Q2 20/21

Sep 30, 2020

Ladies and gentlemen, good day and welcome to the Arman Financial Services Q2 FY 'twenty one Earnings Conference Call hosted by MK Global Financial Services. We have with us today Mr. Alok Patel, Joint MD 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. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Jignesh Shah of MK Global. Thank you and over to you, sir. Yes. Thanks, Anish, and good evening, everyone. I would like to welcome the management of Oman Financial and thank them for giving us this opportunity. I will now hand it over the call to Mr. Alok Patel. Over to you, Alok. Yes. Thanks a lot, Dinesh, and good afternoon to everybody. Thanks a lot for joining in and taking the time to discuss our financial performance for the Q2 and the first half of FY twenty twenty one. So we have issued a detailed press release and also an investor presentation for the past quarter. So hopefully, all of you have had a chance to review it. At the outset, I hope all of you and your loved ones are healthy and doing well in these very unprecedented times. As many of you might have heard, Ahmedabad is going into sort of a curfew or a lockdown for a couple of days starting tomorrow. So both Vivek and I have been a little busy with some of the continuity kind of issues. So please, the disclaimer here is please excuse us if we are not as prepared as usual. But anyway, so overall, we have witnessed a very broad base pickup in the economy in the last few months. More importantly, our consolidated collection efficiency has picked up significantly from 66% in June 2020 to 87% in September and 91% in October. This continuous progress on the repayment front on a month to month basis is encouraging and shows both the resilience and the positive interactions of our customers or excuse me, positive intentions of our customers. In microfinance, only 7% of our customers have not started repayments post April. For MSME and 2 wheeler, that percent stood at 3.6% and 2.9%, respectively. Now I'll start by giving a brief overview of our financial performance for the Q2 and post that touch upon the collections, liquidity and disbursements in more details. At the end of the Q2, our consolidated loan book stood at INR704 crores, marginally lower year over year as a result of the COVID related disruptions as higher repayment rates combined with lower disbursements in the first half led to expected decline in the loan book. Our microfinance and MSME portfolios stood at INR 5.20 3 crores and 119 crores, respectively, at the end of Q2, lower by 5% to 6% year over year. In the urban 2 wheeler segment, the AUM was impacted by the decline in 2 wheeler sales in the preceding fiscal year and the sharp drop in 2 wheeler sales during the first half of the current fiscal. However, our newly launched Google 2 wheeler product has demonstrated a relatively better performance, reporting a year on year AUM growth of 10%. The rural 2 wheeler book now constitutes approximately 12% of the total 2 wheeler portfolio. We gradually resumed disbursements across all segments from August 2020 onwards. Loan disbursements for the month of August stood at approximately INR 17 crores and for the month of September stood at INR 34 crores. This number has increased to approximately INR 60 crores in the month of October. We expect disbursements to approach pre COVID levels by December or January of the current fiscal year. The disbursements were mainly focused on servicing our existing customer base. As the industry began to update the credit bureau data, we have began to service new customers as well, but with a more stringent underwriting process wherever possible. Our net total income increased by 4% year on year at INR 33 crores during Q2, driven primarily by lower finance cost as our borrowings declined by 15% sequentially, combined with raising of debt capital at relatively lower rates from DFIs like NABARD, Sidbi and Mudra. Our company's continuous efforts to rationalize its operating expenses also bore fruit as OpEx declined by 4% year over year to INR 12 crores in Q2, while our cost to income ratios improved by about 3 20 bps year over year to 37.6 percent. In keeping with our conservative approach, we strengthened our provisioning coverage by prudently recognizing provisions of INR 14 crores during the Q2. Further, we also took an aggressive write off of 4.6 crores in Q2 to help reduce the NPA burden of pre COVID doubtful assets in the future. Including the additional provisions recognized during the Q2, cumulative total provisions at the end of Q2 stood at INR 44 crores at the consolidated level, covering approximately 6.2% of our total loan book. At the standalone, Arman level cumulative total provision stood at INR 17 crores at the end of September 20, covering 9.2% of the total AUM. Strengthening our provision coverage should help us deal with any impairments on account of COVID in the future. As a result of higher provisioning, our net profit stood lower at INR 1.5 crores for the 2nd quarter, While the provisioning may remain elevated for the next 1 or 2 quarters, we hope to restore our net profit to healthy levels from the beginning of next fiscal years as the provisions decline. Our GNPA and NNPA has continued to remain low and steady at 1.1% and 0.2%, respectively. In terms of capitalization, we remain adequately capitalized with consolidated debt to equity ratio of 3.3x, which excludes direct assignments. Liquidity wise, we are in a comfortable position right now. At the end of the quarter, we had cash reserves of approximately INR 135 crores including undrawn CC limits. We have repaid all of the debt obligations that were due in Q2 and also repaid the loan moratoriums that we had availed in April May retrospectively. Further, we have also raised INR 50 crores at very attractive rates since July 20 to bolster our liquidity position. Speaking of a more granular breakdowns on collections, in the Microfinance segment particularly, the improvements in the collections has been very encouraging as repayment rates have jumped to 75 percent in August to 84% in September and 89% in October. All operational states besides Maharashtra are reporting almost 90% plus repayment rates. At the stand alone level, the collection efficiency continued to be healthy and well north of 90% in September October. In the MSME segment, the repayment rates improved marginally from 92 percent in August to 93% in September and 94% in October. While in the 2 wheelers segment, the repayment rates stood at 96 percent in September and 97% in October. As we move forward, our foremost priority will be improving efficiency and restoring it to pre COVID levels at the earliest, especially in the MFI segment. To complement our high touch physical collections model, we have implemented a new platform to handle collections digitally via an integrated software solution using unique QR codes client level unique QR codes to receive payments through UPI platforms. We are currently in the pilot stage of its implementation. With the recovery in the economy, pickup in the repayment rates and the end of the moratorium period, we now feel comfortable to gradually and carefully scale up disbursements. Hence, going forward, we expect the pace of disbursement to normalize from Q3 onwards. Finally, to conclude, I would like to express my gratitude to all of our stakeholders for their continued support during these difficult times. A special note of appreciation for the company's field staff, whose perseverance and untiring efforts are the sole reason why we have been able to report such a significant improvement in the repayment rates for September October. Overall, we remain confident that we'll be able to successfully navigate our way through this storm and emerge stronger. On behalf of the company, I wish all the stakeholders a very happy Diwali and a great New Year ahead. I would now like to request the operator to open the floor for questions and answers. Thank you. Thank you very much. The first question is from the line of Amit Mantri from 2.2 Capital. Please go ahead. Yeah. Hi, Alok. Happy Diwali to you and the team as well. Thank you, Amit. Happy Diwali. On the collection efficiency numbers, so there's clearly been a good month on month improvement and we know your Arman is doing as well or better than many of its peers. On the provision front, you've already taken cumulative almost 6% plus of the loan book, which is significantly higher than any of your peers basically. So does this mean that you are far more pessimistic in terms of the eventual credit costs that lack in your microfinance or all the MSME and 2 wheeler loan book? Or is this just abundant caution? Another word for pessimistic is conservative. So taking provisions where the as much as the profitability allows, I don't know what the actual write offs related to this COVID scenario is going to be. The assumption here is kids student to take provisions at least in the 1st 2 to 3 quarters. And then in March, if things are a little better than they actually appeared to be, then we can always reverse whatever is not required. Now 6.2%, I just want to let you know that is the cumulative provisionings. So it's not all of those provisionings for COVID related write offs. Obviously, we'll have some AUM. There'll be certain standard asset provisionings and stuff that will need to be kept on the book itself. But yes, overall, we are not I'd rather call ourselves conservative than call ourselves pessimistic. Sure. And can you give more color on the how the state wise performance is there? So from most of other companies you've heard that Maharashtra has been weak state in terms of collection. So how are you seeing collections improvement in Maharashtra over the last few months? And which are the states which have been doing well for you? Well, I think it was a huge jump in the month of October. So in September, it was about well, starting all the way back from August, I think it was about 62%, then it went up to about 68% in September. And finally, in October, we ended up somewhere around 77% in Maharashtra. In fact, a lot of the increase came as in from September to October on a cumulative microfinance repayment rate came from Maharashtra taking a significant leap. As far as the other states are concerned, Gujarat is clearly the leader in terms of repayment rates at about 95%. MP is about 89 percent, little almost 90% is not Girish. Maharashtra, as I said in October, was 77%. Rajasthan is about 95%, so about the same as Gujarat. UP has reached 90%. Uttarakhand, which is a small portfolio, is about 95.5%. So overall, we have reached about 89% in October for microfinance. And for our 2 wheeler and MSME, primarily the portfolio is in Gujarat with a little bit of portfolio in Maharashtra. So the MSME portfolio, Maharashtra is doing little bit better at about 78%. And Gujarat repayment rate is, I think, about 96% or 96%, 97%, somewhere around that. Gujarat, in the 2 wheeler, all of our portfolio is in Gujarat. So that would be about 96%, 97%. Sure. And even in the month of November, are you still seeing this continuous improvement in states like Maharashtra where earlier they were challenging? We were. So we were. There was so getting into Diwali, we were about on a cumulative basis about 2.5% to 3% ahead at the same period in the previous month. But we lost about 5 days of Diwali. So since yesterday, we are about the same place where we were last month. But overall, we were expecting to see significant improvements in the last 10 days of the month with the new law. I think the lockdown is only applicable to Ahmedabad. So that is not going to have any significant effect on our overall operations in India. And honestly speaking, our systems have evolved in such a way that even the operations can continue running perpetually without the HOA being open because everything is online. So fingers crossed, I think there should be some improvement. Let's hope to cross the 90% barrier this month for MicroPunch. Sure, sir. So I have more questions, but I'll come back in the queue again. Thanks. Thank you. The next question is from the line of Bharat Sanghvi from MK Global. Please go ahead. Hi, Alok. Just a couple of questions. So one is with the interest rate softening, has it been passed on to us or like what has been the impact for us? And how do you see the demand environment changing going forward? In terms of the interest rate softening, especially for microfinance, the rates applicable are as per the RBI Director for microfinance. So that anyway has been for the fresh disbursement that we're doing, our underwrite rates, lower rates and for the RBI mandated maximum permissible Are you asking about the disbursement side or from the borrow or from what we borrow from the bank side? The disbursement side. The disbursement side. The disbursement side. So yes, it's gone down as for the RBI. Whatever new disbursements we have done in this quarter, they've gone down by about, I think, about 100 basis points. 100 basis points. So whatever gains that got in terms of lower interest that customer and unfortunately for the company we have to pass that on to the customer. But to add to that, there is a takeaway that is applicable for the new disbursements. There was book that we have created in the past with the higher interest rate, that interest rate to change your past. Do you understand? Yes. The interest rates are declining for us. That will be that would mean that we would in short term get a better margin because and that creates where the interest rates are increasing. So obviously, from a fair value point of view, if interest rates and the environment goes down, then you are better off for some time until the time you start redeploying the same fund with the lower interest rates. And then what's your outlook on the demand scenario? Demand is, of course, there. I think we are fortunate enough to be in a business where the deal is always evergreen, especially at a time of this. But I think as I mentioned in the last call that even during demonetization, we had soft disbursement for 3, 4 months. In also special issue in the month of August and little bit of December, most of the disagreement has been to our old customers. Since that we bought on the credit bureau data, which was all stale, I mean, it's not a dime since March. And if you pulled up their credit bureau data, it would be a 0 default kind of a customer. How that the credit data is getting updated by most of the financial institutions and the banks and everybody. We start into new customers also. But that we were a little bit in the blind, so mostly new version to our old customers with a proven track record. Okay. Okay. Thank you. Sure. Thank you. Before we take the next question, I'd like to remind participants if you wish to ask a question The next question is from the line of Amit Mantri from 2.2 Capital. Please go ahead. Yes. I'll look back again. So just a couple of numbers related. The interest income has increased on a quarter on quarter basis despite a decline in the loan book. So why is that? On a quarter over sir, in the same quarter of the previous year, you are saying. No, no, no, no. Quarter 1 quarter from previous Q1 versus Q2. So the interest income is higher in this quarter than in the last quarter despite loan book having declined maybe around 13%, 14%. Amit, there could be a marginal impact, couple of things that have the interest income also includes interest on the fixed deposits and cash collateral. Now the component of the fixed deposits, unencumbered fixed deposits have considerably increased in the last quarter or so. And additionally, if you look at it at the beginning of quarter 2, the portfolio was pretty much high. It hadn't declined too much as of 1st July, so to say. Yes. I think the average portfolio would not would be a different story. It's just that the repayment rates increased drastically during the month of especially August and or I'm sorry, in September August. So overall, if you look at the average AUMs, there will be a little bit of a difference. Sure. Understood that now. And so is interest income being recognized on the entire book? Or are you assuming that some part of the book will be NPA? So interest income should only be recognized maybe on a slightly lesser book? Or will that lead to interest reversals whenever NPAs show up in the next few quarters? No. And so partially what you said at the last is the right thing because under the NDAs anyway, even on the NPA, you need to book the interest. Yes. Unfortunately, until 90 days, you are forced to recognize the interest, which I completely disagree with, by the way, because in a normal scenario where it's fine because after 90 days, when your NPE levels are 1%, 2% or something. But on a moratorium book also you had to so we have a large portion which is interest due but not received. Interest due but not received. Interest accrued but not received. So we are, of course, building the provisions and stuff for that as well. However, the way we structured the moratorium is that when the customer pays off, when the I guess the moratorium, you can call it a type of a a restructure only. So when the customer pays it off, that interest accrued but not received gets hit 1st. So I don't think that there will be a very large reversal as a result of that. But if you look at like, let's say, 6% or 7% of our customers who have not paid since the moratorium started, of course, those ones will be reversal ones. And this provision includes the provisions on these assets as well. Yes, correct. Yes. So if you were to only consider those who are paying fully or even partially, then the interest income would be lower by around 6%, 7% of which is the number we're not paying? Which is the well, because there are loan amount that would be around a little bit on the higher side, I think. But I mean, sir, I don't have the exact numbers with me. Because you know the loan amortization schedule, the principal and interest change every month on month, right? So maybe if I can give you that answer, but let me put some thought into it and get back to you. Sure. No, got it. And there's a fair bit of excess liquidity on the balance sheet, you're carrying or the debt has declined and there is a fair bit of cash that is sitting on the balance sheet now. So the plan also continue to carry the kind of excess liquidity even going forward? Not so much. I think about 100 crores or so is what has been working for us. So we'll try to keep it around that between INR 80 crores. And as the disbursements pick up, I think that excess liquidity should continue to go down also. So we have enough things in the pipeline right now, so we are trying to manage it and plan it in a way based on what we project our disbursements to be. So in a couple of days, we are closing another NCB transaction, for example. Okay. Okay. And now at least because now because the disbursements have started and you did INR60 crores in October. So now the loan book is unlikely to decline further going forward, right? Yes. So we have reached that stability now where the repayments at least last month we reached it whether repayments were about the same as what we disbursed. So starting this month or maybe next month, the portfolio should start going up again. Again. Okay. Thank you very much. Thank you. That's all. Thank you. The next question is from the line of Chandra Shekhar, individual investor. Please go ahead. Chandra Shekhar, your line is unmuted. You may As there's no response from the current participant, we take the next question from the line of Srinath from Bellwether. Please go ahead. Hi, Alok. I logged in about 5 minutes late. So if my question is repetitive, I'm sorry. I just wanted to understand, given that the MSME business has kind of done very well in the last 3 months, you had about 90% collection. Or the numbers are a bit on the lower side. So just wanted to understand. And also given that it's an assessed income loan, the slightly scaled bureau data in at least MSME shouldn't be that much of a hurdle, right? So just wanted your outlook. Well, yes, I mean so we are starting to push for the disbursements in that side in the MSME side also. Of course, the incomplete credit bureau data that we relied a lot on was incomplete. And there was a lot of different kinds of businesses that we had sort of blacklisted from MSME until the COVID situation improved. And those are essentially occupations which we thought would be highly disrupted due to the COVID issues, roadside Dhaba type or eateries and those kinds of areas or hospitality kind of small establishments. So I think going forward, that should pick up. As far as the repayment of MSME is concerned, see if you compare apples to apples, of course, MSME is slightly better than micro. But if you look at it, compare it to a state to state, for example, Gujarat in microfinance versus Gujarat to MSME, that large difference is actually becomes a small difference between the two divisions. So I guess we got a little bit lucky from the geographical standpoint. I know, okay, I'm just kind of trying to be fully transparent here. But that said, yes, I think starting from Q4, we are already trying to figure out our next expansion in terms of branches and areas for both MSME and Microfinance. So my honestly, my biggest goal is that to put COVID behind us by the time April 1, 2021 rolls around. So I know that's a long way away. But hopefully, we reach a spot where whatever has to be provided is on the books by March. And essentially, we get a fresh start from April 1, and we continue our growth story. Fair. Fair. I think last cycle Gujarat was the pain area. So it's best to be diversified because it's so difficult to take these calls. Maybe this is not the right forum, but I always joke around with people including Vivek here that last time we got kind of short in the foot at Gujarat. And as a result of that, we diversified across all of these different states. If I would have just been in Gujarat, I would have been a better spot. But of course, this is not the lottery system. You cannot just make decisions based on luck. So I don't regret Nick Chibout's decision, but it just one of those ironies of life. Got it, got it. And this is a bit of a delicate trend. So just wanted to understand what's happening in Maharashtra as in in sense of is this a political kind of an issue or is this difficulty to reach the customer? Again, as much as possible, if you could share qualitative flavor of what is happening in that market, that would be very nice. See, I think different areas have different problems. But largely on average, earlier on, it was about reaching the customer and about political issues. Lot of those issues have gone away. And so I would say Maharashtra, whatever gains that we made in June, July August in, let's say, Gujarat, we had a late start in Maharashtra. So those gains and optimistically those gains should be forthcoming in Maharashtra as well, but a little later. It's just a matter of convincing the customers. But I think primarily issue was that because earlier on there were a lot of political issues. There still are, but lot lower than what they were at least 2, 3 months ago. And of course, access now is not much of an issue, which was a huge issue in those earlier days. Got it. Thanks, Alok. Wishing you and your team a happy Diwali. I'll get back to you. Thank you. Thank you, Sridhar. Thank you. The next question is from the line of Nagraj Chandra Shekhar from Labranum Capital. Please go ahead. Hi, happy to value all over the year. Thank you. Just on the competitive intensity in the last 2, 3 months, obviously, in your area, my guess is that the more total book complete over with NPSC MFI than with MFPs. Are you seeing a smaller NPSC MFI struggling for liquidity and also not the reverse, having to put a minimum extent that we will accept the purpose to sort of replenish our book? Equipment? I think lot of I think most of them have cut back on their disbursements, maybe not as much as us, but enough so where the repayments were higher than what they were disbursing. So I don't think that liquidity is too big of an issue. See, on the field level, when you talk about microfinance side, basically what you need to understand is the same guy who's dispersing is the same guy who's collecting. So as a management sitting at the HOO, we kind of have to try to find a balance that what is the priority. Do we want them to focus on collections 30 days out of the month? Or do we want them to focus on collections 70% of the time or 80% and focus 20% of the time on disbursements. So I don't think that there is one clear right or wrong answer or good or bad answer. I think you have to tackle each area differently, each branch differently. Obviously, states and branches who have reached 90%, 95% repayment rates. It would be foolish to focus 100% of your time for an incremental 1% kind of a repayment rate increase. So in those areas so as the repayments increase, I think disbursement is naturally going to increase. But as far as competition is concerned, I think most people barring a few exceptions, there will always be the outliers. Lot of people cut down a lot on the disbursements compared to even pre February level the same period Q2 of last year itself, I think the disbursements were just probably 40%, 50% in the areas that we are working in. So overall, it's pretty large decline from the disbursement side, but everybody is going to be picking up again. So my informal talks with a lot of the upper level, C level people at the different companies. I think everybody is during Diwali and post Diwali is planning to ramp up disbursements. So let's see what happens. Understood. Thanks for that color. And in terms of tracking this pricing on the ground, things a couple more qualitative points. Are you seeing top up loan happening to customers who haven't been able to pay credit even amongst our customers who might not be able to pay them getting top up loans from others? And on average, how many lenders do it at a typical borrower from us or support Honestly, I cannot comment on the number or who is actually doing it. However, I mean, it's no big secret. I think people are doing it. There are top off loans out there. There are net off loans out there. One way another way to increase your repayment rate is just start dispersing a lot of money because on a static pool, your repayment might be down, but whatever new portfolio you are creating, obviously, that might be at will be at a higher repayment. Well, assuming that will be at a much higher repayment rate, your weighted average will go up. So but there are companies that are making top off loans. There are few companies that always used to make top off loans, and they'll continue to do so. There are certain MFIs who are netting off their outstanding and issuing a whole another new loan. So not very different from a top off, but a different kind of mechanism. I'm sorry, I don't think I have the right answer in terms of how many companies are doing it and how rampant it is. But for sure, I can assure you it is happening at some few companies and some more than others. Understood. One more question being the 6%, 7%, 7% you mentioned for the number of customers who haven't made payments since April. This seems ballpark in line with what a lot of other NBS genotype SOPs are fourteen. Just wanted to understand our concentration by state driven and by main occupation as well. And is it mostly below or recently taken a loan and have a larger amount of minimized remaining or any such color? I mean, we have all of this data. To be honest with you, I don't have all of it in front of me. Maybe we can take it up separately about what occupation you are seeing it from and stuff like that. But just to provide without getting into percentages, I can tell you that about half of those figures are in Maharashtra. So the non starters or whatever you want to call these customers. Also in the sort of the defaulting customers, most of these customers are involved in non agriculture kind of activities. So most of our customers that are involved in providing life kind of services versus or I'm sorry, livelihood kind of services versus lifestyle kind of services. So obviously, those guys are doing a lot better compared to, let's say, the hospitality people and the street vendor type of people. Obviously, they got disrupted quite a bit. They are back on their feet, but clearly not in a way that will allow them to start making repayments, lot of these guys. Another curious thing is that many customers who are showing an intent to repay, it's not like the progress is steady. What I'm trying to say is that imagine a customer who pays in, let's say, August September. Well, although there is a small chance, there is still a chance he'll miss October's payment and then pay in November. So the assumption that most of us made earlier is that once you get them started paying, they will continue paying. But that is, in fact, not the case in a small segment of customers who are paying one installment, missing one, paying another, missing another. It's kind of random in that sense. Understood. And we would be lengthening tenures for the number of our customers who have to monitor the amount within that portfolio and that book. On average, how much does lengthen the tenor with those customers, around 2 months and a half? I'm sorry, I couldn't understand your question. Maybe you could take me off speakerphone. I'm actually not on speakerphone. I'm asking the customers who would have their loan tenors restructured, on average, how much longer would the tenure be? That's interesting. So on average, I guess we can do a weighted average. The average return out is about 2.5 to 2.5 kind of months on an average return on. Yes. So I think almost every customer was given a moratorium for April and May. And about repayment rate started with being about 60%, 60%, 50%, 50%, and 75%, percent higher than that, maybe about 3 months. 3 months sounds like a good average, but I'm sure you can backward calculate it with our repayment rates. Okay. Thank you. Sure. Thank you. The next question is from the line of Shripal Doshi from Equis Securities. Please go ahead. Hello. Good evening, sir. Good evening. My question is with respect to our disbursements of new loans. What so I know that now the credit bidders also update is getting updated. But what is what number of installments are we seeing that the customer would have paid? And so what is the strategy on evaluating the credit due to data ons before this person? No, I mean, certainly, we would have want them to have restarted their payments. So the criteria that we came up last month was they should have made at least 3 continuous payments for us to consider it. That was for MSME. And for the microfinance, we came up with the criteria of 2 continuous payments with absolutely no kind of defaults in the previous months. But as I said, the credit bureau data was quite stale at that time, and there was certain court order or Supreme Court orders that was restricting even post moratorium, some of the financial institutions were not sharing the data adequately. So a lot of the customers, we were relying on our own kind of experience. But going forward, that will become important, that criteria, yes. So the current disbursement that we're doing, I understand we are doing it only to our own customers. So we will sort of have an understanding whether the customer has paid the last 3 AMI or not for the NFS segment. And then accordingly, we'll be taking a call, right? Or we were taking a call? We were taking a call based on our own experience with the customer. And by our own experience means we gave them a free pass if they didn't pay for April May and in some cases June as well. July, August, if they continued their payments and their loans were finished, then we were happy to give them a loan. Right, okay. Okay. And one question of I understand that the previous question was also with regards to this. So what percent of our customers would have a 4 month of loan tenure extension? What percent would have 4 months? About at least 25% would have 4 months or above. Because essentially customers who have not paid April, May June. And they will like. And so even if they have not paid 3 months, then also it will be more than 3 months because there will be some bit of interest accrual that's not bought assets. Yes, yes. Anybody so that way, when Alok given estimate around 20% is required. It will be around 20% because eventually 20 because 4 months and above would be about 20%. So the repayment rate calculating it as the repayment rate was about 75%, that means 25% didn't pay. And so just by extrapolating it was that. Again, guys, I this data, but it's just hard to access it all on a moment's notice. So any obscure like you need, just email our Investor Relations people and if we can get it to you, we'll get it out to you. Sure, sure. One last question was, I mean, how are you seeing the securitization and off balance sheet portfolio opportunities coming up since the I mean in the last one, one and a half months? I don't know. Vivek, we are less than a lot of. Yes. So I mean the inquiry for portfolio purchase is pretty high across all segments. So I mean even 2 wheeler, MSME and micro is always because of the PSL is always in demand. The difference now is that most of the institutes are inclined more towards the PTC kind of transaction rather than the plain vanilla DA transactions. So that's the general interest which the lenders have been showing. We've been fortunate in almost the 6 months or rather now the 7 months that have gone by for this financial year to have had enough liquidity and liquidity from institutions like Sidbi, Mudra and Nabar. So we've kind of have a good lineup of such transactions. But as I said, they're more towards the interest is more towards the PTC transaction where the risk coverages for the investor is higher. I think a lot of banks and financial institutions are looking for good places to deploy money. And so we are getting a lot of offers from both the securitization side and the term loan side. Unfortunately, we've always had enough cash. So most of those things we turned down. But most of the financial institutions, the better ones are sitting on a lot of excess cash because they have not been able to deploy it in the last few months. And so if I can kind of toot my own horn, I would, let's say, consider myself as a good place to deploy their money. So we are getting a lot of offers. And we are in a position to pick and choose the more favorable Okay. If I can just squeeze in one last question, which is something that you alluded in the early part of your comment that now we are seeing imposition of curfew again. And even in smaller towns where the curfew lockdown sort of situation is not imposed by administration, but there are also we are seeing slowdown in economic activity by the discretion of that particular organization business organization. So do you see this will create some hindrance or some delays in the collection efficiency improving Wing9? Absolutely. Absolutely. So I'll tell you a lot of even village areas there are certain cases in the village. Even the Panchayats are making kind of ad hoc decisions of implementing their own version of lockdowns and stuff like that. So on a daily basis, we face those kinds of situations even in branches that are located in areas where there are a lot of cases They're formal or informally, those plays became become containment areas. So we have to figure a way out to get other people to start collecting. But But hopefully, we are we can put this all behind us and in the next 3 to 6 months kind of move forward. So it will not be sort of easy to extrapolate the current disbursement trend for the next, say, second half? I mean, is it fair understanding, like? No, I mean, we have a see, we have reached about a run rate of about INR 50 crores in the microfinance. So this month, we did about 50 crores of disbursement against pre COVID levels of about 70 crores. INR 70 crores, INR 70 3 is probably the 3rd what we reached, INR 75 maybe at the most. So I would say by about December or January, we should be at least at around 65 crores levels. Why that 5 crores gap is because there'll be certain branches that I won't be able to start disbursements. Branches are allowed to be a little slower. So already we have a plan in place of those branches whether to merge them or keep them as collection branches with kind of a lower staff level. And we already have a plan also in place to open around maybe optimistically 15 to 20 branches between December January. So now those branches will be more for the next fiscal year because it takes about 2, 3 months for the disbursements to rank. But they should provide at least a little bit of help this year as well. Okay. The situation is very fluid right now. Every day there are new challenges and new ways to firefight, but thankfully, we have managed going through all of those so far. So let's hope that continues in the future as well. Sure, sir. That's it from my side. Good luck. Thank you. Thank you. Thank you. Thank you. The next question is from the line of Ravi Jain from 2.0 Capital. Please go ahead. Hello. Yes. Hi, Alok. Happy to hear you. So just a couple of questions. One is on the credit cost, I mean, you still you don't have a clarity on what the eventual credit cost will be. But I think all the industry players, when this event when we were at the thick of the COVID crisis, they I mean, they felt that the ultimate credit cost would be lower than demonetization. I mean, that was something that many people spelled out with quite a bit of confidence. So what is now that a lot of time has elapsed and what is your opinion on that? Will it be lower or higher? Sameer, I mean, for the record, I was never the person to say that the loss will be less than demonetization. I never believed that to be the case because demonetization was a cash related issue. And this was more of a loss of income and loss of enterprise head of an issue. So I always felt it's going to be higher than Beemon and I still continue to feel it's going to be higher than Bimon. So but I honestly, I always call myself as a bit of a pessimistic person. So what I was imagining the loss to be in around April May is going to be a lot lower than that if it makes you feel any better. No, even we felt it that way, but I think there was a tremendous amount of confidence, which still there is. But it seems like there would be a minimum of 7% credit cost for the entire industry, which is at least a minimum of 7%, which is more than what was there in demonetization. So right? In demonetization, like, for example, us on a static pool basis, we lost, what, about 4% for it? Yes, You would be among the lowest in the industry, as low as maybe Bharat Financial or some of those, the good ones. But I think overall, the average was definitely more than 5%. And Yes, yes, I would say that's not far away estimate. But a lot of these things will be spread. You have the restructurings available and you have, of course, the gentleman before talked about top ups and stuff going on. So I don't think it's going to have a systemic issue. And honestly, I don't think this is just going to be related to microfinance. It's going to be a the entire financial services is going to have to bear this, including banks and NBFCs and MFIs and MSMEs and everywhere. I mean, there'll be a few maybe the gold loan guys and some might not have to deal with it because they are fully collateralized. But everybody is going to have to take a hit. The sooner you can accept them, the sooner you can move on. And also on this top up loan that you were discussing with the earlier participants, now we obviously share a lot of lenders with our borrowers. So they would be borrowing from, say, the larger banks or SFBs, etcetera. Now few of them are clearly very aggressive in terms of giving top up loans to their customers. And therefore, these customers do not show up as NPE, even for you probably because these guys might be paying you off from those loans. So how do you really discriminate and understand who is really a good customer or bad customer? Because if this is happening on a rampant scale and because you mostly would be sharing a customer with at least one financial institution, right? So if it's happening on a very large scale, then especially the smaller players would be suffering because of poor underwriting by the large players? No, I mean, I don't think it has reached to that level. I don't think it has become a systemic issue or anything like that. But I mean, I'm not saying it doesn't happen. I'm just trying to find the right analogy for you. But let's say in the case of Arman as well, now if we borrow from SBI and have a repayment for quota this month. Does that mean CAF borrowed money from SBIO to pay off Kotak? Well, of course, it does, right? That is our business. Nobody says anything wrong about it. So there are right ways to do it and wrong ways to do it, number 1. Number 2, it's not like I have anything against top off loans. Top off loans done in the right way is although I don't know exactly how to distinguish what is the right way and a wrong way, I'm not a big fan of them. If you fully disclose it and you are doing top off loans and you have certain level of criteria for doing it where at least the management level of a certain company feels that it is the right thing to do and the underwriting standards are adequate, positives outweigh the negatives, then go ahead and do it. Only thing I'm against it is that you use it to cover up your losses and kind of hide your problems. So that is the main issue that I have with the top ups. Otherwise, there are companies who have always And lastly, this in the last 5 years, we have seen 2 6 Sigma events. And when they occurred, they were called 6 Sigma. But if 6 Sigma events occur so frequently, then they are not really 6 Sigma. So what is your learning in terms of how you're going to build your business going forward? Because every once in 4, 5 years, something happens which can really even jeopardize your very existence. So what is the broad change in strategy that you will undertake after this crisis? Well, Wimbledon took pandemic insurance, and I always fantasize sometimes that what if I haven't done that, I would have hit a hero or something. Honestly, for demonetization, there was a lot of learning. As far as the pandemic is concerned, it was on such a global scale that I mean rather than making something up, I don't know yet. I'm sure there are lessons to be learned and good lessons to be learned, but we've been just so busy firefighting here that maybe ask me next quarter. Yes. I mean, there were so pandemic, I mean, obviously, it will not be a pandemic. Maybe it will be an earthquake or whatever. I mean, I hope not, but I'm just saying that if you're concentrated in one state, it just you couldn't have done anything to have prevented it and then you're just at the you're unlucky because you were like you said you were present in Gujarat in a big way and then you were so that kind of helped and sometimes it did not. So how do you future proof this business of microfinance and MSME lending? Obviously, geographical diversification is something that is there to which I think you will continue on that path, right, with respect to what has happened? Exactly. I mean, clearly, we had plans to expand into Bihar in certain areas. I mean we had a wonderful plan which all went out of the window, but there were certain branches in Haryana in places that we wanted to expand into through Western Blue Creek. And so of course, there were big plans for this year. But I mean, what are you going to do? These things happen from time to time. Unfortunately, as I said, 2 kind of events, 1 after another in 2016, 2017 we had demand and of course, we had COVID. So unfortunately, these events, I don't know if it's a coincidence if they happen so close together. Let's hope it's a coincidence because I don't think my nose can take it happening every 3 years. Yes. So just last question on this. So basically, this is a brand that the entire industry has to face from time to time. So one way probably to tackle this is that you could have higher names or eventually you make very high ROEs in some years and then you don't make any ROEs. Obviously, the problem with that is the spread cap that RBI has. So is there any thought that you might go to RBI and say that now that things have this was a fallout of the AP crisis probably. So now that things are much more stabilized, there should not be any such spread cap and even if it of efficiency or should be can be retained by and banks can still retain it, right? I mean, you guys cannot. So there has been attempts in the past to ask RBI for a relaxation of the so called ceiling for the interest rates. And RBI in those cases did not look at it too favorably, very honestly. Whether that stance has changed, of course, that would have to be approached by Amfin or some of the other industry associations, which by the way have already approached them about the 2.75x cap. Right. So they're looking into that closely because it was a really ridiculous formula, right? For every 1% decline, CFO decreased by 2.75 percent. So it just didn't make a lot of sense. So RBI is looking into that, but usually asking the government, can we charge 4 people more interest is not No, actually, you're still charging lesser interest because, see, from the heyday of 28%, 29%, 30%, now the bigger banks are lending at 19%. So it's already come down to a very respectable level. So this is very much To my experience, a lot of the government officials don't understand the nitty gritty operational issues of microfinance or how expensive it is to do what we do. And as you say, every 2, 3 years, there might be a 0 ROE kind of a year. I have met a lot of government officials in my career. And when you explain to them that what you do, they love the story, right? You are helping women and all of that stuff. Inevitably, the question will come up is how much interest you charge. And then 24% or 23% comes out of your mouth, you have lost half. It doesn't matter how much you try to justify to them about operational cost and credit cost and last mile delivery and credit and all of that stuff. In their minds, you are taking fair advantage of the poor people. So that is they have come a long way. I think the center and most of the higher state level officials understand what we do and why it's necessary to have these rates. However, anyway, we can always try. There's nothing wrong in asking. It's just that my opinion when you're asking them to increase rates, it's they don't want a newspaper article saying that RBI allows charging poor people an extra 2%, right? That's a nightmare. So I don't want to allow it. Okay. Yes, that's it from my side. Thank you for your time. Thank you. The next question is from the line of Saptashree Chatterjee from Centrum PMS. Please go ahead. Yes. Thank you for the opportunity, sir. Just two questions. One is, can you just talk about how much is the cycles like proportion of customers in 1st cycle, the 2nd cycle and how is it in the case of Maharashtra? So Maharashtra, we have a large so since we moved in there like about 3 odd years ago, so there are a lot of 1st cycle customers, almost I would say about 70% will be 1st cycle customers in Maharashtra. Overall, if you look at it on our company side, about I would say about 50% of our customers would be first cycle. Understood. And secondly, just a clarification in the balance sheet March versus September, there is 2 items, other financial assets and investment. So what is the increase, if you can give some flavor, increase in other financial assets, what are these items? And in the investment side, these are primarily GSEK or mutual funds or what are these basically? So I mean those are liquid funds, liquid funds and highly liquid kind of risk free kind of fund, which we put it in I'll pick up with the SBI and the treasury fund. SBI or Kotak or some combination there. As far as your first question, I don't know what he's referring to Vivek. Can you help him? Could you kind of repeat this? Yes. So basically, the financial asset, which increased from TRY 7.5 to around TRY 12.7 from March to September, What are the basically items, if you can give some color? I think Okay. You're talking from March to September, right? So this includes the interest accrued but not received on the loan assets. Understood. Okay. Thank you so much and all the best. Thank you. Thank you. The next question is from the line of Srinath from Belvidere. Please go ahead. Hi, Alok. Just wanted to get a few data points. I just wanted to understand how the rural 2 wheeler book had fared given it's in a pilot stage, this will be very useful to kind of see the well tested data because if this product is it survives COVID, then we can significantly scale it over the next 12 to 18 months. So just could you share some feedback? Yes. So last month, it was about 93%. So slightly lower than our sorry. So it's a little bit on the lower side compared to the MSME, but still not too bad as far as compared to the urban side is concerned. So the check bouncing in the urban side has been I don't know if a lot of you read the recent articles about data from notch NACH. On average, about 40% of instruments on NACH on an overall level are bouncing, which is huge. I mean, it's that means people are still in some level of severe disruption or I'm not exactly sure what's happening. Even where we are concerned, our pre COVID bounce rate in the urban two wheeler side was about 20%. And even in the current month, that number is around 34%, so significantly higher. But then when you show up at their doorstep, it seems that we manage somehow convincing them to give the money. But it's kind of a weird phenomenon. I'm not sure exactly what's going on there. So net net, one would assume you're reasonably satisfied with a 93%, 94% collection is actually fantastic. So at the right time, you would look to scale that business line. Would that be a fair understanding? Yes, yes, absolutely. Right now is not the right time because it just seems that people have lost interest in buying 2 dealers. The sales are really low. It's been not a very good season, at least in the areas that we operate in. I know that is contradicting some of the articles which are coming from Hero and stuff about record sales and stuff taking place. So how to reconcile that with my own operations, I'll have to look at it in more detail in the next few days. But overall, it's not I mean, the last year and a half to 2 years have been really difficult for the 2 wheeler segment. Fair. And any other product that we piloted? And could you share how the credit performance has been outside this? I am aware of Rudolf to Villa, but outside that if you have piloted any product, it's very useful to see the stress level? No, I don't think so. There is no other product that we have that on pilot right now. Got it. This 15 to 20 branches you had just mentioned to a previous answer, just want to understand that we're looking to open in Q4 to kind of set up growth for next year. What kind of diversification, what kind of area are we geographical areas are we looking to expand into? And are we looking to see you were saying you want to kind of shut some branches? So if you could kind of give a branch outlook in terms of where are we expanding and where are we contracting from a Q4 to this year? So right now, the consideration is areas of Rajasthan and Western UP into neighboring states as well. So that is the so 15, 20 branches is not a very large, long list. The idea is to hopefully concentrate on areas where the repayment rates are of course, that goes without say, but even our experience with Rajasthan and Western UP has been fantastic. Overall repayment rates have been 95% for the past few months. Look into those areas. But I think a lot of research and time and effort go into before selecting the exact branches and areas. We're not quite there yet. So we have a lot of work to do before we decide on the exact areas. Thanks, Alok. Thanks a lot. I will get back into the queue. I think we are about shooting 15 minutes over. So operator, maybe one more question and then we can end it. Okay. Sure, sir. We take the last question from the line of Vinayam Baker, individual investor. Please go ahead. Hello. Good evening, Alok. Good evening, Dereck. Am I audible? Yes, yes, yes. Yes, thank you. In the previous conversation, I heard a whisper about trade secrets. So pardon me for asking this. So within whatever you can elaborate, can you talk a little bit about this digital collection initiative that you said you had started? I mean, is it in MFI or MSME or how has the performance been? And how are you thinking about scaling it up? So right now what we have done is we have tied up with I think, Twin Lines and one more person. I forgot the name exactly. It's a trick of my tongue. But anyway, well, that's a different thing, yes. So two things that we are doing. One side is that there is a unique QR code that gets generated for every customer, and you can use any UPI based app either whether it be Paytm or PhonePe or anything like that or even your bank's app. And if you scan the QR code, the money will automatically get reflected into my bank account. And the customer's account will automatically get credited in the LMS system. So we also have mechanisms where the customer can pay you via unique codes over the phone if we are trying to do collection efforts and things of that sort. We have also tied up with Finos payment bank, wherein either the customer or the field officer can go to their nearest Fino merchant and deposit the cash directly and have it be reflected into their account directly. So those are the two things that we are doing. Let's hope the uptake is good, but I think this is a long term deal. I don't think you're going to see results in a few quarters. I think it's going to take a few years to permeate through the system. But overall, the at least the hope is that we can shift the customers at least partially to a non cash based payment, but not lose that high touch kind of model. So still do the center meetings and things like that, but have a lot of them pay the money on a cashless mechanism. Right, right. Because one of the solutions that you used to offer and continue to offer in the MSN is also doorstep collection. So you see part of it getting replaced with digital collections? I mean, that's see I think right now the situation itself wants you to prepare yourself for having this digital collection as a mode available, not that you want to replace the high touch model that we have on the microfinance or MSME. That will have to continue the way at least in the foreseeable future. But yes, if as somebody earlier asked that how are we preparing ourselves for the next big issue. So I think this is one of the things which should be there as an offering to the larger set of customers so that we are prepared for something that kind of turns out to be worse than what we've already seen. Yes. So it's also another way that you don't want to be stuck in a position where if you cannot reach the customer through whatever reason, whether it be a pandemic or an earthquake or something, there has to be some backup option available. And the customers have to be trained and their culture needs to be changed wherein you teach them that, okay, we can come and collect it, but if we are not able to, then you need to transfer the money electronically by some method. So that will take some time. All right. Second is just to extend a point that you had made about balancing collections versus disbursements because the same field officer is doing both. And as you are likely to increase disbursements going forward, there could be lesser time spent on collections. During demonetization or just after that, there was a separate team that was formed and I think the other buyer was overseeing that to focus only on collections. So is there some thought around these lines in this current situation? Hello? So just allow me a minute. I'm just trying to reconnect the management. Okay. Please stay on line. Requesting participants to please stay connected. We are just trying to reconnect the management back to the conference. Requesting all of you all to please stay on line. Thank you. Sir, you all are reconnected. The question is Mr. Lalon. Please go ahead. Yes. Sorry, I think I got disconnected for whatever reason. Can you repeat your question, Vinay? I'll do that, yes. You earlier mentioned that the same field officer is doing collections as well as disbursements. And then how much time is to be spent on each activity is something that is a little fluid as of now. During demonetization, there was a separate team that was formed under Jainabha sir to focus only on collections so that they and that continued for some time till it was self serving in that sense, the payback period, the payback used to happen positively. So is there some thought around having a similar approach in the current situation? Absolutely. Absolutely. I think you hit the nail in the hammer. So that is the plan. We have already started recruiting on the MSME front because those repayment numbers are sort of stabilized, right? So whichever customers are there, which are either have not started or have started in no meaningful way, so those are the customers that we'll be targeting. So we are starting with a team of about 20 people in MSME and that will expand. And hopefully, the thought here is the same one that we had was as long as the amount collected is more than what it cost, I think we'll continue having it. So that will be probably a long term game. In terms of microfinance, we'll have it once the repayment rate stabilizes. So the current team is still continuing to make progress on a month to month basis. Once we see some level of stability, we can implement that RO structure, recovery officer structure on a branch to branch basis as well. Right. A clarification on disbursements, when you said that you probably reached say around INR 60, INR 65 crores maybe by Jan or Feb or December. And also you mentioned that you are giving the preference is to give loans to existing customers. And you also said that currently we are not doing top up, we are doing we are only serving those who have closed their loans. So I would assume that you would for the next 6 months, say till March, you would have data available about which are the customers who are going to whose loans are going to get closed. And then based on their performance history, you probably target them for disbursements. My specific point was that out of the 65, or whatever this number that you're targeting, do you have some sense how much would be new and how much would be these kind of customers that you would end up by March? Not by March. Unfortunately, my Chief Operating Officer will probably be better to give you those rates. But I think what you did was a very fair assessment of what we did. So reduce a lot of that burden, we kind of a pre approved kind of a scenario as far as our old customers are concerned. And basically, gave Rand Highmark and the credit bureaus on a not on the request of the branches from but from our own data on the HO. And we sent a list to the branches directly saying that here are the old customers who are maturing and we have run their credit bureaus. These are the ones which are pre approved as far as the credit bureaus and stuff are concerned. And so their work becomes a little bit easier as far as the underwriting and stuff goes, right? So that's basically what we did. Now in terms of the month of August, almost all of the customers that we did were old customers. In the month of September, almost about 70% no, more than that, I think 75% of our customers were old customers. But soon enough, you're going to run out of that well as well of old customers. So you'll have to start concentrating on new customers as well. So I'm not exactly sure what that number is going to look like going forward. But I think overall, our reliance, of course, cannot go on for all customers go on for perpetuity. Right. Just a last question on this. Because I believe with the NSME, we have been primarily targeting new to book customers. So is there a thought where our late cycle MFI customers who have grown and with us, is there a thought to increasingly tap that database for the MSME pool? And how do you see any number forming in your mind? How much would that constitute or something? It's a spot, but actually the micro division, MFI itself is considering of doing the what are you saying around Yes, about 50,000 loans we are considering of starting in the MFI segment as well. What has actually happened in the past when we started to do inter department kind of transfers and this is something that you will find when you are running business is that MFI team members don't want their hard earned 5th cycle customers to go to the MSME division. So there are ways around that as well. But so in the MFI book as well, we are starting a INR 50,000 product on an individual loan basis. So that will run through its own pilot stage. Hopefully, we can launch that in December or January sometime. As far as numbers go, I'm not exactly sure what that it won't be a very large number this year. But depending on how the pilot goes, it can be maybe 5%, 7% of the portfolio in the long run. That's good actually because if the MSME division is catering to their own separate pool and then you have within MFI larger customers getting some similar kind of offering, then it may probably prevent a leak of these other lenders tapping these customers for their personal loan offerings, I would imagine, right? Right. So anyway, wonderful. Yes, just one last data point, sorry. Within the 6.1% provisions that you mentioned, would you have a breakup of how much is COVID specific extra provision that you've taken and how much is the normal standard provisioning that you would have made? Yes, we will clarify that. Vinay, that would be about 3.86% as the COVID provision. And the balance will turn out to be the normal standard ECL provision. Even ECL will be bumped up for COVID as COVID because the cycle in the ECL, you would have a higher cycle higher rate of provisioning for the higher cycles or the 30, 60 year cycles. Hence, the ECL provision itself is bumped up, but the COVID provisioning itself stands at about 25 watt crores for both the entities taken together. And that turns out to be almost 3.9%. So that would be a part of the standard asset provisioning. Actually, COVID provisioning right now would be considered as a standard asset provisioning. Right. Okay. Okay. Got that. Okay. Thank you. Thank you, Alok and thank you, Birik, for your detailed answers. Thank you so much. All the best. Thank you so much. Yes, sir. That's the last question. You may please go ahead with your closing remarks. Thank you. Yes. So no prepared closing remarks. Thank you everybody for joining. I think this has been a sort of a record where we have gone half an hour over and above what we typically do. But it was a nice experience. A lot of questions had me thinking towards the right direction as well. So thank you for that. And hope to see you all next quarter and hope you all have a happy Diwali or had a happy Diwali and have a great New Year ahead. Thank you so much. Thank you. On behalf of MK Global Financial Services, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.