UGRO Capital Limited (511742) Earnings Call Transcript & Summary

Good morning, everyone, and a warm welcome to you all. My name is Shreepal Doshi, and I'm from Equirus Securities. We thank the management of Ugro Capital for allowing us to host their 4Q FY '20 result update call. On behalf of the company and Equirus Securities, I would like to thank you all for participating in the company's earnings conference call. On the call from the Ugro management, we have Mr. Shachindra Nath, Executive Chairman and MD; Mr. Abhijit Ghosh, CEO and Director; Mr. Kalpesh Ojha, CFO; and Mr. Vivek Seshadri, Head of Strategy. We'll start with the opening remarks from the management, followed by the question and answer. Over to you, sir.

Good afternoon, everyone, and many thanks for joining us for our quarter 4 FY '20 earnings call. FY '20 was our first full year of lending operation post the change of ownership and new capital raise. And the story of this financial year for NBFC has undoubtedly been adaptability in the face of adversity. The industry has faced a series of daunting challenges, culminating in the COVID-19 crisis, and it is times such as these that the mettle of firm is tested. I believe that we have performed admirably given the macroeconomic conditions, particularly given our youth as an organization. We have launched 4 distinct distribution channels, through which we can serve a broad range of SMEs within our sectors of specialization. The portfolio we have built in short term is sizable at well over USD 100 million, but more importantly, is of a high quality due to our conservative risk management framework. However, before speaking on business metrics, I would like to start by speaking on COVID-19 crisis and how we have responded as a company. We have taken the unequivocal view that it is our duty to prioritize the long-term well-being of our workforce and our customers during this crisis. We swiftly transitioned our employees to work from home to ensure their safety, and we have not reopened any branches that are not in green zones till date. The transition to working from home has been commendably undertaken, and our employees remain highly engaged through the commencement of a range of strategic projects that will add long-term value to Ugro. As for our customers, we have granted all of them a 3-month EMI moratorium with a default opt-in approach to reduce the financial pressure on them during this period, which has already been so difficult for small businesses. Over 80% of our customers by loan volume have availed this moratorium. We have simultaneously taken steps to preserve the strength of our business at this time. We have taken stringent cost optimization measures, such as renegotiation of leases, which will lead to significant savings during the lockdown period. Additionally, we have postponed bonuses for FY '20 company wide, with me and our C-level officers voluntarily foregoing our variable pay for FY '20 altogether. Our independent directors have likewise voluntarily taken a 12.5% reduction in their sitting fees for FY '21. Lastly, our mid and senior level executives have led short-term adjustment of remuneration through the end of FY '21. Our provisioning has also been liberal in the face of COVID-19 uncertainty, and we have proactively provisioned a total of INR 10.5 crores for FY '21, of which INR 3.3 crores is specifically for the loan impairment resulting from coronavirus impact. Moving on to the business metrics. As of end of FY '20, Ugro has INR 1,366 crores of total disbursals, of which INR 1,284 crores were achieved in FY '20. We disbursed INR 290 crores in quarter 4 itself despite the COVID-19 lockdown, which made us lose a full month of sales productivity. Our asset under management as of end of FY '20 stood at INR 861 crores with blended yield of 14.3%, an unprecedented figure in the first year post reinvigoration of the business. This becomes more impressive still when considering our credit policy, which are very conservative by design. Our portfolio is well diversified by sector and geography and is nearly 70% secured in nature. Our AUM is spread across 7,764 customers for an average ticket size of a highly granular INR 11.1 lakh, which leaves us minimally exposed to concentration risk. Our GNPA and NNPA figures stand at 0.9% and 0.5%, respectively, both being comfortable figures given that our book is now starting to show some vintage. Our distribution channels have seen further growth in quarter 4 despite the widespread destruction. Our GRO partner network has increased 14% from last quarter to 355 in total, spread across the nation's key SME clusters. Our ecosystem channel has added 5 anchor partners with 40 new vendors receiving sanctions from INR 34 crores of incremental supply chain financing sanctions. We have not disbursed loans in March, April and May 2020, but we expect to resume disbursing from June 2020. A key part of this resumption will be our Sanjeevani Program, which will be rolled out in 2 phases. The first phase will target those SMEs that provide essential goods and services while the second phase will focus on those that have maintained robust cash flow through the lockdown. We are excited to roll out these programs as we feel this will provide an excellent path for fundamentally strong small businesses to get back on track as the nation's economy reopens. On the liability side, we have a total sanction of INR 300 crores as of the end of quarter 4 FY '20. And this, combined with our large equity base from inception, has allowed us to maintain a comfortable position in terms of liquidity, which is not a claim that most lenders can make at this time. We maintain immediate liquidity of over INR 200 crores, which includes INR 127.5 crores of sanctioned liability that we have not yet drawn on. The RBI's TLTRO scheme is also likely to lead to a good deal of comfort for high-quality lenders, such as Ugro, as it promises a reduction in the liability crunch in the months ahead. Our high liquidity during this time of crisis is a real boom in terms of the flexibility it allows us as an organization, and we are confident that we can parlay this into a growth in our market share in the coming months. Our financial performance has been good, with us declaring a profit after tax of INR 20.4 crores for the quarter and INR 19.5 crores for the financial year. This has been largely a result of the efficiency of our tech-focused approach to lending, which has allowed us to garner a large disbursal volumes, while keeping the operational cost relatively low. We have recorded a 30% increase in our net income quarter-on-quarter, with our Q4 figures standing at INR 30.7 crores. Our net worth as at March 31, 2020, stood at INR 922 crores. Overall, FY '20 has undoubtedly been a tough year for financial services in India. However, as the saying goes, pressure makes diamonds. And I firmly believe that the lessons we have learned this year have led us to becoming a far more mature as an organization than would be expected by our age. Our success in the face of the many obstacles we have faced this year have primed us to grow into a larger player in the Indian SME lending space, and we hope that you will keep faith with us on our journey to future successes. The full impact of the COVID-19 moratorium opted by borrowers across lenders and the mortality of small and micro businesses is still unknown. Given our deep understanding of our selected sector and our digitized platform, combined with analytical capabilities, we believe that we are at much better standing vis-a-vis our peer set. There are not many NBFCs in the current environment which have capital adequacy ratio of more than 85%, virtually no liability side problems with gradual increase in the debt facility coming from a diversified set of lenders. These factors lead us to believe that we will restart the business with more vigor than most other lenders. And we will continue to work towards our mission of solving the credit gap of small businesses in India. Thank you all, and over to Equirus team, Shreepal.

So the forum now is open for question and answers.

[Operator Instructions] First question is from the line of Prashanth Sridhar from SBI Mutual Fund.

Yes. Am I audible?

You are audible.

Yes. Sir, education, I think, would be one of your largest sectors looking at presentation, but schools would probably be one of the last things to reopen. So could you just throw some light on sort of what is the feedback you're getting from customers and what's the situation on ground in the education part?

Prashanth, you're right that the schools would be the last one to open, but majority of our education, which is K-12 and playschool, are in the prime segment of the market. And largely, these are the schools which have very long vintage and higher residual cash flows. So most of them have while availed the moratorium, fundamentally, we still believe the health care and education are more resilient as a sector, especially K-12 school in the Tier 1, Tier 2, Tier 3 towns would physically resume and their cash flow would restart.

Okay. And your cash position, as such you don't see it deteriorating because of the lack of income or something?

So normally, school -- the K-12 as a sector is a little cyclical because most of them receive their first tranche of cash when the new admission and the results happen. So the largest volume of cash which the schools normally receive is in the month of March and then when the next season starts. Unfortunately, this time, the March has been a year wherein most of them would have not received cash or received less cash. But as I said that you should divide the K-12 school segment between prime schools to APCs (sic) [ APSs ], which is Affordable Private School. The majority of the cash flow stress is in Affordable Private School. Mainline metro K-12 schools are still receiving a large portion of their fee income because they have gone digitized and they continue to impart education through digital mode. But obviously, the real -- so we don't see school as a business to have mortality where we will see they will permanently shut down or will go out of business. They may have a temporary cash flow mismatches.

Sure. And just one last thing, if you could just give your views on the various MSME measures announced by the government? That's it from side.

Sorry, can you repeat the question?

Sir, just your views on the various measures announced by the government for the MSME sector?

So there -- as you know, they are multifold approach which has been adopted by both the Central Bank as a regulator and government in terms [indiscernible] Within the alternative lending segment or the lending segment, what you will appreciate that the largest focus or the support from the government and the Reserve Bank has come from SME and micro SME segment. We have not been -- and rightfully so because they are the backbone to economy. Now these measures started from providing additional liquidity by the RBI to the banks and motivating them to lend, which has not -- on the ground has not seen much changes or much liquidity to come in the hands of the NBFC. But the latest measure which has come, which is the INR 30,000 crores of the emergency credit line or the partial guarantee scheme for SME and micro SME, what was announced yesterday, fundamentally, I believe that this would improve the health of SME and micro SME very dramatically. But obviously, there is a lag effect and the execution effect. So you should wait for 2 quarters to -- for the rebounds to happen. Obviously, the caveat is that we don't see a Phase 2 of the COVID-19 pandemic coming in. And we are -- by the July, we should see the peak and then flattening of the curve.

[Operator Instructions] Next question is from the line of Anadi Kaistha from Vivriti Capital.

Congratulations for the good set of numbers that are here. As we have seen that -- there are a few set of questions here. Firstly, how much OpEx reduction is expected in percentage terms quarter-on-quarter?

And what is the next question?

Next question is regarding this disbursement in March, it declined more than 20% on a month-on-month basis whereas lockdown was announced after 20th of March. So is there any specific reason whether you sensed earlier that it is going to get worsened and [indiscernible] that the disbursements were -- whether the disbursements kept high towards the end of the month? That is my second question.

Okay. So I'll take the second one first. As you know, normally in the lending cycle, you see the majority of the volume of the disbursement happens by the end of the month, and it obviously peaks at the end of the quarter and not at the beginning of the month. So that's point number one. Number two, you are right. We were early in terms of stopping the businesses and going what we call work from home. So we transitioned and closed our offices by 17th of March, 5 days prior to the lockdown being announced. And we closed our fresh disbursement. The last disbursement happened, I think, on 16th of March. So that is the reason of what you see a decline in the quarter-on-quarter numbers. Vivek, do you want to take up the first question, which is what is the percentage of OpEx reduction has happened?

So I think you should look at OpEx reduction in 2 parts. One is -- actually 3 parts. One is salary related, two being other OpEx that we have negotiated with vendors so on and so forth and three is general process improvement. On the first part of it, we have essentially traded salary reductions for all employees above INR 20 lakhs. That salary reduction can be anywhere from 5% to 12.5%. But on a blended basis, I think the salary cost should come down by at least 7% to 8.5%. On the second point, which is OpEx related, we have essentially tried to renegotiate rental so on and so forth, and that saving would be anywhere between INR 75 lakhs to INR 1 crore. And obviously, the process improvement side, there's been a lot of changes that have been made to make the process more efficient and therefore, costless, but that's something which is more fluid and more variability.

Okay. Okay. There are a few more questions. So shall I go ahead with that or shall I come in queue again?

No, please go ahead.

Yes, sure. Sir, you mentioned that 80% of the customers have asked for morat. So it's in volume terms. In value terms, how much it would be, sir?

No, sir. Just to clarify, unlike the common practice adopted by the lenders, we offered the moratorium because most of the NBFCs were not able to offer moratorium to all customers because they had their own asset/liability side mismatches. Given that we didn't had that problem, we offered moratorium to all our customers. 20% of our customer voluntarily opted out wherein they said we don't need the moratorium. And when we say this 80% and 20%, this is by loan volume in the portfolio -- total value of loan outstanding.

Okay. And sir in morat -- sorry...

Just one more point. Unlike most NBFCs, there is very little distinction between the -- I mean there isn't -- we don't have one loan at INR 200 crores and one loan at INR 1 lakh, right? So the difference between number and value is broadly the same.

Right. Right. Okay. Sure. And in morat 2, how many customers have been given morat, sir?

So we -- in the moratorium 2, I -- our view is that, in the moratorium 2 we are not planning to offer it to all customers. We are offering only to the customer who are -- who would opt-in, which means that they have to make a request and there is a recredit exercise which should be done that whether the customer doesn't have a real cash flow or -- has a real cash flow issue and should we offer that or not. So that is the process which we are starting now. Our Board has recently approved the policy and now we'll start.

Sure, sir. Sure. Sir, since morat has been given, so our collection efficiency would be very less during this -- Q1 of this current financial year. So how you are seeing the collection efficiency going forward? Means once the lockdown is being lifted in some parts of for the country and it is in the process of getting lifted, so how you are looking at collection efficiency at a gross level?

So as we said, in the moratorium 1, when we offered the moratorium to all 100% of our customers, 20% of customers opted out, and we saw 100% collection efficiency from them. Now going forward, what would be the collection efficiency, we'll get to know only depending upon how many of our customers opt in for the next set of moratorium, whether we offer them or not, what is the recredit exercise. And basis that, so the real -- what is actual collection efficiency would come, we will get to know within in a month or so. But I would like to remind you that unlike NBFCs which are into the -- so the NBFCs can be divided into the micro lending segment, SME and micro SME, mid-segment and the prime segment. Our portfolio largely belongs to the prime segment and as a sectoral focus so we think that majority -- barring few sectors, majority of our sectors would reopen, and there'll be a bounce back which will happen.

[Operator Instructions] Next question is from the line of Dinesh Kotecha from KRIC Concepts Private Limited.

I just wanted to know 2 things, sir. Any capital raising plans which were there and which have been shelved or delayed now? Hello?

No, sir. No, sir. I think the way of sufficiently -- yes, if you can hear me back?

Yes. I can hear you.

There's no capital raising plan which we have publicly disclosed or we have shelved off. And you would appreciate that we have very large capital cushion. We are at 85% plus capital adequacy. So there is nothing which we have either planned or shelved off.

And sir, secondly, I wanted to know more about the Sanjeevani project which you just discussed, I was not able to catch that up. I mean what was that actually? The 2 projects which you mentioned, the Sanjeevani projects. Can you elaborate a little bit more about it?

The Sanjeevani project is when we restart, we intend to restart disbursement by 2 design elements. Completely digitized product wherein the first set of the customer which we have segregated is those who are involved in essential commodities and services, and we are planning to do lending towards them. And second, we are looking at the customers, who, during this period of crisis, have maintained robust cash flow. So these are different programs designed to serve the need of these 2 types of the customers.

Are we ready with those -- I mean those schemes? Are we ready with those alternatives?

Yes. We are already ready. We are just waiting for some of the more liquidity because we want to maintain our existing liquidity on our balance sheet. So we are waiting for some of the TLTRO related and other emergency credit line guarantee scheme and some of the other liquidity to come into our balance sheet. We don't want to sacrifice the existing liquidity, which is quite significant, though. And as soon as some of those liquidity would come, we would start the disbursement on these programs.

Sir, also I appreciate the sacrifices that you have made in terms of salary. And for the excellent results, I congratulate the entire management. Keep it up.

Thank you, sir.

Next question is from the line of Gauri Sharma from Roha Asset Managers.

Can you hear me?

We can hear you very well, Gauri. Thank you.

Sir, my question was regarding the hospitality sector. So as in the last few months they would've seen some sort of a stress due to COVID, and we have a sizable exposure towards the sector. How do you -- sir, just your thoughts on how do you think the sector will perform? And what are the opportunities or certain factors that [indiscernible] should be careful about?

So Gauri, hospitality has been one of our core part of the sector. Obviously, when the sector selection was done, you don't -- or there is no visibility of a pandemic like COVID in which whole world would come to a complete shutdown, was ever envisaged and that was more driven by the fundamental of the economy, which is consumer -- consumption income -- sorry, disposable income increase and the consumer trends. Our view is that, first, also our hospitality sector, a large portion, roughly around 70% is secured portfolio and secured by collateral, which is physical mortgages. Second, in select places, we expect some of these hospitalities, and we largely have done QSR and fine dining kind of platform, which are now gradually restarting home deliveries and other segments. But we expect the bounce back of the hospitality to be the last one. So we expect the delinquency to go up -- what we call the full loss ratios to be still lower given that sizable portfolio is secured portfolio. And as depending upon how the different part of the country moves and how they go back to normalcy, we'll see the sector. As of today, in our restart, hospitality as a sector has been stopped as we have stopped order component around 3 quarters back. So hospitality will remain stopped, and we will take a fundamental view of when to restart after our full review of all of our sectors and subsectors.

[Operator Instructions] Next question is from the line of Gaurav Agarwal from Real Ispat and Power Limited.

Actually, I didn't catch up the first couple of minutes, wherein what -- is the total disbursals in Q4?

We have already given the full earnings presentation. You will be able to find all those numbers. But Vivek, quickly, can you give the number, please?

Sorry, I was on mute. The incremental disbursement in Q4 was around INR 300-odd crores.

Okay. And, sir, so going forward, what do you expect of the disbursals going forward? And what do you think of the credit strategy that we'll deploy now since the equity that we've raised? And going forward, how much debt do you have in mind? And also any average yield that you have in mind? Also, sir, there's one more question. What do you think of the secured and unsecured percentage in the book? Currently, I see it is 2/3 and 1/3. So going forward, where do you see your comfort line post COVID situation?

So fundamentally, we have not yet taken call to make any strategic shift to our business. As you know that our business is designed around serving the need of SME and micro SMEs in India. We specialize in 8 sectors and roughly around 40-plus subsectors. So -- and we continue to believe in those, and we think that pandemic is an unknown which was -- which has come to the humanity at one go. We would -- for now, obviously, there are certain sectors which we will not start, wherein we think that the pandemic effect is very severe. And in terms of our restart of the business, as I said, that we are starting with a program called Sanjeevani, wherein first we will start supporting small businesses which are in essential services and commodities. Second, we are starting the business for SMEs and micro SMEs within our existing portfolio and the new customer who have maintained cash flow through this pandemic cycle and have been able to remain active in the business. And by that time, we think that the normalization curve would start, and we will restart the business. So fundamentally, the way you are seeing our business, we are not seeing any dramatic shift as of now. But as you know, these times are very different times. And we have utilized last 200 -- last 100 days in evaluating all of these things, and we have undertaken a large number of strategic projects, including complete digitization of the physical underwriting PD exercises, all loan management cycles so on and so forth. So that's where we are. I think so it's very difficult for anyone to tell you the exact number how much of disbursement which will happen this year. What I would like to say that we think that we have a better competitive position or strength vis-a-vis the other peers at NBFCs because majority of the NBFCs post COVID-19 crisis would require at least 12 months of period of stabilization, wherein they have to manage their large portfolios and the impact and the impairment coming from that. They have to then manage the liquidity because it's a cascading effect. Once your portfolio goes a little bad, then your liability gets constrained. So the ability of the other peer set to start disbursement, again, would be constrained vis-a-vis we won't have that constraint. And that's why we think we will be able to restart and be in the growth mode very quickly. But simultaneously, we are optimistically cautious. We don't want to make hasty decisions. These businesses are businesses built for long term. So we will calibrate our approach. And just because other lenders don't have ability to lend, we would not jump into the well too fast too soon. But we are making calibrated approach to restart and get back to a regular business as soon as possible.

All right. Sir, one follow-up question to this, sir. In the current scenario, we see you have exposure to primarily 8 to 10 sectors which are majorly exposed. So amongst that, what do you think are the sectors that will post COVID situation which will be affected the most? And where do you see the numbers lie in terms of the NPAs or any kind of impairments coming in the current book?

So you could see from our financial results presentation that we have done an accelerated additional provisioning for the COVID impact. We are -- as per the -- we followed the RBI guidelines as well as -- because we are in Ind-AS accounting norms, we also followed Institute of Chartered Accountants COVID-19 Advisory, which required us to undertake all probable scenarios and estimate the COVID-19 impact. While that's a -- we took a deep exercise of contact -- doing survey across all of our customer segments, 3 rounds of customer contacts have been done, we estimated their cash flow and basis that we have done the provisioning. But the real provisioning would come out only once we see the next quarter ending and how many of them would be able to restart. Within the sectors, except the hospitality, which we think so that will take a little more while to bounce back, rest of the other sectors are more resilient and would bounce back very quickly is our estimation. Giving you a number estimate of what would be that -- requirement of what would be delinquency is very hard. But I must say that, look, this is a -- now the market is a market of relativity. All lenders which are -- whether they are in consumer finance or whether they are into micro finance or whether they are into SME and micro SME finance or whether they are banks have to take additional provisioning and hit onto their balance sheet. But Ugro is in this enviable position because of our capital cushion. Any relative -- first, we believe the relative provision in our books would be lesser than the other lenders just because of the nature of the secured book, prime book. But whatever it would be, our ability to absorb and bounce back is much stronger vis-a-vis any other lenders.

[Operator Instructions] Next question is from the line of [ Suhani Saha ], an individual investor.

Yes, sir. So I wanted to ask that this quarter we've seen that disbursal amount, the number of loan disbursals have increased, the total amount of disbursals. However, the number of customers has not increased to a significant extent. Sir, is it that we are cross-selling our products amongst the existing customers? Or are there more bigger ticket size disbursals that have happened during this quarter? Can you just throw some light on that, please?

Vivek, do you want to take this up or Abhijit?

So if you -- I'm not sure if you had a chance to follow us over a period in time, but we broadly have 4 distribution channels: One being branch-led, wherein the ticket sizes are, of the 4 channels, higher; second, being the supply chain part; third being the BFSI partnership; and fourth being the digital and direct-to-customer module. Given our risk assessment of MSME and related issues associated with them, we have gone slow in the third and the fourth distribution channels, if you will, and have focused on the first and the second distribution channel for Q4. And therefore, you will see that the relative number of customers has not gone up because in the third and the fourth distribution channel, which is the BFSI partnership led and direct-to-customer channels, are the ones wherein we have extremely low ticket size. So it's a relative impact on the channel that we focused on in the last quarter.

Okay. Okay. Sure, sir. Also, another question I had regarding the ecosystem lending model. So how does it work? And who are some of these partners under this system for you all? If you could just throw some light on that?

So Vivek, you wanted to carry on?

Yes. In ecosystem distribution for us, you need to look at it as a typical supply chain, but not to AAA, AA corporates. We focus on the second tier of customers, if you will. So the entire strategy is an anchor-led strategy, and I will not be able to give you exact names of anchors given that that's a sensitive information. But the idea is to tie up with BBB+, A- kind of corporates in the 8 sectors that we are a part of and create distribution strategies, wherein we provide working capital facilities to their distributors, to their vendors, dealers, so on and so forth. So it's -- the ecosystem strategy is an outcome of that.

Okay. Okay. And sir, just 1 last question. Sir, how do you see the collection post the end of moratorium because I believe there will be still some sectors who would be going through stress for a longer duration post the moratorium end? So how do you see the collections?

So I think Shachindra also covered that in his previous question, and we have a slide on that on 8 as well. So we have essentially done huge exercise wherein we've looked at each of the subsectors that we operate in and the relative impact that COVID will have. Basis that we have prioritized the sectors that we should lend to and also clearly called out the sectors that we will not lend to. Second, post that we will also do assessment of the geography the customer is in plus the basic cash flow assessment will anyway be done. So basis that, I think our lending profile will evolve over a period of time. The idea, however, is to be cautious in the next 2, 3 months till the full impact of COVID is gone.

Next question is from the line of Anadi Kaistha from Vivriti Capital.

Sir, I noticed in the presentation that we do have the co-lending partners as well. So how much is that our balance sheet looks as on today, sir?

So on co-lending side, as you would be aware, we have signed 4 co-lending partnerships, 3 already signed and 1 in the works. These have all been signed with large public sector, large private sector banks. These partnerships got signed somewhere in November, December. We were in the process of integrating with these partners because the entire process has to be an automated flow, right? And therefore, the integration as such is still in the works, the operational part of it is still in the works. So there is nothing that we have done on the co-lending side as of now. We will start it as soon as -- most of that work is now complete, and we should start it as soon as we start the process.

Sure, sir. And sir, second follow-up question is the cost of funds, so like in the quarter 3, cost of funds stood around 11.5% and this time it is 11.3%. So how do you see the cost of funds going forward? Whether it will decrease or it will increase slightly in this current scenario?

So Vivek, I'll take that up. So look, our ongoing premise is that given our sizable capital, given our kind of portfolio, on a sequential basis, we should look at the cost of funds going down, right? So now these are -- few quarters are quarters of aberration and we just don't know if the pricing of the debt is dependent upon the liquidity available. What we are seeing is lower cost of borrowing which are coming in these quarters, but those are largely from the liquidity scheme launched by RBI and other schemes, which banks are doing that. They may not be a good benchmark to see what would be our sequential cost of borrowing. But in few quarters, we expect our cost of borrowing to be a little lower. But let me also tell you that our approach at this point in time is to take liquidity on our balance sheet whether -- whenever they are coming in because liquidity is quite important for any NBFI to maintain. But when we take that liquidity, it comes with some negative carry costs because when you draw those facilities then the cash sit on your balance sheet and it carries [indiscernible] We are prepared to take that because for us, we think that having liquidity -- significant liquidity in the balance sheet allows you to go back to the business very quickly and with much more stronger hand.

Sir, because last time when raising was given that -- due to Section 20 as per RBI so there is difficulty to raise funds from PSU banks and SFB. But are we looking at PSUs and SFBs now? Or still we have some [indiscernible] there?

Sorry, I don't get your question. What is...

Yes. So yes, during last Q2 -- during Q3, so, it was like the rationale was given that cost of funds was high because of common directors between many PSUs and directors -- independent directors on Ugro's Board. So that is why that we are not able to raise the funds from PSU banks. So are we looking towards those PSU banks now?

No, I don't think so that there is a linkage to cost of borrowing with being common directors. I think what we would have mentioned in our last quarter that it is taking us more time to get these sanctions from the public sector banks and small finance bank or for that matter any bank because the process of sanctioning for a Ugro loan, every bank is required to place our proposal to the management -- minimum to the management committee of the Board as per the RBI circular on -- whenever there is an NBFC on whose Board there is a Board member, which is on the Board of other banks, the banks has to take the proposal to their management committee. So obviously, that makes more time. But during this period of time, we have seen incremental sanctions coming from public sector bank, which are not -- which are post the quarterly results. And over a period of time, I think so most of the banks would undertake our proposal at the highest level. I think the good part is that while initially it just takes a little more time to get these sanctions, but -- having said that, given that all large banks and their Board are approving sanctions to Ugro, it also means that our loans or Ugro's credential are being accepted by the large banks' Board. And over a period of time, that is beneficial for the company.

Sure, sure. Sure, sir. And sir, 1 last question from my side. So have we taken morat during -- from our lenders during this period?

No.

Okay. So we are paying [indiscernible] to our lenders?

Yes. Because as we said that our portfolio is largely funded by equity, debt which we had is just sits on our balance sheet as a liquidity. In fact, we have prepaid some of the liabilities voluntarily to just -- because we felt that there are too expensive liability for us.

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

I just have a few questions. I think although we are strong on balance sheet and we have a very high capital adequacy ratio also, but on the asset side, like when do we plan to start the new business sourcing? And some color on when do we start with the fresh disbursements also?

Yes. So Shreepal, I think we covered this in our opening remarks. Mid of June, we are planning to restart the business. Our restart of the business is in 3-phase approach. We have launched a program called Sanjeevani. This program is first designed to support SME and micro-SME involved in essential commodities and services. Second is the phase of the Sanjeevani program is to look at the SME and micro SMEs who have maintained cash flow and activity during the lockdown period. And third would be the regular business and regular sourcing. So we are incrementally seeing starting from mid of June some disbursement to start. But we are balancing between first, looking at the health of our existing portfolio, increasing the maximum collection efficiency and simultaneously starting full disbursement. I think so by end of this quarter, we are all praying to God that we have more normalcy, then we can restart the business with full flow.

Okay. By the end of this quarter is what is our expectation broadly?

Yes, to get back to the same level of activity, which was where we ended in Feb end.

Yes, yes, yes. And sir, as you highlighted that for a couple of quarters there could be increase in funding cost, I mean, for the broader NBFC space. Do we see the pricing on the loans also getting reflected? Like do you think there will be passing of that cost on the lending front also in the next couple of quarters?

No, Shreepal. So first, just to clarify, we expect our cost of borrowing to go down, but we simultaneously expect the other NBFCs' cost of borrowing to go up. That's what I mentioned. Second, I think so that majority of the NBFC as an industry has to take a margin hit because there is very severe push from the public sector banks and the large lenders to provide credit at a much more reasonable cost to the SME and micro SME borrowers, rightfully so because their margin has crushed so much that they need borrowing at a much lower cost. So you'll see incremental credit from the large banks, especially public sector banks. And if the NBFCs have to remain in that market, you will see the net interest margin for NBFCs to go down and so hit of the profitability and so on and so forth. And that's why I said that the broader NBFC segment for a foreseeable period of 12 months would have both asset side problem, margin-related problem, capital adequacy and liquidity problem. And that's the way they whole -- but I think post 12 months it should normalize.

Okay. Okay. Okay, sir. And sir, just last 1 question. Sir, based on your interaction with your borrowers and also with other people, some color on how like geography-wise, there is some business-wise impact that you see that in some particular states or say in some particular geography, there is a higher impact of COVID based on your interactions with your customers?

Abhijit, do you want to take that? I don't see any such data, but if you -- unless you have a very different view on this.

Sure. So first of all, we are present broadly in the SME hub. We are as on date present in the 9 locations, which are SME hub. Now in that, this is broadly regulated by how the states are also being impacted. So as on date, for example, we have seen normalcy broadly coming in all the locations except for Maharashtra. That also is led by how the state government is leading. So -- but again as Shachindra spoke multiple times, this is a first-time event, we look at it as a black swan. So we cannot predict much how are things going to be. For example, today, you might be in green zone. Tomorrow, you might be in orange because you have a containment zone within the green zone. It may move to red as well. So this is a reality that is going to be there with all of us for some time. So making forward-looking statement right now is a little challenging is what we feel.

The next question is from the line of Kajal Gandhi from ICICIdirect.

I just wanted to understand, recently, the Finance Minister made those changes in tenders and for TReDS platform, we can see volume increase. So how are we placed there? And what do you think the impact?

Sorry, can you repeat your question what is...

Sir, the TReDS platform where the exchange. So that changes on the tenders that it can be opened for MSMEs and participation can grow higher. So that way, are we participating -- you must be participating in that lending, bill discounting...

We are still waiting for the notification. As you know, on the TReDS platform only factoring NBFCs can participate. There was a budget proposal that regular NBFCs would be allowed to participate on the TReDS platform, but we have not seen that notification. So once we are notified that as a regular NBFC you can participate on the TReDS, we would participate. But just so that you may probably have noticed that this moratorium which has been offered by RBI that has not automatically got implemented on TReDS platform. The majority of the bills which have been discounted on the TReDS platform, those moratorium benefit has not been availed by the customers. So there seems to be a little bit of a regulatory impasse or a problem there. Yes.

Are we seeing an impact of defaults there?

Sorry?

Sir, are we seeing defaults there then, right now?

I can't comment on that. You have to look at the TReDS and what disclosure they are making. I can only make general overview. We are not participating on TReDS as we are not allowed to do that, so I can't comment on that.

Okay. Okay. Sir, what will be your like 3-year or 5-year guidance on -- anything on size or anything on the return ratios?

So we have mentioned this, I think, a few quarters back, and I would repeat that. Our objective or our mission is to be a prime most player of SME and micro SME financing in India. We intend to solve the credit-related problem, which the SME, small business and micro businesses face. We think that we can solve that problem by creating a highly specialized platform driven by technology and analytics. And we think that by doing all of that and creating distribution sizable capital, we should be a 1% market share of the entire SME and micro SMEs in India in the next few years. And we should be among those top performing return on equity and return on asset business.

[Operator Instructions] Next question is from the line of Vivek Bhaskar from AU Small Finance Bank.

Sir, my question is on the NBFC book. So you have an onward lending book. So what is the guidance of the book? And how many customers of that book would have taken moratorium? And are there any asset quality issues which you intend to face in the future or you envisage?

So Vivek, as you know, you guys also know most of those lenders. First, let me state that our onward lending book is not -- we don't see that as a stand-alone activity. We created our onward lending book with an objective of creating co-lending partnership. And most of our selection criteria have been basis how we can serve a particular segment of the customer and basis that we have defined and selected our onward lending partners. I won't comment specifically to any particular underlying NBFC partner and how they will do. But broadly, except barring few, we are seeing majority of them continue -- obviously, all of them are challenged in terms of the liquidity mismatches, but majority of them have either an external investor, either it's a private equity fund or have access to liability. And we are seeing sequential improvement in their liquidity, especially from the TLTRO 2 and some of the other measures which has come. So as I said, barring few, we are not seeing a broad-brush challenge to any of our onward lending partners as of now.

Just a follow-up. What percentage of that book would have taken moratorium?

We -- as we said that we offered our moratorium to all our customers. So our -- unlike most of the other lending institutions in the moratorium version 1, asked the customers to opt -- asked for moratorium, we offered moratorium to all. And my presumption is that majority of our NBFC partners would have -- taken the moratorium. Vivek, correct me if I'm wrong.

Yes. So broadly in the same rate as the rest of the portfolio. It is not very different to that. One other point that we want to -- I just want to make is it's a very tiny percent of the book right now. It's less than 7%, 8% of the book, the BFSI channel altogether.

As there are no further questions, I will now hand the conference over to Mr. Shreepal Doshi for closing comments.

Thank you so much to the Ugro management once again for giving us this opportunity. And I thank all the participants for attending this call. Thank you.