Welcome to second quarter FY 2024 earnings conference call of Edelweiss Financial Services Limited. 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 this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Priya Chopra, President, Edelweiss Financial Services Limited. Thank you, and over to you, ma'am.
Thank you, Neeraj, and a very good afternoon, everyone, and wish everyone on the call a very happy Dhanteras. A very warm welcome to our results call today. We have on the call with us Mr. Rashesh Shah, Chairman and MD of Edelweiss, Ms. Ananya Saneja, Chief Financial Officer, Edelweiss Financial Services Limited, and Ms. Radhika Gupta, MD and CEO of Edelweiss Asset Management Limited. We hope you've all had a chance to review the investor presentation as well as the business update on the mutual fund business that we filed earlier with the exchanges today. During our discussion today, we will be making references to these. Please do take a moment and review the safe harbor statements in our presentations. We will be making some statements today that may be forward-looking in nature and hence may involve certain risks and uncertainties.
With that, I'll hand over the call to Mr. Rashesh Shah to begin the proceedings for the call. Thank you all, and over to you, Rashesh.
Hello. Thank you, Priya, and good afternoon to all of you, and a warm welcome to our earnings call for the quarter ended September 2023. First of all, I wish all of you a very happy and prosperous Diwali. I hope that you and your families have a very prosperous coming year also. I think as we look forward, it's going to be an exciting one year from this Diwali to the next Diwali, because the global environment is very uncertain. It's dominated by news of war, recession. However, India also has some events, especially the main elections coming up next year. But on the economic front, as all of you know, I think all of us read the papers, India is doing pretty well. I mean, relatively and absolutely, we are in a good place.
I think a GDP growth of about close to 6.5 is what is expected. With the inclusion of the government bonds into the JP Morgan index, there'll be more inflows coming into India. So overall, I think things are, seem to be going pretty well for India. I mean, being in the business for so many years, there are always some pockets of worry, but on the whole, this is very good and benign in economic environment that we have. In this, for our reporting to you about our quarter, the quarter ended September 2023, we had a consolidated PAT of INR 76 crore, but if you remove insurance, because we are still making a loss, which is an investment phase in insurance, our ex insurance PAT after minority interest is INR 153 crore.
So this is a PAT number we look at very closely, the ex-insurance PAT, which is up about 15% on a YOY basis. So what has happened in the last one year, in the various businesses have been very exciting. Our alternatives asset management. We are one of the leaders in alternative asset management business. That AUM has grown by 25%. We have now reached INR 50,000 crore. So alternatives AUM of INR 50,000 crore is very, very encouraging. In this INR 50,000 crore, as you know, friends, that, fee-paying AUM is only the amount that we deploy. So the fee-paying AUM is about INR 27,000 crore. So we have another INR 23,000 crore, which is not fee-paying AUM, which also as and when we deploy the money, the AUM meter-
Sir, sorry to interrupt you. I'm looking at you.
We'll start earning money on that. Our mutual fund also has shown more than 25% growth YOY, and our AUM is now INR 114,000 crore in the mutual fund, out of which more encouraging has been equity AUM. As you know, we have BHARAT Bond, which is about half of the mutual fund AUM, but out of the other half, which is close to about INR 55,000 crore, almost INR 34,000 crore is equity AUM, which has grown 30% YOY. And in both these businesses, now we have hit that inflection point for the healthy growth and profitability, and mutual fund also has shown good growth and profitability. We also have Radhika on the call today. She'll be happy to take questions on mutual fund business or perspective.
We have every quarter added one business update for our investors, for the analysts. So in this quarter, we added the mutual fund business, and Radhika is also there. She'll be very happy to give you more color on that business and how we are taking it forward. Our ARC business acquired debt of INR 1,300 crore. They also had good recoveries in this quarter. The general business grew by 18%, and the gross written premium for the quarter is INR 191 crore. Even the life insurance business had a good quarter, 18% YOY growth. So overall, I think all businesses have done well. Credit businesses are now seeing a fairly major uptick.
Our housing finance saw an uptick in disbursement, which is INR 300 crore disbursed for the quarter, which is a fairly heavy growth over the same quarter last year. MSME book also has seen good growth in this quarter in disbursement. So both MSME and housing, which we are doing under the co-lending formula with our partner banks, has also seen good updates. And lastly, the wholesale book reduction is on track. We are on track as per the 50% reduction, and we are now at INR 4,350 crore, and we expect to continue to reduce the wholesale book, but the trend will continue, and all of you would have seen that trend we have had in the last two years on the wholesale book reduction.
So after the businesses on the balance sheet side continues to be very strong capitalized, we have more capital than required in most of the business, as you would have seen from the capital adequacy and other details we have given. We have more than 36% capital adequacy across all our credit entities. So capitalization is good. Liquidity has improved. We have INR 3,300 crores of liquidity on our hands, and our borrowing is coming down. So on the whole, I think the liquidity is positive, the borrowing is also very healthy. We also continue to reduce our debt. Currently, the net debt is about INR 15,220 crores.
It's come down by almost INR 2,700 crore in the last 1 year, and, as you may remember, maybe some of you, our peak debt was around INR 40,000 crore, which has now come down to INR 15,000 crore. So we have repaid almost INR 25,000 crore of debt over the last 5 years. Lastly, an update on our priorities. 18 months ago, we had put down some priorities in our investor presentation. One was to complete the unlocking value of Nuvama. We're very happy to see the adoption process of demerger and the subsequent listing has gone through smoothly. The listing was done on September 26th. The stock has got fairly well listed. They have their quarter 2 results also coming out, which are also very encouraging.
As you know, about 30% of the equity of the company was distributed to Edelweiss shareholders. Edelweiss continues to own around 15% balance of the equity in our hands. So overall, we still have economic interest with our shareholders and us in the business. But on the whole, I think spinning off that business, getting it listed, has been a very, very gratifying outcome that we have seen. The second objective here was scaling up our asset management business. As you have seen, we have made good progress on that, on both alternative asset management and on the AMC side. Third objective was, third priority was to reduce our wholesale book, which also we continue to do as we go along.
As we have got some of these priorities underway, our going forward in this investor presentation, you would have seen, we have set out new priorities for the next 18 months. Just to enumerate them, we now want to scale up the profitability in the AUM and mutual fund business. I think they both have got critical mass. Now we are at a stage where we can start scaling up profitability, get economies of scale in that business. The second priority is to grow the retail book through the co-lending model. We've set a target of 8-year growth of 20% minimum for the next 2-3 years.
And again, we can grow faster, but as we have learned in credit business, it is actually better to grow in a calibrated, in a very stable manner, which we think a 20% growth is good for that. Our third is to build profitability in the insurance business to reach breakeven by 2027. Both our life and general insurance business between 2026 and 2027 will reach breakeven. Hopefully earlier with the new IFRS guidelines coming, because IFRS guidelines are more friendly to the insurance business profitability than the current guidelines. But under current guidelines, we expect to be profitable by 2026, 2027 in both the insurance business. And fourth, we continue to focus on reduction of debt. We want to reduce our debt by 20-odd% every year in the next two years and continue on that.
That will bring our debt down to a very, very, very easy level. It's already come down at a very comfortable level, but we want it to become even more robust, our balance sheet. So to sum up, our work on balance sheet is largely complete. We still have some way to go, but we'll continue to plug away at that. The key task now is to work on profitability, especially in asset management business, get the insurance businesses to breakeven, and increase our co-lending disbursements in credit, in SME and housing. And again, overall, we are very happy with how the businesses have grown. All the businesses have strong management teams. Our unbundling focus on making each business standalone, independent, with their own governance, with their own capital base, with their own operating responsibility, has worked well.
We continue to do that. This has made our structure very simple. And it has been easier to monitor the businesses, but at the same time, this unbundling has created a phenomenal amount of ownership, and the leadership unbundling that has happened has been even more gratifying. So we'll continue to work on this path. We are done unlocking of the Nuvama. Over the next few years, we would want to create value and unlock value in all our other businesses. So I think with that, we will now open up to questions, because I'm sure a lot of you have questions, feedback, color on what we are doing, and we'll be happy to hear that. As I always say, this interaction we have with all of you is something we find very useful, we find very gratifying.
Once again, thank you, all of you, for being part of this and being here with us. Over to you, to the-
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use while asking your question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask the question. Anyone who wishes to ask a question may press star and one to ask the question. Participants, you may press star and one to ask the question. The first question is from the line of Siddharth Purohit from Yes Securities. Please go ahead.
Good afternoon, everyone. Hope I'm audible.
Yes, you are.
Thank you. So I have broadly three questions. First one is on the alternative business. So we see that there have been new funds raised in the private space. So does the economics of these new categories were similar to the private debt in terms of the fee earnings and yields? This is first. Second is, did we see any further diversification in terms of product offerings like private equity as well? And the third question is, currently approximately 50% of your AUM is deployed. So going ahead, will we see you increase deployments? Does the management have any specific timeline to deploy the dry powder in that? These are the three questions.
Yeah. Thank you. I think these are good questions. We are launching new funds, but almost all the funds, actually, all the funds, not almost all the funds. All the funds have fee, which is between 1%-2%, and they have a carry. The carry changes from some are onshore funds, some are offshore funds, some are with a hurdle rate, but usually there is on an average, there is a hurdle rate of about 8% and then a full catch-up carry on an average. But as I said, this changes from fund to fund. Our internal expectation is to make about 2%-3% as annual fees, fees plus carry on the fund strategies we have. Carry comes obviously very back-ended, while the fees come on a as you deploy the money.
So on an average, all our funds will have some carry if we hit that threshold level. We are deploying new strategies in our current focus areas are private credit and real assets. So we have launched a commercial, real asset fund, a commercial lending fund. On the real estate side, we have, we have a stressed assets, special situations fund, structured credit fund. So we are doing quite a few, new strategies. Overall, I think we have about, seven or eight funds already in the current whatever AUM we are seeing. And our current focus is on private credit and real assets. We are not looking at private equity as of now, not because it's not a good asset class.
I think it's a great asset class, but there are already quite a few players out there, and we also want to stick to our focus. We've been one of the early players in private credit and real assets in India, and we now have a 12- to 13-year track record in that. We want to continue to build on that. We think this is a large enough opportunity, but we continue to evaluate adjacent strategies. And our long-term objective of the alternative asset management business is to be a multi-strategy fund. So we will be a multi-strategy fund house. And on deployment, you are right. We have deployed about half the money. Other half is dry powder because a couple of funds were raised. Usually, it takes about 3 years to fully deploy a fund after we raise it.
So when we raise, let us say, INR 8,000-INR 9,000 crore AUM, it will get deployed over three years, and the fee will come as we deploy. We are currently targeting deployment of about INR 10,000-INR 12,000 crores every year. So across all our strategies, we intend to deploy INR 10,000-INR 12,000 crores. So whatever is the undeployed funds in the AUM, we hope to complete this deployment in the next two years. But, but also remember, in the next two years, we'll raise new funds also. So there will always be an AUM to deployed gap that will always continue to be there, because we would have raised... First you raise the money, then you deploy it.
But I think assuming a 50%-60% on that is good enough, but the current INR 22,000 crore, which is undeployed, as we deploy it, will start earning a fee for us.
Yeah. Okay. Thank you, sir. Thank you very much, and all the best.
Thank you. Next question is from the line of Lalit Deo from Equirus Securities. Please go ahead.
Yeah. Hi, hi, sir. Good afternoon. So I have two questions. So first one, on the AMC business, and the mutual fund business. So, we are looking to build on the retail third party distribution franchise. So could you give us more color, like how are we looking to grow this business on the distribution front? Which are the partners, which are the channels where we are specifically focusing in this year?
Yeah. Fortunately, we have, we also have Radhika on this call. So maybe Radhika, do you want to give more color on this?
Yes. Hi, and good afternoon to everyone, and wish all of you a very, very happy Diwali! So over the last five years, I think we've looked out to build out an independent distribution franchise. And if you look at the distribution mix of AMC today, it is, and I'm talking about the retail distribution, largely the equity distribution. It is about 75% through distribution, of which MFDs and platforms are a very significant percent. Banks are actually a small percent. So a predominant number, about 90% of that number is through MFDs, and large platforms like NJ and Prudent. I think what we have realized over the last five years is because of a combination of three things. One is consistent product innovation. Second is, you know, really consistency in many of our funds.
You know, not swinging Q1, Q2 performance, but long-term consistency or track record. And thirdly, deep ground outreach. Our market share and penetration in individual distribution pan India is only growing. We are also seeing that with partners like NJ and Prudent, as we've onboarded 4-5 years ago, our market shares are becoming increasingly more meaningful, and we expect that trend to continue. So I always believe that distribution is a journey. Our retail distribution is a journey that takes time, and we've made serious investments and now we are seeing the dividends. In fact, if you look at our most recent NFO, which was the multi-cap NFO, we raised about over INR 1,000 crore in that NFO, and largely retail distribution. Our partners like NJ Prudent, plus more than INR 500 crore from MFDs.
So it's a process we've invested in, and we are beginning to see the dividends now, and I think it will only get better.
Sure. Thank you. And so second question is that, so like we have been focusing on the debt reduction part. Now, we have done a good, reasonably good job over there. But in terms of the net debt profile, if you see then the, the debt, net debt, debt is, the gross debt is increasing in the corporate side. This is that, that marginally. So like, how should we look at that segment as now?
So on the corporate side, as we're increasing debt, actually, this quarter is a misnomer because we are also holding liquidity. You would have seen from, from last quarter to this quarter, our liquidity has also gone up. So we're holding a little bit of liquidity because of some repayment in the next couple of quarters. So that is, we don't focus so much on gross debt only. We look at the net debt, because on a quarter-to-quarter basis, it will change. And, so on that side, the corporate is not changed a lot. But the corporate also owns, you know, 14% of Nuvama, which we can liquidate over the next couple of years. And the corporate has also, has got a lot of assets, like the office building and other stuff into which it is invested.
So we have a plan to manage the corporate debt, but part of the corporate debt increase is because of liquidity that we are holding at hand. So the net debt may not show as much change. But INR 200 crore-INR 300 crore here and there, it will keep on changing. But on a three-year basis, we plan to bring it down. As I said, we are 14%-15% of, you know, the Nuvama stock, which is valued at INR 1,300 crore-INR 1,400 crore, which over 2-3 years, plus, we have a lot of other assets. We have investment in our funds, which will also come back to us over the next 2-3 years, which is another INR 2,000 crore. So I think it's fairly well matched with assets which will come down.
The other debt are the business debt between ARC, Housing and NBFC, which has also been managed with their own individual cash flow. We have been holding a lot of liquidity at the corporate. We continue to do that, given the uncertain times and all. We always debate whether we should hold more or less liquidity, but I think we are comfortable with the current liquidity we have. But our idea would be that the corporate debt, as we have earlier said, with maybe some stake sale, equity stake sale, plus the assets which we can liquidate it, should get close to maybe INR 1,000 crore or so in the next 3-4 years. That's the guidance we have given our investors and bankers.
Sure, sir. Thank you, sir.
Thank you. Next question is from the line of Sanjay Pandit from 1729 Capital. Please go ahead.
Hello. Congratulations on a good set of results. We are very big fans of the intrinsic value approach to capital allocation you outlined in the AGM presentation. You know, suspect that given your discount to NAV, at some point, buying back stock would present a great use of capital. Nuvama has built terrific businesses in wealth and alternative assets in AMC. Wealth IPO very successfully, and we imagine that AMC and Alternatives can follow suit before too long. We're also very pleased with the pace of the wholesale book wind down. My question relates to the sort of businesses that aren't yet at scale or profitable. Number one, can the newer co-lending businesses—do you expect it to reach a certain ROE threshold in the next three years or so, say, 15% ROE, is that realistic?
The second question is: Might it make sense to get outside strategic or financial investors in the insurance businesses so that to arrive at sort of a market-driven NAV, this can also help with proper capital allocation going forward?
Yeah. Yeah, thank you, Sanjay. I think, I think these are also good questions. So I think, as you said, we are also strong believers of intrinsic value, but we know that intrinsic value is also, it is based on our assessment and all that. To answer your question first on the, on the co-lending side, we do believe that eventually, if you look at a housing finance, they have about INR 800 crore of equity, with some retained earnings over three years, we expect. We don't expect to put in more equity in that, we won't require. We expect, the equity will reach maybe about 1,000-1,100 crore over the next couple of years.
We do expect that under co-lending, the on the modeling we have done, that if we can get to a disbursement of about INR 5,000-6,000 crore a year, we can get to about INR 150-200 crore PAT. So about 15%-20% PAT is what we would target, which we would get with a INR 6,000 crore disbursement. Currently, we are creeping along at about INR 1,500 crore disbursement in that business, but we were half of that a year ago and half of that a year ago. The same thing is true with SME. Currently, we have about INR 500 crore equity allocation to that, but as the wholesale book is getting wound down, we'll put another INR 500 crore equity allocation to that.
Both the co-lending businesses, the housing business and the SME credit business, in, let us say, 2026 or so, I would expect that they would have about 1,000-odd crore of equity and should make INR 150 crore-INR 200 crore of PAT each, and that is our internal target. INR 15 crore-INR 20 crore, 15%-20% ROE is possible. And in both of them, we are currently at about. In SME, we are at about 1,100-1,200 crore annual disbursements, and in housing, we are at about 1,500-1,600 crore annual disbursements. We are creeping along then, so if you see the growth rate, I think we should get to INR 5,000-INR 6,000 crore annual disbursements in, by 2026, and at that time, we should be able to make this level of profitability.
Your other question on insurance, we are always open to strategic partners. We do get overtures and all, and we do think India is getting to be a very interesting market for a lot of strategics, and even PE investors are getting interested in the insurance business. So we will be open to, you know, having some conversations. We'll look at it over the next two, three years. But as you can understand, we are fairly close to profitability, and a couple of catalysts we were waiting for. One is in direct insurance business, we have now hit EV breakeven, so that was a good, you know, a very good milestone to achieve, getting to EV breakeven.
I think we'll get to accounting breakeven as per target, and as we're getting closer to that, I think it's becoming an interesting business for PE investors as well as for strategic investors. The same thing is true with general insurance industry. Both of them, we are not overcapitalizing it, we are not putting a lot more capital out there, but if you get a good partner, which will be, as you said, can endorse the value of the business as well as help us grow the business even further with more capital, we'll be open to that. We are not currently deviating from our path to breakeven on both businesses. We are very committed to the breakeven plan we have for both those businesses, and we are confident, with partner or without partner, we will get there.
Okay, great. Thank you.
Thank you. Next question is from the line of Praveen Agarwal, individual investor. Please go ahead.
Hello, Mr. Shah. I have two questions, actually. The first question is regarding the insurance business. Just on the lines that you were just explaining about giving breakeven, can you give us a little more color on-
Your audio is not coming clear. Can you please speak more?
Hello. Am I audible? Is it better?
Yes, I can hear you. I can hear you, sir.
Great, great, sir. Great. So the question is regarding the insurance business, sir, that you just mentioned regarding the EV breakeven coming in, insurance. Could you please, you know, throw some light? Are we on track for the, as per the guidance given, regarding breakeven in 2026, 2027? And will the revised EOM regulations have any impact on that anyway?
I think, we are on target on both the general insurance business and the life insurance business. In 2026, 2027, we will hit accounting breakeven under the current accounting guidelines. There is some talk about adopting IFRS and others. If that happens, it could happen faster. So I think the two important things to watch out in the insurance, you know, business, reported numbers, one will be IFRS, which will be positive.
We are hopeful that IFRS will get introduced earlier. And the second, and the second is the risk-based solvency, RB, RBA guidelines, which is the current risk capital RBC guidelines, which will also be positive for people like us. It will release some capital, and it will improve the solvency of the business. So these two are important regulatory developments which can only impact the businesses positive. Yeah. Other, outside of that, we are currently assuming as is, where is business status quo, we will hit breakeven in 2026, 2027. We are committed to that, and we have, very clear solutions for that. Okay. New guidelines are actually, it will not affect us much. It does require some tinkering around in product mix, some tinkering in the strategy and the channel mix you have.
But overall, we do, we are confident we meet the guidelines which are there. We also hope that these new regulations will lead to more sanity and more clarity and more transparency in how the insurance commissions are paid. Overall, I am personally pretty positive with what IRDAI has done. These new guidelines are pretty good. It will reduce the complexity, and it has put a cap on how much you can pay, which is a good thing, because all of us will able to be efficient and manage the channel mix accordingly. But we have a clear roadmap and strategy on capitalizing. Right. So the second question is regarding, you know, on the listing of Nuvama. So firstly, many congratulations on the listing of Nuvama Wealth Management.
The unlock was executed fairly well and as per the committed timelines. Going ahead, is the management thinking of any more transactions in the business? As I always say, we have to first create value, then we have to talk about unlocking value. I think we are creating value. I think the roadmap for creating value is now asset management and mutual funds, alternatively, because they are, as I said, we are very, very focused on getting economies of scale and improving profitability metrics as we increase our fee pay in, deployed capital. After that, I think will come the credit, the retail credit businesses, both of them co-lending strategy that we followed on SME and housing. And after that will be insurance. As I said, 26.
So the next 3-4 years, I would say asset management, then credit, and then insurance in terms of value creation. And as and when we think of businesses reach the value creation point at which we can either spin off or IPO or demerge that, we will be very happy to do that. We are working on, on the plan. I think over the next 3 or 4 quarters, we should be able to come back to shareholders and inform them on what are the next value unlocking plans. But I think the next one year, as we have set out the new priorities, we are very, very focused on now creating value, scaling the value that is already there in the asset management businesses.
Right. That's an interesting pipeline, and, thank you so much for the answer.
Thank you. Next question is from Lamo Sidacha, individual investor. Please go ahead.
Hi. Thank you for taking my questions. I had two on the alternatives and one on the NBFC. So on the alternatives, you know, if you look at the AUM versus fee-paying AUM, it seems real assets has really done the heavy lifting in terms of deployment. So is anything holding back the last year or a few quarters? And two, in the presentation, you know, it seems that our deployments are role, are lower than our realizations for the last two quarters at least. If that is the case, how do we see kind of the SPAUM scaling up in the alternatives business?
Yeah. Yeah, good point, Siddharth. I think one is the real assets. We have not yet closed the new fund and also there, so the deployment of the old fund is almost over and completed. So we don't have a lot of dry powder in the real assets. On the credit strategies, we just raised a couple of funds. You know, we raised our the ESOF fund couple of years ago, so that still has another one year to go for deployment, so there is some dry powder on that. We raised our ISAF III fund in this year, only in the last year, so that has still got a lot of dry powder. So when you look at this, usually it is also about the vintage of the fund.
When a fund is raised in the first year, you have only AUM, but no deployed. In the second year, about a third is deployed. Third year, another third is deployed, then the, 100% is deployed. So it varies from vintage of the fund to vintage of the fund. And hence, I think rather than look at only one quarter or one half, you should look at the, you know, a 12-month average. A lot of our credit funds, we've been getting back a lot of the old deployment, because there is actually a good secondary market also now developing on some of the, you know, assets we had acquired, some of the loans we had acquired, because a lot of those companies are doing well, so there are large hedge funds and others who have come in the market.
So we have been opportunistic in that, and we have exited wherever we could exit, even though there is a little bit of time left, because we do believe that exits are always important. But overall, as I said, we will deploy about INR 10,000-INR 12,000 crore a year on an average. Now, what happens is, very often we have IC approved pipeline, investment committee approved pipeline, which is not yet deployed because these are in document share and stage and all. And at any point, we have about INR 5,000-INR 6,000 crore of investment proposals which are approved and which are in the document share and stage with various clients across all our funds, not only in one fund. But last couple of years, we have always seen an average about INR 5,000-INR 6,000 crore is always in the pipeline.
So I think on that basis, on a quarter-to-quarter basis, it can vary by INR 1,000 crore, here and there, INR 1,000 crore, INR 2,000 crore. But on an average, I think we are on track. We will always have more, more AUM than fee-paying AUM, because we raise the fund and then deploy it. And in credit and real asset, the norm is that you get fees only on deployed capital, unlike the private equity, where sometimes you get it on committed capital. We also have a couple of funds where we also have charged committed capital, but largely our funds are where we get the deployed capital. So that is where the fee-paying AUM is an important number.
The good news on that is there is a INR 23,000 crore undeployed amount on the AUM, which we get without any additional cost, and then when we deploy, it starts earning a fee for us.
Understood. Thank you very much for that. Just one clarification on the NBFC. You know, I think we've wound up, wound it down to about INR 4,300 crore of wholesale assets. I just wanted to clarify, 'cause it seems the mix of those wholesale assets between loans and SRs are skewed towards the security receipts. If so, will that pose any kind of liquidity risk or challenge, you know, to the business going forward?
No, I think, as you, as you know, we have quite a bit of equity also in that. So whatever SRs we are holding, they have equity also, plus SRs also are getting resolved. I mean, we can always sell them down to other funds because a lot of these are restructured loans now. And as I said, we have taken whatever impairment we have to take. So we currently don't see any further impairments on the wholesale book, which includes SRs as well as the loans. And we do an ALM, ALM matching on that, and wherever we think, we have, you know, we need liquidity, we can always sell the SR. There is a good secondary market.
In the last four years, we have, we have done asset sale deal also, which includes SRs also, to people like Oaktree, to people like BlackRock, to funds like Meritz. So in the past, we have done that also, and that option is always available. So we do an ALM planning on an on a one-year forward basis. So at any point of time, under very conservative estimate, we make sure we have enough liquidity for the next one year. And if we want to be on the safe side, we can always do asset sale. But we have, even without that, even SR, the recovery has been pretty good. In fact, if you want to get a proxy of that, you should look at the ARC part of the business. ARC, in this first half of this year, has had INR 5,000 crore of recoveries.
Total recoveries ARC has made is 5,000 for the first half of this year. So as the real estate market is improving, as the economy is also improving, I think recoveries are getting easier and easier. Even SRs, some of the projects which have gone to NCLT, they're getting resolution, the money is coming in, and we have quite a few cases where, you know, a stuck project, yours, we got paid back and all, they after they were in SR form. So we do a detailed estimate, and we are always very conservative on the ALM, so that we have on a rolling term basis, we're always more than comfortable on liquidity is our approach.
Understood. Thank you very much for clarifying that.
Thank you. Next question is from the line of Anand, from Prabhudas Lilladher. Please go ahead.
Yeah, hi. Am I audible?
Yeah.
Yeah. Hi, so thank you for the opportunity. My first question is that, we are seeing a lot of new entrants in the mutual fund industry. So how do you see this industry evolving in the next, let's say, 3-5 years?
Again, I will invite Radhika to answer that. I think Radhika and me grapple with a lot, but she has got a lot of views on how the industry could evolve and how the co-competition will evolve. Radhika, over to you.
Yes. No, I think, you know, the industry has always been a competitive place. There have been 40-45 players, and now you see you probably have 6-8 new entrants, and a pipeline of 5-7 new entrants. Firstly, I always say that that is a sign that, you know, you are never too late to start in the AMC business. India is so early in its days. Mutual fund AUM to GDP is still about 16% in India, when the global average is 80%. So there's a lot of scope for penetration. And I think that is why you are seeing new entrants. And once you start building a book, it can become a very meaningful and profitable business. So I think new entrants are always welcome. And, you know, most new entrants are actually adopting very different strategies.
So it's not that you can say the new entrants are only low cost, the new entrants are only active, the new entrants are only passive. We really see new entrants come in all mixes. Now, as far as our business is concerned, I think we have a laser eye on execution. What we have seen over the last five years in our industry and with our own business, some of the data is also in the addendum that we put out, is that there is a meaningful opportunity for a young player who's got their product and distribution proposition right to see disproportionate growth. And I think that is what our journey from INR 8,000 crore to the INR 1,15,000 crore that we are at today tells us.
We continue to be laser focused on product innovation, on the quality of performance in our funds, and deepening distribution depth. And we do believe that, again, as we view India is in penetration, there is more than enough room for everyone, but we continue to be laser focused on execution.
Yeah, thank you, ma'am. Just a follow-up question. So, do you see any impact on the margins given the increasing competitiveness? Your current profitability seems a bit muted for the scale you operate at. So, what steps can we see in the near term to address the same?
So let me answer the two questions. One is our current profitability, and second is margins in light of new players. Let me take both those questions a little bit separately. So if you look at our trajectory over the last five years, you know, you can break our AUM really into two parts. There's a BHARAT Bond AUM, which was, I think, a customer acquisition exercise, and there's what I call a core AMC AUM. Now, we started out with disproportionate growth in fixed income that has really helped us scale. But if you look at the non-BHARAT Bond or core AMC AUM, you know, in the last five years, we've grown from about INR 8,000 crore to INR 52,000 crore, of which INR 35,000 crore is equity, and that is very, very meaningful.
So our product mix continues to improve, and our margin profile continues to improve. In fact, if I look at the revenue yield of the core AMCs, then it's about 30 basis points, and it's well in line with many of our peers, you know, in the top next seven, eight. So it's very much in line. We, of course, don't have the advantage of a backbook that some of the larger established players have. But as our focus on equity keeps growing, as equity AUM keeps growing, I think you will see operating leverage playing out. You're already seeing that, and PAT yields will continue to improve. So that is on our current profitability.
It's muted because of the large base, but if you look at our profitability on our core AUM, it's in line with our peers, and PAT yields will continue to get better. As far as how new players influence our margin profile, I really think it is about having discipline in how you raise money. So we always focus on striking a balance between growth and profitability. We are not ones to do new fund offers that very, very raise up in margins. That's not something we want to do. And I think old players, new players, all kind of players can do, you know, very, very attractive pricing tactics to raise money. For us, it's really about finding the balance, and that's what we've tried to demonstrate over the last five years.
Okay. Thank you, ma'am. And just last, can you throw some light on the evolving regulatory stand on commissions and TER? So how are you seeing this impact on Edelweiss Mutual Fund?
So, great question. I think the noise about, a revision in TER stance has, has been there for about six months. The regulator has had multiple rounds of consultation papers and taken, a lot of data and feedback from the industry. A final consultation or a final draft of regulations is yet to be out, so we don't know the contours of that. However, from our perspective, in whatever draft that we have seen, we don't see any adverse impact of that on an AMC of our scale and size. If anything, the impact could be marginally positive. So the potential adverse impact would be on players that are large, that have more than INR 100,000 crore-INR 200,000 crore of equity AUM. We don't see any adverse impact from the papers that we have seen so far.
Okay. Thank you so much, ma'am, for answering all the questions.
Thank you.
Thank you very much. Next question is from the line of Urvashi Khetan from Bharat Capital. Please go ahead.
Yeah. Hi, sir. Good evening. So, my question is on the NBFC. So the capital adequacy for the NBFC remains in the higher side. So are there any plans of equity relief and its redeployment as well? And given that the insurance business is nearing a break-even, you know, any new lines of business that are being planned? Thank you.
I think as I said earlier, our current focus is for the next couple of years to focus on these three priorities: get the asset management profitability up, get the retail disbursements up, and thirdly, get the insurance to break even. And we are currently very, very laser sharp focused on that. We think it will take us up to March 2025 to be extremely, you know, to have actually progressed a lot in business, where we can come back and say, "Now, this is done. We now have new priorities." So in our current priorities, there is no emphasizing on starting new businesses, you know, because there is enough work we need to do in this, and it's, it's exciting. The business we are doing very well.
On the NBFC side, we have excess capital, but currently our idea is, our priority is to reduce the wholesale book and as the retail, especially MSME disbursement scale up, if it needs more capital, we have more than enough capital. But as I said, on a long-term basis, by 2026, we expect MSME business in NBFC to use about INR 1,000 crore or crores of equity, and housing finance to use about another INR 1,000 crore. So balance could be excess capital. We can use, we can see how to use it, maybe make an acquisition, maybe do other uses of that, but that we will decide only after March 2025.
From now to March 25, we want to reduce the wholesale book, reduce the debt, profitability, get the insurance, break even, and make sure that we are increasing scaling of our retail disbursements over the next year. So these remain the priorities.
. Got it, sir. Just a related question: so, given that, the capital adequacy is so strong, why are we still going to the co-lending model? Because as I understand, it's more useful in a case where, you know, there are, capital, issues or, you know, thereabout.
Actually, it's a good question, and I'm happy if you asked that. Thank you for asking that. Actually, co-lending is not because of capital or liquidity shortage. We do think co-lending is a new model. It will take some time, but as you know, Edelweiss, you know, we started ARC in 2008, when and until 2013, ARC did not take off. It took about five years. We started our private credit when nobody had heard of private credit. You must have seen last three, four years, private credit is a hot sector all over the world, not just in India, but we started this in 2008. So if there is, you know, a problem, sometimes we are, we are early with a trend, but we do think that co-lending is a standalone NBFC strategy.
It's not like, the own balance sheet lending, or, you know, co-lending when you don't have capital or liquidity. It is a standalone business. It's a different business than a normal NBFC, which is lending money. That is what we also used to do. And there are various elements of that. Maybe in one of the future dates, when we do an NBFC update, we can give a lot more color on this. But we do believe that co-lending, even if we had liquidity, we want to follow co-lending. That is, underwriting is a lot better. I think your overall, capital returns are a lot better, your discipline is a lot higher, and, when you have good partner banks. I think there are two kinds of NBFCs which are there.
One are NBFCs which will compete with banks, and the second is NBFCs which will partner with banks. You have to choose to be one or the other. You can't say, "I will compete." You can compete with banks, you can borrow from banks and still compete with them. That's the old model, which also, I think, is a good model. It's a valid model, but it is a different model of being a, you know, balanced lender. When you are following what is, what we call to be a partner with banks, you have made a decision and you can't flip-flop between the two, and very hard to do both.
So either you have to be a NBFC, which is using its own balance sheet to lend, where you are borrowing from the bond market and banks, or you are saying we are partner with banks and we put all our energies on working together with banks into developing underwriting, underwriting models, making sure we are much stronger on origination, underwriting, servicing, in partnership with banks and not using balance sheet. And there are a lot of differences, like in the first one, you first go and raise the liability, then you raise the asset. Here you first raise the asset, and you have to keep the liability in mind because the asset is back-to-back, you know, linked to that.
So it's a very lot of changes you make in your model, a lot of changes you make in your approach, a lot of the changes you make in your internal processes also, which we have done. So we believe in co-lending. We want to do that. It is a little bit slow to take off because banks also getting used to it, but we are very, very comfortable, and we think in the next two, three... It will take time. This will become a very exciting business model within the NBFC space, but it will be different from what we have seen NBFC as a standalone using their own balance sheet.
Sure, sir. That was helpful. Thank you so much.
Thank you. Next question is from the line of Roshal Sharma from Sharma Enterprises. Please go ahead.
Yeah. Hi, good evening. Am I audible?
Yes, yes.
Okay. So, so I have two questions. One with respect to co-lending only. So you just explained the new trend that is setting in with respect to co-lending. I just wanted to understand what is your initial experience on the, you know, economics of the business with respect to yield, asset quality and spread? And, you know, how does the risk/reward equation work in these partnerships? Will the, you know, Edelweiss only serve the book or it will be, you know, led by a partner? And what about the processing fee? Whether it be total income for you or it will be split with your partner.
So I think the way co-lending works is on a similar program, because now there is a blanket cost approach, and we are not borrowing from banks and taking money on a balance sheet, managing the ALM on lending it to clients like you will do in a normal NBFC business. In a co-lending, what you are effectively doing is we originate the loan, we give the money to the client, and we give 80% of that, we sell down to the bank. Like, a lot of NBFCs do sell down portfolios to the bank, as you would have seen in the direct assignment or the PTC structure, but usually that is done after 180 days, because that's the minimum lending period.
In co-lending, as per the program, if whatever, whatever loans you have given as per the program to your partner bank, you can actually offer 80% of that to the bank the next day morning. So your money is turned over a lot faster, and you are at 20, the bank is at 80, but now effectively your cost of fund is also your cost of fund on 20 and bank's cost of fund on 80. On an average program, customers have a lower cost of about 100-125 basis points. So there is a 100-125 basis point advantage to the customer in a co-lending product offering that we do.
If we were not to do co-lending and we were to do on our own, with our own balance sheet, usually the interest rate charged would be 100-125 basis points higher. Like, and an average is on an SME, on an SME, you know, business loan, if we are charging, say, 13% and banks are charging 10%. Here we'll be able to do it for the customer at about 11%-11.5%. So the bank gets slightly better, we get slightly better, and the customers get slightly better, because now we have reduced the capital required on our balance sheet.
We don't have the ALM risk, we don't have to have the treasury, because when we borrow from banks and on, and on-lend it for 30, 40 days, the money is ideally in your hand at almost no cost. So when you add up all the costs, all three of you are better off. However, with co-lending, because it's a partnership model and banks are still evolving, understanding, we are also understanding how banks think, plus the work involved is much higher because you have to originate a lot more. So the way I explain co-lending is, co-lending is about, of, about 50% better from our returns and, and the efficiency of your capital point of view, efficiency of the risk point of view, but it is about, like, twice the work.
So you will work almost 2x for a 1.5x kind of a return, but your capital, ROEs are better, your risk is better. You don't carry ALM risk, because more than credit cost, it's the ALM risk that we all really worry about, because our markets are still evolving. There could be either disruptions. So having a lighter balance sheet makes you more agile, makes you more, you know, efficient on an overall basis, but it does require more work. So and it's like anything else, it's like, you know, I think having a lot of capital on a balance sheet and deploying it versus raising money and deploying it in an asset management formula is much harder. Providing capital is always easier.
So in the similar vein, co-lending is a more execution-intensive model, but with much better returns, and it's still new trend in India. We do think it will take another couple of years for it to really catch on, and there is a lead time of 2-2.5 years involved. And as I said, I give examples of private credit, NBFC and all. I think all these businesses we started early and we saw 3-4 years of the build-out phase before the business model became very obvious and very interesting from a scale point of view.
Okay, thank you, sir, for that detailed and, you know, designing on this business. I have one more question related to your retail credit business. Can you give us some guidance on the disbursement trends and, you know, any timelines for scaling it, scaling up this business?
So as I said, we've been growing this business, disbursements in this business by 30%-40% for the last couple of years. On a small base, obviously, because effectively we have restarted this business. Both these businesses are like startups in the Edelweiss internal system. It's not that they are old businesses, because this is a new model, the co-lending. We are currently at a disbursement rate of about, about INR 1,100 odd crore, INR 1,000 crore-INR 1,100 crore for the MSME annual disbursement. So slightly under INR 100 crore for the MSME business, and we are at about INR 1,500 crore, INR 1,500 crore for the housing finance business, annual disbursements. So between both of them, we are at about INR 2,500 crore-INR 3,000 crore range in annual disbursement.
Our eventual target is to be INR 11,000-INR 12,000 crore annual disbursement, 5,000-6,000 in the MSME business and about 6,000-6,500 for the housing finance business. It will take us another 2 years to get there.
Okay. Thank you, sir. Thank you very much.
Thank you very much. Ladies and gentlemen, due to paucity of time, we need to conclude the call and hand the conference back to Ms. Priya Chopra for closing comments.
Thanks, Nina. Thank you all very much for your time today. Please do write in to us at Edelweiss Investor Relations for any questions or additional information that you may need. Once again, wish you all a very happy Diwali and a great weekend ahead. Thank you!
Okay. Thank you, everybody. Thank you once again for being here with us. Bye.
Thank you very much. Ladies and gentlemen, on behalf of Edelweiss Financial Services, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.