Ladies and gentlemen, good day, and welcome to the Q3 FY 23 earnings conference call of Arman Financial Services Limited, hosted by InCred Equities. As a reminder, all participant lines will be in the listen-only mode. 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 Shial from InCred Equities. Thank you. Over to you, sir.
Thank you, Michelle, good evening, everyone. On behalf of InCred Equities, I welcome all to this Arman Financial Services Q3 FY23 earnings conference call. We have along with us Mr. Aalok Patel, who is Joint Managing Director, and Mr. Vivek Modi, our Group Chief Financial Officer. We are thankful to the management for allowing us this opportunity. I would now like to hand it over to Mr. Aalok Patel, Joint Managing Director of Arman Financial Services for his opening remarks. Over to you, Aalok.
Thank you. Thank you so much, Jignesh. On behalf of Arman Financial Services, I extend everybody a very warm welcome to our Q3 and nine months earnings conference call for fiscal 2023. With me, as Jignesh said, I have Vivek Modi, the Group CFO, and also representatives from our investor relations team. I hope everyone has had an opportunity to go through the results, press release, and presentation for the quarter and the nine months ended December 31, 2022, which are uploaded on the stock exchanges and the company's website. The global economy is progressively returning on a growth path as the Western economies are gradually showing signs of recovery, coupled with China lifting the COVID-19 restrictions. However, this growth has also led to unexpected inflationary pressures and interest rate volatility amongst other factors.
Amidst all this volatility, the Indian economy is on a strong footing. As per the recent budget announced by the finance minister, India's GDP is estimated to grow by 6.5% in FY 2024. The growth is attributed towards multiple growth drivers such as robust GST collections, rise in consumption level, and revival of the rural and semi-rural economies. Coming into the microfinance and microcredit industry, in the last 2-3 years, the industry has navigated the COVID-19 disruptions fairly well. Credit demand has also remained unaffected despite RBI's recent repo hike of 25 basis points, taking the repo to 6.5%. Specifically for the quarter three and the nine months gone by, the credit demand in the sector has rebounded and the disbursement activities have picked up, which is an important positive for the country's economy.
The company too has witnessed healthy uptake in the credit owing to improving on-ground recovery in the rural and semi-rural markets. In Q3 FY23, the company registered a strong disbursement growth of 61.2%, which stood at INR 478 crore, while the disbursements for the nine months grew by 65.8% to INR 1,135 crores. This improved rural and semi-rural market demand, coupled with implementation of company's new LOS and LMS system, has also aided our assets under management to grow by a solid 57.2%. Our assets under management as of 31st December stood at INR 1,642 crores, up from INR 1,045 crores over the same period last year.
At Arman, it is our constant endeavor to service the low-income, underserved people of the nation who have little to no access to the formal banking or the financial services system. In this regard, the company has started offering Individual Business Loans, or IBL, towards graduating microfinance customers without any group guarantees and on an individual basis. As on 31st December 2022, IBL constituted 2.3% of our AUM. The idea of the product is to retain and graduate good microfinance customers into individual higher ticket size loans with cashless repayment methodology and higher underwriting. So far with this small portfolio, we have a 100% repayment through it and 100% through cashless collections. We have achieved another major milestone in the month of January, where our microfinance business has been assigned the highest-ever grading of MFI one by CARE Ratings.
This is the highest possible grading of a MFI company. It validates our, rather, operational and financial capabilities to undertake, sustain, and scale our operations. This grading of MFI 1 will not only help the company improve its borrowing profile but also lend confidence to all of our stakeholders of our ability to manage our operations at scale. Our technological shift towards implementation of new LOS and LMS system will enable us to improve our efficiency, lower the operational risk, and enhance customer experiences. We are pleased to report that the entire microfinance process is now completely paperless, including the loan documentation using digital signatures.
We were one of the first MFIs in the country to have a 100% paperless loan originations. With immense opportunities unfolding in the MFI and MSME sector due to government emphasis on rural and semi-rural India, the company is on track to scale its disbursements and achieve targeted AUMs while maintaining book quality and profitability in the coming quarters. Coming to the financial highlights. As of 31st December, assets under management stood at INR 1,642 crores, registering a growth of 57.2% year-on-year and 14.4% quarter-on-quarter. Of the INR 1,642 crores of AUM, 81% is contributed by the microfinance segment, 13% by the MSME segment, 4% by the two-wheeler segment, and 2% by the new Individual Business Loans.
During the quarter, the company disbursement increased by 61.2% year-on-year and 72% quarter-on-quarter, totaling INR 478 crores. Disbursement for the nine months stood at INR 1,135 crores. This disbursement growth was supported by high demand in the microfinance segment. MFI disbursement for the third quarter stood at INR 406 crores, registering a growth of 68.8% year-on-year and 83.5% quarter-on-quarter. The gross total income for the company stood at INR 103 crores, registering a growth of 75.6% YOY and 11.2% QOQ. This growth was supported by improvements of yields in the MFI segment. Our NIMs for the quarter stood at 14.8%.
Company's pre-provision operating profits stood at INR 38 crores, registering a healthy growth of 206% year-over-year and 10.3% quarter-over-quarter. Profit after tax tripled and has recorded the highest ever profit during the quarter to INR 22 crores. On a consolidated basis, GNPA stood at 3.37% and net NPA was almost negligible at 0.15%, showing an improvement of 100 basis points and 50 basis points respectively from March 2022. This was on account to improvement in collection efforts and increased asset quality post-COVID-19. Cumulative provisions stood at INR 70 crores, covering 4.6% of the on-book portfolio, of which provisions and standalone provisions for the standalone business stood at INR 15 crores, and for the subsidiary numbers stood at INR 55 crores.
The collection efficiency has been improving steadily on the back of economic and business growth. Overall collection efficiency stood at 98.3% in January, this current January of 2023. Collection efficiency for January 2023 for various segments stood as follows: microfinance segment, 98.4%; MSME segment, 98.1%; and two-wheeler segment, 96.5%. At present, we are present in 8 states with a comprehensive branch network of 321 and a workforce of 2,857 team members. Of all the states, Gujarat contributes 29% to the AUM, followed by Uttar Pradesh at 23%, Madhya Pradesh at 16%, 10% each in Maharashtra and Rajasthan, and the balance in other newer states like Haryana and Bihar. The company has recently forayed into 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 opportunities in new states as well. Coming to the borrowing profile and liquidity. As on 31st December, the company had total borrowings worth INR 1,518 crore. This is excluding the debt component split of the OCRPS and CCD as per Ind AS of INR 53 crore. Of the total borrowings, approximately 29% is through banks, 24% through NBFCs, 16% through securitizations, which is the PTC route, 16% through NCDs, and the rest is borrowed through DFIs, ECBs and direct assignments. As on 31st December, the company has a healthy liquidity position of INR 285 crore of cash and bank balances, liquid investments and undrawn CC limits. Additionally, the company has INR 31 crore of undrawn sanctions from existing lenders.
As per Ind AS, which includes this equity split component of the CCBs and OCRPS, the company's equity stood at INR 332 crores with a debt-to-equity ratio of 3.6x. On a fully diluted basis, assuming full convergence of all convertible instruments within the next 15 months, the total equity base stands at INR 383 crores. With the recent fundraise, the company is well capitalized. Capital adequacy for Arman stood at 48%, while the subsidiary numbers stood at 21.6%. We believe the worst is behind us, and we are well poised to achieve growth and harvest the benefits of fairer weather. Our focus will be on scaling up disbursements in a calibrated manner.
Having said that, I must also mention that our larger interest will be to build profitability and maintain quality for our loan book over the coming quarters and years. Thank you very much, and I would request Michelle to open the floor up for any questions and answers. Thank you once again.
Thank you very much, sir. We will now begin the question and answer session. Anyone who wishes to ask a question may please press star and one on their 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 a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have the first question from the line of Amit Mantri from 2Point2 Capital. Please go ahead.
Yeah. Hi, Aalok. Congratulations on the strong growth in this quarter. Hello?
Yeah. Thank you so much, Amit. Can you hear me?
Yeah. Yeah, I can hear you. Just a few questions. One, the finance costs have increased significantly quarter-on-quarter. Is this because of the interest portion on the equity that has been raised in the last quarter?
Yeah, a combination of both, Amit. One is the interest on the CCDs and.
Provision
...provisions on the OCRPS. Those have added to the burden in this quarter, specifically to Arman standalone. Also the interest rates, unfortunately, due to the consistent repo rate increases by the RBI, there is some level of, you know, pressure on the interest rates as well.
Sure.
By about 70, 80 basis points on a weighted average, which is quite a large jump on a quarter-over-quarter. I think about INR 5 crores of the interest expense, I believe, Vivek, correct me if I'm wrong, is related to the OCRPS and the regulatory part. Regulatory, yeah.
Additionally, Amit, if I can also add, as we kind of keep on increasing our disbursements, it's important for us to also maintain a slightly higher level of liquidity. The additional liquidity anyway will have a bit of higher level of, you know, financial flow. Correct.
There'll be, I think, specifically also in Q4, there'll be slightly higher carry cost because we are expecting to carry slightly more amount of cash in in on-market reports to service the, you know, somewhat slower debt volumes in the first quarter, which is usually the trend.
Mm-hmm. Okay. Okay. There's some direct assignment that was done in this quarter. What was the size of that transaction?
Sorry? The data center, the direct assignment.
Data center.
That's about INR 100 crores.
100 crores. In this transaction, the value in the P&L, the gain has been around 6.6 crores. For the same 100 crores, when it was done a year back or January 2022, the gain was around 5.8 crores. Are we now receiving better spreads on the direct assignment versus a year back?
Yeah, you're right. To complement you on your ability to analyze this at once. Yes, we're getting a lower MRR, which is like the retention ratio against the last one has come down. That kind of adds, makes it slightly more profitable. There are other factors as well, like the weighted average tenures of the assets sold and things like that also make a difference.
Mm-hmm. Sure. Sure. Okay. My last question, the, in the MFI, the asset quality has deteriorated from 3% to 3.3%, sequentially. What's the reason for that?
On the MFI side, you're saying?
Yeah, the, in our business.
Partially, the, you know, the overall impact is about less than 0.15 or something. You know, now as we keep on moving into the more average kind of a scenario, I think, it will slowly but surely come down, but it's likely to kind of level up. There is a slight bit of a pressure, especially in areas of Maharashtra, in Western Maharashtra. That is what you are seeing as a blip, but it's well under control.
Okay. Okay. Thank you, and good luck for the future.
Thank you.
Thank you. The next question is from the line of Sahil Sharma from SS Capital. Please go ahead.
Hi, sir. Congratulations for great numbers. The first thing I wanted to understand, sir, especially for our MFI loans, do you track or have information on the end users that customers put these loans into? For example, at least from my understanding, a large percentage go into dairy or dairy animal-related activities like milk harvesting and selling. Is that your understanding too? Do you have some rough breakup of how these loans are utilized in MFI?
I mean, you are absolutely correct. We do track the end use, when giving, when originating the loans. We do try to track the end use specifically. Yes, a large portion does go into things like allied agri, which is almost 35%-40% of the portfolio. That includes cattle. Exact breakouts, if you email the investor relations team, we'll get it out because there is a very large variety of occupations that our customers enter into. Now, one thing about end use you have to understand about microfinance customers is that. Typically, these guys don't have, like, separate bank accounts for business and, you know, their personal use. Whatever money that is incoming is going into one pocket and whether it's...
Once it all mixes up, it's very hard to keep a track of, you know, something like cattle, you can always go later and see whether they have bought a cattle. If they are using it for, let's say, a kirana store, for buying inventories, it's hard to track that. We try to do a good job, but there is no foolproof mechanism to track once you disperse the money. It's, it's usually on a best effort basis. Okay, sir.
Thank you so much. I will email the IR for the breakup. My second question is, sir, we see that the GNPA has gone up a little bit in this quarter.
Are we seeing any problems on asset quality or is this more like a small variation and we shouldn't read too much into it? It's a small blip. It's a small variation. I wouldn't put too much emphasis in it. As I told Amit, who was the last question guy, there was small blip which has happened in Maharashtra which might be putting it up. Additionally, what has happened is the quarter three, the new RBI guidelines were in. Yeah. You know, the 90-plus DPD. Once it goes into 90-plus DPD and gets classified as NPA, stays as NPA. Correct. So that kind of has further increased it by about 20 basis points. Yeah, I. Sorry, I think that's. I completely forgot about that, Dvij. Thank you so much. Yes.
Largely, if we can add to it, because this is, this was a regular concern also. I think since we are now absolutely aligned to the RBI's new guidelines, the overall impact is not more than about, you know, 0.2% on the overall NPAs for the company. Right. Just to kind of elaborate on what this new RBI policy says, although I'm sure most of the listeners are aware. Earlier what was the situation was once an asset cost 90 days, it was considered as an NPA. But if it went down to, let's say, 80 days past due, then it would be, you know, back again as non-NPA.
What the new RBI guideline says is that once an asset becomes NPA, which means it crosses 90 days in our case, it will continue to remain an NPA until the DPDs are zero. That means even if a customer pays you through installments and goes down to 30 days past due, it would still be an NPA until the account is completely cleared and zero. Yeah, that has also caused, you know, about 20 basis points increase in the overall NPA recognition. Nothing has really changed in that case. It's just a mechanism of classification.
Thank you so much, sir. On the next. Sure.
Thanks.
Thank you. A reminder to all the participants, anyone who wishes to ask a question may please press star and one now. The next question is from the line of Parth Vasani from KK Advisors. Please go ahead.
Yeah. Hello, sir. Good afternoon. Thank you for the opportunity. I wanted to ask, I mean, as our top three state contributes roughly around 60% of our AUMs, do we plan to de-risk the same going forward?
I mean, I think like Our constant endeavor has to, was to reduce our geographical concentration. If you look at, let's say, March of 2017, 80% of our portfolio was only in one state, which is Gujarat. We have come kind of a long way to diversify that. We are in eight states right now. Bihar and Haryana were new states. Obviously, the overall portfolio of Rajasthan, which we entered into couple of years ago, is increasing. I think overall concentration in the top three states, you should see it going down. By what percentage, it will be hard for me to predict at this point.
I think, it has continued to come down as time goes on, and the concentration risk will continue to come down as we go forward as well.
Okay. Okay.
Yes.
How are the new geographies of Haryana and Bihar performed if there's any number?
Bihar is doing excellently.
Uh-huh.
Haryana is doing fine as well, but a little slow, as far as the growth is concerned. Bihar is surprisingly much, even much better than our own anticipation. Touch wood that continues to be the case.
Okay. Okay, great. Great. Okay, sir. That's it for now. Thank you.
Thank you.
Participants, you may press star and one to ask a question. The next question is from the line of Alok Shah from Shrinath Securities. Please go ahead.
Thank you. I just had two questions. First was with funds coming in, what kind of growth are we expecting for FY 2024?
We typically don't give growth targets, Alok. Typically we target somewhere between 35%-40% growth on a long-term CAGR basis. It would be similar to somewhere around that neighborhood in the coming year.
What kind of leverage are we comfortable with?
Typically, we try not to go beyond 5x on a debt equity ratio.
Okay.
That is not to say we never did below that, case in point, like right before we raised these funds, but, typically we try not to go, you know, above 5x.
Okay. All right. Thank you, sir. That's it from me.
Thank you. Before we take the next question, a reminder to all the participants, anyone who wishes to ask a question may press star and one now. We have the next question from the line of Devendra Pandey from DP Financial. Please go ahead.
Thank you. Good afternoon, sir. My first question is on our MSME segment. The government has announced various schemes and initiatives for the MSME scheme over the last few years. What is our strategy here, and what kind of growth are we targeting in this segment?
I mean, most of the schemes that are arranged by the government, typically, we don't apply for it because, you know, MSME is a very broad term. It can include a 1 lakh INR loan, it can include a, you know, 10 lakh INR loan, and it can also include a 5 crore INR loan. There has been some movement, you know, backed by SIDBI of getting, you know, these low scale MSME workers into, what is it called? With the Gyan or something along those lines.
Yeah. I mean, there are multiple schemes, but one of the schemes is-
To get them on. Usually we don't or our customers don't qualify for many of these MSME schemes. That being said, we are growing steadily in the MSME segment. It's a segment that is performing very, very well for us, specifically, given, you know, its profitability, its margins, and even its asset quality, which is not very, very different from microfinance space. It's a slightly higher operating cost are there in that, but the margins more than offset it. The only thing in that segment is you have to grow very carefully. You have to understand the customer and their businesses.
That very quick growth that people are used to seeing in MFI segment that we have come to realize is difficult or slightly, I don't want to say dangerous, but it's better to be avoided in that segment. We want to grow carefully. We are very bullish on that segment. You know, the kind of growth that is possible in ALC microfinance is hard to catch up in MSME in the short term. In the long run, we feel that MSME will overtake microfinance in, you know, if you visualize 3-5 years or 5-7 years down the road.
Got it. Got it. Sir, what is our average cost of borrowing as of nine months?
That is for consolidated, we turn out about, 12.75, 13.
How much we expected to remain the range for the next two, three quarters?
We'll try to maintain it here or maybe about might expect another 25 dip in Q4. I mean, it's dependent on a lot of, you know, environmental factors. One, we've started to see that as we kind of Aalok just shared with you that for Namra Finance, we are already being graded as MFI 1. That does get us a better credit rating with most of the lenders. Along with that, definitely the scene that the interest rate seems to be kind of topping out for at least for us, as the interest resets happen for some of the loans that have not seen the interest reset, it might push that up.
On an average, I think we are trying to maintain this, at this level solidly and hope, we are kind of successful doing that in the next couple of quarters.
Got it. Are we able to pass on this increasing average cost of borrowing to our end customers?
Yeah. Thankfully, due to the new RBI guidelines that were issued in March of 2022, obviously the larger than the margins that you are seeing are as a result of that. Yeah, we are able to pass it on to our customers, so far at least.
Can we expect the yields to remain in the similar range, for the next few quarters at least?
Yes. Yes.
We expect it to increase a bit?
It will likely increase a bit. The older, you know, lower interest portfolio kind of, runs out and is replaced by slightly higher margin portfolios. There is not a lot of that portfolio left, but you can expect some marginal increases in the mean.
Got it. Got it. Thank you, sir. That's all from us.
Thank you. The next question is from the line of Amit Choudhary from Wolfe Research. Please go ahead.
Hi, sir. I wanted to understand the gross of your income has gone up by 72%, but the PAC has moved up by some 73%. Could you help in understanding the margin expansion?
Well, look, the PAC is dependent on lot of other factors. While the revenue has increased, as we come out of COVID, overall provisioning requirement has gone down considerably. Additionally, the cost of funds, the main effect would also play out the fact that our, you know, profitability keeps on increasing. That is as much a function of the leverage. I think if you look at our... If I understood the question correctly, it wasn't very audible. If you are talking specifically of our margins, see, if you look at our employee cost and stuff like that, they have not increased as much as the portfolio has increased. We are gaining some efficiencies as far as our staff cost and everything is concerned.
Okay.
Provisions have also gone down significantly, which were, you know, higher due to COVID. Now they are getting back to somewhat normalcy. All of those things will have a impact to the overall margins. Did that answer your question? I'm sorry, I didn't quite understand your question.
Yeah, I got my answer. My second question was, at some point.
Mr. Chordia, I'm sorry to interrupt, sir, with you. I would request you to use your handset to ask a question. Sir, the current participant has left the queue. We will move on to the next question, which is from the line of Kunal Gilani from Vivriti AMC. Please go ahead.
Hi. Thanks for the opportunity. Hi, Alok. Hi, Rohit. A question on your ticket sizes. We've seen the ticket size over the last 12 months or so, increase, at least on the MFIs. Seeing that increasing from about 36,000 to 46,000 in one of the slides. Just trying to understand, is this a reason on account of maybe higher cycling of customers or is it because of the new guidelines which is allowing you to be a bigger part of the balance sheet of your customer? Are you able to underwrite more with better conviction to be offering higher ticket size? Just trying to understand, you know, what are the factors that are going into that number going up.
No, I think there are three or four factors. Factor number one is, of course, as the customers shift from a lower cycle to higher cycle, as you said correctly, the ticket size on average does go up. Number two, I think the slide which you are looking at, which is talking about from INR 36,000-INR 46,000, that was in September of 2022, which we were being slightly more conservative due to COVID, you know, first wave, second wave, third wave and those things kind of coming in. Artificially, we had reduced our ticket sizes into something that we were not so comfortable with. Third thing is about the fact that, like it or not, this is the industry trend. Overall, we are...
Our average ticket sizes seem to be slightly lower than the industry average. The general trend and the tendency in the industry has been to increase ticket sizes. Now, you know, as far as things like interest rates, our customers are not very sensitive. They are more sensitive to things like ticket sizes and-
Turnaround times
to turnaround times. If you want to be in the market, we cannot be a complete outlier in the lower end. We always have to balance the ticket sizes according to what is kind of ongoing in the market. Finally, also, to give you a little bit more comfort around this fact, see almost 10%-15% of the customers have kind of left microfinance because during COVID they had a default or an overdue. We are not servicing the customers. Whatever is customers are left after removing the... are the type of customers that repaid the us or repaid whoever else during COVID also, right? Can we afford to take a slightly higher risk on these customers? I would say yes, probably we can. Really the proof is in the pudding.
I think, the overall, default rates that we observe. I mean, if you look at our data, and this is going into slightly more detail than you probably want. If you look at our data of, you know, current default, post-COVID default rates, there is not much of a correlation between the ticket sizes and, you know, the chance of default or chance of overdue.
Understood. That is. Yeah, that's very helpful. My second question was on the capital structure and of course with the equity raise, the position has become lot more stronger. But of course on account of accounting related considerations, part of the sort of the capital is recognized as not truly as equity, right? There, what have been the conversations like with investors in terms of convertibility, in terms of what sort of timelines you are tracking?
Majority of these instruments were in the form of CCD. INR 76 crore is CCD. They are compulsory convertible. They are tier-one equity and they'll convert in another 13 and a half months or so from.
Yes. I mean, the hard line will be a couple of days before March 2024.
Yeah. March 2024 will. That's when they'll convert. As far as the OCRPS is concerned, that is about INR 38 crores. See the issue price was INR 1,230. Today's price is somewhere around INR 1,800 or, excuse me, INR 1,500 or ±. Not seen it today. If it's, you know, it just depends on what really the price is at the time of conversion. I have not really talked to any of the investors. It's too early to talk to them. We'll see, you know. It's, I'm not too worried about it, let's just put it that way.
Wonderful. Great to hear that. Thank you so much. Wishing you very best for this coming quarter and the months.
Thank you.
Thank you, sir. Participants, you may press star and one to ask a question. The next question is from the line of Shubham Ajmera from SOIC Ventures LLP. Please go ahead.
Hi, sir. Thanks for providing me the opportunity. sir, I had few question on the cost of funds side. in the current quarter, as you mentioned, increase in finance cost, and one part of that is due to CCD and OCRPS. can you please share the how much cost is due to the like quantum of amount? also if you can share, like, it would be a one time, one quarterly impact or, like, it would be going forward in the same manner.
No. I mean, I think I had mentioned it was approximately INR 5 crore. Exact amount I don't recall. Yes, this will continue for the period the CCD is finally converted.
Yeah.
for whatever, another 13 and a half months.
You have, I think about INR 3 crores will be Vivek, for the CCD.
CCDs and approximately INR 2 crores.
Yeah. Maybe slightly less. I don't know.
Let's say comfortably between INR four and a half to 5 crores.
Exact figure if you want, just email and we'll send it out to you. And this will of course be for every quarter until they convert, which will be until March 2024. See the good part about equity-
For five quarter it will be the same way.
Yeah. See, the good part about equity is, immediately as soon as these instruments came in, there was going to be an additional load because obviously we cannot leverage on the new equity right away.
Within 90 days.
Within 90 days. That was to be expected, that this was going to have some load or some burden immediately. As we keep leveraging on that, extra equity, overall the extra burden will be far offset by the extra income that we generate on the, whatever, five.
Portfolio, portfolio.
Yeah. Five extra we leverage on that INR 115 crore. Right? I hope that makes sense.
Yeah. Understood. Understood. In fact, after this improvement in the credit rating, so can the cost of borrowing will come down, like by how much Basis Points it can come down?
It's hard to tell. Yeah. It's hard to predict. We honestly, it's always a function of supply and demand. More and more that we do this and even banks and financial institutions realize that, you know, that, Now that the margin caps are removed, they are also anxious to try to increase their own margins. You know, it's always a function of negotiation and supply and demand. The more offers that we have from, people offering us debt, the more in a position of negotiation we'll be. With things like ratings and gradings and other factors, the hope is that you are in a better negotiating spot, with the lenders, you know.
In that way it will result in a slightly decreased cost of borrowing. Whether that gets offset by consistent increases in the repo rate by RBI, there are too many variables, too many things to really predict, down to the basis points of how much it will reduce or increase in the future.
Yeah. Got it. Got it. Sir, my last question is on this interest income part. Our disbursement during the quarter, that increased to around 70%. On QOQ basis, our interest income is up by only 4% only. Like, what could be the reason for this?
I mean, disbursements and income correlation will be hard for you to do because, you know, the disbursements will help us earn interest income for a period of two years. Vivek, did I understand the question wrong? I don't think it's an apples to apples comparison.
No. One answer to that is absolutely it's not an apple to apple comparison. The second part is, are you just looking at the interest income alone or are you also looking at-?
The income generated from, the sale of portfolio because there has been a sale of portfolio that has happened in November which has got INR 100 crores. From that aspect.
Actually, I was looking at interest income alone.
Yeah. Because when you sell off the portfolio, then the interest income does not get into the, I mean, the interest income that you will be able to generate has already been taken into the, you know, gain on sale of the portfolio.
Okay. Got it. Yeah. Got it.
The income is upfronted.
Oh, understood. Yes. Thank you. Thank you so much.
Thank you.
Thank you. A reminder to all the participants, anyone who wishes to ask a question may please press star and one now. The next question is from the line of Akshay Doshi from Intraday Capital. Please go ahead.
Yeah. Thank you, sir, for giving me this opportunity. My first question is that, do you have any co-lending arrangement as of now?
We do not have any co-lending arrangement as of today, sir.
Okay. Any plans to venture into that?
Let me put it this way. The purpose of getting into co-lending can be a lot of reasons. Primarily people enter into co-lending because, you know, it allows them to not worry about fundraising, for example, both equity and debt. They don't have to dilute or they don't have to leverage their own funds, and they can rely on a larger bank or something to do it. For us, we don't face those problems. Purely on a commercial basis, if there is an opportunity available on co-lending or on BC or something, we are happy to explore it. Not for the first two reasons which I gave.
Thank you. Sir, my question is.
I'm sorry to interrupt, Mr. Doshi. Your voice is breaking. May I request you to please use your handset to ask a question?
Okay. Sir, how our next lending going ahead would be? Like, are we planning to add new products like personal loans, et cetera, to our portfolio?
I missed the first part of your question because your voice was not audible. The part which I got was that whether we are planning to add any more products.
Yeah, yeah. Yes, yes.
Complementary, complementary products like IBL and stuff we have added. MSME is something that we added in 2017. You know, obviously, I hate to say it, but, you know, Micro LAP has been on a kind of a to-do list since pre-COVID-19. Finally, now that things are stabilized, something that we can consider down the line. It's always... As, you know, running an NBFC, it's always nice to balance between the number of products you have. I mean, you don't want to be a jack of all trades. You need to find like a niche product that you are good at. Like, you know, you are not a bank where you can do 20 different products.
As an NBFC it's always important to find a good balance between number of products that you do and how many of them you do really well.
Okay. Okay, sir. Understood. Sir, my third question is that, also we have been increasing our digital mechanism. Does our underwriting method have witnessed any improvement due to this, digital innovation?
Yes, yes. I think, in the presentation and in the other stuff, I think we did mention, all the, you know, benefits that we are getting from it. Just to name a few, let me just open up. We are using, for example, facial recognition, with ML for the KYC documents. There is a KYC OCR verification directly done with their OCR pictures. We are using Penny Drop for a bank account verification, voter ID verification. Every step of the way we are geotagging. There is a center risk categorization. We are using e-signatures.
I mean, there are a lot of cool new tools that are available to us now that will reduce the TAT and also reduce the overall risk in underwriting, especially due to, you know, there is auto-algorithms to go through their credit bureau system. You know, 80% of our customers, the credit bureau data is not even seen by a human. It's auto-approved by a computer. There are lot of benefits that we have gained. Overall, the turnover time has reduced already by about two days.
Okay. Okay, sir. It's great to hear from you, and that was very helpful. Sir, all the best and thank you.
Thank you so much.
Thank you. The next question is from the line of Savi Jain from 2point2 Capital Advisors. Please go ahead.
Hello.
Yeah. Hi, Savi.
Sir-
I just have this question on the MSME lending rates which are around 36%. Now, there are money lenders, you know, in every town and every district who lend at about 40%, without, you know, any kind of income assessment or any documentation. How exactly are you competing with these guys, despite, you know, your onerous process?
It's not 36%, Savi. Again, Savi, when we think on the yield, it includes the processing fees and other things. That's how it kind of. About a year. The yield kind of looks high. Again, I think the competition definitely is not with the money lenders that you kind of talk about because when we are getting into structured MSME the way we have been there for last 20, for last five years or so, it's about the entire predictive mechanism and the engagement with the customer that is more important. That's why they keep on coming back to us or kind of we have this engagement that keeps on running into multi cycles with the customers.
No, why would they want more engagement? They want faster turnaround and lower rates. If your rates are not very different, are you getting like subprime customers whom even the money lenders are not willing to lend because the rates are not really very different, right?
I would not... Savi Jain, I will not be able to comment on what the money lenders are charging. My guesstimate is that it's a very different world when it comes to money lender. I can comment it. It's typically 5% to 10% a month, so you are talking about 60% to 120%. It's not less than 5%. I don't know what it is in Maharashtra, but at least in Gujarat that is what the current rate is. Largely speaking, Savi Jain, our customers are not very price sensitive and we don't really compete so much on the interest rates. It's as you said, it's the availability of funds. Certainly our rejection rates are north of 70% even today. And that is a provable fact.
I would say that we are cherry-picking, not subpriming. That is just the reality of the market in today's scenario. I think, you know, the microfinance rate before the overall RBI law came up in 2013, that was no different. That was still about 35%-36% on an IRR basis. Typically speaking, customers more are attuned to understand flat rates. If you calculate on a flat rate basis, it turns out to be about 15%-16%, and that is something that the customers are willing to pay. Now, if there is ever a circumstance where the market is demanding for me to cut my rate, you know, I have said it openly, I'm happy to cut it. There is just no require.
I do not see a requirement today, but as competition increases, we might be required to cut our rate. You know, given the margins, there is probably room to cut it as well. Just today, I don't see the need to be a little blunt, I guess.
One thing, you know, I was like, I don't know if you've been following Ujjivan, but they are seeing huge recoveries on loans that they had written off. You know, as a result, they're having like net zero credit cost for some quarters now. Are you also seeing some recoveries on loans that you wrote off some time back?
Well, in the MSME book, Savi, in the Arman book, we are, it's a kind of a, you know. Negative impairment cost right now. What you are saying is true. Even in the Namra book we are collecting, but, you know, not as much as we are providing or writing off as of today.
you know, you're reporting an almost net zero NPA. Now, aside of the specific provisions towards NPA, How much extra provisions do you have, including standard asset provision?
There is no standard anymore. It's all ECL.
Yeah, yeah. ECL. Yeah.
It's all ECL. Over it, we take about 1.2% to 1.5%. Largely, if you kind of... Since our NPAs are 100% provided for, and our NPAs kind of turn out to be about INR 50 odd crores, both the organizations together, the balance about INR 20 crores stands as the standard asset provisioning, which is about 1.75% or 1.5%. Right. It's about 4.6% is the total cumulative provisions against gross NPA of 3.37%. Balance would be about, what is it, 1.3% or something?
Was this number higher before pre-COVID or lower? Sorry.
No, it was lower.
Yeah.
I mean, pre-COVID, our NPAs were less than 1%. Yeah. Pre-COVID was, you know, microfinance, in particular was a very different, you know, regime because the entire sector probably was reporting less than 1.5% of NPAs. We were in March 2020 our GNPA in MFI was 0.53%. The hope always is, it's something that we stock away for a rainy day, so I don't expect this number to go down. In fact, it might go up. The provisions.
Your provision quarter-on-quarter have started increasing, so it's, basically more of, standard provisioning rather than, NPA provisioning.
Some combination thereof. I think, overall, specifically for microfinance, you know, 2-2.5% kind of loan loss is something that you would have to expect going down the road.
Mm. Right.
Forget about COVID, but even in our current book, which is, you know, about I think what is it? Post-COVID book would be 1,500 crores or something like that. Even that would be, even on that you have to expect about annualized 2.5% cost on a, you know, on an annual basis.
How much of your liabilities was MLD and what will be the impact now because of this budget?
You know, MLD, I don't know how much. The total MLD which are largely in the MLD structure would be about INR 45 crores in all. In terms of the overall impact, since we've already issued, we don't really see any impact because we have to pay the interest that we have to pay the interest regardless of what the tax regime is. As far as the future investments or the, you know, the interest of the market in MLDs is yet to be seen. Right now, obviously, we do not see that the investors would be coming back so easily or fast to the MLDs. But that
It might as well be FCDs.
FCDs. It will be like more like an FCDs, but the regular, you know, taxation and let's see if there is active interest and to what extent the active interest comes from. I don't foresee a lot of interest in the future.
Okay. Yeah. Is there some tightness in now the sourcing liabilities? Are you seeing some kind of a pressure there?
Thankfully for us, no. I don't know about the market, but we are okay so far, touch wood.
You don't have to calibrate your growth downward based on availability of liabilities?
As of today, no. Is there a chance that could happen in the future? I don't know. Possibly. As of now, no. Probably if this kind of relates to just the MLD kind of a thought, and I think historically what we've tried to do is diversify as much as possible on the liability side as well in terms of the products and the lenders, kind of buckets. Hence, you know, if one kind of a lender is not working out in a quarter or a half year, there are others who are kind of more than willing. It's, it's having your eggs in multiple baskets so that there is more collective outcomes. Yeah. The, the funds are typically available. It's just from what source, right?
For example, during COVID, we got a lot of cheap funds from the DFIs. That helped us greatly to reduce our overall cost of borrowing. Now, I mean, it's being replaced by bank funds or NBFC funds, which are obviously not going to be as cheap as the NABARD, SIDBI or MUDRA funds, right? Availability will be there, but from who is the question.
Got it. Thank you.
Thank you. The next question is from the line of Kunal Kadam from Easy Mills LLC.
Yes, sir. At INR 2,500 crore AUM, what kind of revenues are we targeting and what will be a sustainable financing margin at this volume?
Say that again. At INR 2,500 crore AUM, what are we targeting?
What kind of revenue are we targeting?
What kind of?
Revenue.
Revenue.
Revenue are we targeting? Yes.
I'm sure we cannot really specifically answer that kind of a question, to be honest. I don't think I can answer that. I'm sure we have projections built up, but that's disclosable or not. Largely for ROAs and ROEs are any kind of, you know, guesstimations. We leave it to the market to kind of. Yeah. Right. I would like probably assume the NIMs would be constant and do your own calculations. I would assume a 14%-15% NIM and then, go forward from there.
Okay. Cool. Okay. Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. With that, we conclude today's conference call. On behalf of InCred Equities, that concludes this conference. Thank you for joining us, and you may now disconnect your line.
Thank you.
Thank you, sir.
Thank you. Thank you.