Poonawalla Fincorp Limited (POONAWALLA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Magma Fincorp Q1 FY '21 Earnings Conference Call hosted by PhillipCapital (India) Private Limited. [Operator Instructions] I now hand the conference over to Mr. Pradeep Agarwal from PhillipCapital (India) Private Limited. Thank you, and over to you, sir.

Thank you, Sanford. Good morning, everyone, and welcome to the Quarter 1 FY '21 Earnings Call for Magma Fincorp. To discuss the results, we have with us Mr. Sanjay Chamria, Vice Chairman and MD; Mr. Manish Jaiswal, MD and CEO, Magma Housing Finance and SME; Mr. Deepak Patkar, CEO, ABF Business; Mr. Rajive Kumaraswami, MD and CEO, Magma HDI General Insurance; and Mr. Kailash Baheti, CFO. I would now like to hand over the call to Mr. Chamria for his opening remarks. Over to you, sir.

Thank you, Pradeep, and thanks to all of you for joining us. Hope all of you and your near ones are safe and healthy. The current year 2020 continues to be unpredictable and extremely volatile for all of us as we face each day and learn and implement newer dimensions in living our life. India has already surpassed all countries barring U.S.A. and Brazil in terms of COVID positive cases. And the incremental per day rate is now highest in India and is spreading across the small towns, which has caused lockdowns in certain states like West Bengal, parts of Bihar, Orissa, Eastern UP, Maharashtra, Karnataka and a couple of more. Government of India with the limited physical resources and RBI with consulted efforts have been quite proactive to seek feedback from the industry association and held consultative sessions and initiated a fringe of measures during the last few weeks again to relief the liquidity crunch faced by the borrowers through onetime restructuring and expand the scope of ECLG scheme to include individual MSE borrowers. I'm happy to share that, we, at Magma, have been very actively engaging with the government and RBI, both in our individual capacity and through the agencies of FIDC, CII and FICCI, which resulted in the government and the reserve bank providing substantial support by way of several liquidity enhancement measures and bringing needed policy changes. While the economy in general is not doing well, the rural economy seems to have made faster recovery, especially with the agriculture sector outperforming. There is an upfront upside to this as far as the performance of monsoon is concerned and movement of vehicle for freight movement in tier towns and providing better load to our customers. During our last call in June, we had shared with you that at Magma, we have adopted the principles of survive, revive and thrive along the 7 measures comprising: number one, employ safety and welfare programs; second, customer engagement and support; three, capital preservation; fourth, prudent liquidity management; fifth, OpEx control; sixth, portfolio quality; and seven and the last, the digital platform for contactless lending and collections. We have continued to focus on the above principles. And at the end of July, 5 months of pandemic, we have managed to survive and build good liquidity and maintain portfolio quality, while taking full care of our employees across India and reaching out to our customers and doing 2 full-scale surveys covering more than 2.5 lakh customers each time. I would like to share a brief overview of how things have progressed in Q1, amidst the pandemic. I'm happy to report that 94% of our branches are operational. And disbursement have resumed, although we have been cautious on fresh lending. As mentioned earlier, 20% of our branches were impacted during the last 3 weeks of COVID rebound in smaller towns, which resulted in intermittent closure of these branches and did impact the normal functioning of collections and customer servicing. We had already launched this scheme to help our customers financially looking at their cash flows and providing them additional working capital. And now with the coverage of individual CV and CE customers under ECLG scheme and extension of onetime restructuring schemes, it will gain impetus, and we can help our customers overcome the period of low revenue due to lower capacity utilization and then normalize as the situation improves. We estimate that the demand pickup should happen from October with the onset of the festive season. And by then, hopefully, the COVID impact will also stabilize. We believe that a strong balance sheet is what is required for companies to survive, revive and thrive. To protect the balance sheet, we are working on the 4-point agenda. The first and the foremost is on the moratorium and collections management. Magma has made emphasis on collection. We have seen a good pickup in collections in June and July, and also seen further improvement over June, though not as expected due to frequent and intermittent lockdown in several states. Number of customers opting for Moratorium 2.0 has significantly reduced to 45% in June '20 and it has further come down to 40% in July. Our efforts will continue to bring this number substantially down in August and September so that we can make an orderly exit in the month of September. Provision management. We have chosen the path of conservative approach in provisioning and have made substantial additional provision during the quarter to cushion the impact once the moratorium period ends. Apart from the total COVID provisioning of INR 148 crores. We are also holding additional INR 78 crores of provision, which is retained on contracts, which have either normalized or moved to lower buckets through part collection, but where the customers have opted for moratorium on the first installments. These provisions would be released once we exit moratorium, and therefore, the bucket standstill. Liquidity management. The second most important one, the company has excellent liquidity buffer of INR 1,790 crores as on June 30, and is comfortably placed to service all its repayment obligations and continue normal disbursals. Our new borrowings have been at substantially lower cost of funds leading to a reduction of cost of funds by about 24 basis points sequentially. We have received overwhelming response and support from the state-owned banks to meet our long-term funding needs and we will rather access the same depending on the demand revival. The third one is the OpEx management. We are focused on reducing our OpEx to bring in line with the industry. We have been able to reduce our OpEx by INR 41 crores Y-o-Y and INR 25 crores Q-o-Q. While the OpEx is likely to increase as we step-up disbursals, we remain confident of achieving significant reduction in our OpEx ratio Y-o-Y as also the absolute amount of OpEx. As a result of our sharp focus on protecting balance sheet through this 4-point agenda, and in spite of further additional provision of INR 32 crores for COVID during Q1, our PAT for the quarter is INR 38 crores against INR 11 crores in the corresponding period last year. We would now outline the segment-wise performance, and I will request Deepak to take you through the ABF. Over to you, Deepak, please.

Thank you, Sanjay, and good morning, everyone. The environment continues to be challenging with COVID-19 spread across the country. However, with the easing of lockdown and a slew of government measures, we are clearly seeing some return to normalcy happening. Especially the borrowers with agri-based income sources and the ones dealing with essential goods are showing healthy revival for us. This augurs well for us given that we operate mostly in the Tier 2 and the Tier 3 towns. This has encouraged us to resume disbursal in our focused product category towards the later part of June, though the number has been quite modest at INR 40 crores. We have continued with our relentless endeavor to stay in close touch with all our customers through customer service, trying to understand their asset deployment and cash flow situation. And we have seen a good improvement on both counts towards the end of this quarter across the product segments of CV, CE and commercial cars. The tractor customer revival has been the most encouraging with majority of our rural customers, having sold off their crop, leading to a better repayment behavior. Based on these insights, we have realigned our underwriting policies with regards to the customers and the product segments. Following the announcement of moratorium on EMI repayments, we did grant moratorium to around 84% of our customers in phase 1. However, post relaxations of lockdown and the start of economic activities, we witnessed a good traction in collection in June. The collections in June was around 60% of what a normal June month collection should be. 53% of our portfolio is still under moratorium as at June end, which is an improvement of 31% from the 84% that was there in phase 1. This improvement has been seen across all product classes through as expected, commercial vehicle borrowers have availed moratorium to a greater degree, and it is leased for our tractor customers. We had also stated in our last call that we have made substantial investments in the collection infrastructure last quarter. We are happy to share with you that we are already seeing the benefits of the same and are confident of continued benefits in coming quarters. Continuing with our focus on cost optimization, we have undertaken several measures to reduce our operating expenses and the result of the same are already visible in quarter 1. Sequentially, our operating expenses has reduced by 15% in value terms. For quarter 2, we are closely monitoring the situation on ground and the economic activity picking up, especially in the rural belt, we plan to gradually pick up the pace of our disbursals. In that respect, our focus towards used assets and tractors will hold us in good stead. On the collections front, the focus is on lowering the portfolio under moratorium in current bucket and reducing outstanding dues in the delinquent buckets. With that, I will request Manish to give you an update on the housing and SME business. Thank you.

Thank you, Deepak, and good morning, everybody. I'll first talk about Magma Housing Finance. Over last 3 years, Magma Housing Finance has evolved into a national scale affordable housing finance company with focus on retail and granular assets. The company's strategic mission of Go-Direct, Go-HL, Dig Deep are now imbibed as a culture in the organization. Women borrowers constitute 96% of our total loan originations. 72% of our loans have been disbursed in Tier 2 and Tier 3 towns. Magma Housing Finance is focused on minimal construction risk assets, our entire portfolio has only 2% of loans as builder construction apartment, and thus the collateral construction risk is minimal. Over the last 2 months of gradual lockdown lifting, our mortgages portfolio has shown resilient bounce back. The moratorium customer count substantially stands reduced from 51% at peak in May to a little below 20% by end of July. The mitigated impact of pandemic in rural and semi-urban areas is expected to regress people to learn to live with COVID and initiate business survival. Magma Housing Finance adopted a caution with care approach given negative externalities of lockdown and restricted mobility. We got in touch with more than 90% of our customers through direct engagement. Our teams have worked relentlessly during pandemic to send over 1,571 odd PMAY cases to NHB, so that our customers get their PMAY subsidy of INR 2 lakh to INR 2.5 lakh, such a large quantum of PMAY subsidy not only deepens bond with our customers, it also seeds the probability of better asset quality behavior in future. Magma Housing Finance disbursed INR 133 crore in last quarter and the AUM of Magma Housing Finance now stands at INR 3,400 crores. In fact, our overall mortgage business just crossed INR 4,000 crore in July as we speak. The company reported a PAT of INR 7 crore for the quarter. The company has been able to hold onto the asset quality with a marginal improvement in GNPA, which now stands at 1.59%. We have made additional provisions of COVID-19 worth INR 4 crores in Q1. Thus, over last 6 months, Magma Housing Finance has aggregated COVID-19 provisions of INR 12 crore equivalent to 0.4% of AUM. The overall PCR of the firm now stands at 40%, and it is expected to normalize when the pandemic settles. Company reported improvement in operational efficiencies as OpEx ratio stands from -- reduced from 3.2% to 2.7% in the first quarter. Magma Housing Finance is in a comfortable position on liquidity and ALM. During the last quarter, the company has been able to garner INR 502 crore of incremental liquidity at weighted average cost of 8.19%, which is almost 2% lower from our cost of fund about a year back. Magma Housing's overall cost of fund has thus improved for the quarter by 23 basis points. The company is looking at gradual pickup of momentum and disbursals and will continue to build assets with sharp focus on portfolio quality, selection, and most importantly, the prime focus of the company in these tough times will be to stand by our employees and customers and weather the storm together. I'll now come to the SME business. The SME business took long strides, as Sanjay mentioned earlier, in working with the Ministry of MSME, SIDBI and NCGTC to give flip to the initiative of ECLGS, which is Emergency Credit Line Guarantee Scheme under our Government of India's Atmanirbhar program to provide timely liquidity support to MSMEs. Deploying the best of fintech capabilities in our SME business, the team digitally accessed and disbursed 500 loans to SMEs amounting to 44 -- INR 43 crore in last quarter, rather mostly in the month of June itself through paperless and seamless processes at the backdrop of 100% government guarantee. Almost 46% of eligible MSMEs who need revival capital have been beneficiaries of ECLGS under our Go-Digital SME initiative. We are exploring such collaborative opportunities and more to deepen our contributions under this program. The pandemic times have provided us the opportunity to redimension the SME business towards go-direct and go-secure strategy. The product, process, policy and trading activities in line with the other 3 messages have been completed duly in the last quarter, and the launch pilots are underway to build a long-term steady-state relationship-driven business. The soft testing of SME Go-Direct was witnessed during -- as our teams provided medical coverage to 600 MSMEs in these pandemic times. In line with our agenda of supporting MSMEs to reboot their business model, the company entered into partnership with a global leading philanthropic institution Wadhwani Foundation and has accessed over 500 MSME customers. Under their Sahayata program, the MSMEs would be offered pro-bono consulting and advisory towards digital learning, business rebooting, resource management, financial and revenue enhancement programs. The company maintained its focus on portfolio quality and the moratorium cases in SME business have reduced from the peak of 56% in the month of May to around 25% in terms of value by end July. In line with the company policy to restrength the SME portfolio, 71% of our book as of June '20 is covered by the credit guarantee scheme. In ensuing quarters, the company would focus on ECLGS, essential goods and further bolster the franchise for Go Direct and Go Digital initiatives. I now hand over our colleague, Rajive Kumaraswami, the CEO of Magma HDI to give an update. Thank you.

Thanks, Manish. Good morning, everyone. The economic crisis has impacted the general insurance industry as well. The lower vehicle sales and consequent sharp de-growth of the motor segment has been cushioned by a heightened realization on the need for health insurance as well as reinsurance-led rate increases for the commercial business. The industry registered a degrowth of 4.2% in Q1 where a sharp fall of 23.6% in the motor segment was counterbalanced by the growth of 6.4% and 16.2% in the health and commercial segments, respectively. Against the market de-growth of 4.2%, our drop was 19.5%, much sharper, primarily due to our current high level of dependence on motor as a class of business. However, after registering 2 consecutive months of degrowth in April and May, we've registered a growth in the month of June. This trend of growth in June continues in Q2 as well, and we are confident of pulling back the degrowth of quarter 1. Our investments in technology ensure that while we continue to work-from-home as an organization, more than 3,000 intermediaries use our platform to issue policies. The usage of our pre-inspection survey app increased from 27% in Q4 to 41%, and the usage of touchless claim settlement increased from 13% to 49% in the quarter. We continue to expand our OEM spread, and we have gone live on the program of 1 more prestigious passenger car manufacturer in June. This enrollment trend continues in July as well, and the company is getting impaneled and commencing business with more OEMs in quarter 2. Traction in health business has been the most satisfying achievement of the quarter gone by. Our retail health numbers in April to July, this fiscal have actually crossed the full health numbers that we did in the entire year of 2020. The composition of health insurance in the first quarter stands at 5.9% vis-à-vis 4.5% in the previous year. We've delivered a profit after tax of INR 10.5 crores on a GWP of INR 240 crores this year. However, a decline in the business volume impacted our combined ratio, which stands at 124.4% this quarter vis-à-vis 120.7% for the full fiscal last year. Over to you, Sanjay.

Thanks, Rajive and Manish and Deepak. So now we are all ready to take any questions that you all may have, the entire management team. Thank you.

[Operator Instructions] The first question is from the line of Anitha Rangan from HSBC Asset Management.

Can you just give some color on your liquidity you have in your balance sheet, you said you're getting active traction from PSU banks. Can you just throw some more light on how much sanctions you're getting? And what is your available [Technical Difficulty] specifically what you're seeing? Kailash, you want to take it up? Yes. So as we mentioned, our total overall liquidity as on June 30 stood at INR 1,797 crore. We had drawn about INR 502 crore in the first quarter from various banks. We have further drawn about INR 550-odd crore in the month of July. The liquidity is coming from various facilities, such as the emergency credit line, the TLTRO, the PCG bonds, et cetera. And we have further sanctions in pipeline apart from INR 550-odd crore, which we've already withdrawn, about INR 850-odd crore -- INR 850 crores, INR 900 crores of sanction lines, which we can draw whenever we want. So this liquidity is almost good till maybe December this year and even beyond.

The next question is from the line of Abhijit Tibrewal from ICICI Securities.

] Sir, referring to your Slides 16 and 17, can you help me understand how should we read your NCL of INR 93 crores in Q1 and INR 139 crores in Q4 FY '20 versus the COVID-19 provisions that we have done?

So if we go to Slide 17, the total NCL for the quarter is INR 93 crore. The composition is -- you would see the third line, which is loss on settlement/repo, which is about INR 20 crore. And obviously, the activity was low during the quarter. You could not either do settlement or deposition, and deposition was even not desirable in the given circumstances. So most of the activity was settlement, and this happened in the month of June. So when you settle, there may be some provision release and some loss. So net-net, in this quarter, we lost about INR 20 crores. Then we -- you would see the ECL provision line. Usually, when you have bucket strength, you would not have any roll forwards and therefore, our actual ECL was -- actual loss on account of standstill was not much. What has happened is that there would be contracts which are for SME moving to 450 plus due to the time passing by. So say, some contract which was in 360 would automatically move to 450 because neither is there collection nor is there any [Technical Difficulty] these cases, which are in higher buckets. And at 450 DPD, we have a cutoff for 100% provision and write-off. Similarly, in SME, we have -- in ABF, we have 730 as the cutoff for write-off. So anything which moves to 730 in that the movement would have continued. So these are the contracts where we would have made 100% provision. And apart from this, we have, as we said, additional INR 32 crores provision, which is on account of pre COVID. So additional provision we have made and this provision has been largely made or entirely made in the standard assets bucket. So in NPA buckets, we do not see any necessity for any further provision. But in center buckets, there are some contracts in 31 to 90 who have taken moratorium and have not paid any overdue installment. That's where we thought that there is some increase in the credit risk and therefore, we should provide more. And that is where we have provided additional INR 32 crores. So that's the total INR 70 crore for you.

] Okay, sir. Sir, but the question here in Q4, you had an NCL of INR 139 crores. And out of that INR 58 crores was loss on settlement or repo. If I take that out, how have you provided INR 117 crores of COVID-19 provisions, which will -- which should be against standard assets, right? COVID provisions, I'm sure you are doing on standard assets.

So the way it happens is that in the last quarter, which is January, February, March, we are able to roll back significant amount, and this has been the trend all along. So usually, you would see that January, February, March, we will hardly have any credit loss. There would be release of provisions because the buckets actually shrink, these higher buckets actually shrink. And therefore, whatever we have provided, there would be release. So this time was no different until about 20th of March. We had a large number of contracts moving down, and there was a release of provisions. So if we had not provided INR 117 crore of provision for COVID, you would have seen the ECL provision line as negative. Instead, what you see is INR 72 crore positive. So that's how the total NCL was INR 139 crores, including INR 117 crore of COVID provision.

] Got it, sir. Yes. And sir, one last question. I mean, I see that, I mean, we have now classified tractors or agri as one of our focus products now. Just trying to understand, in the last quarter, most of your peers, I mean, saw very good traction in tractors. And for that matter, they have reported very good disbursements in tractors, and some of them have even reported very high market share gains. Why is it that we chose to stay away from tractors, especially when we have seen very good collection efficiencies in tractors? I mean what I'm trying to understand is, I mean, in cycles, I mean, I've seen that when we are doing tractors, the others are choosing to stay away from tractors and now that others have started doing tractors, we have not disbursed as much at least in Q1.

So yes, yes, you're right, absolutely right. And there has been traction in the tractor sales and tractor disbursals in last quarter. However, we've actually chosen to look at it from a different angle. What we have tried to look at is what is our customer actually saying on the ground. Even in tractors, if you notice, we've got a large amount of moratorium running at this point of time, about 40% of [Technical Difficulty] it is in spite of the economic activity that we have seen. And therefore, we've decided to stay away for a while from any kind of aggressive disbursals. Honestly speaking, we did not see any specific signs on the ground in terms of why we should aggressively disburse during this quarter. Our focus for the quarter was collections and portfolio management, and that's what we started.

] Okay. And what will be the stance in Q2 now?

So there is quite a bit of positivity that we are now seeing. Like I mentioned, we are seeing an improvement in the moratorium situation from June to July as well. August also, we hope to be better. And therefore, we'll have a measured approach in terms of how we ramp of our disbursals. And there will be activity on disbursals that you would see in quarter 2.

The next question is from the line of Rohan Mandora from Equirus Securities.

Sir, if you could help by sharing the details on what percentage of customers have not resumed business activity post COVID as of June end -- or as of July end, in say the vehicle finance and the SME segment? That would be first. And secondly, after the restructuring scheme that has been announced by the government -- as announced by RBI last week, so in case we chose to restructure any of our portfolio within that scheme, will those assets be considered stage 1 or stage 2? And how does the provisioning move because we follow Ind AS and the requirement is for minimum 10% provisioning, so some clarification on that would be helpful.

So I will take the second question first and which is about restructuring. So the way it happens is this restructuring scheme is not new. And we actually started -- we started giving the relief of restructuring to deserving customers even before RBI had announced the extension of the scheme, the scheme has been there for some time. It was -- it started in the last year -- in the year '19 in January and then was extended in the current year in February. The way it operates is that when we have Ind AS provisions, say some contract is in 61 to 90. And under Ind AS, we may have provided, say, about 10% or 12%. If we give restructuring RBI says that you have to provide additional 5%. So we continue to maintain that 12%, we make additional 5% and then provide the restructuring benefit to our customers. So we do not take any advantage. RBI says that you need to provide 5% additional. Here, we deviated a little bit from Ind AS provisioning and actually go conservative. And when you provide restructuring, there is a little bit of increase in the credit risk. So this is how we take care. That 12% continues for 1 year and 5% also continues for 1 year. After 1 year, whichever bucket the customer would be sitting on, that's the bucket on which provision will continue.

Okay. This was helpful.

Okay. Let me deal with the first question. The first question that you asked was, as to the -- how the movement of customers in the moratorium has been and who haven't paid any installments. So if you actually refer to slide number...

Sir, specifically not -- like how many have not been able to resume any business activity also.

So let me first -- yes, I understood the question. Let's go to Slide #16 and look at Note #2, where we have said that the total number of customers who were sitting in the 1 to 90 bucket and who availed the moratorium and who did not pay any installment in the first quarter, the total portfolio stood at about INR 900 crores, which means that these customers at the time when they were given the moratorium, they were already having 1 to 2 installments overdue, and therefore, they were sitting in the 1 to 90 bucket. Now as you also know that RBI provided for a standstill treatment on the opening bucket. So these customers, while they have not become NPA, they have not paid the overdue installment. And on the current installment, anyways, they've got a moratorium. Now that amount has reduced to about INR 700 crores in July. So about INR 200 crores worth of customers have paid some overdue installments, while they have availed the moratorium. I think this is 1 data point. The second one, when -- we did actually 2 surveys. One we did in April and which continued till middle of May, and I think that I shared in the June call. And the second survey we did in the month of July and then we tracked. And both the time when we did the survey, we covered over 2.5 lakh customers who are live customers with us. And then we found that now in terms of the tractor customers, those who are principally into farming and are largely dependent on farming, they have all got a good amount of money. And last time we said that about 50% of them had received the harvesting remittance, but the rest of them were waiting, and they were waiting for the prices to improve. But this time, we found that almost all the customers were in cash flows. So far as the truck customers are concerned, last time, we had mentioned that only 6% customers were having a deployment and 94% customer did not have deployment. Whereas in case of construction equipment, we said about 8% to 9% customers have deployment and 90% customers didn't have deployment. This time, when we did the survey in July, which ended by last week of July, where we found that a good percentage of customer, about almost about 50% to 60% of the customers were able to deploy. But still about 40% to 50% of the customer didn't have deployment. And even among the 50%, 60% worth of deployment, the load availability was about 50%, 60%. And which is what is reflected also when we look at -- if you look at the Note #3 in the Slide #16, it says that, while in July, the overall moratorium portfolio has gone down to 40% in July from 45% in June. But in respect of the vehicle financing, it has actually gone down to 49% from 53% in June. When we further look at the breakup of this 49%, there we found that in respect of commercial vehicle and construction equipment, this percentage is even higher, which shows that the customers who have taken the trucks and the construction equipment, they are still having a deployment issue. And even it is borne out by the survey that we conducted, that while about 40% of the customer did not have deployment, 60% of the customer had a deployment, but that was also about 50% to 60%. And therefore, it is not good enough to take care of their expenses and their installment. And that brings to the second point which Kailash tried to answer, that we have also developed a program called Sahayog which we launched from 1st of June. And that is under the restructuring allowed even under the February 11, 2020 circular of RBI for the lending to the micro and small enterprises. And therein RBI had allowed the time till December 2020, which I think last week when they announced the onetime restructuring for all kind of borrowers, for this category of borrowers also, they've extended it to March 31, 2020. So what we have done under the Sahayog program is to now like in second moratorium 2.0, we have not given carta blanca to every single customer. What we are doing is that we'll look at cash flows of every single customer based on the deployment, what asset we have funded, which territory is he operating in, is it under intermittent lockdown? And how much revenue is he earning? And therefore, should we reduce the installment by 30%, 40% and do we need to reduce it for second and third quarter? And can we increase it to 75% by fourth quarter and then full installment, maybe from April. So here, we are doing a revaluation of each and every case, where the customer would need, and then we will provide that onetime restructuring. And as Kailash mentioned that under the RBI guideline, if you restructure any account, then you need to earmark it separately and then make additional 5% provisioning over and above under Ind AS, what you are required to provide, depending upon the bucket in which that particular contract is residing. So I hope this is an overall wholesale answer to your both the questions.

Yes, sir. Sir, this was pretty detail and I loved it. And just 1 small question. Individual trust owners classify under the MSME restructuring scheme? Or are they covered under any other scheme right now?

So this was one of the big victories for our industry as such. And as I said that we, both as an individual company and as a part of the industry body, represented vigorously to the government that: one, they should not only be treated as a priority sector under the vending guidelines, and therefore, we get concessions from the banks; two, under the interest subsidy also we get certain subsidy, which we provide to these customers; third, also under the ECLG scheme, they were not covered originally. And the -- it was inadvertent because while they covered all the micro and small enterprises, but they excluded the individual borrowers. So I can tell you I personally even had an interaction with the MSME Minister and the Finance Minister and the Bureaucrat, and we pointed out to them that there are 66 million, 70 million MSMEs in India, and of which 99% are individual borrowers. They don't form a sole proprietary, say, for a partnership firm to launch that business. So therefore, the intent of the ECLGS scheme cannot be to exclude 99% of the absolutely bottom of the pyramid micro and small enterprises. And then we also got in touch with the NCGTC officials, which is the National Credit Guaranteed Trust Company set up by the government to provide this INR 3 lakh crore guarantee. And eventually, then last week, they came up with that classification in which they have also included the individual borrowers, provided the loan is taken for a business purpose. And this time, they have also said that commercial vehicle and construction equipment customers are specifically included. So now they have benefits under all the government programs.

[Operator Instructions] The next question is from the line of Subhankar Ojha from SKS Capital.

I have a slightly different question. In terms of -- so your perpetual bonds are trading at 18%, 20%, which is basically a strong negative signal. What is your plan about this? Can you not call it back?

So perpetual bond by nature is something which does not have a redemption period. And therefore -- and you get the benefit of a perpetual bond into the upper tier capital calculation of the capital adequacy as allowed by Reserve Bank of India. And you might be aware that the perpetual bond, I think, is allowed to the extent of 15% of the pure Tier 1 capital. And after a minimum period of 10 years, then if the company wants to redeem it, then it can do so with the prior permission of the Reserve Bank of India. So these are the statutory guidelines. So far as the discount part is concerned, I think it is more a reflection of the market sentiment about the overall economy and the sector per se. And there are n number of companies where secured bonds -- perpetual bonds are unsecured by nature, and they also have an unlimited tenure. And I can share with you, and I'm sure you are from the market, you will know that between 3- to 5-year secured bond also are being traded at a huge discount and they're giving a good yield to those who want to invest and buy. So I think it is not a reflection on the company. It is more a reflection of the market sentiment.

[Operator Instructions] The next question is from the line of Pradeep Agarwal.

Sir, 1 question from my side. While disbursement for the last quarter has been severely impacted due to lockdown, by when do you see that we going back to the earlier level of disbursements or things getting normal?

So what -- in fact, even last month, I mean, in June, when we had our annual results, that time also, we said that first quarter, we were not expecting disbursals. I guided about INR 200 crores, but then we did not really budget for it. And second quarter, we have budgeted for disbursals, but obviously, it will be a low key. Today, you see commercial vehicle and construction equipment. The deployment is very soft. And there is no point taking additional exposure where you have more than 55% of the customers having opted for the moratorium, even after 5 months of pandemic. So it actually is indicative of a very poor load availability in the market. So far as the SME business is concerned, there, again, a lot of them have been impacted. And as Manish mentioned, that we are focusing on the sectors like daily provisions, pharmas, which are not negatively impacted, and these are very few and far in between. And we are largely providing support to the existing customers under the ECLG scheme, or the customers who are coming in from these positive sectors under the pandemic. And obviously, it would reduce the overall pipe for lending opportunity. So far as the housing is concerned, of course, there, we are, as usual, bullish, and we have done also disbursals and we'll continue to do it. And so with the case -- in case of agri business, where tractors and for other needs of our farming customers, we will do it. So from that standpoint, I think second quarter, we will have -- we would have started this -- we have started disbursals, but it will be nowhere near normalcy. And I would guess that, as I mentioned in my initial address that from October with the onset of the festive season. And also assuming that the impact of COVID would have stabilized, and that means we won't have intermittent shutdowns in the different states as we have experienced in the last 5, 6 weeks. I think in the third quarter, disbursals could be about 60% to 70% of the normal disbursal. And in the last quarter, which is Q4, it could be about 80% to 90%. But in terms of reaching the 100% normal level of disbursals, I think this year would be -- we'll be hoping it to be very optimistic.

So as you said, last 3, 4 weeks, we have seen spread of COVID in Tier 3 or Tier 4 towns, smaller towns. So you see incrementally things getting worse in rural areas or interlines compared to bigger cities and hence will impact operations for a -- maybe from a quarter 3, quarter 4 point of view?

Sorry, actually, I lost your voice in between, Pradeep.

Yes. So basically, what I'm asking since you said that the COVID we have seen last 3, 4 weeks, it has spread to Tier 3 or Tier 4 towns as compared to prior periods where the spread was only seen in bigger cities. So do you see the impact being there in quarter 3 or quarter 4 from these smaller cities in terms of operations getting impacted or disbursements getting impacted in these areas?

So this is precisely what I was saying that it is quite unpredictable. Like when June, the scenario improved dramatically. And then we thought that now we are past the peak and situation will gradually normalize. So while in July, we did somewhat better than June in terms of collections and our moratorium cases came down to 40% from 45%. But this was not as we expected. We thought that we'll bring it closer to maybe about 35% or 30% but that didn't happen. And there, we found that 60 -- that is roughly about 20 -- 18% to 20% of our branches from around 10th of July for the rest of the month where intermittently shutdown and these are in the tier towns. And I mentioned the states like Karnataka, Maharashtra, Bihar, Orissa, Bengal, parts of Eastern UP they all actually got impacted. And there, like you find that in the industrialized states like Maharashtra and Tamil Nadu and Karnataka, 70% of the cases are coming in from the top 4 cities. Whereas in Bihar and UP, there, you find that the top 4 cities account for only 23% of the cases. That means 77% of the cases in these states are coming in from the tier towns. And that shows that the spread of the COVID is more in the tier towns and which is where then it would impact the economic activity. So it is actually difficult to predict as to what will happen in Q3 or Q4. But hopefully, I mean, second quarter, obviously, the activities anyways in the rainy season is less for the vehicle financing because the load movement is lesser. So with the onset of the festive season in October and assuming that we are able to peak out by September, then I think from October, we can expect 60% to 70% of the normal activities, load and demand for the fresh loans, et cetera. And maybe from the last quarter and hopefully, by then, things would have settled quite a lot, it could be about 80%, 90%. That is what my cautiously optimistic projection.

The next question is from the line of Abhijit Tibrewal from ICICI Securities.

] Sir, I'm just referring to your Slide #16, where we talked about additional provisions of about INR 78 crores, which we have not released from some of the contracts which might have upgraded during the course of this moratorium period, did I hear you right when you said that you'll be looking to release this provisions in Q2 now after the moratorium is over?

Yes, that is right. RBI guidelines say that when you are in standstill, your standstill both going up and going down. So while on some of the moratorium overdue contract, we may have collected money. The contracts have remained in the same bucket and have not gone down. And when the moratorium stops for these contracts, the provision will automatically get released.

] Okay. And sir, in point number four, Kailash sir, you were saying about this collection efficiency for Q1 was about 103%. So this collection efficiency, how have we calculated it? It is excluding those people who have been provided moratorium?

Yes. So the way we calculate collection efficiency is our entire collection divided by our entire billing. And since the billing is lower, that's the billing we have taken, and it is the entire collection as the numerator.

] Okay. And in -- and the last question I had was around the SME book. So I mean, out of those INR 1,700 crores or INR 1,742 crores of your SME book, have we done an evaluation, what proportion of the AUM is eligible for this ECLG scheme, this Emergency Credit Line Guarantee Scheme?

Yes. We have done a -- this is Manish, here. Can I take this question? So yes, we have done a fairly deep evaluation. One is that customers who are entitled, should you go and give ECLGS to them because it's available and there's 100% guarantee. There are some players who would take those chances. But what we have very cautiously decided is that we have our proprietary model MScore, where it essentially grades a customer's risk profile. So we have chosen very specifically around 5,300 odd customers, who we believe we will be putting good money after good customers, so what if government gives guarantee. And therefore, we have very cautiously chosen to get after these 5,200 customers, out of which very close to 2,000 customers have already availed, and we believe that this should be a 50% strike rate. So which means that 2,500 to 3,000-odd customers of our overall pool of our customers would be beneficiaries under this government program of Atmanirbhar and ECLGS.

] Okay. And Manish, sir, do we have the discretion of deciding who you want to extend that loan to and who we don't want to extend that loan to? Or anyone who is eligible under the scheme we have to extend a loan under -- loan to them under the scheme?

All I can say is, lenders are under no obligation to finance everybody and anybody. If we believe there are profiles of customers who we do not wish to finance, we are happy to give the NOC much as anybody would like to go and finance them. That is absolutely fine. Similarly, on quid pro quo, there are also customers who are with other lenders and where the other lenders either have their own issues of liquidity or whatever, they are approaching us with NOCs and we're looking at those customers as well. So it's, in a sense, a quid pro quo, but we are very clear that under SME business, we -- today, as we speak, have more than 3/4 of business, which is trade guaranteed under Atmanirbhar every business, which we do is 100% we have credit guaranteed. So we would continue to ensure that while we lend on one hand, we have ring-fenced our portfolio through various such schemes.

] Sure. And now that some of our vehicle finance customers, especially the CV and CE customers will also be eligible under this individual ECLGS scheme. I mean have we had a chance to kind of analyze, I mean -- or have customers already started reaching out to us for taking disbursements under this individual ECGL (sic) [ ECLGS ] scheme?

So it's a little premature. The ECLGS extension to individual customers happened quite recently, and we are in the process of evaluating. But we're quite confident that there will be a significant chunk of our customers under the CV and the CE portfolio, which were there despite the SLA.

Thank you the next question is from the line of Deepak Poddar from Sapphire Capital.

Just wanted to have some comment on what sort of credit cost we might be looking at this year?

So the credit cost this year also would be a function of the special provisions that we are making, like if you see in Slide #13, if you see the NCL is about 1.6%, which is the prior to special provision of COVID and 2.3%, if we include that INR 32 crores of special provision that we have made, and this is on an annualized basis. But I think this is not a reflection truly. And so like normally, when we make a provision, we assume that the credit cost could be in the range of -- in the current times about 2.5%. So -- but then again, it will depend upon how the post moratorium the bucketing would move. And that is why, like us, every other player also have been building buffers. And you saw that in Slide 16, we assume that the total buffer that we are now currently sitting on is almost about INR 227 crores, which is about 1.4% of the AUM. So we feel that with all these buffers that we have built in, plus another buffer that you saw was the INR 70-odd crores, the portfolio where the customers paid, but then because they were in the standstill or a moratorium, we have reported them as NPA because we don't know as to post moratorium, how will they behave. So we have a comfort that the performance of the customers relative to our peers in the industry, we have done well. And therefore, our credit cost this year should be lower or if not then at least at par with the peers in the industry, like last year, it was higher. This is what I can say at the moment. And we are also taking it quarter-on-quarter basis.

The next question is from the line of Shreepal Doshi from Equirus Securities.

Sir firstly, a data keeping question. What would be the interest capitalized component in the AUM currently for the -- like in the 1Q number? Hello?

I think we do not have that number right now. You'll have to get in touch with Dinesh after the call, and he will give you the number.

Sure, sir, sure. And sir, secondly, like since we are saying that we are comfortable till December '20 on the liquidity front, so what kind of disbursement -- I mean I understand that given that 60%, 70% disbursement in 3Q and 70%, 80% in 4Q. But what kind of trends have we assumed in -- on the disbursement and collection front, while we are saying that we are healthy on liquidity till December '20?

So Kailash, I'll take this question. See, the way we -- when we calculate the liquidity and we make a statement that we are comfortable till December, it is based on 3 factors. The first factor is that what is the current available liquidity, and that's where you see, out of INR 1,800 crores, which is mentioned, almost close to INR 900crores, INR 950 crores is the money that we have in the bank, which we can draw without anything. Rest of it is the lines that we have, which we can draw for the purpose of fresh business. Then we have another INR 700 crores, INR 800 crores worth of sanctions in the pipeline, which will come in, in the Q2 and thereafter, where we have a clear visibility. Apart from that, we also look at that, what is the monthly collection trends. So with about 40% of the portfolio, which is in the moratorium, our monthly collection itself is in the range of INR 300 crores to INR 350 crores, and that money is coming in. So from a repayment to the bank on our existing borrowing, from the angle of doing a fresh disbursal, from the angle of available lines where we already have got the drawing power, then the money that we have got in the fixed deposit and the money market instruments where we incur a negative carry and the pipeline of fresh sanctions, so if you do a sum total of all of these things, there we feel that, as on say 31st of July and as on 30th of June, in terms of liquidity, we are in a far better position than we were 1 year ago or 3 quarters ago. And therefore, even if -- and that is why right through March till August, we have not taken moratorium for any single month from any single bank either on the interest or on the principal repayment because we have been collecting money. And therefore, we have been paying to them. So that is the background. Now let's assume that if the disbursals instead of, say, 50%, 60% in Q2, that becomes to 80% or in Q3 from 60%, 70% they become 90% to 100%. So that's a happier situation because we have so much of sanctioned pipeline and banks are also under pressure to lend to the companies which are engaged in the retail lending and which are lending to the micro and small enterprises or in the priority sector, we are finding there is a significant appetite. Actually, in the last 4, 5 months, as I mentioned, by state-owned banks, and in addition there to you have 3 institutions, which is NABARD, SIDBI and NHB, they've also been providing a credit, and the government has provided the more than INR 60,000 crores, INR 70,000 crores to help the companies which are into the retail, secured and priority sector kind of a lending. So I don't really see any issue from a liquidity standpoint, whichever angle that you look at it.

Okay. Okay. That was helpful. One last question, sir, with respect to our affordable housing book, wherein we have cushioned 33% moratorium book. So what would be the mix with respect to salaried and self-employed customer profile or, say, formal and informal customer profiles? What would be the split there?

So our deep rationalization as an organization is more towards employed customers, and that's what truly differentiates us. The core tenets of our affordable housing finance business is to find self-employed borrowers in semi-urban, rural economies. And we, as an organization, have a 3 legged experience and capability to assess the credentials of such customers. So we are pretty focused in that segment. We don't want to change that. And apparently, it does look like that our strategy is also reasonably well playing out, while more salaried are seeing certain stress on maintaining their salary, but we find that the self-employed customers who are almost 2/3 of what we finance, they are showing resurgence, and they are coming back in businesses. While their top line might shrink, but it also shows that from peak of 53% under morat by value of count, by number of count of customers, we are now down to a little shade below sub 20%. So a long story short, we believe that we would stay focused in this segment on self-employed, and that will be our forte, and we wish to access these customers directly as you observed in one of our slides that about 80% of our business is sourced directly. So we source directly, find the customers directly. Our model is around INR 10 lakh of ticket size. Largely self-employed, if some salaries come on the way, we pick them up, but that is about 20%, 20%, 30% of the customers.

So sir, basically, salaried segment is seeing a little more stress with respect to, I mean, repaying as compared to self-employed, is what you trying to put it across, right?

No, I'm not trying to put that across. I'm saying by very conscious choice, we have made a choice in our business model, and we are focused on self-employed, which comprise 2/3 of our customers. And that's our business model. So there could be stress on some salaried, but there could be also stress also in self-employed. Our expertise and capability and forte is self-employed customers, and we are staying on course with our plan. And we feel that this segment bounces back fast, it gets affected fast, but it also bounces back fast because it's a resilient sector. People have to keep working to earn their livelihood and they need a home to stay in this COVID-ian time. So therefore, we believe it's a safer sector overall from our strategy point of view.

[Foreign Language] I'd like to further add on to what Manish has mentioned. That more than 70%, 75% of our total customers are in the self-employed category. And less than 30% are in the salaried category. And if we also further look at then within 70% self-employed, around 50% would be informal and 20% would be formal. Similarly, if you look at less than 30%, which is salaried, again, there, we will find that more than 20% would be informal and less than 10% would be formal. And so therefore, if you look at the salaried segment also, most of the guys that we are funding in the salaried segment would be working in the SME enterprises, either in the formal or in the informal segment. The second thing is -- so this is the question of positioning because a salaried customer will look at a 9% to 10% rate of interest on a home loan. Whereas ours it's including a LAP, which is about 30% of the total book would be about 13.7%, 13.8%, and we operate in a ticket size of INR 9.5 lakhs to INR 10 lakhs. The second point, and which is quite significant, that more than 85% of the customers, both in the salaried and in the self-employed that we are financing, they are under self occupied residential property. So therefore, it is not that they would have a godown or they would have a shop or they would have an investment made into a flat and on which we would have funded. They are living there with their own family, and that is more than 85%. Then a very significant part of the balance 15% is also where we have funded, say, the LAP loan where the customer is having self occupied commercial property, which means it is a shop or a workshop or a showroom or a salon on the basis of mortgage of which we have given a loan. So there is a -- apart from a emotional attachment, there is also a dependence of the customer on these things. And therefore, the tendency to default is much less. And finally, as Manish mentioned in the inaugural address that the home loans that we are giving, and which is about 70%. And 70% of that 70%, which is about 49%, 50%. They are also qualifying for the PMAY subsidy. Now one of the conditions under the PMAY subsidy also is that the customer has to keep his account current. If he is a delinquent customer, then he loses that benefit and which is quite significant at about INR 2 lakhs to INR 2.5 lakhs on a total ticket size of INR 10 lakhs. So from all these angles, we find that there is a sufficient amount of ring-fencing in terms of the portfolio we are in.

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Pradeep Agarwal for closing comments.

Thank you, Sanford. On behalf of PhillipCapital, I would like to thank Mr. Chamria and the entire senior management team of Magma Fincorp and all the participants for joining us on the call today. Thank you, and have a good day.

Thank you, Pradeep.

Thanks, Pradeep.

Thank you.

Thank you. Ladies and gentlemen, on behalf of PhillipCapital (India) Private Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.