Ladies and gentlemen, good day and welcome to the Q3 nine months FY 2024 conference call of Fedbank Financial Services hosted by Equirus Securities. 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 now hand the conference over to Mr. Anuj Mohata from Equirus Securities. Thank you, and over to you, Mr. Anuj.
Thank you, Zico. Good afternoon, everyone. I welcome you all to the earnings conference call of Fedbank Financial Services to discuss the Q3 nine months FY 2024 performance of the company. We have the senior management team with us, represented by Mr. Anil Kothuri, MD & CEO, Mr. C.V. Ganesh, CFO, Mr. Amit Singh, Head of Investor Relations. I would now like to hand over the call to Anil sir for his opening remarks, post which we can open the floor for question-and-answer. Over to you, sir.
Thank you, Anuj, and welcome to everyone on this call. We finished our board meeting a couple of hours ago and have declared our Q3 results. This was a profit after tax of INR 654 million, INR 65.4 crore for the quarter. That's a 28% growth on a year-on-year basis. Our return on assets was 2.5%, and our return on equity was 14.3%. That was for the quarter gone by. This was on the back of an AUM growth of 34% year-on-year. Our AUM in the quarter was INR 107.1 billion. This AUM was because we had disbursements of INR 33 billion for the quarter, which includes INR 11.2 billion for gold and the remainder, which is almost INR 22 billion for non-gold. Our disbursements have grown 24% year-on-year and 21% quarter-on-quarter.
We've seen some disbursement growth in the quarter gone by. As far as asset quality is concerned, our level of absolute GNPAs has actually declined by INR 8.18 crore, and by 15 basis points, quarter-on-quarter. Our GNPA or gross stage III stand at 2.2%. The other important fact on asset quality is that we've taken up our LGDs on mortgage loans to 23% from the earlier 20%. We've taken up our provision by about 3% on mortgage loans. As a consequence of this, our overall PCR is now 24.5%, and our net stage III is 1.7%. During the quarter, we commenced co-lending on gold loans, and the co-lending AUM stands at INR 1.8 billion. We started this in December, and in one month we've covered about INR 1.8 billion. We also sold down our portfolios through direct assignment transactions.
INR 457 crore was the total quantum of portfolios sold, the investor share of the portfolios sold. The other positive development that has happened, albeit after December 31st, was the fact that our credit rating has got upgraded. We are now rated AA+ stable by CARE Ratings. This is a two-notch upgrade over the past 14 months. We used to be AA- till December 2022, and in December 2022, we got upgraded to AA, and January 2024, we got upgraded to AA+.
CRISIL has also rated us, and we are rated AA positive. This happened in the first week of January. The outlook for Q4 remains good and strong. Our disbursements have grown in Q3, and will continue to grow in Q4. This is because we are now present in 17 states and union territories, 609 branches. We added two branches in the quarter gone by. With that preamble, I will open up for questions. Yeah.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Sameer Bhise from JM Financial. Please go ahead.
Yeah. Hi, thanks for the opportunity, and congrats on a good quarter. Anil, just wanted to understand how you see the ROA flow-through for a co-lending model in gold. Also, what are the current rates of direct assignment that you guys are getting? These are my two questions. Thank you.
The ROAs on gold will obviously be very high, Sameer. The reason for that is twofold. The first is that our overall AUM goes up because we have access to a segment that we hitherto wouldn't cater to. Our yields on our gold loan book are about 17.5%-17.75%. Okay? We stay anchored to that yield. Because we do gold lending, we are able to access customers at lower price points. Let's say we have somebody at 13.5%. The difference between 13.5% and 9.5% is 4%. 80% of the loan goes to the partner's book, 20% stays on our book. It is what, 4% into five, which is a 20% that you get on your own capital in terms of the spread alone. Okay? That's in comparison to the normal 10% or 9% spread that you get on a regular home loan.
Obviously it is ROA accretive, ROE accretive for the gold lending business. As far as our mortgage and unsecured DAs are concerned, or mortgage DAs are concerned, the sell down rate is approximately close to our cost of borrowing. Which is why we pursue this sell down strategy, because it also releases capital, which we can redeploy. For unsecured loans, there's obviously a premium of 100 basis points over our current borrowing rates.
Okay. How much of gold lending do we intend to scale this up to?
We'll wait and watch the next quarter, but our intent is to take it up to as much as is possible, because it is hugely capital efficient for us, and we will just see how the subsequent quarter goes, and we will scale it up quite significantly, Sameer.
Okay. Great. That is all from my side. I will come back if there are other questions. Thank you, and all the best.
Thanks so much.
Thank you. Ladies and gentlemen, you may press star and one to ask a question. Our next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund. Please go ahead.
Good evening, and congratulations. My question is on the credit environment that you are seeing. Is it still robust collection efficiencies holding up? The provisions that you have made, you have nudged up the loss-driven default. Could you just explain the methodology around that? Those are my two questions. Thank you.
Hi, Vivek. So, the first question first. The overall credit environment, I think, continues to be benign in that our collections are on track, and we see our customers paying up. I have no additional point to make other than the fact that it continues to be robust. Yeah, the LGD. What happens is that we've had LGDs of about 19% thus far. What we've done this quarter is to take up the LGD on mortgage loans from 19% to 23%. 20%? 21%. Yeah. 21%. We used to have a management overlay of 1%. Now what we've done is to take the whole thing up to 23%. This is an annual refresh exercise that we do, and we've done that, and we've taken up to 23%. Yeah.
Thank you very much, and wish you all the best.
Yeah. Thanks.
Thank you. A reminder to all participants, you may press star and one to ask a question. Our next question is from the line of Madhuchanda Dey from MC Pro. Please go ahead.
Hi. I have a question on your interest margin. This quarter, we saw a tad drop in the interest margin, but as you mentioned that you have seen credit rating upgrades, it should have a positive impact on your borrowing cost. You are getting more aggressive through the gold lending in gold loan, which is also a high-yielding segment. Given all these pieces and given that you have raised a lot of capital also, what is your take on interest margin going forward, maybe in FY 2025, if you could give us some color?
There are three factors which will come into play in terms of our interest margins on the coming quarter or in the coming years. The first is the fact that our product mix will continually get enriched by higher-yield products, okay, whether it is small mortgages or gold loans. So that is point number one. Point number two is that we will continue to do co-lending, so therefore, there is lower capital and there is no interest cost to be paid on that. So that is the second point. The third point is that we very recently got a rating upgrade, so it will hopefully have a positive impact on our cost of borrowing. That is number three. Against all of this, there is the fact that there has been an increase in risk weights over the past what?
Month or so after the RBI circular, the effect of that is not yet played out. We also have money that we raised in the IPO, okay, which we have seen the impact for only one month in the quarter gone by. So we will see the entire full three-month impact in the subsequent quarter. So that will also take up our margin. So these are the different factors at play, because of which I expect that we will reasonably maintain the current margins, if not improve on them.
Okay. As you rightly mentioned, this increase in risk weight is going to increase your cost of bank borrowing, right? What kind of conversations are you having? What kind of increase in rates do you expect because of this?
Can I come in here, Anil? Sorry.
Yeah, please go ahead, Ganesh.
Yeah. Madhu. We have had conversations with banks, and we have reason to believe that we will come out relatively with a lower increase in rates than we had originally guided. We also believe that we will come out with a lower increase in rates than the peer group.
Why is that? Because of your credit rating.
Various factors. Right. Please also note that currently we are sitting, as of 31st of December, we are sitting on cash and cash equivalents of about a little over INR 1,500 crores. Okay. We have the IPO money which has come in, plus we have our regular liquidity and investment. This amount would typically cover at least five to six months of disbursements in a normal year. Right. We are sufficiently carrying liquidity.
I think it positions us well to have these conversations with the banks. Also, the fact that our lending is non-consumer. It is to the MSMEs. That's also a strong point which positions us well in these conversations. I'm sorry I cannot give you more guidance than this. But all of this will play out in Q4, and I think when we come out with the full year results, you will get to see a little more data around this.
Okay. Just one question, which is a little general question. Some of the other gold loan financing companies that we speak to, they have been saying that because of the increase in risk weightage on unsecured consumer loans, that could actually motivate people to take gold loans, in case if they have surplus gold in their household. Do you see this factor playing out at all? Is there any kind of credibility to this kind of argument?
Difficult to say, Madhuchanda. I tell you why, okay. One hand, the kind of person who borrows against gold is completely different from the unsecured customers. Okay. So that is my intuitive understanding. The second thing is that once people begin to take on debt, okay, it becomes a lifestyle and they will need to substitute with other kinds of debt. That is also a feature of the lending industry. So there could be some migration of unsecured to gold. But really, the kind of people who borrow small ticket unsecured is different from the kind of people who take gold loans. The customer profile is different. So I think the impact may be there but will be muted. That's my take.
At least you guys have not seen it so far.
Yes. We haven't seen anything so far.
Okay. Thank you. Thanks for answering all my questions. All the best.
Thank you. Our next question is from the line of Nischint Chawathe from Kotak Institutional Equities. Please go ahead.
Just a small question. How do you think about leverage, optimal leverage for the business and what is the conversation you are taking with institutes on this?
Can I take the question? Thank you, Anil. Yes. Nischint, we are all said and done the subsidiary of a bank. That means that from a financial leverage, while it is a hypothetical construct for most NBFCs, for us, it is a demonstrable lever. And our banking covenants permit us to go up to 6.5x-7x over equity. That is the extent to which we can currently lever based on our partnerships with lending institutions. However, I think in the course of the last few quarters, we have also embarked on a journey of as we have put in our tech delivery on strong margins, strong ROAs and strong ROEs.
What the whole securitization and co-lending program is to help us allocate the equity we have to the higher-yielding loans and at the same time collaborate with partners who have access to lower cost of funds than us to ensure that we do not vacate the other segments and are also making margins there without allocating equity. What that does is it permits us to travel far with a lesser amount of equity. Essentially, I think what we have demonstrated is with two things, one with the fresh equity raise as well as this monetization program of loans.
We have a solar-charged battery. We have a borrowing substitute in the form of these two instruments, which should allow us to go much further with much lesser gearing than what we had originally estimated. That is precisely why, and one of the bigger reasons why all the rating agencies have taken a very positive or a upgraded view on us because they see us as being able to not only lower gearing over an extended period of time, but they also at the same time see us being able to generate stronger return metrics.
I think that what you are saying is that maybe you can theoretically go up to 6.5x-7x on balance sheet, and you can probably have another 20%-25% outside the balance sheet. Is that a fair reading?
That would be a fair statement. Whether we choose to go there or not would be a choice on us. But I think we would have our own criterion from time to time, but yet some of these levers are available to us.
Sure. The second question is on your coverage on stage two and three loans. We are seeing a gradual inch up on a sequential basis. Is this some revisit of estimated losses or is it to do with just the changing product mix?
First, stage two and stage three have to do with product mix change. Because for each product, there is a certain model LGD that is required. Depending on the change in mix by each stage, the ECL provision is an output variable.
How many years of data have you considered for calculating LGDs? How frequently does this get revisited?
We refresh our LGDs every year. We have been considering data since 2017. How many years is that? That is about six years of data at this point in time.
You consider data since 2017, and it is not like rolling six years, but you keep on adding to the data and you probably recapitulate, once a year, typically post quarter. Is it all post quarter?
That is right. This time we have done it at the end of the third quarter. 2017 to 2023, six-year data that we have. On that basis, we have worked our LGDs that you see on slide 37 of our investor deck.
You have to insert something between the second and the third quarter. That is what my question was.
That is right.
Okay. Perfect. Thank you very much, and all the best.
Nischint, I will just add one point just to add a little more color to the optics around what you may see as the coverage on stage two and stage three. Currently, 86% of our loan book is secured. Right? And secured either by gold or property. If you see the LTVs we have published, the LTVs on the property is in the range of 52%-55%, and on the gold loans is 70%. When you look and form a view on the coverage, please also consider the security covers we run with.
Yes, of course. No doubt. Thank you.
Thank you. Our next question is from the line of Renish Bhuva from ICICI Securities. Please go ahead.
Yeah. Hi, sir. Just two questions from my side. One on the credit cost side—
Sorry to interrupt, sir. May we request you to use your headset, please? Your audio is not clear, sir.
Am I audible now?
Yes, sir. Please go ahead.
Okay. Yes, sir, just two questions from my side. One on the credit cost side. If you look at the sequential movement in the ECL provision, the net increase is hardly INR 10 crore-INR 11 crore, but our P&L provision is close to INR 25 odd crore. I am assuming there will be some write-offs. Can you please throw some light on this write-off numbers, please?
Yeah, we have done INR 17 crore write-off in the quarter gone by. Yeah. Okay?
Okay.
Yeah. That includes mortgage loans, unsecured loans, as well as gold loans. That is the number that we have done.
In Q3, you have done INR 17 crore write-off.
Right.
What is the write-off number in this quarter?
Q3 is the quarter gone by, yeah.
Okay, cool. Going ahead, let's say the annualized credit cost, which stood at 0.9% or let's say 90 basis points in Q3, including these write-offs. What should be the steady-state credit cost, or if you can throw some light on the, let's say, write-off pool, which we might have as on Q3.
Our sense is that the standard credit cost should be about 80-ish basis points. Yeah. That's what we will guide. Okay?
Okay.
Q3, we take these write-offs on a chunky episodic kind of a basis. We chose to do some of it in Q3, which is why the number is INR 17 crore.
Right. Got it. Okay. Should we assume this is a peak write-off at least for this year?
Can I come in here, Renish?
Yeah.
Yeah. The fact that we have increased our PCR right on the mortgage book, which constitutes over 55% of our total book, means that we have done a PCR increase on the entire stock in Q3. Right?
Right.
It's like a one-time raising on the entire book. Right? In that sense, it's not a frequent exercise. Right? Like for example, the same PCR in Q4 would be only on the incremental book.
Got it.
Yeah. I think with that perspective, it should come back to a more normalized number towards the range which Anil indicated.
Got it, sir. My next question is on the, let's say the AUM mix side. Clearly when we look at PPT, incrementally we are growing high-yielding book, which is your gold and the small ticket loan. What should be the ideal mix, let's say by 2025 in terms of small ticket loan plus gold loan put together? If that has to play out over the next four to five quarters, where do you see the asset on yield settling and ultimately the NIMs? Because naturally, if we continue to grow our high-yielding book, that will have a positive impact on NIM. How do you see this NIM profile internally?
Let's talk about the product mix first and then NIMs separately. Okay?
Yes.
Now, we have three of our products which yield 17%+.
Right.
Which is gold loans, small mortgage, and unsecured loans.
Got it.
Now the proportion of medium ticket mortgage is lower and it is going to keep coming down.
Right.
Now, overlay on this, the fact that we are going to do co-lending, therefore your yields will be a little higher because you recognize only the spread on the—
On the rated book.
Yeah.
Correct.
Therefore, there is an upward bias to the yields for these two factors. Okay? I am happy and comfortable guiding that our NIMs will be definitely there at the current levels. And how much they will improve by, we will be able to cast once we do the annual operating plan for the next year.
Got it. But directionally, considering the recent rating upgrade plus considering the business model wherein we do not have any sizable exposure to any unsecured PL, wherein the risk weight will come into picture when it comes to borrowing costs. Directionally, NIMs should improve, right? Considering the AUM mix change towards 17% yield book plus the rating upgrade?
Yes. NIMs should definitely be at least at the current level, if not better. Yes.
Okay. That is it from my side, sir. Thank you.
Thanks, Renish.
Thank you. Our next question is from the line of Bhavik Dave from Nippon India Mutual Fund. Please go ahead.
Yeah. Hi. Good evening, sir. Sir, a few questions. One is just to harp a little bit on the NIMs—
Sorry to interrupt, sir. May we request you to use your handset, sir? The audio is slightly muffled, sir. Thank you.
Yeah. Is it better now?
Yes, sir. Please go ahead.
Yeah. Okay. Sorry. Just particularly deeper into the NIM argument. Just wanted to understand what's our incremental cost of borrowing after, like suppose we've got a rating upgrade, the incremental cost of borrowing, has it come down meaningfully for us?
No. The rating upgrade is only 10 days old, Bhavik, and we haven't done any borrowing since then.
Okay.
There is no obviously impact as yet that is crystallized. But give it a little time, and I'm sure it'll have the appropriate impact on our cost of borrowing.
Because when we look at the quarter-on-quarter cost of borrowing moment, it's like even if we've not borrowed quite a bit, the cost of funds increased from 8.5% to 8.7%. That's a 20 basis point up move considering we had capital benefit this time around. Just trying to understand, are we borrowing at a significantly higher cost today and that will come down post this upgrade? What was maybe the incremental cost of borrowing before this upgrade? Just ask the other way around.
Can I come in here, Anil? Can I try to answer this?
Yeah, please.
Yeah. Bhavik, again, we cannot give out numbers which are not already in the public domain. Right?
Sure.
But I will tell you the argument for NIM expansion. Just before the equity raise,—
Yeah
—we were running at a leverage of 5.5%.
Correct.
September reported number was 5.45%. By November, it had crossed 5.5%. 5.57%.
Correct.
As a result of the equity raise, the December mentioned gearing is 3.69%.
Sure.
Okay? That is a significant drop in gearing.
Correct.
Now from a NIM expansion, if you have more equity,—
Correct.
—that also results in an expansion of net interest income. That is point number one.
Correct.
Now, on the borrowing side, the banks or our lending partners have always seen us as different from the peer group with the same rating.
Okay.
So the impact of this would be in two ways. One, an AA+ gives us access to maybe funds which earlier had a threshold which would not permit them to invest in us. So it gives us access to deeper pools of liquidity than what we earlier had. And per se, on the market borrowing side. It opens up pools which were not earlier available to us or may have been available at a higher cost. Okay.
Sure.
Now, when and how much this will play out is a little bit into the future. It will have to be seen. As you know, right now, RBI is tightening liquidity around bank lending to NBFCs. And in line with our earlier guidance, I think when the times are tough for NBFCs, bank-owned NBFCs like us come out with a better advantage than some of the other peers. I think that's the limited point we are making. And that should also help both from an availability and a cost of funding. On a relative basis, we believe we will continue to enjoy those advantages, which will be further boosted by the upgrade.
Understood. Second, sir, again, a question regarding your incremental growth. When we see your disbursement this quarter, the growth is significantly coming from small ticket and medium ticket LAP, right? Just wanted to understand from you, one is how is the yield or the competitiveness actually in this segment because a lot of affordable housing companies are also getting a little competitive when it comes to LAP in the small and medium ticket. That's question number one.
So yields on this product, how are they shaping up? Second is on the business loans. When I see your last four or five quarters, the numbers that you have reported, the number is hovering around this INR 300 to— sorry, INR 330 crore, INR 340 crore to INR 350, INR 360 crore range. Any thoughts on this? Why are we not maybe increasing intensity here? What's happening on this part of the loan book? That's question two.
Sure. Look, competition always exists. Okay. But it is quite low in the small mortgage segment. Okay. That's because we are present in several states, 17 states, and there is nobody else who's present in so many states. There are regional players and there are players who go deeper into the market as opposed to wider like us. Therefore, there is less competition in the kind of ticket size that we cater to. The competition tends to be a little more concentrated in slightly smaller ticket sizes, INR 8 lakh, INR 7 lakh, that kind of stuff.
Okay.
Our average ticket size is INR 12 lakh, INR 13 lakh.
Yeah.
Okay. The second point is that it's a reasonably virgin market and it's getting created as we speak. My estimate is about 3% of the overall loan against property AUM is in this segment. Even this 3% has got created over the past maybe four or five years. That is my assessment. That is as far as competition is concerned.
Correct.
Now, in terms of unsecured, we keep our originations calibrated to our risk appetite. Okay.
Correct.
We want to keep less than 15% of our book as unsecured. The current number is 13% and directionally—
Correct.
—it goes down. Okay. Our strategy is to originate and sell the bulk of this down. You will notice on one of our slides, slide 25, that our- percentage of off-book for unsecured has actually increased. It used to be 27%.
Correct.
Now it is now 32%. A year ago it was 13%. We have these relationships and these pipes in place now.
Correct.
We will take up our unsecured originations to feed the appetite of our buyers in future.
Understood. And sir, one more question is regarding the conversation around increasing our PCR or the ECLs on stage two and stage three. When I see your business mix increase is broadly more towards the LAP, the small and medium ticket LAP over the last, whatever, nine months. In that context, what led to this increase? Because even after the increase, they are still a little lower than a lot of these affordable housing companies who do both housing and LAP in that INR 8 lakh-INR 10 lakh ticket size. You think this 24%, 25% ECI we have on stage three is good to go for now and we won't require any further change in this? Is that the way to think about it?
What we have is the LGD on the entire stock, and we do an annual refresh of the exercise of the entire stock. The most recent refresh was done using data ended November 30th. Okay.
Okay.
On that basis, this is more than adequate. Okay.
Sure.
Now, obviously, we keep doing this every year and the number will either go up or down depending on how the portfolio and our collections have performed and stuff. Okay. That's the point about this. We've guided that we'd like to keep taking this up and we will keep taking the provisioning up with the passage of time.
Understood. And sir, last question is on your operating expenses. When I see your other operating expenses ex of employees, that remains flat quarter-on-quarter, and we've seen a healthy disbursement growth this quarter. Just wanted to understand what's playing out here and is this 56% cost to income that we've achieved this big deal in terms of the quarter-on-quarter decline. Do you think that this is sustainable? Anything on the other operating expenses that we've been able to deliver this quarter, how are you thinking about it? Is 56% cost to income a reasonable number to work with? Or you think that maybe this was a one-off and it will go back to that 58%, 60% odd levels that we were at?
I'll tell you the different moving parts here.
Yeah.
The last quarter we had the IPO money for 20 days, 25 days or something.
Correct.
This quarter we will have the IPO money for the entire quarter.
Correct.
The income will go up to that extent. That is one moving part. The second thing is that normally your cost gets reset in the first quarter of the year, and the impact of that increase happens in the first and second quarters.
Right.
That is now behind us.
Right.
Q4 for everybody tends to be an extension of Q3 in terms of how the costs play out and stuff.
Yeah.
For these reasons, I believe that the gains that we made will probably consolidate on those in the subsequent quarters.
Correct.
Sorry, I will just add one point to what Anil said. That is that, see, we normally front end the branch expansion.
Correct.
This year, in the first half of the year, we added 34 branches to our small ticket LAP and affordable home loan network. In the last three years, you would have seen that we have grown from about 59 branches to about 172 at current count.
Correct.
That's a significant increase in firepower.
Yeah.
For this high-yielding product. Now, there is a product. Now, obviously, there are new hires who have come in. We have done some re-engineering of the construct in terms of the credit and underwriting teams and so on. Now this engine will slowly start firing with higher productivity. That also will translate to improvement in OpEx. See, I think the last quarter when we guided, I think what we took pains to say is that we don't see this as a sprint. We see it as a marathon.
Yes.
We will not compromise on the build expense. We are in it for the long haul.
Correct.
We have to go far, and we will build it surely, but slowly. But very clearly, I think there is a commitment out there in terms of bringing down the cost to income in a gradual way. There are also economies of scale playing in. All of this will help us in the journey to optimizing OpEx to AUM and OpEx to AUM and consequently expansion of ROE.
Sure. But from a one year or a two year perspective, this 5.5% that we've achieved this quarter, you think this will eventually trend down maybe in FY 2025, 2026? It will maybe improve by 10 basis points, 20 basis points every year. Is that a fair assumption?
See, we don't want to put numbers out there. All we are guiding is gradual improvement in margin.
Sure. Fair point. All right. Okay, sir. Thank you so much. Thank you.
Thank you. Ladies and gentlemen, you may press star and one to ask a question. Our next question is from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.
Hi, good evening. Thank you for the opportunity. Three or four questions. The first one is, given the fact that we are focusing more on mortgages, and we also have a substantial part of the gold loans, this 23% LGD is largely coming out of the mortgages because the LGDs for gold loan would be lower. That's the first question. Second is the—
Sorry to interrupt, sir. May we request you to use your handset, sir? Your audio is not clear, sir.
Okay, one second. Hello, is this clear?
Yes, sir. Please go ahead.
Right. The first question is around the LGD. If we can spell out the LGD for each product, because I think the 19% or 23% increase of the LGD, my suspicion is that it is mostly because of mortgages. The gold loans will not have such high LGDs. If you can spell out the LGDs also because we are taking six years of data for the LGD. When we roll it over the next few years, the COVID impact would also come off.
Should we see LGDs coming off in the next couple of years, and we should see improvement in ECL coverage going forward? The third would be around OpEx. What sort of employee addition and branch addition are we going to look at in FY 2025? We have had a sharp increase in the last three, four years. And if we can speak on the risk management in the unsecured as well as small ticket LAP. Thanks.
Thanks very much. I'll take your questions one after the other. First up, you had a question on increase in branches. This year what we've done is to take up our small mortgage branches, whereas we focused on taking up the AUM in the existing gold loan branches. That's why our small mortgage branches have increased from 130 to 180 approximately. About 50-ish branches we've opened this year. Now, every year when we make the annual operating plan, we firm up the expansion, whether it's for gold or mortgage, and that process is underway. Specifically, where we will add branches in the coming year, I will be able to talk about in the subsequent call. At this point in time, we are rationing our branches across these businesses, and we will firm that up by the end of the month. Okay.
The second thing is, for gold, the LGD is 0.75%. Okay? That is what the model says. And obviously, there is nearly no loss to be had on the gold NPA that is transient, that gets created at 90 DPD and gets extinguished by 150 DPD. So we carry about 60 days of NPA on gold. Now, in future, what will happen to the LGDs? Well, it obviously depends on the collections performance in the current year, okay, and really, what the translation of one bucket to the next is and how much we are able to collect and arrest, and most importantly, how much we are able to crystallize in terms of loss at the time of enforcement of collateral. But it's reasonably fair to say that there is a certain industry standard for mortgages, and we are kind of there.
Now, how much we will seek to provide against that is a matter of choice. The industry is at about 25-ish percent and we are at about 23%, so there's not too much of a gap. Finally, in terms of risk management, I'll just encapsulate this in a nutshell. We choose our markets with some care and caution. We make use of data from the bureau as well as intelligence from the market and open our branches. We seek to populate our branches with people who have relevant experience in the same geography so that nuances of either property or business in a specific location are understood, and individual learning translates into organization learning. We have a standard personal discussion template, okay, based on which there are decisions made. Essentially, what we do is to try and ascertain the individual's income for mortgage loans as accurately as we can.
We seek to triangulate it using various data points, which is to say that if he has a certain surplus every month, we try and see what he's done with that surplus the past year or the year after and use that to validate our assessment. We have a salesperson, a credit person, and a collections person in each branch so that we are able to optimize our performance on all three vectors. As far as unsecured lending is concerned, we lend only to customers who have declared income on their documents. Okay.
Typically, these customers are P&L, balance sheet, tax returns, audited financials, and about 30% of our customers are objective rejects, and the remainder are subjective rejects, and that's the way this works. Some data regarding the quality of the book is provided on slide 34 with regard to the kind of score bands of customers that we lend to. Yeah. This is a bird's-eye view of our risk management.
If you could just tell out one question you guys are answering, what's the LGD product-wise?
Product-wise LGD, mortgage is 23%, gold is 0.75%, and unsecured we write off at 90 DPD.
Understood, sir.
Yeah.
Thank you so much. I will come back and get to you.
Yeah, you are welcome.
Thank you. A reminder to all participants, you may press star and one to ask a question. Ladies and gentlemen, to ask a question, you may press star and one. We have a question from the line of Sagar Doshi from Fintuit Investment. Please go ahead.
Yeah. I just wanted to know, we are on a small base as of now, and looking at the leverage that we can pull off, what is the growth rate that could be expected, let's say, a year or for the two-year period from now on?
You look at our past, we had INR 1,000 crore of retail AUM in FY 2028, and as of right now, we are at just shy of INR 11,000 crores. The opportunity is vast. We have all the resources, branches, employees, as well as capital and the ability to raise debt. From here on, I am happy guiding a compounded growth rate of 25%, and we will try and top that.
Okay. Any other new products that we may go in apart from what we are doing?
No. For the foreseeable future, we will optimize our performance in the products that we offer right now, and we will refine our current operating model for superior results. Okay.
Wonderful. Thank you.
Thank you. Before we take the next question, a reminder to all participants, you may press star and one to ask a question. Our next question is from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.
Hi, sir. Thank you for taking my question. Which part of the book are we going to do the co-lending in? Second question is, how do we differentiate our gold loan portfolio from our parent's gold loan portfolio? Thanks.
Currently, we have co-lending arrangements for gold loans. Okay. That has got tested through the month of December, and we're going to scale that up in the coming quarter. Okay. As far as our parent Federal Bank is concerned, they lend to a different segment of customers. Their average ticket size is between three and four times our average ticket size, and their average yields on the portfolio are also significantly lower than ours. If you look at the previous quarter's investor deck, you'll see that their yields are, I think, about 10.15% or so. Okay. Our yields on the gold loan portfolio are upwards of 17.5%. So we cater to a completely different customer base in different geographies. So it's different. Yeah.
Understood. Thank you so much, sir.
You're welcome.
Thank you. Ladies and gentlemen, that was the last question of our question-and-answer session. As there are no further questions, I would like to hand the conference over to Mr. Anuj Mohata for closing comments.
Yeah. Thank you, Zico. Once again, thank you all for participating in the call, and we would like to thank the management of Fedbank Financial Services for giving us the opportunity to host this call. Thank you, everybody, and have a good evening.
Thanks, guys. Have a good result season. All the best. Yes. Thank you.
Thank you. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.