Ladies and gentlemen, good day and welcome to the Arman Financial Services 3Q FY 2025 conference call hosted by Equirus Securities. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchstone phone. I now hand the conference over to Mr. Shreepal Doshi from Equirus Securities. Thank you, and over to you, Mr. Doshi.
Thank you, Sharbat. Good evening, everyone. I welcome you all to the earnings call of Arman Financial Services to discuss the 3Q FY 2025 financial performance and business update. Today, we have the senior management team of the company represented by Mr. Jayendra Patel, Vice Chairman and Managing Director, Mr. Aalok Patel, Joint Managing Director, and Mr. Vivek Modi, Group CFO. I will now hand over the call to Mr. Aalok Patel for his opening remarks, post which we can open the forum for question and answer. Over to you, Aalok.
Thank you so much, Shreepal, and good evening, everybody. On behalf of Arman, I would like to welcome all of you to our Q3 and nine-month-ended fiscal 2025 earnings call. Joining me today is actually just Vivek, the Group Chief Financial Officer, and our Investor Relations team. I hope you had the opportunity to review the results, the press release, and the presentation, which are available on the stock exchanges and our website. Apologies. I do not think normally we provide at least 24 hours this time due to scheduling conflicts. There was a very short interval between publishing the results and the call. Anyway, I will walk you through the results. I would like to begin with an overview of the industry developments, highlighting the key trends in business, followed by a financial and operational performance of Arman.
Over the past few quarters, the microfinance sector has faced several challenges, including over-leveraging, weakening of the center-meeting discipline, deterioration of the joint liability group or JLG model, and rising employment attrition. Furthermore, the post-COVID euphoria experienced by microfinance institutions, and in particular, non-MFI lenders in the retail unsecured space, combined with a favorable regulatory environment, has significantly increased household indebtedness. This has occurred despite limited real income growth, placing considerable strain on borrowers' ability to meet their repayment obligation. As a result, we have witnessed delinquencies and a corresponding rise in impairment cost across the industry for the past two quarters. These challenges have directly contributed to an uptick in the default rates, further exacerbating the financial stress within the sector. In response, both Arman and the broader industry have made concerted efforts to strengthen underwriting standards and mitigate the risk of over-leveraging.
Naturally, these measures have led to high rejection rates and, as a consequence, lower disbursements. Additionally, the increased focus on collection has also stretched the field bandwidth, further impacting sourcing efforts and contributing to staff attrition. This, in turn, has led to a decline in both disbursements and AUM. These evolving macroeconomic conditions have intensified pressure on microfinance institutions, making it necessary for us to strategically recalibrate our business models. The industry-wide AUM degrowth has also resulted in liquidity issues for the microfinance borrowers, and it is essential that these challenges stabilize before the cycle reaches a state of equilibrium. In response to the above-highlighted challenges, Arman has taken a cautious approach by prioritizing portfolio quality and collections over growth. While this has resulted in lower disbursement and AUM contraction, we believe that this long-term strategy will strengthen our financial resilience in the long run.
As of 31st December 2024, our consolidated assets under management stood at INR 2,280 crores, reflecting a year-on-year decline of 6.5%. Disbursement for the quarter amounted to INR 338 crores, while the nine-month disbursement stood at INR 1,170 crores, down 28% from the previous year, of course, due to the reasons mentioned previously. Our gross total income for the quarter was almost INR 165 crores, down 2.4% year-on-year, while for nine months it grew by 10.9% to INR 530 crores. Pre-Provisioning Operating Profit, or PPOP, stood at INR 69 crores for Q3, down 4.7% year-on-year, but grew by 13% to INR 231.6 crores for the nine-month period. Now, moving to the segmental performance. For the microfinance business, our wholly-owned subsidiary Namra Finance reported an AUM of INR 1,768 crores as of December 31st, 2024, a decline of 13.6% year-on-year. Disbursements for Q3 FY 2025 stood at INR 214 crores compared to INR 459 crores in the same quarter last year.
The cautious lending approach, along with aggressive provisioning, has impacted short-term profitability, with Q3 profit after taxes at a loss of INR 17.2 crores due to increased impairment cost of INR 67 crores this quarter. However, despite these headwinds, for Namra Finance, we continue to maintain a strong capital adequacy ratio of 45.7%. Our gross NPA for the microfinance business stood at 4.4%, while net NPA was only at 0.56%. MSME, two-wheeler and LAP, which is part of our standalone Arman entity, this business delivered an encouraging growth. AUM for this segment grew by 30.9% year-on-year to INR 512 crores. This segment's gross total income for Q3 FY 2025 stood at INR 44.9 crores, growing at 32.4% year-on-year, while PAT increased to INR 9.9 crores, which is about 5.7%. As of 31st December 2024, capital adequacy for the standalone Arman entity stood at a healthy 39.45%.
From an asset quality perspective, GNPA for MSME stood at 3.43%, and for two-wheeler, stood at 4.03%. Despite industry challenges, this segment remains resilient and continues to support the company's overall growth trajectory. The new loan-against-property or micro-LAP segment introduced last year, although it is at a pilot stage right now, has gained encouraging traction. Presently, the product is offered in Gujarat and piloted in Telangana and MP . It's about 1% of the AUM so far. The focus of this product is on tier three and four and rural locations where we are expecting good growth in the coming years. The average ticket size of LAP loans currently is about INR 450,000. Now, coming to the liquidity and borrowing, our liquidity position remains strong with cash and bank balances, liquid investments, and undrawn CC limits amounting to INR 262 crore.
Additionally, we have INR 120 crores in undrawn sanctions from existing lenders, ensuring continued financial flexibility. Total borrowing stood at INR 1,765 crores with a diversified funding mix. Of this, 34% was from banks, 11% from NBFCs and financial institutions, 20% from NCBs, and direct assignments or off-balance sheet liabilities contributed to about 30%. The rest is borrowed from DFIs such as NABARD and SIDBI and others. This mix reflects our ability to maintain funding access despite industry headwinds. On the collection efficiency side, collection efficiency for the month of December 2024 stood at 95.3%. The segment-wise collection efficiency for the nine months FY 2025 stood as follows: Microfinance 95.2%, MSME 96.2%, Two-wheeler 95.7%. Before we open the floor for questions and answers, I would like to take a moment to highlight some of the strategic initiatives that Arman has undertaken in response to the current challenges.
We have reinforced our underwriting standards to ensure stronger asset quality and have expanded our collection team to improve borrower engagement and repayment discipline. Additionally, we have introduced a dedicated credit department at the branch level, which focuses exclusively on maintaining credit quality. In a sense, we have now completely separated credit from sales in microfinance. Encouragingly, early indicators from December and January show improving trends in the credit cycle, with zero DPD flow-forward rates stabilizing. While it is a little too early to tell whether we have reached the bottom, should these trends continue, we will adapt our business strategy accordingly. Although we have experienced a temporary slowdown in AUM growth, we remain confident in our ability to navigate these challenges in the industry and position Arman for long-term sustainable growth. Thank you very much, and now we can open the floor for questions and answers.
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 their touchstone phone. 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 again. You may press star and one to ask a question. Our first question comes from Apurva Singh from Pancharatna Investors. Please go ahead.
Hello.
Yeah, go ahead.
Yeah, am I audible?
Yes.
Yeah, good evening. I just wanted to understand what are the green shoots you are looking for to understand the cyclical turnaround and what measures you have taken for recovery.
See, as far as green shoots are concerned, typically what we look at to judge whether we are coming out of it is zero DPD flow-forward rates. This means people who were previously paying regular who have now crossed, who have become one day overdue at this point. Normally in the MFI segment, we would experience that at about 99%. There would be 1% flow-forward. Now, again, just because something has flowed forward, that does not mean it will get written off. Obviously, at every bucket, there are repayments that happen. We typically track flow-forward rates quite closely at every bucket. This will be too much detail to get into, but until the zero DPD flow-forward rates return to 99%, I would not say this is over or this is behind us.
Now, that being said, we have seen, at least for the last two months, zero DPD flow-forward rates have been 98% plus. I think it was 98.03% in December and 98.15% in January. This month, in February, zero DPD flow-forward, again, I think till now we are about 35-40 basis points ahead of previous month on a month-to-date. I am not superstitious, but in days like this, you become a little superstitious. I do not want to jinx anything, but obviously, there are minor improvements in the zero DPDs in the last couple of months. Now, as far as the initiatives have taken, I mean, there are many, many initiatives. Obviously, on a day-to-day basis, we work on all of them.
Some of the larger ones is, see, people who follow microfinance will know there was always a bit of a conflict of interest between credit and sales, where at the operational level, at the branch level, microfinance principle was that the guy who does the disbursement does the collection. While there was obviously a credit mechanism at the HO level and at the regional levels, it was not at the branch level. We have completely separated that now. At least so far, about 120 branches. By March, we will reach most, if not all, branches. The idea being is that if you cannot rely on JLG or JLG culture anymore, which again, it's too early to tell whether it's completely gone or if this is just a blip in an otherwise very successful model which we have been following.
Arman has been following for 15 years, but the market has been following for or the industry has been doing for the better part of five decades almost, right? That is one initiative. Another is that we have started with CGFMU. That is, I don't know, Vivek, if you want to.
That kind of is the CGFMU is the guarantee cover being provided through the government NCGTC, the national kind of credit guarantee cover scheme. That is available for microfinance borrowers. We're probably one of the few microfinance entities which have already enrolled. As of quarter three, disbursements, which let's say about INR 2 billion of disbursements that have taken place in quarter three, have a guarantee cover through the CGFMU.
The guarantee, it's a little complicated like all of these things get, but essentially what it covers is about 72% of your principal in default, ignoring time value of money. Let's say your default is INR 100, they will give you INR 72, and INR 28, the company has to eat it, for which we pay a premium. It's sort of a default insurance. Basically, how the math works is that considering time value of money and all those other things, if your overall static pool losses at this point with what we are paying them crosses about 3.5%, you'll make money or you'll come out ahead in less than that. Again, let's not get into this is not a profit-making venture or anything. It is to buy me better sleep, if that makes sense.
Got it. Definitely. We focus with clearly visible. Thanks. Thanks a lot.
No. I am sorry for the long-winded answer, but I am sure something similar to these questions were there in probably most of the people's minds. That is why I took my time on this question.
No, no. This is really helpful. Thank you.
Thank you. Next question comes from Shubham Jhawar from Dexter Capital Advisors. Please go ahead.
Yeah. Hi. Am I audible?
Yes.
Yeah. Hi, sir. Thanks for the opportunity. I had a couple of questions. The first one being, sir, on what DPD do we write off the loans?
I think right now we are writing off quicker than, so the policy is.
The policy is anything which has not paid us for the last six months, once the account turns 180 plus. Essentially, anything which is over and above, let's say, 300, is automatically written off. As of, I mean, right now, we are writing off anything which has not paid us after it has turned NPA, that is 90 DPD. Essentially, anything which is 250 days or 240 days plus will get written off.
Basically, we are being slightly more conservative, and everything over about 250 days, if we see no hope of any recovery, is written off.
All right. Sir, basically, also I wanted to understand, basically, for customers who are flowing from DPD buckets, right? For example, DPD 30 to DPD 60 plus, what action do we try to take to stop that net forward flow?
There are a lot of initiatives. First of all, we have RO mechanism recovery officers that now we have about 350 of those, and that will continue to increase. Those take over at the FO level. We have various schemes. We are using bot calling. We are using auto calling. We are issuing legal notices . [crosstalk]
Yeah, 90 or 180 plus. Everything that you under the sun that you can think of, we are doing. Again, I'm open to ideas. If anybody has any clever ideas, I'm all ears. Anything to increase the collection.
Right.
You have to be careful. You have to be careful with these customers. I mean, you cannot use high-pressure tactics because the kind of customers that you are dealing with, that is obviously not something that I would encourage.
All right. My another question was I wanted to understand more on overleveraging, right? As I understand, the first guardrails had been announced somewhere in August of 2024, and the second guardrails were announced in November 2024, right? I wanted to understand, since before these guardrails were announced, what were our internal guidelines that we followed which ensured we were not exposed to any overleveraging in the borrowers? What was our internal guideline before the first guardrails itself?
We were using FOIR like everybody else. This will require a bit of a history lesson. Prior to April 2022, there were hard-coded overleveraging, what do you call it, rules that were issued by the. [crosstalk]
No. So no more than two MFIs or no more than three lenders. The three-lender norm was by NFIN more than anything else. This only applied to MFIs. There was a time when MFIs were controlling 80-90% of the market. Today, we are probably controlling 40, at the most, 40% of total household debt of rurals. Obviously, MFIs, although our portfolios increased, now there are many, many players that are servicing the rural segment, right? After April 2022, all of those in a deregulation by RBI, a lot of change, including removing those caps. What cap they imposed was a 50% FOIR. You assess them, and their installment should not be more than 50% of what they are earning, right?
All in all, that hindsight is 20-20, but all in all, that seemed like a good measure, right, that you look at their household income and their could not cross more than 50% of that. Largely, a lot of people were not looking at this plus one, plus two, plus three, or anything. We had numerous underwriting standards which were in place. First of all, we were looking at all loans, not just MFI loans, because MFI was losing ground in terms of market share. We were looking at husband-wise. We were looking at default rates. We were not even entertaining a customer who was one day overdue anywhere else. There were various measures which were there. In hindsight, yeah, I mean, number of lenders is something that we found a close correlation.
Let me tell you, even right now, 46% of our customers have an exposure of less than INR 50,000 total. Sixty or, excuse me, 68% of our customers have a total loan exposure, including all loans, of less than INR 100,000, right? I do not want to put overleveraging as the only problem here. I mean, there are a lot of, you see, problems like this rarely occur due to one issue. I mean, there are always multiple issues. It is like the Swiss cheese model where it has to pass through a lot of holes to get here. I acknowledge 50% of the issue is definitely overleveraging, but there are many other issues. Debt has increased. Aspirations have increased. Culture has changed. JLG got diluted. I am willing to accept my share of the blame for whatever has happened.
I will not completely say it is due to overleveraging or weak credit. There are many, many aspects here. Honestly, right now, the biggest issue is credit has stopped, right? I mean, credit has crudely. Disbursements are like half of what they used to be. When you stop liquidity, obviously, things are going to get worse before they get better. Anyway.
Yeah. Last two questions, and then I'll again quickly join back the queue. The first was, is there any, what is the standardized process for income assessment both at the industry level and that we follow at Arman? The second question was, what are our loan officers and collection agents, how are they incentivized, is what I mean, these two questions?
To answer your first question, we have completely revamped how we are assessing income. I mean, that will be.
When did we do that, sir?
I think we started the initiative in August. With the new BCM structure that I was mentioning earlier, the correct earlier, again, that conflict of interest, right? The guy who's disbursing the money was assessing the income.
Now, today, there's an independent person whose bonuses and everything depends on asset quality. Rejection rates are like 80-82% right now, right? That's not something to be proud of. I mean, very few lending businesses can run with that kind of rejection rate. Something or another has to change. Anyway, that's fine. I'm not too concerned about the declining. During demonetization, it had declined by a third. During COVID, once things are over, things catch up back very quickly. That is not my concern. My concern right now is simply on asset quality. 90% of our time goes towards that. Management bandwidth is stretched. Field bandwidth is stretched on collections and repayments. Disbursements will come back to normal in due course of time. That is not my priority at this point. Now, how are we incentivizing?
See, field officer incentives, I mean, on average, they are like around INR 2,500. That's a mix of a lot of things. Nowadays, with attrition and everything, the rate is, and every month being different than others, we rely a lot on R&R kind of incentives. We'll have certain zero DPD targets or collection targets and those things, or we'll have multiple contests. The actual incentives themselves have gone down significantly overall in exchange of base salary. This is what the field officers are demanding. Given the attrition, we kind of have to deal with that. Collection people, on the other hand, obviously, their incentives matter on what buckets they are collecting. The harder the bucket, the more money they get. It's a standard system that pretty much everybody follows, including HDFC Bank and banks and NBFCs and whoever else.
Right. My apologies. I couldn't understand once the income assessment. Wait. Could you please elaborate that once again?
The income assessment, a lot of it is based on judgment. We try to get evidence as much as possible depending on the kind of occupation that they are doing. The simplest way to explain it is that if they are in a large part of our portfolio goes into cattle. Depending on the number of cattle they have, it is easy to guesstimate what kind of income they will be having. Other occupations, it really depends on a case-to-case basis.
Nowadays, it also depends on a lot of self-declaration that the customer might.
Yeah. Nowadays, we are not really paying much attention to the self-declaration.
That's where the BCM or the credit evaluation becomes more independent and assessment by the company.
Over and above that, there's also a lifestyle assessment that we do. There are what kind of house they are living in in comparison to people who are their neighbors. What kind of facilities do they have? Do their children go to school? Do they not go to school? There's a whole form that is there. I mean, if you're interested, we will walk you through it at a separate time. Unfortunately, I don't think this is the right way, a right place to kind of walk through it right now.
Sure. Sure. And sir, what is our loan write-off this quarter out of the total impairment?
It's about INR 45 crore.
45.
If you're talking of number alone.
Yeah. Yeah. Number and total as well, the consolidated.
I think I'll have to refer to the presentation, but it'll carry somewhere there.
Sorry, sir?
Carry somewhere in the presentation, but 25 and number are about 4 odd crores in Arman. So 45 plus 4 about 50 odd crores.
50 odd. Thanks. Thanks, sir.
Thank you. Next question comes from Narendra from RoboCapital. Please go ahead.
Hi, sir. Thanks for the opportunity. Am I audible?
Yes.
Yes. Please go ahead.
Yeah. Sir, given that we are in a position, give any to him growth or credit cost.
Sorry to interrupt. Narendra, your voice is coming very low. If you're using speakerphone, may we request you use handset or something, please?
Yeah. It's low, but it's cutting off. I'm missing some of the words.
Is it better now, sir?
Yeah. Maybe.
Yeah. My question was that given the situation that we are in currently, are we in a position to give out any guidances regarding AUM growth or credit cost for the next year?
What? I cannot even give you a guidance for next month. I mean, I'm kind of joking, but the fact is any guidance is meaningless at this point. I mean, we don't know how the next quarter is going to look like when the things, so until things stabilize, unfortunately, no. I'm not in a position to give any guidance.
Great. Understandable here. Thank you so much, sir. I'm logged here.
Yeah.
Thank you. Next question comes from the line of Moksh Ranka from Aurum Capital. Please go ahead.
I want to understand since JLG models are supported, so are we moving more towards secured mix, and will our AUM growth be mostly towards. [crosstalk]
Are we moving more towards what, did you say?
Mostly secured mix for LAP and two-wheelers, and MFI disbursements will be low.
No. LAP is a long-term play. I mean, just as we started MSME in 2018, about five, six years ago, and now it's INR 500 crore. I mean, we really don't, we are not a kind of company that moves very quickly. We're sort of boring in that way. LAP is a long-term play. Yes, you are right. We would like to get into a more secured kind of a book, but I don't think the secured book is going to be meaningful for at least two-three years. Secured is a whole another beast, really. I mean, if I open up a shop to give unsecured loans, it's very easy to sell those loans. If I open a shop to give secured loans, then it's not that easy.
I mean, you got to find customers who are willing to mortgage their house for their business and stuff. It is a different business in many ways. I guess one way to answer your question, if I could, yes, definitely I would. Today, I do not see it having a meaningful, I mean, definitely, we can target like a 5%-10% over the coming three, four quarters. To say the majority portfolio will be that, I wish it was the case.
Microfinance is kind of here to stay. Yeah. We are through right now in the middle of a bit of a crisis, if we can put it at a certain level. Microfinance, I mean, it's not going out of pocket.
No. I mean, all you have to ask is, is there a need for this product? I do not think 99 out of 100 people you ask are going to reply yes. There is a need for unsecured small-ticket loans in the rural segment. I was saying this to even people at RBI. I think I said it last time also, but I will say it again. Since the 1960s, Indian government, to their credit, has been trying to push the financial inclusion agenda, right, starting from farm credit to PSU banks, to PSL banks, to cooperative banks, to RRBs, to bank linkage, NABARD, SHGs, MFIs, I mean, you name it. To their credit, they have done it all. Everybody has been so concerned to make sure money reaches at the bottom that nobody was too concerned about too much reaching the bottom, right?
In many ways, if it helps you sleep better at night, this is a success. It is a success of the financial inclusion agenda, at least the reach part. Now, all we have to worry about is how to assess them better and convince the customers to repay us better. Incomes, real incomes have not really increased since COVID. I think if you look at real incomes in the rural, they have increased by 0-1%. A lot of these guys, in hindsight, again, I have gone to the field myself, were supplementing inflation with loans, one way to put it. I acknowledge that there were a lot of things broken. The first step of solving a problem is, first of all, admitting there is a problem and B, finding out what that problem is.
I think all of us, and I'm not just saying the company. I would say the industry at large has grasped both of those things, has acknowledged that there is a problem, and now we are aware of what those problems also are. Give us some time. We'll fix them.
My second question would be, don't you think MFI as a sector, our business model, is quite fragile? Because if you look at generally, our cost of borrowing will be very high. On top of that, we need to carry a very high number of field force for collections. Because of that, our costs are going to be very high as compared to a fintech or maybe a bank. Don't you think our business, generally, our business model as a whole industry is quite fragile?
I mean, exactly 12 months ago, people were calling it very resilient. I guess the flavor of the month will change every quarter. No. I mean, I'm not exactly sure how to answer that. If you are comparing us to fintechs, let me tell you, okay, that is not the right comparison to make. Fintechs, in operating in rural, unless they have a good method to collect the money, is a ticking time bomb, according to me. Again, what the hell do I know? As far as banks, I mean, they've had a good 80 years to do it, and they have not managed. If banks were in a better position to do what I do, then why haven't they? I mean, they've clearly had adequate time to do it. Again, I'm not exactly sure how to answer your question.
Okay. My last question would be, what would be your cost of borrowing?
Marginally, I would say it's about 11 and a quarter. If you include everything else in it, cost of.
For the quarter, for the nine months, turning out to be about 12.86.
Yeah. All in.
The increment of the marginal cost, as Aalok Patel said, is 112.
Okay. Thank you. I'm wishing you all the best. Hope you have a good day.
Thank you. Next question comes from the line of Aditya Pal from MSA Capital Partners. Please go ahead.
Hi. Thank you so much for the opportunity. Am I audible?
Yes.
Yes.
Thank you.
Please go ahead.
Sir, just wanted to understand from you that, say, four to six quarters, the disbursements that we have originated, how have they performed on a quarterly cohort basis? If you look at last 12 months.
Better. In microfinance, first six months, you don't really see a lot of defaults. It's hard to judge at this point, but.
No, because just trying to understand the momentum where we are at, right? Because.
I understand. If you are saying the stuff which we have, let's say, disbursed between April and May, June, right?
No. Let's say 12. Let's take December 2023 onwards, right? Because that will give a good runway for you.
I mean, obviously, that will not look good.
Understood.
I mean, this was, I would say, okay, the peak of the bubble, if this is what it was, was Q4 of.
FY 2024.
FY 2024.
Understood.
That's when the most amount of over-leveraging would have taken place. After all said and done, if you do a static pool analysis, that will be the worst quarter, all considered.
At least the last 9-10 months, the book that has been generated, they have been performing adequately in your.
Yeah. I mean, yeah. It's adequate is the word. I mean, there's nothing to write home about, to be honest. It's not.
I mean, largely, what you want to compare it with, I mean, if I were to compare it with pre-COVID kind of a scenario, obviously, these last nine months' performance may not kind of compare directly with the pre-COVID kind of a system because the behavior of the customer has changed.
Right.
Right? Is it performing? The rest of the book at INR 1,800 crores of total AUM, INR 600 crores being the last nine months or six months, are the INR 600 crores doing better? Obviously, they're doing much better.
See, what makes this current crisis that we are facing very different than what we have faced in the past is that in the past, we could essentially buy ourselves out of whatever trouble or the industry could rather buy themselves out by disbursing good quality customers, which were plentily available, right? Post-COVID, post-demon, we grew substantially. By the time you got into taking care of the bad customers, the good customers had replaced. In today's scenario, when the portfolio is falling, obviously, the denominator effect works both ways, right? That is why on a static pool today, my numbers will look better than what it is right now because the portfolio is declining. Again, everything is all relative. I understand. Let's not get into nuances of what ifs and what nots.
No, not getting into nuances, but just trying to ascertain where the momentum is heading, right? Because.
No, no. I'm not talking to you. I'm not talking to myself. I'm sorry. No. Yes, the portfolio that we have created in the last six months looks much better than what we have otherwise, to answer your question simply. But it is not pristine or anything like that, what we experienced on a post-COVID.
Understood. There has been a sharp increase in our 31 to 90 as well. Specifically speaking about MFI. It has gone up from 2.4 to 7.1. How to read it?
It was in March, I believe, when 7.1 is currently, right?
Yeah. True. How to read into this and what will be the flow forward? Do you see that you can address this over here rather than it flowing deeper into our NPA buckets?
I mean, there isn't much to read from it. It's not like hieroglyphics. It's definitely not good. I mean, I have nothing good to say about it except to say it is what it is. We are working on it. Flow forward rates, if it gives a little bit of comfort, are improving at every bucket. I would say that we are watching those numbers very closely. All buckets, we are watching very, very closely. We are trying to do everything that we can.
On a consolidated basis, we've done INR 175 crore of credit cost, which INR 150 crore is number for the nine months. How bad do you see this entire worsening of asset quality or higher rate of being pushed to FY 2026? Because we should start growing now, right? At least from this quarter onwards, or maybe from FY 2026, we should start having some growth. Not just growing, but even the base effect will kick in, right?
No. I think disbursements will improve. We are seeing improvements in disbursements in Q4. Disbursements will improve. As far as growth goes, again, I do not think that will happen till Q1. What was your opinion? [crosstalk]
If your question is, "Can we push anything forward for FY 2026?" the simple answer is no, absolutely not. I think people who have known us in the past will attest that we have not done any top-offs, not done any restructuring, not done any net-off type things. So far, we have not done any ERC type transactions either, which is not to say I am about doing those, but we have not done it yet. Whatever needs to be taken care of has been taken care of.
The reason I'm asking all these questions is just to surmise quickly that on average, an MFI loan is anywhere between 18-22 months. Some players also do 24 months. On average, industry is 20-22 months. Now, if we see when the crisis started, if we say that if we call FY 2024 as peak, we are already 50% inside through the journey of that entire credit cycle being weakening, worsening. Now things have to start to give in, right?
If you say that the crisis started in April, we are nine months into it. By all logic, we still have about 15 months to go, 24 months loan give out.
Okay. 24 months. Okay. Right?
That is a fair assessment to make.
Consider that the first quarter, there were no real changes. I mean, people just started seeing an uptick in the.
Q2.
I mean, people just started seeing uptick in repayments. And then there were heat waves and elections and stuff, which I openly said, "I mean, this is India. It's always hot here. There's always an election somewhere." Anyway, I think we wasted the first quarter in just saying, "Okay, this is a temporary blip, and it will recover." Really, I would say until August, nobody really took it seriously. Now, post-August, obviously, everybody's kind of been, I don't want to say panicked or anything like that, but taking it very, very seriously, including the industry and everybody. I think, listen, yeah, I think my estimate, which I gave one quarter ago, remains the same, that we will see the bottom by March.
Already, I feel that we have probably reached the bottom, but I'm refraining myself from that conclusion because I don't have the data available with me to call it yet. From Q1, I would say you should start seeing an improvement. Improvement also to get back will take about a few quarters, right? It's not like it's going to happen overnight.
I mean, definitely. Definitely. It's a lending business.
Aditya, sir, may we request you return to the question?
I'm done with my questions. Wishing the team all the very best.
Thank you. Thank you, sir.
Thank you so much for taking the time.
Thank you.
Thank you.
Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please restrict yourselves to two questions each. If you have any follow-up questions, please rejoin the queue. The next question comes from the line of Nidhesh Jain from InvesTech. Please go ahead.
Sir, can I see a PAR-1 plus data for the microfinance book?
PAR-1 plus data, Vivek, you have that.
It's in the presentation.
PAR-1 data may not be there in the presentation, but you can go to the second question if you have, while we kind of pull that out.
The second question is, what is your assessment of the stress in your book on the microfinance side, given that there is a certain percentage of customers who are stressed? Once those are identified as GNPA or stressed, then the likes of that, the book should perform reasonably well, right? What is the assessment of stress on the book and the microfinance side in your view?
I'm not sure I understand. You're not very clear. What is my opinion on the stress of the microfinance book? Is that what you're asking?
Yeah. Probably 10% customers, 15% customers are stressed. Once those customers have recognized as PAR-1, then the rest of the book should start behaving reasonably well, right? What is your assessment that this number is 10%, 15% in your view?
I would say that, again, please don't quote me on this, although this is recorded. I would say about 20% of the customers are stressed in the industry. Why I say that 20% number is that 80% of my customers pay me on the second that it is due, the money, right? About 20% of customers will be late by an hour, two hours, five hours, five days, whatever, or don't pay me at all. If I were to extrapolate, maybe 20% are under stress.
The PAR 1-30 we were referring to was about 3%.
3%. [audio distortion]
Yeah. Yeah. People who skipped one installment and their.
They're stable or. [audio distortion]
2% zero DPD flow forward, and another one will be stable . [audio distortion]
Thank you, Vivek. In your assessment, with all these guardrails coming into force, industry becoming much more conservative, do you think this over-leveraging problem will be solved, or we expect further cycles, let's say, three years down the line, four years down the line, because industry will again go overboard and again overland?
No, I don't think so. Believe it or not, I have experienced a lot of overlending and over-leveraging in my career, including many bubbles. See, if it was only the MFIs who were controlling the industry, I would say, "Okay, no, it should not happen again." We are now controlling NBFC MFIs are controlling INR 4 lakh , give or take INR 4 lakh crore, of an industry which is INR 10-12 lakh crore. If you consider rural lending, right? I mean, you have INR 2.5 lakh crore SFGs, INR 1.5 lakh in retail to the customers, another INR 2.5 or so to the spouses. Again, these are estimates. These are nothing you won't find this hard data available on the net.
It has earlier on, every Tom, Dick, and Harry was coming into rural lending because they thought it's high returns, high margin. Even people who had nothing to do with lending money, the only way they could monetize their business was through lending. A lot of technology companies and other ones, I'll refrain from using names or anything. Now, all of that euphoria is gone, right? I mean, companies who had no business being in this industry post-COVID and post-deregulation came in droves. I think MFIs never wasted a good crisis. I think we kind of pick ourselves up, make the adjustments, and move on with life. Until everybody else kind of sees that, I'm not exactly, I don't know. I don't know. Maybe I'm being too pessimistic. The fact is, Indians have a very short memory.
Everything will be done and dusted, and two, three years later, people will forget, and life will go on. That's the way it should be. Life is too short to be dwelling on the bad days alone.
Sure. That's it from my side. Thank you.
To simply answer your question, I hope so. Go ahead. Next question, please.
Thank you. Next question comes from the line of Bhumin Shah from Sameeksha Capital. Please go ahead.
Good evening. What has changed in the last two or three months where so that low rates are decreasing? Is it a structural change, or let's say due to the crop season, people are earning the money and paying back, and then again, this issue may come up again?
Nothing like that. We are just running out of stressed customers.
Okay. There is a liquidity issue. Let's say borrowers who had three or four loans. What is your assessment? Are they paying only one MFI, or are they letting go of two or three MFI because they are not getting any other money for the new loans, right?
Actually, an excellent, excellent question. See, there's about 8% of cases that we have that people are paying us and not paying others, or vice versa, people are not paying us, paying others. In my opinion, this thing about, "Oh, I'm a bank, they'll pay me, and they won't pay others," I mean, it's a myth. Practically speaking, it really does not happen. Most of the defaulters, and I would say 90% plus, if they stop paying one, they stop paying others. That is number one. Number two, in our BI team, I mean, we look at a lot of data, and now that we have business intelligence also, we have noticed that whether you are Arman plus one, two, three, four, five, six, whatever it may be, the lowest defaults are amongst the customers who have remained stable at the number of MFIs.
Let me try to explain that better. What we have found is that let's say when I originate the loan, the fourth, right, which today, for some reason, everybody is tracking plus one, two, three, four. Honestly, I think people are paying too much attention to this. Anyway, I'll hold my thoughts to that. Let's say somebody that I lent money to that I thought was a good customer at origination, but I became the fourth lender. The lowest defaults are those that remained at four. The person who was at four and became three, default increases. Who was at four and became two, it slightly increases more. The reverse is also, who was at four and became fifth, obviously, in that case, the default rates skyrocket. The lowest ones are the ones that remain stable with their outstanding and number of lenders.
This is what is true in my portfolio. I don't know if it's true in others. You see, right? I mean, the only thing that you can kind of judge from that is to say that people who need money but don't get money also will become defaulters. It works both.
Okay. Thank you so much. All the best.
Thank you. The next question comes from the line of Ronak Chheda from Awriga Capital. Please go ahead.
Hey, hi, Aalok. I'm audible?
Yeah, please. Thank you.
Yeah. I have two questions. One is on the CGFMU. You just mentioned that your rejection rates are upwards of 80-82%. Given that the industry has gone through a cleansing of your customers, or the industry per se, or whatever the rotten apples were, and then at an 80% rejection rate, how are you thinking of going ahead and getting one more layer of security on the disbursements which you are doing? At what cost? Because you're stepping up on your underwriting staff, you're stepping up on your collection staff. Now, if you were to pay this premium, how does your economics work? If you could just highlight that.
I mean, the CGFMU cost for us right now is about 1% a year for the principal outstanding of the customer, right? For a period of time, I mean, let's say 2%. 2% will be the cost of that. When I said 3.5% , basically, that calculation comes in because they're not covering 100%. They're covering 72%. Also, there is some time. [crosstalk]
Really do is going to be almost 24 months from now, kind of a thing.
Right. Now, that 2% kind of a cost theoretically can go up if your default rates are, so this is like the one year, and obviously, depending on the default rate, they will reset it as time goes on. That is what it is right now. The first claim, I do not think, will come in till 2026. It is a long game. I mean, it is a long play. I would not, but if I understood your question correctly, I think, are you asking me that am I being too conservative? Did I read your question correctly?
Yes. I understand when the first claim will come in. I am just asking where your rejection rates have gone up. We have gone through nine months of cleansing of the industry, and then we are adding one more layer of insurance. Just wanted to understand.
You're right. You're right. I mean, that is definitely possible that I'm being too pessimistic and everything like that. As I said in my speech also, we are happy to change our strategies, even consider them every month or every week if need be, or every day. Until I'm comfortable, I don't think I—I mean, this is not a casino. I can't take crazy bets. I mean, theoretically, if CGFMU is insuring 72%, I should go nuts, right? Just start lending. I don't think that's how it should work or can work.
Got it. My second question is on MSME. Your AUM last quarter was also around INR 400 crore, and this quarter is at INR 410 crore. You did allude that management bandwidth is towards collection. How should we think? Your GNPA, etc., asset quality numbers are in line. What is happening here? Why are we not stepping up? Is there a concern in this segment also which worries you?
Obviously, MSME credit costs have gone up. Really, you are just dealing with a different subsegment of the same customers. They are cousin brothers only of MFIs, right? It would be surprising if there was no impact. I mean, then that would definitely mean that something is amiss overall. There is just so much pressure in the market that you cannot push disbursements right now. Whatever is happening naturally is happening. The rest of the time, we are concentrating on quality. We're not pushing anything. Let this year end. There is about a month and a half to go. This year has been a wash. I do not think it is probably one of the worst years of my career, to be honest. Let this year get over.
Come April, we'll take a rethink and restock of things, including policies on MSME and everything, and whether we want to push growth or not push growth or whatever it is. I don't think that we are going to achieve much in the next month and a half, even if we change our strategies right now.
Got it. Thank you so much. Best of luck.
[audio distortion]
Thank you. Next question.
We'll take a few more questions.
The next question comes from the line of Srinath V from Bellwether Capital. Please go ahead.
Hi, Aalok. Just wanted to find out how's the experience been in the MSME business? Would it be possible to share X bucket, zero DPD? How has been the credit experience when you're balancing growth as well as collections in this particular product? Because I remember both were being handled by the same person.
Yeah. Last month was 98.8% was zero DPD. Not quite 99% plus, but better than MFI for sure. I think NPAs and stuff look similar, but you have to understand that you cannot just look at NPA. You have to look at NPA along with the impairment cost and provisions and everything. Whatever is written off is not going to come in NPA. By that respect, as Vivek said, in MFI, we have written off about 45, while in MSME, we have written off 5 or 7 crores maybe. I think, Vivek, if you want to share MSME specific numbers, happy to share it.
Generally, Srinath, I mean, in terms of the bar numbers that we were discussing earlier on some of the questions and also in the presentation, the bar 31-90 is about 1.9%, so under 2%.
The NPA for MSME is about close to 3.5%. Overall, comparatively, this risk is lower. If you compare it with what it was last year, obviously, that is a 2.2% NPA has grown to about 3.4% already, and there have been much bigger write-offs that we've seen in MSME and Arman standalone. That is where the stress in the unsecured can be felt in the Arman book as well. On a kind of apple-to-apple comparison, the overall stringent credit process that we followed over the years is, I mean, kind of giving better returns.
Got it. Given that the product has had a little better credit experience, are we looking to kind of what is the growth plan here from, let's say, branch growth perspective, team addition? Because disbursements have growth has kind of flattened out quarter on quarter. Are we looking to take this to INR 100 crore disbursement somewhere mid next year or something like that? Just want to get a broader understanding, Aalok.
We have grown by about 30% on a same quarter previous year to now. Yeah, in the past couple of quarters, it has flattened specifically due to the microfinance stress. I mean, obviously, that has led to rapid rejections.
Rejection would automatically be felt here as well because if, let's say, there is an overlap customer who is defaulted on microfinance loan, obviously.
At some other place.
At some other place, the impact is going to be felt here in terms of the microfinance player.
Yeah. We are definitely not where we should be, even in MSME. I think, honestly, I would have expected sort of a disbursement run rate at this point of being at least around INR 50-60 crore. Clearly, we are not there yet. We are more around INR 40 crore or so. Let's say by first or second quarter, we can reach somewhere in the neighborhood of INR 60-odd crore of disbursement.
This is per month, right?
Sorry?
This is INR 60 crores per month or per quarter?
Per month. Per month.
Got it. Got it.
We are not disbursing branches. We got to keep the OpEx down. Obviously, OpEx has gone up in an effort for this collection. Income is going down. Everything is out of hand. I cannot afford the P&L and my balance sheet cannot afford right now me going crazy and opening branches. As I said, management bandwidth is also stressed trying to deal with these issues. I understand MSME is doing better than micro, but there is, I mean, there is no compound wall also sometimes. I mean, whatever problems MFI is facing, some of it will creep into MSME as well.
Got it. At least it's fair enough to assume that on the way out, probably sometime mid next year, this would be one of the first businesses to start growing, right? Meaning where you go to INR 60 crore a month, so on and so forth. Just fair understanding, right?
Yes, I agree. See, right now, it's very difficult for me to put pressure on anybody to disburse money. Let me be very frank with you. I cannot go to my business head and be like, "Disburse targets, this and that." Whatever is naturally happening is happening. Yes, I call in three times a day about collections. That's for sure.
Got it. Last question is on LAP. How is the pilot in Madhya Pradesh, Telangana? What has been the broad feedback? Again, there, what are our branch growth? How many branches are we in Gujarat, outside Gujarat? What is your broad thinking on putting up new branches? If there was a kind of five per branch kind of vague number in your mind, is that also going to improve? Or largely, are we looking at growth from just a branch perspective, moving away from the slightly more sadder topics to something more interesting? Yeah.
Yeah. Yeah. Thank you. Overall, in MP and Telangana, it's too early. We have just hired our team yet. Telangana, have we disbursed anything in Telangana? [crosstalk]
Twenty-two files. Overall, in micro lab, I think you'll get a better idea. We have not disbursed till Q3. I know that. [audio distortion]
January and stuff, we have started disbursing. We've just hired a new guy who has some experience in secured and LAP loans also. Right now, we are disbursing out of 15 branches, if I'm not mistaken. We'll probably expand that to at least 25 branches by next year.
We've got people and set up there to about 19-odd branches as of December.
Got it. How do you see 12 months out from a, again, what are your broad plans on branch rollout and the team setting up and broader architecture or thought in your mind for that business?
For the micro lab side?
Yes. LAP. Yeah.
We have reached a run rate of around INR 3 crore a month. The target was to reach around INR 5 crore by year-end. Obviously, that did not happen. Overall, the good part about micro LAP is that it does not run down very quickly, right? Because the tenures are longer.
Correct.
While the disbursement run rate, I do not expect it to cross INR 5 crore-INR 7 crore in the coming three-four quarters. The portfolio will increase faster than monthly disbursement run rates because it is longer tenure, obviously.
Perfect.
We have a lab guy there. We have hired people in Telangana, MP. Gujarat is obviously there. I think, as discussing with others also, that probably Gujarat is not the best market for this product. Telangana will be, slightly southern markets are more favorable for this product. MP, again, there is good feedback we are getting for this product as well. This might not be a product for all states because, again, the paperwork and all of those things are very important. While you might find customers who are interested, whether these are mortgageable properties, at least to a reasonable extent, I know that we are not going to get like a 100% executable mortgage or whatever you call it. As long as we can get it to a point where we are comfortable, I'm okay to do it.
A lot of places in rural and in tier four cities will not be there. The paperwork is just not there.
Cool. Thanks. Thanks a lot, guys. I'll get back to the questions too.
Thank you. The next question comes from Anant Mundra from Myt emple Capital. Please go ahead.
Hello. Thank you for the opportunity, sir. What is the provision cover that we carry on our stage two bucket in Namra?
Can you move on to the second question or just pull out this figure?
Sure.
This is cover on stage two bucket. That is 30 to 90.
Yes. Yeah. What I'm trying to basically understand is our current book has reached 98.1-98.2% kind of X bucket collection efficiency. Do we at least make a break even on the current book? Whatever credit cost that has to accrue in future is only mainly going to come from the bucket that has already, like the current stage two bucket. That's what I'm just trying to understand. Is that understanding correct? Do we at least make a break even at 98.1-98.2% current bucket efficiency?
I mean, ballpark, you can make your calculations, but I cannot comment on this. What is the provision cover?
Provision cover is about 42% on the stage two cases.
Okay. All right. Good.
Okay. Okay.
That's the ECL. That's the ECL record. [audio distortion]
Okay. Okay.
Sir, any comments on do we make a break even at least on the current book at a 98.2% kind of a collection efficiency?
Frankly, I don't know. I can do the math, but I'm not sure at this point.
And Vivek?
I'm not too sure whether he got the question right.
He's saying to me, I mean, a lot depends on flow forward rates for other buckets. He's asking at 98.2%. Are we at a break-even stage?
See, there are too many wheels. There is OpEx. There is credit cost. There is lending cost. I'm sorry, borrowing cost. And there is also interest income and many, many factors.
I mean, just to kind of keep it to your question only specifically, 98.2, let's say, is one part of the entire bucket. I mean, this probably might account for 95% of the revenue for me. But then the balance side is equally important. The flow forward, when we talk of the current bucket, it probably has the largest impact. Flow forward that all the buckets are equally important. I mean, if I've written out, let's say, INR 100 crore in the last four quarters, it doesn't mean that I've forgotten about them. I mean, even if, let's say, 3% collection has to happen for them, that's revenue for me. I mean, nobody can.
In two-wheeler, it's like 20-25% zero DPD bucket, right? You collect it by the month end.
If current bucket collection, as Aalok said earlier, also if it kind of is 99%, that's good. Given the situation, that's probably the best thing to have.
Yeah. That's probably as is.
I mean, it's like if you are going to a temple and asking and praying for something, don't ask for a private jet. Ask for something reasonable. So 99, is it amazing? Probably not. But I'll take it at this point. I can manage easily with that.
Got it. Got it. Got it.
Sir, just I missed out. How much are we paying as premium on the CGFMU insurance that we are availing?
1% a year.
1% a year. Got it. Got it. Okay, sir. That's it from my end. Thank you.
Plus GST. I guess 1.2%. Yeah.
Thank you. Ladies and gentlemen, we would take that as our last question for today. I now hand the conference over to Mr. Shreepal Doshi for closing comments.
Thank you, everyone, for being part of the call. Special thanks to the management of the company for giving us the opportunity to host this call. Thank you, sir, and have a good weekend, everyone.
Thank you.
Thank you, everyone.
Thank you.
Thank you. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.