Ladies and gentlemen, good day, and welcome to the Arman Financial Services Q2 FY 2021 earnings conference call hosted by Emkay Global Financial Services. We have with us today Mr. Aalok 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. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Jignesh Shial of Emkay Global. Thank you, and over to you, sir.
Yeah. Thanks, Janice. Good evening, everyone. I would like to welcome the management of Arman Financial and thank them for giving us this opportunity. I will now hand it over the call to Mr. Aalok Patel. Over to you, Aalok.
Yeah. Thanks a lot, Jignesh, good afternoon to everybody. Thanks a lot for joining in and taking the time to discuss our financial performance for the second quarter and the first half of FY 2021. We have issued a detailed press release and also an investor presentation for the past quarter. 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 a sort of a curfew or a lockdown for a couple of days, starting tomorrow. Both Vivek and I have been a little busy with some of the continuity kind of issues. The disclaimer here is please excuse us if we are not as prepared as usual.
Overall, we have witnessed a very broad-based 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, excuse me, positive intentions of our customers. In microfinance, only 7% of our customers have not started repayments post-April. For MSME and two-wheeler, that percent stood at 3.6% and 2.9% respectively. I'll start by giving a brief overview of our financial performance for the second quarter and post that touch upon the collections, liquidity, and disbursements in more details.
At the end of the second quarter, our consolidated loan book stood at INR 704 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 a expected decline in the loan book. Our microfinance and MSME portfolio stood at INR 523 crores and INR 119 crores respectively at the end of Q2, lower by 5%-6% year-over-year. In the urban two-wheeler segment, the AUM was impacted by the decline in two-wheeler sales in the preceding fiscal year and the sharp drop in two-wheeler sales during the first half of the current fiscal. However, our newly launched rural two-wheeler product has demonstrated a relatively better performance, reporting a year-on-year AUM growth of 10%. The rural two-wheeler book now constitutes approximately 12% of the total two-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 crore, and for the month of September stood at INR 34 crore. This number has increased to approximately INR 60 crore 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 begun 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 crore 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 320 basis points year-over-year to 37.6%. In keeping with our conservative approach, we strengthened our provisioning coverage by prudently recognizing provisions of INR 14 crores during the second quarter. We also took an aggressive write-off of INR 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 second quarter, 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 provisions stood at INR 17 crores at the end of September 2020, 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 second quarter. While the provisioning may remain elevated for the next one or two 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 and May retrospectively. We have also raised INR 50 crore 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% in August, to 84% in September and 89% in October. All operational states besides Maharashtra are reporting almost 90%+ repayment rates. At the standalone level, the collection efficiency continued to be healthy and well north of 90% in September and October. In the MSME segment, the repayment rates improved marginally from 92% in August to 93% in September and 94% in October.
While in the two-wheeler segment, the repayment rate stood at 96% in September and 97% in October. We move forward, our foremost priority will be improving our collection 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 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. 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 and 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. Ladies and gentlemen, if you wish to ask a question, please press star then one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. This is a reminder to all participants present in this conference, if you wish to ask a question, please press star then one on your touchtone telephone. The first question is from the line of Amit Mantri from 2Point2 Capital. Please go ahead.
Yeah. Hi, Aalok. Happy Diwali to you and the team as well.
Thank you, Amit. Happy Diwali.
On the collection efficiency numbers, there's clearly been a good month-on-month improvement and your Arman is doing as well or better than many of its peers. On the provision fronts, you've already taken cumulative almost 6%+ of the loan book, which is significantly higher than any of your peers, basically. Does this mean that you are far more pessimistic in terms of the eventual credit costs that will occur in your microfinance or MSME and two-wheeler loan book? Or is this just abundant caution?
Another word for pessimistic is conservative. Taking provisions 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, it's prudent to take provisions at least in the first two to three quarters. 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. It's not all of those provisionings were 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 books. Yes, overall, I'd rather call ourselves conservative than call ourselves pessimistic.
Sure. Can you give more color on how the state-wise performance is there? From most of the other companies, we've heard that Maharashtra has been a weak state in terms of collection.
Yes.
How are you seeing collections improvement in Maharashtra over the last few months? Which are the states which have been doing well for you?
I think it was a huge jump in the month of October. In September, starting all the way back from August, I think it was about 62%. It went up to about 68% in September. Finally, in October, we ended up somewhere around 77% in Maharashtra. A lot of the increase came from September to October on a cumulative microfinance repayment rate came from Maharashtra taking a significant leap. The other states are concerned, Gujarat is clearly the leader in terms of repayment rates at about 95%. MP is about 89%, almost 90%, Madhya Pradesh. 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%. Overall, we have reached about 89% in October for microfinance.
For our two-wheeler and MSME, primarily the portfolio is in Gujarat with a little bit of portfolio in Maharashtra. The MSME portfolio, Maharashtra is doing a little bit better at about 78%. Gujarat repayment rate is, I think about 96%-97%, somewhere around that. In the two-wheeler, all of our portfolio is in Gujarat, so that would be about 96%-97%.
Sure. Even in the month of November, are you still seeing this continuous improvement in states like Maharashtra, where earlier there were challenges?
Getting into Diwali, we were, on a cumulative basis, about 2.5%- 3% ahead at the same period in the previous month. We lost about five days of Diwali. Since yesterday, we are about the same place where we were last month. Overall, we were expecting to see significant improvements in the last 10 days of the month. Well, I think the lockdown is only applicable to Ahmedabad, so that is not going to have any significant effect on our overall operations pan-India. Honestly speaking, our systems have evolved in such a way that even the operations can continue running perpetually without the HO being open because everything is online. Fingers crossed, I think there should be some improvement. Let's hope to cross the 90% barrier this month.
Sure.
For microfinance at least. Yeah, sorry. For microfinance.
Sure. I have more questions, but I'll come back in the queue again. Thanks.
Yeah. Thank you.
Thank you. A reminder to participants, if you wish to ask a question, please press star then one on your touchtone telephone. The next question is from the line of Fahad Sanghvi from Emkay Global. Please go ahead.
Hi. Hello.
Hi.
Just a couple of questions. One is with the interest rate softening, has it been passed on to us or what has been the impact for us, and how do you see the demand environment changing going forward?
Vivek can probably answer this.
In terms of the interest rate softening, especially for microfinance, the rates applicable are as per the RBI directive for microfinance. That anyway has been for the fresh disbursement that we're doing are at the revised rates, lower rates as per the RBI mandated maximum permissible rate.
Are you asking about the disbursement side or from what we borrow from the bank side?
The disbursement side.
[crosstalk] The disbursement. Yeah.
Yeah, gone down as per the RBI. Whatever new disbursement we have done in this quarter, they've gone down by, I think, about 100 basis points.
100 basis points.
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. Just to add to that, different takeaway that is applicable for the new disbursements. Whatever book that we have created in the past with the higher interest rate, that interest rate to change. You understand? The interest rates are declining for us. That would mean that we would, in short-term, get a better margin and exercise too, in that case, where the interest rates are increasing. Usually averages out.
Right.
Across all our products.
Obviously, from a fair value point of view, interest rates in the environment goes down, then you are better off for some time.
Yeah.
Until the time you start redeploying the same funds at the lower interest rates. What's your outlook on the demand scenario?
Demand is, of course, there. I think we are fortunate enough to be in a business [audio distortion] , especially at this. I think, as I mentioned in the last con call, that even during demonetization, we had stopped disbursement for three, four months. [audio distortion] and little bit of September, most of the disbursement has been to our old customers.
Okay.
Since then, we got on the credit bureau data, which was all stale. I mean, since March, and if you pulled up their credit bureau data, it would be a zero default kind of a customer. How the credit data is getting updated by most of the financial institutions and the banks and everybody. We start giving to new customers also. To that, we were a little bit in the blind, so mostly we dispersed them to our old customers with a proven track record.
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, please press star then one on your touchtone telephone. The next question is from the line of Amit Mantri from 2Point2 Capital. Please go ahead.
Yeah, Aalok, back again.
Yeah.
Just a couple of numbers related. The interest income has increased on a quarter-over-quarter basis, despite a decline in the loan book. Why is that?
In the same quarter of the previous year, you are saying?
No. Quarter on quarter, from previous Q1 versus Q2. 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. The interest income also includes interest on the fixed deposits. [crosstalk]. The component of the fixed deposits, unencumbered fixed deposits, have considerably increased in the last quarter or so. Additionally, if you look at it, at the beginning of quarter two, the portfolio was pretty much high. It hadn't declined too much as of 1st of July, so to say.
Yeah. I think the average portfolio would be a different story. It's just that the repayment rates increased drastically during the month of especially September and August. Overall, if you look at the average AUMs, there'll be a little bit of a difference.
Sure. Understood that now. 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. Partially what you said at the last is the right thing, because under the Ind AS anyway, even on the NPA, you need to book the interest.
Yeah. Unfortunately, until 90 days, you are supposed 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 NPA level is at 1%, 2% or something. On a moratorium book also, you had to. We have a large portion which is interest due but not received.
Interest accrued but not received.
Interest accrued but Not received. We are, of course, building the provisions and stuff for that as well. The way we structured the moratorium is that when the customer pays off, I guess the moratorium, you can call it a type of a restructure only. When the customer pays it off, that interest accrued but not received gets hit first. I don't think that there'll be a very large reversal as a result of that. If you look at, let's say 6% or 7% of our customers who have not paid since the moratorium started, of course, those ones will be the reversal ones.
Reversal.
Provision includes.
Yeah.
Provisions on these assets as well. Yes, correct.
Yeah. 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 who is not paying.
Which is the, well, I think because in a loan amount, that would be around a little bit on the higher side, I think.
Okay.
I don't have the exact numbers with me. Loan amortization schedules, the principal and interest change every month- on- month, right. Maybe if I can give you that answer, but let me put some thought into it and get back to you on this.
Sure. No, got it. There's a fair bit of excess liquidity on the balance sheet. You're carrying, the debt has declined and there is a fair bit of cash that is sitting on the balance sheet now. The plan also continue to carry the kind of excess liquidity even going forward?
Not so much. I think about INR 100 crore or so is what has been working for us. We'll try to keep it around that, between INR 80 crore and INR 100 crore. And as the disbursements pick up, I think that excess liquidity should continue to go down also. 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. In a couple of days, we are closing another NTB transaction, for example.
Okay. Now at least because the disbursements have started and you did INR 60 crores in October, so now the loan book is unlikely to decline further going forward, right?
Yes. We have reached that stability now where the repayments, at least last month we reached it where the repayments were about the same as what we disbursed. Starting from this month or maybe next month, the portfolio should start going up again.
Okay. Thank you very much. Thank you. That's all.
Thank you. Before we take the next question, a reminder to the participants, if you have a question, please press star then one. The next question is from the line of Chandrashekar, individual investor. Please go ahead. Chandrashekar, your line is unmuted. You may please go ahead. 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, Aalok. I logged in about five 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 three months, you've had about 90% collection. Are we looking to slowly scale up disbursements there? Because the disbursements number hadn't seen, even if you were to assume that only the last month saw disbursements, the numbers are a bit on the lower side. Just wanted to understand. Also, given that it's an assessed income loan, the slightly stale bureau data in at least MSME shouldn't be that much of a hurdle, right? Just wanted your view.
Well, yeah. We are starting to push for the disbursements in that side, in the MSME side also. Of course, the incomplete credit bureau data which 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. Those were 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. 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.
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. I guess we got a little bit lucky from the geographical standpoint. I know, I'm just kind of trying to be fully transparent here. 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. Honestly, my biggest goal is that to put COVID behind us by the time April 1st 2021 rolls around. I know that's a long way away. 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 1st, and we continue our growth story.
Fair. I think last cycle, Gujarat was the pain area. 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 shot 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 in a better spot. Of course, this is not the lottery system. You cannot just make decisions based on luck. I don't regret making those decisions, but it's just one of those ironies of life.
Got it. Just want to understand what's happening in Maharashtra, as in sense of, is this a political kind of an issue or is this difficulty to reach the customer? As much as possible, if you could share qualitative flavor of what is happening in that market, that would be very nice.
I think different areas have different problems. Largely on average, earlier on it was about reaching the customer and about political issues. Lot of those issues have gone away. I would say Maharashtra, whatever gains that we made in June, July, and August in, let's say, Gujarat, we had a late start in Maharashtra. 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. 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 two, three months ago. Of course, access now is not much of an issue, which was a huge issue in those earlier days.
Got it. Thanks, Aalok. Wishing you and your team a happy Diwali. I'll get back to you.
Thank you.
Thank you. The next question is from the line of Nagaraj Chandrasekar from Laburnum Capital. Please go ahead.
Hi. Happy Diwali, Aalok Ji.
Thank you.
I have two questions for you. Just on the competitive intensity in the last two, three months. Obviously, in your area, my guess is with the more rural book, you compete more with NBFC-MFIs than with [audio distortion]. Are you seeing other smaller NBFC-MFIs struggling for liquidity and also not disbursed during the pandemic disbursements to sort of replenish our book? Or are you seeing some players step up disbursements? Just want to get a sense of supply of credit to the lending sort 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. 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 disbursing is the same guy who's collecting. As a management sitting at the HO, we kind of have to try as 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? 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. As the repayments increase, I think disbursement is naturally going to increase. As far as competition is concerned, I think most people, barring a few exceptions, there'll always be the outliers. Lot of people cut down a lot on their 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. Overall, it's pretty large decline from the disbursement side, but everybody's going to be picking up again.
My informal talks with a lot of the upper level, C-level people at the different companies, I think everybody's, during Diwali and post Diwali, is planning to ramp up disbursements. Let's see what happens.
Understood. Thanks for that color. In terms of practice or anything on the ground, I think 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 taking top-up loans from others? On average, how many lenders who a typical borrower from us also borrow from?
Honestly, I cannot comment on the number or who is actually doing it. However, it's no big secret. I think people are doing it. There are top-off loans out there are net-off loans out there. Another way to increase your repayment rate is just start dispersing a lot of money. On a static pool, your repayment might be down, but whatever new portfolio you are creating, obviously that will be at a higher repayment. Well, assuming that will be at a much higher repayment rate, your weighted average will go up. There are companies that are making top-off loans. There are a few companies that always used to make top-up loans, and they have continued to do so. There are certain MFIs who are netting off their outstanding and issuing a whole another new loan.
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. For sure, I can assure you, it is happening at a few companies and some more than others.
Understood. One more question. The 6%, 7%, 10% 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 NBFC-MFIs, SPCs are reporting. I just wanted to understand our concentration by state within and by main occupation as well. Is it mostly people who have recently taken a loan and have a larger amount of EMIs remaining or any such color would be helpful.
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 occupations we are seeing it from and stuff like that. Just to provide, without getting into percentages, I can tell you that about half of those figures are in Maharashtra. 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. Most of our customers that are involved in providing livelihood kind of services versus lifestyle kind of services. 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, a 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 and September. Well, although there is a small chance, there is still a chance he will miss October's payment and then pay in November. The assumption that most of us made earlier is that once you get them started paying, they will continue paying. 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. We would be lengthening tenures for a number of our customers who took the moratorium and were within that 40 range. On average, how much could we lengthen the tenure with those customers? Will it be around two, three months on average?
I'm sorry, I couldn't understand your question. Maybe you could take me off speaker phone.
No, I'm actually not on speaker phone. I'm asking the customers who would have their loan tenures restructured, on average, how much longer would the tenure be?
Oh, that's interesting. On average. I guess we can do a weighted average.
Weighted average will turn out to be about two and a half.
[crosstalk] 2.5 kind of months on an average will turn out. I think almost every customer was given a moratorium for April and May.
April and May.
About repayment rate started with being about.
60%, 65%.
60%.
60%-75%.
Higher than that. Maybe about three months.
Three months.
Sounds like a good average. I'm sure you can backward calculate it with our repayment rates.
Great. Thank you.
Sure.
Thank you. The next question is from the line of Shreepal Doshi from Equirus Securities. Please go ahead.
Hello. Good evening, sir.
Good evening.
My question is with respect to our disbursement of new loans. I know that now the credit bureau data is getting updated. What number of installments are we seeing that the customer would have paid? What is the strategy on evaluating the credit bureau data also before disbursement?
No, certainly we would have want them to have restarted their payments. The criteria that we came up last month was they should have made at least three continuous payments for us to consider it. That was for MSME. For the microfinance, we came up with the criteria of two continuous payments with absolutely no kind of defaults in the previous months. 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. A lot of the customers, we were relying on our own kind of experience. Going forward, that will become important, that criteria, yes.
The current disbursement that we're doing, I understand we are doing it only to our own customers. We will sort of have an understanding whether the customer has paid the last two EMIs or not for the MSME segment, and then accordingly, we'll be taking a call, right?
Yes.
We were taking a call.
We were taking a call based on our own experience with the customer. By our own experience means, we gave them a free pass if they didn't pay for April and May, and in some cases, June as well. July, August, if they continued their payments and their loans were finished, we were happy to give them a loan.
Right. Okay. I understand that the previous question was also with regards to this. What percent of our customers would have a four-month of loan tenure extension?
What percent would have four months? About at least 25% would have four months or above. Essentially, customers who have not paid April, May, and June, and then July.
Yeah.
Even if they have not paid three months, then also it will be more than three months because there would be some bit of interest accrual that would have got added.
Yes. Of course.
That way, when a loan, we give an estimate around 20%. [crosstalk] It will be higher than that. It'll be around 20% because eventually, four months and above would be about 20%.
Okay.
The repayment rate, calculating it as the repayment rate was about 75%, that means 25% didn't pay. Just by extrapolating it was that. Again, guys, this data, but it's just hard to access it all on a moment's notice. Any obscure data you need, just email our investor relations people, and if we can get it to you, we'll get it out to you.
Sure. One last question was, how are you seeing the securitization and off-balance sheet portfolio opportunities coming up since the last one and a half months?
I don't know, Vivek, you are seeing a lot of?
Yeah. The inquiry for portfolio purchase is pretty high and across all segments. Even two-wheeler, MSME, and micro is always because of the PSL, is always in demand.
Yes.
The difference now is that most of the institutes are inclined more towards the PTC kind of transaction rather than the plain vanilla deal transactions. That's the general interest which the lenders have been showing. We've been fortunate in almost the six months or rather now the seven months that have gone by for this financial year to have had enough liquidity and liquidity from institutions like SIDBI, MUDRA, and NABARD. 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 coverage is for the investor is higher.
Okay.
A lot of banks and financial institutions are looking for good places to deploy money. We are getting a lot of offers from both the securitization side and the term loan side. Unfortunately, we've always had enough cash. Most of those things we turn down. 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. If I can kind of toot my own horn, I would, let's say, consider myself as a good place to deploy their money. We are getting a lot of offers. We are in a position to pick and choose the more favorable ones.
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. Even in smaller towns where the curfew or lockdown sort of situation is not imposed by administration, but there also we are seeing slowdown in economic activity by the discretion of that particular business organization. Do you see this will create some hindrance or some delays in the collection efficiency improving going ahead?
Absolutely. I'll tell you a lot of even village areas, if 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. 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, whether formal or informally, those places become containment areas. We have to figure a way out to get other people to start collecting. These are constant operational aggravations that come into play, of course, in this new COVID world. Hopefully we can put this all behind us and in the next three to six months kind of move forward.
It would not be sort of easy to extrapolate the current disbursement trend for the next, say, second half. Is it fair understanding?
No. See, we have reached about a run rate of about INR 50 crores in the microfinance. This month we did about INR 50 crores of disbursement against pre-COVID levels of about INR 70 crores. INR 70 crores, INR 73 crores is probably the peak what we reached. INR 75 crores maybe at the most. I would say by about December or January, we should be at least at around INR 65 crore levels. Why that INR 5 crore gap is because there'll be certain branches where I won't be able to start disbursements.
Some branches are allowed to be a little slower. Already we have a plan in place for those branches, whether to merge them or keep them as collection branches with kind of a lower staff level. We already have a plan also in place to open around maybe optimistically 15- 20 branches between December and January. Those branches will be more for the next fiscal year, because it takes about two, three months for the disbursements to ramp up. They should provide at least a little bit of help this year as well.
Okay. Got it.
The situation is very fluid right now. Every day there are new challenges and new ways to firefight. Thankfully we have managed going through all of those so far. 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. The next question is from the line of Savi Jain from 2Point2 Capital. Please go ahead.
Hello. Hi, Aalok. Happy Diwali. Just a couple of questions. One is, on the credit cost, you don't have a clarity on what the eventual credit cost will be. I think all the industry players, even when we were at the thick of the COVID crisis, they felt that the ultimate credit cost would be lower than demonetization. That was something that many people spelled out with quite a bit of confidence. Now that a lot of time has elapsed, what is your opinion on that? Will it be lower or higher?
Savi, 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. Demonetization was a cash-related issue, and this was more of a [crosstalk] loss of income and loss of enterprise kind of an issue. I always felt it's going to be higher than demonetization, and I still continue to feel it's going to be higher than demonetization. Honestly, I always call myself as a bit of a pessimistic person, so what I was imagining the loss to be in around April and May, it's going to be a lot lower than that, if it makes you feel any better.
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 seven, which is more than what was there in demonetization.
You had a huge variety, right. In demonetization, for example, us on a static pool basis, we lost what? About 4%, 4.5%?
Yes. You would be among the lowest in the industry. As low as maybe Bharat Financial or some of those good ones. I think overall, the average was definitely more than 5%.
Yeah. I would say that's not far away estimate. 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. I don't think it's going to have a systemic issue.
Okay.
Honestly, I don't think this is just going to be related to microfinance. The entire financial services is going to have to bear this, including banks and NBFCs and MFIs and MSMEs and everywhere. There'll be a few, maybe the gold loan guys and some might not have to deal with it because they're fully collateralized. Everybody's going to have to take a hit. The sooner you can accept that, the sooner you can move on.
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. They would be borrowing from, say, the larger banks or SFBs, et cetera. Now, few of them are clearly very aggressive in terms of giving top-up loans to their customers, therefore these customers do not show up as NPA even for you, probably because these guys might be paying you off from those loans. 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 you mostly would be sharing a customer with at least one financial institution, right?
Yeah
On a very large scale, then especially the smaller players would be suffering because of poor underwriting by the larger players.
No, I don't think it has reached to that level. I don't think it has become a systemic issue or anything like that. I'm not saying it doesn't happen. I'm just trying to find the right analogy for you. Let's say in the case of Arman as well. Now, if we borrow from SBI. Have a repayment for Kotak this month, does that mean I've borrowed money from SBI? To pay off Kotak? Well, of course it does, right. I mean that is our business. Nobody says anything wrong about it. There are right ways to do it and wrong ways to do it, number one. Number two, it's not like I have anything against top-up loans. Top-up loans done in the right way is, although I don't know exactly how to distinguish what is a right way and a wrong way.
Right.
I'm not a big fan of them. If you fully disclose it and you are doing top-up loans, and you have certain level of criteria for doing it where at least the management level of a certain company feels it is the right thing to do, and the underwriting standards are adequate, the 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. That is the main issue that I have with the top-ups. Otherwise, there are companies who have always been my last year, and there is as well. I have anything against top-up personally.
Lastly, in the last five years, we have seen two Six Sigma events, and when they occurred, they were called Six Sigma. If Six Sigma events occur so frequently, then they are not really Six Sigma. What is your learning in terms of how you're going to build your business going forward? Every once in four, five years, something happens which can really even jeopardize your very existence. What is the broad change in strategy that you will undertake after this crisis?
Well, Wimbledon took pandemic insurance, and I fantasize sometimes that what if I would have done that? I would have been 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 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.
Yeah. Pandemic, obviously it will not be a pandemic. Maybe it'll be an earthquake or whatever. I hope not, but I'm just saying that if you're concentrated in one state, you couldn't have done anything to have prevented it, and then you're unlucky because you were, like you said, you were present in Gujarat in a big way, and then that kind of helped, and sometimes it did not. How do you future-proof this business of microfinance and MSME lending? Obviously, geographical diversification is something that is there, so which I think you will continue on that path, right? Irrespective of what has happened.
Exactly. I mean, really, we had plans to expand into Bihar in certain areas. We had a wonderful plan which all went out of the window, but there were certain branches in Haryana and places that we wanted to expand into through Western UP. Of course, there were big plans for this year, which what are you going to do? These things happen from time to time. Unfortunately, as you said, two kind of events, one after another. In 2016/2017, we had demonetization, and of course, after we had COVID. Unfortunately, these events, I don't know if it's a coincidence that they happen so close together. Let's hope it's a coincidence because I don't think my nerves can take it happening every three years.
Yeah. Just last question on this. Basically, this is a brunt that the entire industry has to face from time to time. 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. 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. Now that things are much more stabilized, there should not be any such spread cap and any benefit of efficiency can be retained by Banks can still retain it, right? I mean, you guys cannot.
There has been attempts in the past to ask RBI for a relaxation of the so-called ceiling for the interest rates. 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 MFIN or some of the other industry associations, which, by the way, have already approached them about the 2.75x cap.
Right.
They're looking into that closely because it was a really ridiculous formula, right. For every 1% decline, we have to reduce our rate by 2.75%. It just didn't make a lot of sense. RBI is looking into that. Usually asking the government, "Can we charge poor people more interest?
No, actually, you're still charging lesser interest because see, from the heydays of 28%, 29%, 30%, now the bigger banks are lending at 19%. It's already come down to a very respectable level.
To my experience, 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. As you say, every two, three years, there might be a zero 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.
All of that stuff. Inevitably, the question will come up is how much you charge. The second 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 risk and all of that stuff. In their minds, you are taking unfair advantage of the poor people. We 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 are asking them to increase rates, they don't want a newspaper article saying that RBI allows charging poor people an extra 2%, right?
That's a nightmare. I don't think they're going to allow it.
Okay. Yeah, that's it from my side. Thank you for your
I think-
Thank you. The next question is from the line of Saptarshee Chatterjee from Centrum PMS. Please go ahead.
Yeah, 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 first cycle to second cycle, and how is it in the case of Maharashtra?
Maharashtra, since we moved in there about three odd years ago. There are a lot of first cycle customers. Almost, I would say about 70% will be first cycle customers in Maharashtra. Overall, if you look at in our company side, I would say about 50% of our customers would be first cycle.
Understood. Secondly, just a clarification. In the balance sheet, March versus September, there is two items, other financial assets and investments. What is the increase? If you can give some flavor, increase in other financial assets, what are these items? In the investment side, these are primarily G-Sec or mutual funds, or what are these basically?
Those are liquid funds, basically. Highly liquid, risk-free kind of funds, which we put it in.
It's better with a treasury fund.
SBI and Kotak or some combination thereof. 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 it?
Yeah. Basically the other financial assets which increased from INR 7.5 crore to around INR 12.7 crore from March to September. What are the basically items, if you can give some color?
I think that would have Okay, you're talking from March to September, right?
Yes.
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 Bellwether. Please go ahead.
Hi, Aalok. Wanted to get few data points. Wanted to understand how the rural two-wheeler book had fared. Given it's in a pilot phase, this will be very useful to kind of see the self-tested data, because if this product survives COVID, then we can significantly scale it over the next 12- 18 months. Could you share some feedback?
Yeah. Last month it was about 93%. Slightly lower than our, Sorry?
Trade secret.
No, sorry. 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. 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 NACH, N-A-C-H. On average, about 40% of instruments on NACH on an overall level are bouncing, which is huge. 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%. Even in the current month, that number is around 34%, so significantly higher. When you show up at their doorstep, it seems that we manage somehow convincing them to give the money.
It's kind of a weird phenomenon. I'm not sure exactly what's going on there.
Net-net, one would assume you're reasonably satisfied with a 93%-94% collection is actually fantastic.
Yeah. It's not that-
At the right time, you would look to scale that business line. Would that be a fair understanding?
Yes. Absolutely. Right now is not the right time because it just seems that people have lost interest in buying two-wheelers. 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. How to reconcile that with my own operations, I'll have to look at it in more detail in the next few days. Overall, the last one and a half to two years have been really difficult for the two-wheeler segment.
Fair. Any other product that we piloted, and could you share how the credit performance has been outside this? I am aware of rural two-wheeler, 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's no other product that we have it on pilot right now.
Got it. These 15-20 branches you had just mentioned to a previous answer, just want to understand that we are looking to open in Q4 to set up growth for next year. What kind of diversification, what kind of geographical areas are we looking to expand into? You were saying you want to shut some branches. If you could give a branch outlook in terms of where are we expanding and where are we contracting from a Q4 to next year point of view?
Right now the consideration is areas of Rajasthan and Western UP into neighboring states as well. 15, 20 branches is not a very long list. The idea is to hopefully concentrate on areas where the repayment rates are, of course, that goes without saying. 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. 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. We have a lot of work to do before we decide on the exact areas.
Thanks, Aalok. Thanks a lot.
Sure.
I'll get back into the queue then.
I think w e are about shooting 15 minutes over, so operator, maybe one more question and then we can end it.
Okay, sure. We take the last question from the line of Vinay Ambekar, individual investor. Please go ahead.
Hello. Good evening, Aalok. Good evening, Vivek.
Hey.
Am I audible?
Yes. Yeah.
Yes. Thank you. In the previous conversation, I heard a whisper about trade secret. Pardon me for asking this. Within whatever you can elaborate, can you talk a little bit about this digital collection initiative that you said you had started? Is it in MFI or MSME, or how has the performance been, and how are you thinking about scaling it up?
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 at the tip of my tongue. Anyway. [crosstalk] Well, that's a different thing.
Two things that we are doing. One side is there is a unique QR code that gets generated for every customer. You can use any UPI-based app, either let it be Paytm or PhonePe or anything like that, or even your bank's app. If you scan the QR code, the money will automatically get reflected into my bank account. The customer's account will automatically get credited in the LMS system. We also have mechanisms where the customer can pay 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 Fino Payments Bank, wherein either the customer or the field officer can go to their nearest-
Fino merchant.
Fino merchant and deposit the cash directly and have it be reflected into their account directly. Those are the two things that we are doing. Let's hope the uptake is good, but I think this is a long-term game. 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. Overall, 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. Still do the center meetings and things like that, but have a lot of them pay their money on a cashless mechanism.
Right. One of the services that you used to offer and continue to offer in MSME is also doorstep collection. 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. Yeah, as somebody earlier asked that how are we preparing ourselves for the next big issue? 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 turns out to be worse than what we've already seen.
Yeah.
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." That will take some time.
All right. Okay. 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 Jayendra Patel sir was overseeing that to focus only on collections. Is there some thought around these lines in this current situation? Hello?
Sir, just allow me a minute. I'm just trying to reconnect the management.
Oh, okay.
Please stay online. 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 online. Thank you. Sir, you all are reconnected. The question is still on. Please go ahead.
Oh, yeah, 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 Jayendra Patel sir to focus only on collections. That continued for some time till it was self-serving in that sense. The payback period, the payback used to happen positively. Is there some thought around having a similar approach in the current situation?
Absolutely. I think you hit the nail on the head. That is the plan. We have already started recruiting on the MSME front because those repayment numbers are sort of stabilized. Whichever customers are there which either have not started or have started in no meaningful way, so those are the customers that we'll be targeting. We are starting with a team of about 20 people in MSME and that will expand. 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. That will be probably a long-term game. In the microfinance, we'll have it once the repayment rate stabilizes. 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'll probably reach, say around INR 60 crores, INR 65 crores maybe by January or February or December and also you mentioned that the preference is to give loans to existing customers, and you also said that currently we are not doing top up, we are only serving those who have closed their loans. I would assume that you would, for the next six months, say till March, you would have data available about which are the customers whose loans are going to get closed. And then based on their performance history, you'll probably target them for disbursements.
Right.
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. I think what you did was a very fair assessment of what we did. Reduce a lot of their burden, we ran kind of a pre-approved kind of a scenario as far as our old customers are concerned, and basically ran the High Mark and the credit bureaus not on the request of the branches, but from our own data on the HO. We sent a list to the branches directly saying that here are the old customers who are maturing, and we have ran their credit bureaus, and these are the ones which are pre-approved as far as the credit bureaus and stuff are concerned. Their work becomes a little bit easier as far as the underwriting and stuff goes, right. 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. 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. I'm not exactly sure what that number is going to look like going forward. I think overall, our reliance, of course, cannot go on for old customers go on for perpetuity.
Right. Just a last question on this. I believe with the MSME, we have been primarily targeting new-to-bank customers. 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? How do you see any number forming in your mind? How much would that constitute or something?
It's a thought, but actually, the micro division MFI itself is considering of doing the.
Maybe around INR 50,000 loans.
About INR 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 is, and this is something that you'll find when you are running business, is that MFI team members don't want their hard-earned fifth-cycle customers to go to the MSME division. Of course, there are ways around that as well, but 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. 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.
Wonderful. 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?
Yeah. Vivek has the data. Vivek.
That would be about 3.86% as the COVID provision, and the balance will turn out to be the normal standard ECL provisioning.
Even ECL will be bumped up for COVID as well.
The cycles in the ECL, you would have a higher rate of provisioning for the higher cycles or the.
The 30, 60-day.
30, 60-day cycles.
Yeah.
The ECL provision itself is bumped up, but the COVID provisioning itself stands at about INR 25 crore for both the entities taken together, and that turns out to be almost 3.9%.
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. Got that. Okay. Thank you, Aalok, and thank you, Vivek, for your detailed answers. Thank you so much. All the best.
Thanks.
Yeah.
I think.
Thank you very much. Yes, that's the last question. You may please go ahead with your closing remarks. Thank you.
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. It was a nice experience. A lot of questions had me thinking towards the right direction as well, so thank you for that. Hope to see you all next quarter, and hope you all had a happy Diwali, and have a great new year ahead. Thank you so much.
Thank you. On behalf of Emkay Global Financial Services, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.