Spandana Sphoorty Financial Limited (SPANDANA.NS) Earnings Call Transcript & Summary

Welcome you all to the third quarter financial and business update call of Spandana. During the quarter, we recorded a very strong growth, despite numerous challenges faced in multiple stages. In October and November, there were continuous rains in Madhya Pradesh, Maharastra and Karnataka. Few districts of Kerala and Orissa got very badly impacted by cyclone for the second consecutive year. The business was severely impacted, both in terms of collections and loan disbursement as our borrowers in these geographies were not able to go for work for a few days. And in a few places, they were moved to relief camps. We could not even disburse loans to borrowers whose loans were closed. By the end of November, we had many dormant clients. Despite all these headwinds, we achieved a remarkable progress in this quarter. The AUM grew by 40% Y-o-Y INR 4,200 crore to INR 5,879 crore. We continue to be the third largest microfinance institution in terms of AUM, and AUM grew by CAGR of 74% from FY '18 to December '19. The book grew from INR 1,300 crore to INR 5,879 crore from FY '17, since we exited from corporate debt restructuring. Just a moment.

So we have been experiencing some technical problem. One second.

The loan disbursements grew by 63% from INR 1,209 crore to INR 1,971 crore year-on-year. In the last one year, we opened 101 new branches, while we focused all our energies on growing the existing branches before we open new branches. By the end of the quarter, we had 980 branches, 24.6 lakh borrowers in 276 districts. Employee count increased by 26% from 6,000 to 7,545 year-on-year. Top 3 states exposure has come down to 49%, which used to be 58% a year ago. District level diversification is very much intact with 208 districts out of a total of 276 districts having less than 0.5% of the total portfolio. Except 15 districts, all other districts have less than 1% of the total portfolio. Again, the 16 districts as well have less than 2% of the total portfolio. State level, district level and branch level diversification helped us to do more and more assignment and securitization deals, and we raised INR 2,860 crore through PTC and DA in the last one year. Assigned and securitized portfolio increased from INR 700 crore to INR 1,690 crore Y-o-Y. As a percentage of total portfolio, DA plus PTC portfolio increased from 17% to 29%. We continued our stellar performance on efficiency, profitability and productivity parameters during the quarter. We achieved a number of breakthroughs and set new benchmarks as we have always done in the past. Operating cost reduced from 4.3% to sub-4%, which is 3.98%, which is lowest across the industry and it is a new benchmark that the company has set for itself and for the industry. We have a group company, Abhiram, through which we sell our third-party products like consumer durables and utensils. Abhiram reimburses some of the operating costs to Spandana. This quarter, October to December, Abhiram reimbursed INR 3 crore. So if I add INR 3 crore and annualize the same, the operating cost will increase by 20 basis points from 3.98% to 4.18%. So cost to income, while we reported 3.98%, had that cost has been incurred by Spandana, the operating cost should have been 4.18%. So cost-to-income has further improved. A year back, it was 22.8%, and this quarter, it has come down to 20.7%. Gross NPA and net NPA stood at 0.33% and 0.04%. We made a provision of INR 41.5 crore in this quarter. Of course, it includes write-off, which is higher than a normal provision we would have otherwise made in any other normal quarter. About INR 20 crore additional provision has been made on account of affected portfolio in Madhya Pradesh, Karnataka, Maharashtra and Kerala. Coastal districts in Karnataka were badly hit by the continuous rains and interference of local leaders. Fortunately, this quarter infringed to only 3 districts of Karnataka and 2 districts of Maharastra, and rest of the Karnataka and Maharashtra are doing quite good. We have 15 branches in these 3 districts of Karnataka, Udupi, Dakshina Kannada, and Shimoga and the portfolio affected in these 3 districts is INR 63 crore. We got 72% collection efficiency in these branches in quarter 3. Udupi, district has 0.15% of the total portfolio. Dakshina Kannada has 0.1% of the total portfolio, and Shimoga has 0.42% of the total portfolio. All 3 districts together have 0.67% of the total portfolio. We made INR 11.5 crore provision towards the portfolio in this quarter. So it's almost like 100% provision that we made to what's affected portfolio in these 3 districts. 4 branches of Kolhapur and Sangli districts are impacted in Maharashtra, and there has been significant improvement in the collection efficiency of these branches. In December, we got 94.3% recovery, and we expect this to go up to 98% in the next 3 months. So we have no operations in Assam. Average AUM per branch increased from INR 4.6 crore a year ago to INR 6 crore by December. Average AUM per employee, so this is the indicator that explains the overall cost reduction that has increased from 70 lakh to 78 lakhs. In this quarter, we raised INR 720 crore through direct assignments and INR 482 crore through term loans. Cost of borrowings has significantly declined by 170 basis points from 12.6% in quarter 3 FY '19 to 10.9%, and marginal cost of borrowing reduced from 12.4% to 9.6%. And cost of funds, this is on portfolio, that got reduced from 9.5% to 7.6% Y-o-Y. So net interest margin further increased by 50 basis points from 15.9% to 16.4% Y-o-Y, and interest earned in quarter 3 FY '20 is INR 283 crore. However, here, I want to further explain that this pertains to only own portfolio. And we have another INR 59 crore interest income, which is earned on assigned portfolio, which is not included in the P&L. We have not recognized this on P&L because assigned portfolio is not part of the balance sheet as per Ind AS. When the portfolio was assigned, interest receivable was recognized as an asset, and when it is collected from borrowers and passed on to the assignees, it is reversed. This interest, which is collected from borrowers and passed on to bank, is not included in the interest income. Adjusted interest income after adding the interest collected from assigned portfolio is INR 342 crore as against INR 261 crore in quarter 3 FY '19. Interest income, if I compare that with the adjusted interest income, it grew by 31%. Net interest income for the quarter grew by 43% year-on-year from INR 230 -- to INR 233 crore from INR 163 crore. Profit before tax for 9 months increased by 39% to INR 510 crore from INR 365.7 crore. So this is the first time that the company posted INR 500 crore profit before tax in 9 months. And coming to a normalized profit after tax, it increased by 61% to INR 382 crore from INR 237.5 crore. And PAT, which is reported after adjusting DTA, it was INR 269 crore as against INR 237 crore loss -- a year ago, so the growth is 13%. And coming to pretax ROE, that's a 12.4%, and it is reduced from 13.8% Y-o-Y. So this is due to higher provision that we made and 1% drop in the yield. So post-tax ROI stood at 9.1%, which is again increased by 10 basis points Y-o-Y. ROE stood at 21%, and while we raised INR 400 crore in Q2, this has further increased capital adequacy, and there is an impact in terms of reduced leverage. So while we have done more and more off balance sheet deals so the leverage has come down as such that has impacted ROE. So capital adequacy ratio has increased from 41% to 51% Y-o-Y, and leverage reduced from 1.7x to 1.2. Net worth increases from INR 1,813 crore to INR 2,505 crore Y-o-Y, with an increase of 38%. And we had the fresh -- sorry, free cash and liquid investments of INR 491 crore as on 31st December. So when it comes to on-time collection efficiency for the quarter, October to December, it was 98.72%. So with this brief overview, now I open the floor to question and answers.

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

So just a few questions with regards to the AUM growth. Although we've done 40% AUM growth year-on-year, the number of borrowers have just increased by 3%, and quarter-on-quarter the growth is flat. So just wanted your views on this with regards to the increased customer -- borrower exposure -- per borrower exposure.

As I mentioned that October, November, December, so we were not able to -- October, November, basically, we were not able to disburse loans to the existing borrowers. So every month, we will have 150,000 to 2 lakhs loans get closed. But unfortunately, in October and November, we were not able to disburse loans to all the existing borrowers. So we still have all those loans that we are disbursing. So in December, we were able to disburse loans to some of those borrowers, but again, in January, like we were able to disburse loans to most of those borrowers. So they got -- so like, for example, if a borrower's loan got closed, and she has not received subsequent loans, and we will not count that particular borrower as a borrower. So she will not be a active borrower. So as such, like in October, November, almost like 2 lakh borrowers whose loans got closed and whose -- to whom that we were not able to disburse loans, so we were not able to count them as borrowers when it comes to 31st December. But subsequently, in January, we disbursed the loan and our number of borrowers increased on 31st of December. If you see number of borrowers on 31st January -- sorry, not 31st January, on 25th January, it increased by 1.5 lakh. So if you see, for example, like on 31st March, the number of borrowers will increase by 2.5 lakh. So it was a temporary glitch that we were not able to disburse loans to the existing borrowers. But however, as you rightly pointed out, though like there was no increase in terms of number of borrowers, there was an increase in terms of portfolio. So that was because of increase in the loan size. As I mentioned in my previous call also, so the ticket -- average ticket size in our case was very, very low, while we were in CDR for 6 years. So we were disbursing very, very small loan size. And if you see, 7 lakh borrowers out of 24 lakh, they were fourth and subsequent cycle borrowers in our case. And when it comes to fourth and subsequent cycle borrowers, as per our policy, they are eligible for loan of INR 40,000 and -- INR 40,000 to INR 60,000. But again, since we had the funding problem, we were giving them INR 15,000 and INR 20,000. But again, when we exited from CDR, all of a sudden, we did not want to give them bigger loan size. We were gradually increasing the loan size. And today, if you look at our average loan outstanding, it is INR 23,940, which is still lower than the industry average. The industry average is INR 26,000. So we are still lower by INR 2,000 to INR 3,000. So we are -- it's an intentional call. Like we are gradually increasing the average ticket size. Otherwise, we become irrelevant because if you look at like 90% of our borrowers are rural borrowers. And 70% of them, they take loans to buy a buffalo or to buy a cow. And today, if they want to buy a buffalo or cow, the minimum loan size that they require is like INR 40,000. If we don't give them adequate loan, so it will be useless. And if they don't get from us, they will take to other MFI. So if we have to stay relevant, so we have to give them adequate loan. So it was an intentional call that we have increased the loan size.

So Ma'am, what percentage of our borrowers or our loan book would be in the, say, third cycle or the fourth cycle -- in the third or the fourth cycle?

30% of our borrowers are like in the fourth and subsequent cycle borrowers.

Okay. Okay. And then one -- the other thing that we got to know is that now we are giving -- so we are also having a strategy of having more than one live account from the same borrower. So at present, what percentage of our borrowers would have, say, more than one live account with us?

Yes. There also like we are super conservative. If you just look at like across the industry, so across the microfinance industry, today, like there are 6 crore borrowers and loan accounts are 10 crore. So if you see like 6 crore borrowers and 10 crore loan accounts, almost like 70% of the borrowers, they have 2 accounts. But again, if you just look at like in our case, so we have 24.6 lakh borrowers and only 18% of borrowers have 2 loans. So as against say, 70% of the borrowers having 2 loan accounts across the industry, in our case, just 18% borrowers have 2 loans.

So Ma'am, what is our strategy on this front? Like do we plan to have this number increase? Or like we are -- do we have a particular strategy on this front?

So this particular product is available. We are not pushing this for the sake of increasing the business, for the sake of growing the portfolio. Unless and until the borrower really needs this, so we are not pushing as a strategy, but the product is available. So basically, only some 25% to 30% of the borrower, they do like business, like small kirana shops, fancy shops. Only those people, they need working capital loans, that too like during seasons like festivals and all. Those people avail these loans.

Okay. But even in these cases, we do the CB check, and we do the eligibility check.

Yes, very much, very much, very much.

Okay. Okay. Okay. If more questions there, I'll come in the queue.

And increasing average ticket size, it's a deliberate call, and we have taken -- and we are increasing this gradually. At one point in time since we had funding constraints, we gave very small loan sizes just to retain the clients. And now we don't have a funding problem and we have increased loan sizes, and we are just coping up with the market in terms of loan size.

[Operator Instructions] The next question is from the line of Neeraj Parkash from Nepean Capital.

I just had a question regarding the net gain on share value for this quarter. It seems to be a significant proportion of your overall income. I just wanted to know what that was? Because if you net that out, increase in the interest income for [Audio Gap] that item is why such a large figure versus the last year.

Sorry, we missed you. We lost you in between. Could you repeat your question, please?

We have a line item called net gain on fair value and that's increased significantly year-over-year versus the last -- third quarter. So I just want to know what that figure was, if you can explain that? Because if you net that out, then the increase in the actual interest income isn't that much. If you can just explain that one line item, that would be great.

Sure. So if -- first, let me explain Q3 FY '19. So the net gain on fair value changes was INR 18 crores, out of which INR 16 crores came as an upfront income recognized on assignment transactions. So whenever we do an assignment transaction, whatever is the future interest receivable for us, that we will discount it. And then recognize it upfront in the P&L and place it as an asset in the balance sheet, and this is an Ind AS requirement. So in December 2018 quarter, we did one transaction -- one assignment transaction of INR 197 crores, and that is why it resulted in INR 16 crores. Now if I move forward to December 31, 2019, since that assignment transactions, we've done multiple transactions and there is a run rate of at least INR 550 crores, INR 600 crores of assignment transactions that we've been doing in the last 2, 3 quarters. So for example, in December 31, 2019, we did INR 595 crores of assignment transaction. So the upfront income that has been recognized on this INR 595 crore of transaction is INR 46 crores. There is another very small component, which is INR 1 crore of treasury income, but out of INR 46.8 crore, INR 1 crore is the treasury and INR 45.8 crore is the upfront income. Just to also further explain, in Q2 and quarter ending September 30, 2019, it was INR 48.3 crores. Again there, INR 1 crore was treasury income and the remaining INR 47.3 crores was because of INR 715 crore of assignment transactions that we did during that quarter.

But there was a derecognized income also because of this.

Yes. Because of the derecognized asset portfolio...

Mr. Prakash?

Yes. Sure. I just had a second question. Just in terms of your cost to income ratio, you did mention you get somewhat subsidized because of Abhiram Marketing. But even if you add that back, your cost to income ratio is still significantly lower versus your competitor -- your direct competitor. So I just wonder if you can give a quick explanation as to how you're able to achieve such a significant lower cost to income versus others?

So I think the overall -- for any microfinance organization, I think if you just look at the cost, so the cost will be the employee cost. So one important indicator that one has to look at is the average loan outstanding per employee. So one should not really look at like what is it like for the loan officer, what is it like for the branch manager, but one has to look at like what is it for the employee. Because when you were looking at like the average loan outstanding per employee, it includes like the top to bottom. It includes like the head office costs, it includes supervisory, it includes internal audit, it includes everything top to bottom. So this -- in our case, the real reason for the reduction in the operating cost is, so that has increased from INR 70 lakhs to INR 78 lakhs. So -- but again, I could not really see these numbers being published by the competition. So the average loan outstanding per employee -- so I have not really seen this particular number being published by the competition. So most of the competitors, I could see in terms of what is the average loan outstanding per loan officer, but for the entire organization, so most of them, they are not publishing. I think that's very low. So they have a higher number of staff. So basically, the overheads are very high in case of other micro finance organizations. So for example, most of the MFIs, they have regional office, they have zonal office, they have divisional office, which we don't have. For example, for every 5 branches, we have a cluster manager, but the cluster manager operates from one of the branches. So he doesn't have his own cluster office. And again, for every 20 branches, there is a divisional manager, so there is no divisional office. And again, some the turnaround time that is one more reason. So in case of few MFIs, for example, today, if they take a loan application, so it will go to a divisional office. And again, there is a courier process involved. So the application is couriered. So the turnaround time is almost like 15 days to 20 days. For us, it's a browser-based software, and there is a mobile app. So there are many, many, many factors. We have done a kind of study in terms of where we are gaining and where others are losing. So we'll be happy to share that -- whatever the study that we have done. So there are multiple, multiple things where we are making a difference in terms of cost. And travel cost also costs different. Like we have fortnightly collection and some others, they do weekly collections. So as such, there is a difference in terms of travel also because we go twice and like they go 4 times for the collection. So there is a difference in the travel also.

The next question is from the line of Sangeetha Purushothaman from Cogito Advisors.

I had 2 questions. One relates to the credit costs. Now my question was that you mentioned that there were a lot of issues that you faced in certain states because of certain natural disasters and/or political interference. Now when you provide this credit cost, you're essentially writing off most of these loans, right? So do you actually expect to collect them back? So against whatever you are providing, how much do you end up collecting back? So that's what I wanted to understand. My second question is relating to your capital allocation. As of now, the capital adequacy is extremely high. And given that you are experiencing good growth in your profits as well, capital will continue to accrue. So given all this, have you given any thought to what kind of dividend policy you would like to follow going ahead?

I think the capital adequacy is calculated only on our on-balance sheet portfolio. Since as Satish mentioned that in the last quarter, we have done many DA transactions and PTC transactions. And again, the DA portfolio doesn't appear on our balance sheet. So it goes out of our balance sheet. And capital adequacy is calculated only on our balance sheet portfolio. As such, the capital adequacy is very high. That is one reason. And the second reason why capital adequacy is very high is, so in the second quarter, we raised INR 400 crore. So that is second reason why capital adequacy is very high. The third reason is, in the last 9 months, so we made INR 300 crore PAT. So the internal accruals are quite high. So that is why the capital adequacy is quite high. And the first question...

Yes. I understand why the capital adequacy is high. What I want to know is, you can't operate this business with -- even if you adjust for the assignments you've done, the capital adequacy will still be very high given the internal accruals that are coming through. So do you intend to maintain capital adequacy at this higher level? And otherwise, how are you looking at a dividend policy going ahead?

No. I don't think that like the capital adequacy will be maintained at this level. So going forward, so we don't have any capital raise plan, at least for the next 2 to 3 years. So the leverage will definitely increase. So with the portfolio growing further, the capital adequacy will definitely come down.

Okay. So does that mean that if you have to increase the leverage, given the quantum of capital you already have and the new accruals coming in from profit, it implies that you will need to grow your book at a very, very fast rate, much faster than what you're growing right now. And that should still leave you enough scope to have a generous dividend policy. So have you started thinking a little bit about the dividend policy? And how you're going to look at it? And also what kind of growth rate can be managed without taking on too much risks onto the book?

I don't think that for the sake of capital adequacy like we want to really risk the business, and we will grow business like beyond our capability. So that we will not do like with the...

Right, Ma'am. So basically, if you're growing your profits at about 40%, which is what you have done so far, you're generating more than enough capital from your internal accruals to take care of your future growth, and you will not need to dip too much into your existing capital. So in such a situation, you have 2 choices: either you can maintain leverage at current levels or increase it slightly and remain at a very high capital adequacy; or you can look to have a generous dividend policy so that, that also returns some capital to shareholders. So is this something that you and the Board have discussed? Or is there any thinking around this is what I'm trying to understand.

I understood your question. But again, from business perspective -- because our capital adequacy is very higher, we do not want to risk to the business proportionately. Our business targets will not be determined on the basis of our capital. So that is not something that we will definitely not do, but this is a valid concern. So we will definitely discuss at the Board and shareholders level, and...

Okay, ma'am. So then by the time we have the next discussion in the next quarter, can we expect some kind of guidance from you on what you consider a sustainable growth rate? And what kind of dividend policy you would look to follow?

Yes. Yes. Sure.

Okay. Great. My second question was regarding the credit costs. Your net NPAs are very low. So I'm guessing that a lot of it, whenever you have a problem, you're following a conservative method, and you're basically writing off a lot of your trouble loans. Now is that an excessive provision in a sense that, let's say, you've written off or you've provided for INR 41 crores this quarter. Do you actually -- is this -- on the ground is this actually a write-off? Or do you expect to collect back some of it in the future quarters?

So we wrote off all 90 days -- more than 90 days loans overdue. So we wrote-off basically Karnataka, Maharashtra loans. More than all loans overdue for more than 90 days, we wrote-off. But again, at the field level, they don't know which loan is being written off. It doesn't really make any difference. So loan written-off does not mean that it is not followed up at the borrower level. So in the past, if we look at -- for example, loans written off in Andhra Pradesh way back in 2012, so we are still taking recovery. So last year also, we got INR 10 crore. Before last year also, we got INR 15 crore recovery. So loans written-off 10 years back, so we are still getting recovery. And again, the portfolio buyout that -- done by ING Vysya Bank, like erstwhile ING Vysya Bank, today it is Kotak Mahindra Bank. So we are still collecting, and we are still passing on those collections from AP portfolio to that particular bank. So at the field level, it just doesn't really make any difference, but we want to be the conservative. And any loan like which is more than 90 days past due, so we always write-off.

Right. And when you recover the loan, is...

As per our past experience, so we will recover almost 25% to 30%.

Okay. So when you recover the loan, Ma'am, do you take it as part of interest and fee income? Or is your impairment credit cost shown net of recoveries?

Net income. Right of recovery.

I'm sorry, I couldn't hear you very well.

We will show it as other income.

You will show it as other income.

Yes.

The next question is from the line of Renish Bhuva from ICICI Securities.

Congrats for good set of numbers. Ma'am, couple of questions. One is on the -- again, on the customer addition side. So basically, in last one year, we have added the capacity in terms of branches or employer loan officers and also -- all these things are up by 25% to 30%, but wherein our customer base has only gone up by 3%. I can understand October, November has been sort of muted growth in terms of customer addition. But why on an annual basis, also, the growth is so low vis-à-vis the capacity addition.

So I think like if you look at -- basically, the new addition. So we added almost 10 lakh new borrowers. It's not that there was no addition of new customers. So we were just looking at, how many new clients that we added in the last 12 months. So we had about 9 lakh first cycle borrowers added, but however, if you just look -- what you are seeing is the net number of borrowers. So what -- how many borrowers we had about a year ago, how many borrowers we have this now. So it does not mean that there was no addition of new borrowers, but what is happening is, the existing borrowers, there is a drop out because we will not be able to give loan to all the existing borrowers when they close the loan. So you know very well like there is a RBI regulation. So we might have given loan as a second lender but after we have given a loan, so this particular borrower will take a loan from a third lender. The third lender could be a small finance bank or a bank or NBFC because they can give you a loan as a third lender because they are not covered by the regulation. So when our loan is closed, when they apply for loans, we will not be able to give loans. So as such, we have to reject to almost 25%, 30% of the existing borrowers. Since we are losing 25% to 30% of the existing borrowers, despite the fact that we added almost 9 lakh borrowers, still you don't see a kind of growth. It does not mean that we have not added new borrowers, we added 9 lakh to 10 lakh new borrowers in the last one year.

Okay, Ma'am. Okay. I think this is really, really helpful. So just to follow-up on that. So basically, at industry level, is it fair to assume that most of the borrowers are, again, are taking a second, third loan from the other players? And sort of overall indebtedness is actually going up a way higher than what we might have think a year back. So if you can just highlight the overall indebtedness of the borrower at the industry level, let's say, today versus a year back, would be really helpful.

So basically, recently, we have done a scrub in terms of what is the indebtedness of our borrowers. So when we looked at, we got to know that 32% of borrowers so they have taken loan only from Spandana, and 82% borrowers, they have less than INR 75,000 loan outstanding. But again, the biggest problem that -- what we are facing is, for example, about a year back, the information what you were getting from credit bureaus, it is highly trustable because they were doing this bureau check on the basis of unique member, which was Aadhaar, right? So unfortunately, post Supreme court judgment, so they are not in a position to really do this on the basis of Aadhaar. So -- and now like they are not using Aadhaar anymore. So they are doing like whatever they do on the basis of name, mobile number, whatever. Unlike mobile numbers, they keep changing from time to time. So whatever the data that we got from bureau, so that is like 30% of the borrowers, they have less than INR 25,000 in terms of indebtedness; and another 33%, they have INR 25,000 to INR 50,000; and 21% borrowers, they have INR 50,000 to INR 75,000; and 10% borrowers, they were between INR 75,000 to INR 1 lakh; and 3.65% borrowers, they have more than INR 1 lakh.

So this is...

But again, in the industry -- it's like our borrowers, our borrowers. But again, in most of the regions, we do not want to take even 75%. But again, this is in terms of outstanding. If you just look at the count, so 7.5% of the borrowers, they have 3 lenders. So -- and again, 23. In fact, 23.65%, they have 2-plus lenders. So 23.6%, after taking loans from us, they have taken third loan from a third lender. So then because since we are regulated, and again, the small finance banks are not regulated, the NBFCs are not regulated, banks are not regulated. So it's not a level playing field so you have to reject loan to those 23% of the existing borrowers.

Got it, Ma'am. Got it.

For example, I looked at last December to this December. In fact, we added 13 lakh new borrowers.

Okay. In a year?

But again -- yes. In the last one year, so it's a simple mathematics, right? We have over 5,000 loan officers. Every loan officer will add a minimum of 20 to 30 new clients. That is a bare minimum target. So 5,000 into 20, 1 lakh new clients are added per month. Of course, because the better performers, they will add 40, 50. I'm not even counting. 5,000 into 20 like 1 lakh. This is a basic thing, bare minimum performance that every loan officer. 5,000 into 20 1 lakh. So in the last one year, so they added like 12 lakh borrowers. But again, 20% of the existing borrowers, they don't -- they are not eligible for the fresh loan because after we gave loan to them, so they take third loan from some other small finance banks or like some other NBFC or like some other banks because they don't come under regulation. They can be the third lender, they can be the fourth lender, whatever. But again, we have to comply.

But Ma'am, most of these entities are now part of the CRL. So this 3-lender cap is actually applicable to all, right? I mean, most of the players or...

But like that came up recently. So that came up recently. It was just like 2 months ago.

Correct. Correct.

Yes. Now let's -- because 2 months ago, now we can also give -- we can also be the third lender. So -- but last year, it was not the case.

Got it. Got it, Ma'am. Got it, Ma'am. So ma'am, just a second question is on the provisioning part. So you have, in your opening remarks, said that we have provided INR 20 crores towards the 4 states, few districts. So what is the total outstanding -- you mentioned about Karnataka, which is INR 66 crore outstanding. But what is the total outstanding in this challenging districts, all 4 sites put together?

So all 4 states put together, we have another INR 40 crore, which is fully provided for.

Fully provided...

So more than 30 days like we for INR 40 crore.

Okay. 30-plus DPD, you're saying is how much, Ma'am?

INR 40 crore, INR 40 crore. So more than 30 days, it is INR 25 crore, and more than 60 days, it is INR 15 crore.

INR 58 crores?

No, no, no, no, no, 1-5, 15.

Okay. Okay. INR 15 crore. This is as on 31 December, right?

Yes. Yes.

Okay. Okay. And Ma'am, in the...

31 to 60, INR 25 crore. 31 to 60, INR 25.7 crore. 61 to 90, it is INR 15 crore.

Okay. Okay. Okay. Ma'am, can you please repeat this number? Actually, I misunderstood something here.

Yes. 31 to 60, INR 25 crore.

Okay.

And 61 to 90, it is INR 15 crore.

And 30-plus is 40. 1 to 30 is how much, Ma'am?

1 to 30, INR 33 crore.

INR 33 crores. Okay. Okay. And Ma'am, so again, on -- in these 4 states, as we say...

And for this we already made [ INR 53 crore ], Renish. For this 53% provision, we already made for this.

Okay. Okay. Got it.

INR 40 crore.

Okay. Okay. And Ma'am, so in these 4 states, as on date, the collection efficiency is improving from what we have seen in last 2 months, right?

Yes. Maharashtra, we already have 94% collection efficiency. I think, by March, it will come to normal. We will get 98%. Maharashtra, we can say, there will not be any impairment. And again, Karnataka, whatever the belief, whatever the -- whatever -- they were told that there will be a wavier, they don't have to repay. So all those stories, they were made to believe. I think now the borrowers lost that believe. So they started clearing all their overs unlike the borrowers are coming forward to take loans. So I think even Karnataka, which was 70%, so if not 98% by March, I think it will come to 85%, 90%.

All right. And in...

And fortunately, in December, like October, November, December, so we were worried that whether it will spread to entire Karnataka. And the most important part was, it did not spread, it was limited. It was influenced to only 3 districts. Rest of the Karnataka was quite good.

The next question is from the line of Nidhesh Jain from Investec.

Ma'am, on the yield, should we expect yield to come down going forward as our cost of fund has also come down, and there is an RBI spread cap limitation?

We still have high-cost borrowings. We -- whatever that we were to preclose, like we preclosed. But as long as those borrowings are still outstanding, so the term loans, I think -- I don't think that we are going to reduce the rate. For the next quarter also, we are continuing 24%. So -- and again, the portfolio, that was -- that is giving 24%. So that will continue. So even if we continue next year also, at least the yield will not continue -- the yield will not come down for the next 2 years because the portfolio that is giving 24%, that will be there for the next 2 years. The INR 6,000 crore portfolio, which is built, I think it will run for the next 2 years. So the 24% yield will be there for the next 2 years. Even if you reduce also because the impact you will see after 1.5 to 2 years.

Okay. Okay. And all the loans are 2 year in tenure?

Yes. Yes. Most of the loans, whatever that we have given, since we have increased the loan size, we have also increased loan tenure. Most of the loans that we have disbursed in the last one year, most of them are 2-year loans.

Sure. Secondly, on the client growth, despite our effort of adding so many clients, the client base has not grown for this 9 months. So how do you see this client growth picking up from next year onwards? Do you think we will see similar attrition in the client base going forward as well?

No, no. One is like whatever credit bureau check, but the second thing is, we have dormant clients. We were not able to disburse due to impairment in October, November. If you see, for example, by January, there is a significant improvement. So we were able to disburse loans to almost 2 lakh dormant clients that we were not able to disburse in October, November. So this 24.6 lakh borrowers that has increased to 26 lakh already by 25th of January. So if we see the same number by March 31, there will be a significant improvement. But however, subsequently, there has been a change. Now we can also give a loan to -- as a third lender. So the third lender, for example -- so the third lender -- we can be the second NBFC MFI. But if the third lender is a small finance bank or like a bank, so we can count them, and we can be the third lender. For example, if one NBFC MFI has given a loan, one small finance bank has given a loan, and we can be the third lender, and we can give a loan. So now whatever the responsible lending, so the code got changed and everybody has signed. So now there is a better understanding within the industry. So I think whatever the dropout rate that was there last year, it should not be there. And further, RBI has increased the average loan -- the loan indebtedness of the borrowers from 1 lakh to 125,000. So that will also improve.

Sure. Sure. So as of now, we were following 2 lender norm. If there is a 2-lender, even if that is...

Yes. Yes. Yes. Till 2 months ago we were following 2-lender norm. And now we are following the 3-lender norm. So that has significantly reduced the dropout rate.

Sure, sure. And lastly, on the DA, I couldn't understand the accounting end, and also the rationale of doing assignment when we are sitting on so much capital. Doesn't it make sense to keep these loans on our balance sheet and show better leverage?

No. Basically, the rationale for doing DA is, so it's not that we do not want to -- one, the rationale for doing DA is like it's completely risk-free. So like whatever the default, 100% risk is transferred to the bank who is buying the portfolio. So there is no first-class guarantee. So for example, in a PTC transaction, we give them like 5% first-class deficiency guarantee. In a DA, there is no guarantee. So we just act as a collection agent. The 100% risk is transferred to them. So that is one big advantage. The second advantage is, so it is like highly cost-efficient. For example, even today, if it is a term loan, we are borrowing at 10.5% to 11%. If it is a DA, we are doing at 8.5%. It has straight 200 basis points difference. Of course, they filter you like anything. So you need to give them extremely good portfolio -- so truly diversified portfolio, so excellent portfolio. They look at not more than 5% from each state, not more than 2% from each districts, not more than like 1% from each branch and 100% collection efficiency. So the criteria that they give, so you need to really give them extremely good portfolio. So it's not very easy to qualify, but again, for you, it's highly, highly beneficial because it is not possible for you to get a term loan at 8.5%. But DA, you can do at 8.5%, and going forward, we can negotiate even at a lower rate. So that is why we are doing DA, 100% risk is transferable to the bank, whoever is buying.

And in terms of accounting -- sorry, just to answer your question. In terms of accounting, for example, we did a INR 500 crore DA transaction with SBI at 8.5%. Now the yield of the entire pool of receivables that we have assigned to SBI, let's say, that is 24% yielding. So we will get the remaining 15.5% over a period of time. However, as per Ind AS requirement, we will have to project the 15.5% over a period of time, which is usually door to door of 21 months and discount that by 8.5%, which is a contracted rate. And then whatever we arrive as a discounted value of future cash flow, we will have to recognize that upfront, and that is the line item, which shows up in net gain on fair value changes. So this is as per Ind AS requirement, and it varies based on: One, the volume of the assignment transactions that we do and also the rate at which we do such transactions and the yield of the total portfolio that we assign.

[Operator Instructions] The next question is from the line of Kislay Upadhyay from Abakkus.

Congratulations on the strong quarter, Ma'am. Could you throw some light on the contingent liability related to income tax assessment of INR 42 crores?

So this is related to FY '17 -- '16, '17, for which the deadline for closing all the assessments was December 31, 2019. So we received this order from the IT department on 30th of December. Wherein -- I mean, the -- frankly, they have not given us enough chance to also present the case before them in terms of what they have questioned in terms of the assessment. However, whatever information, so I'll come to the point first. So their point being, during the demonetization period from November 9 through December 31, we had collected 500 and 1,000 rupee note from a few borrowers. However, with all KYC documents, even charting down the serial numbers of each and every note that we collected and we deposited with ICICI Bank, which was a monitoring institution at that point in time, and we were still in CDR. So ICICI bank then used that to repay to all the other 38 lenders as part of the CDR arrangement. So income tax has raised the point understanding of collecting those 500 and 1,000 rupee notes, and also asked for borrower-wise details and all the KYC preferments, which we have furnished. Despite that, they've come up with this assessment order. Subsequently, we have spoken to tax experts as well as legal experts on the assessment order, and they feel that we have a strong case when we appeal and which we are in the process of appealing. They feel that at the tribunal level, this will be quashed. However, this is not a standalone case. This is an industry-wide phenomenon. So all the MFIs did that. And there were a few other -- there are a few other MFIs who have also received these notices and also a few NBFCs. And we have some of the NBFCs based in Mumbai, who have also received these notices.

Okay. What is the worst hit that our P&L can take? Is it just this INR 42 crore amount? Or if there can be any higher -- any penalty that can be associated as well, if it does not go in our favor, if at all?

No, we don't see this not going in our favor because...

No. It's not INR 40 crore. Like on that there will be tax.

Yes. So the tax -- demand is INR 40 crores...

It's a collections amount basically.

So first of all, we don't see that going against us because of the sections that they have used, and they don't have a charging section, first of all, to do whatever they have done. So this is not just one person's opinion, this has been a collection of 5 to 6 people's opinion. And there has been some literature going on this in the forums as well. So we don't see this becoming a liability. However, in the interest of disclosure, we've recognized this as contingent liability.

Okay. So the amount, if God forbid, it would be just INR 42 crores, right? No additional, nothing else.

Nothing.

Yes.

I'm trying to understand the amount of in contention?

Yes. Yes. That is INR 42 crores. You're right.

Okay. Okay. Could you mention the attrition over the last one year, employee attrition?

So it was 21%.

You mean December '18 to December '19?