Good day, ladies and gentlemen, and a very warm welcome to the Arman Financial Services Q1 FY 2022 earnings conference call hosted by Emkay Global Financial Services. We have with us today on the call 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 then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Jignesh Shah from Emkay Global. Thank you. Over to you, sir.
Yeah. Thanks, and good evening, everyone. On behalf of MS Global, I would like to welcome the management of Arman Financial. I shall now hand over the call to Aalok Patel for his opening remarks. Over to you, Aalok.
Thank you, Jignesh, and good evening to everyone as always. Thank you for taking the time out of your schedule to join us for this call and to discuss our financial performance for the first quarter of fiscal 2022. We have issued a detailed press release and an investor presentation for the quarter, and hope all of you had a chance to review it. Before I start with the usual agenda about the business during the last quarter and the financial performance, I think it's important to mention how challenging the past quarter was, as I'm sure most of you will be aware. The number and the severity of the COVID infections, especially in the rural areas this time, was very high, and so were the fatalities.
It is with great sadness I have the duty to report that we have lost five members of our team so far due to COVID, of which four passed away during the second wave. Overall confirmed infections in our staff were more than 140 people, or almost 8% of our staff, plus uncounted number of family members and unconfirmed cases. The death of any team member is obviously a gut-wrenching tragedy. However, many of our team members were taken during the prime of their youth, and so were our customers. I know most of the people listening to this call would have had close friends and family that would have been infected, hospitalized, or in the worst case, passed away. Q1 of 2020 last year was mostly about the lockdowns and the loss of income. The second wave really hit home for most of us.
Before we get into the numbers, just imagine for a minute what Q1 of 2021 would have been like for an average microfinance customers. No resources, minimum knowledge, lack of infrastructure, lack of access to medical care, loss of income, and the list can go on and on. Many of you have logged on today to listen to me talk about repayment rates, NPAs, and other factors, which is completely fair. However, I ask you to keep what I said in the back of your head when you contemplate and hopefully sympathize with rural India and what a tough situation they have had to go through in the past 15-18 months.
Even during the worst month of the crisis, the resilience of our customers was showcased when three-quarters of our customers chose to pay their EMIs, when nobody would have blamed them if they asked for a repayment holiday. The disruption caused by COVID second wave lasted around eight weeks. During this time, our collection efficiency was impacted on two grounds. One, it was difficult for our executives to reach the customers due to the lockdowns, and second, due to the financial strain that the customers were going through on the back of closures of their business and in some cases, impact on their or their family's health. Moreover, we cautiously kept the disbursements low and mostly serviced our renewal clients if they were accessible.
However, the situation on the ground seems to have improved and somewhat normalized now with unlocking in most of the geographies, which is also getting reflected in the bounce back in the collections and the disbursements. I will now give a brief overview of our financial performance for the first quarter, and post that touch upon liquidity, disbursements, and collections in more details. Coming to the brief overview of our financial performance for the quarter. At the end of the fourth quarter, our consolidated loan book stands at INR 785 crores, lower by 5% year-on-year, as disbursements fluctuated during the year due to the ongoing COVID crisis, especially during the Q1 FY 2022 due to the COVID second wave. As far as the segmental AUM, our microfinance AUM stood at INR 631 crores, marginally higher by 4% year-on-year.
Our MSME AUM stood at INR 113 crores, while our two-wheeler stands at INR 41 crores. The two-wheeler division has seen the sharpest decline in AUM given the challenging economic environment and the lack of sales during the year, along with a healthy repayment rate. Gross total income during the quarter stood at INR 50 crores at consolidated level, while microfinance increased by 12% year-on-year to INR 37 crores due to higher average AUM. Similarly, our net total income during the quarter increased by 10% year-on-year at INR 30 crores, aided by lower cost of funds. Including the additional provisions recognized during the first quarter, cumulative total provisions at the end of Q1 stood at almost INR 56 crores at a consolidated level, covering approximately 7.1% of the total book AUM. At the standalone level, cumulative total provisions stood at INR 20 crores, covering 12.6% of the total AUM.
While in microfinance, cumulative provisions stood at INR 36 crore, covering 5.8% of the total AUM. Our net profit stood at INR 3.6 crore, lower mostly due to the higher provisionings and write-off cost. Consolidated GNPA stood at 5.7%, NNPA stood at 1.4% for June 2021. The company provided repayment holiday between one and three months to March 2021, level 1 standard customers in the microfinance loan book. These customer tenures were pushed forward between one and three months. Approximately 70,000 customers were eligible for this scheme, with about 40% of them with one EMI deferred forward and 30% each with two EMIs or three EMIs deferred forward, respectively. There were no repayment holidays provided for MSME or two-wheeler customers. The disbursement and collections, which were edging towards normalcy in Q4 of FY 2021, were again disrupted due to the second wave.
Disbursement during Q1 FY 2022 stood at INR 122 crore. This was lower than our projections by at least INR 100 crores. However, given the situation on the ground and difficulty in even accessing the customers, much less evaluating them, the overall disbursements exceeded expectations. The total MSME and two-wheeler disbursements in Q1 were INR 16 crores and INR 7 crores respectively, while microfinance disbursement stood at INR 99 crores. Our focus was to concentrate on renewal loans of existing customers. Liquidity-wise, the company has a healthy liquidity position with more than INR 100 crores in cash and undrawn CC limits. ALM continues to remain positive, and the company continues to have access to new sources of funds. Additionally, the company has INR 55 crores of undrawn sanctions from existing lenders. The company has repaid all of its debt obligations that were due in Q1 FY 2022.
The debt equity ratio stood at 3.64x, and the shareholders' equity stood at about INR 190 crore as on 30th June 2021. Coming to collections, consolidated collection efficiency that saw a normalizing trend during the fourth quarter of FY 2021 again saw a dip in the months of April and May to 88% and 78% respectively, due to the reasons discussed above. The collection efficiency somewhat improved and bounced back during the month of June and July to 89% and 90% respectively. Collection efficiency for two-wheeler and MSME portfolio remains robust at 90% and 93% respectively in the month of June, and 94% and 95% respectively in the month of July. The sharp increase in the collection efficiency in the Microfinance segment is encouraging, where repayment rates reached 88% in June from a dip of 75% in May 2021.
As I have mentioned previously, the segment that we service is very resilient and has a tendency to bounce back quickly. I'm happy to report that the post-COVID disbursements have bounced back to 99%+ repayment rates as of July. To sum up, I would like to say that we are cautiously optimistic, satisfied with how we have handled the past 18 months. While we hope for the best, we are always prepared for the worst. Barring a really bad third wave, Excuse me. It is very likely that the worst is behind us. The future looks bright with the new RBI white paper that deregulates the NBFC MFIs and puts them on a level playing field with other practitioners. If you haven't done so already, I would urge you to go through it if you follow the MFI space closely.
Finally, as always, I would like to conclude by expressing my deep gratitude to all of our stakeholders for their continued support during these very difficult times, and a special note of appreciation to the company's field staff, who juggle between infection rates, risk, and their duties. Now I request the operator to open the floor for the Q&A session.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone 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 the question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from the line of Anand Bhavnani from White Oak Capital. Please go ahead.
Thank you for the opportunity. Two questions, Aalok. First is on collections. On the slide, the numbers that are given, collection queue. This would not include the clients who have been given a holiday, right?
No, these would include. We gave an apples to apples comparison. I'm sorry, we should have mentioned that with an asterisk somewhere. The repayment rate ignores the repayment holidays.
Okay.
You have to read them as no repayment holiday was given.
Okay. Secondly, if I see provision-wise, cumulative provisions for Namra are 5.8, whereas for standalone it is 12.6. If I look at this provision cover and juxtapose it to the collection efficiency. Collection efficiency is actually a bit inferior for microfinance, whereas it is relatively better for MSME and two-wheeler. Shouldn't you be having more provision for the micro?
I think last year we took as many provisions as we could in all the divisions. Overall, the microfinance AUM has increased quite a bit in Q3 and Q4 of last year.
Okay.
Whereas there was a little bit of a decline in the MSME portfolio during Q1. That is one reason. The other reason also is that we have done a lot of write-offs also in the microfinance. I think you'll have to take both the provisions and the write-off numbers and kind of stabilize it with the overall movement of the portfolio as well. Overall, we have taken as much as we can pretty much, just in anticipation of COVID, whatever losses that may come.
You don't see any special additional provision needed in rest of the quarter going forward?
It's unlikely we'll need any other provisions going forward as far as Arman, because as far as the MSME and the two-wheeler portfolio. Micro, it remains to be seen, so we'll need a little bit more time and maybe another quarter's worth of provision might be required.
Thank you, Aalok. I'll come back to you.
Thank you.
A reminder to the participants, anyone who wishes to ask a question, then please press star and one at this time. Next question is from the line of Amit Mantri from 2Point2 Capital. Please go ahead.
Hi, Aalok.
Hi. What's up?
Yeah. First of all, my condolences for the loss of your teammates. I'm sure the company is doing its best to support their families through this tough period.
Thank you, sir. It was a rough time for everybody, I think.
Yeah.
Family and business-wise. At least we are a bit far away from it now. Hopefully, it doesn't come back as bad during the third wave, if it does come.
Yeah, I hope so it doesn't come. Let's just pray for that. In terms of the business, which geographies were impacted more? Is it all the same geographies as earlier with Maharashtra lagging behind?
Right now, if I were to rank as far as repayment rates goes, the first one would be UP, followed by Gujarat. A little bit reversal there. Earlier it was Gujarat was at the number one spot. Now it is UP, followed by Gujarat. It would be Rajasthan. No, I am sorry, Haryana would be the number one.
I mean, Haryana is 100%.
Haryana is 100%.
Two quarters ago.
You're right. It would be Haryana, U.P., Gujarat, followed by Rajasthan, M.P. and Maharashtra at last place. I think the biggest hits we took was in Rajasthan and in M.P., where Rajasthan was performing very well, I think they had a very stringent lockdown, where we could not go and collect the money and incomes and everything was disrupted. Now it's coming a little bit back to normal. M.P. also saw kind of a larger hit. Maharashtra dipped down, now it has gone back to what it was pretty much barring the few percentages.
Okay. In terms of disbursement, so has that also picked up in July? How much was the disbursement that you did in July?
July we did about INR 75 crores in microfinance. I believe, INR 10 odd crores in MSME.
INR 3.5 crores
INR 3.5 crores in two-wheeler. Very close, picked up quite a bit. To give you an idea, I think, in March month, micro was INR 75 crores. I'm sorry, excuse me, INR 85 crores. If I remember correctly, MSME was about INR 14 crores and two-wheeler was.
It was about three.
about INR 3 crores.
Disbursement will also normalize it looks like.
Disbursement is, yes. I think that is picking up fine. It's just we are now concentrating on the repayment as far as the field is concerned. Otherwise, we can push it further. There is plenty of demand in the market for funds.
This will be the continuing to be the run rate or will you further increase it from here?
No, I think it will probably go up in August. There are a lot of holidays in August. I think we are expecting to go between INR 80 crores and INR 85 crores in Micro this month, and about INR 12 crores-INR 13 crores in MSME and two-wheeler, we are expecting about INR 4 crores, INR 4.5 crores.
In a way, kind of reach a century this month.
Yeah.
Your MFI yield has increased in this quarter. How has that happened? Wasn't yield expected to come down due to decline in base rate to 8%?
No. I don't think the yield has increased, but I think what you are seeing is if you are comparing it to the last quarter, I believe there were a lot of reversals.
Because of write-offs.
because of write-offs and interest reversals. Overall, I think the average portfolio has increased.
Aalok, last quarter that means the quarter four, the average AUM was about INR 590 crores, while the average AUM in quarter one has turned out to be about INR 640 crores.
There's always a timing difference also, so that is there. Whatever we disbursed in February and March, their first EMIs don't come due until.
April and May.
April and May. There's always a little bit of a timing difference between the portfolio and if you are increasing or decreasing the disbursement by a huge amount, there's a little bit of a lag interest between interest and the AUM.
What will be the boarding yield typically? Would it be 22%-23% boarding yield?
What do you mean? What is boarding yield?
On paper, what is the yield?
Yeah, it's about 22% plus 1% processing fee.
Okay.
New portfolio is as to that, but we continue to have about 40%, which is about 24.
24+.
Yes.
Got it. Okay. That's it. Thanks a lot.
Sure.
Before we take the next question, we would like to remind participants that you may press star and one to ask a question. The next question is from the line of [Urmi Jain] from Frequent Investment. Please go ahead.
Thank you so much, sir, for the opportunity. Sir, how is the demand for two-wheeler loans right now? How is the collection efficiency in August till now? How do you see the trend going ahead?
As far as the demand for two-wheelers, it's picking up. Personally, I'm not an expert on two-wheelers. I can have my other people look into it. Last month was about INR 3.5 odd crores, which was the highest we've done since-
The COVID hit us.
-the COVID 1.0. This month, I believe we are expecting to do about 800 vehicles.
Yeah.
That should be just about INR 4-5 crores, somewhere close to INR 5 crores. It's definitely picking up. I don't think it's nowhere close to what it was pre-COVID, but the demand has started returning. As far as exact percentages you'll have to excuse me, I don't have them with me. At least from our experience, things are picking up.
If you could also throw some light on the ground situation currently in all the three segments, the MSME, two-wheeler and the microfinance.
The ground situation. You had asked about the repayment. The month of August is obviously better than the month of July, and July was better than June. We are improving, but it's not very large. I think if you notice between the month of June and July, there was about a couple of percentage difference. We are expecting something similar in the month of August. I don't think that we are expecting to go to March levels or anything like that in August. That will still take a couple of months. There is an improvement, at least by a couple percentage points so far.
Thank you so much, sir. That's it from my side.
Sure.
Thank you. The next question is from the line of Balkrushna Vaghasia from Axanoun Investment. Please go ahead.
Good evening, sir. In the last annual report and your last couple of conference call, you were mentioning about the collection mechanism. You are trying to modify the collection mechanism which has hybrid manual as well as digital portion. Have you made any progress on that front?
Not a very lot of progress. I think what I like to say is that we are future ready. In that sense our systems are in place. We have given unique QR codes to all of our customers. We have several tie-ups with all these merchants and different payment banks. It seems that our customers still prefer, largely speaking, to pay via cash. I think it's going to be a slow burn. I don't think that this is going to happen over a period of months or quarters. I think unless something very drastically changes on the ground level, I think it will still take a while. I don't know how long. No, I guess long story short, we have not made much of a progress there.
Largely also, the ecosystem is still cash in the rural India. If the ecosystem is cash-driven, we really can't expect our borrowers to go digital completely. We can't directly change their behaviors because the entire system needs to kind of move towards digital, not our only pushing will not change them.
Correct. Well, it has to be convenient for them, right? I think you can have all the mechanisms in play. You can do UPI and Paytm and Google Pay and there are countless solutions today. The fact of the matter is that it was exponentially easier to convert our disbursement into completely cashless because until the money was disbursed, the power was all on this side, right? It was all on the company's side. If you told the customer you'd have to open a bank account to get a loan, they'll do it. What typically happens is as soon as you disburse the money, within one or two days, the amount is withdrawn in cash by the customer. Now, the power has shifted towards the customer when I need to collect the installment. That will be a lot harder to convert.
See, in the case of disbursement, they only need to go to the bank once to withdraw the money. In the case of repayments, they need to go to the bank at least once a month or 24 times to deposit the money. Because frankly speaking, all of these mechanisms, whether you talk about UPI or whatever platform there is to repay the money, at the end of the day, you need to have money in the bank account. Everything is connected to your bank account. I don't think it's going to shift until it becomes more convenient for them to keep their money in their bank versus keeping it in cash.
Right. My next question is related to the same matter. If we assume that okay, over a period of time, the digitization in the rural area will also increase, as the education level also increases. Would that scenario threaten our business model? Because as the digitization and access to technology increases in rural area, banks and other more sophisticated players which have access to lower cost of funds, they would be able to lend in the rural area. I mean, would that threaten to us in the long term?
No, I don't think so because I think if you look at MFIs, we are very adaptable. I think if our customers are ready to shift their focus into a digital mode of payments, I am ready to service them. In fact, today, that would be preferable for me. Instead of having a 2,000-person team, I can make do with probably half of that. I mean, I'm just kind of throwing numbers in the air, but it takes a lot of operations to collect on a cash mode. I would be the happiest person to service my customer on a cashless mode. There is just one thing which we'll have to worry about is that high-touch model. One of the reasons why the customers have a very good repayment rate barring stuff like COVID is what I feel is that high-touch model where you are not a faceless corporation.
You are meeting with them at least once a month or twice a month. That might be one of the disadvantages, but otherwise, there are plenty of advantages. My operating cost will reduce. The customers' interest rates can reduce. Overall, I think if the customers are ready, we'll be ready. I don't see a threat coming externally.
Okay. My last question is related to the collection efficiency of pre-COVID and post-COVID loan book. I mean, do you have any bifurcation on that front, or do you see any difference in the collection efficiency of pre-COVID loan book and post-COVID loan book? When I say pre-COVID, I mean the loan book which originated before the first wave.
I mean, I don't have a bifurcation, but all I can say is that the loan that was originated post-COVID, that repayment rate went down to about 90% during the month of May. In June, that went up to 98%, and in July, it's 99% plus. We are almost back to normal in that book.
All right. Thank you so much. Good luck.
Thank you.
Thank you. The next question is from the line of Rajesh Kumar from Share Giant. Please go ahead.
Hi, sir. Good afternoon, sir, and thank you for giving me opportunity to ask the question. Pardon for my ignorance if you have already answered this. I wanted to know, like, sir, do we see the mix changing between the MSME microfinance and two-wheelers over the longer run, sir?
Do we see what? I'm sorry.
The business mix changing between the various segments of MSME.
That's an excellent question. Not in the short term.
Sure.
In the medium to long term, yes. My personal opinion is that the customers are already starting to prefer or already starting to demand on the individual higher ticket, higher underwriting kind of loans, which is why we created the MSME to begin with. I believe in the long run, the individual loans, which is what we are doing under MSME, will start having more weightage in the overall book. Might be a few years away, though, at least two, three years away.
Okay, sir. That's good, sir. Sir, also wanted to check, we have seen a very good recovery in terms of collections. How do you see the trend going forward? Because till July there has been good recovery. August, how has it been fared, and what is your outlook in the next quarter, sir?
I wouldn't call the recovery good per se. It has recovered well. The collection efficiency, what had reached about 94%, 95% in March, I was hoping by this time we would reach like 97%, 98%. 98-plus would be a good repayment rate. It would be kind of a pre-COVID repayment rate. I think what I had said basically to everybody pre-COVID, or I'm sorry, pre-second wave, was that we wanted to forget about COVID and just move on from April 1st. Unfortunately, that did not happen. I would not say we are back to square one, but we definitely took a few steps forward and then took a couple of steps back. That has been kind of the theme of this entire COVID to begin with. Q2, I think July, August have started well. September will be even better.
I think by the end of Q3, we should be back to at least-
March 2021 levels.
March 2021 levels, assuming that there's a good season, Diwali season and stuff. Yeah, it will take maybe a quarter and a half, roughly speaking.
Okay, sir. Sir, on your growth expectations, considering the COVID disruptions and all, how do you see the growth in AUM panning out in FY 2022 and FY 2023?
Frankly, I've been so busy with recovery. Of course, we have projections and everything in place. Earlier target was to reach somewhere around INR 1,200 crores. We'll definitely cross INR 1,000 crores. I don't have a doubt about that, barring any kind of third wave or any kind of other disruptions. That is always going to be my disclaimer now any time somebody asks me about anything forward-looking. I don't know. The AUM will have a healthy growth, maybe start 10%, 15%, 20% easily. I don't think that will be a problem, but don't hold me to it. Let us see how the next couple of months go.
Okay. Sir, our provisions front. Do you see the burst of provisioning to be behind us and now we should see better days ahead?
The burst itself has lost a lot of meaning in it. The moment we talk of burst, I think we're surprised by the next new one.
Yeah.
The new burst. I think my answer is the same as I gave it to the previous gentleman, that I think that there's probably more than sufficient provisions at the parent Arman level for MSME and two-wheeler. I believe there is at least one more quarter of provisioning which we'll need for the micro side, at least. I think that's my answer without getting into too many other details.
Okay, sir. Sir, one just last follow-up question. On the rural front, the second wave has created more challenges compared to the first wave. Your business model is very much tilted toward that side. Hence, wanted to see your view, sir. Do you see this setback in rural to have any kind of permanent impact there? Slowly, once the COVID situation gets normalized, they will get back to the same situation as earlier? Any change in the strategy or the plans of the company to tackle any impact on rural due to rural like, I mean, per capita income or something which might be impacting the COVID to them, because this time the disruption is more towards the unorganized sector and the lower-income group side.
Any change in strategy and how company plans to go ahead with the future growth prospect and considering these factors in mind, sir?
We are definitely rural focused. Primarily, most of our portfolio is in the rural segment. I think I said it earlier that, yes, the rural segment is sensitive to, I mean, everybody is sensitive to stuff like COVID. I don't want to say if they are more sensitive or less sensitive. Overall, I believe that the rural segment fared better during the last FY 2021 lockdowns, at least. I don't want to call it a first wave because it really wasn't a first wave. It was more disruptions related to loss of income due to the extended lockdowns. I think that the rural fared better than urban. As far as this time is concerned, I think urban probably fared better than the rural. I'm in Ahmedabad. I can provide a context of where I see and where I live.
I know a lot of people will be joining in Mumbai and say that, "Oh my God, what is he talking about? That's not true at all." On average, I think the urban fared better than rural this time speaking. As far as our strategy, I did say that we'll probably be in the coming medium to long-term, be concentrating more on the Not more, but giving more weightage towards the individual loan side and the sort of the higher ticket, higher underwriting kind of loan product. We are still rural-focused. I think largely speaking, after seeing a lot of ups and downs in the last 10 years or the last 11 years for me personally, these customers are very resilient. They tend to bounce back very quickly. As quickly as they get into trouble, they get out of it as well.
I'm not too worried about the long-term permanent damage to the rural economy. I think that these guys are much more resilient than we urban dwellers are in general because they are used to dealing with such kind of situation very often.
Okay, sir. Thank you, sir. Thank you for giving me the opportunity to ask the question. Thanks for your all the free-flowing answers to it, sir. Thanks.
No problem. Thank you.
Thank you. The next question is from the line of Harish Shah from HS Capital. Please go ahead.
Thanks for the opportunity. I have some questions. My first question is with regards to what would be your average ticket size looking like now across all segments?
The average ticket size in the microfinance side would have increased to about INR 30-
35,000.
INR 33,000-INR 35,000. Now, there are two reasons for that. One is, yes, the ticket sizes for our renewal customers have increased to a small extent. The second side is also that if you look at throughout last year, most of the year we were concentrating on renewal loans only. Those come in at a higher ticket size to begin with. In the MSME segment, it has remained somewhat consistent between INR 70,000-INR 75,000. The two-wheeler, we haven't done a lot of business in two-wheeler, but what we have done has been slightly higher.
The inflation.
Yeah. Obviously.
The BS VI-
BS VI and ABS and the insurance and all of that other stuff. That has caused the price of the two-wheeler to increase drastically in the last 2- 3 years. It went from a five-figure to a six-figure thing for even normal motorcycles now. That ticket size is, Vivek, what?
That's for INR 55,000.
INR 55,000-INR 60,000.
It used to be about 48.
Right.
Okay. In terms of expansion, what are our CapEx plans? For example, opening of new branches or expanding into new geographies. If you can share some details about that would be helpful.
The good news is we are already done with that. In anticipation of all this amazing growth we were expecting starting from April 1st, primarily we opened a lot of branches in Haryana and in Rajasthan. About 30-odd branches against the planned branch opening of about 40-45. Almost we are about two-thirds to three-quarters of the way done. Post the second wave, I have put a hold on any branch openings. I think right now is not the time. I mean, you can only concentrate on so many things, right? I don't think that I want to thin out my operational upper and middle management people to concentrate on branch openings when they should be concentrating on getting back to normal as far as repayments and disbursements are concerned.
The balance 10-15 branches, we'll think about opening them in the next quarter, the third quarter. Right now, I'm not planning to do anything. In the MSME side, yes, we do have a plan to open about 10-15 branches. We have started slowly opening branches this quarter. I think we have opened up about three branches this month itself. We'll probably be done before Diwali for sure with our MSME branch expansion.
MSME, we are taking the footprint into Rajasthan as well.
Yes. Thank you. As Vivek mentioned, in Maharashtra, we only have a couple of branches, and we've kind of put a hold on the Maharashtra expansion for MSME. Instead, we are venturing into Rajasthan. Given our good experience we've had with the micro portfolio there.
Okay. What would be the cost of opening branches? You may just give me some ballpark numbers. That would be helpful.
Ballpark, it's not actually very expensive. I think it depends, like anything from a branch to branch perspective. I think the equipment costs somewhere around INR 1.5 lakh for the computers and the rest stuff. Maybe another INR 60,000-INR 70,000 for furniture. Yeah, about INR 2.5- 3 lakh, you'll get everything, including the safe and the CCTV and the gas and all that other stuff. There's a template that we follow. Whenever we open a branch, there is a minimum amount of stuff that goes in. There is other things. Depending on the area, there might be a safe or different sizes of it, or might be multiple computers if it's a regional office, more furniture. It just depends on what the need of that specific area is. Yeah, ballpark about INR 2.5 , INR 3 lakh of CapEx investment.
Essentially, the CapEx is not something really important for us when it comes to expansion. It is more as to whether we can have a consistent delivery in those areas and we can have a good asset quality coming up, which is the longer process, and having the right set of employees to man these offices is something more crucial for us.
Yeah. The commitment to open a branch is not dependent on the CapEx expense. I think it's more dependent, as Vivek said, on the operating cost side. Because opening a branch is cheap, but keeping a branch running is not so cheap.
No, point taken.
Yeah.
I just have a last question. What would be your outlook in terms of cost of funds?
That has been reducing. I think post-COVID, every quarter that has been reducing slowly. Actually, Vivek would be the best person to answer this since he looks very closely at the liability side of things. My personal opinion is it has still room to go down in the next two quarters. Vivek, I don't know what your-.
I think in the last four quarters or so, the cost of funds has consistently come down, and for sure, we look forward to kind of getting the benefit of the reduced MCLR by the larger banks for these quarters to start reflecting on our new and renewal lending. That definitely is likely to go on. Along that side, if you look at it, I think the repo rate has stabilized. You're not seeing any further repo cuts for the last two quarters. I think from an overall larger economic background, I think the lending rates by the banks seems to have kind of bottomed out for the time being. Not a very large room for our cost of funds to go down. There could be furthermore efficiencies that can come in play and help us.
The mix could also change.
The mix could also change because last fourth quarter, we started doing market-linked debentures, structured products wherein some smarter returns from organizations like us have seen higher entries or higher interest. That will definitely help us. Because we definitely look forward to further reduction in the cost of funds.
Nothing too drastic in the bottom line.
Thank you, team, for your detailed answers. I'll wish you all the best.
Thank you.
Thank you.
Thank you. The next question is from the line of Balkrushna Vaghasia from Axanoun Investment. Please go ahead.
Good evening, sir. After the pandemic, when we are reading in newspapers, whether it is national or international newspaper, they are projecting that big companies are getting more bigger and stronger are getting more stronger. They have advantages of some sort or another. In our industry, of course, in terms of cost of funds, bigger player would have advantage. Apart from that, do you see that bigger players have more advantage or more efficiency in terms of getting customers or more financial stability or something like that?
Well, it's an interesting question, I guess. As far as the cost of funds go, yes, I think the larger players typically have a better ratings from the rating agencies. While I might, I will personally disagree with that, a lot of the ratings are based on size, but let's not get into that debate because we'll run out of time. Typically speaking, yes, they do have a better control, marginally better control over their cost of funds. As far as their operating cost, I think in my experience, there are economies of scale to an extent. After that, it's not endless. After a while, I think whether you are INR 2,000 crores or INR 5,000 crores, unless something changes in your strategy or in your product structure, you're still going to need one FO for every 400 or 500 customers, and you're going to need a chain above that. Right?
Overall, economies of scale will only go up to an extent. What we have in fact noticed is that, at a certain level, there are diseconomies of scale. Especially when you go from a small MFI to a medium MFI, there is a lot of diseconomies of scale going on. Now, how we combat that? Typically speaking, as per the current guidelines of the RBI, whatever savings that we get as far as the cost of funds, we have to pass them on to our customers. That is the 10% margin or the 2.75x rule that RBI has. Overall, I mean, not us, but lot of the people in industry have become a little lazy because our customers are not very price sensitive.
When it comes to bargaining for a better cost of funds, I think on the back of your mind, you always like, "Well, if I save 20 basis points here, I'll have to pass on 20 basis points to my customers, and my customers don't really care about 20 basis points, so why am I struggling so much? I might as well get the funding." Those kinds of things. With the new RBI white paper that has come out, which is really a game changer as far as I'm concerned, I think it's important to note that stuff like cost of funds will play a huge factor, because that white paper is basically removing all margin caps.
If I save 1% in cost of funds, that 1% is going directly to my bottom line, which is all the incentive I need to try look high and low for the best possible rate that we can get. Yeah, I guess a little bit of a long answer, but I don't know if that helps you.
Sure. Next question is related to the AUM per branch that we have in microfinance. Basically, we are growing at a very high pace in microfinance. Our AUM per branch is lower when I compare that figure with that of other players. Is it because we are expanding, so that is why it is low? Or is our operation structure different or what it is?
Well, our structure is different. There are many factors as far as AUM per branch. Number 1, you have to consider what is the average ticket size of the loan. Right? Let's say if my average ticket size is INR 30,000 and the guy across the street from me is INR 36,000. Apples to apples, there should be a 20% difference in the AUM per branch. The number of clients might be the same. The second thing is about how the vintage of the branch is, so how old is the branch. The third is that what your strategy as far as branch expansion is.
Are you going after the lowest hanging fruits where there are a lot of population but lot of competition, Ahmedabad, for example, or are you venturing out into places like Kachchh, where there is a low density of population and it will take you a while, but there is low competition and, in general, better kind of credit discipline. Are you rural versus urban? Urban MFIs typically tend to have a much larger branches. Rural don't. There is many factors to consider. Of course, let's say I just opened 30 new branches. Those branches will have no customers, and they will basically pull down the average for the rest of it.
A normal branch will take at least three quarters-
Yeah.
-four quarters to reach the standard benchmark for the branches.
Yeah.
Okay.
I think, typically, we reach a breakeven point between 500- 700 kind of customers. We will try to get there at least in six months or so, typically speaking. After that, I won't call it smooth sailing, but once you reach that critical mass, the growth, you don't have to push so much for the growth of the branch.
All right. The last question is related to equity fundraising. If I'm not wrong, we passed a board resolution recently. Can we expect equity fundraising in next couple of months or maybe in the next quarter?
I think what you are referring to is the resolution on A, the NCDs and B, the QIPs. This is basically enabling resolutions that we take from the board and the shareholders before every AGM. Otherwise, we raise a lot of NCDs, foreign NCDs in particular, and going to the shareholders every time doesn't make a lot of sense, and it delays things by a huge margin and adds a lot of cost also. For us, NCDs, term loans, whatever it is still debt. We take an inaugural resolution. QIP resolution also, I think we have been taking for the last three years. Let's hope we use it this time. Typically speaking, yes, I think you can expect some equity raise coming in the next 3- 6 months. I think that it's no big secret.
We were in the market in March. Unfortunately, the timing of the second wave kind of hindered our plans. Right now we are taking a little bit of a break. Once things are stabilized and I think the equity investors are confident that the worst is behind and they get little bit more confidence around the numbers, specifically, 3- 6 months, we should be okay. I think we have sufficient equity right now for growth for at least for six months, 6- 9 months. We are not in a too big of a rush.
All right. That was very detailed. Thank you so much.
Thanks.
Thank you. As there are no further questions in queue, I now hand the conference over to the management for their closing comments.
I don't have any closing comments, but thank you, everybody. Stay safe. If you can get some travel in, get it. I just got some done, and it was wonderful. Thanks for joining again. Take care, everyone.
Thank you very much. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.