Q4 20/21

Jun 28, 2021

Good day, welcome to the Arman Financial Services Q4 FY21 earnings conference call hosted by Emkay Global Financial Services. We have with us today Mr. Jayendra Patel, Vice Chairman and Managing Director, Mr. Aalok Patel, Joint Managing Director, and Mr. Vivek Modi, Group CFO. 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 0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Jignesh Vyas from Emkay Global Financial Services, here over to you, sir. Thank you, Monica, and good evening, everyone. On behalf of Emkay Global, I would like to thank the management of Arman Financial for allowing us this opportunity. We have with us Mr. Jayendra Patel, Vice Chairman and MD, Mr. Aalok Patel, who is Joint MD, and Mr. Vivek Modi, Group CFO. I'll hand it over to Mr. Aalok Patel, Joint MD, for the opening remarks, and then we can go ahead for question and answer. Over to you, Aalok. Thanks a lot, Jignesh, and hi, and a very good evening to everybody. Thanks for taking the time out of your busy schedule to join us over this call to discuss our financial performance for the 4th quarter and the year ended March FY21. We have issued a detailed press release and an investor presentation for the past quarter. Hopefully, all of you had a chance to review it. If any of you were watching the FM speech just a few minutes back, some big announcements for MFIs with regard to credit guarantee schemes to the MFI customers. A little early to get into the details at this point, but at least I'm glad to see that MFIs are continuing to be recognized as an integral part of the overall financial sector, especially the rural sector of India. Anyway, to start, I hope that all of you and your loved ones are keeping safe and healthy and doing well during these unprecedented times. Despite FY21 starting off on a challenging note for the microfinance industry as a whole due to the pandemic and subsequent lockdowns in the first half of FY21, the company's performance has been more resilient in the second half of FY21. In the final quarter of FY21, it seems repayments and disbursements were both edging towards normalcy. The company enjoyed adequate liquidity and a strong balance sheet position, which makes it well-positioned and agile to achieve growth over the medium to long term. The demand from the market remains strong. We also welcome RBI's announcement to harmonize the regulatory framework for various regulated lenders in the microfinance space, which would stop the regulatory arbitrage amongst the non-NBFC-MFI microfinance practitioners and create a more robust industry to prevent over-leveraging among the microfinance customers. The removal of the pricing caps will allow us to price the product according to risk and competition and also allow us to service previously underserved areas in the underserved districts of India. Now, I will give a brief overview of our financial performance for the fourth quarter and post that touch upon collections, liquidity, and disbursements in a little bit more detail. At the end of the fourth quarter, our consolidated loan book stands at INR 814 crores, lower by 5% year-over-year, as the repayment rates combined with lower disbursements during the year led to a rundown in the loan book. As you all know that being a very conservative lender, we had essentially stopped disbursements during the moratorium period and slowly started disbursements from August. In the microfinance division, we initially focused on renewal loans for our existing customers who had completed their previous loans. From the fourth quarter, we have started servicing new customers as well. In the previous quarters, it was riskier to service new customers as a lot of the credit bureau data was stale. In the two-wheeler and MSME segments, we created more stringent underwriting processes. As a policy, we did not indulge in any top-off loans in any of our products to prevent evergreening of our portfolio and to ensure good credit discipline. Loans with disbursements for the quarter stood at INR 275 crores, up 51% Q-over-Q as compared to the third quarter. The total disbursements for the year was INR 510 crore, 42% lower compared to the previous year for obvious COVID pandemic related reasons. The pace of disbursements again slowed down in the first quarter of FY22 due to the second wave of the pandemic. Disbursement levels are expected to reach pre-COVID levels and even exceed pre-COVID levels in the coming second quarter as the second wave situation seems to be normalizing. The disbursements in the microfinance segment reached a peak of INR 90 crore in March 2021, as a result of branch openings and economic recovery post-COVID lockdowns. The company primarily focused on renewing loans of existing customers and starting to disburse new loans to new customers as well. The MSME segment had reached average disbursements of pre-COVID levels in March, while two-wheeler segment is yet to reach pre-COVID levels. Our microfinance portfolio stood at INR 643 crore, while MSME and two-wheeler portfolio stood at INR 171 crore at the end of Q4. The microfinance portfolio was higher by 4%, and MSME and two-wheeler portfolio combined was lower by 28% YoY respectively. In the urban two-wheeler segment, our performance was impacted by the decline in two-wheeler sales for the last many years, but more severely in the last one year given the challenging macroeconomic environment in the two-wheeler segment. The sales in the two-wheeler industry have yet to recover. However, our pilot two-wheeler rural product has demonstrated a relatively slightly better performance, reporting a year-on-year AUM growth of 4%, despite the disruptions caused by the COVID-19 pandemic. The portfolio has reached about INR 10.1 crore at the end of March 2021, with plans to further expand in this lucrative segment. The two-wheeler rural book now constitutes of approximately 22% of the total two-wheeler portfolio. Gross total income during the quarter declined by 20% YoY to INR 44.3 crores, and net total income during the quarter decreased by 18% YoY to INR 25.1 crores. This is on account of the decline in the average portfolio during the year and also softer yields on post-COVID disbursements. Sorry, average portfolio decline during the quarter. Excuse me. Including the additional provisions recognized during the quarter, cumulative total provisionings at the end of Q4 stood at approximately INR 52 crores at the consolidated level, covering approximately 6.3% of our total loan book. At the standalone level for Namra, cumulative loan provisions stood at INR 33.1 crores at the end of March 2021, covering 5.3% of the total AUM. At the Arman level, the cumulative total provisions stood at INR 18.4 crores, covering 10.8% of the total AUM. Our net profit stood lower at INR 90 lakhs for the fourth quarter. The consolidated profit after tax for FY 2021 stood at INR 10.6 crore compared to INR 41.5 crores the previous year. This is largely due to the increased provisions in relation to numerous factors related to the pandemic, which I'm sure all of you are aware of. Our GNPA and NNPA stood at 4.6% and 0.6% respectively as on March 31st, 2021. Liquidity-wise, we are in a comfortable position right now. As of March 31st, we had cash reserves of approximately INR 132 crores, including the undrawn CC limits. Liquidity position has improved, driven by the pickup in collections and incremental debt capital raised during the year. In the previous quarters, the company had also accelerated repayments of high-cost borrowings and replaced it with lower cost borrowings. To give a little bit more granular breakdown on the collections. In the microfinance segment particularly, the improvement in the collection has been encouraging, as repayment rates have jumped from 91% in December to 92% in January, 94% in February, and 95% in March 2021. However, due to the COVID second wave disruptions, the repayment rates fell to 87% in April and 75% in May 2021. Repayment rates have bounced back quickly in June with easing of lockdown restrictions in most geographies. The collection efficiency in MSME and two-wheeler segment continued to be healthy at 94% in March 2021. The sudden spread of the second wave of COVID-19 pandemic has created a challenging operating environment for us. The collections experienced a temporary decline in Q1 FY 2022, on account of several intermittent lockdowns and restrictions being imposed across various states. The situation impacts the customers' ability to manage their activities as well as our ability to conduct meetings to recover our dues. Based on our month-to-date experience in June, the repayment rate seems to be recovering a lot faster compared to COVID 1.0 lockdowns. COVID 2.0 was unexpected and disappointing in many ways. It is with great sadness that I report that COVID 2.0 resulted in the death of five of our team members and untold numbers of family members of our staff. Overall confirmed infections in our staff members was about 180 people, apart from, again, many hundreds of family members of our team that were impacted. In light of the human tragedy across India, it seems improper and even impolite to discuss the impact on the business. Our business itself is very resilient. As I mentioned, the prepayment recovery has been very steep during June, and we expect it to reach manageable levels starting from July. Disbursements were negatively impacted during Q1 of FY22, and therefore, the volumes will be lower than the approved business plan decided in March. It will be imperative to be extremely cautious in disbursing loans to customers with weak cash flows and having exposure to impacted sectors, which is not always easy to evaluate in the microfinance segment and relies greatly on the judgment of your ground level people. On the flip side, our confidence towards our customers who have managed to remain regular in their payments and have shown greater resilience to withstand downturns during both phases of the pandemic may be able to absorb higher exposures. Significant effort from MFIN has ensured MFIs to be listed as essential services in many states, which helped a great deal in many areas to continue our operations. This also reinforces recognition by the government of the importance of MFIs in enabling financial stability at the bottom of the pyramid. We shall closely evaluate the business impact of ongoing disruptions and derive our experience of FY21 to stabilize our business. We shall evaluate and support our borrowers using various measures available to us. Our strong balance sheet, adequate liquidity and capital, stable credit ratings, and strong relationship with our lenders should enable us to receive continued funding access over the coming months. Further, our demonstrated capability of managing asset quality stress as witnessed multiple times in the past, backed by a resilient business model and coupled with highly experienced and stable management team, should give comfort and confidence to our lenders, investors, and various stakeholders. Finally, to conclude, I would like to express my gratitude to all our stakeholders for their continued support during these very difficult times, and a special note of appreciation for the company's field staff, many who juggled between infection risk and their duties. Now, I would request the operator to open the floor for question and answer session, please. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, hit *1 on the touchtone telephone. If you wish to remove yourself from the question queue, you may press *2. Participants are requested to use headset telephones. Ladies and gentlemen, we will wait for a moment while the question queue assembles. For participants to ask a question, you may press *1 now. The first question is from the line of Sarvesh Gupta from Maximal Capital. Please go ahead. Hi, sir. Thank you for taking the question. The first question is, for the June month, how has been the collection efficiency with respect to microfinance and other divisions? I was anticipating this question to be the first one to be asked, honestly. It has improved quite a bit. From last month in the microfinance segment, it was about 75%. Still another three odd days to go on this month. We are expecting to close the month anywhere between 87%-89% prepayment rate in the microfinance segment, and 90-plus in both the two-wheeler and the MSME segment. Similar to May. You said that you are expecting July to be sort of a normal month, so you are expecting July to be similar to, let's say, a March month? No, it was similar to May. May was only about 75%. This represents almost a 12%-14% increase from the previous month. No, sorry, April, I meant. You're expecting June to be similar to April, right? percentage more than April. Yeah. A quick V-shaped curve as far as recovery is concerned. Frankly speaking, I don't think this time is as bad as last time, given the short nature of the lockdowns. It wasn't on a nationwide level. There were only certain areas that were more locked than others. For example, Maharashtra or Rajasthan, and that too more so in some districts than others. Given the situation, sir, while we have saved a lot of money on the other expenses, so you would expect a lot of that to come back, right? We have saved a lot of money on other expenses than we would. I'm not sure I understand your question. You would expect the cost of income to normalize for most of the part of this year compared to, let's say, FY 2020? Yes. That is at least generally the plan. Let us see how this year progresses. We made a lot of plans only to kind of have it go out of the window. We had pretty large plans and detailed plans for FY 2022. Now, of course, we'll have to go back on the drawing board and work out what FY 2022 will look like. Generally speaking, yes, we expect them to remain in comparison to FY 2020. Sir, on your two-wheeler financing, can you split up the gross NPA for two-wheeler financing? Secondly, what is the expectation going forward? Are you seeing some better indicators on that front? The NPAs in the two-wheeler group is slightly higher. Two-wheeler, Vivek, do you have those figures, the two-wheeler NPA figures? Sure. Two-wheeler NPA is about Sorry to interrupt, Mr. Gupta. Also, there's a slight disturbance coming from your line. Request you to mute your line when the management answers your question. Gross NPA is 8.3%, and net NPA is about 1.9%. I see. Thank you, sir. Thank you. The next question is from the line of Savi Jain from 2Point2 Capital, in coalesce. Yeah. Hi, Aalok. Hey. I just wanted to know, what is your restructured book right now? What percentage of the book is restructured? That's less than to about 3% that will be on the books right now. Yeah. After December, we have not done any restructure. That being said, as long as you brought this topic up, I think there might be some restructures that we do in the form of just plain moratoriums for the people who might have missed April and May's repayments. We might just push the tenure forward by 2 months. These would only be customers who were completely regular on March 31st. Generally, that is the plan, and that is what we discussed during the board meeting. What is the collection on your earlier restructured book? How is the collection doing? Collection went as high as about 40% in March. During May, that number came down to about 7% on the restructured. In June, I would have to look it up, to be honest. I don't have that on top of my head. Okay. As far as the first wave goes, including provisioning and write-offs, I think almost taking more than 9% of the book as provision or write-offs. Is that right? No, I don't think 9%. I think it will be about 6%. Including write-off and provisioning both. Including write-off, yes, you can say that. No, I don't think so, Vivek. I think including write-off and provisioning, it was something like INR 54 crores last year. If I'm getting your question right, the provisioning that is available for the future. Yeah is about 6.3%. Yeah. The write-off that has taken place is approximately INR 16 crores, which will be about 2%, so about 8% maybe. Yeah. That will take care of. You believe there'll be no further requirement, at least for the first wave? Second wave, obviously, we are still probably evaluating. Yeah. It is our belief that that amount was adequate to take care of- Yeah, I think at the beginning of the wave, I think there was a lot of discussion about what will be the credit cost due to this event. At least the industry, a lot of players were saying it will be less than Demonetization, but it seems to be clearly significantly higher than Demonetization. Yeah. Even in your case, I think it is much higher. I think for the record, I've always said. Yeah. No. As I said, other players. As for the second wave, what do you think will be the incremental credit cost? Now that assume that this is over, what do you think can be the credit cost because of this? Yeah. Really, I think it's a very good question. I wouldn't want to comment on it right now. A lot of the things we are seeing is that customers who were facing a problem during 1.0, and after a lot of struggle, we got them into some semblance of normalcy, where they were at least starting to make repayments. Again, these guys have, probably most of them through no fault of their own, have slipped back into kind of overdues then. How that will be managed, converting them again to having some kind of back into repayments. I would hope so. Really, there are too many variables and factors at play. I really won't be able to comment for at least another couple on what the. Yeah. Just to get a sense of the magnitude, it will definitely be much lesser than the first wave, right? The haircut. Yeah. It should be much lesser. Because we are seeing it much better. Very surprisingly, as I said, we expect to end this month at about maybe 87, 88, maybe even if we are lucky, 89%. A very quick recovery. I think during COVID 1.0, when we payments in June, when the lockdowns were over, it started at about 60%, and then it took us. Yeah. It took almost three months, right? 4-5 months to get to 90%. Yeah. This time, hopefully, the way things are, it never dipped to such low levels, and from May to June itself, it should be almost a good U-turn. I'm looking at the April-May numbers significantly better than the industry. Is that because Gujarat was probably much better placed this time around? I'm looking at other players' numbers. It's more in the range of 60%-65% for the April and May. I heard. I don't know which players you are referring to. I think most people were in the early to mid-70s, as far as my market knowledge is concerned. Of course, you probably know and probably track this even more than I do as far as the competitors go. At least the unlisted players and people that I have a regular conversation with, we're probably slightly above average, but not by that big of a margin. Okay. Anyhow, disbursement, what is the status now? Have you resumed or are you still waiting and watching how this will evolve over multiple waves? We are dispersing. You see, there is a different form of strategies you have to use as far as disbursement goes during times like this, that way you don't want to pressure your people, you don't want to give them large targets and things like that. As I said in my speech, it's very imperative that we at least microfinance, there is not a lot of paperwork available to formalize a system about cash flows and things like that. I think it's very imperative that you don't push your people too hard, and you tell them, "Okay, you can do less business, but make sure whatever we are doing is of a higher quality. Emphasis on collection. Much more emphasis on collections also is what we are telling our people, so that gives them a little less time for disbursement. That being said, we are expecting this month around a disbursement of maybe about INR 50 crores in the microfinance book and maybe around INR 12 or INR 13 crores in the other book. Total INR 62-INR 65 crores, somewhere around that neighborhood. Compared to March, that would be about 60%-70%. Not too bad overall, but it'll take us maybe another month or two months to get back on March levels. Okay. even if it obviously, not many people expected the second wave to be of this intensity. will you be now much more conservative, maybe expecting a third wave or something in your disbursement and growth? Well, I think we were already quite conservative to begin with, even post-COVID 1.0. I don't know how much room I have to be even more so. Okay. Factors that I can create in underwriting that my board would accept. The answer is, of course, yes and no. We want to keep your eyes and ears open. In a sense, I don't know if we can continue doing business by keep expecting the third wave and the fourth wave and the fifth wave. We take it on as it comes. You mentioned in your presentation about the declining, you're replacing high-cost liabilities with low cost. What is your cost of funds right now? I wanted to understand the impact of this base rate reduction, that 2.75% base, I think that is applicable now, and because of that, will your NIM decline going forward? Obviously, with the harmonization guidelines, that will be taken care of, but status cannot be notified. Yeah. I think if you notice in our presentation, they have already declined. Our average yields have also declined because of that 2.75%. The good part is that we have managed to offset it partially or mostly by reducing our cost of borrowing. Today, the blended rate is about 12.25% all-in, as far as microfinance. While we are probably not getting the full 10% margin, we'll be closer to over 9.5% or 9.25% or something. Not as bad as a lot of our competition because we have managed reducing the rates. Of course, once the rule is harmonized, I think that will be some much needed breath of comfort to the entire segment because all of a sudden it opens up the industry to price it according to risk and price the product according to competition. Really, that's the way it should have functioned from the very start. You started with the Malegam Committee report almost 10 years ago, in 2011, and everything kind of took a full circle back 10 years later. So- Very well. When do you think this will come into effect? What is the timeline, you think, this will happen? No idea. No idea. Reconsider. Yeah. 3-6 months at a minimum? No idea. No idea, because I think there is no specific guideline in terms of how fast would they want to turn around. Yes, for sure. Do you think players will start again lending at, like you will start lending at 26%-27% and make some really high NIMs and hurry because to compensate for so many bad years that you have had in the last five, six years? Is that where the industry will move, at least on the NBFC-MFI side? The overall expectation is that people will increase their rates to try and offset some of the losses during the COVID era, so to speak. I would hope that we don't go back to the pre-AP kind of situation where people are charging 30%, 32%-plus. That wouldn't happen. There is too much competition right now for that to happen. Earlier on, it was a different story where the industry was one-tenth of its size right now. Anyway, let us see. I think there's a lot of things to consider. It's really now microfinance 3.0. Okay. I think lastly, I just wanted to know, I think you would have just emerged from the first wave, I'm sure, discussing already with funds for an equity raise, and then the second wave hit. Where are we on the fundraise? Are you again starting dialogue? What is your thought there? I would really probably wait till stable enough before going after equity. Right now, we are quite comfortable with capital. The equity raise for most growth funding for FY 2022, thanks to the second wave is just I think not at least for 1 or 2 quarters. Okay. Yeah. Thank you. Yeah. Thank you. Thank you. The next question is from the line of Vishnu from Bellwether Capital. Please go ahead. Hi, Aalok. The MSME business had a very good showing in wave 2 also on collections. Just wanted to kind of understand where we stand on this business. There is significant amount of rejection rates, and it's a kind of labor-heavy model. Given the fact that it continues to show significant better performance, are we looking to scale this to that kind of INR 50-60 crore disbursement per quarter over this year or next year? Just wanted your views on this. See, last time around, Gujarat had that little better performance. This time, the wave 2 seemed to hit most of the western states quite similarly. Would it be fair to say that assessing income is actually showing a better asset quality performance? Yes. I think MSME did record significant better recovery rates compared to MFI, at least in the starting. It somewhat stabilized faster while the MFI repayments were continuing to increase. I think, I believe in March, MFI repayment rates crossed MSME repayment rates. That being said, I think if you compare it from a geographical sense, the difference slightly becomes lower in that case. Because MSME was primarily in Gujarat. If you compared Gujarat MFI versus Gujarat MSME, it was slightly better, but you won't see that significant difference. As far as the growth side in MSME is concerned, I think I've said this, that it takes a special kind of customer. To find a special kind of customer for the MSME, and therefore growth is not as easy, I guess. I don't want to call it easy, but not as difficult as it is in the microfinance segment. We are still committed to it. I always said I was waiting for one downturn to come before I really expand on this segment. There were plans to expand into Rajasthan and further expand into MP during FY 2022. The second wave put a hold on those branch openings, but we have a target to maybe open about 22 odd branches in the current fiscal year in MSME. Yes, I think we should continue the growth in the MSME segment. In the long run, I think even if you look at the new RBI white paper that I was discussing, nowhere in the entire document is the term group loan mentioned. Overall, I think the microfinance segment in the long run is moving towards the more individual side loans rather than the group loans. That's exactly what we are doing in the MSME. We are a little bit ahead than most people there, and we should be able to turn that into our advantage. The MFI individual product would be very similar to the MSME product, firstly, again, when you disintermediate these groups over a period of time, would we do this kind of cash flow analogy? Yeah. Sorry to interrupt, Mr. Srinath. There's a disturbance coming from your line while you're speaking. Requested to mute your phone. Srinath, that is the plan overall, that as time goes on, you'll have to rely more on technology and more on, by microfinance, the JLG model, you could have relied on the group loan, and you could have relied on the smaller ticket size to sort of offset your risk. You'll have to actually go on the ground level and develop some mechanism to evaluate the customers. With this new guideline, the FOIR rule has come up, so you can only give them 50% of their overall monthly income, the household income. Their EMI should not be more than 50% of that. Now they've also put the onus on the boards of the companies to develop strategies for assessing their income level, the household income level. I think over the next couple of years, there's going to be a lot of changes, a lot of innovation, and a lot of exciting new things coming. If it wasn't for COVID, I think. Have you been able to run some sort of pilot, could you share some insights on that? We have already started the pilot in the microfinance side. We already have some 44 odd customers and probably going to increase that by another 100 customers this month. The idea is, in that case, we are trying a cashless model of collections. We are still using the income assessments. For the customers who have been with us for 3 or 4 cycles at least for the last 5-6 years, if they have matured enough to a point where we can assess their incomes a little bit better or at least estimate their income similar to what we are doing for MSME, if they are in an industry that we understand well, then we are dispersing money on an individual basis, on a pilot basis through our MFI segment alone. We are attempting that we recover the money, at least majority of it, through cashless models. Right now we are doing eNACH. We are trying a couple of other things as well, like auto UPIs and things which are coming up. There are numerous different methods to get it on a cashless way. I think pulling it out of their bank account will be better than waiting for them to transfer it, like using the UPI apps and things like that. That being said, I think, the important thing is that they should have money in their bank account. All these cashless models of payment will rely on them having some cash in their bank account, which the rural segment doesn't seem very enthusiastic to give up easily. We'll have to give it time. As per putting the new regulation into perspective, over the next 3 to 5 years, do you see large part of the book migrating to an individual model, given that you anyway have to income assess every loan post-normalizations? Yes, that is correct. That is going to be expensive to do, and that is not going to be 100% scientific because you can only do an estimate of it. There are a lot of things, honestly, that we still haven't figured out, if I'm completely honest with you. We will, and there is enough time to do it. Perfect. Couple of hygiene questions. Just want to understand that the INR 400 crore incremental loan book that we built in MFI, is that showing significant better collections than the stock book? That will be about INR 250 crores. That would be one. Two is, if you could give any regional understanding of collections in day one Maharashtra, collections were significantly lower, and you had said it and given us understanding that, say, 50% Hello? Mr. Srinath, your voice is not audible, sir. Incremental loan book. Yeah. Hello, yeah. On the incremental loan book, how has collections been? Thank you. Okay. On the incremental loan book, they dropped down to, or they were at about 99.8587 in March, so they were performing extremely well. I mean, to that extent, probably better than the pre-COVID scenario. Much better than the pre-COVID scenario also. I think in the month of May, they dropped down to 90%. Right. That was only because most of them we could not collect it. This month has increased again. The last I checked was about a week ago, and I think that was at about 94% level. Hopefully, by the end of the month, we should be back to at least a 98-plus kind of a metric in those loans. I would have to really check the status of those loans, what happened in the last one week. Perfect. Largely the stress is in the stock book and not in the incremental loan book. Is that a fair assessment? It's a fair assessment. As I told a previous participant also, the people who are already facing problems during post-COVID 1.0, and we had finally got their repayment levels high enough where the repayment rate was 95%, those guys have slipped back. How long it will take them to take them back up, that remains to be seen. Aalok, thanks for handholding in such difficult times and patiently answering all the questions. Thanks a lot. I'll get back. Thank you. Thank you. The next question is from the line of Balkrishna Gadodia from Axis Investments. Please go ahead. Good evening, sir. I have a couple of questions. Sir, do you think that your current high interest rate in MSME segment can damage or dampen your long-term growth approach or long-term plan? I mean, they are significantly higher than your peers, right? I don't think in the MSME segment we have a lot of peers. Whichever one we do, our pricing is somewhat similar. Overall, our customers are not very price sensitive. If you look at the last quarter yields also, I think we have reduced the rates in the MSME side. As we have reduced our cost of borrowing, we have passed that along to some of our customers. Reducing rates further is not so much of an issue. As I mentioned, on a pre-COVID level, that was our highest ROA product, and we were very conservative as far as pricing this product for the risk involved or so-called additional risk that we thought we would have to bear. Now on a post-COVID scenario, it's offsetting previous losses faster than, let's say, MFI book. If it's competition that is reducing our growth, I really don't have much of a problem of reducing the MSME rates if it ever needs to be reduced. On a clarification note, are you saying that since this particular segment or ground where you are lending MSME loans, you don't have much competition, so you are trying to reap the benefit considering credit risk as well as limited competition? It's a free enterprise system that we have accepted, sir. If the market demands that we reduce the rate, we will definitely be the first one to reduce the rate. The thing has not reached at that level or that point. We have to look at that level. Whatever that we decide, whatever the quantum that we have decided, we are in a position to disperse as far as MSME is concerned. My collection record is also good in MSME. It's not something that we are collecting the second-class citizens so-called. I don't see any issue as far as reducing the rate is concerned. If in the future it demands, yes, we'll definitely look into it, sir. Okay. My second question is related to your medium-term plan. Where do you see yourself in terms of AUM and all the business segment in next three to five years, sir? No comments on that, sir. We'll have to rework the projections and plans based on the COVID 2.0. Sir, last question. In the long term, do you see or would you like to unlock the value of Namra Finance by listing it? No, we have no plans to dilute at a Namra level. For the foreseeable future, Namra Finance will remain a wholly owned subsidiary of Arman. In that way, it provides the most amount of value and transparency for all of our products, or for both the companies, rather. Right now, it's the only 1 complete pass-through entity, and I think it will just confuse the valuations of both companies if you dilute at the subsidiary level. The entire purpose of creating Namra as a subsidiary was not for any business reason. It was purely for a regulatory perspective. Because RBI came up with a rule that said that if you want to do microfinance, then 85% of the assets had to be in the nature of qualifying microfinance assets. We were essentially forced to demerge it into a wholly owned sub. Otherwise, there was no other good reason to do it. All right. Thank you, sir, and best of luck. Thank you. The next question is from the line of Srishti Gagati from Emkay Global Financial Services. Please go ahead. Hello, good evening, sir. Congratulations on good set of numbers. I am Charlie. This is a bit of a repeat question. Can I get the disbursement numbers for April, May, and June? For three months. Okay. April month we did microfinance INR 38 crores. I think we did MSME about INR 42 crores on a consolidated basis was in April. During the month of May, we did about INR 20 crores. Less than ₹20 crores. Slight less than ₹20 crores. During the month of June, as I said, we are expecting to do somewhere maybe about ₹60, ₹62 crores. All right. Okay. That is well. Sir, just one more question. When you mentioned that you're renewing loans for the existing customers, have these customers fully repaid their previous loans or have they seen any foreclosure of loans? No. Our condition itself is that they should have a clean credit history. Now, they could have been late during that. I think she's talking about the renewal loan. Renewal would be our own customers. That gives us a lot of comfort, and they would have to be completely clean on our books to be eligible. I guess there are no top-up loans or anything like that, or no ever-greenings. They would have to be completely clean. As far as the other customers are concerned, see, there are a lot of customers that had overdues starting in August or in September, or even in October. If the customers had a past overdue, but they have settled that overdue and that customer is clean, so to speak, today, on a case-to-case basis, we will approve that loan, depending on our credit evaluation of the customer. Yes. It's important any overdue amounts as of today. Okay. Thank you, sir. That answers my question. Thanks, and all the best. Thank you, ma'am. The next question is from the line of Abdul Qureshi from New Mercury Capital. Please go ahead. Hi, good evening. Thanks for the opportunity. I would like to know which states were affected much more in wave 2, because as I remember, in wave 1, Maharashtra was much affected, and it has been reflected if I refer to the slide number 35 of the presentation. Our MFI AUM mix has declined in Maharashtra from 21% to 18%. I would like to know whether it was a conscious decision and what we're going to do in further depending upon the repayment rates we have in different states. Thank you, guys. It was definitely a conscious decision. During COVID 2.0, I think your first question was which states were more impacted. Right. During COVID 1.0, I think Maharashtra was probably 1 of the worst impacted. By impact, I don't know the COVID figures, but at least from a repayment standpoint, based on lockdowns and other factors, the repayments were mostly impacted. I don't want to comment on whether they were facing more COVID cases or less, or more deaths or less deaths. To be honest, I don't even know or remember that data. During COVID 2.0, I think 1 of the most stringent lockdowns was probably in Rajasthan, followed by Madhya Pradesh. Certain districts of Madhya Pradesh and certain districts of Maharashtra. Now, I think Maharashtra has been in and out of lockdown for so long that both my staff and the customers are fairly used to it by now, where in life goes on. Yeah, I think that answered. I think Rajasthan was going okay for a while, and then they had a very stringent lockdown starting from the 8th of May. 8th of April, literally from 8th of April. 8th of April, yeah. Sorry. 8th of April. literally for 60 days, Rajasthan was probably on one of the most stringent lockdowns in the last 15 months which the state has seen. Right. Fortunately, our exposure in Rajasthan is in the single digits. Yeah. Okay. Got it. Uttar Pradesh, thankfully, were not very strict this time. Okay. Again, in Rajasthan, just to clarify, I think we're still very young there in terms of our initial stages. We got in there in 2018, 2019 only. I think the bouncing back in Rajasthan is much faster. Correct. Okay. I think there were no. I heard that MSME sector you want to expand in Rajasthan and MP. There are no much impact about collection efficiency in these two states. No. Both of those states have bounced back. I won't call it that they are back to normal, there was a very V-shaped recovery as far as repayments in both those states. We'll see. If there are any individual areas which have not recovered, we might be cautious to open a branch there. Our confidence on the entire state has not wavered in either one of those two states. Okay. Understood, sir. Thank you, and all the best. Thank you. Thank you. The next question is from the line of Dhruvesh from Mirabilis Investments. Please go ahead. I thank for the opportunity. Just one quick question. I wanted to know the lock-in for Elevation Capital. Lock-in period. Lock-in period for Elevation Capital? Yeah. Lock-in period. What? Pardon me. There is no lock-in. What do you mean by lock-in period? They are free to exit. Their lock-in period was 18 months, and I'll have to call my company secretary, so don't quote me on this, but I'm 90% confident it was 18 months. Okay. Which have long passed. There is no lock-in period. Check what it was. Yeah. Okay, sir. Thank you. Thank you. The next question is from the line of Siddharth Bhandari from Highbridge Capital Management. Please go ahead. Yeah. Just a quick question. Assuming that business operations normalize and there's no wave 3, by when do you think you'll be able to comment roughly on what the credit cost impact of wave 2 is? Do you think you'll have visibility by August, or do you think it'll take longer so you'll be able to provide an accurate picture? Well, if you recall in the last COVID, I never really provided an accurate picture even after two, three quarters. I'm not talented enough to give an accurate forecast. I don't know what to say. If the repayment rates recover and bounce back within a couple of months, I can tell you that, okay, this is not going to have any impact. If they don't bounce back, then it will be difficult for me to say whether they'll ever bounce back, not bounce back, whether I'll manage convincing the customers. These are really very unprecedented times. Nobody in my entire management team has any experience dealing with situations like COVID. I don't think any manager does in the entire world. Fairly speaking, I don't know. Maybe we can have a better understanding in the next quarter. Right. Thank you. No, I was not looking for some guidance or explicit numbers. I was just asking when do you expect to have more clarity? Maybe a few months out then it might be the right time to even ask this question. I think if you wait until next quarter, let us see how the repayment rates behave. Right. Got it. And then we'll get to the- This is a resilient industry. As I said. I think one thing we have learned, what Jayendrabhai is also saying, is that the industry and our customers are very resilient. Everybody tends to bounce back. You have the worst kind of predictions and then you wind up getting surprised yourself, right, of the positivity of the entire segment. Money is always green, sir. Yeah. Right. Yeah. Okay, thanks. That was all from my end. Thank you. The next question is from the line of Debashish, an individual investor. Please go ahead. Hi, Anup. I just refer from what you said into the previous question that you're not talented enough to comment. I personally feel you and Jayendrabhai are feet on ground people, and your projections are far better than the industry. For example, when first wave happened, I think the entire industry was saying that credit costs will be less than demand, but you and Jayendrabhai always said that it is not going to be so. This is difficult time for MFI industry and for you. I'm sure this is very frustrating with all these lockdown start, stop. In spite of that, March collection was very good. From that perspective, 94% is good, one of the best in the industry. Now again, second wave has hit. When you feel we'll be back to that 94%-95%? Is July a fair assumption or it'll take more time than that? I think it will take. Couple of months. Yeah maybe August, roughly speaking. Thank you for your compliment. To be fair to others, I don't think anybody expected loan losses to be less than demand. Sometimes what you say is different than what you think. Sure. Anyway. I don't know. Normally speaking, what tends to happen is that when the recovery starts, the first few months they're very quick. Then the last percent or two, you have to struggle month by month. Even if you look at, let's say, January, February, March, to get it from, I think 92% or 93% in January to 95% in March, that was only 2% increase. The amount of change that you can create in terms of percentage basis will keep on becoming difficult as you go through. Right now you target the lowest hanging fruits, right? The people who had no intention not to pay, but you could reach their house. Those are the easiest ones. Then the ones are slightly less impacted by the overall. The last stage will be people whose incomes had been completely disrupted during 1.0, 2.0, everything. You keep in touch with them, you follow up with them, you sympathize with them, you do whatever it takes. Get them to start paying. This is just the nature of the beast. It's just you constantly have to follow up with the customers, and that's all we can do in these cases, right? This is microfinance. There is no collateral, or there is no vehicles to repossess or anything like that. Aalok, from 2015, something or the other keeps happening. It was Demonetization, then IL&FS crisis, then COVID 1.0, 2.0, then there are natural calamities which keep on happening in different geographies with respect to flood or otherwise. There's government intervention which keeps happening, which spoils the credit discipline of a particular state. Given all these, do you think that you need to tweak something in your strategy in terms of, say, new product more on the secured side? Three years back, you had talked about housing loan, which you are trying to prototype that. In terms of penetration strategy with respect to geography, do you think you need to think through some tweak in strategy? No, I do agree with you, Debashish, that we've had our fair share of unexpected calamities in the form of Demonetization and COVID both, and that too in a back-to-back succession. Two things. That is exclusive to the microfinance industry. I think barring maybe 10% of the industry, probably 90% of the industry faced some problem or other during Demonetization and COVID. As far as natural disasters, if you are large enough and spread over a large enough geography, natural disasters happen all the time. There's always too much rain or too little rain somewhere or other that we operate even during the best years. We were more than capable of dealing with it because it was isolated in certain branches or in certain districts. It was never a nationwide thing. Having those kinds of things are really priced into our product only that every once in a while there'll be some natural disaster or other in some isolated area. As far as government intervention goes, it's a two-edged sword, right? There are good interventions and bad interventions. We've had our fair share of good interventions in the past few months. Assam was going to blow out, and there was positive news there. Of course, we are not in Assam, so it doesn't impact us, but at least for the Assam players, it was good news. This new RBI white paper that has come out is very good news, I think. I think it would be a game changer for industry as a whole. I was mentioning in my comments that the finance minister just made a credit guarantee scheme announcement exclusively for the NBFC MFIs. All in all, I think it's a two-edged sword. Overall, as far as the central government is concerned, and most of the state governments, I don't foresee much of an issue because while there was during AP crisis, I think most of the people understand that we are an integral part of the overall lending business, overall financial inclusion business. Now you find local-level corporators and those kinds of guys creating issues all the time. Again, these are isolated incidences on a normal year. Yeah, I guess that sword always remains hanging. There is something very serious passed in terms of recognition from the central government that could have a very material negative impact on us. I don't know exactly how to offset that risk. That can happen in any industry, right? Even in a gold loan, they can be like, well, you can charge more than a certain amount of interest. That could happen to any industry. My last question, Aalok, is it's very difficult to get a sector and company consistently delivering a 25%-30% ROE, okay? There's a huge headroom for growth. You have been delivering 25%-30% ROE for a very long period consistently, and there's headroom of growth where you're not penetrated in most of the states. When you expect, and now given some support is also coming with the RBI new regulation or today what the finance minister has said on INR 7,500 crore guarantee cover. When you feel that you will be able to hit that 25%, 20% ROE? Is it a couple of years away or is it much before? I think we should be back on track by FY 2023, I would hope. I would have assumed that we'll be back on track by the second half or the last quarter of FY 2022 itself. That was the original plan. Now with COVID 2.0, I'm not exactly sure, definitely by FY 2023. I don't expect this to be a huge disaster. Now that we've gone through COVID 1.0, we kind of know what to expect. Earlier, the expectation was very abstract because, again, you didn't know what to expect. Today, we have a better idea of what to do exactly, and if certain customers in certain areas are behaving in such a way. What exactly worked last time, didn't work last time. We have a lot of knowledge at our disposal. As far as ROEs and things are concerned, we've had our fair share of good years, and we've had our fair share of bad years as well. Luckily, none of them were, I would like to think, were our fault. That's anybody's opinion, I guess. I'm not exactly sure how to answer it. Basically, it's very easy to get impatient in this business. I think we experienced some level of impatience last year, and we had pretty good, pretty solid targets set for FY 2022. In relation to that, we opened up some 20-odd branches in microfinance in March month alone. I think we were planning to disperse somewhere between about INR 1,200 crore of disbursements is what we were planning in microfinance alone. Best-laid plans sometimes don't work out, and nobody expected COVID 1.0, nobody expected COVID 2.0, and now everybody's expecting 3.0 and hope it never happens. Just to add to what Aalok just said, the uncertainties around this make it even difficult to immediately commit to the original plan. Let's say if you have a setback because of your own faults or something going wrong, then maybe you can course correct. Yeah. Here, there's nothing that has gone wrong in terms of how we would foresee the future, without a COVID 2.0. I think you have a point. I think patience is the key word here. If I can add a few lines because of my age, would be this, that one thing that you remains committed is not because of these natural disasters and the government poking their noses into it, but because of the trust that you can repose in this kind of people. I have dealt with millionaires, and I have dealt with so many HNIs, but these are the people that I deal with. These are the people who have taken money from you, and they believe in paying you back. COVID 1.0 or 2.0, yes, they might put you a few months behind, but their intentions are not bad, and that's what keeps you going. These people believe, they believe, "I have taken the money, so I will have to pay it back." That's all there is to it. Yeah. I know that's well said. I think most of these people are not willful defaulters. They have genuine issues. It sucks that they're not repaying you back, but at least you can sympathize with them. As a business owner and people who deals with the bottom of the pyramid, I think it's very important to maintain that trust and that sympathy towards them, rather than making it all about dollars and cents. Along with what you said, if you're driving a car, impatient to reach your destination, but you're driving in a fog right now, and it's always dangerous to accelerate. There might not be a truck in front of you, but there might be. Do you want to take that risk? I, for one, don't want to. Let's go a little slow. I think in the grand scheme of things, a few quarters here and there don't matter too much. That's true. Thank you, and all the best, Aalok. Thank you. Thank you. The last question is from the line of Parth from Prudent Broking Services. Please go ahead. Hi, sir. Sir, I wanted to understand the MSME vertical a bit better. I have three questions on this part. What's the difference between a microfinance and an MSME client? Second being, what's the difference in credit appraisal process between a microfinance and MSME client? Third, what are the rejection rates in this vertical? Thank you. The first question is, typically speaking, microfinance loans are lower in ticket. They are backed by joint liability. Usually speaking, in microfinance, you're lending to a woman borrower to supplement the household income. In the MSME segment, usually it can be male or female. There is no joint liability, and the ticket sizes are slightly higher than microfinance, but not by a huge margin. However, they're still not large enough to have it be secured. Primarily speaking, these guys are involved in whatever activity we are lending them money for, that's usually their full-time job or their primary source of revenue. In our case, our MSME loans range from INR 50,000 to about INR 2 lakhs. Average is only about INR 70,000. In the microfinance, the average will be about INR 30,000. We are trying to cover different slices of the pyramid. While the microfinance might be the bottom of the pyramid, our MSME can be more aptly called microenterprise loans, which is tailored to the rural segment, and that is supposedly 1 step above the very bottom of the pyramid. As far as the credit appraisal, I think we are at about 20 minutes over. Maybe you can call the investor relation people because this will take a little bit longer to explain the differences. The rejection rates have varied very significantly pre- and post-COVID. I think, overall, on a pre-COVID level, the microfinance rejection rates were about 40%-50%. Right now, they're about 65%. The line for the management is disconnected. Kindly stay on line till I reconnect them. Ladies and gentlemen, we have the management line reconnected to the call. Thank you. Over to you, sir. Apologize everyone. I think we got disconnected. I was saying the rejection rate varies widely. Currently speaking, the rejection rates are very high. Microfinance, they are close to about 65%, and in the MSME side, it is about 70%-75%. A lot of rejections are happening due to the credit bureaus, customer showing as overdue, et cetera. I think we have time maybe for one more question, and then, unfortunately, I have to leave someplace. All of us have to. Okay, sir. Thank you. Yes. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments. I think I keep forgetting to write closing comments, but thanks everyone for joining. Take care of yourselves and we'll see you, I guess, this time a lot sooner. This time it got delayed by a month. This time it got delayed by a month. Thanks everyone for your participation, and our apologies that this ran a little bit longer. If anybody has a serious question. Yeah they can call directly. Yeah. I think we have investor relation people. Their contact information is in our press releases and stuff. You can always shoot them a question, and one of our team members will be happy to answer it. Thank you, guys. Thank you. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.