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

Ladies and gentlemen, good day, and welcome to the Spandana Sphoorty Financial Limited Q4 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Padmaja Gangireddy, Managing Director of Spandana Sphoorty Financial Limited. Thank you, and over to you, Ms. Reddy.

Good evening, and welcome you all to quarter 4 of FY '21 and full year of FY '21 financial and business update call of Spandana. It was more than a year since the nationwide lockdown was imposed in March 2020. While we have been managing the disruption caused by COVID-19 in the last 3 quarters, quarter 4 gave us a respite with the business hitting back to almost near normal. This was the first financial year in which the total revenue exceeded 1,500 crore. Our revenue increased by 40% quarter-on-quarter, from 344 crore to 480 crore and 9% year-on-year. Quarter 4 had 33 crores of income recognized upfront towards direct assignment transaction and 23.6 crore write-off recovery. Quarter 4 performance was much better compared with the previous quarters in terms of loan disbursements rating, all-time high and selection efficiency hitting near-normal rate. Though there was movement our portfolio from Stage 1 to Stage 2 and 3, we have seen huge reduction in PAR 30-plus. So 2,420 crore was disbursed in Q4, which is all-time high that we have levered this growth in the quarter. Loan disbursement increased from 49 crore in Q1 to 1,634 crore in Q2 and 2,300 crore in Q3 to 2,426 crore in Q4. Full year disbursement has been 6,426 crore as against 8 crores that we disbursed last year. Disbursements took off only in the last 2 quarters as most of the states had intermittent lockdowns until August 20. Collection efficiency for the quarter increased from 96.2% in quarter 3 to 100.6% in quarter 4, including the arrears. Number of zero-paid borrowers reduced drastically to 61,000 in quarter 4. We opened 61 new branches in FY '21, and these branches were opened in 39 districts of 11 states. Most of the new branches were opened in states where we have less penetration. And these states are also less penetrated in terms of number of MFIs operating base and the average AUM per household. Of these 61 new branches, 5 are gold loan branches opened under Criss Financial Limited, which is our subsidiary in Andhra Pradesh. Portfolio grew by 393 crore from 7,764 crore in Q3 to 8,157 crore in Q4, recording 19% growth Y-o-Y and 5% quarter-on-quarter. Out of 8,157 crore portfolio, 5,771 crore portfolio has been created post COVID from June 2020 onwards. This accounts for 81% of total loans in terms of number of loans and 85% in terms of portfolio. As communicated in the last quarter, our new loans disbursed from November 2019 have monthly repayment cycle. The transition from biweekly to monthly as borrowers do not want to commit higher time for attending center meetings in order retain installments. This has helped us a lot in the last 1 year as loan officers were not required to pay 4 to 5 digits in a month. Monthly loans have been performing significantly better than weekly and biweekly loans. With the collections cycle starting from second half every month and ending by 10th, there is ample time left to follow-up with the borrowers who have not paid their installment on the scheduled date. Monthly loans have 99% collection efficiency in Q4 versus weekly and biweekly loans showing 86% collection efficiency. Spandana's portfolio quality to improve the -- with the 30-plus portfolio reducing from 9.4% in Q3 to 6.8% in Q4. GNPA was at 3.1% and NNPA was at 1.4%. We made 695 crore provision in the last 5 quarters, including Q4 of FY '20. Of this, we wrote off 196 crore in December and 166 crore in March, totaling to 362 crore. After writing off 362 crore, we still carry 412 crore provision, which accounts for 5.1% of total AUM. This includes 53 crore provision on standard portfolio. There has been significant recovery from the portfolio we wrote out in December. In the last 4 months until April, 20.4 crore has been recovered, which is almost 45% of the total demand from these loans. So Criss Financial Limited, which is a subsidiary of Spandana, and is an NBFC that offer secured loans and group loans to households, whose income is above a threshold of microfinance borrowers. Performance of CFL has been superb as it has done exceedingly well on every parameter in the last year. Its portfolio grew by 840% from 168 crore to 403 crore. Portfolio has been well diversified across segments and products. Besides group loans, it also offers loans against property, business loans and gold loans. CFL disbursed 326 crore in FY '21. CFL has operation only in Andhra and Telangana state, and these states have done exceedingly well, with collection hitting 99% by October '20 itself. Revenue of CFL grew by 60% from 35 crore to 56 crore Y-o-Y. Portfolio quality has been diverse, with a GNPA at 1.1% and NNPA at 0.9%. So coming to liabilities, we raised 4,000 -- sorry, 5,480 crore debt in FY '21 as against 5,120 crore in the FY '20. In quarter 4 alone, a total amount of 1,912 crore was raised. So we wanted to diversify and broaden the funding base and they vary dependently on a few lenders. Our efforts to raise funds from capital market yielded very good results, and we raised 834 crore through NCDs and MLDs. This does not include the funds raised through NCDs under the LTRO under PCGS. Though it was a little expensive in the third quarter, we could bring down the rates in quarter 4. Despite paying a little higher rate on NCD and very few delayed transactions that we were able to do this year compared to last year, overall financial cost ratio still reduced from 8% in FY '20 to 7.7% in FY '21. Average cost of borrowing also reduced by 50 basis points from 11.9% to 11.4%. On-balance sheet debt outstanding increased from 3,025 crore in FY '20 to 5,373 crores in FY '21, resulting in leverage ratio increasing to 2.6x. So we also added 5 new lenders in Q4. And in the year, we added 16 new lenders. Criss Financial raised 208 crore in FY '21 from banks and financial institutions. And last year, CFL was dependent on Spandana for debt, and it started raising debt on the strength of its own balance sheet. And it is heartening to note that the branch lenders in the first year itself increased from 5 to 11. Total cash and bank balance remained at 1,135 crore, which is 13% of total assets versus 10% in Q3 of FY '21. So no new features in the usual scenario spend 50% of day time on collections and the rest to 50% of business expansion, which includes the acquisition of new clients and disbursement of loans. This changed drastically in the last 1 year, with almost 100% times spent on collections and still not being able to meet all the borrowers as per the schedule. We wanted to maintain 1 loan official for every 400 borrowers and to enable them to reach all borrowers within the scheduled time. It was a deliberate attempt to make to increase the branch loan officers in Q4 and as such, the branch loan officers increased from 6,100 to 6,720. Average portfolio per employee increased from 0.8 crore to 0.95 crore from FY '20 to FY '21. Average portfolio per loan officer also increased from 1.122 crore to 1.2 crore in FY '21. Average portfolio per branch increased from 6.8 crore in the FY '20 to 7.8 crore in FY '21. There was a slight increase in the cost-to-income ratio, which increased from 19.9% to 21.9%. It's basically 200 basis points. And this was due to: a, higher income that we recognized in FY '20, owing to multiple delayed transactions; and b, the lowering of interest rate; and c, the write-off of interest income. NIM reduced slightly from 16.7% in FY '20 to 15.4% in FY '21 despite the reduction in financial cost ratio. This is again due to reduction in the lending rate, as we reduced interest rate by almost 280 basis points in the last 1 year. And the other reason, as I mentioned earlier, we have done very few delayed transactions and further like there was an interest written off. Operating costs continue to be lowest at 3.24% in FY '21 versus 4% in FY '20. Abhiram, our group company, contributed just 4 crores towards rent for the quarter. Had Abhiram not contributed this amount, operating cost would have been 3.29% and the difference is just 5 basis points. Credit costs for the year stood at 8.8%. Pre-provision operating profit decreased from 892 crore in the FY '20 to 846 crore in FY '21. This reduction is due to 219 crore upfront income we recognized last year versus just 43 crores that we recognized at this year. And as I mentioned, the interest lending rate reduced by 280 basis points, and there was some interest, which was written off. PBT reduced from 618 crore in FY '20 to 200 crores in FY '21 and PAT reduced from 352 crore in FY '20 to 145 crore in FY '21. While the pre-provision ROA was impacted 11.6% for FY '21, post-provision impact, it was just 2%. ROE was 5.4%, while the normalized ROE, without considering provision, it was 20.9%. So Criss Financial made 17 crores PAT on an average book of 286 crore, and CFL's share of portfolio being 4.9%, but its share in profit was 9%. The net worth increased 5x in the last 4 years from 537 crore in 2017 crore to 2,749 crore and capital adequacy ratio was healthy at 40%. And state-level, district-level diversification is very much intact. Three largest states MP, Orissa, Karnataka constitute 48% of the total portfolio. Karnataka replaced Maharashtra as third largest state after MP and Orissa, as we have been doing disbursements very cautiously in Maharashtra. Only 10% for more than 1% of the total AUM and no district has more than 2.2% of the total portfolio. We continue to maintain 94% rural and 6% urban in terms of AUM. Our agile risk management helped us avoid states with high MFI penetration. As such, we don't have operations in Assam, and our portfolio investing with less then 50 crores as we have been pulling back in the last 2 years. We had several rounds of discussions with the Reserve Bank of India under inspection report, finding out that we charged an excess interest rate from Q3 FY '18 to Q3 FY '20. The guidelines state that interest charged around loans to be calculated on average loan outstanding exactly the same way that cost of funding is calculated on average debt outstanding. The guidelines also state that margin is a difference between interest charged on loans and cost of funds, which should not exceed 10%. As stated in the guidelines, we always make sure that the margin was not higher than 10%. While our base interpretation is interest charged on loan should not be higher than cost of fund plus 10%, though point #4 and 5 of pricing guidelines clearly indicate that interest charged around loans to be calculated on average loan outstanding and the difference between interest charged on various loan products should not be more than 4%. While the management is very clear on -- very clear that we have not charged the excess interest rate, and RBI's acceptance saying that we charged excess interest rate, and our queries on why the guidelines state that the interest charged on loans is to be calculated on average loan outstanding was never answered by RBI. We saw guidance of Board on it and the Board decided to refund the excess interest charge as opened by RBI. We submitted a proposal to RBI agreeing to repay interest on closed loans and reduce interest by 1% in actual loans, and this proposal was submitted in November. While the loan level calculation is still pending, we made 55 crore provision towards refund of interest on closed loans. We proposed to calculate excess interest charged on total loans and refund that amount in case a borrower had not taken subsequent loans, or no loans given so far, or had ever been written off. For borrowers who have active loan, this amount, the average amount of which comes to 200, this amount will be credited to the existing actual loan. And in case any of our loans were written off, this amount will be recognized as recovery out of written off loans. For the remaining active loans, we proposed to reduce 1% interest rate, while resecuring loans post to moratorium, and RBI said that they will come back at a later stage. Coming to the impact of second wave, while we thought that FY '22 will be a normal year, without having to make the additional provisions towards COVID as our balance sheet partly sufficient provision to cover the impairment of portfolio impacted by COVID last year, it was very, very discouraging to see what ramps filed in April and May, number of cases tapering May, which is 4x of last year's peak. So almost every state had announced a lockdown and a few states, such as Chhattisgarh, Rajasthan and the MP, they did not include, unfortunately, MFIs and essential services. This time, contrary to last year, large number of clients that were infected, and some of them were also hospitalized. But however, the difference compared to last year and this year, while we shut down all branches almost for 2 months, so while we wanted to open after 1 month, it still took time for us to get back the staff and again open down the -- this time later, that has not happened. And at least, like all those borrowers who are having cash and who are willing to repay the installment, so our staff are able to reach out to them. So we have taken care of our employees in this testing times. Each employee has 3 lakhs cover towards health insurance, which also covers COVID. Besides that, we also extended some more financial support to help them buy medicine, oximeter, et cetera. All affected employees are given 15 days paid leave. So as 70% of our loans are now having monthly repayment schedule, and all these loans are collected by 10, there was no much of impact in April. However, collection efficiency in April, because Maharashtra had locked down from 25th to 27th of March, however, collection efficiency in April fell by 5% to 95% as against 100.6% in March '21. So Maharashtra had early lockdown from third week of March onwards. 10% to 15% of our staff like fell sick, and they could not get in to work. Due to 15% staff going on leave, either they are sick or like family members are not well, we could not reach out to all borrowers on the scheduled day of payment. Once again, like the livelihoods of borrowers got impacted very badly due to lockdown. And for example, like in Rajasthan, which is very, very badly affected, as we operate like the Gujarat border, the districts, so most of the spouses of our borrowers, they once again like claim that to Rajasthan as like all factories, constructions and diamond factories were shut down, and then again shut down in Gujarat. So except agriculture, which was more or less impact, every other economic activity got impacted. We are expecting most of the states to end the lockdown and resume by May end as the number of new cases are falling consistently in the last 15 days. So if that happens, we may have to provide a 2% to 3% more provision in the FY '22. And we are hopeful of generating at least like 5% to 6% ROE in FY '22 and the portfolio growing to 10,000 crores if the lockdown comes to an end. It is like by 10th or 15th of June. So we are very bullish on gold loans, and we see less competition from organized players in Tier 2, Tier 3 towns of AP and Telangana. And we are planning to open 50 to 75 new branches in FY '22 and grow the portfolio to 250 crore to 300 crore from the current level of 40 crores. So with this overview, I'm opening the floor for questions and answers. Thank you.

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

I hope everybody is safe at the management level. My question was with respect to the collection efficiency against the billing of the month. So while we are indicating that beginning in December, that number was close to 93%, which is excluding the areas. What would be that number for -- comparable number for Feb, March, April and May?

Yes. So it was 93% for December. And without areas, city, it was 94% for March and -- sorry?

96%

Sorry, it was 96% for March. And then, again, like it came down to 92% in April.

And then how is it trending in May months, like some color if you can do?

It's at like January, it went up to 94%. And again, like February, it increased by 2%. And it stayed at the same level in March. Despite that, like Maharashtra was in lockdown and a few other states like started showing the signals of increasing cases. But in April, like that has come down to 92%, which is a 4% dip. And May, like I have reported, like as I said that like all our loans will be closed by 10th as per the schedule. So -- but however, like our staff are not able to meet like all the borrowers at this time as 20% of the staff, like they were not available in branches, like the collections are still going on. We are meeting the borrower so that we could not meet sell spend. And at this point in time, the collection efficiency is like some 82%. But however, like we have 1 more week to follow-up with all these borrowers, and we are hoping that like that will increase.

Right. Right. Well, ma'am, the last one. The other question to this was that, which are the 3, like, say, 3, 4 top states, which are having the least collection efficiency? And what are the kind of challenges that you are facing there?

Yes. For us, like, it's just Kerala. Kerala has lowest collection efficiency. And they -- I think like it's more to do with the culture. So like Kerala is very silent in terms of allowing MFIs to operate in the state. So I understand that like there is ambiguity to that extent. But again, and like the staff of the -- it is a state-specific issue. So the moment lockdown is announced, like they don't want to really move out of the branch, like they don't want to go and meet the borrower. So all of them, like they just sit in the branch, and like they are just following up in terms of asking borrowers to pay digitally. So here, like there is no difference that I could see from -- the borrower level between Kerala and also Andra because Andra, Telangana, like even now, like we have 94%, 95%. In May also, we have 94% collection efficiency. I don't see that like there is a difference at the borrower level. But like it is more from the staff. And then next to states like, which is not really doing great for us is Rajasthan. So Rajasthan here, at least, like most of the branches, have staff. So they're going to the field, like they're meeting the borrowers, like they're interacting with them. Of course, like following that protocol in terms of not conducting central meetings, but like they're going and meeting individual borrowers. I would treat it like a serious concern. So -- and again, we have operations in [indiscernible], [indiscernible] and bond. [indiscernible] And these 3 districts, like they have so much of a dependency on Gujarat's bad book. And again, like in the last 1 to 2 months, there was a reverse migration. Surat was closed and all diamond factories like in Gujarat were closed and all textile factories were closed. And so -- and construction activity, I was told that like in the last 3 days, permission was given until 2:00 p.m. But otherwise, like, while all economic activities were closed, so our borrowers pauses, like they came back from Gujarat and they are now with Rajasthan. So what has happened last year also, Rajasthan started at a very low collection efficiency. But in a month's time, like once the lockdown was unlocked, so Rajasthan has shown significant improvement. I'm expecting the same, like I don't see Rajasthan as a problem. And this is like something different like the AMP and MP, like -- so it's a kind of like very strict lockdown and profile into [indiscernible] Like the impact, particularly on the staff, is very, very high. And speaking like on behalf of the industry, because everybody reported like a very high number of COVID-impacted cases, like particularly for staff, also and again, most of them we're not able to reach. And 1 more reason that I could see like in AMP is like this time, so we have been -- the yield was very, very low. So that also has impacted the collection efficiency. So these are the noise to 3 stage.

Okay.Okay. And just 1 more question. Like since now, we will be following the RBI guidelines on the NIM -- on the spread management, so what would be the incremental impact that will come on our NIM, like is that business model-wise?

So I think like from February 2020 onwards, so like we started following whatever like as per RBI norms past the plus 10%.

Okay. Obviously, you've already done that. Okay. Okay, clear.

Yes. Yes.

One last confirmation maybe on that. So last quarter, our zero-plus [indiscernible] was 10.9%. Now this quarter, it would be 10.3%, right?

Yes, it's 10.3% for this quarter.

Yes. So this is in addition with the 2.4 -- 2%, 2.4% write-off that we have taken during the quarter. Fair understanding -- is that a fair understanding?

[indiscernible] because mostly, as ma'am mentioned in terms of impact, last week, the lockdown started in Maharashtra. So it was -- were added much to zero-plus.

But it was down -- if you see like 30 less [indiscernible] , like there is a significant reduction. So for example, like the 30-plus, we have 2% -- 31% to 62%, 61% to 91.6%. 2% plus 1.6% is 3.6% plus 3.1% GNPA, it is like 6.7%. Basically, like up to 30 days means like they have only 1 installment. So at least like we have seen 99% recovery like from that bracket.

Right. Because now we are also moving towards monthly collection model. So...

And I think -- for example, like if the installment is say, for example, 1,600, and if the borrower has paid 1,500, so like still that and borrower will be classified in whatever, 1% to 30%.

The next question is from the line of Sarvesh Gupta from Maximal Capital.

I hope everyone is safe. So first question, ma'am, you have like 71% of the portfolio, which is your new book, which has been created post the first COVID wave. So now that book has obviously been pristine until March, but I would want to know the collection efficiency from that book of 5,771 crores in April and May to understand how that is behaving.

Thank you, Sarvesh. So we -- in terms of number of loans, like that is 71%. And in terms of portfolio, that's about 85%. So the brand collection efficiency was very much intact like when it comes to new loans, it was 99.98%. But in May, so it is still at 91%.

So then like...

Like we have 1 more week to go, and we are expecting like much more effort being put in this week. So -- but at this point in time, like it is 91%.

So yes, I mean, prior to first wave, we had a book and then that behaved in a certain manner as we saw in the first few quarters of last financial year. Now do you feel there is -- is there any reason to believe that this book is going to behave differently and because -- will it be a low-risk book at all for us? Or will it be more or less behave similar to other portfolio, which has not been written off yet? Because 91%, again, is a significant demand brings in memories of the first wave or post first wave. So is this book -- should we treat it differently? Or should it be treated at par with your remaining 20% of the book?

No, if I go back to previous crises, like starting from [indiscernible], [indiscernible], [indiscernible] crisis, so wherever like we have given loan, new loans to your borrowers so who had like overdue at some point in time, of course, like when we disbursed the loan, she cleared her overdues, and there was no loan outstanding as far as the previous loan was concerned. But again, like some of these borrowers, for example, between April to October, so like they were in overdue bucket, like they were in 30 days, 60 days. But subsequently, upon paying the overdue, we gave them loan. So if I look at like how these portfolios have performed in terms of like loans given to overdue borrowers at one point in time, so I have seen like -- so it's not the same 1% credit loss that we have seen. When it comes to these loans, be it like post-dated crisis, of course, like AP behaved much better. But if I look at like loans given to borrowers post demonetization, the new loans given had this credit loss of 2% to 2.5%. So I expect like -- I don't think that like we will have 0.5% to 1%. But considering like whatever is happening, so considering that like whatever has not happened, maybe 1% might increase to 1.5% or mark 2%. But considering the current situation and, for any reason, if the lockdown gets extended for a longer period, I expect at least like 2% to 3% losses on this portfolio.

Okay. 2% to 3% is for this 80% of the book, the new loans, right?

Yes.

And for the remaining part of the book, which is 20%, which is legacy loans, how -- what kind of provisions?

For that, like, we still carry -- apart from whatever that we have written off, we still carry 420 -- 412 crore provision on our balance sheet. So if I look at like a 60-plus, which is mostly getting into 90 days, today, we have 295 crore plus 257 crore. 300, 557 crore -- so we have 557 crore. so even assuming that like 80% of this will not be paid back, but to that extent, like we have 412 crore provision.

Okay. But for that 5 -- 1,500-odd crores of legacy book, will 400 crore be enough for the provisioning as of now? Or do you feel that further provisioning would be recorded?

So almost 80% -- it's almost like 80%. So if you see like we wrote off 196 crore in December, so January, February, March, like 50% of the demand that's pertaining to these loans was recovered. So I'm -- like we have taken 80% instead.

Okay, understood. And on your cost of borrowing now compared to your nearest competitor, your cost of borrowing at 11.4% is 250 basis points higher, which is very surprising, given your higher capital adequacy, lower NPA, higher AUM growth. So what are the lenders reading differently between you and your nearest competitor when it comes to cost of borrowing? Because this is a significant gap.

It's a question, sir, also, like we are not able to understand. Like while we are comparing the interest rates of ours, like we have common banks, for example, IDFC Bank, Kotak Mahindra Bank, the channels who are the common banks, it's banks like State Bank of India, so like Bank of Baroda. So when we look at like these common banks, of course, like you know that like we had a CDR history. And the past rating that we had in 2017 was BBB, we got to BBB- impact. So we started there and like the rating was upgraded still. So yes, but still like when we compare the interest rates of common banks, we have not seen more than 25 basis points. So like, for example, State Bank of India, which has done 2,500 crores base last year, it was down at 8.5%. So and then again like Bank of Baroda, there is absolutely no difference. We thought that like this 25 basis point difference would be attributed to better rating, like they have 1 notch higher rating than us. But like we are not able to understand like this difference between 8% to 11%. And whether that 80% financial cost ratio, so we were wondering because it cannot be cost of borrowing.

Okay. And...

Even part, for example, like whatever the funds that they have given to MFIs on the TLTRO, it is same like first to 1 year, they charge 7%. And from second year onwards, like they have been charging 11%, yes.

Okay. Maybe it's a mix question...

I think because of -- speaking by industry, like we calculate like the average cost of fund. We calculate financial cost ratio. We calculate marginal cost of borrowing. So I think that there is some confusion. So if you look at like our financial cost ratio, it is 7.7%.

Okay. And ma'am, final question on this collection in this cycle. I think you alluded to 3 things. One, you alluded to staff behavior in Kerala. You alluded to problems of Gujarat industries for Rajasthan. And you alluded to very high impact of COVID on the staff in MP. But our basic premise has been that because Spandana is very much exposed towards rural and people who are mostly deriving their income from basic sort of services, which have been like milk or agri, et cetera, which are, even in this wave, we haven't seen the impact. I mean people are consuming everything pretty much at the same pace, apart from some intermittent. So overall, I mean, the basic premise that most of our customers are not that much affected, is that holding true as per your ground level experience? Or are you seeing some different shades of the impact in this second wave on your customers and their income profiles?

Yes, I definitely share the similar kind of understanding. But the thing, what is happening is, like some of the borrowers, like who have like some money in their hands, but they are not ready to use that money to pay the installment because they are saying that like the situation is very precarious. So generally, like agriculture laborers, like May, June, like it's a kind of lean season for banks. So like agriculture activity begins from July. So but right now, for example, like as I was always explaining, when it comes to low-income households, so they have diversified the sources of income. Of course, like most of the women like who are our borrowers, they work as agriculture wage labors. But their spouses, like they will work as construction laborers, so they will work as drivers, they will work as painters and all that. Unlike their kids like because they'll be working as mechanics, carpenters, plumbers. So like they have diversified sources of income. And sometimes like the spouses work as auto drivers and rickshaw drivers and all. So those agriculture, to some extent, is intact. But again, like part of the household income is impacted. And then again, like wherever like there is no impact or like there is a major impact, but again, like what our staff are often saying is, borrowers like they are saying that like, yes, like we have money. But again, we do not know like how long like this situation will continue, this lockdown. So like what we have seen last time, like it got extended, extended. That is why like we are holding this money, we are saving this money for our basic needs. And then, again, for any reason, like if the lockdown is lifted, like next month onwards, like we'll be more than happy to pay. So this is -- I think like because of the precarious condition, uncertainties associated with the current lockdown, and people are like, if everybody is having money also, they're just holding that money in their hands, not ready to give away because they don't know like when the other sources of income will really get opened up.

And this is slightly higher than the last cycle that we have seen, the behavioral impact of holding on to the resources?

And then again -- but again, for example, like in April, like it was just last week, so we started with 2 percentile efficiency, at least like the best time, it has not gone that bad. So like no branches shut down, so all staff are there. So we are meeting like every borrower. So whoever is willing to pay, like we're collecting. And at this point in time, like it is still at 80%. So things are really better. Because -- like even in May also, like it was some 14% percent collection efficiency when we reopened our banks just last year. So it has not gone down to that level.

The next question is from the line of [ Sagar Khanna ] from [ PWC ].

Just continuing from the previous speaker, this wave, I believe, is far more prevalent in the rural areas, unlike wave 1. And it has not just affected -- I mean, lockdown -- it is not just lockdown which is affecting incomes, but I believe productivity and mortality has also impacting incomes. What are your thoughts and how are you assessing things?

It is very different, like from state to state. So for example, like the last 3, 4 weeks, like the -- it had big-time impacted in Karnataka. So until that time, like April, at least like it was only Bangalore and also Bellary and Hubli, like these urban places were more impacted. But what we have seen, like in the last 2 weeks is like the rural Karnataka is getting impacted. And then again, as you rightly mentioned, like the casualties are much, much higher. So -- and again, like from the staff point of view, so like we are like more sensitive in terms of asking staff, of course, like the following safety measures. But again, like if somebody has lost like some of the close family members, so they were like a little scary in terms of going to field. So that sensitivity is much, much higher like this year. But again, last year, the difference is because one month, like these are like home, like it was complete shutdown, whereas this month, definitely like the casualties are higher, the medical expenditure has big-time increased. And [indiscernible] the government support that has gone to like this particular segment last year. Somehow like we don't see that happening this year, like, because the ration -- extra ration, and again, like each household got like INR 1,500 to cope up. And then again, unfortunately, like the vaccination, like which should have been a kind of solution somehow, but again, like whatever the government has spent on vaccination, which is like less than 0.3% or 0.4% of GDP, whereas like because of the shutdown, we all know that like the impact on GDP is almost like 2.5% to 3%. By spending 1% of GDP, they should have saved like 2% of GDP and, more than anything, of course, like people's lives and health.

So ma'am, considering this scenario in wave 2, would you still hold on to your credit loss number? Or do you think that can inch up higher in the current scenario?

No. I did mention in my like initial remarks -- in the remarks, like this year, the normal provision will be like up to 1%. I don't think that like 1% will do. So we have to make at least like the 2% to 3% higher than that. So of course, it will definitely be not as high as last year, looking at like situation, most of the states getting into control. And if not like by this month, then like if the lockdown is unlocked by 10th or 15th, so we will have normal July. Assuming that and if there is no third wave, still like, I think, apart from the standard 1%, we may have to make the [indiscernible] like to 2%...

So 2%, 3%, and in addition to the 5% buffer that we hold, right?

Yes, yes.

So we will be drawing down this buffer. So...

That is 5 percentage towards legacy loans. Those loans disbursed prior to COVID '20, yes, March 2020.

March '20, okay. And any change of strategy considering that wave 2 was a big surprise and it coursed all of us on the wrong foot? And now there are talks of wave 3. Any change in our business strategy?

So like any other MFI, like we are right now focusing in terms of building, like the digital collections. But again, to what extent like we'll be able to motivate borrower just by calling us is still a kind of question. And then again, like the cash that the borrower is holding has to, first of all, go to the bank account and then only like she can transfer the money using like any payment gateway. But however, like assuming that like some 30%, 40% of the borrowers, with the help of their family members, they can do that right now, like we have been working on digital collections.

No, ma'am. Not just from a collection efficiency perspective, but in terms of how we assess risk, what kinds of disbursement we would want to do considering that disruptions may keep happening, from that perspective.

So disbursement, I think, like even last 1 year also, while we wanted to disburse about INR 8,500 crores, we were not in a rush. So we were very, very careful and cautious, and we even let like some 2 lakhs borrowers to drop out. So whatever the behavior that we have seen during the lockdown. And subsequently, even if like some of these borrowers, they have closed their loan, but like if they were too erratic in terms of attending center meetings, unlike they were in 90-plus bucket for some time, but even post to closure of that loan also, so we did not give loan to each and every borrower. So we just let them drop out. That is why, like you could see like some drop in the number of borrowers also. So I think like we will be extra cautious and careful. And then again, so of course, like Spandana is an NBFC-MFI, the opportunity in terms of diversification is very, very limited. But we have CFL. And they're -- so like we want to -- this could be a kind of real opportunity because like if NBFCs and NBFC-MFIs are not disbursing much if they become very cautious, of course, like one more reason to be very cautious is availability of funding. And so the liquidity is one more reason. So like we see new opportunities for gold loan, and particularly, like the southern states like where most -- even low-income households, like they will have some gold. So we want to really focus on that. So that is doing extremely well. So we want to focus, and we want to open more branches, like in small, small towns. And we already opened some 10 branches, and we want to open like 50 to 70 branches in the next year -- 1 year.

Okay. So FY '21, our leverage ratio was 2.6x, right?

Yes. And I'm think -- I'm thinking while answering. So like -- and when were looking at like which are the loans going back, and some like interim loans, like because the borrower has one loan. And then again, so we gave like interim loans. Of course, like in our case, like at any given point in time, not more than 25% of the borrowers had the second loan. But still, like if I look at how each of these loan products are performing, the performance of interim loan is very, very bad. So that says something. So I think like the borrowers who are greedy and who are always in lookout for loans, who are taking second loan without the existing loan getting closed, so they are not repaying loans. So I think we need to really think back whether we need a borrower to have multiple loans. So we have not started, like in the last 1 year, we have not given even one interim loan. So it means the next 3, 4 years, I don't think that like we are looking at giving one more loan because like if a borrower has 2 loans, everybody was saying, "Okay, let me just pay one loan, but I cannot pay one loan."

Right. So ma'am, just one thing on the leverage and the capital adequacy. FY '21, our leverage was 2.6x, right?

Yes, yes.

And where do you see it ending in FY '22 based on the current plans and the way we see it today?

As per our risk management policy, like the maximum leverage that we are allowed to have is 4x. Maybe this year, like 3, 3.2 max -- 3. While we are looking at INR 10,000 crores and we have our own capital, like which is INR 2,700 crores, so the most like, we might raise like INR 7,000 crores, which means like it is 3, not more than 3x.

And where would that capital adequacy be at end of FY '22?

Similar range. Like we will still maintain 40%. So assuming that like the CDR -- so ROE is like -- as I said, this year, our NIM will be 15%, so FY '22. 15% minus 3% credit cost, like that is 12%, minus 3% operating costs, like that is 9%. And then tax, 2.5%, so it's -- so 5 -- 7 -- 6.5%. So this is 6.5% and 3x leverage. And then again, like 6.5x on -- even on the INR 8,000 crores also, I think, like we should be able to add, if not more, like at least INR 400 crores back to the CDR.