UGRO Capital Limited (511742) Earnings Call Transcript & Summary

A very good afternoon to everybody. Thanks for joining this call. On behalf of Quantum Securities Private Limited, we welcome you on to the Q3 FY '22 post results with virtual analyst meet of UGRO Capital Limited. From the SG management team of UGRO Capital, we have Mr. Shachindra Nath, who is Executive Chairman and Managing Director of the company. Along with him, we have a larger team, which includes Mr. Amit Mande, who is the Chief Revenue Officer; Mr. Anuj Pandey, who is the Chief Risk Officer; Mr. Amit Gupta, Chief Financial Officer; Mr. Rishabh Garg, Chief Technology Officer; Mr. Nirav Shah, Chief Strategy Officer and Head of Investor Relations. Now without further ado, I would like to hand over the call to Mr. Shachindra Nath, who will give us an overview of UGRO Capital's unique business model and Q3 FY '22 performance, post which we would open the floor for Q&A. [Technical Difficulty]

Thank you, [ Ari ], and thanks, everybody, for taking out time to listen to our investors presentation post our Q3 results. We would like to quickly present how we have fared in this quarter. But also given the youngness of our company, we'd also like to present the unique business model of driven by data analytics technology, our sector focus. And how the lending landscape of MSME financing is changing in here. And that's what we call ourselves that we are catalyzing the future of cutting taxes for MSME in India. This position is provided in a relevant part. Some of that is a matter of detail, and I will skip that. But broadly, the executive summary is that who we are. The way you should think about us is we are a combination of knowledge plus technology. Knowledge is our sectoral focus and technology driven by data, which helps us to underwrite our customer and build a superior model. And simultaneously what we think is the 3 core things which is required for a sustainable financial institution creation, we have embedded that at early stage of our company. Experienced management team, a very deep and strong corporate governance framework, and we are backed by a very large institutional capital. Moving forward, that's what we call is what is our mission. So we intend to be a facilitator to solve the unsolved, which is the deep credit problem for MSME in India. And we have a method which we believe that we can play a small role in debottling the credit problem and capture 1% market share of MSME lending by 2025. This is the way we see how we have evolved. This company, it had been an existing NBFC, which was listed. The change of management and control happened in July of '18, when we raised significant amount of upfront capital of roughly around INR 958-odd crores. We took 8 months period of time to build our platform, technology and people infrastructure, physical distribution. The first 3 months of the FY '18, '19, we did around INR 79 crores. We ran our business for 11.5 months until March '20 and did the INR 861 crores, which was predominantly funded by our own equity. Then the COVID -- first shutdown of the COVID happened. We used that time of COVID period to build further on our infrastructure, people capability and digitization. And other than the brief wave 2 destruction, since then have been growing at a steady pace. And as of December '21, we have a total asset base of INR 2,589-odd crores. This is a way how our disbursement trends have been. I'll explain our multichannel approach of how we service right from a INR 1 lakh borrower customer to INR 3 crore of MSME financing. But all of our channels have now come into full flow, and that is reflective in terms of our disbursement trend. So over a period of last 1 year from December '20, which was also a period of pandemic from INR 142 crores of monthly disbursement volume in December '21, we have reached to INR 414 crore of volume. Obviously, the month of January, there is again a disruption with respect to COVID. Fortunately, this disruption is not too much of threat to life, but business is still disrupted because -- first [ 30 ] days have been a difficult period where we have seen multiple slowdown in terms of operating parameters of multiple small business and even large businesses. This is the way our asset under management trend has been. As I said, that we have now supported by a large number of financial institutions, 50-plus, we'll explain that and also a unique model of core lending. And that has helped and supported us to grow our asset under management of INR 2,589 crores. And we have publicly announced -- stated that by 2025, we would take 1% market share in INR 20,000 crores of a year. But at a run rate where we are, we generally believe that we are on path of achieving that. And this is broadly an executive slide which summarizes who -- where we are. It's a company with INR 959 crores of net worth, an asset base of INR 2,589 crores. We have seen cumulative disbursement of more than INR 4,689 crores. We are servicing across the country 16,500 plus customers. We have support of more than 50-plus lenders, a gross debt of INR 1,764 crores. We have in the month of December, touched 1,000 people -- becoming a 1000-people company. We focus between secured and unsecured financing, a large portion of our business is secured financing businesses. And our physical infrastructure has grown significantly. We are now present in 85 physical branches. And relatively, our portfolio quality has stood the test of time. Our gross NPA numbers also include an increment which has happened because of the change of the NPA recognition norm for NBFC as an industry, which has increased -- otherwise, our NPA for the quarter would have remained the same what it was the previous quarter. But we were the first one to adopt the RBI new regulation on NPA now, and taken that into account. This is an executed summary on all the parameters, and this is obviously the public domain. But we have been growing almost on every parameter. Now our early investment into our people, infrastructure and technology is playing out very well. On the bottom line performance, unlike many of our peers set, which are unlisted and are early-stage companies who burn cash for many first few number of years, we have focused on building sustainable business driven by its own profitability and that has been growing. In the current quarter, given that new wave of the COVID, we have become more cautious. There is roughly around INR 2.74 crores of additional provisioning, which is we call management overlay provisioning, which we have provided for, and that is reflective in our numbers. So on our steady-state number are much higher than what is reported in the quarter. These are some of the operating metrics. Some of that I've already spoken about. I think this company still has massive capacity on its equity capital base. We are still under-levered. We have only 1.84x leverage. And also given the core lending model, which we are building quite expeditiously. Actually, we think that we are building a new form of business model wherein NBFC would become lending as a service. So continuing [indiscernible] for the capital base for our company would not be required as if you see in the conventional NBFCs. I would quickly take you through that, how we think the -- what is our model and how the lending landscape is changing. I'll take probably 2 minutes in terms of explaining to you what is happening to MSME financing space. This transition of collateral to cash flow have been happening in last 4 years. And now it is actually getting accelerated with every passing day. This is happening because of what we call the data stack around MSME financing, which we call the UPI Moment 2.0 or India Stack 2.0, where the lenders of the future would be able to underwrite the cash flow of an MSME financer at the point of origination itself. And that would help to disseminate the credit, reduce the distribution cost and assess the customer far better than in the traditional approach of lending. This is also facilitated by the entire ecosystem of MSME now getting digitalized. And this is -- we will get further supplemented when the entire OCEN network would come, wherein the entire ecosystem would get divided between lenders, borrowers and in middle layer, which is the loan service provider, which would be able to bring the customer with their unique data set on which the underwriting can be done. And we are the first implementer of OCEN in India. So the Gen size which is the middle marketplace, the entire financing platform implementation design has been done by us. And that would eventually lead to 3 types of credit for MSME in India, what we call embedded credit, buy now, pay later and flow-based credit. And obviously, there are multiple new generation VC-funded companies. Each one of them are trying to experiment in this, and we are more or less present across all segments of the market. But how we do our business in the current scenario. First and foremost, our belief is that MSME financing in India is a non-homogeneous sector. 2 different type of MSMEs are not unique set. And that's why under-lending companies, when they look at doctors, they just look at a doctor. They don't look at the underlying type of the doctor. So a dentist, an IVF clinic, an eye clinic or a general practitioner are all different type of doctors having different type of cash flows. An [indiscernible] school, an engineering school and medical college are completely different. A specialty chemical company versus a chemical trading shop are 2 different type of business. And that's what we call this nonhomogeneous sector. And we, in 2019, tried to bring homogeneity, find the homogeneous nature of the sector and focus on that. So along with cases, we did this analysis of 180 sector, drill it down to 20 and selected each sector. UGRO operate in this define age sector and micro enterprises as a sector neutral approach and a customer-focused approach. And within these age sectors, we focus on 100-plus sectors. Idea is that to build an IP or a knowledge base over the next 5 to 7 years, wherein on ground, a customer is completely differentiated when the loan is being provided. And these sectors have certain characteristics which we rely upon. When actually pandemic prove that our approach actually works far superior than a generalized lender. And this, when we look at sector and then we designed our underwriting, our underwriting is driven on 2-foot front. First and foremost, we are among those very unique companies, which rely on data to give the first approval to our customer. And then we rely on a defined templated underwriting platform for every subsector. So for hundreds of our subsector, we have an operating parameter analysis, which the underwriter has to assess and provide a weightage and that converts into an underwritable score. But more so, we rely on what we call our data tripod. So historically, if you go to an SME and ask what's its revenue, answer would be not known. If you ask what's his expense, answer would be not known. And what is the behavior? Very difficult to assess. We have moved 95% of our underwriting on the data tripod what we call the GST Banking and Bureau. And we believe that this approach of underwriting and filtering the customer can take MSME financing in India near to consumer financing level. And today, our data tripod underwriting approach is accepted by 4 of the largest banks in the country: State Bank of India, Central Bank, Bank of Baroda and IDBI, wherein they are co-lending with us on this approach of underwriting. And this converts into a score. This score has the ability to categorize our customer in 5 bags, use the future forecast of the cash flow and evaluate and say what level of underwriting intervention is required for every customer. In terms of how we are reaching the customer and distribution, we have 4 channels of distribution because we want to build scale, and we want to service all formats of customers. Right from INR 1 lakh of an unsecured small trading customer to a small manufacturing unit. And that's why our channels provide an important part, what we call the branch let channel, the ecosystem, the partnership at Alliance, which is the largest co-lending platform now in India and direct digital channel. Our branch let channel actually services 2 types of customers, prime customer and micro enterprises customers. The prime customer is serviced depending upon which score band or the rating band they belong to and what type of cash flow and collateral we are analyzing. And we have today, because of our core lending model, have ability to service a Pratham customer, which is our own characterization or nomenclature which is a CMR 1 to 5 customer, less than 9% price band. But has the cash flow which is prime and reported and collateral, which is really prime. I call it a only property versus a Borivali property. And a happy customer in our prime channel, which is a customer, which is a Borivali customer, but haven't assessed cash flow. This channel is supported by now 900-plus intermediaries who come on our GRO plus platform and get sanctioned in 60 minutes time before it moves to the underwriter intervention. And our second part of our branch let channel is micro enterprises, which is a Tier 2, Tier 3 physical infrastructure branch network, where we are expanding to almost 280-odd locations, we are already live in 80-odd locations. This channel contributes 70% of our business today. Second portion of our business is supply chain financing. As I said, that movement of collateral to cash flow is happening through cash flow supply chain-led financing. And there, we focus our data-driven underwriting parameters allows us to partner with different set of anchors and finance their vendor ecosystem and purchase ecosystem. We have now a large base of anchors and a large base of fintech who are integrated on our platform, and we are building this as a very unique financing platform for supply chain. And second portion of our ecosystem is what we call the machine financing business. Generally, the lenders -- traditional lenders in India don't understand the productive asset financing. Productive asset is a small manufacturer, which is buying a CNC machine, which is critical for his manufacturing and has -- the machine itself has a value. Our underwriting remaining the same. OEM supporting us in terms of taking over the machine and refurbishing in case of a default is a very unique proposition for a market. In India, we have only 1 or 2 lenders which does that, and we are growing this as a channel for ourselves. And last but not least, there is a platform. Our view is that NBFC's fintech market aggregators would largely play the role of access to the customers when the liability side would be funneled by big banks. Our GRO-Xstream platform today has, on the liability side, 5 of the largest banks, who are co-lending on our originated assets on 1 side. On the other side, we have roughly around 29-plus small NBFC and fintech ecosystem with whom we do the co-lending. Our eventual page is that is that a large bank should be able to do a co-lending with a partner, an NBFC of ours and provide co-lending through our tech platform and we earn a fee on that. So this would become a very large -- some of the people now -- this is the company in itself, but for us, this is a channel. And last but not least, in few months' time, we will launch our complete digital platform, and we'll at least by next quarter, results -- we will showcase what we are doing over there. Some of this is all about our technology. This is all in public domain. I'm happy to answer the question. I think in terms of one of the critical questions, which a lot of people -- bank versus us is that banks have a perpetual source of financing. Because when you go and deposit savings money in a bank account, you don't ask where the money is being lent. Versus when it comes to an NBFC, the financing is wholesale. Every lender of ours have a view of what we lent, and that's why we believe that the governance and the size of capital play a very critical role. We have been fortunate that we were backed by a large institutional capital base, 4 large private equity investors who manage $38 billion plus in Asia are large contributors of our capital. Management has a meaningful stake in the growth of the company. And then our liability is designed lending as a service. So obviously, today, we are borrowing on our balance sheet. But eventually, we have a place to move this to a co-lending model. Every origination engine through which we are originating assets, there should be a band which should participate up to 80% of the loan. And some of you might know that RBI and the government has been focusing on co-lending as a main line liability engine for the NBFCs in India. Now it is coming to fruition. I have publicly said that this year, FY '22 to '23, INR 50,000 crores worth of MSME financing would happen through co-lending model. And last but not least, given that 100% of our assets are priority sector, we are attractive for mainline banks to buy our asset on a silent basis. That's also a tool we use. And within the lending universe, our strategy is to have a diversified lender base, establish and build our name among the lenders. And over a period of time, you scale that. We divide our lending universe in 4 parts, public sector banks. Majority of them are with us now, private sector bank, Majority of them are with us now, small finance bank, large NBFC, DFI. So in last December quarter, we did our first impact financing trade with a responsibility, INR 138 crores of financing came from there. And other capital market instruments. So multiple issuance of NCDs, MLDs, we have done with private wealth player and directly to the market. And we have seen that over a period of time, our cost of borrowing has been gradually going down. But given the size and the vintage we are, I think we are more focused on creating capacity versus optimizing the cost of borrowing because we think we have a unique asset mix wherein we can afford this level of cost of borrowing as well. And last but not least, I think so as I said, we are a market leader. We are the first co-lending partner to Bank of Baroda, we are the first co-lending partner to SBI. And we are first co-lending partner to IDBI, and we are third co-lending partner to Central Bank. But even for them, we are first co-lending partner for MSME financing. Generally, there is a skepticism that co-lending actually is only on piece of paper. I must tell you, if you look at our financial results, there is a portion of asset which has now gone in co-lending. I must agree that operationally, it is hustling. The process is a 1 to 1.5 year of process wherein a bank has to agree on our credit program, technology integration. And then at a physical location, their credit officer post-disbursement has to assess our pipe, but it is just a matter of time. The interplay of technology, digitization and robust process will funnel very large capital to NBFC like us. And the beauty is that today, if I have to earn a 5% margin on my balance sheet, I have to maintain at least 25% to 30% of capital adequacy. In a co-lending, I earn actually 7% margins, no capital deployed for that. So the return on equity metrics through a co-lending model has a 10x multiplier, and that's why we are very focused on building this as a platform. And last but not least, the governance of this company because majority of this capital structure is held by institutions. We are driven and controlled by an independent Board. The company can -- any shareholder which is more than 10% of our network, has a board seat. We cannot lend more than 1% of our network. So I think our governance framework is equal, if not better, to any bank or financial institution in India. And this is the set of our Board of Directors, set of people who come from background of very diversified financial services industry. And they continue to supervise and operate from a board perspective. These are the 3 nominees of our shareholders. And the management team, our focus has been to build management team, not at only the L1 level, the first layer. But also invest heavily in our entire breadth of our management team. So the team which is here and present for answering your question. So it comes from a very deep, diversified experience background. But more so, we have invested heavily into our layering of our organization. Our asset head, which is Mr. Amit Mande who is on the call is supported by at least 8 business heads, our Chief Risk Officer is supported by Chief Credit Officer. Data analytics team is headed by 3 sets of people: Finance, treasury, legal. So company of our vintage and size normally does not have this kind of management bandwidth which we have built for ourselves. And last but not the least, our portfolio overview, which most of this is self-explanatory, but we'll be happy to answer some of that through the questions here. These are only things that I would focus on which is most of the time when lending companies are now a days analyzed through what is the restructuring and the bounce rate of the portfolio. I think so we have been given that we were focused on certain select sector pre-pandemic, though you're focused on prime asset class, our balance sheet got much better response and got protected. Out of 5.3% of total restructured pool, 86-odd percent is standard and current. 95% of our asset is stage 1 asset. And we have seen gradually our bounce rates coming to normalization as pre-pandemic level. And then on the bounce rate, our resolution rate is almost 85%, 90%. I will stop here, and we can -- we'll be happy to answer questions.

Thank you for providing the detailed overview of the results and your business model. [Operator Instructions]

This is Manish Agarwal from Edison Group. I have a couple of questions. Number one, ma'am, what is the kind of growth rate are we expecting in next 3 financial years? That is my question number one. And my question number 2 is management is planning to increase AUM to INR 20,000 crores out of which management said last time that around 50% to 60% will be an off-balance sheet item. So you mean to say that company's own deployment will be around INR 10,000 crores with the leveraging of maximum 3.8x. So our own network, which we will be requiring will be INR 2,100 crores approximately. And our current net worth is INR 950 crores. So from where is the balance amount be financed? Any view on that? That is my second question. And like my third question is what are the kind of benefits which we are giving for the co-lending part what we are giving to the banks, especially, which banks and other fintech companies can't do it themselves? Because now if we look at many of the management of banks, they say that they want to increase their branches to rural areas and other MSME sectors. So even if they want to expand and what kind of additional facility are we providing to banks so that they will be with us for a long period of time?

So Manish, I can summarize your question in 3. First is you said what would be the growth rate? Second question that how the incremental capital required from the company would come from. Third, why we should continue doing co-lending. I would request Amit Gupta and Amit Mande. Amit Gupta can take up the issue question of capital, and Mr. Mande can take up the question of the growth rate and why banks would work with us.

So on the issue of the capital, as presented by Mr. Nath, as of now, our leverage is 1.8x. So immediately, we don't really require to raise capital. But over a period of time, clearly, as you have rightly pointed out, this kind of a leverage of 3.8x where our on-balance sheet asset is INR 10,000 crores, we would be requiring a capital -- equity capital of INR 2,100 crores. So it's very clear that we would need to raise additional equity capital. Clearly, what we are trying to say, even sitting today, we do not have that kind of a desperation to raise equity capital. We have the time in our hand to reassess capital. Obviously, we will be going out and raising this capital to ensure that we have the right equity capital to [indiscernible]. So to answer your question, this will be done over a period of time. That period won't be short term, it would be done in the medium term. So we would be raising additional equity capital.

Just to add to -- sorry, Manish, just to add to what Amit Gupta said. I think the way to think about net worth is 2. One is coming in external equity infusion and second is the internal approvals, right? There is an ROA guidance that has been given to you for 2025. Obviously, that -- what -- the guidance for 2025 will sequentially achieved over the next 3 years. What you can potentially do is from the network that you have arrived, you can minus the internal approvals and the remaining balance is something that potentially will look at an equity. Of course, you will not get the precise number, but you will get a roundabout number of primary infusion that we expect over the next 2 years' time period.

Okay. So there are chances of equity infusion in the next 2 years?

Absolutely. Yes.

I don't know whether Amit Mande is on the call or not.

Amit Mande is not on the call since he was pulled in by the bank.

I will answer the growth question today, sir. So as you have seen that we are projecting the total AUM build out of INR 20,000-odd crores. Well, December exit run rate was INR 400-plus crores per month. And I'll try to elaborate, large portions -- our -- this company is still intrabuild more. So our headcount have increased from 300 people to now 1,000-plus people. Our physical infrastructure, microenterprises branches have grown from 25 to now 89 people. And normally, some of this becomes productive over a period of 9- to 12-month period of time. So first and foremost, your profitability, which is being shown. See, we are a business builder. We build these businesses for a long period of time. And we expect investors to also recognize that this business is not at the point of today, but it's for future. So a large portion of our infrastructure would pay off in next multiple quarters, which would come. And that's why we are saying that you should expect our AUM to double or beyond every year by 2025. And I think we will, after that, we'll have a normalized growth cut. So that's where we are today. So I've tried answering the question of which has come on the chat that why it is not showing on the PAT. One, our -- we are incrementally improving our PAT, but we are just not focused on just PAT itself because we are simultaneously calibrating the investment into the business. I think a large portion of our investment has now been done. And over the next 2, 3 quarters, we are ensure that, that investment pays off better. But for a market, which is a high-growth market, maybe it is all of the early effort of high intensive investment which we have done in data analytics, technology, sectoral focus, senior management team would not get realized unless if we support that by other infrastructure, distribution, technology and liability infrastructure. Okay. Go take next question.

Shachin, there's a question from Pamod. How much -- so why 3 directors have resigned? So maybe you want to answer that first.

So in India, actually, there is an RBI regulation. RBI regulation master secular on loans and advances have -- for a very long period of time, have a restriction. The restriction does not only apply to NBFC, but for any company, which has a director, who is on the board of the bank. Every bank in the country -- banks cannot lend to that NBFC unless the board of the bank approved that rule. To give an example, out to our 3 directors -- so first and foremost, to eliminate this challenge of UGRO sanction going to the board of the bank, this was considered. This was -- we have been discussing this for a 6-months period of time. And finally, yesterday, 3 of our directors said that they had the compulsion, they could not leave the board of the bank, but they said it is not fair on UGRO to suffer from this, and that's why jointly, we identified 2 very senior people, one is an ex-Alliance chairman, and another is an Indian Overseas Bank Chairman. And they stepped down and these 2 people came in. But just to elaborate the problem I think. So Mr. [indiscernible], who was on the Board of Capital Small Finance Bank, which is a small SFD in Jhalandar. Term loan Sanction from State Bank of India had to go through the Board of State Bank of India. Now there's problem with that, except that the Board of State Bank of India considers large sanction and large proposals, INR 5,000 crore and plus. Versus we are a young NBFC and whose proposal has to go to and get approval by State Bank of India takes x number of months. So given the rate of growth and the liability which we have to raise, Board decided to request the 3 board members to choose between UGRO or the bank. And in their judgment and their own set of preferences, they said it would be fair for UGRO to adopt to 3 new board members. So 2 of them we have already adopted yesterday, and there is a search which is on by our Nomination Remuneration Committee, so a new board member will be in effect soon.

Or maybe Akash has been on mute. Has been on [indiscernible] so maybe you can continue Akash Jain, if possibility.

Congratulations, sir, on a good set of numbers across majority of the parameters. But I have a question as to why your credit cost has gone up in this quarter?

Yes, sir. So Mr. Jain, actually, there is the recent RBI circular. The recent RBI circular has now harmonized the NPA recognition norms between bank and NBFC. To give you an example that today, if I, NBFC, have a borrower who had a repayment date call, say, 7th of January or 7th of February. And if he -- the customer has missed the payment on 7th of February, but if it makes the payment before 28th of the February, the account does not get classified as an NPA, which means the provisioning norm does not change. Now RBI has harmonized and said that if on a particular day, the customer misses the EMI, then the account would move to an NPA bucket and the provisioning has to be done. More so, unless all the due or EMI. So if the 3 EMIs are due, unless all the EMIs have not paid back, the accounts would not move back to as a standard account. And that has led to -- and this is for the entire NBFC industry. In this quarter, you'll see there is an increment which will happen on the provisioning side. So for us, actually, the impact is very low. So it has moved from 1.9% to 2.4%. This 0.45% increment is on account of this RBI supply. Amit, you want to add something to this?

Yes. And on the provisions itself, because we are sector focused and we have been observing the behavior of customers by sectors, we find that in most of our sectors, normalcy has come back, except for hospitality. In hospitality, we want to be a little conservative restaurant business -- businesses overall have not come up. Across all other sectors, education, light, engineering, chemicals, et cetera, we have started seeing a lot of buoyancy. So we want to be prudent, and we have taken a management overlay of extra provisioning of about INR 2.7 crores. So this credit cost number quarter-on-quarter is looking higher because of this extra provision as well, which we have taken.

Yes. So my second question is, overall, SME space has been under stress, which is evident from all majority PSU bank reserves. So we have identified, say, around 8 sectors. So are we looking to move out of these 8 sectors or we are focusing only on this 8 sectors considering the stress in the overall SME space?

So when we chose these sectors, it was a strategic decision. And these sectors were chosen basis -- the relative competition in these sectors for our kind of ticket sizes, our own assessment of how the government policies will play out, et cetera. So in the long run, we don't see stress going on. In any case, are these 8 sectors we have chosen, contributes to approximately 50% of the SME GDP. But yes, from an experimentation basis, we keep checking if there are other sectors which are worth developing the expertise on. But over a long period, medium to long term, we don't see going out of these 8 sectors.

And Mr. Jain, I would just add 1 more point. I think one other thing or the point which people miss, MSMEs in India is at the center of what we call the mind share of policy initiative. The reason in a democratic country sector, which contribute almost more than 30% of GDP, a sector which employs 11 crore people, which these 0 crore family members are employed by MSME. In last 3 or 4 years, every policy support is towards an MSME. So you would realize that while general perception is that there is a stress on MSME because of pandemic or otherwise, but that got alleviated because of the support, which came only for MSMEs. So right from pandemic 1 to pandemic 2 and now, you would see the emergency credit line only for MSMEs in India. The Tier 2 capital structure, which government gives is only for MSME. The restructuring guidelines, only for MSME. The recent addition to an emergency credit line, only for MSME. All of the policy initiative, so whenever the government focus on a particular sector in our country, they bounce back much quicker because they have the power of the capital, right? So the amount of focus, which policy makers, RBI and the government have on MSME financing and on digitization. Our personal view that this is a sector which would grow faster than other credit markets, consumer, real estate, infrastructure, vehicle financing because this is a productive employment sector. So actually, the recent trend and the support, which has come from the government actually is helping us in a big way. And obviously, it's not to say the least, the level of digitization which is happening today is also of a very different nature and kind.

Okay. My third question is, we have seen a good strong growth in this quarter, especially on the disbursement front. And the AUM book has also grown very fast. I wanted to understand how sustainable is the growth over the next 2 to 3 years? Do we face any bottlenecks?

Mr.Jain, this growth has 2 parameters, right? Asset side and the liability side. I think so we have found our unique mojo or mode when it comes to the asset side. UGRO is the only company today which has a diversified channels of asset generation, branch-led prime and micro ecosystem supply chain machinery, co-lending platform and digital. So from an asset engine perspective, I think we are well on the path of achieving over INR 20,000 crores of milestone. On the liability side, which has always been a challenge for NBFC because we don't have access to a CASA or a public deposit. Our view is that, that would always remain stressed, but we are trying to solve that by bringing co-lending as a solution to that. Because banks are flushed with liquidity and they have the capacity to provide any financing to the customer. I think one of the questions you or somebody else -- I think you only asked, why these banks would continue with us? First and foremost, it is about banks can also do the same jobs. We cannot match SBI distribution. But for where we are superior is our data analytics capability, method of fundamentality, access to customers being able to originate support services, disburse and collect. And banks, vis-a-vis, their cost of operation versus our cost of operation, always find it beneficial to partner with us. This is a trend just not for India. Globally, every fintech is now supported by large banks. Banks are embracing innovation to generate assets. And I think so that would help us in matching the liability for our assets as well.

Akash, can you please wait in the queue because there are, I think, people wanting to ask a multiple chat. We'll take up your questions again.

Mr Jain, we can come back to you.

[indiscernible] who has been in queue for a long time.

Personally, congratulations on the results. What I wanted to know is it's a follow-up to the director questions. So you talked about how the Board of the co-lending bank has to convince every time [indiscernible]. Except the people who resigned, they resigned on the Board of small finance banks. So what is our -- firstly, what is the quantum of [indiscernible] you are hearing from these banks? And also, will it just make more sense to go and -- inside these from...

Sorry, sir, [ Mr. Soto ], let me clarify. So if I have a director who's on my board and the director -- the same director is on the bank -- board of a bank. From that bank, we cannot borrow, that is prohibited. But the restriction is also for every bank in the country. So if I have a director who's on the Board of UGRO and he's Director on SFB, this restriction applies to the State Bank of India, which means that it is not a restriction for that particular bank. It is a restriction for the entire banking industry.

Right. That makes more sense.

I think [ Surbhi ] has been in the queue for a long time. Maybe [ Surbhi ] go ahead.

Sir, my question is, can you please tell us your adjusted book value? What is your adjusted book value?

Adjusted for what, [ Surbhi ]?

Adjusted book value.

No. But adjusted for what?

Okay. Okay. So I'll get back on that. Another question is that can you tell us your NIM? N-I-M, net interest margin?

[ Surbhi ], it's our presentation. So if you don't mind, you can refer there.

Okay, sir, and return on assets?

The NIM is about 7.5% -- 7.6%. Return on assets will be very, very low, considering that we are in the build-out phase.

Yes. So we would definitely request you to go through our detailed investor presentation. All the metrics are very well defined there.

I think, Shachin, you should take questions from the chat box. So first was from Mr. [ Tulsi Badina ]. Please, can you tell us about your experience co-lending with SBI? Will the contract be renewed in March?

Sir, I don't know where this question from [indiscernible] in the contract. These contracts are not to be -- these contracts are perpetual by nature. They're not driven by time, but they are driven by an asset size. So we are not disclosing, but in public you can find out what is the size of our contract. Our experience with SBI that we will go operationalize this in the month of February itself. SBI, we have been the first co-lending partner of SBI in November '19 when the first circular of RBI came, and we have now signed around 2 months back. And there has been a deep engagement. Our program, which is Sanjeevani, both secured and unsecured has been approved by the Board of SBI. So obviously, it has taken a little bit of time, almost now 7, 8 months, we have engaged. But now we think that starting February in the next 2 quarters, a significant volume of business would happen with them. We are in the process of integrating the technology and operational process. Your question is how much lending has been done on co-lending programs. Okay. So as we said, that most of our co-lending program are leasing because we have been doing at this path for almost now 7 and 8 months. In the month of December, we saw the first flow to come -- bank other flow has been coming on an average, we have now done almost INR 40-odd crores of co-lending with them, that's a difficult program, prime market. So that's why we have seen lower volume, but we are now getting more program approved from them. Ideally, we are seeing regular flow of almost INR 4 crores to INR 5 crores every second, third day. And we are expecting a very large volume of our assets to be down sold to Central Bank of India in the month of February and March. And SBI will go live soon.

The next question is, what is the reason for DBZ (Cyprus) selling their 7% stake? Isn't it too early for the investors to exit?

So when we started this because we were funded by large private equity investors. We made a conscious choice to choose our investors who have different time horizon. Because you would like the company -- one of the characteristic of a listed company to have liquidity also available for retail public shareholder and other institutional shareholder. Within the construct of 4 private investors who backed us and invested the capital. DBZ (Cyprus), which is the name of the [ entity ], but it is [indiscernible], which is a $38 billion fund. This fund had the less life. And we chose them, and preferred them over many other investors at that time because they were willing to provide early liquidity to the market. So when we felt that the company has reached to a size, they stepped down from our Board and then gradually started providing liquidity to the market. They have continued to be a big backer of us. But I would say that they are making a sacrifice of -- sacrificing their long-term return, but allowing others to enjoy the return which can come from this company.

Then I think, what is the status of co-lending agreements with 9 incremental banks? I think somewhere in your public discussion, you have talked about the 9 banks, order of 9 banks, NBFC, that you're talking to. I mean, what has been the possession? Some guidance on that, Shachin.

Yes. I don't know which panel discussion I would have quoted a number, I would have made a generalized comment. But I must add this that given that UGRO, vis-a-vis many other established NBFCs which have been in the existence for more than 25, 30 years in the country have acceptance from the largest banks. And that is a function of our sector-focused MSME, priority sector and data analytics and distribution platform. I must confirm that almost every bank, which is in public sector, have some other conversations with us. Now we have to also make sure that we just don't sign up with everyone. This is a cumbersome process of delivering to our existing bank. So over a period of time, you will see some more partnerships to come as our asset growth would build. But I will not give you exact number of bank. I'll grow our GRO-Xstream platform. Eventually it would be a platform with most of the banking system in India would be on this platform as a co-lender. And most of the SME financers who are financing or originating assets would be on that platform. Our stated goal is to be the largest co-lending platform for MSME financing in India, and also the largest SME financing platform of India.

How is the risk of default in co-lending shared? Are we liable if -- in any way, if the customer recommended by us default in payment? So is the risk share...

As per regulations, this is an act pari-passu happens. So the risk is shared in the proportion of the co-lending. So most of the co-lending is in 80-20 ratio, so risk to share in that proportion itself.

There is someone from Grameen Crédit Agricole Foundation. Could you please repeat the portion of the portfolio eligible for PSL? On this segment, what is the number of borrowers and the average loan balance expected the evolution of the client base in the future and any initiative on social performance?

Yes. Very good question. Thank you for asking this. So almost 95% to 98% of our portfolio are priority sector loans. We have financed almost 60,000-plus customers. Our average ticket size is roughly around INR 16 lakh. Our evolution of client base, we have publicly said we would like to take 1% market share and have 1 million customer base by 2025. In fact, in our current quarterly presentation, there is an extra slide on our social impact parameters. And you may refer that, which will give you a clear perspective of what we are doing on that. But we are also in the month of -- end of February or beginning of March, we would be publishing our social impact or what we call our impact assessment report. A global, very well-established impact consulting firm is doing this assessment on us in every parameter of impact and multiple SDG goals, and how we have fared on each one of them, we would be publishing for Europe.

Any plans for SMB license and challenges from competition? Can you elaborate on this?

I know, we don't have any plan for an SMB license. I think so the -- on a comparative basis, the banks and the kind of composition which comes with a banking license, we think our model as where we stand today is superior because we are enjoying the benefit of the large liquidity available in the banking system. And we are focused on asset engine and our data analytics platform, which is -- and we really enjoy that. So there's no plan for that as such.

Can you please discuss the economics of a typical co-lending loan? What is the impact on ROE?

Nirav, why don't you do that, please?

Yes, sir. So basically, in any arrangement, we have an 80-20 kind of a partnership pair. 20% is the funded portion by UGRO Capital, and 80% is funded from the balance sheet of the partner. There are 2 kind of spreads that we own on this. One is on our own portion of 20%. There is a spread that we own. So hypothetically, if the customer is lend at 14% and our cost of borrowing is say, 10.5% beyond the spread on our own 20%. Over and above that, our arrangement with the partner is not -- I mean, they don't take the 80% share on the loan itself. So our arrangement with the partner is also at a lower rate of interest. And that rate of interest will depend upon bank to bank. It will depend upon the category of customer, et cetera. So on the 80% of the loan, we earn the spread again -- there again. So if the arrangement with the co-lending partner is at 10.5% and our lending rate is 14%, we actually earn a spread of 3.5% on their 80% as well. So the ROE is actually multiple of what we do. So this is, I think, will answer. The exact ROE impact will not be able to give as a commentary at the moment because it will depend upon the bank to bank, the product to product and the kind of customer segment that we operate in.

So yes But simple math itself, if I have INR 100 of loan book, regulatorily, I require to have at least INR 15 of capital. And I earn INR 5 margin, which is my NIM on my -- basis my INR 15 of capital. In co-lending, I can take the book to INR 500 and 80% of that will be in the balance sheet of the bank, which means only INR 100 still remain on my book. which is my equity -- which is again with a 15% equity. So on the balance, INR 400, the same NIM is being earned on the same equity capital base. So that's a 4x multiplier return on ROE.

Okay. What about private sector with respect to co-lending? Yes, we are in discussion with private sector banks as well at the moment for the co-lending partnership.

There's a question, which says, your corporate governance is almost like a template in corporate governance in India. Why don't we share the code of conduct? Our corporate governance code has been converted into our Article of Association. Our Article of Association is a public document. Anyone can go and take our Article of Association. So it's a public document. There is -- and the main summary of our corporate governance code always comes in a slide in our presentation. But if anyone would like to have our Article of Association, that is available from MCA or from us at any point of time. We have 1 more hand raise. I can't read the name on the.

The name is not.

you can just unmute them.

[indiscernible], I think that's the name. I don't think so we have more questions.

There is a follow-up from Mr. Akash Jain and Mr. Manish Agarwal.

This is Manish Agarwal. So my question is, sir, we have read somewhere that as per your code, no key management personnel can resign without the prior approval of the Board. Is it true?

So our CFO and CRO cannot be terminated without the approval of the Audit Committee Chairman and Risk Committee Chairman, both who being the independent directors as per our Article of Association.

Okay. They cannot be terminated, but can they release themselves?

Sir, we are in 3 countries, how can we hold somebody -- contractually, we cannot make people to work without their free will, right?

Exactly. That is -- okay. Sir, one more question.

The reason why it has been done. We have seen in financial services industry and with respect to few bank, senior management foresee the risk had to take in a riskier call because there is a relationship or an alignment with management have with certain set of customers and borrowers. So in order to protect the franchise, the Risk Head has been given a protection in our article, which has now become an RBI norm. So even the RBI now see this as regulation has set the Chief Risk Officer would have access to the risk committee and will -- every quarter can meet the risk committee independently. We implemented that prior to even RBI saying that.

I have 1 more question, sir. So my question is that recently, we see that due to invent of artificial intelligence and digital platforms, MSME sectors are facing a lot of disruption, like small business actually are facing some kind of disruptions in the business. Like most of the retail shops which we go, like they are facing disruption due to brokers coming in and big basket coming in, they are facing a lot of problems in their business like [Foreign Language]. And there is small MSME lender. So how do you maintain the growth looking forward?

Anuj, do you want to say?

We -- our focus is micro small and intermediate prices. Traders are a small part of that, but there are other facets also. So if you look at our sectors, 3 of them are more service-oriented. 5 of them are mixed. And all of those sectors will have smaller micro traders as well. Now it is a question of how environment has evolved and more and more people who adapt and adopt to new ways of doing business, the more successful they would be. A good example would be pandemic. We have hospitality as a sector, and we have funded a lot of restaurant. A lot of restaurants successfully navigated to online services. Those have done well. Some of them who couldn't migrate have faced stress. This is true for any kind of business in any kind of environment, if they fail to adapt to the changing environment, their success is not guaranteed. So broadly speaking across our sectors -- this is true for manufacturing as well. A lot of manufacturers where production has got automated, their OpEx has come down. Overall, their profitability has gone up, but a lot of manufacturers where it is still labor-intensive, they continue to face that problem. So this is something which we are all aware of. I mean, just to tell you, now we have developed programs specifically to attract aggregators and their suppliers and their buyers in a digital way. So we are looking at this as an opportunity to grow our business. But the fact remains that artificial intelligence and machine learning is the way to future. Businesses which will be able to adopt will survive, others will find it difficult.

Shachin, there is a question which maybe I can answer. So the company were comparable to [ contractor ] business finance in terms of secured product. However, in terms of PAT, it is quite lagging. Why do you -- when do you reduce the dependence on DSA channel, which are thin margin business? I think the way to think about us -- go ahead, Shachin. Go ahead, please.

No, I just wanted to say that you're right. One portion which is of our business is similar to a 5-star. So we have 4 asset channels, branch-led ecosystem grow extreme co-lending and digital. Branch-led micro enterprises in South is similar to 5-star. 5-star has been in existence for 15 years and the asset growth has come in 5 years. Our micro enterprises channel, where we have been in existence only for 2.5 or 3 years, of which -- 2018 to 2022, of which around 2 years have been lost due to pandemic and RFS. Our microenterprises channel is only 9 months old. And the results which we are showing in that 9 months, and I'm 100% confident that given the size, scale, diversity, digitization technology, our micro enterprises channel would -- by 2025, would be equal to any player which have in that. Also that because we are a broad-based micro MSME lender, we also use data for our prime. We also have supply chain. We also have multiple other channels. Our micro enterprises financing, which is led to branch-led channel, which is direct sourcing, not through DSA, would have superior productivity and cross-sale opportunity there only micro enterprises focused lending institution. Nirav, you can add.

No, yes. I think -- if you think about it is micro branch business per se. I think the other channels that we have been able to develop, which is a supply chain financing, the GRO-Xstream platform that Shachin talked about, the machinery loan financing. All of that requires a bit of investment in terms of what Anuj mentioned, artificial intelligence and machine learning. So basically, the take around it, the analytics around it. The micro business, per se, is slightly different, but rest of the other businesses need a lot of investments initially in terms of the AI, ML and so on and so forth. The other thing is also the way to think about us is basically, we are developing 4, 5 engines simultaneously. And we believe that if you have to achieve the INR 20,000 crores, all of the engine has to fire in the right direction for us to achieve that number. And hence, a bit of initial investment and hence, lower profitability, but I think it will be able to generate far more ROAs over a period of time.

And also -- the diversity also protect you against the cycle, when you are only focused on a particular channel, right? 20% to 24% yield and micro loan secured and unsecured in adverse cycle, that business can give you grief. But when that business is also there, which is improving your blended yield on the portfolio, but you also have prime assets, which are -- where the PD is only 0.5%, SGBs less than 0.1%. When you have a cash flow-driven business like supply chain financing, machinery, no digital, you are building an institution, which would -- which not only would show superior profitability but would also survive all cycle -- credit cycles in the marketplace.

I think 1 good question also. Thanks for the wonderful insight on priority sector plus ESG study underway, what kind of government support do we get in the priority sector? Example, is there any chance of reducing cost of funding via priority sector, government support?

Yes. So fact is that today, 40% of average net bank credit in India by banks has to be done -- lend in priority sector. And a large component of that is MSME, which is 7.5%, and certain other sectors have been added. And government -- one of the reasons is priority sector financing is -- has stayed for -- since the last 3 decades, have continue to remain very big focus is because the dissemination of credit to underpenetrated creates broader economic growth for the country. And that's why these regulations have been brought in some of us. Number two, there is our actually sectoral approach and the kind of support which is coming. So one, banks are incentivized to give lower cost of capital or cost of credit to priority sector because that works in their favor. Second, I'll give you 1 example. When the COVID hit, the RBI came up with a INR 50,000 crore credit line for COVID-related healthcare infrastructure at a very economical cost to the bank. And allowed banks to lend to NBFC to onboard lend for healthcare infrastructure. We are among those rare NBFCs because our focus on health care, when we received financing from banks to lend to healthcare. So bank benefited from lower cost of capital from RBI, and we benefited same lower cost of capital in our balance sheet. So I think that this is next 2 decades or 3 decades, you will continue to see systematically, financial institutions would be supported to deploy capital to priority sector, Agri, MSME and under-privileged sectors. And we are at the forefront of that. And we have seen in the last 2 or 3 years, every initiative of the government within the priority sector has been for MSME. Because it generates direct employment and actually helps our economy to come back.

Just to add, I think the way to think about the ESG study is that over a period of time, I think governments, not only Indian government, but multiple -- multilateral agencies and the DFIs, et cetera, have been trying to channelize the priority sector. And because of this ESG study and our impact in sectors like health care, education, et cetera. This will help us [indiscernible] which is long term in nature. And second, we will be able to raise the capital at a much lower cost of rate of lenders. So I think it's just not government of India, but there are multiple European government agencies will be able to fund us once we have the ESG study to be some of the sector to channelize the money [indiscernible]. Is there any question that you want us to kind of take up? I mean you can just...

We can take another 1 or 2 questions. Mr. Akash Jain, he is in queue so we can take a follow-up.

Yes. Sir, I had a question on your unsecured book. Can you give some color on that book? And are we facing any stress or any kind of restructuring that has been done in that book?

Anuj, you want to take that?

So first to answer in a short way, we are not seeing any stress specifically on the unsecured book. We -- because we link by sectors. Within our sectors, hospitality, is overall, whether it's secured or unsecured, has taken much longer than expected to come back. So that impact is there even in the unsecured book. And hence, in anticipation of that, we have done some aggressive provisioning in form of management overlay. Overall, from the portfolio vintage perspective, both from secured and unsecured, we are looking at the lead and lab portfolio indicators, which are -- they are more -- much more in line of what we are expecting. The current 30-plus and 90-plus trends and the recent bounce rates and collection efficiencies also have improved a lot in the last quarter.

Okay. And just second question is, with regards to partnership alliances with fintech companies. So could you give an overview as to how do we secure our business through partnerships, through fintechs?

So what -- basically, the model is that when we choose a partner who is a sourcing partner for us, we look at the historical performance of that partner through its portfolio performance, its business model and its target segment. Then we arrive at a common lending policy with them. And then once that is arrived, looking at the portfolio performance and the nature of target segment, then we agree and start the co-lending business. This arrangement is also fortified with a credit enhancement from the partner typically. And this is a function of the historical portfolio performance of that partner. So typically, this kind of rate enhancement is in form of an FLDG between 5% to 15% as a function of how the historical portfolio has performed. So from our safeguarding perspective, which you are saying, we are quite safeguarded.

Okay. And sir, my final question is, in this co-lending arrangement with PSU banks, do they have a second say in selection of a lending criteria since we are having a superior framework for selection of an asset?

So if you look at the way we have done co-lending with PSU banks, we have relied on the second circular co-lending, which is co-lending akin assignment. And there, broadly, the process is that they also -- we agree after a thorough due diligence of PSU banks on a common lending program, which gets approved at their board level. Once that program is approved, then the sourcing happens only as per that policy. We go ahead, approve and disburse the loan. And post that disbursal, assign 80% of that to the partner bank. Even then, they have a choice of not to take it. Practically speaking, they have to do hind-sighting or whether the agreed policy has been applied or not, but they have freedom to select or reject the case.

I think, Shachin, we should take up the last question now, which is very interesting. Recently, RBI is considering credit cards issuance by NBFCs without the need of banks. Any plans to introduce credit card for MSME segment, I think?

So very quickly, I think so that would be a very favorable for us. So today, RBI does not allow other than 2 NBFCs, RBI does not allow credit card issuance by NBFCs. One of the challenge of MSME credit is that if an MSME has to borrow from an MDSC, it can borrow only for a fixed term. So if I need INR 10 lakh for 20 days, I would have to borrow from NBFC for at least minimum 3 months or 6 months on a 1-year period. Once an NBFC would be allowed to issue a card, we can do working capital financing, which means the borrower would be able to take credit as and when and for the period for which it needs. So once the regulation comes in play, we would definitely be looking at making use of that, for sure. We have a few good questions also, Nirav, we can take that. One question is thanks -- somebody said that thanks, Shachindra, we believe in you and UGRO, presentation wise. Thank you so much, sir. But I can say you should believe in is the institutional capability of UGRO. It's broad and deep experienced management team. It's very superior quality of shareholder and governance framework. And a segment of the market, which is on a very high growth potential. So I think it is beyond just me, it is -- we are making of an institution and you should have belief in that. Yes. I guess we have answered almost everything now.

There are certain factual questions. Shachin, we can answer that to an e-mail like, for example, there's one question on other income. There's one question on other expenses. I think those we will answer it through an e-mail. We have [email protected]. Anybody is free to answer questions on that. And anything which is in public domain, which we can answer, we'll definitely try and answer those.

Sure.

Okay. So let's send it over here. I would like to thank the management team, especially Mr. Shachindra Nath and the entire team of UGRO Capital who provided very detailed insight on the Q3 performance and also their detailed business plans. I would also like to thank the participants for asking very interesting and relevant questions. So from Quantum Securities, this concludes this con call.

Thank you.

Thank you for hosting us. Thank you so much.

Thank you, team, all the best.

Thank you.