we reached INR 12,400 crores, INR 404 crores of assets under management, which is around 8.3% growth year-on-year and just about a 1% decline over the previous quarter. Our strategy was to calibratedly do disbursements and not to go aggressive in the current environment. So, we have continued to play on that strategy. And hence, we have disbursed around INR 2,035 crores of loans, which is a decline of around 21.5% year-on-year and 23.9% quarter-on-quarter. In terms of our distribution network, we continue to calibratedly expand our distribution network. We have now reached to 1,651 branches. This has increased around 16% year-on-year and 3.6% quarter-on-quarter. Our active client base also has increased by around 4.5% year-on-year. There's a minor dip in the quarter-on-quarter. This is on the back of our strategy that our focus is to focus on our existing good customers, reduce new customer acquisition a little bit, because most of our new customers was coming through the North, which was UP, Bihar, and other states in the north, there we have controlled our disbursement. So, the new customer acquisition has dropped a little bit. Earlier, we used to have around the mix of new to Muthoot and new to existing Muthoot of 50-50. That shift has changed a little bit to around 40-60. And going forward, that will remain for the balance of the period. In terms of our GNPA, we have increased a bit around 74 basis points increase in GNPA to 3.03% year-on-year. And if you look at quarter-on-quarter, around 33 bps of increase. Considering the macro environment and the industry, this is a reasonably good performance in terms of controlling the GNPA. The collection efficiency has come down to around 93%. If you exclude the overdue collection and any sort of pre-closure, it's around 93%. And if you look at including the pre-closure, it is around 95%. Our net NPA stands at around 1.27%. This is something which we will elaborate because we have gone ahead in this quarter taking an incremental provision, ensuring that any sort of uncertainties that are there are taken out. Of course, there are certain things which are still playing out in the macro environment, but most of the overleveraging related issues which were there, have been taken care of to a large extent. If you look at the financial performance quarterly, we have done really well in terms of our, income has increased around 17.7%, PPOP has increased 39.6% year-on-year. Our cost to income has come down almost 550 basis points. Quarter-on-quarter, it's also 125 bps reduction. Our net interest margins have improved around 23.1%, INR 420 crores is the net interest margin. Our overall net interest margin has also increased around 13%, 13.5%. And if you look at the PAT has, of course, come down because of the credit cost that we have taken. The PAT is around INR 38 million, around INR 3.8 crores. But we have maintained a very healthy CAR, Capital Adequacy Ratio is around 30.51%. So, we have gone in a strategy where we want to remain very healthily capitalized, have adequate provision cover and also at the same point of time, remove all the shocks from the system and take whatever credit cost upfront. Same thing if you look at for the 9-month period, our income has increased around 24.7%. Our PPOP has increased by 43.1%. Our cost-to-income ratio has come down to 43.27%. This is a 389-bps reduction year-on-year. Our NIM has increased by 28.5%. And if you look at NIM stand on a 9-month period, our NIM is around 13.07%, so which is in line with what we have given our guidance of maintaining a NIM between 12.75% to 13%, and we are confident that we will be able to maintain that NIM. For the 9-month period, the PAT is around INR 178 crores. So, this is where we are. The key point is that in terms of our operating expense and operating efficiency, we have maintained that. Our operating expense has not gone above drastically. It's still at around 6.1% OpEx that we are incurring OpEx to AUM. And in terms of our operating efficiency, it is improving consistently. Our cost-to-income ratio is coming down consistently. The challenges were the credit cost, which we are addressing upfront. The important highlighted point that I wanted to share with you is if you look at the overleverage, which is the key concern, it is coming down significantly. If you look at as a percentage of portfolio in Q2, the 4 and above customers were around 10.9%, which is almost 11%. It has come down to around 7.1%. Even our Muthoot + 3 customers, which were around 13.5% have come down to 12%. At the same time, our contribution to the unique customers has increased, which is 27.6% to around 30.1% and also in the Muthoot +1, which is around 26.5% in Q2 has gone to 28.7%. So overall, we are calibratedly putting the guardrails and we have effectively utilized them. We are sincerely following the guidelines which have been given by various SROs and ensuring that those are effectively implemented so that the overleverage reduces. Of course, the guardrails have had an impact. We have introduced a slide which shows the rejection rates. So, the rejection rate has increased by 15%, but we think that's a short-term cost; we should be able to build a much healthier portfolio with the guardrails that have been implemented, and we are committed to it. We have sincerely followed it up and implemented that. We have even put over and above certain filter above the guardrails within our systems where we do not lend any customer more than 30 plus. And of course, we have a scorecard system, which is there. As we see the environment developing, I think the focus of everyone is coming at around the credit-focused lending, which is something that is there. One of the advantages that Muthoot enjoys right now is that we have always focused at a separate underwriting vertical, so which is yielding results now. Also, we have had a strong collections team, which is also helping us. So, because of increased delinquency, since we already have a team, we don't have to incur additional cost to build that team. Some of the other competitors are building team. That's why the operating cost for them is going up. So, in current environment, we have a steady state return. And as soon as the environment improves which we are seeing in terms of our collection efficiency, definitely, that will improve. If you look at our X Bucket collection efficiency at an organization level, it is at 99.5%. If you look at there is a state-wide month-wise breakup also we have given. It is showing an improved trend month-on-month, the collection efficiency on X Bucket is improving. The rest of India, it has reached around 99.2%. The key states where Kerala it's at 102%, which means some advances are also there. And around Tamil Nadu is 99.4%, which is our 2 key states where the collection efficiency is improving. Even in Karnataka, the X bucket collection is 98.3%. If you look at overall collection efficiency also month-on-month, it is improving. Tamil Nadu is at 95.4% and Kerala remains a very, very profitable and robust market for us. It's at around 98.8%. We are touching around 99% collection efficiency even now. And in other states also, there is an uptick in collection. I think the chart may show that October, the collection efficiency is higher and November, it was lower and then December again. So, October has to be looked at from a point of view that there were certain advance collection for Diwali as well. So that collection efficiency has to be looked at from that perspective. But overall, we are seeing a positive trend in terms of improvement in collection efficiency in December and also in January, we have had a positive traction in terms of our collections. Disbursements, we are doing calibrated disbursements. Wherever we think that there is higher possibility of risk, we are slowing down on collections disbursements and focusing on collections. And wherever we think that we have a better control and the collection efficiency is good, there we continue to maintain robust disbursement. Having said that, of course, this year, it would be not a growth of very large number. We have given a guidance of 5% to 7% growth. And we hope to maintain the asset quality. That is the focus that is there for this financial year. That's all from my side. I'm happy to answer any questions.

[Operator Instructions] First question comes from the line of Jay Prakash with L&T.

Congratulations. Sir, how much portfolio do you have in Karnataka? And what is [indiscernible] are taking in you know the new ordinance is coming by the Karnataka government.

Yes. I think there are 2 questions there. One is on the ordinance. So, I'll preserve my remark, but I'll give you my personal perception, not the company's perception. In terms of our exposure, we are just about less than 10% exposure of our overall portfolio in Karnataka. And in terms of the regulation, I think from a practice of curbing unregulated lending I think it is something which is good. I think it should be welcomed by the regulated entities. I think this will remove unnecessary overleverage and coercive practices that have been followed by people who are not the authorized or regulated lenders. These are local money lenders, which use strong arm tactics also, which gives a bad name to the microfinance business. So, I think it is something which is very good. As things stand, I have seen the drop. I can't comment on it till the time it becomes the bill. But as the things stand, regulated entities are out of it. So, I think overall, in the long run, it is a good policy to control the lending practice of unregulated organizations. In short term, it might have a little bit of an impact. But in the long run, I think it's positive for lenders like us.

Okay. So do you actually, your collection efficiency also decreased there, 98.7% in Karnataka right now, as you mentioned in your PPT. You are thinking that this collection efficiency also decreased in January and in December, sorry, in February?

So I can't comment on January, February numbers as of now. But I think what we are witnessing, it is steady. It is steady in terms of what it was in December. That is where it is holding as of now. We are not seeing any incremental deterioration. That much I can tell you.

Next question comes from the line of Saumil Shah with Paras Investments.

I would like to know your revised credit cost guidance for this year?

Yes. So, if you look at our revised credit cost guidance, we have given a guidance of around 7.5% to 8.5% as overall credit cost for the full financial year. Again, I would like to emphasize this as budgeting, like basically preparing ourselves for the worst and hoping for the best. So that's the strategy that we have adopted. If the environment in Karnataka does not play out the way it has been anticipated as the worst, it might be better than that. But since we are very close to the end of the financial year, we didn't want to give a very optimistic picture and end up at a very bad situation. So, I think we have taken into consideration that even if Karnataka legislation, the way it was originally thought of, that it will curb lending and all of that. If that plays out, then what could be the credit cost, that is the kind of thought process we have taken into building that credit cost guidance.

Just a quarter back, we had guided for 3.25% to 3.75% credit cost guidance. And sir, you were saying that we will be touching a lower band. Now suddenly in 1 quarter, I mean, how come we are increasing so much of credit cost guidance.

No, that's a good question to ask. Basically, at that point of time, we didn't have an insight that there would be certain ordinance that will come in, and there was no expectation of any sort of a Fengal cyclone. So, both of the things have come in, which is like something which you can't build in a model. So, both of them are in a critical area of operation where we operate. Tamil Nadu is one of the largest kind of portfolio. We had 25 districts which were impacted because of Fengal cyclone. And in Karnataka, we have 10% exposure. Of course, we are anticipating, we are hoping that it will be not as bad as what it has been perceived. But if the worst comes true, that is what has been baked into the credit cost. Both of these things were not visible to us in Q2.

Okay. So, I mean, we can see more pain in the coming quarters because current credit cost is around 5.4%. So, do you anticipate more pain in the future quarter?

Yes. So, we have budgeted for that. That's what we are guiding towards that we would go with a strategy that we will provide and write-off whatever is necessary upfront. We don't want to go light on the provisions. So, if you look at overall coverage, we have 89% coverage of the provision. If you look at stand-alone Stage 2 versus Stage 3, it's 58.8%, but this is because we have taken a large write-off in this current quarter. In the current quarter, the credit cost, which has gone up to around INR 247 crores is also because we have taken a certain INR 164 crore credit cost because of our write-off and there is some ARC transaction that we have done where there is an INR 83 crores of credit cost. We have taken upfront if the things hold normal as it is and there is no intervention that comes in through the Karnataka bill, I think it will be much better than what it is for the Q3.

And sir, we do have insurance against this, right?

Yes. For the natural calamity, we have the insurance. As I explained, as of now, we have received around 32% of the claims because it happened in the month of December. By the time the claim settlement happened, we had received certain claims, sorry, I I'll update 59.8% of claims. The balance claims also the money we have received, but that did not get settled in the month of December itself. It was received in the month of January. We will settle those. The impact on that would be much lesser. But the impact is in the sense that the disbursement does not happen at the same pace and there could be a spillover effect as well where there is no claim as well.

Okay. So out of this expected credit cost loss of 7.5%, how much would it be insured?

The insurance is with respect to natural calamity insurance only, and there is a credit life insurance. In terms of any sort of loss due to operating collection efficiency, there is no insurance on that.

[Operator Instructions] The next question comes from the line of Anant Mundra with Mytemple Capital.

Sir, just wanted to understand more about our credit cost guidance. You also mentioned that you want to take all the pain in this financial year itself. So, is it fair to assume that from Q1, we can expect normalization in our credit costs?

Yes. If we take the hit in Q4, most likely, the things we don't get any other surprise in Q4, we should be able to kind of get back to normalcy in Q1. That's the idea. The increased credit cost is taken just to ensure that whatever is the shock of this portfolio, we take it in this year only. We don't carry this for the next financial year. So Q1 is expected to be a much, much better quarter.

All right. And sir, you've also done some kind of accelerated provisioning in this quarter. Could you just highlight like is it like INR 180 crores plus is completely written off or something of that sort that you would want to give color on?

Yes. We have done an ARC transaction, which is around INR 344 crores of portfolio. We have received a valuation of around 45% on that transaction, which translates to around INR 155 crores, it's 85-15 kind of a transaction. We have received a certain 15% cash up-front, but the investment remains INR 134 crores. Because of this, we have taken an accelerated write-off of around INR 83 crores. So, this is all 90-plus pool, which has been written off. Certain 90-plus pools have flown in from say, which was Stage 2 prior to the transaction just as the transaction happened, they were in Stage 3. We have taken that hit upfront. But definitely, we are seeing better collections from the earlier pool as well. So, there would be definitely some write-backs that will come in. But to the extent of INR 83 crores, we have taken an accelerated write-off.

Okay. So, all of it is due to the ARC transaction?

This is because of the ARC transaction. Also, we have created a buffer which we had created last time of around INR 32 crores of management overlay. We continue to carry that.

That is sitting on Stage 2...

Correct.

That is sitting on Stage 2. And on the ARC transaction, on the SR, we are carrying 100% provision. What is the provision that we're carrying on the SRs?

So basically, since we have written off all the uncertainties, there is no requirement of provision specifically to SR. They go as an investment. They go as a rated paper. If there is a rating deterioration, then the provision is required. So as of now, they sit as an investment in our book. And whatever is required in terms of we have taken the write-off.

Got it. And sir, if I see sequentially, actually, our provisioning across Stage 2 and Stage 3 seems to have actually reduced, in spite of there being a higher credit cost. I mean, I was expecting that our PCR would have gone up because we are preparing for the worst in Q4. So why is it that in this quarter, we've not increased the PCR in these 2 buckets?

So, since we have taken the write-off this quarter, we have already taken around INR 247 crores of credit cost, which includes around overall write-off of around INR 211 crores. So, INR 21 crores on the account of portfolio, which is on the balance sheet, and INR 83 crores on the account of ARC transaction. So around INR 104 crores we have kind of written off. We feel that in terms of cover, we have adequate cover because of the asset that was impaired and really severely affected, which we have already taken out. But if you look at it overall cover, we still maintain around 89% cover. And if you look at a couple of quarters back, we had a similar 89% cover overall the asset. If you look at the overall provision against Stage 3, it was 89.1% in Q1, which was an improvement over the Q4 number of 85.1%. It is still at 89%. Stage 3 specifically, it has gone better because we have utilized that for write-off in the ARP transaction. And the credit cost guidance that we have given is only for the purpose of increasing that provision. So, in the coming quarter, definitely that will increase.

Got it, sir. And sir, so you mentioned that December you've given the data December has seen better collection efficiency as compared to November and Jan, and you're seeing stabilization. So is it fair to assume that Par accretion has stabilized for us in the coming... Yes, sir, please.

Please complete your question.

So, is it fair to assume that, that bucket like PAR 30 plus or something will see because the SMA 0 bucket for us has seen a decline quarter-on-quarter? It's mainly the PAR 30 plus, which is seeing a bloat-up. Is it fair to assume that, that piece will also get stabilized now?

Yes. I think that's the correct interpretation. Our X bucket collection has reached around 99.5% overall if you look at pan-India. And that has been the kind of collection efficiency in the past financial year also where you had 50 bps, which will go into 0 plus and then you recover the majority of it. So not much accretion happens in the higher buckets. What remains to be seen, what is the recovery efficiency on the cases which have slowed in the last couple of months because the collection efficiency for the previous month was not as accurate. I think that is where the whole collection vertical comes into effect. We have a strong collections team, and we have seen good collection efficiency coming out of that. In fact, if you look at December was better than November, if you look arrear collection perspective, and even if you look at the collection from January, that was even better. So, month-on-month, we are seeing better collection on the arrear accounts, and we feel that we will be able to roll back better than what we have seen in the previous quarters and previous months. But however, part of it will flow through. That's why the credit cost has been built in. We have also seen that customers with a better vintage have better collection efficiency. If you look at quarter-on-quarter, this is also included in our presentation.

Correct. So is there, sir, any number that you would want to give us for what kind of credit cost that can we expect for Q1 of the next financial.?

See, I don't want to jump and give a guidance in a very kind of long short. Given what development we are seeing in Karnataka and also overall situation, I think we will go quarter-by-quarter. We will play as it comes. Q1, we anticipate it to be a normal quarter and in a normal scenario, our credit cost is 2% to 2.5%, that is what we anticipate, but of course, any sort of guidance, we will be able to give post the closure of the financials.

All right, sir. And sir, the MFIN 2.0 guardrails that have been implemented from Jan 1, partially implemented from Jan 1. So, in that, is there any kind of regulation or any kind of restriction on giving NATCAT insurances?

No, there is no restriction in terms of NATCAT insurances. The only thing is that it should not be kind of clubbed with a loan in a sense that it should not be deducted from the loan amount. It can be taken from the customer. So, there is no such restriction that is there in terms of giving NATCAT insurance. So that is there. I think if you look at the Guardrail 2.0, 90% of that is already implemented. Only one aspect of it, which is 3 lender restriction, which will come in, in April onwards. I think rest of it is already implemented.

Got it. And sir, one final question. When do you start seeing disbursements improving sequentially?

See in terms of availability of funds and our team readiness and branches, we have everything in place. We don't want to go out aggressively in an environment of uncertainty. So, we are calibratedly kind of doing disbursements wherever we think the disbursements area is good, we will do. So, we will wait and watch. I think the normal steady state disbursement guidance is around INR 2,000 crores per quarter at the moment. If the situation improves and if the Karnataka ordinance, which will come out in a couple of days' time, if it is in favor as we are expecting, then I think it may go up a little bit but at the moment, we are maintaining our steady pace.

Got it. Sir, but at least, I mean, because X market collection efficiency is seeing improvement, can we expect Q4 to have a higher disbursement than Q3?

Yes, that's our anticipation. But again, we will see how the things develop. We have planned that way, but it is subject to the macro environment, how it plays out.

[Operator Instructions] Next question comes from the line of Ashlesh Sonje with Kotak Securities.

Congratulations. Sir, first question is on the individual loans book, which you have created. Can you share what is the portfolio outstanding in this book in this quarter as well as the previous quarter? And it would be great if you can start sharing the portfolio size in these other products as well. That is question one. I have a couple of other questions. Second one is, you indicated something on the lines of the slowdown in disbursements in Tamil Nadu impacting your provisions for the Tamil Nadu exposure. Can you just elaborate on that point, if I heard it correctly? And the last one is what is the carrying value of these SRs, which you have from the recent [indiscernible]?

Yes. The first question on the individual loan. So basically, if you look at our -- I don't have the slide number, there is a slide where we have given the breakup of the portfolio. So, 96% of our portfolio is the income-generated group loans, which is the Livelihood Solutions that we have put in. The rest of the portfolio around 3.5% is the portfolio which we have for individual loans and other Health and Hygiene loans, which is sanitation loan and some secured loan, 1%. So, the portfolio in terms of value stands at, for secured loans, INR 126 crores. For Health and Hygiene loans stands at around INR 200 crores and for Life Betterment Solutions, which is, again, individual, but it stands at around INR 111 crores, put together they are around INR 437 crores. That is the portfolio that stands. This is a slight reduction from what it was in the previous quarter in certain buckets. Health and Hygiene has gone up a little bit by INR 70 crores. But if you look at individual loans, Life Betterment Solution, which we are calling it, which has gone down by INR 5 crores and secured loan which was in the form of gold has gone down by around INR 40 crores. So overall, it stands at around INR 437 crores as of today. The second question was regarding -- sorry, can you repeat the second question?

If I heard you correctly, you said that the higher provisions which you are taking in Tamil Nadu is partly offset by the NATCAT insurance, but it is still high because of the slowdown in disbursements. If you can just elaborate on that point?

Yes. So basically, what happens is when the cyclone happens and the customer is not able to pay, then she moves into the buckets. So those of the customers who have moved into Stage 1 or Stage 2, there would be a provision created for them. Of course, we have received, for some of those cases, we have received the settlement amount, but that was received in January. So, our provision will carry that amount but that settlement that we have received in January, we will settle that with that amount. So, to that extent, that provision will be settled off, we will get that back. But again, the ability of the customer to continue to pay is something that we have to see. So that's where I think the challenge would be in terms of how many of those customers will continue beyond the kind of a NATCAT claim that we have got. So NATCAT claim depends upon the severity of the damage, somewhere you will get 3 installments, somewhere you will get 6 installments, somewhere you will get the whole loan. So that is how it works.

Understood, sir. And just the last one was on the carrying value of the security.

Yes, carrying value. Praveen, do you want to take that?

The carry value is INR 134 crores of investment.

Next question comes from the line of Mayank Mistry with JM Financial.

I have 2 questions. First is on the margin trajectory. So given that now there will be a narrow customer base led by this coverage, so narrow customer base to maybe you have to focus on people who are -- who do not have more than 3 lenders in the book. And so, would this lead to even lower count, given the higher competition led by all MFI focusing on the same category of customers, while favorable customer quality would also prompt you to give loans at a cheaper rate? So that is first question. Secondly, our Stage 2 has also increased by 90 bps sequentially. So how much should we expect this to slip into NPAs? I mean could you elaborate on how this movement has been so higher in this quarter?

I think of the first question in terms of the competition and our ability to maintain ourselves as a priority in the eyes of the customer. See, one thing if you can look at the data, the unique customers are increasing for us from 27%, it has gone to 30%. And if you look at on the count basis, it has gone from 32.9% to 34.8%. So, which is something as an indication that we are able to retain our customers and they are having a trade line only with us, which is a comforting sign. It is not necessarily because of the operations that we are having in the North where we are acquiring new customers. It is more to do with our core market area, which is Kerala and Tamil Nadu. So, we are witnessing lesser competition in Kerala and Tamil Nadu. Players who had come to Kerala from North and all that, they have considerably stopped disbursement. There were a couple of players on which there were restriction from RBI also in terms of disbursement. So that also benefited us. We will continue to be among the preferred lender because in terms of our pricing, it is very competitive pricing. We have cut rates almost 3x in the last 12 months. We have reduced rate by 115 basis points. And we have adopted a strategy wherever we will have a reduction in our cost of fund, we will pass on to the customer. So that way, I think we continue to have better customer engagement. Apart from that, we have a customer app, which is very, very efficient way of kind of engaging with the customer, which actually kind of differentiates us from any of the competitors. The customer can actually check her eligibility, draw the loan and also repay installment, check her installment, check her loan track through the app. And we are doing the integration at the level of a superapp of our company, of our group. In the superapp, the customer would have much more revenues of like buying insurance, buying saving products, booking bus tickets, many other facilities paying utility bills and anything. So, it will become one-stop solution for financial services for the customer. So, I think those kinds of services that we are offering is ensuring that the customers are more engaged with us. But the key part is that our key market is Kerala and Tamil Nadu. In Kerala and Tamil Nadu, we are seeing comparatively lesser competition than North. You had another question, sorry, I missed on that.

Yes. The second question was on the Stage 2 increase, which has gone up, I think, 90 bps sequentially. So, I would like to know, I mean, what kind of slippages are we expecting from here to Stage 3? And what kind of recovery are we expecting, let's say, since today, our GNPAs are at almost 3%. So, from this, how much is expected to be recovered either through insurance or through our own collection, in-house collection team?

Yes. So, traditionally we have seen around 44% to 45% recovery on the Stage 3 assets over a life of that asset, which is in a period of around 2 years after the maturity of the loan. So around 44% recovery happens on that. On the Stage 2 asset, the recovery is slightly better. We get around 69% to 70% recovery traditionally, I think we remain to see how the collection efficiency pans out because in Karnataka, because of the environment, we are not pursuing too hard with the customers. We are doing soft collections there. So, there would be impact a little bit. But overall, I think the collection efficiency would be there. But there would be some slippages which will come into Stage 3 from Stage 2, definitely. Traditionally, it has been around 30% to 40%. This time, it could be slightly more than that. That's why we have built in the higher credit cost that we are saying. Incrementally, addition to the Stage 2 has reduced because now we are at a 99.5% collection efficiency and whatever even goes 0 plus, that 50 bps that also gets collected mostly. Very few cases go into higher bucket. But cases which have already slipped, the collection efficiency that we expect on that should be in the range of between, depending upon the environment, 50% to 70%.

Okay, sir, but our credit cost guidance is extremely elevated now. So, from 3.5%, we have given 7% almost it comes to, I think, more than 6% again in Q4. So, is my calculation correct?

Yes. So, see, basically, as I said in my opening remarks, we are preparing for the worst and hoping for the best. So, we have given a guidance where we feel an extreme situation where Karnataka pulls out a legislation where operations is not possible and collection efficiency drops significantly. If that does not play out, which is likely the case, I don't want to second guess that. So that's why we have built in that credit cost guidance. Our expectation is that if that does not play out, then the credit cost would be much lesser.

Okay. Just one last, if I can squeeze in. So basically, we are not expecting this credit cost to be spilled over even in the next year, right?

For sure. So, the thought process is that whatever has happened in this year, we will take the hit this year. Next year should be a clean slate. That's what we are trying to do. That's why the elevated credit cost we have built in. Whatever has to be provided, we will provide in this financial year. And Q1 should be barring if there is a new event happens, there shouldn't be any issue.

Next question comes from the line of Kamal with Investec Capital Services.

Sir, can you please help us know what was the interest reversals during the quarter?

Yes. Praveen, you would have the number on hand.

Sorry, can you repeat that question?

Interest reversal during the quarter.

You are asking about interest spread or interest reversal. Yes. So from the NPA recovery, we have an additional recovery of around INR 12 crores, which is adjusted to the write-off. And the interest reversal for the specific quarter is around INR 21 crores.

And sir, despite everything we have been able to maintain our NIMs very well. So, would you like to guide something on the NIMs part, like how have we able to maintain the NIMs very well?

Yes. So, I think that is one of the key things. Thanks for asking the question. So, our NIMs are improving. We have around 13.07% NIM that we are maintaining. And we have been able to reduce our borrowing cost slightly a bit year-on-year cost of fund has reduced by 14 bps. Quarter-on-quarter, it has remained almost same. But overall cost of fund has reduced by around, incremental cost of fund has reduced by 3 bps. And largely, it is driven by our ability to do PTCs at a very effective rate. So, one of the strategies that we have adopted is that we are going through a PTC route to tap the PSL market instead of doing direct assignments because direct assignments are coming at a higher cost considering that banks are concerned with the risk that is there in the asset. So, but PTCs are coming at a very fine cost. We have done PTCs at around 8.8% as well and around 9% as well. So that is really helping us to reduce our cost of fund and hence, our net interest margins are remaining good. And that is all helping us to maintain. If you look at fundamentally, the PPOP has improved almost 40%, so which is a very good sign. And the cost to income has come down significantly almost 550 basis points year-on-year. It's at around 43.2%; so, on the efficiency of the capital and also operation is still there. It's the credit cost, which is the variable because of extraneous events, which is causing the impact on the PAT. Otherwise, I think fundamentally, things are moving in the right direction.

Got it, sir. I just also wanted to ask that, are we facing some attrition level issues even at the branch manager level and on the overall level, if you could highlight that? And what is the incremental collection team we have built to cater to the asset quality issue going on?

Yes. I think on the attrition issue, we have taken certain steps. So right now, the attrition is well within control. One of the things is that, of course, because of the environment, there is not too much growth in the sector. So, there are not too many opportunities so people are not jumping the shift. The second thing is that we have taken calibrated steps. So earlier, we were operating in a model where we did not have residential facilities at our branches. Most of the microfinance companies offer residential facility. But we have noticed that because of some of the people were reluctant to join or maybe after joining, they were leaving us. So, we have created 140 such facilities where we saw a little bit higher attrition where we are providing accommodation to our staff. So, these are stand-alone kind of places where at a nominal charge to the employee, we provide residential facility. So, it's kind of a mess where people can stay, 8 to 9 people can stay and they pay INR 500 kind of monthly charge. And for us, it's an incremental cost of around INR 3,000 per employee. But definitely, it saves around a lot on the attrition. But it is not everywhere. It's less than 10% of our branches where we have started this facility. That is one step. The second step that we have done is that we have focused on hiring a lot more female relationship officers. So traditionally, there has been a perception that female would not be able to travel too much and there are difficult hours in our operations to work early morning and all that stuff and necessity of the bike. So, I think that we have overcome. We have identified females. We have at the field officer level who are willing to work. The only augmentation that we have done to our policy earlier, we were posting everyone 60 km's away from their base location. But for female staff, we are giving that relaxation that they can be based out of that similar location. They would not be lending in that same area. They would, they can be based within that particular better area. Also, we have tied up with a couple of EV providers. We are providing bikes to these people on a lease model. So, the lease would be in their name, of course. We will be facilitating that and they would have the 2-wheeler also. So, we are tracking this very closely. Now our female employees base has almost reached around 7.5%. This will, we are hoping that it will increase beyond 8% in the remaining period. And we are tracking the efficiencies also. So, in terms of productivity, they are at par with the male staff. And in terms of collection efficiency, they are slightly better. And it also works well in the environment where we are operating currently because of the regular follow-up with the customer and unnecessary perception that there is harassment, if a female is interacting with our female customer that will give a better synergy. So, I think on the narrow point is that the attrition is well within control and it's coming down. In terms of the collection resource, Udeesh, you have the numbers on that?

Yes. So, we have added another 200 people in this financial year. So right now, we have close to 512 people in the collection team. Apart from that, we have added tele callers also. So, we have added around 20 tele callers mostly for the North India, which is based out of Delhi. So yes. And tele callers, they will be calling and generate the promise to pay date and the field executives are going and collecting payments from the customer. So last month, we have seen a better collection. They have collected almost around INR 15 crores of collection from the delinquent bucket. And this quarter also, we are adding more people to the collection team.

Sir, can you also quantify the number of -- like the employee attrition part? Like if you could just give the number, what is the current...

Employee attrition has come down to around 30% now, which was slightly higher earlier. So, the industry was seeing almost in the range of 50%, but it has come down to 30% now, which is the normal case in terms of microfinance.

Got it, sir. And lastly, if you could just give a comment that with the implementation of guardrails from post April, like how do you think the entire scenario would pan out for the entire MFI industry? Would we again see a cycle where there would be some increased level of credit cost to the borrowers whom funding would not be provided? So, what's your view on that?

So in terms of the guardrail 2.0, as I mentioned earlier, 90% of the points are already applicable. Only one incremental point, which is from a 4-lender cap, we're going to move to a 3-lender cap, which is going to come in force. So, if you see, lender data, we are already defocusing on the 3 lenders. Wherever there are 3 lenders or 4 lenders, we are actually not lending to those customers. We are focusing much more on the unique customer or Muthoot +1 or Muthoot + 2 customers. So, from that perspective, I think it's in line with our strategy. It will not impact us at all. Overall, I think in the industry per say, I think it will be good that leverage on a borrower will come down and it might have some temporary pain, but I think in the long run, it should be beneficial for the industry as well.

Ladies and gentlemen, as there are no further questions, we have reached the end of question-and-answer session. I would now like to hand the conference over to Sadaf Sayeed for closing comments.

Thank you, everyone, for giving us this opportunity and joining our call. Once again, I would like to emphasize that if you look at fundamentally, the company is seeing improvement in the income aspect, maintaining steady net interest margins and improving on the cost-to-income ratio. The temporary dip in the profit is because of a call that we have taken consciously to take incremental provision and accelerated rate-offs. And in the coming quarter also, we have given a guidance which is 7.5% to 8.5% given the uncertainty, but we are hoping that it will be much better than that. Given the macro environment, we have given that guidance. But if that does not play out, the fundamentals are very clear that our net interest will remain consistent. Our income from operation and PPOP will remain in that zone what we have seen around 40% growth year-on-year. It will continue. But I think we have to, as we said, play quarter-by-quarter. So, we have given the guidance of this quarter, and we are running a strategy where we want to take that hit only for this financial year and this year. In the next quarter, Q1 should be absolutely clean quarter given that there are no other macro events. So that's the strategy. Overall, I think we are in a steady state. We have not seen any challenge on the liability side. We are getting adequate funding. We are getting good rates on our borrowing as well. So fundamentally, the business stays strong and steady. This is a time where we need to be a little bit more conservative and cautious. So that is what we are doing. We are hoping for the better quarter in the next coming months. So, I think I'll close at that and appreciate your joining this call and all the support. Thank you very much.

Thank you. On behalf of JM Financial, that concludes this conference. Thank you for joining us. You may now disconnect your lines.