Ujjivan Small Finance Bank Limited (UJJIVANSFB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '21 Earnings Conference Call of Ujjivan Small Finance Bank, hosted by IIFL Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. [ Pratik Cheda ] from ISM Capital Limited. Thank you, and over to you, sir.

Thanks, Rateja. Good evening, everyone. Welcome to the 4Q FY '21 Conference Call of Ujjivan Small Finance Bank. From the management team, we have Mr. Nitin Chugh, Managing Director and CEO; Mrs. Upma Goel, Chief Financial Officer; Mr. Ashish Goel, Chief Credit Officer; Mr. J. Srinivas Murty, Head of Liabilities; Mr. Rajat Singh, Head of Micro Banking and Rural Banking; Mr. Sneh Thakur, Head of Credit and Collections, Micro Banking and Rural Banking; and Mr. Deepak Khetan, Head of Investor Relationship. I would like -- now like to hand over the call to Mr. Nitin Chugh for his opening comments, post which we can open the floor for questions. Over to you, Nitin.

Thank you, [ Pratik ]. Good evening, everybody. Welcome to our earnings call for the fourth quarter of last financial year. I sincerely hope that all of you and your loved ones are well and safe. And hopefully, all our prayers collectively will give us enough strength to overcome the pain that we are going through because of the pandemic. We actually finished a fairly challenging last financial year on a very high and optimistic note in the last quarter. We registered our highest-ever business and collections outcomes in March. You might have seen that from our results. However, yet again, we are in the midst of a monster second wave all around us. And I'm sure a lot of us have been impacted from very close. In Ujjivan, we've lost 6 of our colleagues just in the second wave, which is very, very disheartening for us. And as of now, nearly 600 of our colleagues are infected and recovering, and we are praying for their speedy recovery. The business and the overall environment was both evolving, it was dynamic, and it was also challenging at the same time. April onwards, we've of course seen the increase in COVID cases all across the country, localized state level lockdowns. At this point in time, I think nearly 80% or more of the country is already under some kind of a lockdown. And this has indeed affected the livelihoods and business quite like the last time around. However, the key difference this time is that we have a lot of experiential learning from the last time. We have a very high level of preparedness. And we also have a finite hope in terms of the vaccination, in terms of the reducing number of cases that we are noticing for the last few days now, and the recovery rates, which are also improving across the country, and I think, more importantly, all the steps that have been taken by the government on the medical infrastructure side and the other official measures that RBI has recently announced. I think those are very, very positive steps in the present environment. In these times, I think we have fared pretty well. We still stand strong as a purpose-driven organization rooted to our mission of serving the best for our customers. And at the same time, we look after -- we continue to look after our employees, and we are taking all kinds of precautions and also making sure that our workforce gets vaccinated by the end of July, and we are trying to work towards that as well. So my opening remarks, really speaking in the following parts, the last quarter and the highlights of the last quarter. You might have picked up quite a bit of that from the release and the presentation that we circulated. We'll also talk about the situation as we're seeing it right now, the way we are experiencing it and our preparedness and outlook for the rest of the financial year. So like we've been mentioning in our past calls, we have taken a cautious approach while being optimistic to the new business in the first 3 quarters of FY '21, and we have started to grow the business only from December '20 only. And you would recall that in December, our reversals grew by 8% year-on-year, which we reported in the last earnings call. That momentum continued well into the fourth quarter, where we delivered an extremely healthy all-round performance. Our Q4 emerged to be the best quarter of the fiscal, in fact, the best quarter ever for Ujjivan, with business growing and surpassing way beyond pre-COVID levels, and collections also improving to 94%. Deposits, for example, grew by 22% on a year-on-year basis to INR 13,136 crores, with retail deposits at 48%, much like what we had in December. However, our CASA book grew by 85% and our CASA ratio is a very healthy 21%, and it seems to be going in the right direction. Our disbursements were highest ever for the quarter. For the month of March, they were indeed the highest ever for a given month also. And our disbursals grew by 31% year-on-year for the quarter at INR 4,254 crores. The secured book which we have been trying to build, trying to diversify out of microfinance-heavy book that we had, is now 27% versus 23% last year. And the non-micro finance -- sorry, the secured book is 27%, and the non-micro finance book is now around 28%. We also added about 800,000 new customers during the year. We continued adding customers on the liability side through the year through our digital workflows, et cetera. But on the asset side, the step-up really happened from December onwards. And the share of nonpaying customers, starting with the first phase of moratorium beginning of the COVID I wave, that has continued to decline to the share of nonpaying customers, and now 96% customers are making payments in some shape or form. We have also progressed substantially on our digital initiatives. We have improved our productivity substantially. I'll talk about that also a little more in detail. And we were able to set up our noninterest income substantially, both through treasury as well as our third-party income line. Our treasury operations actually contributed in a very healthy manner. We generated a substantial amount of trading income also by participating into the opportunities available to us through OMOs, et cetera. And our capital adequacy also remains healthy and higher, 26.4% and LCR at 116%. So on the fundamentals, I think we are as strong as ever. There has not been a problem at all in the last financial year. So with these levels of fairly strong disbursals, our loan book went up by 11% on a quarter-on-quarter basis from Q3 to Q4 and 7% on a year-on-year basis to INR 15,140 crores. And the growth was well diversified across all business lines. And like we've been talking about in the past, we are -- we were working towards the non-microfinance businesses also contributing meaningfully enough on the growth in future, and that has really happened. And both MSE as well as affordable housing for us are now very, very large businesses. Now talking about each of these businesses a little briefly. In micro banking, we did see a pickup and restoration of activity from November, December onwards. That is when we also decided to start looking at new customers. Before that, we were only dealing with existing customers through repeat loans in a fairly limited manner. And as a result of opening ourselves up in a limited manner to the new customer acquisition, our proportion of new customers went up to 22% in the last quarter, and we disbursed about INR 3,317 crores, which was 18% higher than the Q4 of last financial year. In March, micro banking disbursed INR 1,240 crores, which was again a record level for us. In affordable housing, we crossed a milestone of INR 2,000 crores in our book. This was led on the back of fairly improved productivity and also diversifying our business into little more formal segments. In Q4, we disbursed INR 324 crores, which was 55% up over the previous quarter and 73% up over the same quarter last year. And the affordable housing book grew by 34% on a year-on-year basis, I think which is very, very healthy. Similarly, the MSE book grew by 31%. We disbursed about INR 276 crores in the fourth quarter. And we also tied up with a fintech partner, and we've been trying to diversify in the MSE business into more formal segments. In our institutional lending, which we call it FIG, where we deal with MFIs and NBFCs, we also diversified into better-rated entities. We were not very, very bullish about the microfinance NBFC, so we were trying to diversify that book as well. Our disbursements grew by 129% quarter-on-quarter and 189% year-on-year to INR 240 crores. In fact, in the month of March, again, FIG reported the highest ever reversals of nearly INR 185 crores. So that book is now about INR 648 crores out of our total book, well within the 10% cap that we have an internal benchmark of. In our other businesses like personal loans and vehicle finance, though they were new and relatively small, I think they scaled up on a fairly large multiplier basis, even though the books continue to be small. But we are scaling up these businesses with a slightly different approach now, and mostly through our branches. And that has resulted in about INR 44 crores of reversals in personal loans, which is 5x more than the fourth quarter of last financial year. And in vehicle finance we disbursed INR 38 crores, which is again 4x compared to the fourth quarter of last financial year. One of the aspects that we have been working through, and we mentioned this in our recent interactions and the part interactions also, is to improve on our productivity and efficiencies. And I'm very happy to let you know that our employee productivity has not just improved significantly across all lines of businesses, it has happened with better quality of customer relationships also that we acquired. Our productivity was highest ever in the fourth quarter of last financial year across all businesses and functional areas. And this is despite we had a headcount reduction of nearly 1,200 to 1,400 people, which you might have noticed on the Investor Day. The -- all the businesses have delivered their ever-highest numbers and much more in excess of what we were doing 1 year ago. So clearly enough, our productivity has been significantly improved. At the same time, through our digital workflow, we've been able to reduce the turnaround time for customers. And you'll note our error rates, et cetera, also has reduced [ pretty ] substantially. Now coming to collections and provisions. We have spoken about improved collections in the month of March at 94%. The increased collections were due to our multi-prong strategy and effort through both put out of field force collection agents, give alternate options to customers to make their repayments, tying up with fintechs and giving them alternate options to make their repayments. And all of this has led to giving more options to customers and has really helped us, and it continues to help us even in these circumstances, when we have a network where we are able to collect payments from customers, which are proximate -- which are in close proximity. However, in April, of course, there has been a dip, so the 94% dropped to 88%. And largely, the impact has been in the second fortnight of April. The first fortnight, while we were experiencing difficulties, but the larger difficulties have started to come only after the 15th of April. We do intend to add more people to our collections organization, which will benefit us in the medium term. Amongst the larger states, Maharashtra continues to be worst hit. It had just about started to recover. It had reached a level of 87% collections efficiency in March. However, that has again dropped in April. And Maharashtra, because it bore the brunt of the second wave rather earlier on, and even though things are improving, but it continues to drag behind. And some of the other states which are also challenging at the moment are Assam, Kerala, Punjab, MP and Chhattisgarh. MP and Chhattisgarh, though they are small portfolios for us, but the collections efficiency was really impacted because of early lockdowns and the widespread levels of infection. In Assam, while our portfolio is at a bank level only 2%, and then micro banking is under 3% now, we haven't been dealing with too many new customers over the last 15 months or thereabouts. The government has now announced setting up of a committee to evaluate the loan waiver which they had announced during the elections time. And we do hope to be able to work with the government and the other SROs, et cetera, to be able to come to some conclusion. As of now, Assam has dropped in the collections efficiency even lower than what it reported in April. And this is pretty much the feedback that they're hearing from the entire industry which operates in Assam. So we had taken accelerated provisions last quarter, as you would remember. And therefore, this quarter, we have not taken any provisions. We had, at that point in time, estimated slippages and credit losses for Q4, and we had some idea for Q1 as well. However, at no point in time at that stage we were anticipating a second wave, and we were certainly not anticipating a second wave of this magnitude. So I think some of that -- those assumptions have to get recalibrated as we go through this quarter. However, we continue to carry a fairly good amount of provisions of INR 172 crores on our books. And our provision coverage ratio is 60% and the extent of book that is covered is in excess of 6%. We had also restructured about INR 852 crores of our micro banking book, which has performed well in the last quarter. We reached collections efficiencies of 75%. However, much like the rest of the book, that has also dropped in April, and we are keeping a close watch on that and working along with the customers. The good thing is that now RBI has announced a second version of the restructuring framework, which we are working on the policies, procedures and the other checks and controls. And we should be able to give some support to distressed borrowers through this framework as well. In the other businesses, we did not actually do any major restructuring. Now one of the reasons why the GNPA and our MSE portfolio has gone up is also on account of the estimate that we had for restructuring that time, which we had estimated close to around INR 100-plus-crores. However, when we had the customer-level discussions, we would only restructure about INR 13 crores of that portfolio, as a result of which the most of it slipped into the higher level of GNPAs that you're noticing. We do have plans to identify customers for restructuring, both in housing and MSE, and that is again something we'll work through the restructuring 2.0 framework. I've spoken about the channels that we have added in terms of repayment for our business distribution. Again, we have fintech tie-ups now which are maturing. We have a fairly steady tie-up in MSE. In personal loans, we have tied up with 2 fintechs. And we are working through a pipeline of at least another 25 fintechs over the next 2 quarters, which will help us in all kinds of workflows, distribution, collections, et cetera. We are also going to be adding more touch points to our existing tie-ups with Airtel Payments Bank, PayNearby, et cetera. And even the Money Mitra arrangement that we have, we have rolled out about 250 outlets. We will be adding more proximity points for our customers to be able to make their repayments. Now commercial liabilities, the focus was really on buildup of the retail liability portfolio. We also wanted to reduce our cost of deposits. We wanted to replace our wholesale deposits with retail to the extent possible. And because we were going slow on disbursals, we were also keeping our liability business in a range bound manner, which I have explained in Q2 and Q3 earnings call as well. Our deposits went up to INR 13,135 crores, 22% year-on-year growth. And the retail book has actually grown by 32% and is now at INR 6,242 crores, which is 48% of our total deposits. And the thing that we are most happy about is our CASA, which has now gone up to nearly INR 2,700 crores, which is 21% of our liabilities, and CASA has indeed grown at 85% year-on-year, both across current as well as savings. This has been possible also through fairly improved productivity in our branch banking channel and the digital account workflow that we have introduced early on. The cost of deposits, of course, has trended lower through the year, which is now at about 6.6%. And predominantly because of a higher share of CASA as well as replacing the high cost deposits with lower deposits. In our third-party products, we had a fairly high reliance on our group credit life product, which is bundled along with loans. And since we are not disbursing too much in the first 7, 8 months of the year, that income line was under pressure. However, we worked through a retail insurance income line, and we were able to also certify from roughly about 400 people at the beginning of the year, we took it to nearly 2,800 people by the end of the year, and we were able to work for our branch banking channel, especially to generate a lot of third-party insurance income, as a result of which our total third-party income has remained unchanged at INR 20 crores, but the mix of retail has improved substantially, and that gives us the confidence that our branches are now maturing, and they should be able to contribute to third-party in a much more meaningful manner. We also expect to introduce mutual funds later during the year. We have [ bought out of ] the ARN, and we do expect to introduce mutual funds in the early part of the next quarter. We also had a fairly good allocation for CSR. We spent about INR 5.53 crores during the year. We wanted to focus largely on COVID relief and things that we would help with supporting the health care, the health workers, et cetera. So we have indeed worked through all of this. We also went out on a COVID education program, trying to educate our beneficiaries to practice safe COVID-appropriate behavior. And that has really helped and that is something we're really happy about. We've been able to reach out to nearly 300,000 beneficiaries, both as a combination of the work that we've done along with the healthcare and the law enforcement agencies as much as what we've done directly ourselves. We also completed 24 infrastructure projects, which we call as Chote Kadam, which are largely in the areas of education, health care, et cetera, with our partner, Parinaam. Our digital initiatives were well on track. We -- I'd explained this earlier that we have a 3-year road map for our digital strategy. We were able to finish rolling out all our APIs. We had 159 of those, which we finished by the end of March. That has helped us and is continuing to help us in tying up with fintechs and many other platform-led partnerships such as those with NPCI and BBPS, et cetera. And it is also now turning out to be an alternate servicing channel for us. We do have a pipeline of at least another 25 fintechs in addition to the already 24 that we have, so we expect ourselves to be a fairly meaningful player in the fintech space also through these ecosystem partnerships that we are forging now. Our processes were robotized to a large extent. We have a road map now of about 125-odd processes. We've completed 14 of them, which are giving us fairly good outcomes in terms of improved efficiencies, et cetera. And now we have a road map to automate another 110 through this financial year, which we hope to complete by December. The digital channels have also started to mobilize business directly from customers, even though it's very small right now, about INR 8.3 crores of deposits and INR 4 crores of loans that we have disbursed. But this has given us a good amount of optimism that these channels can be good fairly large alternate channels for us as we work through that. We have also invested in a marketing automation tool which we tested through multiple campaigns. And that is resulting into fairly good outcomes on the balance build upside in CASA and collections as well through these measures with existing customers. And we expect that a combination of analytics with marketing automation tools, which we call it Martech, and digital channels and digital marketing will help us in creating alternate capabilities for the bank. Now let's come to our plans for this financial year. So we will continue -- and this is only in the context of digital that I'm talking about, just to finish that topic. So we will continue enhancing our digital capabilities. We do want to introduce wealth management, like I mentioned, mutual funds, et cetera. We are also digitizing our insurance workflows through another fintech partner, and we expect to have an end-to-end digital workflow for sourcing insurance and being able to profit. We will continue to benefit from our existing investments in all these partnerships and the API framework that we've made, and these channels will continue to keep adding more capacity for us. We have also put in place a road map for artificial intelligence. We have signed up at one of the leading artificial intelligence companies. And while right now we just have a chat bot, which is multilingual, but we do have a road map to bring in artificial intelligence into a lot of our business workflows over a period of time. A little bit on the RBI measures that have been announced. So like I mentioned, the restructuring framework is being worked out. We are working on the policy and the procedural framework, and we would be able to provide you details at a later date. We have also made use of the other measures that RBI announced; just yesterday we participated in the TLTRO and we were able to raise INR 50 crores. We wanted to test that out, and that is going to be used up in the next 30 days for lending and microbanking. We are also working on the on-tap liquidity of INR 50,000 crores that RBI announced, and that is expected to help us with lending to MSE business in the health care -- on the health care side, what RBI has announced as what can be classified as COVID loans. And that program will also get launched very soon. On our financials, I think we have kept a very sharp eye on our costs. Our operating expenses have indeed reduced by about INR 100 crores. We went line-by-line through the year. We went through multiple rounds of negotiations. We went through multiple iterations, and we've been able to not just work on our efficiency and productivity, but we've been also been able to trim our costs substantially, as a result of which our cost-to-income for the year is at 60% compared to 67% for the last financial year. A 7% reduction, I think, takes us ahead of our own milestones by at least 1 year. We were originally scheduled to be at 60% by the end of FY '22 and 55% by the end of FY '23. The quarter 4, of course, has had a higher cost-to-income at 69%, but that's largely because of the reversal of interest on the non-performing portfolio to the extent of INR 75 crores, which we recognize as NP. And that has impacted a fair number of ratios for the quarter, which includes the NIM as well as the cost-to-income ratio. Now for how we're looking ahead, it seems like the second wave is now showing signs of coming under some control. The number of cases are coming down. The business activity is expected to start normalizing once mobility is restored, hopefully in July. If not, sometime in June. We don't expect too much of lockdowns to continue unless the health situation really requires the governments to take -- the local governments to take those kind of steps. So we believe that in a lot of ways, Q1 of this year would probably be not very different from Q2 of last financial year, when it was kind of on the path to recovery and unlocking was happening across the country. We've had some disbursals to the extent of about INR 690 crores in the month of April. So it's not like it's going to be a washout quarter like the first quarter of last year. And in general, we do believe that the sentiment would improve as the health care situation starts coming under control. The only difference this time is that a lot of people have been impacted at a personal level. A lot many of our own colleagues are impacted. Their families are impacted. So it's more of an emotional burden that we have to work through. And we have -- we are really trying our best to support our people and everybody else around this time. So we do expect that we should be able to grow anywhere between 20% to 25% based on our estimates right now. We will, of course, keep calibrating this during the year. And we do expect our CASA to continue to grow. We expect our CASA to be able to cross 25% to 27%, which will again be ahead of -- 1 year ahead of our original milestones. Our original milestone was to get to 25% by FY '23. And the diversification of the asset book will continue. And within each of these businesses, we are again diversifying into more formal segments. We are diversifying into better-rated entities in our institutional business. And that process will continue so that we also build these cushions, the logical cushions for future quality of the portfolio. And the best thing is that we have tested our capabilities in Q4, right? We know what we are capable of. We've been able to deliver a certain level of outcomes. And that gives us, our entire team, a lot of confidence that this is what we are capable of. We will, of course, be adding people in businesses where the level of optimum productivity has been achieved and which we have actually indeed achieved in the last quarter. And therefore, as things start going back to normal, I think we would just be coming out of this whole situation and going back in full force. We also expect some more fine-tuning of our expenses on the back of our investments in digital as well as improved efficiencies on the operating expenses side. And we do believe that we have a chance to reduce our cost-to-income by at least another 300 bps in this financial year. Now the only thing which is a little unclear to us right now is the extent of credit cost. While we have taken -- we are going into this year with a fairly good level of provisions of INR 172 crore and 60% of PCR, this time around the things are different because, one, there is no moratorium. And last time around, we had pretty much of 100% moratorium, which was followed by gradual unlocking. And then the restructuring framework was announced, which we made use of in Q3. Now we have the whole framework available to us right now. So we will be able to take action, and we'll be able to come up with support for our customers much faster as compared to last year. The health situation, while it is more alarming, but I think the localized countermeasures, the state-specific lockdowns, the vaccination drives, which I spoke about a little earlier, are also promising enough. And the whole timely announcement of the restructuring framework which I'm repeating is also going to be very beneficial to us. So things are not going to be exactly the same as the last year. We are fairly optimistic this time around. We're just hoping that this whole situation gets over sooner than later. And it does seem like that it would. And therefore, our posturing will remain conservative. And the estimate for any kind of credit costs or any kind of slippages, I think will emerge once we go through this whole process of the second round of restructuring and how this quarter really performed. Our overall profitability, which has improved, the performance of the new book which we added last financial year, which continues to report 99.5-plus-percent collections efficiency and is even now performing a lot better, is also expected to push on this, as much as the increase in the fee income and other kind of other income line for us will also contribute in a healthy manner to the P&L. So the other thing is that we will also expand our branch network. We're just finalizing plans. We have shortlisted about 55 new branches that we want to add. We just need to go through some internal approval processes. We also have a few tech investments lined up, like data lake analytics, in artificial intelligence, also in augmenting our capacity in network. So all of that will continue. And in summary, what I would say is that we expect this financial year to be a reasonable year of growth and stabilization, with the latter half holding a lot more promise. And we will also retain our sharp focus on improving our earnings and quality of the balance sheet, maintaining our conservative positioning related to provisioning. So I'll stop here and open this up for questions. Thank you very much.

[Operator Instructions] The first question is from the line of [ Ada Sangoi ] from [ VT Capital ].

My first, if I just look at the PAR number, PAR 31 to 90, it's approximately 4.5%. I have a -- I have a 2.9% kind of NPS. And apart from that, I have a 6.8% kind of restructuring. So against this overall stretch that we have as of March 31, and we are well into half of the first quarter, why haven't we chosen to make some kind of accelerated provisioning this quarter as well? Because from your commentary, it was like pretty clear that we are still not sure about how asset quality outcomes will turn out. So any thoughts on the provisioning front? My second question is on the GNPA. So GNPA has increased quite a lot this quarter. And the broader question I had, like, earlier we used to say that micro finance is a business where people rebound very easily. But when we get into second wave, this is like -- this is second time when the same set of people have been hit twice, like in a matter of maybe 1 year, when they were not able to recover as well. So this 5% collection drop that we are witnessing, like what is the color? Like which type of customers are witnessing stress? Is it the same kind of customers who witnessed stress last year or are these new customers? So thoughts on these?

Okay. So the -- let me answer the first one on additional provisions. Since we are carrying already INR 172 crore of provisions, unused provisions, we don't think that there was a need to create any more provisions in Q4. However, Q1, like I said, we will have to take stock as and when, when we get better estimates. And we are still going through a situation. April hasn't been like a lost month altogether; like last year in April, we had 5% collections efficiency. Compared to that, we are at 88% collections efficiency. And May, while it has dropped, and the numbers will come by the end of the month, all is not lost, okay? So it's not like we are completely in a hopeless situation and therefore we run for cover and we [ try and end ]. And in any case, INR 172 crores is a decent enough cover that we have. Coming to the elevated levels of GNPA, one reason, of course, is that we haven't done any significant write-offs. We've just done about INR 72 crores of write-offs, okay, unlike many other lenders who've done very large write-offs. So we didn't want to do that. The question on microfinance borrowers. I think this time around, it is lesser to do with occupations which was more pronounced the last time around, where specific people were impacted and they were not getting their incomes restored because of the loss of livelihood or lockdowns, et cetera. We also -- this time around, it is -- the spread is also equally as much into the rural areas as compared to the last time around. So from our point of view, the entire portfolio is behaving similarly. It is not really different from an observation point of view very much this time as compared to the last time around. And therefore I think as things normalize they will normalize for everybody at the same time. Yes, there will be some occupations which will probably lag, but we don't expect them to lag the same amount as they lagged the last time, where they took them more than 6 to 9 months to recover and some people actually never recovered. There is a possibility that a small proportion of the portfolio may be permanently impaired, and they may not be able to restore their livelihood. But we do have certain categories of customers who are also very quick to change their occupations, okay? We are expecting a good monsoon this year as the forecast has been. We are just hoping that the infections in the rural area -- rural areas also are taken care of. And I think there is a lot of attention going by the government there. But this time around, things are slightly different. Just the fact that the rural area is more impacted than the urban areas is also causing some concerns. Now if we have to look at specific occupations, especially in, let's say, the month of April, the occupations which were impacted early on because of the lockdowns were not very different from the last time around, okay? They were pretty much the same, but we didn't see too much of a difference between, let's say, an agri occupation-led set of customers versus somebody who was, let's say, into a housemaid kind of occupation, okay? We can see too much of an impact. Now if this continues, then the gap will start to increase. The other thing also to understand on the GNPA is that we did not give any kind of top off loans. You might have noticed that our Q3 was also fairly subdued. You might have also noticed that Q3 for a lot of other lenders was fairly elevated in terms of new disbursals, okay? And Q4 hasn't been that much of a Q-on-Q growth for a lot of lenders who had a fairly high Q3 set of outcomes. Now we had stayed away from all of that. We have only dealt with our existing customers. We have not done any kind of so-called evergreening, et cetera. Last time also, there was this question around are you funding your existing customers. We had not done any of that. And so the path we chose was to restructure. And that was done under the regulatory framework that is permitted. So from that point of view, I think our GNPAs reflect the true picture. They reflect exactly how you should deal with a portfolio in a responsible manner, how you should work through with your customers, and wherever you need to provide with any assistance, any sort of framework to customers to help them, that is what we have done. So I would urge you to not compare, because I think the approach that we have taken is very, very different. I hope that answers your question.

Understood, sir. So just 2 follow-ups here. So as of March, I had a portfolio at risk of 14.9%. So the collection efficiency drop that we are witnessing in April and May, this 5% to 6%, is it from this PAR pool also? Or is that -- is there some effects on the standard pool also? And my second follow-up is the write-off for the whole year, if you could share that number. So that's it from my side.

Write-off for the full year is INR 74 crore. And the impact on all kinds of customers, all kinds of buckets is uniform. We are not seeing any difference in the number -- some bucket behaving differently. And especially in the context of how much it has dropped over March, it is generally uniform. And that is why I also specified that as we look through the occupations, we are not seeing too much of it in one occupation type than the other right now. If this continues, then obviously, things are going to be very different.

The next question is from the line of [ Nashud Shah ] from [ Kabdu Capital ].

Yes, my questions were answered. Thank you.

The next question is from the line of [ Amandeep Singh ] from Oculus Capital.

Yes. So sir, I was actually looking at your employee costs. And looking at a trend over the last 8 to 10 quarters, and I saw that we are back at like about 6 to 7 quarters back, what the trend was, about 120-odd-crore. So what kind of optimization has happened? Or is that due to any attrition that you are seeing? And is there any attrition at higher levels? Or what is that? And my second question is what is your view on the talent pipeline? Are you seeing churn or are you looking to bolster senior leadership in existing segments, I mean the newer products that you are introducing?

Our employee costs remain unchanged on a year-on-year basis. So I didn't quite get it, that how it's different on a quarter-on-quarter basis. What has really happened is that, because of the improved productivity, the variable cost for the sales teams have gone up, okay? And that, to some extent, reflects in our overall employee cost, but that is a good cost to carry because it is proportionate to the amount of business that people have been able to generate, right? Now in terms of the headcount reduction that we've seen, that of course would have added to some savings in the employee cost. But we've also given an increment during the year. Even though we give it in early in October after reviewing the situation for the first 2 quarters, we gave it prospectively from October onwards. So some change in the overall payroll bill would have also happened because of the increments that we've given. I don't think there are any significant gains because of the attrition, and we have not looked at attrition from that point of view in any case. We also did not lay off anybody. I mean all this attrition that has happened is all natural, the usual attrition, and most of it picked up during the second half of the year rather than the first half. Now in terms of bolstering our leadership team, I think we have -- I can tell you this very confidently, that we are probably the strongest team amongst our peer group, the leadership team. We have been able to strengthen our team over a period of time. And at the moment, I think we do believe that while we will keep intaking people wherever we have requirement for or where we are expanding or whatever else that we're doing, but we are not finding any problem with attracting talent. If it all, we're attracting more and better talent over a period of time.

The next question is from the line of [ Anand Bhavnani ] from [ Vital Capital ].

Two questions. One is if you can give us the split of disbursals in FY '21 across the [indiscernible] new customers, [indiscernible] loans and existing customers who got [indiscernible]. So what's the percentage split?

So you mean the -- in microfinance or overall?

Microfinance.

So like I said, in the last quarter, we had 22% disbursals happening to new customers, right? And 78% to existing customers. And through the year, we have worked through, I mean in the first quarter, we just had probably about 5%. That went up to, I think, 8% or 9% or 10% in the next quarter and finally went up to 14% or 13% in the third quarter and now it's at 22%. So we have been mostly dealing with the existing set of customers. Most of them would be in the second cycle or the third cycle. Largely would be in the third cycle.

On the basis of your last year's experience, how would you want your disbursals in [indiscernible] to be drastically different this year based on the experience with customers in different geographies? And do you see [ certain ] geographies to avoid or to prioritize?

Again in the context of customer acquisition, right?

Yes. For FY '22, given [indiscernible] target. Just trying to understand how we've seen our experience across related [indiscernible] if there are any intangibles that [ could lead ] to the recovery.

That's a very good question to give you a lot of insight on. So first of all, I think because we also tightened our credit policy framework last year, April, and we ran a 100-day policy and we subsequently extended that to another 100 days, we were very conscious of what kind of new customers we acquire, okay, at a general level. In the non-microfinance businesses, it has been our desire and we are working towards bringing in more formal category of customers. I mean one of the reasons which I also explained for higher level of GNPAs and MSE, is that largely the GNPAs are coming from the informal segment and the low ticket loans, which are under INR 25 lakhs, right? So we do acknowledge the fact that we need to push, in the portfolio, we need to bring in more formal categories, balance-sheet-led lending, audited financial base lending. And we've been able to make that shift in our people skills as well as our business strategy over the last few months, especially in a business like MSE. In housing, we are now dealing with more formal salaried customers, unlike in the past where we had a larger proportion of cash salaried customers, which are again mostly informal in nature. Now in microfinance, from the learnings of the past and since we very carefully calibrated our new customer acquisition and gradually took it up to 22% for the last quarter, for the full year it is now more than 20%. Now this year, in the present situation, we have again rolled back some of those things. And in branches where we need to obviously cater to the existing portfolio, prioritize selections more than anything else, or there is uncertainty about how the recovery might be, we have either stopped new customer acquisition altogether or we would have slowed it down substantially. So again, in this quarter, the focus will be on dealing with existing customers. And next quarter, again, we will recalibrate and take a call as to what we want to do. But in all the other businesses, I think the whole drive towards formalizing the portfolio to the extent that we can over a period of time, that will continue.

And lastly is regards to credit cost. Now assuming good news continues COVID, some from the India [indiscernible] do you anticipate or expect anyone to have [indiscernible] FY '21?

See, that is why I didn't want to answer that in a numerical manner, because we also don't have the ability to answer that in any kind of a numerical fashion right now. What I have mentioned in my opening remarks is that how do you qualify the situation right now, how is it different from the last time around, what kind of actions were available to us the last time around, what kind of actions are available to us this time around? Now we have to be able to judge any kind of estimates based on what we are going through and how soon the whole situation resolves itself, which it does look like that it is resolving itself, and the learnings from the past and the availability of a resolution framework much in time. Now all of these learnings will go into making sure that we try and contain it. Much too early for us to put any kind of range or any kind of a numerical goalpost to that. So I would refrain from that. But over time, I think we can keep you all updated about how things are progressing.

The next question is from the line of Nishant Shah from Macquarie.

Nitin, a couple of questions from me. One of them pertains to the question earlier in the call about the staff costs. So last quarter, I think the staff costs were in the area of about INR 2 billion, and they've come down about 17-odd-percent, quarter-on-quarter, despite like having uptick in disbursements in the quarter. So kind of -- what kind of explains that?

In the staff cost. Sorry, are you referring to a specific slide in the deck, Nishant?

No, just like the OpEx part that you have reported -- sorry, the staff cost that you have reported, if I -- just hold on. And just in the BSE reported filings that you have given, right? For example, let me just quote you the exact amount. On Page #5 of your BSE filing, the employee cost is 10-point -- sorry, that INR 169 crores in this quarter, and it is INR 203 crores in the previous quarter. So what explains this like 17% kind of sequential decline in staff costs despite this quarter having a lot more business than the last quarter?

One of the reasons for the decline in the staff costs is a decrease in the average headcount on a sequential basis. So in Q3, we are average headcount of 15,879 which reduced to 15,652, and that's one of the major reasons of dropping the cost. Second thing is why our productivity is improving are what we can call it as variable pay, which is a sales-related incentive. There has been an optimization, and that gets projected into savings, what we're seeing on the staff costs.

Understood. Would that variable kind of cost optimization, would that be -- would we be able to kind of like sustain that like for the coming year as well? Or at some point, we will have to kind of like mean revert and it will come with a little bit of [ arrears ], so to call it?

No, we'll be able to sustain that, Nishant. And I can't think of anything else that would have gone there. But in general, I think if you look at the previous 2 quarters, it was in INR 185 crore, INR 189 crore, and then it went up to INR 203 crore, and then it's come back to INR 169 crore, but largely, it reflects the change in our headcount. The variable pay, of course, is not in the same proportion as the top line growth because it's on the back of very, very improved productivity. So the fixed cost remains unchanged, and the variable is not going to be in the same proportion, [indiscernible] clearly what is coming out here.

Okay. Fair enough point. And a second question, more macro, any discussions or any like further kind of communication with the RBI on like a couple of aspects here, harmonization, those which are being talked about, and secondly, on the IWG committee recommendations on the reverse merger. Any update at all? Like RBI has kind of gone into silent mode. So would you be engaging in any dialogue, any comments from the RBI?

No, we are in -- we have been dialoguing with RBI, both individually as well as through our small finance bank association. As far as the harmonization is concerned, I believe RBI is going to come up with a discussion paper anytime soon. That's what we heard last, and that will be open for discussions, and then we will probably come up with the guidelines and regulations. IWG, what we have heard last is that the guidelines are expected any time, right? They were expected any time after March. So it does appear that they should be out any time now. We have of course been in dialogue with RBI to find out their inclination towards giving us an approval for the reverse merger. But we have time for that because we haven't yet finished 5 years and we will be completing 5 years only in January. But we have been active dialoguing with them. And on both these things, IWG as well as the harmonization, we are expecting RBI to come up with something soon enough.

Yes. Sir, one quick follow-up on the harmonization. Where does the RBI kind of direct more focus towards? Is it on the spread caps? Or is it on the indebtedness?

See, we are all building our own hypothesis right now because we haven't heard from them. I think there, from their point of view, they would rather prioritize customer protection. They would prioritize something on the lines of the code for responsible lending, where they have an indebtedness cap that everybody follows, the number of lenders that everybody follows, collections practices, et cetera. While they do have regulations for all of them, but in practice, some people deviate once in a while, and that does create issues. So we do expect more in terms of responsible lending behavior that they will come out with guidelines. It is also expected as part of our own estimation that they might look at harmonizing the cap that they have for NBFCs versus the banks. We did that whole estimation when this whole came up -- this whole dialogue discussion came up. And we don't expect too much of a change other than maybe 100 to -- 115 to 120 bps in our yield because of any kind of harmonization on the cap.

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

So 2 questions. So one is on this customer leveraging. So we have been hearing most of the industry players are working on the existing customer pool. So I mean -- so is it a good tactics to sort of lend to the same borrower, where we are seeing extremely tough cycles they have gone through and again they are entering the same cycle? So strategically, how one should think? I mean is it a good practice to lend to same borrower or one should try to focus on a new set of borrowers rather than leveraging the same customer again and again?

I don't really agree with you, and that is why you need a very, very good framework, a very good set of policies, procedures and more importantly, a very tight discipline when you're dealing with existing customers. Now the way we look at existing customers for repeat loans, we have a very tight framework. So we don't go beyond INR 100,000 of total indebtedness, okay? We are happy to be the second borrower. We are happy to be the third borrower -- lender, but we are -- we will not go beyond a 3 lender norm, which, again, we are a signatory of. Now what typically happens in terms of overindebtedness, which we have seen playing out in Assam, especially, that when mindless lending happens without any regard for the code or any kind of responsible lending and big digit lending happens, in our case, our average loan sizes are under INR 40,000. We have a policy of going up to INR 60,000. For new loans, we don't go beyond INR 40,000. You have to exercise prudence there. Unfortunately, [ 3 ] borrower deals with multiple lenders, those checks and controls have to be brought in place. Now just to highlight that point, when we signed up for the CRL, right, [indiscernible] not looking at 3 lenders, okay? We were only looking at total indebtedness. But the thing that we were doing was that we were looking at, we were making use of the comprehensive credit information report, which the rest of the industry we were not very sure whether they were doing that or not. When we signed the CRL and implemented the [ seal ] under norm, our rejection rates went up by 5% to 7%. But we were happy to let that go because it tightens your overall credit discipline. And that is what we believe in, that there is no -- there are no great marks for trying to burden the customer, even if the customer at that point in time has the ability to pay. But as we've seen over the last 1 year and more, these kind of shocks can be completely impairing for customers. And then the [indiscernible] have seen today are really because of excessive overlending, leading to coercive collections, leading to customers complaining and then political intervention and then compounded with some national calamity and then with COVID and then it just become a very big thing for anybody to handle. So we have always stayed away from that, and we will continue to stay away from that. So if you notice, our micro banking business has been growing at the rate of -- we grew by 18% last financial year, whereas the industry grew by 35%. In this financial year, our micro banking book has not grown substantially. It's probably grown by 3% or 2% -- it's actually flat, it's not even grown. Now we are not pursuing any mindless growth in these circumstances. And that's the reason why, even when you're looking at a new customer, it's not just the customers new to credit all the time. They could already be indebted.

Correct. Correct. Yes. So worse. I mean one has to be very careful, even while dealing with the existing customer base is what you're highlighting, right? Yes. So secondly, on this branch expanding strategy, so you highlighted incrementally we focus on the more formal category. So the current distribution network is capable of sourcing those customers, or we have to build a new distribution network, seeing there is a change in strategy? [Technical Difficulty]

Ladies and gentlemen, the line of the management got disconnected. Please stay connected while we connect it. Ladies and gentlemen, the line of the management is reconnected back. Thank you, and over to you, sir.

Yes. Sorry, I think somebody was asking a question and then we were disconnected. If we can repeat that question, please?

Yes. Renish here, sir. So my second question was on the branch expansion strategy. So you did highlight in your opening remarks that incrementally, we'll focus on a formal category of customers. So our existing branch network is capable of sourcing these customers? Or do you believe we have to add maybe more branches to serve this formal category of customer since there is a change in the strategy?

I think the existing set of branches are very capable. I don't want to say that for our rural branches, which are the [indiscernible] rural locations. But there again, you have an opportunity to do some more formal lending, okay? It's not like you can't. So far, we've been doing mostly in group loans, or agri group loans as we call them. But we do have plans to even start more formal lending even in those markets, wherever we have an opportunity. But all the other branches in our metro and semiurban locations, we don't have a problem of sourcing these customers, and we are doing that for existing branches. The new set of branches will mostly be in new geographies which we don't cover right now, r in a market where we feel better density and where we have a larger opportunity for market share, that is where we will be adding.

Got it. Got it. And sir, just last question from my side on this credit cost. Of course, given the situation, we'll not be able to estimate the numbers, but qualitatively speaking, looking at our net NPA number of 3%, and whatever INR 172 crore of our [indiscernible] [ is hardly ] 1% to 1.5%. So why don't we sort of improving our coverage to 80% or so and provide a bit more in Q4 rather than waiting for Q1? I mean do we expect a higher recovery from that pool and hence we are not increasing our coverage ratio, or what is your thought process behind that?

See, with the unused provisions, we are already at 6% coverage, right? So it's not like we have left the book uncovered. And 6% is a very decent cover on the book. In micro banking, it's actually 7.7% on new provisions apart, okay? So that's nearly like 77% PCR, okay? So that is one, so we don't have a problem of coverage. The second part, in terms of recovery, we do expect the environment to be different this time around. Last time, because it was a prolonged moratorium for 6 months, the recovery was somewhat impacted. And that you might have seen from our recoveries as compared to the last financial year, where versus some INR 31 crores that we recovered from NPA accounts -- NPA customers in FY '20, we were able to recover from INR 8 crores or INR 9 crores only, right? Because last year, we were unable to recover even due to the prolonged moratorium and even the [ NPA ] customers stopped paying. That's happening at Assam right now that even the good customers don't want to pay, everybody looks for a loan waiver. So this time around, things are different, and we do expect through the augmentation of our collections organization which we've done, and we will continue to do that through all these other alternate mechanisms that we have done. We have actually also tested some of these use cases through fintech partners as well, where we saw recoveries who are NPA, a small bucket of NPA customers which we tested, by just trying with a fintech partner, we were able to recover nearly INR 50 lakhs out of nothing at all that was coming through. So we are hopeful for better levels of price backs and recoveries this time.

Got it. And sir, just a follow-up. I mean what is the role of these fintech partners? I mean this more of calling them constantly and chasing them up? Or is it that they provide...?

No, it doesn't work by calling, because calling can be done through a collections agency. You don't need a fintech partner for that. So the one that we have worked with, they have a way of profiling customers. They have a way of nudging them using social media or other attributes. They have also a way of identifying locations. They have a way of finding out in case the customer is incommunicado. In most cases, customers are contactable, it's just that they need some kind of nudges, soft nudges. And when that happens through a fairly intelligent way of -- by using analytics and location data, et cetera, you are able to get the customer to start paying, which is what we have seen in our pilot.

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

So sir, when we are seeing INR 172 crore of provisions, that is in addition to -- that is not included in our calculation of 2.9% net NPL. Is that correct?

Yes, that's correct.

So in effect, our net NPLs are probably 1.9%?

Yes. That's right.

And secondly, just can you share gross NPA in MSP and housing? Because net NPA number looks pretty high in both these segments at this point, especially -- specifically MSE.

MSE is about 10 point -- MSE is 10.3%, housing is 3.6%.

Sure. So when we compare these numbers with some of the peers, it looks reasonably high.

Yes, it is high. No doubt about it. But like I explained, in MSE, this is largely coming from our informal category of customers, the smaller ticket loans, under 1 lakh. And that is also one of the reasons why we are trying to diversify into more formal category of customers. However, the book coverage in MSE is now about 4.8%. In housing it's 2%, and even better, our collateral coverage in both MSE and housing, it's about 2.2x of the outstanding. And all of these are secured. We don't have any unsecured reported here. Unsecured is something that we are anyway running down.

And sir, when we are entering into formal segments in both housing and MSE, how do we think about profitability, ROA trajectory for the bank? And if you can share what could be the incremental yields on these 2 portfolios going forward, that would be helpful.

Yes, yes. Good question. So these are not being looked at on a stand-alone basis. Yes, we do expect the yields to get compressed as we move into more formal segments. But that is exactly the reason why we have tried to work on our cost of funds, we've tried to work on our operating expenses. And the only unknown last year was the credit costs, which again, we have accounted for. So this year, again, it won't be very different. We will continue to improve on our efficiencies and the other levers that we have to keep expanding the margin. But the top line yield will of course come down as we move into more formal segment. But given the fact that it will come at a lower credit cost for all times to come and on a secured portfolio basis, we are not uncomfortable with that. In fact, that's probably a better situation to be in rather than live with the uncertainty of a portfolio which can turn differently in situations like these. But because of the lower cost of funds, lower expenses, better productivity, efficiencies, et cetera, we will be able to maintain healthy margins in any case. But I don't want to give you any kind of outlook on what kind of yields are we expecting because the portfolio is gradually shifting into more formal segments. And a good way to expect would be probably on a year-on-year basis rather than quarter-on-quarter, because quarter-on-quarter these things will not usually move very much.

[Operator Instructions] The next question is from the line of Abhijeet Sakhare from Kotak Securities.

First question was on the restructured book. Just a clarification. There is one line which says the GNPA at 3.6% for restructured book. So is that 3.6% of INR 852 crores?

Yes, that's right.

Okay. All right. Just a follow-up on the restructured book itself. Now what we observed is that there's probably no other large MFI lender which has adopted a restructuring approach. So the concern, is that...sorry?

Really, quite a few have. They may not be listed, but we are aware of parties who have done that, and maybe in even larger proportion than what we have, as a percentage of their portfolio.

No, but sir, the concern here is that the other lenders to that borrower, if they have not adopted a restructuring approach, could probably get a first access to the cash flow. Given, as you indicated, there's been a fair amount of top-off refinancing, whatever you call it, which has gone on in the system the last few months. Now given that behavior of the competition, would your approach to the second round of restructuring change, given that you might not be able to get the first access to cash flow if you are offering restructuring to your set of customers?

The restructuring the last time around what we offered was the elongation in tenure or reduction in EMI. Both of these are beneficial to customers. There was also a part of our portfolio that we offered a 1-month or a 2-month moratorium. They were customers who are genuinely facing difficulties. All our customers, all such customers appreciated that. I don't think they prioritize anybody else who's giving them a loan versus somebody who's giving them a better option to manage their cash flows. And these relationships are fairly individual lender based, okay? I can't guarantee for sure that somebody comes and dumps INR 50,000 with that borrower and says that I am giving -- that person who's giving you the loan, forget any other lender and start paying me first. I mean that's kind of irresponsible behavior can leads to irresponsible behavior from borrowers, but we haven't seen that. We have also kept a good check on our portfolio by looking at which customers are, if at all, paying any other lender, because you can get that information through [ bureaucrats ]. And we have been doing that over the last few quarters. That helps us in prioritizing some of our discussions and making sure that we are not getting left out if in case the customer has the ability to pay and we end up in the queue the last one and the customer by that time has finished the available cash flows. So we are making -- we are keeping a tight control on that as well. But behaviorally, we haven't seen any change. In fact, if at all, customers are happy that we've offered them this kind of leeway, and we have seen collections efficiencies therefore go up to 75% in the month of March. As far as this time around, the second time, I think we will follow exactly the guidelines that have been mentioned. We will do exactly as per the framework. We will not try and do any shortcuts or any other ways of making sure that the money comes back. And we will do a genuine assessment of the income impairment, cash flows, et cetera. And then on that basis, we will offer. And that's why I'm saying that, that exercise is going on right now, identification, policy and procedures, technology, et cetera, we do have a lot of learning from the last time around, and therefore we should be able to do this in a much better manner.

Got it. Just one number question. What's the GNPA in the microbanking?

7.8%.

Thank you. Ladies and gentlemen, due to time constraints, that was the last question for the day. I would now like to hand the conference over to the management for closing comments.

Well, thank you, everyone. Thank you very much for joining us. I hope we've been able to answer the top of the mind questions. In case we've left out any of you or any more questions from the ones that who spoke, please do feel free to write to us. [indiscernible] contact man for writing in to us, and we will respond to all of that. So thank you very much for making time for this call.

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