Ladies and gentlemen, good day and welcome to Arman Financial Services Limited Q2 and H1 FY 2023 earnings conference call hosted by InCred Equities. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. During the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I hand the conference over to Mr. Jignesh Shial from InCred Equities. Thank you, and over to you, sir.
Yeah, thank you, Aman, and good evening, everyone. On behalf of InCred Equities, I welcome you all to Arman Financial Services Limited Q2 and H1 FY 2023 earnings conference call. We have along with us Mr. Jayendra Patel, Vice Chairman and Managing Director, Mr. Aalok Patel, Joint Managing Director, and Mr. Vivek Modi, Group CFO. We are thankful to the management for allowing us this opportunity. I would now like to hand it over to Mr. Jayendra Patel, Vice Chairman and Managing Director of Arman Financial Services Limited, for his opening remarks. Over to you, sir.
Thank you, Jignesh. On behalf of Arman Financial Services Limited, I extend a warm welcome to our Q2 and H1 FY 2023 earnings conference call. With me, I have Aalok Patel, Joint Managing Director, and Vivek Modi, Group CFO. We have also on the call representatives from FCA, the investor relations team. I hope everyone has an opportunity to go through the results and presentation for the quarter and half year ended September 30, 2022, which was uploaded on the stock exchanges and the company website. In the past two years, microfinance sector has successfully navigated the pandemic and is back on track showing healthy return. Additionally, Reserve Bank of India's new guidelines is expected to help the industry grow even faster. During the H1 FY 2023, the industry was focused on adapting these new norms, on account of which the loan disbursement slightly subdued.
However, the microfinance business has emerged as one of the important tools for promoting financial inclusion and serves as a last mile of credit to those at the bottom of the pyramid. At Arman, we are focused on serving the low-income, underserved regions of the nation, promoting livelihoods and offering microcredit to socioeconomically backward people who have little to no access to the formal banking or financial services system. At present, we have a presence in eight states with comprehensive branch network of 313 and a workforce of 2,620. Of all the states, Gujarat contributes 31.9% to our AUM on a consolidated basis, followed by Uttar Pradesh, Madhya Pradesh, Maharashtra and Rajasthan. Company has recently forayed in two new states of Bihar and Haryana.
We will continue to focus on extending our presence in newer districts in existing states while also exploring new states. On consolidated basis, gross NPA stood at 3.3% and net NPA stood at 0.1%, showing an improvement of 230 basis points and 100 basis points respectively on account of improvements in collection efforts and lower provisioning. Cumulative provisions stood at INR 70 crore, that is 4.9% of the consolidated AUM and 5.2% on book POS, portfolio outstanding. Therefore, total provisions remain much higher than GNPA. Collection efficiency improved to 98.3% in October 2022 as compared to 95.3% in March 2022. Collection efficiency across all segments has shown improvement and aligned with the pre-COVID levels.
This was mainly due to the passionate on-ground workforce, continuous customer interactions and a customer-focused approach. Collection efficiency for October 2022 for various segments stood as follows, microfinance segment, 98.4%, MSME segment, 98.1%, two-wheeler collection, 96.7%. Now, coming to the borrowing profile and liquidity. As on September 30th, 2022, company has total borrowings worth INR 1,419 crore. Of the total borrowings, 53.8% is through banks and NBFCs, 21.7% is through securitization, and 14.1% is through NCDs and the rest is borrowed through DFIs, ECBs and direct assignments. I'm happy to share that during the quarter, company successfully raised INR 115 crore via allotment of CCDs and OCRPS on a preferential basis.
The arrangement stands as follows. Company has allotted 6,24,388 unsecured compulsorily convertible debentures or what you call CCDs amounting to INR 77 crore. Some of the marquee investors include fund or funds controlled by Singapore-based Sixteenth Street Capital and USA-based Seven Canyon Advisors. Other investors include both domestic and foreign individuals. Company has also allotted 3,10,972 optionally convertible redeemable preference shares, or you can call them OCRPS, amounting to INR 38 crore. These were allotted to individual investors and family offices.
A mix of year one and two equity capital will be used to fund the targeted growth plans of approximately INR 2,500 crore with a healthy capital adequacy and a debt-equity ratio while leveraging our presence in the MFI, MSME, two-wheeler and other loan segments which will enable the company to achieve a sustainable growth momentum in the coming few quarters. As for Ind AS, company is required to split hybrid instruments into debt and equity, and therefore the company's balance sheet net worth stood at INR 311 crore. However, fully diluted net worth, assuming full conversion, stands at INR 362 crores. Also, we have a healthy liquidity position with INR 376 crore in cash, bank balance, liquid investment, and undrawn CC limits. Capital adequacy for Arman on standalone basis stands at 51.21%.
I repeat, 51.21% and for Namra, our subsidiary, it stands at 20.51%. With the equity fund raised and new LOS and LMS system, we will steer the next phase of our growth and expansion by harnessing the power of technology and innovations to create a smarter organization that will enhance customer experience. We will grow this business at a careful but steady pace by spreading out across states, building necessary capabilities, and adding relevant resources. With that, I would like to request the operator to open the floor for any questions and answer session. Thank you all so much for joining. Thank you. Operator?
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the questions queue is unplugged. First question is in the line of Virat from Shah Investments. Please go ahead.
Hi, sir. What kind of AUM and disbursement growth are we targeting for F.Y. 2023? Any comments on this?
Comments on that, typically we try to grow between 35%-40% CAGR over the long run. It will be somewhere in line with that, what we see on projected results for F.Y. for next year.
Sir, how do we plan to utilize the fundraiser of INR 115 crores?
As you know, as an NBFC, there are regulated ratios to maintain, mainly the Capital Adequacy Ratio. We were approaching close to that and hence, it was required for us to raise this excess capital. The funds will be used just for onward lending to leverage on top of that to increase our AUMs.
Okay. Thank you.
Thanks.
Thank you. Any participants who wish to ask a question at this time, you may please press star and one. The next question is from the line of Anjana from Shah Investments. Please go ahead.
Thank you for this opportunity, sir. A couple of questions from my end. The first one, I would just want to know if you could throw some light on the reduction of our MFI book. You know, we plan to reduce our MFI book to some 60% of AUM. Could you elaborate on the same?
We plan to reduce our MFI book by 60%.
No, to 60% of AUM.
To 60% of AUM. I mean, you're talking of it by returns from something like 80% to brought down to 60%.
Exactly. Yes, that's right.
No, I mean, there is a long-term plan to diversify the product line into other ancillary products like micro enterprise that we have, which is about 2%. We have also, you know, have individual business loans, which is 2%. Two-wheeler loan is 4%. The long-term goal is to, you know, get more into micro ancillary products rather than the JLG products. We still very much plan to be in the micro retail segment serving the rural customers. I think that is what you are referring to. Overall, as time goes on, I think more and more, you know, the microfinance segment has been showing extremely good growth in the past 10 -12 years. Going forward, we expect it to continue growing at least for another three -five years.
With that, the expectation is that the other products, such as micro-enterprise and individual business loans, will start showing more growth than the JLG-based group loans. Now, these are estimates, of course. Market forces will behave as they behave from the future, but that is our expectation.
Sure, sure. Sir, also, how do you see our two-wheeler and MSME business panning out?
They are doing extreme, I mean, we'll take one at a time. MSME is doing extremely well. I think over COVID, it has performed really well as well. It takes a very specific kind of customer. If you are comparing, like, let's say a growth rate between group-based unsecured JLG lending versus, you know, the micro-enterprise with much higher underwriting and everything, it's not very comparable. The growth rates might be a little dwarfed by the rate of what microfinance is doing. MSME stands on its own and is an extremely good and attractive customer segment that we are in. Now, as far as micro or as far as two-wheeler is concerned, you know, that industry has been in the doldrums since COVID and even before that.
I think if you look at the amount of vehicles sold in 2019 at somewhere around 21 million to somewhere around 13 million in the last 12 months. Overall, the volumes of two-wheeler sales have declined drastically over the last three odd years. We have not completely discounted two-wheeler. It's hanging in there. There are tough times in the past and probably tough times in the future as well for the two-wheeler space.
Sure, sir. Understood. Well, sir, we've started disbursing loans under MSME segments. How do we see this panning out in coming quarter?
Coming quarter may be too early to tell, but in the coming couple of years, the idea is that a lot of these microfinance customers who have been with the company for several years, you know, five-six years, and have been microfinance customers for, you know, 10-15 years even in many cases. Rightfully so, there is a requirement. Can we graduate them away from these group-based loans into individual loans? The natural progression and evolution also is to get away from cash-based collection into cashless collection. That is the goal overall, and I think it will take a couple of years to gain good traction in this industry. We are planting seeds right now as far as, you know, diverting away from your JLG-based, group-based microfinance.
Understood. Sir, with these individual loans, do we foresee any risk-based pricing model coming in play, which is not possible under JLG?
Risk-based under what? You said pricing risk?
Yes, sir. Risk-based pricing model, basically.
No, I mean, lot of these customers are, have been with us and have amazing track record even during COVID. I consider these customers to be, you know, very, very safe. Let me also tell you that the repayment rate in this segment, although it's only, you know, 2% of the book, the repayment rate is 100%. We don't have INR one in overdue or default in this segment so far. It's a little early to celebrate, but we consider this as very low risk approach. Vivek, you want to add anything?
Yeah. Largely at this stage, these are basically our own set of customers who probably are dropping out of JLG, and hence it's about retaining the best-in-class customers with you through a product innovation. Over a longer period, since these would become kind of a full banking kind of customers, we might also kind of graduate over a period of time to a larger ticket size loans which could be there. Those are nice things in the future. At this point of time, it is more about retaining our quality customers with the ideal tenure.
Absolutely. Lot of the studies that we were doing on our retention levels, we saw many of these customers kind of leaving after three or four cycles with us. The question was why? The answer was that they were going for individual-based loans from banks or SFBs. These were our clean customers, so why should we lose them? You know, we can service them just as well as any other bank can.
Got it. Thank you. That was really helpful.
Thank you. The next question is from the line of Savi Jain from 2Point2 Capital . Please go ahead.
Hello.
Yes, Savji Jain. Go ahead.
Yeah. You mentioned that there were some liquidity challenges during the quarter. Has that normalized now this quarter?
Yes, yes. It's completely normalized.
Okay.
In fact, we are facing a reverse issue. See, largely speaking, as we were approaching our CAR ratio, obviously, you know, most banks do not wait for your debt equity or capital adequacy to go down to 15%. That was one challenge. Macroeconomics was another challenge. Frankly, we have not faced liquidity issues in our, you know, at least for the last 10-12 years. Yes, for a month and a half, we did face some issues that has been largely solved, hence to the recent fundraise. It also gave us some time, fortunately to transfer and transition into our new LOS and LMS system. All in all, we made good use of it as well.
Okay. This CCD and everything, you know, for the rating agencies, would it have been added liquidity?
CCD is considered as pure equity. It is Tier one equity because it's compulsorily convertible. In case of OCRPS, it's a Tier two equity until converted because it can optionally convertible or you can redeem it as well. Yes, CCD is considered as core equity and OCRPS is Tier two equity, so it's like a hybrid debt.
They will at least use the CCD. They'll give the benefit of CCD for your rating improvement, yes.
Yeah. For purpose of OCRPS as well, because there are multiple investors. I think if you look at the balance sheet, and as Jayendra said in his speech also, under Ind AS, hybrid debt instruments have to be split between debt and equity.
Okay.
The net worth you'll be seeing as around INR 311 crores. While fully diluted net worth, if you consider everything converting, today would be INR 362 crores-INR 353 crores or something like that. Already there is a discount given because of the hybrid nature of these instruments in the net worth of the balance sheet under Ind AS itself.
This individual loan that you were talking about, is it the same as MSME? What is the distinction there?
Similar. Similar, but the client segment is slightly different. In the MSME side we are finding cash customers, and it's a cash-based collection. On the individual business loan side, which are graduated microfinance customers. You know, the underwriting might not be as stringent because we have, you know, three, four , five years of experience with them. We have switched them to a cashless collection model. As I said, Savi, we are planting seeds. You know, yes, there are some similarities for sure between the products, but especially as far as ticket sizes are concerned on average. The sourcing is different and the collection methodology is different.
Yes. In the MSME loans, you know, which you are doing, is this similar to what Five Star is doing but lower ticket size? Is that the right way to look at it?
I'm not sure what Five Star actually does. Five Star ka average ticket size is somewhere around INR 5 lakhs-INR 6 lakhs, if I'm not mistaken.
Lower. Okay. Only difference is that they do secured, you do unsecured. Your yields are obviously higher in there. You know, is it a logical progression for you to move into higher ticket size and maybe secured? Is that possible for you?
Yes, absolutely. It's worth considering. The models are different and I don't know Five Star model, but largely speaking, it's a secured asset which is difficult to repossess. With the limited amount of research I've done into it. Of course, there is a sentimental value of having your residence or your house mortgaged, but in case of a default, very difficult to repossess these assets. I don't think that's a very big secret.
No, that's true. You know, even Equitas says the same thing about their HBL customers. I think the big difference on the credit cost is pretty for unsecured loan versus a secured loan. Even though it may not be technically, you know, possible to repossess, but I guess the credit cost is much lower just because of the fact that they've kind of mortgaged their house.
You are absolutely correct. We have discussed this both at a board level and individually as well. It might be something which is a natural progression for us. Let's see. I think certainly I'm not discounting it as a viable division in the future.
I think the only difference is that the GDP per capita in your state is much lower than the southern states, and I think that makes it more difficult to do it in north or in, you know, in the rest of the country as compared to southwest India.
The difficulty also lies in the fact of the paperwork and the legal work involved, especially if you talk about the rural areas. Primarily mortgaging in the rural areas at least is very difficult because the paperwork is very thick.
Provisioning with respect to COVID, is that over in the system?
Everything pre-COVID, which is assets disbursed prior to March 2020, is extinguished.
Mm.
Written off or provided for. That's over with. Yeah.
The provisioning still seems a little high. Is it because the standard asset provisioning has increased?
The asset size has increased, the standard asset has increased, and also the fact that, you know, microfinance is no longer under the 1% loan loss regime. You'll have to expect a couple of percent. We are monitoring that closely. Thanks to the RBI regulations also, to a certain extent it has been passed on to the customers as well through margin increases and rate increases. Yes, I think a lot of it is related to scope and NPAs as well.
What is the standard asset provisioning percentage that you are now using?
I mean, we are under ECL provisioning.
Mm.
Our provisioning is 5.2% and NPA is 3.2%. In a layman term, you can call it 2%, if you like, on the standard assets.
On the standard assets. That's higher than what it was pre-COVID.
Yes. Yeah. It's definitely higher than the pre-COVID. Again, the reasons for it being slightly higher is also the fact that there are pre-COVID, both which were restructured and are in standard buckets, continue to have a bit of higher provisioning, but they continue to be in standard buckets. From that aspect also that is there. Overall, you know, this management overlay that has been created during the COVID phase will be there for some time till we kind of taper it off and we kind of relook at the entire ECL model based on the overall experience the last five years.
Yes.
Requirements.
I think that's why our auditor told us, okay, there are no black swans in ECL. No black or no white swans, only history.
Why is it that we have released provisions in the standalone numbers?
Mostly write-backs. Lot of these are write-backs in the standalone side.
Got it. For growth, you don't have a number for this year? Do you have a number for this year and next, for 2024?
Unfortunately, I mean, I wouldn't want to comment on the growth numbers this time.
Okay.
You have a better idea about it.
Thank you. This is your request to join the question queue for any follow-ups. All participants are requested to limit the questions to two per participant. If time permits, you may join the queue for any follow-ups. Thank you. The next question from the line of Srinath V. from Bellwether Capital . Please go ahead.
Hi. Hello. Good evening. Yeah. Am I audible? Hi. Yeah, sure. Just want to find out from a NIM perspective, has the new regulation kind of fully kicked in? Do we need to wait for a couple of more quarters for the old book to kind of get flushed out and the whole repricing? Are we likely to see some more NIM accretion over the next couple of quarters?
Yes. I don't know. I think we'll need a few more quarters.
No, sir.
I don't have that number of what percent of the book is new regime, what is old regime. It will be a significant basis at this point.
At this point of time, Srinath, probably we don't have a specific number to share with you, but via a simple back-of-the-palm kind of a calculation, at least 50% still continues to be old regime because we were at about INR 1,100 crores in microfinance when the regime changed. Right now it's at INR 1,200 crores. By that logic, largely, you know, it is 50/50. Since the average balance tenure of the loans as on, say March 2022 would have been approximately 15-18 months, you know, it will take some time to find out, completely find out.
As far as your NIM question goes, see, our cost of borrowing has been going up significantly also because of the repo increases and stuff. While we do expect NIMs to increase in the future, it will not be to such a large extent because it will be offset by some bit of absorption in the cost of borrowings.
Got it. Okay. Got it. Up trending NIMs, but the larger part of the NIM accretion has already been completed in the last two quarters. Fair understanding. Is that a fair understanding?
No, I would disagree with that. I would say about half of it is done.
Okay. Got it. Perfect. Hello. Cool. Moving on, just want to understand, you know, have you faced any teething issues in implementing the new regulation? Of course, we have a significant edge given that we already do all of this in MSME, but from what I remember, those set of, you know, employees are a grade or two higher when you hire them in first place. You know, how is the on-ground situation on income assessment and documenting it and then, you know, kind of figuring out that, I can't remember again, 50% or there's some limit the government has given.
How is this whole process working on the ground and, you know, how do you see that improving over the next six-eight months or one year or so?
Oh, it's definitely a work in progress. I think overall, you know, in April we had used our old system and kind of done a best effort job of evaluating. That is continuously improving, and it has improved significantly with our new software conversion as well, as far as inputting all the right kinds of information to assess income. Besides that, I think since we are capturing household indebtedness, as a result of that, rejection rates have also increased. I think that package has been consistent with lot of the other MFI peers as well. All in all, I think, you know, the rejection rate has slightly increased because of this.
Got it. Got it. Just switching to a last question before I go. Just I want to find out if you've opened any new geographies, any new micro markets, and if we have, you know, made some progress on going into lower density areas because of the flexibility in pricing. Also, have you disaggregated pricing because we have had very different credit cost experiences over the last couple of years in different micro markets and even from demonetization today. Are we looking at disaggregated yield structures in different markets based on your risk perception and so on? Thank you.
Yes. Yes. We have not done that yet. That is part of the plan in the long run. Maybe starting from, you know, the Q4 or the Q1, the geographic-based pricing or risk-based assessment pricing. Now as far as the micro markets are concerned, no. I think the past couple of quarters have been challenging with a lot of different projects in our hands, with RBI implementation, with software implementation, with liquidity, capital raise and stuff. Obviously the growth that we are looking at, which is ongoing. Yes, that is something to consider. I think I can confidently more say about the differential pricing in geographies. As far as moving into these micro markets, you know that we are never a first mover into any kind of a new situation.
That will be sort of slower. Let us see what the competition is doing and what their experiences are in some of these markets. Other than that, you know, we recently moved into Bihar, planning to expand on that in the coming few months. Bihar has been behaving wonderfully. That has been a pretty decent foray into a new state.
It is running out of your Uttar Pradesh team itself, or you now kind of have a completely new setup to train and so on?
It will run out of U.P. team until Q4. After that we'll split it from Q1 next year.
Okay. Perfect. Thanks a lot, Aalok, and congratulations for the great set of numbers.
Thank you.
Thank you. Next question is from the line of Yash Mandawewala from Mandawewala Family Office. Please go ahead.
Hi, Aalok. Congratulations on a good set of numbers.
Thank you.
Aalok, you know, most of the FMCG companies seem to be complaining about, you know, poor rural demand. Yet, you know, most microfinance companies such as yourselves are reporting good collection efficiencies. You know, what is really happening on the ground? How is there this, you know, divergence of commentary on the same set of customers?
I mean, Yash, I don't consider myself an expert on macro or microeconomics. All I can say is that we have not faced so much of a difficulty or so much of a feedback from our operations or field that people are facing any large-scale difficulties as far as economics are concerned or weak rural demand or anything is concerned. Maybe there is a lag effect, I don't know. Other than that, I wouldn't want to comment anything more on that.
Got it. Maybe let's wait and watch. Just one more on the new software system. Is the implementation now completely done? I know it's early days, but, you know, where are you seeing sort of large differences or where are you seeing significant, you know, value adds from the new software?
No. I mean, already our TAT has reduced by about 30%-40%. That has been a big achievement. Overall, it was very successful and lot of things had to go correctly. It is fully implemented now and, you know, we are collecting large volumes of data. The risk controls skyrocketed overall with geotagging and everything. We are using digital signatures now. We have a tie-up with legality. We've become completely paperless. It has a lot of different advantages. Yeah, I think overall it has already been a big success.
Do you think in the end it will lead to the, you know, loan officer being able to handle a higher volume of clients, customers?
It could, but I'm not exactly sure whether that should be the goal, because higher per person capacity also comes with its own set of risks when something goes wrong. When the delinquencies and stuff rise, one person is not able to manage such a large caseload. The group sizes also have been overall, in the industry, going slightly lower as years go by. What it will help us in the future is moving more towards the cashless repayment. In that case, yes, an FO will be able to handle more customers, but that will be a whole new model. Under the current model, I don't think that is our overall goal, is to increase the caseload per FO. Although that might be an ancillary benefit down the road.
Got it. Thanks a lot, Aalok. That's it from me.
Thanks.
Thank you. Our next question is from the line of Balkrushna Vaghasia from Axanoun Investment Management. Please go ahead.
Good evening to you. Many congratulations for the great quarter.
Thank you.
I want to know what is the average turnaround time, customer turnaround time for microfinance and MSME business?
For microfinance, state by state I have the figures. I think approximately 4.6 days is the last I checked.
For microfinance.
Three days will be the customary or the regulatory training that we have.
Yeah. It cannot be less than three days. Three days off where it was at least seven days, we have brought it down quite much. In MSMEs, we have brought it down from 12 days to about eight days. There is still a lot of room for improvement there.
Okay. What is the branch expansion plan for the coming up year?
Quarter, the plan is to open about between 15-20 branches. For Q4, we are still working on that, so you'll have to wait on that question for the next quarter's call.
15-20 branches in Q3?
Correct.
Okay.
More or less for the F.Y. 2024.
Right.
Normally you kind of see a larger branch expansion happening in the Q4 and the Q1 of the next year.
Exactly. When we do our planning for F.Y. 2024, a lot of the branch openings will happen in, you know, February, March, April, that time frame. We don't expect a lot of business to come out of those in the current F.Y.
Okay. All right. In terms of the average lending rates before the new regulation and, I mean, post the new regulation, what is the average change in average lending rate in microfinance that you have observed in your loan book?
About 2.5% has been the increase.
2.5 %.
Yes.
Okay. In terms of MSME segment, two-three years back or three or maybe four years back when you started MSME segment, you said that, "Okay, I do the experiment initially and then if I am satisfied about the scalability of the particular business, then we go with full force." Like, are you satisfied with the MSME segment and you want to go on full throttle on this? What do you think? Do you want to exit this business now?
We are very satisfied with MSME, and it is no longer an experiment. It is definitely a full-blown division. As I answered the first question, I'll kind of give you the same answer, in that we are growing and we are growing well.
Got it.
It requires a specific type of customer in the MSME. The rejection rate is still about 70% in that division. If you are going to compare apples to apples in terms of growth rate for compared to micro and MSME, you know, my lesson learned is, okay, it's not going to be very comparable. We are still growing at good 20%-25%.
Got it.
Percent over the year.
No.
Year-over-year basis, what happens is obviously F.Y. 2022 September. We had just come out of the second wave of COVID. Still if we use September 2021 as a benchmark for both microfinance and MSME, I think MSME again in our case has grown to over 60% from something like INR 125 cr as of September 2021 to about almost INR 200 crores as of September 2022. I think MSME has been showing good growth generally and can see good times going forward as well.
Okay. Okay. Which segment among all of your microfinance, MSME, individual loan and vehicle finance, which is the most profitable for you including the effect of NPAs as well?
No, definitely if you compare just the bottom line margin, MSME is the most profitable, followed by microfinance and followed by two-wheeler. Uh, but I mean, these are very... I don't want to say very different businesses. They are not very, very different businesses, but these are different businesses. You know, on one hand you have a better growth potential, on the other hand, you have a better margins. So we try to take the best of both worlds and do both the businesses.
Okay. Last question. For microfinance, how many of your customers are unique to you?
I always give a disclaimer to that question. Unique to me only applies to when I'm doing the credit bureau report and I find it as a no other financial institution where they have an active loan with. That is approximately 25%. After I loan them the money, if they borrow from somebody else, I have no track of that.
Yeah, yeah. That's what. What is the cycle-wise classification of the borrowers, like first cycle, second cycle in microfinance?
Vivek, you have that. About, I think 65.
68% is first cycle. Rest of it is second cycle and above.
Exact breakout, unfortunately I'll have to pull it out. I mean, I have an idea, but I don't want to give you wrong numbers.
Okay. That's all my side. Thank you so much.
Thank you. Next question is from the line of Amit Mantri from 2Point2 Capital. Please go ahead.
Yeah. Hi, Aalok. First congratulations on the good performance.
Thank you.
Yeah. I just wanted to understand, so in the MFI book, what has been now the number on what percent of the March 2020 book went bad? On a static pool basis, what was the credit cost of the MFI book?
10%-12%.
Okay, thanks. Basically post COVID, which is F.Y. 2021 and F.Y. 2022 disbursements, there you didn't really have any significant credit costs, is it?
Not yet, but we are expecting somewhere around 2% on post-COVID on a ongoing basis.
Okay. Okay. Got it. Second question, now, you know, the book today is almost close to INR 1,500 crores and you're actually in a year and a half, maybe looking at INR 2,500 crores. From the management side, senior management side, have been too many additions that you're making and plan to make going forward?
We had a CRO joined, Mr. Srinivasaraghavan, the Chief Risk Officer. Other than that, I mean, of course, lot of team members joined, not on a C-level position other than Raghavan or second line.
We are looking at in terms of an HR perspective. We are also kind of moving from a regional management system to maybe a zonal kind of a management where we kind of might split the entire geography that we work into various zones and kind of provide more man strength in terms of the overall operations.
Right. Okay. Thank you very much.
Thank you.
Thank you. The next question is from the line of Hirenk umar Desai as an Individual Investor. Please go ahead.
Yeah. Sir, congratulations on a good set of numbers. The question is, in this inflationary situation and one of the participants asked about MSMEs is staying very low and having some difficulty with that section of the society. Do we have a breakup of what portion of our loan is for business or livelihood earnings or something like that? What portion is for consumption?
As per technically, all of our loans in microfinance and MSME both are for income-generating activities, which is not to say that once you give the money whether some of it winds up to consumer, but largely speaking, all of our efforts is to make sure it's for some income-generating activity.
Okay. The second question is, after the usage of the software and as we move forward, do we hope to see some operating leverage in terms of OpEx coming down as a percentage of AUM or income, whichever they use, right?
I mean, that is always the hope and, as Jayendra Patel would put it, that cost-cutting and finding efficiency is always a constant endeavor. However, you will find us to be quite lean overall. How much extra lean that we can become, you know, I think the idea is to always find a balance. If your goal is to become the leanest or the most cost-efficient company in the industry, you might get some good short-term results, but that means you are not investing enough. Your people might get frustrated, your retention might suffer, a lot of other things might happen. With the software, definitely we are expecting to see efficiency of the efforts increase in terms of the number of disbursements they can make.
Largely speaking, the second biggest goal was to reduce the overall risk in terms of operations and in terms of credit risk to the customer. Those were the large two goals with the software implementation.
A question if I can peek in is, while interest rates are rising, assuming that most of our customers borrow at a fairly high rate, how sensitive are they to the rate that we are charging? The question is, in the rising rate environment, I mean, have you correlated to some past cycles or something like that to say how it impacts our growth?
Surprisingly, sir, they are not at all sensitive to interest rates. Largely speaking, they are able to absorb 1%-2% here and there without any problem, and without even, frankly speaking, noticing too much. Now any large scale increases like 4%-5%, obviously it will be a problem. Generally speaking, you know, for us, going from a weighted average cost of borrowing of 11.5%-13% would be a huge problem because the ROE will reduce by 1.5%. For them it will make a difference of INR 20-INR 25 in their EMIs, which most people don't notice or don't care enough about. All they care about is timely availability of funds and the least hassle which causes them a least amount of disruption and hassles, if I can put it that way. A good level of service.
Thank you. We take the next question as the last question from the line of Savi Jain from 2Point2 Capital. That's a follow-up question. Over to you.
Yeah. Hi. Where does this equity take you in terms of, you know, how many years of growth can be taken care of by this equity raise?
I mean, that's the million-dollar question. You know, you have your own internal accruals. Depends on what kind of ROE we can generate and depends on what kind of ROA and internal accruals that we can get. If we are growing at our rate of ROE, then we never need to raise. We can grow indefinitely on our own internal accruals. Yeah, it's actually at some INR 2,500 crores.
Yeah. I mean, basically this equity raise just kind of the three years of growth is and the leveraging fees have been taken care of. Now you are at a level where it's a comfortable CAR. At 30% growth rate and 30% ROE, you would not need to raise any equity.
Exactly. Exactly. I mean, 30% ROE is difficult to maintain if you are growing at 40%. It will take us time. You know, I don't think equity is a big concern for me at this point. It's not like, yeah, this was just kind of a teaser round and then six months later I'll need to go back to the market again. I mean, at the very least, given that there are no more surprises like COVID or anything like that, we should be good till at least INR 2,500 crores.
Great. That's all, sir. Thank you.
Thank you.
Thank you. Ladies and gentlemen, that concludes the last question for today. We now hand the conference back to the management for the closing remarks. Thank you and over to you.
Thank you everyone for joining. We hope that we've been able to answer all your queries. We look forward to the next interaction in the future. In case you require any further details, you can contact us directly or our investor relations teams. The contact information will be available on the presentation, which is on the company website and on the stock exchanges. Thank you again and have a pleasant evening.
Thank you very much. Ladies and gentlemen, on behalf of InCred Equities , that concludes this conference. Thank you for joining us, and you may now disconnect your lines.