Poonawalla Fincorp Limited (POONAWALLA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the magna -- Magma Fincorp Limited Q4 FY '20 Results Call, hosted by Ambit Capital Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Udit Kariwala from Ambit Capital Private Limited. Thank you. And over to you, sir.

Thank you so much. Today, for this call, we have with us the entire senior management team at Magma Fincorp. We have Mr. Sanjay Chamria, Vice Chairman and Managing Director for the group. We have Mr. Kailash Baheti, Group CFO; Mr. Rajive Kumaraswami, MD and CEO for Magma HDI General Insurance; Mr. Manish Jaiswal, CEO for the Magma Housing Finance and SME business. And we also have with us the Investor Relations head, Mr. Jinesh Shah. So without further ado, I hand over the call to the senior management team at Magma. Thank you so much. Over to you, sir.

So thank you, Udit, and good evening to all of you, and thank you for joining Magma's Quarter 4 FY '21 Results Conference Call. Before I highlight the performance for the quarter, I'd like to express my deep gratitude to all the employees of Magma, who have gone beyond the call of duty during the year. I'd also like to say that our management team remain hard to keep employees and their families safe during the second surge. I'm hopeful that we will overcome this devastating pandemic soon. FY '21 was a year of unprecedented change in the way business is conducted. It was a test of resilience of all variables of the economic system, from household, to corporate, to governments. The country faced big economic contraction, and the start of FY '22 seems to be headed in a similar direction, with the second wave hitting us harder than the first one. In these extraordinary times, we at Magma have been fortunate to have become a subsidiary of Rising Sun Holdings, a company owned and controlled by Mr. Adar Poonawalla. Poonawalla Group has ambitious plans, whether it's foray into financial services sector and has injected fresh capital of INR 3,206 crores from Rising Run Holdings. Additionally, the existing promoters have injected fresh capital of INR 250 crores, making it one of the best capitalized NBFCs in the industry. The Board will be headed by Mr. Adar Poonawalla, who's been appointed as the Chairman of the company. In line with Poonawalla Group philosophy, we, at Magma, will serve the needs and dreams of the nation. We see a huge potential in the financial services space in India. The company will be a professionally run organization under the new leadership team, and will be fully supported by the existing leadership. Mr. Abhay Bhutada is appointed as a Managing Director of the group effective 1st June 2021, that is tomorrow morning. Mr. Vijay Deshwal has also been appointed as the CEO and will be joining by first week of July '21. The management team will be further augmented with highly qualified and experienced professionals from reputed financial institution for various management position. These individuals are expected to join by second quarter of FY '22. I also welcome 2 new partners in Magma HDI General Insurance franchise, which saw a strong investor appetite. The total deal size is INR 525 crores, comprising fresh capital infusion of INR 250 crores and the secondary served by the existing promoters of INR 275 crores. These are all subject to regulatory approvals. The new investors are ICICI Ventures, Morgan Stanley, Cyza Chem Private Limited, a group of -- a Poonawalla Group company, and 2 family offices. This deal will enable Magma and its group companies to comply with the RBI guidelines on the ownership of promoter groups and insurance companies, besides providing growth capital to Magma HDI, enabling its expansion and improving the profitability margin. Magma Fincorp has today infused INR 500 crores equity capital in Magma Housing Finance, 100% subsidiary, shoring up its network to around INR 1,000 crores, resulting in its leverage going down to 2.5x and capital adequacy improving to 58% as on 31st May '21, which is today. It will enable Magma Housing Finance to pursue its growth ambition, and expand its customer universe, and also benefit from the lower cost of funds and expected improvement in the credit rating. Magma Fincorp and Magma as a group is embarking on Magma version 2.0, a strong growth story from FY '22 on core strategic pillars of customer centricity through offering multiple -- multi-tier customers proposition, which we call as PTCS model of price, turnaround, convenience and service. The strategic advantage which Magma 2.0 has positions it to be a unique NBFC due to: stronger parentage of Poonawalla brand and the large capital base; esteemed Board and highly experienced professional management team; robust risk framework; product strategy to focus on select customers; digital focus and best-in-class digital technology and analytics; operating efficiencies through enhanced digitization and rationalizing branches; asset quality through conservative provision buffers and accelerated write-offs. The above strategic advantage, along with significantly reduced leverage, improved ALM profile and prudent asset quality buffers shall lead to further sharp reduction in cost of funds. This can have a strong positive impact on all the stakeholders, such as employees, lenders, customers, investors and also the regulators. We are now looking to the future to bring in a modified product mix and a large customer segment. We will continue to serve our customer franchise, but also add credit-savvy customers, and we shall now have the benefit of lower cost of funds and abundant liquidity, which will give us the benefit of the scale to accelerate healthier growth and result in superior ROA and the ROE. Now coming to the year gone by. As the external environment was unpredictable, we continued our focus on strengthening the balance sheet through superior management of collection, control on expenses and maintaining prudent provision buffers created during COVID wave 1. The superior efforts on collection -- health collection efficiency improved month-on-month post moratorium. And from 84.5% in September '20, it reached 101.8% in March '21. Quarter 4 collection efficiency was nearing normalization at 99%. However, the trends reversed, and collections started to show the stress. And in April '21, the collection efficiency was at 84.3% due to COVID wave-2 induced lockdowns across geography. And May '21 is also trending lower than April '21. These extraordinary times call for proactive measures. So Magma has its practice, had built adequate provisions to absorb any shocks from COVID first wave. Further, going by the vision of the new promoter, Rising Sun Holdings, second wave uncertainties, and with the absence of the regulatory guidance, which was present during the first wave, the company management has taken a 2-step measure to strengthen the balance sheet and protect it from these uncertain shocks and future waves, if any. The company has designed one of the most conservative provisioning policies in the industry. It has been first decided to introduce 100% provisioning and write-off of all the accounts at 180-plus DPD in vehicle financing from earlier 730-plus DPD, 90-plus DPD in unsecured SME lending from the earlier 450-plus DPD, and 730-plus DPD in affordable housing. All of which has resulted in an additional onetime impact of INR 274 crores in Q4. Second, considering the unknown risks from COVID wave, the company has additionally created management overlay provision of INR 621 crores to take care of any further impact on the book, causing the provisioning coverage ratio to improve to 68.6% compared to 36.5% last year. However, it is expected to normalize in FY '22. Significant part of this provision is made in the 0 to 90 bucket. ACL's provisioning in 0 to 90 bucket stands at 7.2%, which is the highest in the industry. And overall, ACL stands at 9.5% of the total assets. With comfortable liquidity of INR 2,000 crores and superior treasury management, FY '21 cost of funds declined by 36 basis point over FY '20 and 62 basis points in quarter 4 of FY '21 over the same period last year. It is expected to decline further with the capital infusion and strong parentage. With the capital infusion, our liquidity buffer as on 15th May 2021 stands at over INR 5,000 crores. OpEx was contained lower by 20% in FY '21 over FY '20. And OpEx to AUM ratio, which was 4.1% in the previous year, ended at 3.6% in FY '21, though some increase is expected as the business would resume normalcy. While all the above measures have resulted in a loss before tax of INR 749 crores for FY '21, on a normalized basis, the PBT would have been INR 146 crores, which suggests a decent operating performance in a difficult year. Magma now has industry-based gross stage 3 assets at 3.7%, which is down from 6.9% on a quarter-on-quarter basis, and net stage 3 assets at 1.2%, down from 4.5% on a quarter-on-quarter basis, which is a drop of 330 basis points in the net stage 3. The capital adequacy on a stand-alone basis stands at 20.3% as of March and adjusting for the subsequent capital infusion. In May '21, the calculated capital adequacy now stands at 69.8%. The company now has one of the strongest balance sheets, with lowest leverage at 1.3x, post adjustment for the capital infusion of INR 3,156 crores in May '21 and industry-based capital adequacy, net NPA and prudent provisions. This, along with the strong parentage, brand name and best talent, I'm confident the cost of funds will also go down to the best in the industry. We are looking forward to an excellent growth story in all of our businesses under the Poonawalla brand name. With that, thank you very much for your patience listening. And now me along with my entire management team are happy to take any questions that you all may have. Over to you, Udit.

[Operator Instructions] The first question is from the line of Akshat Jain from Paragon Partners.

Sir, first of all, congratulations on the merger. I have a few questions. Sir, you have mentioned that a new set of management team will be joining. So you said that Mr. Vijay Deshwal will be joining. Can you tell us who all are the other guys who would be joining? And my second question would be that, you mentioned that you will be forbearing into further products. So is there any specific products that you guys are looking at?

Sure. What I suggest, we have also uploaded the investor deck on the website and on the stock exchange. So let me first take you to, I think, Slide 4 or something. Roshan, can you bring Slide 4, which talks about the new leadership team. And there, Mr. Abhay Bhutada has been appointed as the Managing Director and Mr. Vijay Deshwal has been appointed as the CEO. Mr. Abhay Bhutada takes charge tomorrow morning. And Mr. Vijay Deshwal will take charge by first week of July. In addition to this, there are at least about 10 to 12 other leadership positions for which the offers either have been rolled out or are in the process. And therefore, we expect all of these positions to be filled up by quarter 2 of this year, which is by September '21. And this will pretty much complete the entire deck. And this is what we had announced even on 10th of February that whether it is COO, same retail business head and various other positions that we are looking to fill up. Coming to your second question, I bring you to Slide number -- on the new products, slide number -- Can you go to that? Yes, Slide 12. There, what we are saying in terms of the new product, there are some products that will get launched immediately, which is loan to professionals and the personal loans. Now these are the 2 loans which Poonawalla Group were already doing in the -- their company, Poonawalla Finance Private Limited. And as you know, as a part of this deal, Magma will also acquire that portfolio, which is one of the best-performing portfolios. And they have a policy of write-off at 85-plus DPD. And most of the contracts are in the 0 bucket only, and that's roughly about INR 1,000-odd crores. So these are the 2 products which will get immediately launched once the technology integration is over. And then right now, we are doing the affordable home loan. So now with the lower cost of funds and additional INR 500 crores infusion into the housing finance subsidiary, we'll also venture into the non-affordable home loans, which is the mass affluent customers in the metro and the large cities also as well as the tier towns who would go for the home loan which are non-affordable. And then third is the secured SME loan, which currently we are not doing so much. We are doing affordable LAP. But in the SME segment, where people have a requirement of between INR 25 lakhs and INR 2 crores, that LAP we are not doing. So again, on a chosen basis, we will look at doing those products. So these are the 4 new products that will get launched immediately. And also before the end of the year, that is before March '22, there are 3, 4 other products also which will get launched, like the consumer durable, medical equipment, machinery loans and merchant cash advance. So these are the 4 other products also which will get launched. And overlaying all of the existing as well as the new products, there will be a digital platform for sourcing business and servicing them. In addition to that, out of the current product range that we have, certain products also are being discontinued, which is the used truck and the used construction equipment and the tractors and the auto lease. So this is how the product strategy will get refined and it is adequately covered in Slide #12.

Okay. Sir, another question is for the year FY '22, what is the estimate of provisions that we have? How much provisions can we look at?

So we have -- see, what has happened is that so much of capital infusion that has happened, we decided to go for a very conservative provisioning policy and a very stringent write-off policy. So that the entire culture within the organization would be to ensure that you have the best customer selection because now you have the benefit of the lower cost of funds. As a result of that, the total provisioning, and that is excluding the write-off of INR 274 crores that we have done, I think it's about INR 1,192 crores, say, about roughly INR 1,200 crores that we are carrying, which if you calculate on the total book, it is 9.5%, which is to my knowledge the highest in the industry.

The next question is from the line of Rajesh Kothari from AlfAccurate.

Sir, my first question is, I think in one of your slide, you mentioned that you're planning to become top 3 NBFC for consumer and small and medium business finance. So I think there are 2 segments. Consumer, of course, it is a very broad term, and SME business finance. So how do you quantify this when you say to be among top 3?

So this is the vision for Magma version 2.0. And this is a 4-year vision, which has been put out starting now and going up to FY '25, which means by March 2025. And up till now, Magma was positioned as a MSME lending and affordable mortgage company. But now with the change in the management and the change in the shareholder with Poonawalla Group coming in and the lower cost of funds, there is a change in the product and a customer strategy. And it will now be positioned as a consumer as well as the small and the medium business finance company. So when we talk about consumers, then we talk about consumer durable loans, we talk about EMI cards, we talk about personal loans, and we talk about loan to professionals. So these would come under that category. Whereas when we talk about the small and medium business finance -- and also the car loans. So small and medium business when we talk then it is the SME lending, both secured and unsecured, then we are talking about medical equipment. We are talking about machinery finance. We are talking about merchant cash advance. So these are all the loans that would qualify under the small and the medium business finance. So these are the 2 -- there will be a very huge customer-centric approach, and therefore, one, on the consumer side, the other, on the SME side, these are the product ranges that we have, one, which will get launched immediately, and the second one, which will get launched before end of March 2022. Now when we talk about the top 3 NBFCs, this is the aspiration and the vision that, when you don't have the limitation of capital, where you don't have the disadvantage of a cost of fund compared to the largest NBFCs in the country or even a bank, then you want to grow faster and you want to gather market share. And there, the branch network that we have, aided with that -- the digital lending platform in which the Poonawalla finance team already has an experience, it is one of the youngest NBFCs, which built up a portfolio of almost about INR 1,400 crores completely doing digital, in fact, from 8 or a 9-branch network, it was doing more than INR 100 crores of lending till February 2021, which is just before the lockdown which happened. So therefore, it is in terms of the AUM that we aspire that we will grow and become very large in these 2 product segment -- customer segments.

So in your opinion, these 2 customer segment, the -- within that, whichever buckets you are planning to have a strong presence into. What is the total size of that, I think, in terms of the, say, #1, #2, #3? Who would be #3 in your opinion? And what will be the size?

So rather than getting into specific of that on naming the other companies, I think what we have mentioned in the same slide, which is Slide #21.

Yes. 3x current AUM.

The accelerated growth that we are looking at, given our current AUM at about INR 14,000-plus crores, we are looking at about INR 45,000 crores, INR 50,000 crores AUM by March '25, and focus on these 2 customer segments. This is basically what we are looking at.

Okay. And sir, since you talked about the growth, AUM, and that slide also mentions about cost of fund, about 200 bps reduction, and net NPA below 1%. So basically, when you go to 3x current AUM, what you think will be, #1, your leverage? And #2, one slide, I think, which is probably is missing in the press release, sir, what is your view on the cost-to-income ratio? And how you plan to improve that over the next 2, 3, 4 years? And last but not least, what will lead to ultimate to ROA and ROE over a period of 3, 4 years?

So you see that till now -- and I mean, we have experienced this in the last few years with the liquidity crisis that the -- because of the lack of strong parentage and the capital base, the cost of funds has risen to about 10.06% in FY '20, which has come down by 36 basis points for FY '21. Still, we have a good 150 to 200 bps disadvantage to the peer group, which is operating in the same segment. And that makes us uncompetitive and also results in the adverse customer selection. So therefore, what we are saying that now with the leverage, which in the parent company, which is Magma Fincorp, is at about 1.3x, and Magma Housing, it is at about 2.5x, makes us possibly the lowest leveraged company in the sector. And with the capital of over INR 6,000 crores in the parent company and over INR 1,000 crores in the mortgage company, it positions us very well to seek lower -- benefit of the lower cost of fund: one, because of the leverage and the capital adequacy; and 2, because of the brand name and the parent support. This we believe then should help us reach the best cost of funds in the industry. And we believe that the best companies have the cost of fund which would be anywhere between 7% to 7.5%. So this is where this comes from. And when this happens, this will also accelerate the growth rate of the company because, right now, we are constricted in the customers who we can service. Now with this kind of cost of funds, like we said in case of housing finance, we can cater to mass affluent, which actually look for the better rate and also superior service, similarly loan to professionals or in consumer durables. So all of these products that we are talking, where you are competing with the best and the brightest. And that you can do only if you have a strong analytics and the digital engine as well as the lowest cost of funds. So this is how it will happen. Now in terms of the cost to income ratio, I'm afraid, right now, I'm not in a position to share with you. But I guess, over the course of the quarter, you will have a chance to interact further, and we will be able to provide more detail.

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

Congratulations for the [old league]. Sir, my question was with respect to the product bouquet that we are sort of expanding. So how are we -- what is the thought process on the branch expansion side and also on the employee base side? Because these products will require a completely different skill set and also the underwriting processes will be very much different than what we've been inherently doing. So if you can just throw some color on these lines.

Yes, Shreepal. Very apt question. And you see, again, this is where the -- this merger between the Poonawalla Finance and Magma brings about the strength of both the organization. So Magma has had a traditional strength in distribution network, branches, collection and those kind of things. Whereas in Poonawalla Finance, the strength lies in the digital, the risk analytics and sourcing the customer digitally. So therefore, combining these 2, and that's where I shared that loan to professionals and personal loans being done digitally through tie-ups with various associations and industry bodies is something which Magma didn't do. And therefore, that is what will get launched immediately. And you are right in terms of the skill set that you require is very different. And that's well when I mentioned that 10 to 12 senior leadership positions, we are looking to fill up and either offers have been rolled out or are in the process. And we expect the people to come on board by September '21. So there, we are looking at subject matter experts, be it on the digital engines, be it on the risk analytics, and these areas and on some of these products also. In terms of the future strategy on the branch and on the people, I think we are looking at, one, with the superior cost of fund and the digital, a complete 100% electronic mode of collection through the e-match. Right now, we have a significant part of the team which is actually engaged in the field connections, door-to-door visiting customers every single month. And almost about 40% to 50% of our 5-lakh customers, we have to collect in cash. As opposed to that, now the lending will be done where there will be 100% e-match, and that is also what will bring down the operating cost, because then only in case of bouncing, you need to go and contact the customer through the telecalling and then personal visit by the field executives. Second, in terms of the branch network, you see the world is now more moving towards the branch-light model? Because, again, now even in the tier towns and the interiors, people are very savvy using the mobile phones and the digi locker to provide their KYC and do the wet -- dry signatures to be able to take the loan and also service the installments through the electronic medium. So I think going forward, with the kind of growth that we are looking to achieve, the branch and the employee growth will not happen in the same fashion. And that is where the benefits of its scale will come in and the benefits of technology will come in.

Okay. Sir, my second question was with respect to our -- the non-affordable housing loan product that we're launching. So that will be part of the housing finance subsidiary that we have. So then the business model of the housing finance company will also be changing. And the thought process of 2.5% to 3% ROA might get changed. Is that a fair understanding?

So what I will do is I will let Manish, who is the MD and the CEO of the Magma Housing Finance, take the question with regard to the customer segment and how we are proposing to do that. And then related to the ROA part, if there is anything missing, then I will take up. So over to you, Manish.

Thank you, Sanjay. So let's keep it simple. To begin with, what we have, we will preserve, we will develop. And the important thing with this development in the organization is that Magma Housing Finance has now got 2 things: cost of funds and deep credibility, which are absolutely essential in the mortgage space. With an expected much lower cost of funds, and we start in the range of 200 to 250 basis points, our ability to cater to contiguous segments of salaried or customers with better credit rating significantly expands. And not only this, if our cost of fund indeed, we are able to get at sub-7 levels, we would certainly explore our strategy. We need to refine our model. There could be 2 engines of growth: one, which is completely affordable; and second, which is completely prime. So these are our development to the organization, which will take its own time for incubation. We have to look at how we can leverage our combined distribution in the best possible way. So this is an early start. I will not have all the answers to your questions, but the direction is very, very clear, that given cost of funds and deep credibility and from whatever we've already built up a franchise of almost INR 4,500 crores, and having grown by 30% for last 3 years CAGR, it does seem to me that we can now look at a much more sharper growth and a much more qualitative growth by developing into contiguous segments.

Thanks, Manish. So Kailash, do you want to take up the remaining part of this question?

Sorry, I think the only point which was mentioned was non-affordable LAP. Where will it be done? And there, I think, while Manish mentioned, but non-affordable LAP or SME LAP, you would be...

So Kailash, if I can answer that question, the SME LAP is a cash flow-based LAP which could be a higher ticket size, and therefore, while it looks like LAP, it is actually -- LAP is property, just the collateral and security. So what we do right now on LAP is a 10 lakh, 12 lakh ticket lakh -- ticket size loan, which is really non-affordable below the GST-paying threshold of both companies. As you graduate into a better cost of fund structure, your ability to look at more organized customers with better balance sheets, and therefore, look at cash flow-based lending, there collateral is their -- residential or mortgages is a collateral. So those segments open up, and that is the reason if you see that is where we can immediately start going. We anyway have a very rich SME business, which is dealing with unsecured loans, the same sort of customers who are -- who will probably have collateral and they're sufficed to say they don't have adequate bank limits can be also our clients. So this is something where we can get started in this year itself.

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

Yes. So firstly, in terms of this entire transitioning, okay, if I broadly understand, I think one of the key levers to this entire scale-up would be the cost of fund advantage, okay? So just trying to gauge in terms of, say, if Poonawalla had almost the Poonawalla Finance had, the INR 1,400 crores of the portfolio, we had INR 14,000 crores, 15,000 crores. So was is like Poonawalla Finance was more in terms of maybe getting the processes, systems, digitization in place and now it is prepared for the scale-up, which will add-on to the growth? And for us, largely, and the way we have been in the transitioning phase for last 3, 4 years, in fact, the cost of funds would actually add on to the overall growth lever. And ideally, when we look at it in terms of almost like 3x kind of the portfolio in, say, 4 years from now, how broadly would be the split between what is existing currently in Magma's book? And what will get added, okay, because of the new products which are getting rolled out, either this fiscal or the next fiscal?

Thanks, Kunal, for your views. One is that the thrust on housing, obviously, will be more because we are expanding the product as well as the customer segment. Both in the home loan, we are looking to expand in the non-affiliate And as well as in the LAP from affordable LAP, we will also go into SME LAP. The SME LAP, of course, will be done in the listed company, which already has an SME franchise. And as Manish mentioned, that when we deal with NBF service more than, I think, 40,000 SME customers. And they have a requirement for a secured loan as well as the unsecured loan. Until now, we were catering only unsecured, now we can also do the secured. So that will be done in the listed company. Whereas in the housing finance company, where we are doing affordable home loan, affordable LAP, there we will do the non-affordable home loans also. So because of the longer tenure of the home loan compared to the other loans like SME loans or the car loan or the personal loans or the consumer durable loan, the share of home loan will actually grow over a period of time. Now in terms of various products, how the mix will look like, I think it's right now difficult to comment. Maybe it will take some more time for us to share the details as we have more and more leaders come and join on Board. But broadly, I think the share of housing will increase. And second, the used car, we are very, very bullish because, one, we have a very strong presence in the market over the last many years. And there, again, we were constrained by the cost of funds. And therefore, we were operating in the informal segment in the tier town and segment B car. So segment C, segment D, and then formal income and in the metros and the large cities. So if you look at the entire market, these markets which we were not able to cater was also more than 50% of the overall market. So I think that is another segment we are looking at a huge growth opportunity going forward. So that way, I can give you a qualitative flavor of -- which are all the products that we propose to grow. The third one is the loan to professional, consumer looks and the personal loans. And all of this will be done significantly leveraging the digital footprint and the strength that Poonawalla Finance has built over the last 2, 3 years, and have a successful proof-of-concept and have built a portfolio of about INR 1,400 crores. So all of this, I think will start from the second quarter itself, which is from July onwards immediately as we are looking. Right now, we are in the process of just integrating the technology and the operations functions so that we are able to move together in the field.

Sure. And that INR 1,400 crores of portfolio, where would it be more concentrated currently on?

So I'll let Kailash take up this question in terms of that portfolio and how do we suppose to integrate. Over to you, Kailash. You are on mute, Kailash.

Thanks. And then the INR 1,400 loan portfolio has actually run down and would now be standing at close to INR 1,200 crores. We are still looking at all the options, whether we can onboard given the technology requirement, et cetera. So we won't be able to exactly state when it could be taken over into Magma Fincorp book. What we can say is that the intent of launching all these products, so Poonawalla Finance had stopped doing any additional loan to professional, personal loan, non-affordable home loan, et cetera. And -- sorry, they were doing loan to professional, personal loan and SME loans. So they have stopped all these products right now, and these will be onboarded within the current quarter, hopefully, in Magma Fincorp.

Okay. Sure. And one last question, in terms of this entire provisioning policy, I just want to understand the thought process for such a conservative policy. Today, it's like even after not us growing and being very, very conservative on growth, our provisioning is very high. And in terms of the write-offs also, would it continue going forward as well? And should we assume that because such write-off policy, the credit cost will always be higher than where the industry is because we will continue to be conservative and this is not onetime.

Sanjay, shall I go...

Yes. You go ahead, Kailash.

So Kunal, there are 2 parts to it. One is when your cost of credit will be going -- will be high going forward, I would say that credit cost brings the culture in the credit underwriting. So if you are taking the early write-off mill, there is a pressure on the business team, on the underwriting team, but you have to be very, very careful when you are underwriting and not let the products, the contracts flow forward. And secondly, on the business and collections team, that you collected before 180 DPD or it is going to be a loss for you. So this is clearly going to bring in the required improvement in quality of the portfolio. Unsecured loan, 90 DPD, I think it's a -- it's a no brainer. Unsecured loan, there are other peers who are doing it 90 DPD and even affordable housing finance, 730 was a no brainer, because 730 is when you generally like to provide. So I think the loan concentration will be 180 DPD. Is it going to give you more hit? Maybe in the interim, maybe for some time, but ultimately, it will improve the credit quality. Now coming to the second part of your question as to why we have taken additional provisions. The additional provision has everything to do with the wave 2, COVID wave 2. And as Sanjay mentioned, there has been significant deterioration in the credit quality or collections efficiency, I won't say credit quality because portfolio credit quality probably will not deteriorate so much, and we must see something bouncing back. But right now, what we see is that the RBI provided scheme of OTR has not taken off. We are not able to provide any significant assistance to our customers. We are not able to pause the flow forwards, et cetera. And this will not be only product, but for the entire industry that this is a problem. In fact, IBA in yesterday's statement has also mentioned that they are seeing difficulty in implementing the OTR and its implementation. So that challenge is there. And if that challenge remains as it is, then the quarter 1 is going to be difficult, quarter 2 is going to be difficult for the industry. And that's how -- and we are sitting today on 31st May. Knowing that this is what is happening, we could not have kept eye away from the reality of the situation. And then we looked at what kind of additional provision we need to take. We did our calculations and found that there is need for management overlay and therefore, have gone ahead and done this management overlap of INR 621 crores. This should help us in conserving our in preserving, I would not say conserving -- preserving our FY '22 performance. It should be back to a normal year even when we have COVID wave 2.

So I'll just add on to what Kailash has said, because this is the single largest item in our P&L for Q4 and FY '21. So one, I think your question and straight answer that the provisioning or the write-off policy that we have evolved, we don't intend to roll back. So therefore, it is here to stay. Second, the intent is very clear that there should be pressure on the entire management team right from top to bottom that this is the write-off policy, business of provisioning policy that we are going to follow. So that, one, right from the initial stage when you are doing a selection of a customer, then to servicing, and then to taking a hit in the P&L. And everybody is -- the bonuses and stock options, everything is linked to the performance. So therefore, the interest of the organization and interest of the leaders is completely aligned. And there's a lot more awareness in terms of underwriting and in terms of servicing of the customers. So this is the second point. The third point is that, also, when we have raised so much of, capital, and we are looking at a product, some of the products being discontinued, some of the products being getting introduced, so then we thought that this is probably the right time when we should align the write-up policies and the provisioning policies is what is the best norms in the industry. And there, of course, in the end result, we found that, with the 2 months of visibility on collections in April and May, which I think a number of our peers in the industry would not have had, we decided that let us factor in all that declaration that could happen, and therefore, make a provision in Q4 itself. And like last time, you see on 27th March, RBI came up with a moratorium policy. On 17th April, RBI came out, I think, with that provisioning policy. And then RBI came with the OTR. But this time, the OTR policy that RBI has come out with on 5th of May is not as similar to what it was last year. This time, it appears to be more of a patchwork. And there are certain exclusions in both the individual and the small businesses on one end and the MSME on the other, which we believe that it may not give too much of a relief to our customers. And therefore, we thought that let us also make sufficient provisioning such that COVID wave 2, we don't feel the impact of the stress on the P&L or the balance sheet in the current year. So these are all the various parts of the answer on this particular point that you and some of your other colleagues have raise in the call.

The next question is from the line of Utsav Gogirwar from Investec Capital.

I have a couple of questions. First one, largely, if I look at your vehicle finance book, you are largely vacating from there. And we have -- first, I want to understand the reason behind it. Why we are vacating in the used business? And what will happen to the employees who are working on the mid level or ground level? Do we plan to shift them towards the new products? Or what is the thought process behind that? That is first question. And second question is with respect to the new product launches which you are planning to do it. So if I look at the new segments which you are entering, it is broadly similar to the largest diversified NBFC Bajaj Finance. So is it kind of we plan to replicate that kind of model in the next 2 to 3 years? Is that something which we are targeting? Or is there something else we want to build?

So you see like the way the model that we followed in the past is the guys that we have in the field, they are doing all the products in the used segment, which is car, CVC and the tractors. Now we want to focus on the used car segment. And therefore, the guys who are sourcing business in the field, they will instead of focusing on 4 products, they will focus on one product. And this product, we have seen that -- today, for example, last year also in pandemic here, the India sold about 4 million used cars, which is about 1.8x the number of new cars that were sold. But in terms of finance penetration, in the used car, it is less than 25%. And that's because the sale of the used car also, 70% is unorganized and less than 30% is organized. So the opportunity there is huge. And it's a lot of white space. And Magma, till the pre-pandemic time, we used to do about almost 60,000 used cars in a year, which gave us almost about 5% share in the overall financing of the used car market. So we believe that now with the value prop that we have to fund the C and the D segment cars then the formal segment -- income segment customers, then in the metros and the cities, something that we were not able to operate earlier. Because earlier our lending rates were about 16% to 17%. Whereas this segment that I'm talking, the lending happens at about 12% to 13%. But with the cost of fund at 7%, we can easily compete there and grow the universe of the used car, both in terms of the product range as well as in terms of the customer segmentation. So I don't think that it will have any impact in terms of the employees who are doing something else and cannot do this. So they were doing the used car earlier. Second, also, we have a portfolio which is quite sizable. And therefore, servicing the existing customers also, we will meet the team, so they will do that. They will get shifted there. Third, even in the past, whenever we have launched any new product, we have undertaken a reskilling program of our employees. What we have seen that in a customer-centric approach, product becomes secondary, and how you go and appraise the customer, how you close the deal in terms of the commercials and then do the documentation, that is more important. And therefore, we have a very strong L&D program in which we can reskill the field executives and the first-line supervisor. Of course, at a leadership level, we are expanding by getting a number of subject matter experts, either on the digital side or on the sourcing side or on the underwriting side. Therefore, we don't want to take any chance there. I hope that answers the question you have put.

Yes, sir. Yes, sir. On the journey, is it like you are planning to replicate what Bajaj Finance has done in the business? Because I see the product segments which you are offering, they are probably similar, the share of housing, we want to increase the medical equipment and personal loans. Is that right understanding?

Well, actually, Bajaj Finance today is a gold or a platinum standard in the retail NBFC space in India, and they have done quarter-on-quarter, year-on-year very successfully. So I don't think it would be appropriate for me to say that it is replicating that model. But yes, I think today, in terms of the branding, in terms of capitalization, in terms of the cost of funds, in terms of the digital analytics and a lot of other expertise, I don't think that now our platform could have any of the handicaps that it has had in the past. And therefore, it is time for us to chart out a new journey with a relook, fresh look at the product with a fresh look at the customer segmentation and cost-to-income ratio, and also assemble a best-in-class leadership team, which has the proven expertise in the respective areas of operations. And then I think, see, over the next 4 to 6 quarters as to how our journey will pan out. And then it will be there for all to see as to who are we aspiring to replicate or we are carving out our own niche.

[Operator Instructions] The next question is from the line of Rohan Mandora from Equirus Securities.

Rohan here from Equirus. Just coming again on the strategy part, wherein you are trying to move more towards the better quality of customers. So just wanted to understand like, obviously, currently, we have a healthy capital adequacy and so we will be able to do lending. But as we are trying to grow 3x AUM in -- by FY '25, or until leverage will increase. And so I just want to understand how do we see our competitive positioning in terms of the pricing power and being able to compete in the segments which we are targeting? And also, like if we understand -- so that's part -- first part of the question. Second is that, right now, we see like using digital, many organizations are trying to move into those segments where the lending was difficult earlier. And with the alternate data coming in and use of technology, they are trying to move into newer segments where the yields are higher. And we are actually trying to move away from that segment. So this is slightly -- again, just trying to understand, obviously, will -- how do we correlate this thing in terms of -- just because that, historically, we have seen a higher stake on this equity that's forcing us to move into this strategy? Or something else is there?

So I actually lost track of your question. Maybe you can just briefly tell me...

Yes. So the first part of the question is that as we grow over the next 3 to 4 years and the leverage increases, will there be enough competitive advantage to us in being able to compete on the pricing power, given the fact that right now, we will be able to compete a given higher level. That was one.

Yes, yes. I got your question. I got your question now. See, first of all, I think on the competitive advantage in the cost of funds, at the cost of sounding immodest, I think we can say that with the positioning that we have today, with the INR 6,000 crore capital, with the leverage at 1.3x, with the capital adequacy at 69%, I think there's no doubt that we will aim to be the best or compare with the best in the industry. So therefore, in terms of a competitive advantage, for sure, we are looking at having that and very soon. As the loans get repriced or we contract new loans, I think you will see every quarter the benefits flowing into the P&L. The second part of your question, that we are looking at a very risk-adjusted return kind of price metrics. So at one level, when we are looking to do the loan for professionals and personal loans and consumer loans, these are at the high-yielding IRRs. And these are done through the digital means. So your cost of acquisition is lesser. 2, I mentioned to you, I mean someone else, that we will have going forward 100% electronic modes of collection through the e-match as opposed to current, where 40% to 50% of the customers, we have to reach to their home every single month to collect money and deposit in the bank. So this will also bring down the operating cost. The third is, on the other hand, I also mentioned that the share of mortgage will increase in the overall portfolio, which comes in at a lower yield. But then that also gives us a lower operating cost. So if you look at the affordable housing companies which are built to scale, their OpEx is less than 3%. But if you look at the non-affordable, their OpEx could be even less than 1.5%. And now we are looking to also, those are non-affordable segment where you have a high ticket size, you have a formal segment customers, therefore, your operating costs are lower. And there, you also have the asset quality which is quite pristine. So I think it will be a combination. And the product mix will ensure that, one, we have a profit cost to income. We also, given the stringent provisioning and the write-off norms, have the eye on the ball in terms of how it is moving the provisioning and so on. So that -- so you have a bouquet of products, both in the secured, which is secured by property or secured by vehicle or equipment versus you have unsecured where you are doing personal loan, durable loans or loan to professionals and then have a heading mix of this return ratios.

The next question is from the line of Neha Mudailiar from IFC.

So I had a quick question. Could you provide a brief overview of the new CEO? Sorry, I could not get that from the presentation. And also, given your significant experience building Magma over 3 decades, how do you -- what is your role going to be going forward? And how will you continue to be engaged with the company, which we hope you'll do?

So, Neha, when I was looking to have a separate call with you, Supriya and Mr. June, but anyway, since you are on the call and you have raised this question, and I'm sure it would be of interest to other people also on the call, so I will answer it. But so far as the CEO is concerned, Vijay, Vijay actually is currently the business Head in ICICI Bank, and he has been heading the services sector business. And having dealt in the NBFC space over the last few years with the -- all the leading and the midsized companies in the country. He has a very deep understanding of how does the sector operate. What are the various levers on the liability side and on the asset side, given the challenges owing to the liquidity crisis and then the COVID crisis that happened. So that is one. Second, he also has handled in the last few years the services business which is largely digital and the technology-led. And this is what is going to be the focus area in new avatar of Magma version 2.0 that I've been talking about. Third, Vijay, even prior to this, for a period of 5 years also managed the debt syndication desk at the ICICI Bank, raising significant amount of debt, both in the domestic and in the international market. And what we have seen in the -- and with my own experience of more than 30 years in the NBFC space, that liability side, which is actually more important than the asset side, you need to have long-term source of funds, you need to have competitive cost of funds. And your pricing power should be there to be able to compete in the market. And you need to have confidence of the lenders. So therefore, the experience on the liability side, having multi diversified sources. And as you scale up and reach INR 40,000 crores, INR 50,000 crores AUM, you cannot simply rely on the bank source of fund. You need to have a diversified mix. And I think there, over 5 years experience should really come in very handy for Vijay. And prior to that, he was also heading the commercial business as the Head of the zone in the north of India. So overall, he has about 12, 13 years in ICICI in the current [profession]. And he is an IIM graduate from Ahmedabad in the year 2002, with almost about 19 years post qualification experience. So that's the background on Vijay. So far as I'm concerned, as a part of the arrangement and the deal that we have done with Poonawalla, this is a clear change of management and the shareholder. And Mr. Adar Poonawalla acquired 60% in the expanded equity in the company. So he's a dominant promoter. And my role is the second promoter, and we have 13.3%. So that makes us the second largest shareholder in the company. And I will be the representative of the current promoters and continue as the Executive Vice Chair. My role going forward will be in terms of supporting a very successful transition, because whenever there is an M&A that happens, there can be certain casualties. And there is a culture. There is a product. There is a people issues. There is a customer segmentation. There is a distribution network. And then there are 3, 4 companies that we have, and there is a whole lot of cross-selling and the sharing of infra and so many things. So therefore, as we build each of the companies to scale, how do we kind of make them independent? So there's a whole lot of role that is there over the next 3 to 4 years which I will be playing, supporting the existing management and the new leadership team that comes on board.

The next question is from the line of [Gaurav] from Bowhead India.

You have very nicely explained about your role, how it will evolve over the period of time. Sir, just another question on these lines. After a month or so, we'll have the MD and we'll have CEO, which you just talked about. What will be the role played by these 2 guys? And is there any overlap between them? How will these things go?

So what I would suggest that let us save some of these questions once the new team takes charge. In fact, MD is taking charge tomorrow morning, which is Abhay. And Vijay will take charge in first week of July. And what I would suggest that Jinesh, who is our Head of IR, he will actually schedule interactions with them. And you hear from the horse's mouth. I think that will be the best way to go about your query on this side.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Udit Kariwala for closing comments.

Thank you so much, team Magma for helping us know the status of current business as well as what lies ahead. I thank all the participants and management for having this call. Thank you so much.

Thanks, Udit, for organizing this call. Thank you very much.

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