Poonawalla Fincorp Limited (POONAWALLA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Magma Fincorp Q3 FY '21 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kunal Shah from ICICI Securities Limited. Thank you, and over to you, sir.

Thank you, Aisha, and good morning, all of you. This is Kunal Shah from ICICI Securities. We have with us today Mr. Sanjay Chamria, Vice Chairman and Managing Director; Mr. Deepak Patkar, CEO of Asset Backed Finance; Mr. Manish Jaiswal, MD and CEO of Magma Housing Finance; and Mr. Kailash Baheti, Chief Financial Officer from Magma Fincorp to discuss their Q3 FY '21 earnings and also to give the medium to longer-term outlook as well as our strategy. Over to you, sir.

Thank you, Kunal, and good morning to all of you, and thank you for joining Magma's third quarter FY '21 results conference call. First, a few sentences on the macro. The Indian economy is clearly on the path of quick recovery. The high-frequency indicators like PMI, GST and the green shoots in the CapEx cycle all suggest a strong recovery ahead. India presently seems to have avoided the second wave, the country's massive vaccination drive will ensure that the pandemic have now remained behind us for good. The budget, as we clearly indicated, is focused on growth through a strong expansionary budget. A strong focus on capital expenditure, rural and agri infrastructure, especially road and railways, along with the scrappage policy will ensure trade expansion, a 74% FDI in insurance is a welcome move and will invite significant FDI. Housing sales continue the momentum as the home affordability is at a 25-year high due to the price correction, state government [indiscernible] teams and significantly lower interest rate. While the auto industry was facing the headwinds even before the pandemic, the pandemic gave a big blow to the sector. As for the recent CM data, the industry is going through a structural slowdown with the CAGR of major vehicle segment showing a declining trend over the past 3 decades. Having said this, the used car space has shown remarkable growth on a YTD basis and a few pockets in the new vehicles, like private cars and the MUVs, are also showing a strong revival backed by the personal mobility needs and a lower interest rate. The new and the used commercial vehicles remain under stress. RBI-focused policies ensure significant liquidity and benign interest rate. This has resulted in excellent liquidity and cheap cost of funds for the NBFCs, such enabling catalysts could ignite the growth engine going forward. On the sector growth front, a leading rating agency expects modest growth in the NBFC's AUM by about 5% to 6% in FY '22 with manageable asset quality risk. As for the rating agency, there may be about 3.5% to 4% onetime restructuring for the vehicle finance sector by March '21. NPLs have peaked in Q3 and now should show downward trend from Q4 onwards, and the situation is further expected to improve in FY '22, and most NBFCs will carry cushion of COVID provisions in FY '22 as well. Coming to Magma's performance during Q3, our focus on niche segments like used assets, agri business, affordable home loans and SME is propelling us amidst the competitive intensity seen by NBFCs from banks, mainly in the segments which are addressable by banks, like new vehicles, urban home loans and the former segment of customers. Our portfolio performance has been superior than [in the past] in ABF and housing, while we are experiencing some stress in the SME business. Having said that, we are adequately provisioned and the worst is now behind us. Our NPAs to gross asset 3 -- stage 3 assets are projected to go down in the last quarter of the current fiscal. We continue to have healthy liquidity of INR 2,100 crores at the end of Q3. We have capital adequacy of 28%, supported by equity release from our nonfocused portfolio. This will ignite the growth engine of the high rate focused products. [Then far] on the right on account of boost in the portfolio grosses from focused products, and decrease in the cost of funds in the benign interest rate environment. Our asset quality is in check with a strict monitoring and control mechanisms in place. I will now share some of the highlights with you for the quarter. Moratorium portfolio, where customers haven't paid 1 EMI till December '20. It stands at about INR 280 crores, which is about 1.9% of the AUM. We are carrying a total COVID provisions of 149 crores, which is about 1% of the AUM. And we are confident that we are adequately provided. This confidence is due to the portfolio resilience despite Covid headwinds. Our net extend 3 assets in Q3 at 4.5% is similar to Q3 at 5.20%. As for the honorable Supreme Court order, if you were to give effect, then the net NCLs would be down to 2.4%. This being the peak, we expect NPL to decline in Q4 of FY '21. We have received excellent support from our bankers during this entire period and a strong pipeline of sanctions in hand and expected. The current benign interest rate regime has also helped us bring down our Q3 cost of funds by 56 basis points over H2 of FY '20, and we expect this trend to continue. We have achieved significant reduction in OpEx to the tune of INR 116 crores Y-o-Y on a YTD business, and this translates into a drop in the OpEx by about 17 bps during 9 months Y-o-Y. Out of the 70 bps, we expect sustainable savings to the tune of 40 bps while the balance will gradually come back as business picks up and the variable costs go up. As a result of our initiatives, despite additional COVID provisions made, our profit after tax is about INR 13 crores in the quarter from INR 22 crores in the same quarter last year and higher by 42% from INR 63 crores on a YTD basis 9 months to about INR 89 crores in 9 months FY '21. With the COVID-related portfolio issues behind us, we will now focus on growing the disbursals from Q4. I will now give you the update -- brief update on the strategic initiatives taken by the company. On the first initiative related to our sharpened focus on the high-ROA products in ABF business, which is the used assets and tractors. Our share is expected to increase from around 58% currently to about 80%, 85% by March 22. Around INR 210 crores of capital is expected to get released from nonfocused portfolio runoff in FY '21, which shall get deployed towards the growth of focused products. The resultant mix change helped provide a figure to NIM, ROA and the ROE. On the second initiative, Magma Housing Finance, the wholly-owned subsidiary continues to carve out a niche for itself in the specialized affordable housing space. The capital raise process is underway and has so far received healthy preliminary interest from potential investors. Magma Housing hopes to receive from investor interest over the next 2 to 3 months. On the third initiative, Magma HDI is well poised for growth, and that strong market opportunity in the underpenetrated general insurance space. On the capital raise front, we have received form interest from few parties, and we hope to reach definitive alignment in the foreseeable future. I now hand over to Deepak to share the update on the ABF.

Thank you, Sanjay, and good morning, everyone. Giving a brief overview of the sector that we operate in. In the Vehicle Finance segment, high-yield factor and value buying have driven up sales in Q3 by about 10%, 15% Y-o-Y in the used car. This has largely been driven by the entry-level segment and by [percentiles]. The higher [indiscernible] fixed pricing and vehicle availability and now the improved trade conditions are also driving the used CD sales back to the pre COVID levels. After significant growth in the tractor sales in Q2 and for some part of Q3, there was a sharp decline in growth in December, about 25% on a month-on-month basis. On our disbursal, our strategy to build focused product disbursals has led to the focused product book increased to 58% of the ABF business and will rise to over 60% by Q4. The used car reversals are at 85% of the pre COVID levels and expected to normalize in Q4. We started our used CV and fee disbursal in Q4, and we will see a large contribution happen in Q4 from these product categories. The new tractor disbursements have been slow, but we expect normalization in the next 1 or 2 quarters. On the risk management front, the flows from the greater than 3 months moratorium was the key for us in Q3 as a result of a differentiated collection strategy undertaken by the team, we were able to manage these customers well, and more than 75% of these customers have paid us at least 2 EMIs or more in Q3 itself. Disbursals in Q4 will accelerate with us opening up all our product lines in line with the pre-COVID level policies and in our chosen geographies. With this -- in this respect, our continued drive towards digitization of our processes as well as expansion in the channel network and engagement with channels should hold us in good stead. That's about it from the ABF front. I will now hand over to Manish for the housing finance piece.

Good morning, everyone. Housing Finance now is a national scale of [indiscernible] housing finance company focused on retail assets with minimal construction risk. Over the last quarter, the economic revival has been sharper in Tier 2 to Tier 3 towns. Our disbursements for the quarter grew 38% over the previous quarter, and we now stand to that INR 367 crore, almost back to normalcy post the COVID-19 disruption. Our AUM has grown by 16% to reach INR 3,709 crore. The mortgage vertical AUM overall stood at INR 4,248 crore at the end of the last quarter. Our bucket 0 collection efficiency has reached back to the long-term average of 98% and collection have returned back to normal fee. Our asset -- gross free stage assets stood at 1.9%, down from 2.1% during same period last year. The company showed prudent and chose to write off COVID impacted assets of INR 24 crore during the quarter. Despite write-offs, the company reported ROA of 1.1%, and the PAT stood at INR 10.2 crore for Q3 FY '21. Our offering reflects our mission of keeping customer first. Over the last quarter, 60% of our fresh onboarded home loan customers are eligible for PMAY benefit. 74% of the loans sold were sourced directly. Deploying technology and stringent control resulted in OpEx ratio reducing to 2.9% as a percent of AUM by the end of last quarter. To encourage employees, there have been continuous engagement programs of senior leadership team through regular connect sessions, digital sessions and the company now will readily focus on building a strong national franchise to serve customers with legal documentation and semi -- rural geographies. I'll now give an update on the SME business. The company focused on asset quality over fresh disbursals, collection efficiency, even for SME business has now reached back to pre-COVID levels. MSMEs are undergoing revival month-on-month basis and their monthly sales are -- appear to come back to pre-COVID levels. Our SME team provided PCL GS loan to 3,200 customers with minimal paper work. This pickup of economy, we are now cautiously optimistic to scale at that new business in Q4. The SME business has also successfully concluded its pilots of secured lending in 3 states and now expect to double distribution in this quarter. The SME business has also embarked on going direct and engender transformation during these pandemic times to build long-term direct client relationships. Given the strong need for MSMEs to reboot and relook at the business model, our company also partnered with Wadhwani Foundation, a leading philanthropic institution, to provide them pro bono advisory under XXSITAXX program. The MSMEs are reaping its benefit under various subsets of programs, such as advisory on digital learning management, resource management and revenue enhancement programs through 130 hours of engagement thus far. I will now hand over back to Sanjay for update on general insurance business. Thank you.

Thanks, Manish. So Rajive, our CEO for the insurance business, is tied up today, so he couldn't join. So I'll provide the update on the general insurance business. The industry has registered a growth of XX0.9XX% in Q3, with all segments registering a growth except crop insurance. The motor insurance -- motor segment also bounced back after 2 quarters of negative growth and registered 7.6% growth in Q3. The commercial segment grew by 17%, and the health and the accident segment by 8.4%. On the overall basis, the industry registered muted growth of 2.5% during the 9-month period ended December 20. As a company, we grew by 2.3% in the third quarter with a strong growth of 82% in the commercial segment and 32% in the health and the accident segment. The regrowth in the motor segment also tapered from 6.6% in the second quarter to 4.3% in the third quarter. Traction in the health business continued this quarter as well. The health and the accident segment contribute to 6.3% of the total portfolio as of December. The activation of the dealerships, IT integration with newly acquired OEM partners and acquisition of agents continue. Our motor-only claim assessment through the radio streaming is stable at 45%. Our investment AUM now stands at about INR 2,881 crore in December with a leverage of 6.6x to the capital. By the way, our AUM in January have crossed INR 3,000 crores. Our profit after tax for 9 months period stands at INR 22.3 crore, adding INR 7.3 crores during the same period. Our solvency margins as of December '20 is 1.81x. With the distribution engine here that claims in the operations platform stabilized, the company is well poised for growth to conclude with the recent budget announcement of a proposed increase in FDI in the mix of 49% to 74%. We remain excited of the opportunity in the sector and the outlook for the company. So with that, I hand over back to the moderator and now me, Deepak Manish and XXKamalXX would be happy to take all. Any questions that you all may have. Thank you.

[Operator Instructions] The first question is from the line of Sumit Bhalotia from MK Ventures.

Congratulations for the good of numbers.

Thank you.

Yes. I wanted more understanding on the asset quality movement. So you think that the GNPL, pro forma GNPL, that they have peaked in this quarter will be coming down from next quarter onwards. So we have seen in the last that trend has been pretty divergent. If I look at your peers' movement, clearly, vehicle finance companies. So can you give us more color on say, how the Stage 2 asset [indiscernible] what kind of [indiscernible] In this quarter-specific to safety assets? And have we dealt the proven buffer that we had? I think our buffer has also come down from [250 to 150]. So in the restructuring overall stress in our restructuring and also, the guidance have also increased a bit. Last quarter, we had mentioned around something around [3%]. And this quarter presentation, you have mentioned to be around 4.5% to 5%. So if you can [indiscernible] guidance on these [indiscernible]

Yes. One, I think your voice was quite muffled, but I understand your question is broadly pertaining to the asset quality, the write-off, the adequacy of the cost provision, the outlook on the Stage 3. So I think it's quite an all-encompassing question on the portfolio behavior, and that is what I will attempt to address. So the region we have said that the Q3 is the peaking of the NPAs, which is the Stage 3 impact, this was the first quarter after the moratorium, that 4 months have gone, September, October, November and December. So therefore, the customers who didn't pay after the moratorium got over, and which is what in our previous quarter call, we have defined, if you remember, as of September, it was INR 1,500 crores to INR 1,600 crores portfolio. And as at October end, because we had our call in November. So we shared the number was about INR 600 crores. Now that number, if you look at Slide #17, the third bullet, we are saying this number is now down to INR 280 crores. So therefore, after the end of the moratorium in August, out of INR 15,000 crore portfolio, now INR 280 crore worth of customers -- portfolio worth of customers are the ones who haven't paid the EMI from September until December. And all this portfolio has already moved into 90 plus. So they have already become Stage 3. And that is exactly what we had given a guidance, that Q3 will be the peaking of the NPAs, and that is what has happened. When our NPLS, if you look at in the same Slide 17, sales 3 has moved up from INR 710 crores to INR 927 crores. Now how do we say that it has peaked and now it is stable. If you look at in the March, our Stage 3 was INR 914 crores, which was after taking the benefit of the moratorium in the month of March. And that number is now INR 927 crore after the entire portfolio has moved up good to the moratorium. And therefore, we believe that now it can only come down and it cannot go up. This is the second reason. The third reason is in the same slide, the first bullet, we have explained the collection efficiency in month-on-month. The first month after moratorium, it was 84.5%, which built up to 90% in October, remained at 90% in November, improved to 94 in December and further to 97.2% in January. So there is a consistent improvement in the collection efficiency, and that gives comfort and confidence to us that now the NPLs will come down and the collection efficiency will keep improving. And now if we go to the next slide, which talks about the restructured portfolio, which is on Slide 18. The total restructuring done by us is about 1.9%, which is INR 281 crores. The important thing here is that while we have restructured the portfolio of INR 281 crores, and if you look at the left side of the table, it shows that Stage 1 is 34, Stage 2 is XX235XX and stage 3 is 12, but we have not altered the staging after restructuring. So while we have given the benefit to the customer of restructuring, we have not recorded the restructured lower bucket in our books. And therefore, if you look at the right side of the Slide 18, you will see that Stage 1 is only INR 2 crores, out of 281, Stage 2 is INR 262 crores, and stage 3, INR 17 crores. So this is based on the pre-restructured portfolio plus the payments made by the customer during the restructuring period. And that's how we have recorded and reported the numbers, where in the middle market. In the table, INR 256 crores at Stage 1, that actually is -- if we take the benefit of the restructuring, which we have not taken. And the third point and the last point here is that when we have restructured the portfolio, we have retained the original provision. And also if both customers who have not paid after restructuring and have moved up in the Stage 1 or Stage 2, there we have made an additional provision of 10%. So in nutshell, out of INR 281 crore portfolio, we have restructured portfolio. We have made a provision of INR 43 crores, which is about [15%]. We show some total of all this give us the confidence that we are adequately provided and we still continue INR 150 crores worth of provision at against INR 117 crores in March '20. And we believe that we will not need to consume this in Q4 entirely, and we will carry over a significant part of this provision in FY '22. I think I've tried to answer the first part.

Yes.

[indiscernible]

Yes. Sir, very helpful. On the restructuring, what kind of restructuring are you [indiscernible] restructuring or extension? What is the exact nature of restructuring?

Maybe our CFO, Kamal, can give a specific response to this question. Kamal, over to you.

Yes. So when we do restructuring, we do not give any debate on our rate of interest. We do not give any top-up loan. We only complete the tenor of the loan.

Okay. And what would that -- what kind of exchange [indiscernible] tenure?

It depends. If it is -- it cannot be more than 2 years generally. That's the RBA guideline. So we're still within the guidelines.

Okay. Sir, one last question under the provision. Any target provisioning, any coverage that we have in mind?

So you see our overall coverage of the ECL has improved to 5.3% in December as against 4.8% in September and as against 4.4% in March. And so far as the Stage 3 is concerned, it is stable at 36.8%, as against 38% in September and 36.5% in March. So the Stage 3 PCR provisioning coverage ratio is guided by the LGD experience that we have vision [indiscernible] given the fact. And what we have seen in Q3, and there is another slide if I take you to, which is the total waterfall of [INR 182]crores NCL that we have debited to the P&L in the year. If you look at the third line, which is a loss on settlement or repo, it is back to the pre-COVID levels at INR 50 crores. And if you see in Q3 of last year, also, it was INR 58 crores. So what we are saying that as a projection, sales and settlement is now almost same at the pre-COVID levels. And also, we have seen that loss on sale or the loss on settlement in terms of percentage also compares same with the pre-COVID levels. And therefore, the LGD rates are guided by that, and we believe that they have not deteriorated.

And to just give another point, Magma writes-off entire ABS portfolio, if it moves to 730 bucket and SME portfolio at 400 -- if it moves to 450 bucket. So to that extent, you will never see that the portfolio spare with us if it is in higher bucket, it is written off. This is not a India's requirement. This is Magma-specific policy.

[Operator Instructions] The next question is from the line of Vibha Batra from FairConnect.

My question is on emergency credit line disbursement. If you can tell me that what percentage of disbursement in current years are under emergency credit line?

So Kamal, would you take the question?

Sure. So our total disbursement under emergency credit line is INR 325 crore. This comprises of INR 110 crore in SME loan book and balance INR 225 crore in the ADF loan book.

Okay. This is for the 9 months current year or only for the quarter?

This is to date, the entire ECLGS.

Year to date. Okay. And this loss on report in relation to the asset value when you repossess, what would be that percentage now?

Deepak, would you like to?

That would be in the range of about 38% to 40% right now.

38% to 40%. And it was similar in Q3 2020 also?

Yes, that's what we mentioned, right? We are back to normalization. We haven't seen any deterioration in the loss rates on the repo [indiscernible]

Okay. Okay. Actually, loss in repo in absolute value, it has gone up sequentially, if you see. But I think that's because you have done more of repo sale, Q2 first. Okay. Would it be possible to give the movement of NPAs and restructured assets, like Mr. Chamria, you have very nicely explained how we know what is vulnerable because there are overlaps now in a lot of cases, Page 2 and restructure. So if you can pick the vulnerable assets and how they are moving quarter-on-quarter, it will be really helpful.

I think what you have to look at is our slide, which shows what is the amount of Stage 2 and what is the amount of state fee you would see that the Stage 2 and Stage 3, which is this is Slide 13, March 31, Stage 2 was INR 1,366 crores; December 31, INR 1,582 crores; Stage 3, INR 960 crores. It is stands at INR 927 crores. So we are more or less in a range at the pre-COVID level, which is March 31 '20. So second question on OTR. We have clearly seen, and Mr. Chamria mentioned it, that the entire OTR spends or we do not take any advantage. So while the [XXXXXXXXXXXXXX]. So whatever is covered in Stage 2 and Stage 3 already covers entire XXstressXX. There is nothing which is there in the 0 bucket or Stage 2 -- Stage 1. Our conservative policy ensures that we do not take any advantage of the OTR, and the so well to bucket at 0 bucket or 1 bucket. The entire train has already moved to Stage 2 and Stage 3. So you do not necessarily focus on OTR separately. It is already part of our Stage 2, Stage 3.

Actually, what I'm trying to say is that there is an overlap between restructured and overdue accounts. So one should not double count. So if you just take a pool of vulnerable assets and then share at the moment.

Excuse me, Vibha, I will explain you. I understand your question. Typically, what I've seen in quite a few reports. If the NPA in a particular organization is 7% and if the restructured assets of 3%, then analysts take it at 7%, plus 3%, 10% is the portfolio.

Precisely. Yes, yes.

That's what you -- answer your question?

Yes, yes. In your case, it is 7. It's closer to 7. So if you take that pool and show the movement coming quarters, it will really be evident, yes.

Therefore, just to put the simple answer. In our case, while we have 1.9% of the portfolio, which is restructured. But as Kamal mentioned and before that, as I drew the attention to Slide #18, we have not restated the bucketing post restructuring. So there are Stage 3 restructuring. And because there is Stage 3 restructuring. So therefore, whatever is in NPA has been reported in NPA, whatever is in Stage 2 has been reported in Stage 2. And therefore, in our case, 6.9% GNPA and 4.5% as NPA already includes your impact of restructured portfolio. That is what I would say.

Yes, yes. Yes. I think this is a good table, and you explained it very well. I was trying to understand this.

I don't know if Manish because they want to add something on to this?

I think Sanjay has wonderfully explained. I have nothing more to add. This is the [XXXXXXXXXXXXXX] but that was a great question.

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

So just I wanted to understand, you are talking about flat AUM in FY '21. So that effectively means a 7.5% kind of a quarter-on-quarter growth in the fourth quarter, which seems quite steep to me. So any comment on that would be helpful and any growth outlook for the next year?

So I think there's some misunderstanding. What I said that a leading rating agency has predicted a modest growth of 6% to 6.5% for the vehicle finance portfolio at an industry level in FY '22. But so far as Q4 is concerned, what we have guided is that we will improve our disbursals. Now that portfolio quality-related issues we have put behind. We are very confident about it. And our endeavor is now to arrest, and this is what the guidance we gave in the last quarter that the portfolio may decline AUM until Q3 and in Q4, almost it will stabilize, and that is what we would endeavor to achieve in Q4. That means our INR 15,000 crore overall AUM will not decline in Q4. And next year, obviously, we will look to grow at, at least 10% to 15%.

Understood. Understood. Understood. And then in terms of your credit cost also, since you mentioned that from fourth quarter, you are expecting like the third quarter, the NPA has peaked out. So by when you are expecting your credit cost to also normalize? And what will be the new normal of the credit cost? Like post COVID, so where do you see a new normal in terms of credit costs?

So one, last year, our credit cost was at about 3%. This year, for 9 months annualized is 3.5%. We expect this to be in the range of about 3.3% for the year as we end March because the fourth quarter, we expect better performance, reduction in the NPA reduction in the NCLs. And the new normal, because we have now stopped doing the non-focused business of new car in the new CV and our share of the mortgage is increasing. And the tractor in the used assets. So therefore, the new normal of the NCS should be between 2.5% to 2.75%.

Okay. So 2.5% to 2.75%. So that's what we can start from first quarter, right? That's what we can expect, like the normalization of your credit costs may start from first quarter of next year?

No. I don't think we will be able to comment on that right now. Right now, I think that guidance we will give in the next quarter call once we end the year and we have done our workings. But I understood your question as to what is the new normal post COVID, then I would say new normal post COVID based on the portfolio composition should be between 2.5 to 2.75.

[Operator Instructions] The next question is from the line of Shreepal Doshi from Equirus Securities.

Sir, my question is with regards toward housing finance business. So then what is the normalized leverage level that we are comfortable with? I suppose, currently, it is close to 4.5 to 5x. So what is the leverage level that we are comfortable with in that segment?

So can I take this question?

Yes, yes, please go ahead.

So I think we believe that 4 is a good leverage level to have. And as we already -- Sanjay already given in his strategic mix that affordable housing business is in the process of capital raise. So we are very conscious of what we're doing, and I think these 2 would tie up your answer.

And the second question for the same segment. So I understand like we are in the smaller ticket size between 9 to 13 and below 15 like ticket size. But we have seen that even in this segment, the competition is increasing. So are we seeing any pricing competition playing out there? And what would be the normalized ROA, ROE profile that you are looking at this business?

Okay. There are quite a few questions all put together. Let me slice each one of them. So in terms of pricing pressure, while it may look like that there are plethora of affordable housing finance companies. But if you really see the markets are very localized in terms of distinctive national character, there are far and few players. So in terms of localized competition, the intensity, by and large, remained the same. We have not seen any abnormal trend or pricing pressure. That's to answer your first question. Then looking at the normal ROA and ROE, you can do your math, this is leveraged, but our sense is that this business on a steady-state basis should eventually reach towards an ROA moving up, graduating from 2.5% to 3%.

Okay. So sir, I mean, since you said that the competition is broadly localized. So are we seeing a vacuum created because of smaller NBFCs, the -- I mean, the smaller AUM or smaller NBFCs are still struggling, and therefore, we are able to gain that market share there?

Well, I can say that there is no letting up on the demand and irrespective also though far and few players are, 1 or 2 player, not really active. Has that changed the market dimension? I feel that the size of the opportunity and also our landscape, I think it's basis our installed capacity. We feel that there's discomfort. There is not such a game or a shakeout that you've seen a large space being created. To answer your question, it is it's probably very mild impact and it is yet not played out.

The next question is from the line of Abhishek Murarka from IIFL Capital.

Congratulations for the quarter and the kind of provisions you have made and the great explanation you gave earlier in the call. So just moving on to the insurance business. So your tie-ups, you've mentioned that you've tied up with a leading NBFC. So if you can just talk a little bit more about this tie up, what products. And the other question on insurances in terms of combined ratio now on an incremental basis, you are running at 117%. What -- whereas 9 months, this is 120%. So clearly, you're improving that. What is the target for '22? Where do you think by end of '22, you should get or what are you planning for?

Abhishek, it is paradoxical that this is the first time in many quarters, that there is a question on insurance and our CEO, Rajive, is not on the line. But I will attempt to answer the questions to the best that I can. First is that we have a very proud set of tie-ups with the largest OEMs in the country, be it in the passenger vehicle, commercial vehicle, tractors XXto risersXX. And among the specific set of companies, whether it is microfinance, gold loan, et cetera, and even in the vehicle financing. So today, for a company our size, the tie-up that we have, we can actually do much, much higher amount of business. And that is the reason we were looking to raise growth capital. And as I mentioned in our strategic initiative that we are now pretty close to achieving closure on the same. And in terms of the combined ratio, we are now on a declining trend. And while we are at about 116%, 117% after giving impact for some of the for the motor od loss resales aggregate and the TP loss resell that we did, I mean insurance. On a normalized basis, already, we are down to about 113% in terms of the combined ratio. Our endeavor is that in the next 3 to 4 years' time, we would like to take the combined ratio down to about 103% to 104%. And in terms of the growth that we are witnessing, it is coming largely now from the health because the Board has mandated. The management team that we would like to see if we can grow the health business from a low single-digit to double digit. So already, we have crossed 6%. We added about 6.3% or 6.5% now. And I think soon, maybe in the coming couple of years, it should touch about 10-odd percent. And here also the tie-ups with the lenders on selling the bundled product on the health insurance also is helping grow the volumes. I don't know if I've answered all your questions on insurance.

Sure, sir. And one question on the ABF business. Now this repo activity, typically, when you repossess and the vehicles come to you, you would be sort of -- you would be seeing some settlement by customers, and then you proceed to sell those vehicles. So this rate of settlement after repossession, has that improved?

Yes, I'll take that. Thanks. It's a great question, and it's one of the most important parameters that we measure in the ABF business because our endeavor is not to really repossess everything and reset. The objective is to -- for the customer to actually come back, make these payments and release the vehicles. In the last quarter, we have seen a significant improvement in terms of the release percentages going up. We stand at about 65% on the release percentage side, which is a very, very heartening sign, which means that there is cash flows returning to the customer, and customers seem to be wanting back to deploying their assets. So that is where we stand at. Q4, we expect an even better performance in terms of the release of the assets after repossession. And that is the sign of the economy coming back to model for us.

Historically, sir, what is the highest release percentage that you have reached? And what is an average? Just a ballpark.

So ballpark, we look at about 75% release is what we want to maintain it at, and we are already at about 65%.

And the highest would have been what, like just highest ever or highest in the last 5, 7 years? .

So that 75% is a number that we would have moved around with most of the times.

Okay. Because it's so cyclical. So at the peak of the cycle, it will probably be 75%. But at the -- profit would probably be, I don't know, 40s or 50s. So that's why I was looking for an average also.

So even in the trough for us, we have never hit a 40 kind of a number. It was only during the [indiscernible] beginning of the quarter where we saw that kind of a number happen. But like I said, it quickly came back to a 65 as we ended the quarter. And in January, also, we've seen improvement. So we are happy with the way we progressed on that front. But we were worried when it was about 45 in the beginning.

And in terms of number of vehicles being repossessed, that has also come back to pre-COVID levels or there you're still going slow?

No, no. We are at pre-COVID levels now. We were obviously not doing as much because of the economic situation, and we were not really wanting to put additional stress on the customers. But as we now entered December and in January, we are at the pre-COVID levels now.

Great. And sir, final question, sorry, for multi questions, but just 1 more question. On the ECLGS portfolio, while you have given disbursements, do you see any kind of further stress in that pool? Or customers where you think that you might need to either restructure -- well, you can't -- you may need to restructure or it may slip into NPA in the pool? And any reasons that you can catch why there would be additional share?

So is this question specific to the India business? Are you asking on an overall basis?

No, both. So ABS and the SME portfolio also. I'm just trying to see whether there is further stress in the ECLGs pool. Because one of the banks have actually said that they had to restructure further into the ECLGS pool also. I'm just trying to see what kind of stress or lack of stress you are seeing in that portfolio?

Can I take that question, Deepak?

[indiscernible]

Yes. So we started ECLGS from the first quarter of the current year. And first quarter and second quarter, we have done roughly about 60% of the INR 325 crore, which we are talking of, and the balance has happened in the current quarter. We do not see any significant stress in the first quarter or in the second quarter. And when we had this discussion, our Board looked at especially the entire CLVS portfolio, parent portfolio, how it is behaving. We did not see any significant stress in that portfolio. And therefore, we would believe that our selection of ECLGS customers has been prudent. We have not gone overboard. And of course, we are definitely not managing our portfolio through this ECLGS scheme. That's a category consistent from our side. This will not give any surprise. This is just business as usual. And our duty in the current difficult times to support wherever we could to the good customers who had potential to do good business, but needed money and government came out with a scheme and we supported our customers.

I'll just add to what [Helash] Has mentioned on ECLGS, that for SME business, specifically, it was also an opportunity to look at customers who were good quality borrowers, but unfortunately, it could not get supported by their bankers or their other NBFCs in a way, it was cherry picking of good portfolio from the market as well as our own customers our philosophy was not to put good money after that. So I think we have stayed very conscious on Slide 15, you can examine the numbers. The portfolio behavior, though early, is giving such indications.

I think the way the ECLGS was also implemented for ABF business is very important to understand. We did not just disburse the money because the customer was eligible. Each and every customer that the money was dispersed to underwent the due diligence on the credit side, under 2 parameters. One was in terms of ensuring that the asset was still with the customer and in good condition, and second was a line of sight of this cash flows returning to the normalcy. So these 2, 3 parameters were looked at before any disbursal was made on the ECLGS.

The next question is from the line of Kunal Shah from ICICI Securities.

So on the off balance sheet, okay, across the industry, we were seeing that there was some demand for the portfolio and there is a higher amount of balance sheet or assignments, which was happening. So how do we look at them in terms of RMS, it's still remaining broadly stable so across our businesses, if we can highlight, maybe if there are opportunities and our balance sheet could be the other way of maybe the borrowing source, which we couldn't want to tap even the demand which is there in the industry. So what could be your -- or maybe your follow-on that?

So Kunal, I think sometime back, we shared that our policy with regard to the PTC or XXABFXX will be more from a treasury standpoint than anything else. And given the surplus liquidity, which we have had in the last 3 quarters and consistently over INR 2,000 crores, INR 2,500 crores, there has not been a XXneat fedXX for doing the PTC already. And so marginal amounts we have done. In fact, to that extent, however, this year, overall volumes of this is lesser than last year.

Okay. So I think it can continue. So the balance sheet proportion will very much stay more or less kind of a flat.

Yes, I think it will remain in this range. It may go down or go up a little bit. But it will be either ways, but remain in a very narrow range.

Sure. And secondly, in terms of the collection efficiency we have highlighted, the overall increase, which has been there from INR 84.5 crore, most like INR 97.2 crores now. If you can broadly suggest in terms of the product segment, any place where in we are seeing much better-than-anticipated or much better than industry average collection efficiency and somewhere we would be lagging apart from the SME. You definitely highlighted that it seems to be relatively more stressful. But besides that, within the product segment, if you can highlight how the collection efficiency is standing out.

So maybe I can give an overall view and then Deepak and Manish can respectively touch upon the respective product segments. See, in every product segment, you have a range of collection efficiency across the place in the industry. And it's not a reflection on whether company is better or worse, because it is a reflection of the customer segment that we cater and the type of asset that we cater. So for example, if I take mortgage, we are catering in the affordable segment. And within affordable, we are catering to the self-employed segment. So if one is catering to the salaried segment versus the self-employed segment, there would be a difference. So one needs to compare apple to apple. So if we compare our own performance to the past, there, I think we are doing pretty well in SME or mortgage or even in the APS. Similarly, in ABF, for example, if you're doing to the fleet operator versus you are doing to the single truck owner or a single taxi owner, then the collection efficiency percentages would vary. And we are confident, we have reasons to believe that the customer segment and the product segment in which we are operating, we are pretty much at the peak rates at the top quartile of the top 10% in the industry in terms of the performance. Now I'll leave it to Manish and Deepak in case they would like to add something to this.

So on the ABS front, we've touched about XX98.9XX% collection efficiency in January, which if you look at Jan '20 numbers, would be roughly around 99-point something. So we are pretty much there on that front. And I think that is a better measure for us to look at rather than looking at peers because like Sanjay mentioned, depending upon the product category and within the segments within those products as well, collection efficiencies should vary. So from that standpoint, the ABF business is extremely comfortable is what I see. And January has been the one month that we have seen the swing happen in the right direction for us.

And this would be including the arrears as well?

This will be including, sorry?

Arrears, maybe you have passed arrears well?

Yes, of course, of course.

Okay. Okay. Sir, maybe a few of these guys are reporting more than 100-odd percent, okay, including the arrears, maybe 105, 110 as well. So maybe I think if we knock up arrears from this, then how purely it would be in terms of, say, the collection to billing?

Yes. Again, this would be getting into too much of analysis because different organizations, compute collection efficiency in different ways. When you reposition sales or reposition sectors sometimes some people also include that into the collection efficiency, whereas some don't. So I think it all depends upon how you calculate. But as long as you maintain consistency in your own definition and then report the numbers that how it is moving month-on-month. I think that, to me, is the true measure of the trend, whether it is improving or deteriorating. So in our case, when we said that it was 84.5% in September, going up to in 94% in December and 97.2% in January. It is on the same consistent definition.

Sure, sure. This was helpful. And lastly, in terms of, say, the rundown and overall the disbursement, so still maybe when we look at it overall in terms of the rundown, given the improvements in the collection efficiency, finally, we have seen some kind of a decline in the overall AUM. And in terms of the focused business, it is like INR 200 crores to INR 300 crores up. So now finally, maybe should we expect that, okay, collection efficiency would also stabilize and whatever incremental disbursements are happening quarter-on-quarter, that should ideally add on to the AUM growth next quarter onwards? So you said it should be more or less flat, but just trying to get into it because I think now further improvement in collection efficiency, it should be more or less stable. So if there is any delta in disbursement, it should reflect in AUM growth, which has not happened in this quarter.

So our top priority, if I look at the waterfall, first was to have a normalized year in terms of the XXNPA and NCLXX despite COVID. And now having completed 10 months in the year, we are confident that we will have a normal year ending in terms of GNP and NPA and in terms of the NCL. The second priority was in terms of the strategic initiative, pivoting the business towards the higher yield and the higher NIMs, that also like it is now at 58%, which will increase to 85% by end of next year. And overall, our NIMs, which is currently at about 8.5%, 8%, will actually cross 10%. The third one was also the OpEx reduction, which has now gone down to 3.4%. We have also given the guidance that it may increase by another 30 bps due to the variable expenses coming back as we return to normalcy. So with all of these things, now our priority in Q4 is to arrest the decline and maybe have a flat AUM compared to Q3, and the next year start growing where we have given that we would like to grow at 10% to 15%. I think Manish wants to add something to this. So over to you. So we are all digitally connected. And so I can see Manish wanting to say something. Over to you.

So I just wanted to only say that even if you look at this quarter's deck, all our focused products across the sector, we are either stable or growing. It is the defocused products, which have contributed to decline in the last quarter. So in the net sum game, while it may appear a declined, but I think we are now relatively well focused I must say in a focused product category to record growth. And I think we already mentioned that in the housing business, we have seen a growth 16%. In SME, there is a clear rebound trajectory is on. And also, if you see these slides also on ABF, the core focused products, there's a clear stabilization with established set of entity level, I think we are quite reasonably comfortable where we are. And whatever is non focus, that anyway is a core -- is a strategy to run it down to be more capital efficient.

The next question is from the line of Sachit Motwani from Param Capital.

Congrats on great set of numbers. I just had a question on your capital raise in the subsidiary. Can you indicate some timeline with respect to capital raise, both in housing and the general insurance subsidiary?

So Sachit, as I mentioned, even in my initial comment that so far as the insurance is concerned, we had started the process much earlier during pandemic slowed down. And last quarter, we said we had received interest from quite a few bidders, and we were evaluating. And now we have received the definitive interest, and I think we will have this closed out in the foreseeable near future. So far as housing is concerned, that process we launched from September. And given the affordable housing being the flavor of the season, we have a fair amount of interest being expressed. And I think in the next few months' time, we should be able to also go the same path as the insurance.

Okay. Okay. And you mentioned about 12% to 15% AUM growth, like next year onward is something that you are looking at. So this would be only for your focused products? Or this should be on an overall AUM basis?

In fact, it will be slightly higher in the focus product because our deep focused products will have a negative effect on the AUM, and it will go down, and we are not adding. And which used to be about 40%, 45%. So therefore, we'll have to grow faster in the focused products than even 15% so that on an overall basis, we will have between 10% to 15% growth in the next fiscal.

Due to time constraints, that was the last question. I would now like to hand the conference over to the management for closing comments.

Yes. So thanks a lot for very active participation by all of you. And it has been a pleasure for me, Kamal, Deepak and Manish, to try and answer all the good set of questions. And look forward to you in the next quarter. Thank you very much.

Thank you.

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