It's not that this conference is being recorded. I now hand the conference over to Mr. Mayank Mistry from JM Financial. Thank you, and over to you, sir.
Thank you, Zico. Good afternoon, everyone, and welcome to the Q4 and FY 2024 earnings conference call of Arman Financial Services. First of all, I would like to thank the management of Arman Financial Services for giving us the opportunity to host this call. From the management team, we have Mr. Aalok Patel, Joint MD, and Mr. Vivek Modi, Group CFO. I would like to hand over the call to Mr. Patel for his opening remarks, post which we can open the floor for Q&A. Thank you, and over to you, sir.
Thank you so much, Mayank. On behalf of Arman Financial Services, I extend a warm welcome to our Q4 and FY 2024 earnings conference call. So with me today, we also have Vivek Modi, who is the Group CFO, and also on the line are the SGA investor relations people. I hope you had the opportunity to review the Q4 and FY 2024 results, the press release, and also the presentation, which is available on the stock exchanges and on our website. Before diving into the quarterly and yearly performance update, I would like to highlight some key aspects of the macroeconomic landscape. Following the initial two years of the COVID-induced stress, the economy has shown significant recovery over the past two financial years. This rebound has positively impacted sectors such as ours, particularly microfinance and the MSME lending sectors.
Consequently, the industry has experienced steady and sharp growth over the last two years, with all parameters reflecting excellent results. Key indicators such as disbursements, AUM growth, operating expense, cost of borrowing, and asset quality have all shown improvements but largely remained stable, demonstrating the resilience and adaptability of the industry. The sector maintained its momentum in the last two years largely without any major setbacks. This resulted in record profits and growth. Arman's growth was bolstered by effective risk management practices and effective last-mile delivery of credit to the customers. Consistent performance and positive developments have laid a solid foundation for continued growth in the sector in the long run. As a testament to this, the credit ratings for both Arman and Namra were upgraded to A-minus, with a stable outlook by CARE Ratings in March 2024.
Now, turning to Arman's FY 2024 consolidated performance, the company has implemented stringent credit filters, resulting in a high rejection rate but ensuring the maintenance of a high-quality loan book. Despite the rigorous screening process, we reported a 30% growth in disbursements, amounting to approximately INR 2,300 crores, driven by robust and consistent demand during the review period, that is, FY 2024. Our microfinance and MSME AUM reported 35% and 44% year-on-year growth, respectively.
As on March 31st 2024, Arman's consolidated assets under management stood at INR 2,639 crores, registering a growth of 36% as compared to INR 1,943 crores on March 31st 2023. Our standalone assets under management, which include lending to microenterprise, two-wheeler loans, and, of course, the new Micro LAP, pilot vertical, increased by 42% to INR 446 crores as compared to INR 315 crores on March 31st 2023.
Assets under management of our microfinance subsidiary, Namra Finance, registered a growth of 35% to reach INR 2,193 crores as compared to INR 1,628 crores on March 31st 2023. This growth was further supported by favorable economic environment post-COVID, as I mentioned, and also the revised regulatory framework issued by the Reserve Bank of India in 2022. Our consolidated profit after tax for the full year ended 31st March 2024 stood at a record INR 174 crores, registering an 85% year-on-year growth as compared to INR 94 crores in the last year. This PAT, I would hope you'd agree, was much higher than expectations. Arman has always embraced a progressive approach, which has been instrumental in sustaining growth while maintaining asset quality and collection efficiency.
Our gross non-performing assets, which is GNPA, stood at 2.28%, and net non-performing assets, which is NNPA, were at a low of 31 basis points for the period ended March 31st 2024. Collection efficiency for the month of March in our microfinance business stood at 96.5%. MSME business stood at 97.6%, and our two-wheeler business stood at 95.6%. Consolidated collection efficiency stood at 96.6%. Total borrowings amounted to INR 2,261 crores, comprising a diverse mix of financial instruments. We maintained substantial liquidity of about INR 180 crores in cash and bank balance, liquid investments, and undrawn CC limits, with a comfortable debt-to-equity ratio of 1.8 times and a healthy capital adequacy ratio of 62.7% on a standalone basis. The subsidiary Namra has a capital adequacy of 32.8%. As such, thanks to the recent QIP, we are well capitalized to continue our growth trajectory.
Cumulative provisions stood at INR 90 crore, which is 3.4% of the consolidated assets under management. Of this, provisions for the Arman standalone business stood at INR 17 crore, and for the subsidiary Namra stood at INR 73 crore. In terms of branch expansion, we have opened 67 new branches over the last 12 months, bringing our total branch count to 402 branches. This expansion has been complemented by successful penetration into newer states and geographies, where performance has been promising. Additionally, we have initiated a pilot for the rural Micro LAP product in Q4. While it is too early to comment on its success, we are optimistic about its long-term potential.
Over the last year, the company initiated several technological and digital advancements, including Aadhaar-based biometric eSign, the launch of new HR software, live staff tracking, streamlined paperless loan origination, AI-based bot calling, monitoring apps for audit and supervisors, the establishment of a business intelligence unit using advanced analytics, and many other initiatives as well. During the year, we successfully completed a fundraise through a qualified institutional placement, or a QIP, of INR 230 crores, which ensures that we are adequately capitalized for future growth.
The completion of this QIP is a significant milestone in our journey towards enhancing financial inclusion in rural India. The fundraiser saw participation from various marquee investors, underscoring their confidence in Arman Financial Services business and its business model. You may also recall that the company had raised INR 115 crores through CCDs and OCRPS in September 2022.
These instruments all converted in March 2024 and simplified our shareholding structure. The consolidated net worth now stands at almost INR 813 crore. We are confident that we are on the right path to achieve our strategic goal of building INR 5,000 crore of AUM while maintaining a balanced debt-to-equity ratio. This solid financial foundation, combined with our strategic initiatives, positions us well for continued growth and success. Now, let me run through the key consolidated financial figures for the quarter and the full year ended March 31st 2024. For the fourth quarter of FY 2024, the gross total income stood at INR 183 crore, registering a growth of 23% year-on-year as compared to INR 149 crore in Q4 FY 2023. Net total income amounted to INR 120 crore, registering a growth of 40% year-on-year as compared to INR 86 crore in Q4 FY 2023.
Pre-provisioning operating profit, or PPOP, stood at INR 88 crores, registering a growth of 40% year-on-year as compared to INR 63 crores in Q4 FY 2023. Profit after tax stood at INR 51 crores for the quarter, registering a growth of 40% year-on-year as compared to INR 36 crores in Q4 FY 2023. Yields stood at 25.1%. Net interest margin stood at 15.2%. Cost-to-income stood at 26.6%. Now, for the full fiscal year ended 2024, the gross total income stood at INR 662 crores, registering a growth of 56% year-on-year as compared to INR 424 crores in FY 2023.
Net total income amounted to INR 396 crores, registering a growth of 57% year-on-year as compared to INR 252 crores in FY 2023. Pre-provisioning operating profit stood at INR 293 crores, registering a growth of 73% year-on-year as compared to INR 170 crores in FY 2023. Profit after taxes stood at INR 174 crores, registering a growth of 85% year-on-year as compared to INR 94 crores in FY 2023.
Return on average AUM stood at 7.6%. Return on equity stood at 27.8%. And just as an FYI, this 27.8% ROE calculation includes the QIP proceeds of INR 230 crores raised in the last week of December. So all in all, a great year, and thanks to all the stakeholders for their invaluable support. With this, I would request the operator to open the floor for the question-and-answer sessions. Thank you very much.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star, and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star, and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Amit Mantri from 2Point2 Capital. Please go ahead.
Hi, Aalok. Congratulations on a strong quarter and a year. Thank you. So my first question, so what's the average borrowing rate for the company now, and has that number declined because of this funding and decline in leverage for you?
Yeah, Vivek, you want to ask that.
So Amit, all costed out, it turns out to be about 30-odd % for the year. But both the QIP, we've already seen the rates coming down by about 50-75 bips in the last quarter, which is both on account of the benefits of QIP itself and the recent upgrade that we've also got with CARE.
That 13%, by the way, is an all-inclusive also.
Okay. So now going forward, you expect 12.5%-13% interest rate that will be there for the company?
No. Lower than that now.
Lower. At least we are expecting 100 basis points, as is the market interest rates. So if the market interest rates were to decline further, then obviously, it would be even more decline in the rates.
And are you also cutting the sorry, continue.
So in addition to that, Amit, since we are also kind of issuing pretty a lot of listed entities, wherein generally, the rates are approximately 11%-11.5%, all costed out.
Sure. And are you also cutting your lending rates by the same amount, or are those pretty much staying the same?
We are cutting our lending rates, of course, for competition and, of course, through different pressure that is announced by regulators and other things. So definitely, the rates have gone down, but not necessarily due to the weighted average cost of funds going down. But yes, overall, the rates have been declining. The yields have been cutting down.
Sure. Sure. And can you talk a bit about the collections? The collection efficiency seemed to have seen some dip in this quarter, so.
Yeah. So overall, there is some pressure on the collections. Numerous factors at play. Of course, there is heat, and there is elections. But largely speaking, there's a lot of, I mean, in certain areas, there has been a lot of overlending going on, and that has been generating pressure for us on the repayment side. So hopefully, it's nothing permanent, and we can get it fixed in the next couple of quarters.
Got it. And what kind of loan book growth are you targeting for this financial year?
So about 25%-30% is what we are approximately targeting.
Okay. Okay. Got it. Okay. Thank you very much, Aalok, and good luck for this year.
Thank you.
Thank you. The next question is from the line of Narendra from RoboCapital. Please go ahead.
Hi. Thanks for the opportunity. Am I audible?
Yes, sir. May I request you to use your handset, please?
Yeah. Thank you. So can I have an idea of what kind of credit cost are we expecting in the next year? And also, we have an idea about FY 2026 as well.
See, as far as credit cost, these things are a little difficult to predict. But on an ongoing basis, on a steady state, on average, we expect about 2.5%-3% of credit cost going forward. There'll be some years it might be lower than that. Some years might be higher than that. But about 2.5% is what we expect on average.
Okay. Okay. Great. And in the previous question, you said that you have been reducing lending rates as well, and also our borrowing rate is expected to reduce. So are our NIMs going to be protected, or would there be pressure if you could show some examples?
NIMs would be largely protected.
Okay. Okay. Thank you so much, and all the best.
Thank you.
A reminder to all participants, you may press star, and one, to ask a question. The next question is from the line of Balkrushna Vaghasia from Axanoun Investment Management. Please go ahead.
Good morning, sir. Sorry. Good afternoon. So, what is your branch expansion goal in the financial year 2025?
Yeah. So we are targeting anywhere from about 60-75 new branches, plus certain split branches as well. That will be a combination of expansions in the Bihar and Jharkhand areas. And also, at this point, we are fairly certain of going to Telangana, as we had predicted in the previous year that we were testing it for our MSME side. So microfinance will also go towards Telangana and possibly also Karnataka. So full work is going on right now as far as evaluations.
And with regard to Micro LAP that you have conducted the pilot project, so what do you think what will be the bottleneck in this product for expansion?
This quarter, we are predicting about an INR 6 crore or INR 7 crore disbursement. Again, it's a pilot. It's really early to say. All in all, we are quite bullish on it. There are certain as far as the customer and the product goes, there is no real challenge. It's a product that we sell, and of course, it's a product that there would be a demand for, especially in the rural area where there is not a lot of suppliers or other financial institutions in place.
But on the flip side, the reason why there are not is because doing the documentation for the mortgage is challenging there. And so working out those issues remains the larger challenge more than anything else. So let's see overall, but quite bullish on the product overall. And I don't think that it's going to be a very significant portion of our book this year. These are more about planting seeds for the future.
So another question is on the macro level. When I look at the microfinance players, particularly if I consider those guys who are listed, so everybody is talking about growth from 20%-40%. So do you think there is a euphoria in microfinance lending, or what are the indicators at which we can look and say that, "Okay, the sector has peaked right now?
Largely speaking, I think everybody is talking about 20%-25% growth, specifically the larger players that include SFBs. There is still a demand. There are definitely certain areas that are more saturated than others, if I can put it that way. But definitely, there are areas in India, I would say at least 40% of India is underpenetrated. But these are more sort of difficult-to-access places, or the density might be the issue. The operating cost might be slightly higher. And so slowly, slowly, MFIs, including ourselves, are making our way into those areas.
Now, that said, overall, from a regulatory environment, things have become. I don't think RBI has been a little worried about unsecured lending in India. So overall, the sort of lower growth reflects that the regulator's warning on the unsecured lending business in India. But for us, we don't see much of an issue. In fact, overall, our growth target originally, I think, every year has been somewhere in the neighborhood of 35%-40%. This year, given the slight decrease in the repayment that we saw in this last quarter, the question that we ask ourselves is that, "Is this a temporary blip in which we'll have to sort of increase our underwriting, and that might increase rejections and all in all reduce the overall growth rate, or can we continue?"
So 25% is somewhat in the minimum range. Possibly, it might be larger. Now, your original question was that, "Is this euphoria?" I don't think so. I mean, overall, microfinance still has a good 2-4 years to go before it reaches that euphoric moment of growing faster than it needs to. Right now, I don't think that growing 25%-30% is dangerous at all.
Another question is on the capital adequacy. In the long term, what will be your comfortable capital adequacy ratio?
Typically, we target about 4.5x of debt to equity. That comes out to what, about 20%-23% or so.
Yeah. 25% is a good capital adequacy to have. And at times, 25% is when one would really want to trigger off an equity rate.
And last question regarding the provision. So during the year, what was the movement in the provision in terms of how much you created and how much you used for write-off? And another question is, how much loan did you directly write off without using the provisions?
So from an accounting standpoint, I think all write-offs are done through provisions only. So total write-offs, we start with the beginning provision balance, add the impairments to it, and reduce it by.
So overall, the write-offs, microfinance was about INR 40 crore. And the standalone Arman would have been another INR 5 crore taken together. And the balance is the additional provisions that would have come in, which is basically the balance provision is on kind of the growth in the AUM portfolio.
So basically, whatever I am seeing in the profit and loss statement, that is the provision amount you created for the year?
Yeah. So, how much of the impairment? I think he's asking what.
So, about INR 20-odd crore would be the additional provision that has been created, and the write-offs are about INR 40-odd crore out of the INR 65 crore that you might see in the write-offs and provisions. Does that answer your question?
Yeah. So, basically, what I see is the impairment losses on financial assets for the financial year 2024, in the profit and loss statement, there is INR 65 crore, right? So, that is what you created; that is the amount you created for provision, right? That's what I'm asking.
Yeah. Yeah. So, that impairment cost of INR 65 crore, if you had to attribute it to increase in provisions versus write-offs, what Vivek is saying, around INR 40 crore-INR 45 crore would be write-offs, and INR 20 crore-INR 25 crore would be an increase in provisions.
Okay. Yes. Yes. That answers. Thank you so much. Great.
Thank you. A reminder to all participants, you may press star and 1 to ask a question. The next question is from the line of Rohan Mehta from Ficom Family Office. Please go ahead.
Hi. Thank you for the opportunity. My first question is, so what is the progress you have made when it comes to the entry into Telangana and Jharkhand and also on the expansion of the MSME segment and Micro LAP? Just wanted to get your thoughts on what do you read from the on-ground experience so far?
So Jharkhand, we have already gone into with about 10 or 12 branches are already there with a plan to open another 10-15 branches in the next 2-3 months. Telangana, we are already there through our MSME segment. For microfinance, we have not opened any branches yet, but the plan is to expand through Hubli area. So northern or sorry, that's Karnataka. Excuse me. I'm confusing the two. So for Karnataka, the plan is to expand through northern Karnataka around the Hubli area. For Telangana, it would have to be near about Warangal area. Warangal, and yeah, that area we are planning.
But we have not opened any branches there yet. We have started recruiting, and we have the state heads and the RMs and the AMs and the BMs. The initial team, the ones that we are transferring versus the ones which we are recruiting, so all of that is in place. They're all in notice periods and should be joining in due course. So Telangana and Karnataka, you can expect early next quarter to start operations.
The experience in Bihar and Jharkhand so far has been very good for us. In fact, the repayment rate in both these states are quite high. I think Bihar would be 98.5% plus. And Jharkhand is almost 99 or 99%, something. But this is typically our experience that when we go to a new place for at least the first 12-18 months, you don't really run into any credit issues. So the first time you go in is usually a honeymoon period, I guess.
Okay. Okay. Got it. Got it. And so my second question is, how do you see the change in the borrowing mix wherein you see your share of bank mix and DA that has gone up? So any broad strategy, any change over there that you see?
In the borrowing?
Yes, in the borrowing mix.
So if you look at it, let's say from 2023 to 2024, I think the borrowing dependence on the banking increased. I mean, sorry, the borrowing from larger NBFCs has considerably gone down during the financial year 2024. And last few quarters and for the future, I think we are scaling up our retail NCD as a promising way to borrow money. And that should kind of go up from something like 12%-13% to a sizeable 20%-25% maybe.
And so I think almost 41% of our overall borrowings are coming from banks. But the second largest borrowing is from, believe it or not, is off-balance sheet debt. Off-balance sheet debt, which is direct assignments.
Which is also banks.
Which is also banks only, of course. In that case, we are getting quite a bit of quite a good rate, you can call it. This effective rate is all said and done is very attractive to do these DA transactions. I don't know what this year will look like. I'm guessing that DA demand will be as much as it was last year, I'm guessing. But I think the third largest will probably be the NCDs, the listed NCDs or retail NCDs, whatever you call it. So wherever we get a rate advantage and somewhat reliability of funds, that is where we try to borrow from. Of course, that goes without saying, but.
Got it. Got it. Got it. That's all from my side. Thank you so much.
Thank you. The next question is from the line of Ashlesh Sonje from Kotak Securities. Please go ahead.
Hi team. Good afternoon, and thank you for the opportunity. A couple of questions from my side, sir. I see that you now have a fairly wide presence in the microfinance business in more than half a dozen states. Just to get your philosophical perspective, in your view, does the microfinance business operate in different ways across different states? Or, in other words, how much customization do you need to make to your operations when you enter a new state based on the behavioral patterns of customers in that state?
That is actually an excellent question. Like all complicated questions, the answer is that it depends. The good part about microfinances is why it's somewhat easier to grow than other forms of businesses, that it is easily replicable. So my systems that work in Gujarat will largely work in Jharkhand, even though culturally, those two, economically, culturally, socially, in every way, these are very different states. But I would have to adapt my credit underwriting policy depending on which areas I'm operating. And that not only depends on state to state, but it depends on district to district also.
And in fact, if you go to the branch level, that depends even on a village to village level, right, depending on the different occupations and communities and other areas that people operate. So while the processes are extremely generic across India, the overall underwriting policies and risk factors to consider are tailored on a state to state level, if that makes sense.
Thank you, sir. And for secondly, on the commentary which you made around collections, seeing some pressure across different areas, can you just give some more insight on what are the challenges which you are facing and which states in particular are seeing those challenges?
You see, I mean, without sugarcoating things, microfinance had an amazing run post-COVID. I don't think anybody would disagree with that. The regulatory environment was fantastic. The margin caps were removed. Funds were available. Overall, operating costs were under control. Borrowing costs were under control. And asset quality was fantastic. It was better than anybody expected. Now, as a result of growing extremely well in the last two years, there have been certain pockets that there have been overlevered. There have been certain customers that have been overlevered. Now, I'm not going to say I'm holier than thou and say I have nothing to do with it.
Others are being more aggressive. I mean, we are all swimming in the same pool. And so what affects one player will affect the industry. So it's nothing to be overly concerned about. But certainly, as MFI players, we have to take stock of the situation, maybe accept that no honeymoon can last forever. And we are getting back on track. Things are getting back regular. The gains that we saw in the last two years post-COVID, the demand has kind of caught up overall. And so I don't know if that kind of answers your question in a very roundabout way. But largely speaking, my guess is that most of the problems are caused due to certain customers borrowing more than they can afford.
Perfect, sir. Thank you. Thank you for the insight.
Thank you. Before we take the next question, a reminder to all participants, you may press star, and one, to ask a question. The next question is from the line of Ayush Agrawal from MAPL Value Investing Fund. Please go ahead.
Good afternoon, sir. I hope I'm audible.
Yeah, please continue. Good afternoon.
Okay. Thanks for the opportunity. So my first question is that when I look at 3 years ago, if this question is for MFI specifically, the average ticket price was around INR 28,000. And today, it's at about INR 46,000-INR 47,000. So.
Hello?
Sorry. Yeah.
Mr. Agrawal, may I request that you use your handset, please? Your audio is slightly muffled as well, sir.
Is it better?
Yes, sir. Please go ahead.
All right. Sir, I was saying that I was talking about the MFI specifically. When I look at data three years ago, our average ticket price was about INR 28,000. And currently, it stands at about INR 46,000-47,000. So I would like to understand if there is a change in strategy when it comes to MFI. And we are more okay with higher ticket size MFI lending because earlier, we wanted to keep it down and maybe move the customers to MFI when they grow in size. So your thoughts on this would be helpful.
Well, see, overall, the ticket sizes in the industry have been increasing. Specifically for us, when I started microfinance in 2010, it was a INR 10,000 one-year loan. And then the ticket sizes started going up overall. The demand started going up more. Customers were not satisfied with just INR 10,000. And so as the ticket size went up, the tenure went up.
And so we switched to a 14-month product, post-which we switched to an 18-month product. And now, we are at a 24-month product. So the overall goal has been always to keep the EMIs at an affordable rate or at an affordable level. That being said, yes, the overall ticket sizes, on average, have increased faster than they normally do post-COVID. That is just the new market reality and also the fact that post the new RBI regulations wherein the restrictions were not put on total indebtedness. They were put on FOIR. The ticket sizes are a natural kind of cause of those new regulations. Also, I've always said this, but let me mention again that as MFIs, we largely compete on three things. And the first one is not rates. So while we do compete on rates, our customers are not very, very rate-sensitive.
Number one thing that we compete on is service. By service, the customer wants as hassle-free of a loan experience as possible. They don't have time, nor the knowledge, nor the inclination to jump through 20 hoops to get your loan. They want it as simply as possible. Once you disburse the loan, they want to repay it back as simply as possible and conveniently as possible. Number two, we compete on a quick turnaround. Our customers need the money yesterday. They don't need it today or tomorrow. They needed it yesterday. I have to process my loan as quick as possible. Number three, what I compete on is ticket sizes. As an MFI, I cannot be a complete outlier. I mean, I cannot be in a situation where I'm lending INR 20,000 and the industry is lending at INR 50,000 or INR 60,000.
I have to find some reasonable balance between risk and being competitive or staying competitive. So that's where the ticket sizes have wound up. But it's fine. We don't see a lot of stress due to ticket sizes. I mean, we do a lot of data check. We do a lot of analysis. There is not a lot of correlation that we have found between customers that we have lent higher ticket sizes to versus lower ticket sizes to.
Got it. That was helpful. So second question is on the collection efficiency. Pre-COVID, it was around above 99%. And right now, I understand it's a post-COVID scenario. But do you see your collection efficiency moving beyond 98%-98.5% in MFI maybe in a couple of years?
No. I mean, that pre-COVID microfinance of 99% is behind us. Let me also give you the disclaimer that people put a lot of emphasis on repayment rate. But apparently, every company has its own way of calculating repayments. And there is no standard accepted formula for repayment rate. But that being said, let's put repayment rate aside and talk about the bottom line, which is credit cost, right? If I'm lending INR 100, how much money am I going to not get back?
So earlier, pre-COVID, during Demonetization and AP crisis and other times, largely, we were at about a 1% credit cost, 1%-1.5% on average. Those days are, unfortunately, behind us. And you have to understand that when we started microfinance, the total portfolio of the entire industry was INR 20,000 crore. Now, it is something like INR 450,000 crore. So earlier, we used to manage cherry-picking the customers.
Now, that cherry-picking, you'll have to kind of move slightly higher into the tree overall to use that analogy, I guess. So on a steady state over the next, let's say, 3-4 years, I would say that on average, the credit cost should be about 2.5%, not to exceed 3%. But again, please take whatever I say with a grain of salt. Some people say I'm too pessimistic. But that is the reality.
Got it, sir. That is so much good. Thank you.
Thank you. A reminder to all participants, you may press star and one to ask a question. The next question is from the line of Sanidhya from Unicorn Assets. Please go ahead.
Yeah. Am I audible, sir?
Yes. Sir, please go ahead.
Yeah. Hi, Mr. Patel. So my question is basically 2 parts to my question. One is just basic numbers, and the other is more on a philosophical side. So let's go on the numbers first. So our NIMs have reached around 15% quarter-wise or yearly as well. And the yields have been significantly good for us, whereas the collection efficiency is slightly deteriorated versus the provisions that we have made have not very much increased. So how do you look at the whole scenario? So the NIMs are positive, whereas collection efficiency is a little bit negative. Provisions, on the other hand, have been in line with the previous year. So I want your view on these three things together.
Okay. So what is the philosophical question?
Yeah. That's more on the. That's a good question. Yeah. No, this is the philosophical analogy. So I want to understand how you see this. This is not the typical pattern that we see in the industry. Either we see that the NIMs have been decreasing because of the credit cost, and overall, profitability is also hit when the collection efficiency and provisions are rising. But right now, this is some different situation. Even hearing you makes me think that what's actually going on in the industry. So your view on this.
Why should NIMs be affected due to credit cost? NIM is a function of interest expense and interest income, right?
Yeah. No. On an overall basis, I was just saying that compared to the AUM, on an ROA basis, you can say that ROA is also increasing on a.
Our ROAs are fantastic. Our ROEs are fantastic. I mean, yes. Our NNPA is about 30 basis points, which might as well be zero. Over and above that, we have a management overlay of what, Vivek? About INR 20-30 crores.
Oh, so that's part of the INR 90 crore.
That's part of the INR 90 crore. Okay. So I mean, we are covered more and more so than anything else. See, you can run into a 20 basis points issue here and there as far as repayment. That is life. People love to have things smooth, especially the investor community love to see smoothness. But life is not smooth. You are going to run into peaks and valleys all the time. And it is what it is.
But everything else is going in our favor. The regulation is in our favor. If credit costs rise even further, we are at liberty to increase our rates to offset that. We are expecting our lending cost or borrowing cost to decline. Operating cost is under control, largely speaking. So NIMs are great, 15% NIMs. So we have very little to complain about besides the fact that repayment rates have been going down for the last few months. It is what it is. You cannot have every variable in your favor. It's a business after all. Things are not always absolutely in your control.
No, right. So I was just thinking that why don't we take extra precautionary provisions if the efficiency is going down? It doesn't happen that we have to suddenly provision for a large chunk?
So as a person who's gone through three different types of crises and in my previous career, one more, let me tell you that when a crisis does come, no magic accrual number in your balance sheet is really going to help you. What's going to help you is stuff like how much cash you have in your bank account, what is the quality of your team that you have, what was the underwriting standards that you used to disperse the money, and many, many other factors. All that an accrual account does is smoothen the income.
Otherwise, reserve and surplus is that only, right? I mean, it's just that. It's a different reserve. So we do have a management overlay, by the way. So that is already there. But again, I don't want you to get too caught up on this putting aside a slush fund. I mean, these are just accounting entries. There is no real money lying in the bank account except the cash in your bank. And these things are not going to help you in a crisis as far as operations are concerned. It's just going to smoothen the income, which is going to, as I said in my previous answer, that everybody loves this smooth everything. But anyway, I mean, yes, I'm not opposed to it. I could do it. I just don't see the, Vivek. I don't know. Anything to add?
So again, if you look at the overall provisions, there are two factors that I would like to numerically look at. One is the GNPA and the net NPA. Now, net NPA, if your net NPA at a group level is sub 0.5% or it's 0.3%, so largely, you kind of covered up your non-performing assets completely. And overall, the provisions at the AUM level is about 4%, which is, generally speaking, a fairly good provision as we look at the overall asset quality of the company. Normally, over the last I mean, it's not that we have had aggressive write-offs or early write-offs when we hit challenges. That's been a consistent way that we've kind of dealt with the portfolio through various challenges, be it demonetization, be it COVID, first wave, second wave.
See, my strategy has always been that never get yourself into anything that you cannot exit from. And so all of these policies about provisioning and ECL and everything are board-approved and gone through three different auditors and concurrent auditors and bankers and so on and so forth. And everybody has accepted it. Now, for me to change that policy and put in some slush fund in there, if I ever need to reverse it, I'm not going to manage doing it. So never really do anything that you can't get yourself out of. I mean, that has always been my strategy.
Again, I'm not opposed to it. What I can do is be extremely aggressive with provisioning write-off, which is what I'm doing right now, right? So just because I write off something in the accounts, that does not mean it's an operational write-off. My people continue to follow up on it for a year or two years or as long as there is an expectation of getting some money out of it, whether it's legally or through collection or through follow-up or agencies or whatever it has to be.
But I've never been in favor of this ad hoc. And I don't even think it's possible just for me to wake up and ask Vivek, "Vivek, what is the profit?" "Oh, it's INR 175 crore. Can you put aside INR 30 crore as an overlay over and above whatever is the ECL?" That's not even possible to do. I mean, we are a listed company. We have policies. We have board-approved policies that we need to follow.
Oh, very much. Very much. That's great to hear. Secondly, I wanted to ask you that on an aggregate level, the customers to whom we are offering a credit, what do you think? How many other players in the market are also offering the credit to the same customer? This came because you were saying that it looks like the customers are overleveraged. Secondly, just on to add on, we are now expanding in different states. So should we expect the operational expenses to be a little higher going forward?
Yeah. So to answer your second question first, yes, marginally operational expense, especially salaries, initially might be higher. But by the end of the year, that catches up. So this is what typically happens. During Q1, it's slightly higher. By Q4, it settles down. That's as far as operational costs. We don't expect that to be very, very different in the coming year as well. Your first question was about people borrowing from other MFIs, right, or other lending institutions.
Yeah. Same customer from the Q1.
That is very, very common. I think only about 20%-25% of the customers are new to credit or
unique to us.
Or unique to us overall. 75% of our customers would have another loan from some other institution, whether it is a Kisan credit loan or a tractor loan or an MFI loan or a gold loan or what have you, right? It will obviously be there. Overall, what we try to do is assess their income, figure out what their EMI burden is for all the other loans, and figure out whether they'll manage affording our loan. So that is the goal here. Where the overleveraging part comes up is that the last thing which I said about figuring out their FOIR, that is easier said than done because our customers don't come with paperwork. It has to be a judgment call.
So if my judgment says that this guy is good for this guy's income might be INR 200,000 a year, and he's good for a total EMI burden of, let's say, INR 8,500, some other MFI might say that he has an income of INR 300,000, and he's good for an EMI of INR 12,500. So it just depends. Now, all of these incomes are being reported to the credit bureaus.
So I can, not right now, but hopefully in a couple of months, start seeing what the other people have been reporting this person's income to be. But it's very complicated, right, because maybe through the SRO, the MFIs can kind of bundle together and figure everything out. But with the PSU banks and private banks and SFBs and stuff, and there are so many flavors of lenders nowadays, it could be extremely difficult to get everybody on the same page and going together. So that's basically the reality on the overleveraging. But the good part is, and not to, is that there is no CEO or managing director or founder or anybody that I have ever met says that, "Close your eyes or paise baato ." I've never met anybody like that. Everybody has an interest in self-preservation.
And so as a result of that, the hope is that you might be slightly more conservative, others might be more aggressive. But on average, everybody will think with a good head on their shoulder, and good judgment will prevail in the long run, right? And that is true in the lending business, in the stock market business, or whatever you call it. That is true all around.
Yeah. And assuming I was is going through some other competitors, so many are shifting now to weekly collection model due to the same problem of collection efficiency. But do you think it would help us? We are thinking somewhere down the line to shift to weekly for some customers.
No, not as of now. I mean, kudos to them that they are making an effort. But largely speaking, I am a bit skeptical not because I think weekly is a bad model. I don't think that at all. If you are able to have larger center sizes, it's possible to do it. Now, to do larger center sizes, what you have to do is to create a variable center model. That means that you create a smaller center and add more and more members into that center as time goes on.
So in my case, with a static center model, the center sizes are too small for it to be operationally feasible from purely an operating cost perspective. So for me, I would have to change my model in both ways. I would have to basically start this perpetual model, number one. Number two, I would have to be okay with doing a lot of secondary or top-off kind of loans where you keep giving some newer loan to the customer to keep them interested.
But I think in the long run, if you look at my typical rural customer, they are going to get sick and tired of coming weekly. This is 2024. Customers have plenty of choices to borrow money. If you are going to ask them that, "Oh, every Monday, you have to come here for half an hour, step away from your business, step away from your other activities, and come and sit in a center and repay the money," I think the attendance is, in the long run, going to be abysmal. What we should be thinking about is how we can convert these customers into cashless, how we can avoid the centers in the first place.
I mean, these are actually quite interesting debates that we ourselves get into amongst peers where somebody wants to remain traditional and say that we need to go back to basics, and others are talking about saying that, "Well, there is no basic anymore. It's 2024. You have to think forward." And nobody's really right or wrong in these situations. So for me, if I could do it, I would be happy to do a weekly model. I just don't think it will be feasible in the long run. And maybe I'm wrong about that.
Okay. Okay. Thanks so much. And lastly, if you can just tell me that you were saying the 5,000 AUM you are aiming. So which FY are you thinking? 2026, 2027?
Lastly, I think we've shied away from giving those kind of specific guidelines. Give us a quarter or two to rework. I mean, originally, it was somewhere around about 2026, 2027 or something is what the guidance we were giving. But let us see where things settle down as far as credit cost goes. And we'll get back to you on those.
Okay. Perfect. Have a great quarter. Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Mayank Mistry from JM Financial for closing comments.
Thank you all for joining the call today. And thank you to the management team of Arman Financial Services for giving us this opportunity to host the call. Thank you.
Thank you.
Thank you. On behalf of JM Financial.