Muthoot Microfin Limited (MUTHOOTMF) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Muthoot Microfin Limited Q4 and FY '25 Earnings Conference Call hosted by JM Financial Institutional -- Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mayank Mistry from JM Financial Institutional Securities Limited. Thank you, and over to you, sir.

Thank you Madhav. Good evening, everyone, and welcome to Q4 FY '25 earnings call of Muthoot Microfin. First of all, I would like to thank the management of Muthoot Microfin for giving us the opportunity to host the call. From the management team, we have Mr. Thomas Muthoot John, Executive Director, Mr. Sadaf Sayeed, CEO, Mr. Praveen, CFO, Mr. Udeesh Ullas, COO, Mr. Rajat Gupta, EVP, Investor Relation, and Mr. Ammaar Mohammad, EVP, Investor Relations, Head of Investor Relations. I would now like to hand over the call to Mr. Sadaf Sayeed 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 evening, everyone. Thank you for joining the earning call for Muthoot Microfin for Q4 FY '25 results. Before I get into the financial performance, I would like to take a moment to rECLect on what truly actually defines us, our values, our culture and the principle that guides our decision. These may not always translate into immediate financial results, but they are the bedrock of our long-term success. They shape who we are, how we operate, how we navigate challenges, and especially in uncertain times like these. It is these softer yet deECLy critical aspects of our commitment, to integrity, innovation, and resilience that sets us apart from rest of the competition. They may not always be quantifiable, but their impact is undeniably reinforcing our foundation and enabling us to stand strong even in the face of external disruption. As we look ahead, we will continue to invest in these areas, not maybe as a complement to our strategy, but as a core pillar of what makes us unique and resilient. In this context, I'm, proud to share with you a significant development. Within 16 months of our listing, Muthoot Microfin, today has been awarded an ESG rating, with a score of 72.2. This is a top tier rating for CareEdge with ESG 1 rating. CareEdgeESG Rating Limited is a SEBI licensed ESG rating provider. This is not only a powerful endorsement of our responsible and sustainable, growth strategy, but also the highest ESG rating ever awarded by CARE in the financial services sector. It really, really indicates our commitment towards environment, social aspect and also governance. If you look at the score, we have scored 79 points in governance as compared to the median of 54 points. So it really shows how the company is committed to its governance aspect. Apart from that, to highlight some of the key achievements during the quarter, one of the key aspects is that we got a e-KYC license from Aadhaar authority. We are now able to do E-KYC for our customers. This not only improves our ability to identify customer better, it also ensures, that we are able to prevent frauds and eliminate bad customers. And this is going to, play out in a big way in our digital foray that we are trying to do. Apart from this, we have made progress in app download. Today, out of the 34 lakh customers that we service, 18 lakh customers have downloaded our Muthoot Microfin app. Our commitment towards overall well-being of our customers is always there. We have around 740 clinics -- e-clinics in our branches, out of which we have done around 10.2 lakh consultations to our customers, which is also helping us to retain customer and also ensuring that in difficult times, the customer is protected and is getting the service. Apart from the softer aspects, in terms of our financial performance, our AUM for the financial year has grown by 1.3%. We closed this financial year at an AUM of INR 12,357 crore. This was a calibrated strategy. As you are all aware, this was a particularly challenging year for microfinance institutions. We had multiple challenges starting from a Q1 slowdown, resulting in overleveraging of the customers because there was lot of growth in Microfinance segment earlier, leading to guardrails being introduced by SROs, which of course had an impact on the number of customers which were able to be eligible for disbursements. But considering that, we have made sure that we do calibrated disbursement. As a result, we did INR 8,857 crore of disbursement -- INR 8,872 crores of disbursement during the financial year. Our net interest income has grown by 14.3% year-on-year. We recorded a net interest income of INR 1,551 crore. Our PPOP has grown from has grown from -- has grown to INR 858 crores. And our total income for the year stood at around INR 2,564 crores, which is a 13.7% year-on-year growth. And if you look at our overall GNPA, it has reached to around 4.84% from 3.03% in the last quarter. One of the things which I would highlight in this financial year, we have paid considerable attention to ensuring that we insulate our balance sheet from uncertainties. So this year, the credit cost has increased. Our overall credit cost has come out to be around 9.4%, which includes around INR 230 crores of management overlay. If you exclude that management overlay, our credit cost for the full year is around 7.5% that is in line with the lower band of our guidance of 7.5% to 8.5%. As a result, of course, the tax has been impacted. For the quarter, we have a loss of around INR 401. And for the full financial year, we have a loss of around INR 222 crores. But as I said, what we have laid down is a foundation of a stronger balance sheet which is insulated from any uncertainty. We have had instances like Karnataka legislation which came into place, which had an impact. Even though the legislation is directed towards unregulated entity, but by the time the regulation is put in place, there was lot of speculation and which impacted the collection efficiency. We have already seen very good improvement in collection efficiency post that. But, of course, our initial portfolio was impacted because of that. We have made adequate provisions to ensure that there are no uncertainties going forward. And this INR 230 crore provision includes the provision that we need to have for any adverse impact to the portfolio in Karnataka. In the meantime, I'm sure you guys are aware that there is a legislation which has been proposed in Tamil Nadu also. But, the good part about it, unlike the Karnataka legislation, this Tamil Nadu legislation is not based on any customer grievances or anything. This is a proactive step that the government has taken. So as far as, at the moment it is concerned, there has been no disturbance in the performance of the portfolio so far. We have been able to continue to collect that the way we were collecting and the portfolio remains pretty stable in Tamil Nadu as of now. Overall, for the full financial year, our collection efficiency stands at around 93.6%, which is around 4.8%, just from the last financial year. And our X Bucket collection efficiency remains 99.5%. If you look at in terms of our investment, we have opened more branches this financial year. We have reached a branch count of 1,699 branches, which is around 12.7% growth year-on-year. Last year, the branch count was 1,508 branches. And in terms of our employee count, it has reached to around 15,989, which is also a 15.3% growth year-on-year. Our disbursements have come down as compared to the last financial year. As I mentioned, we have done calibrated disbursements around INR 8,872 crores, which is around 16.8% lower than the last financial year. Meanwhile, our customer acquisition continues. We have reached our customer count of 34,30,000 customers, which is a 2.3% growth over the last financial year. I think in terms of our growth in terms of our branch expansion, in terms of our strategy, we have put the foundation there. We have also had a very in-depth analysis of our portfolio. During all of these crises, you get an opportunity to understand what you are doing right and what you are doing wrong. And we have analyzed our 34 lakh customers and we have found that around 12,70,000 customers also have retail loan exposures. And out of those 12,70,000 customers, a good amount of customers have gold loans exposure, very good amount of around 1,14,000 customers even have housing loan or mortgage risk exposure and around 1,56,000 customers have 2-wheeler loan exposure. And these are the products that we are already offering to our customers as a part of our cross-sell opportunity that we have through our Group company. In the coming financial year, we wish to leverage on this opportunity. Cumulatively, if we see the customer base that is having exposure and retail loan, their outstanding is almost INR 28,000 crores. And if we tap that opportunity, we do feel that we can easily tap those customers out of that and build a good portfolio of secured loans of INR 5000 crores. So going forward, this would be one of our growth strategies. This will also help us retain more customers, also build our wallet share of our customers. The good part about it is that these are all loans which are already outstanding with our customers. And, we will, by offering these products, we will be rECLacing the existing loans, so we would not be over leveraging this customer. But we were insulating our customers from any sort of unregulated lending and also helping them grow and build better portfolio with us. So that's the growth strategy going forward, and that will really help us build a strong balance sheet. And as I mentioned, our commitment to social goals and double impact, both on the bottom line as well as social impact, will remain, and we will continue to focus on that. And with that, I'll close my opening remark, and I am happy to, answer any questions.

[Operator Instructions] We have our first question from the line of Shubhranshu Mishra from Philip Capital.

The first one is that the company uploaded only result and the investor presentation can be put out in time to have a look at it. The investor presentation is still not there in the [indiscernible]. Having said that, I just have one question. How are we going to implement the guardrail that is going to restrict us in 2 + 1 format? How do we expect the fourth lender coming in?

Yes. So on the guardrail, we have already implemented all the guardrail that have been recommended by MFIN as well as Sa-Dhan. The guardrail one, we had implemented in August itself and guardrail 2, as we started the financial year, have already been implemented. And in terms of its impact, of course, there is an impact on the throughput. We have had higher rejections because of that, but that has not deterred us from the business performance that we have continued to do. But if you look at the impact from those guardrail is more from avoiding overly rich customers. And I think we have given that information in our presentation also. If you look at consistently quarter-on-quarter, the number of customers which were having 4 loans are coming down, in Q4 it has come down to around 6.2%, which started from around 8% in the -- of an asset, 10.6% in Q2, which reduced to 8.2% in Q3 and around 6.8% in Q4. And at the same time, the unique customers have increased, which were around 32% in Q2. It has reached to around 35% in Q4. And even if you look at from a INR 2 lakh cap per borrower, those percentage of customers have reduced from 3.8% in Q2 to 1.8% in Q4. And unique customers or customers which are only having INR 50 lakh of exposure with us are around 39%, which were around 38% earlier. So from that perspective, we are much better placed. Almost, 81% of our customers -- 83% of our customers are having only us, plus 2 lenders. So we have opportunity to lend them. [Foreign Language] Yes, sir. So there was some disturbance from someone there. Please continue. Yes. I think, that's all that I would like to say. On the presentation upload, my apologies. But I think, before the call started its being uploaded, we have just concluded our board meeting and uploaded the presentation. We take your feedback.

We have our next question from the line of Nidhesh from Investec.

The first question is on, how is the collection trends in the month of April in terms of collection efficiency, for the month of April?

Yes. The collection efficiency is 99.5% in April.

This is the X Bucket -- that's, so the trends are holding up quite well. And, how are the trends in Tamil Nadu in terms of X Bucket collection efficiency? Those I think are still a bit early to say, but do you expect any disruption in Tamil Nadu the way we have seen in Karnataka?

Yes. So, Tamil Nadu, there has been no disturbance at all because of this legislation. The X Bucket continues to be 99.6% that collection efficiency is holding well. So there is no such disturbance as of now.

And the third question is on the stage 1, stage 2, stage 3 coverage. Is it because I think your presentation is now uploaded, right, and I can get those numbers from there. So third question then is, what is the guidance on credit cost next year, if you have made all the provisions on the existing spreads already? So how should -- so whether the next year credit cost will be steady state credit cost and what will be that number?

Yes, I think that's a very good question. I think first of all, I would like to mention that based on the feedback that we have received from various analysts and also our own internal assessment and other thing that the Karnataka issue is also very recent. On the stage 2, we have increased provision considerably. So stage 2 provision today stands at around 30.8%, which was a year ago at around 1.06% , and in the last quarter, it was around 9.01%. Stage 3 provision coverage has also increased considerably. In Q3, it was 58.72%. It is now 73.3%. So, we made considerable effort in terms of making enough provision. Having said that, I think Karnataka portfolio is, in fact, is still very new. Not, the -- much of the loan has raised to stage 3. We don't anticipate that to raise to stage 3 because the collection pullback has been pretty good in Karnataka as well. But we have made adequate provisions. We are carrying a INR 230 crores of management overlay, which should be adequate to take care of any concerns that may come in Karnataka. But in terms of our guidance, we are guiding towards 4% to 5% credit cost. That is our worst case kind of a scenario. That is what we are guiding towards -- 4%-6% for sure.

Because, as you have made all the provisions right now, next year should be a, credit cost should be a steady state number of, let's say, more than this number, or you expect higher rate cost earlier in the start?

Yes, yes. Nidhesh, I think that's what our anticipation is also there. But again, as I said, situation has developed in Karnataka just happened in February and the impact of it is being seen. And we are right now, the early trends are positive and Tamil Nadu there is no impact. So if all of that hold good, then definitely, there could be no incremental cost or no surprising cost. But since these situations are very, very nascent and they are still developing, I don't want to say that this cost would be like a normal here, but what we are guiding towards 4%-6% credit cost for the next financial.

We have our next question from the line of Mayank Mistry from GM Financial.

So, sir, my question is -- if for the quarter, we have taken such elevated credit cost. And even after that, our stage 3 is also up by almost 180 books, from 3% to 4.8%. So now, my question is that if we have taken such high credit cost, what would be your write off? Because, 73%, although we are providing, again, there is some stress we are looking at in our book, right?

So, Mayank, to answer to your question, as I said, we have increased the credit cost because we have increased our provision in the stage 2 bucket. Stage 2 bucket, if you look at, it has gone from 1.06% in the last financial year to 30.8%. And also from last quarter, it has gone from 9% to 30.08%. So because the Karnataka portfolio is very new in terms of the delinquency, we don't anticipate all of it to go to NPA and then to write off subsequently. But we are providing it for, so making sure that there are no further shocks that are there. As far as the write off are concerned, this year, we have had cumulatively around INR 538 crores of write off, which includes, around whatever waiver and settlements are there and any ERC related write off and other write off that we have done is INR 538 crores of write off. This is on a worst year. We don't anticipate similar kind of write offs to come in the next year. The elevated credit cost will ensure that we have sufficient buffer. If you look at overall NPA versus provision, it's 127% provision cover over the NPA, so which really, really kind of puts us in a comfortable position to ensure that there are no shocks.

So there is a possibility that some of the book also might reverse from phase 2, right, for this year already making 30% coverage?

Yes. Correct.

And secondly, sir, how is this Tamil Nadu ordinance different from Karnataka? Because I think that both are only for unregulated entities. It's not like Karnataka is only on -- is on both regulated and unregulated in both entities. So there is a possibility even from Tamil Nadu that the people might start taking advantage of situation like building in Karnataka?

Yes. I think both the things, being a part of SRO where I sit on the board and had an opportunity to engage with the state government at both the sides quite closely, from the SRO side, I have a very good perspective on this. I think on the Karnataka legislation, it was driven by a lot of news reporting which started before and multiple news items were there that they registered because of microfinance lending and all of that and because of which, government came up with the legislation. Essentially, it was only targeted at microfinance entities and stuff like that but we were able to demonstrate to the government that it is not microfinance entities which are causing the distress. It is unregulated entities which are causing the distress. Most of the microfinance entities follow a code of conduct which has been laid down by RBI and also SROs. So, we were able to convince. But, of course, because of the news reporting, there was certain amount of confusion which was created by among the borrowers. That had an impact on overall collection. But as the legislation came in, there is lot of clarity which has come in that regulated entities are not part of this. So we're seeing better connections coming in. In Tamil Nadu on the contrary, there is a very good clarity. The legislation is more driven out of proactive steps that have been taken by the government to avoid cooperative lending. If we reach the act, the name of the act itself is Prevention of Cooperative Lending Practices and it is not taking about microfinance, it is talking about all the lending practices. And it is very clearly from the day 1 focused on unregulated entities. It has not focused on microfinances. So I think that is the main part. Apart from that of course Tamil Nadu is a very mature market. [Technical Difficulty] We feel that in coming quarters, these numbers will only come down because we are seeing better collection efficiency, as well as this year we have calibratedly not grown our portfolio. Our portfolio has remained almost stagnant. The new trend that we are seeing that there is opportunities to bet portfolio, the markets are stabilizing. Also, we, as I outlined, that our strategy is to diversify towards some of the new products which are more secured in nature, that will definitely help us to ensure that portfolio remains more stable and we don't have higher GNPAs. But having said that, from the current portfolio also, we anticipate better collection. We have seen that in our vintage curves that the peak of those NPA cycle has already been achieved, and they are trying they are -- they are all coming down. So going forward, we don't anticipate such high credit costs barring any sort of an event. The focus is on to build a sustainable balance sheet. That's why the credit cost is high, and it includes around INR 230 crores of management overlay. And despite, like these provision costs and the loss that we have incurred for the full financial debt of INR 232 crore, we continue to have around 28% percent, 27.9% capital adequacy. And consistently, like, we are able to bring our cost of capital down, and our leverage is just around 3x. And we have focused on maintaining adequate liquidity. We have around INR 700 crores of liquidity on our balance sheet. And all of that ensures that our balance sheet remains robust and there is consistency, and stability in the business. Of course, the year was challenging year and there were multiple challenges which came around, and this has impacted the performance for this financial year. But in the history of [indiscernible] reported losses, this would be an exceptional year. And hopefully, going forward, we will continue to improve from here and report better results.

What I wanted to check was that is the financial impact which going to stop, or will the provisions reduce or is it going to continue in quarter 1, quarter 2, quarter 3, quarter 4 of next year? What is the management perspective on the reduction of the provision? Because it's certainly a bottom line.

So we have guided towards 4% to 6% credit cost as compared to 9.4% for the full financial year. We are carrying INR 230 crores of management overlay, which will cover you if there is any challenge. We anticipate this to -- a lot of these provisions or the right of recovery to happen, and also provisions to roll back so the credit cost would not be as elevated as this is for this financial year.

Not very convinced, but, I wish you all the best. And I hope you can return some more rights to the shareholders through dividends because, obviously, the growth is not there.

[Operator Instructions]. We have our next question from the line of Anush Mukherjee from Yadnya Academy Private Limited.

So, sir, my question is about, I mean, I've observed this, that there are banks, which are opting for this [ CGMSU ], sort of a hedge against the [indiscernible] small and macro finance trade. So can Muthoot Microfin opt for the same, and then we can -- I mean, that can help us reduce the provisioning number and the credit card eventually? Your thoughts on this, please.

The credit guarantee scheme, CGMSU is a useful scheme, definitely. But there are certain limitations of that scheme why is that there is certain amount of coverage that can be availed in that scheme which is limited to around 15% of your portfolio. It comes into effect. It's like buying an insurance. In the year you buy, it is not effective. But in the subsequent year, it is more effective. It is also having a, upfront cost, which is in the tune of 1.5% to 3%. And, subsequently, there is a first loss which you need to take to around 5%. So in a year like this, where your credit cost is more than 5%, it definitely helps. But in a year where credit cost is much lesser, that CGMSU becomes a little bit of a cost-prohibitive. But, we are critically evaluating this. For certain portfolio. We can definitely take that. That is something that our risk management team is evaluating.

We have our next question from the line of Kamal Mulchandani from Investec Capital Services.

So can you please, guide us what is our current policy of giving a top-up loan or a second chance of loan while the existing loan of the customer is going on?

So in cycle of loans, the current policy is she should complete, at least 50% of the loan amount or 50% of the net disbursement amount she'd get as a loan amount, and she should complete at least 9 installment without any delinquency, 9 months.

Nine installments without any, delinquency or?

And the next disbursement amount should be greater than 50% of the loan amount.

So whichever -- one of that is met then you consider, giving a second chance.

Yes.

And this is came, for your existing customers or a new customer?

This is for the -- this is only for the existing customer. So a customer who have taken up INR 50,000 loan, she should have at least repaid back INR 25,000 to for her to be eligible for a second cycle loan or a top-up loan. And, minimum is to her then should have been paid is, 9 months.

And have there be any interest [indiscernible] the quarter, and if you could quantify this?

Yes. So we have taken a higher write off in the current quarter, which is around INR 332 crores for the entire year, and the bulk of the write off is taken in the Q -- in the current quarter, Q4, which has led to an interest reversal to the tune off of INR 49 crores.

And can you give some guidance over your disbursement and earning growth for next year? That would be my last question.

So we have dated for 5% to 10% growth into the next financial year, and we expect we can retain the NIM, which we have reported in the previous in the current financial year, because the cost of fund is coming down. In the difficult environment, we have seen the cost of fund is coming down by around 18 basis points, and plus we have seen the rate cut when we send you, and it will take around 6 to 9 months to translate this rate cut into the real picture. So that also should help us in terms of managing the NIM. And the OpEx also, we will retain in the same range as in the current financial year. The credit cost, as we discussed earlier, we will definitely come down compared to the current financial year, because of whatever stress. So I think, we expect a better performance of coming up in FY '26.

But sorry -- I am not seeing the PPT. I just saw in your guidance. But, why is the growth so low is what we are expecting for the next year? Like, if you are expecting the credit cost to peak out, and the effect quality stress to peak out, so why are we not too much confident over growth?

No. We definitely can grow more. I think, what we are guiding here is based on how the guardrails kind of play out, the second guardrail has just been implemented, and we are seeing increased rejection rate definitely, which is also impacting on the operating costs. But I think in a couple of months that will smooth out and I think the field officers will also understand the policy and they will source better qualified customers. And our strategy of looking at other products will also play out. So I think these are conservative guidance. Definitely, we can do better than this.

We have our next question from the line of Anant Mundra from Mytemple Capital.

So, firstly, the PCR across buckets has been increased, so that's a good sign. And I just wanted to understand, is this going to be a standard feature going ahead, or over time will be revert back to the earlier provisions that we had, in our stage 1, stage 2, and stage 3 buckets? So is this a permanent kind of a change? That was question number one. And my second question was on -- I just wanted to understand what is the total write off tool size that we have as at the end of this quarter from which there could be potential recoveries in the future?

So on the provision coverage, as I said, there is a INR 230 crores of management overlay. So management overlay, as I think things play out, it will be sub assumed in the overall credit cost. So while we would continue to maintain sufficient provision coverage, but stage 2 coverage might have some changes. Stage 3 coverage, if you look at historically, we have maintained stage 3 coverage of 66%, 65% on an average, which, based on the portfolio and based on our ECL calculation, will remain. And definitely, I think, from a perspective of recovery from write offs, that will happen. This year, we have around INR 538 crores of write off. And previous year, we had INR 131 crores of write offs. So between these 2 pools, we do, we have seen recovery of good 20% over the period of time. So we anticipate that money would be recovered and that will contribute to the bottom line.

Got it. And so when is it that we renew -- review our ECL model? Like, is it an annual exercise or something? Or when do we review it?

Yes. So, this is a very good question and a very relevant question. So we have reviewed our ECL model with our statutory auditors. And based on our reviewed ECL model, we have expanded it a little bit. We are considering -- earlier, we were only considering the GDP growth and we were considering inflation. But now we are also considering what is the employment ratios like in terms of labor participation rates and also the per capita income of each state because each state has a different impact. So our ECL model is a lot more robust now. And, we will be implementing that, from Q1. So, the management overlay that we have created is considering that ACL model. And, the idea is to have one full financial year with the existing ECL model and change only in the next financial year going forward. So we have taken into consideration the impact on the portfolio that has happened over a period of time, and new [indiscernible] have been developed. This has been vetted by BDO and our internal auditors as well, statutory auditors.

Got it. And sir this provision -- sorry, this management overlay that we've created is lying across buckets. It's not in a single bucket.

Yes. Yes. Correct.

We have our next question from the line of Ashlesh Sonje from Kotak Securities.

First question is just a clarification on your comment around something like. This 99.6% collection efficiency number which you have given, I assume that one is for ECL. What are the trends infra in this month, specifically in the last few days in the month of May?

Yes. So we have not seen any adverse impact on the portfolio in the last 6, 7 days of operation. And 99.6% is for April, it's for X Bucket for April. And currently, also, the collection remains quite robust. Yes. So the audit has just come on 27th. It came on the newspaper. So on 28, 29, there were few questions were asked by the customers, but afterwards, there is nothing. Even if you look at the May first week also, the question is again, as earlier we used to get.

Okay. Got it. And, secondly, how is Karnataka trending now in terms of collection efficiency for the month of March and April for you?

Yes. So, collection efficiency is improving. So if you look at the fresh delinquency, which was there in Karnataka was in February, the peak was there, which was around 9.1%. So, X Bucket collection efficiency at that point of time became around 91%. It has -- in March, it has gone back to around 94% and it continues to improve month on month. So even for April month, it was around 95%.

And just lastly, can you explain the chart which you have put on slide number 17, where you have shown the impact of delinquency on specific retail loan products, for any type of loan -- type of financial?

Yes. So if you look at this, that basically talks about the delinquency on various product exposure that is there. So if you look at the customer who's having a gold loan exposure, the delinquency for those customer is much, much lesser. So these are customers who are having a 1 type of loan or 2 type of loan or 3 type of loans. So across, I think if the customer has multiple type of loans also for one loan [indiscernible] gold loan. So you will see the delinquency is lower. I think the second lowest category is Credit Card. If the customer has a Credit Card exposure, they have a lesser delinquency. But among our products, if you look at, if they have some sort of a mortgage loan, then also there is a lesser delinquency. I think both of them basically indicate towards if the customer has an ability to create asset that is creating savings, which shows that their income is creating some sort of a surplus for the household. And that really makes them a more credit worthy customer. Whereas if you look at our business loan product, where the delinquency is much higher, which indicates that the customer is a higher profile, which is there for business loan, but she is coming out and taking a microfinance loan only because she is not getting any more business loan. And hence, the delinquency relatively is, considerably higher. So we are not looking at those set of customers. We are looking at gold loans. We are looking at mortgages. We are looking at vehicle loans.

We have our next question from the line of Deekshant from DB Wealth.

Sir firstly, can you -- since you have mentioned that this is a peak of our provisions, can you, one, mention excluding the management overlay, what is our total provisions? And secondly, what is the percentage of these total provisions that can be recovered in the coming 3 to 4 quarters?

So excluding the management overlay, our credit cost is 7.5%. And, the bulk of this overlay around INR 134 crore pertains to Karnataka portfolio, which is basically, kind of just 2 months or less than 2 months kind of an old problem which started in, February, mid of February. So we anticipate good amount of this money to come back because usually, the customer gets influenced because of the media reporting and other group, customers who are not paying. And then eventually, when she realized that it is hampering her creditworthiness and the future borrowing, then she starts repaying. So, after 2, 3 months, they generally start repaying. So we anticipate not all of this to go into an NPA and or write off further. This -- good amount of this will get reversed. That is our anticipation. That's why our guidance towards credit cost is 4% to 6%. 6% in a worst case scenario is similar thing like a Karnataka happened elsewhere. But in a normal scenario, it will be close to around 4%.

So you are expecting 70%, 60% of your provisions to come back to you?

Traditionally, not 70%, but around 60% of our provisions come back over a period of 2 to 3 years.

Okay. Okay. Sir, the question I'm sure that our management had asked to ourselves is that what is wrong with the system that we have right now on the lending that we are doing? And we have identified which are the lowest and high-risk areas. What I really want to understand from you is, what are we changing right now which will make us a better business going forward?

So we have made multiple changes. So of course, I think the events like Karnataka, which are more driven by political interventions are beyond our control. But in terms of moving on our underwriting, our constant endeavor is to ensure that we improve our underwriting quality, understanding of our borrower. We are focusing more on digital. We have got an e-KYC license, so we'll be using that to authenticate customers. You have a better KYC, like Aadhaar ID, then it helps us to do -- or Aadhaar or a PAN card. It helps us to do a better credit bureau check, which will also give us a comprehensive view of the customer's leverage and the repayment track record that will also help us. Apart from that, we are introducing products to capture the wallet share of the customer. Our existing customers out of that 12,37,000 customers are having multiple products, which, comparatively amounts to around INR 28,000 crores of portfolio. We want to capture that without overleveraging those customers. We will be able to make a greater wallet share of those customers, and those customers will actually become part of our performing portfolio. And that will really result in better quality of assets and better customer retention and better return on assets.

So, I understand that what we are doing ahead, but like and Karnataka is a very recent issue as you have mentioned. But apart from Karnataka and even some of these cyclones that have happened, there seems to be a higher stress in our book than the total markets book in the regulated space. Something else must have also gone wrong as many people are thinking here. And, I don't want to harp on this question too much, but, sir, if you could just give us some color on what has really been the deciding factor that this is something that we want to do it again. Is there something like that for our business, sir?

So, if you look at the industry level, the delinquencies are much higher as compared to us. But in terms of prevention of any impact of natural calamity like a cyclone, we have a natural calamity insurance product, NATCAT insurance, which has really helped us in preventing any damage that was caused due to cyclones in Tamil Nadu or heavy rains in Tamil Nadu. 50,000 of our customers were impacted, but we were able to get those claims on time, and the regimen has remained better as compared to the industry. But, I think overall, we have relooked at our scorecard as well. We have included more variables into the scorecard, something like what we as well discussed regarding customer having gold loan exposure, having lesser of a delinquency. Those kind of inputs have gone into the scorecard, which will help us underwrite better.

Okay. So my last question is on our ROA and ROE outlook. Since we are not expecting a lot of top line growth right now, since we're not guiding a lot of top line growth right now, what do you think the ROA and ROE target should be for FY '27?

So ROA guidance, what we are giving in terms of FY '26 is around 2%. And ROE translates to around 10%. And we feel that with the moderate growth also, we would be able to make sure that our operating costs specialize, our credit costs will -- come down considerably. And more importantly, our net interest margin remain global, so we should be able to deliver around 2% ROA comfortably. And '27 onwards, FY '27, definitely, we will be back to around 4% ROA, provided there is no event situation that comes in.

So do you think that this microfinance issue that we are seeing all around at this point of time, of course, we are seeing that a lot of managements have also peaked out. And since our management has been so good in borrow -- lending and borrow in both parts. Sir, do you think that it has grown out of proportion at this point of time because we are seeing better collection ratios also?

Yes. So I think every business goes through a cycle. So definitely microfinance, these cycles have become little bit more frequent. We had COVID a couple of years ago and now we are seeing a crisis of over leverage and then state level legislation. I think from a point of view of rebound, definitely microfinance as an industry has shown multiple times, whether it was Andhra Pradesh crisis, whether it was demonetization or COVID, it has bounced back reasonably well. So, definitely, we get impacted quite a lot because -- our nature of our product is unsecured, but we get back and are able to kind of get back to normalcy also equally fast because the nature of the loans is short term loans, and the borrowers are quite reliable borrowers, and most of the borrowers are not intentional defaulters. They are situational and circumstance which lead to these delinquencies. So I think definitely microfinance has a long-term kind of space in this lending space and will continue to play a very important role. And as we continue to see more and more borrowers are getting into this space and getting benefit and getting into the formal segment, it plays an important role in financial inclusion. And I don't think so, that it will have dark future. It will have a bright future going forward.

We have our next question from the line of Sarvesh Gupta from Maximal Capital.

Good evening, sir. So most of the questions have been answered. Just wanted some more color on how that growth in terms of new disbursement is getting impacted because of the guardrail 2? What are you seeing in the ground that you're seeing? Like, we have been having that for the last 5, 6 weeks.

So I think because of the guardrail 2, we have seen [indiscernible] a jump in the rejection, which is on a temporary basis around 5% to 6% additional. 3% additional incremental rejection has come in. I think definitely that impacts the ability to retain customer because if a customer has other loans outside, we are not able to give her a loan. But definitely, it is in the interest of the industry. We have seen the industry has degrown from INR 4,40,000 to INR 3,75,000 crores as of March. And the leverage has also gone down among the borrowers' pricing. From a long-term sustainability point of view, I think it is pretty good. And as a player who has been there for a long term, we have good capital delinquency which continue to contribute to the growth. So we will -- definitely we'll be benefit -- benefited once this overleveraging scenario kind of unwinds.

And, sir, on the Karnataka situation, so I think till December, it was one of the better performing states. So I think we saw a lot of spike happening in the month of February for the industry also. And, so now do you expect this problem to sort of take its own slow time, or do we think that a pullback in terms of [indiscernible] quality can happen in a very short time? Because there's -- all these problems have happened over, late then and there.

So, I think that's -- the benefit of microfinance that all of these challenges gets unwinded also quite quickly. We are already seeing a pullback in Karnataka. We don't anticipate any challenges. See, the guide, the regulation that is there it is restrictive towards unregulated lending. So definitely, in the long run that will help the regulated entities like us to service our customers because the unregulated players will move out of this space, and the bad name that the industry gets because of the practices of an unregulated player that will not impact our borrowers. So that definitely will help us in the long run. At the short term pace, but for a long term definitely this will be beneficial for the borrower as well as for the industry.

And by then, when do you expect the situation to normalize there?

I think, by September onwards things will start looking a lot better. And, already we are seeing improvement but these are early days, so I think we need to be -- see a little bit more trend. But by September onwards we should definitely see positive trends coming in.

We have our next question from the line of Anush Mukherjee from Yadnya Academy.

Hello. So you called out that by September, you see things to be turning out better. But in Q -- in FY '25, Q3 was impacted also because of some festive reasons. So do you expect the same to happen in this Q3 as well?

No, we don't anticipate that to happen because I think we have taken some proactive steps. So certain things like we have introduced a policy where all the installment which are falling on a festival date, they automatically gets kind of into an extension of a payout. When they are originating not for the existing loans, but any loan that we are originating at the time of fixing the installment. If you see that installment is falling on a designated holiday or a holiday for the state which is at a large level, that loan tenure gets extended. So a 24 month loan becomes 25 months and then 26 months is 2 installments. That has been multiple ways. One is, on the collection because on a festival day the staff is also not available and the customer is also not available then the collection does not happen. But now that it will not be an installment day, so it will not impact the portfolio. Secondly, it will also help in staff retention in a big way because when there were no such holidays, then the staff was required to go and collect either just before the festival date or after the festival date which also impacted his ability to celebrate his festival with the family. So that relate to attrition and all those activities. But, all of these initiatives will help us build a robust portfolio and help customer satisfaction as well as employee satisfaction in a big way.

And you said that FY '27 provided there is no adverse situation, you see ROE of roughly 4%. Can you also call out the estimated, like the ROE number for that year as well?

So, we can, depending on the leverage including the balance sheet portfolio, we will have around 4.5x to 5x leverage. That can result into around 18% to 20% ROE.

18% to 20%. Okay.

As there are no further questions from the participants, I now hand the conference over to the management for closing comments. Over to you, sir.

So once again, my thanks to all for participating in our earnings call. As I outlined in my opening remarks, our focus is on building a robust and sustainable business model and short-term pains are for the purpose of laying down the foundation of a long-term sustainable growth. We are taking up a very strategic move in terms of exploring products which are of secure nature for our customers. I'm hopeful that the regulatory guidelines on the qualifying assets will also come in rather quickly and which will allow us to take benefits of these data mining that we have done. I think with these products, we will be able to retain our customers better. We continue to have a very strong brand. We are strong leaders in digital space. We have 1.8 million customers who are having our app, and we have seen the repayment trends. We have very strong rating, and we continue to maintain our rating. We have good ESG rating also now. We have a very strong liability trend as this is consistently bringing down the cost of capital. We have adequate capital, adequacy of 27.9%, and we have a strong stable team with a very, very robust branch infrastructure. All of these are fundamentals which are in place. The year which has gone by has been 17% -- I'm very confident that going forward, these fundamental pillars of success that we have put in place will help us achieve the double bottom line that we have wished to and we have aimed for forever that is social impact and also sustainable returns for our investors. With that, I appreciate your patience and, request for support, and look forward to interacting with you in future calls.

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