Good day, welcome to Five-Star Business Finance Limited Q4 FY 2023 earnings conference call hosted by Nuvama Institutional Equities. As a reminder, all participant lines will be in the listen-only mode, there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during 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. Manu Padinjaria from Nuvama Institutional Equities. Thank you, over to you, Ms. Padinjaria.
Yeah. Hi, good morning, everyone. I welcome you all to the Five-Star Business Finance earnings call for the fourth quarter and for the full year FY 2023. We have with us the top management team of Five-Star Business Finance. I welcome them. We have the CMD, Mr. Lakshmipathy Deenadayalan with us, CEO, Mr. Rangarajan Krishnan, and CFO, Mr. Srikanth Gopalakrishnan. Congratulations, sir, on a very strong set of numbers. I now hand over the call to the Five-Star Business Finance team. Thank you, sir.
Thank you, Manu. Good morning, all. A warm welcome to the fourth quarter results and the third conference call that we are taking post-listing. Just to revamp what I was talking about, Five-Star and its business model the last two calls. Five-Star is into a niche segment where the challenges, competitors are low. We cater to lending to a unlent segment, broadly to single and small shopkeepers, self-employed and the cash salary segments of this country. We see a lot of opportunity and the edge what Five-Star has, of 30 years of lending to them and the collection model that what we have set up, exactly suits to the earn and pay customers.
Getting into the quarter's number, as I said last call that the next the Q4 will be the beating the best. Yes. Both from a collection perspective, from a growth perspective, we have beaten our best during COVID numbers and post even previous COVID numbers. Just to take you through on the numbers, going from a branch expansion, which is the first lever of growth for Five-Star. We have added close to 73 branches for the full year. We have moved from 300 branches to 373 branches as of 21st March. We have also added the employee strength. What the second lever of growth will come from feet on street.
We have moved our employees from 5,675 to 7,347 employees, adding 1,600 employees for this full year. That has resulted in a good disbursement. Between last quarter and this quarter, we have moved from INR 910 crores disbursement to INR 1,110 crores of disbursement, which is 22% quarter-on-quarter growth. For the full year, we have increased our disbursement from INR 1,756 crores to INR 3,391 crores, which has resulted in 93% increase in disbursement. The outcome of branch addition, employee addition, and increase in disbursement, AUM has grown very well.
Between last quarter and this quarter, AUM has grown from INR 6,242 crores to INR 6,915 crores with a double-digit growth of 11% in a quarter. For a full year, we have moved from INR 5,067 crores to INR 6,915 crores, registering a 37% full year growth. Moving to the asset quality, which is the outcome of the, this collection, what I said earlier. Let me take you through on 90+. Our 90+ in last quarter was 1.16%. That has dropped down 12 bits to 1.04%. The NPA terminology, which has changed under the revised RBI guidelines also have seen a reduction from 1.45% last quarter to 1.36% this quarter, a drop of 9 bits.
To conclude, 90+ is 1.04% and NPA is 1.36%. The difference of 0.36%, which is INR 22.12 crore of loans, has been tagged as NPA under new revised guidelines even though they fall under less than 90+ category. Translating a good collection, now let me take you through the profitability. Our profits also seen a good rise, both quarter-on-quarter and for full year. Quarter-on-quarter, our profits have risen from INR 151 crore to INR 169 crore, registering a 12% growth. For the full year, we have moved our tag from INR 454 crore to INR 604 crore, registering at 33%. Both from a good asset performance, even from liability side, we have performed very well.
Our borrowing from last quarter to this quarter, incremental borrowing, has moved from 9.1% to 9.5%. We are borrowing slightly little costlier. From 9.1%, we have moved on to 9.5% this quarter. This is incremental borrowing. The cost of fund in the book is dropped down from 10.5% to 10.1%. Still even RBI has increased the repo rate to 250 basis points, are still we are able to get at a very attractive borrowing from the banks, due to, as we said, due to our performance, quality, profitability and good capital what we have. With this, let me hold myself, hand over to Srikanth for more details.
A very good morning to all of you. At the cost of, you know, a few repetitions, please bear with me. I'll just give you a quick overview in terms of how the quarter and the year went by, before opening out for questions from you. Like Mr. Lakshmipathy said, I think one of the other key metrics which we delivered during this year is we almost got close to a loan base of about 300,000, representing a 25% year-on-year increase from about 215,000 to about 300,000 as we speak. Strong branch additions of 23, you know, resulted in a deposit increase of 93% for the year. For the quarter, we dispersed a little over INR 1,100 crores.
The AUM has grown by about 37% from INR 6,067 crores to INR 6,915 crores. For the financial year, I think from a financial metrics perspective, the average yields have been pretty much stable at around 24.2%. The average cost of funds is at 10.12%, resulting in a spread of 14.11% as against a spread of 13.5% for FY 2022. The NIMs also have seen a increase. It has improved to about 18.04% as compared to 15.09% for the full year FY 2022. Our cost to income continues to be around the 38.6% levels.
For the financial year 2023, it was at about 36.4% as compared to 38.92% for FY 2022. All this has resulted in a healthy return on assets of about 8.62% for the full year and ROE of 15.03%. More importantly, I think the ROA for the quarter was again at 8.62% and ROE at 16.1%, which gives you the direction of the ROE trajectory in the quarters to come. The ROE has been going up quarter-on-quarter. From a borrowing profile, I think we have a very well-diversified borrowing profile of about 50 lenders lending to us. Banks contribute about 56% of our debt. We have also issued NCDs.
We have done securitization transactions and also done issuance of external commercial borrowing. During the quarter, we raised over INR 1,400 crores of incremental debt at an all-in cost of about 9.5%. For the full year, our liability increase has been at about INR 3,100 crores of incremental debt at an all-in cost of about 9.2%. While the incremental cost has increased by about 40 basis points compared to the previous quarter, as alluded by Mr. Pathy, we are still borrowing a very good quantum of debt at optimal costs. Our cost for the full year as compared to the last year has actually gone up only by about 32 basis points.
During this period, we have seen RBI raise the repo rate almost 2.5%. That's a very strong performance from the company side in terms of the liabilities. During the quarter, ICRA, our existing rating agency, also upgraded our rating to AA- . We are hoping that the other rating agency will also follow shortly. Our beyond balance sheet liquidity continues to be extremely robust. We are sitting on a liquidity of over INR 1,600 crores as of March 2023. This is something that can actually help meet our growth targets for the next couple of quarters. Collection efficiencies have shown a significant improvement. It stood at 100.3% for the quarter of March 2023.
More importantly, from a trend perspective, I think for the last five quarters, we have actually been clocking collection efficiency of over 100% every quarter with the exception of June 2022 quarter. Even there, we were very close to a 100%. This has resulted in our buckets also becoming better. Our thirty-plus has been showing a consistent improvement over the last few quarters. As of March 2023, we had a 30+ of 10.5%. I just want to, you know, insist upon one fact that this increase has not just come in percentage terms, but every bucket has actually shown improvement in absolute terms as compared to the previous quarter. The 1-30, 31-60, and 61-90 has actually shown an absolute improvement.
In terms of the revised upgradation norms, the revised IRAC circular, our NPA, which was at 1.45% last quarter, dropped to 1.36%. The 90-plus stood at 1.04%, which has also come down by about 12 basis points as compared to the last quarter. Our provision coverage continues to be robust. On the stage three assets, we are holding a provision coverage of 19.33% and overall provision coverage of about 1.61% on the overall AUM. With the effects of COVID completely receding and good improvement seen across our portfolio buckets, we are very confident that our OCR on the overall AUM will start normalizing in the coming quarters. On the restructured book, this number has come down.
What was 1% last quarter has actually come down to about 0.86% of our overall loans is the restructured book. Even on this portfolio, we maintain a provision coverage of about 99.18%. The restructured assets have actually seen this, you know, repayment behavior of 1.5 years post moratorium that we gave. Even today, 91% of this restructured book continues to be in the standard category with only 9% slipping into NPAs. 43%, you know, year-on-year, the quarter-on-quarter, year-on-year profitability from INR 117 crores to INR 169 crores and increase from INR 151 crores to INR 169 crores profitability for the quarter.
For the full year, we have shown a 33% increase in profit, going up from INR 454 crores to INR 604 crores. Our net worth stood at INR 4,300 crores as of March 31st, 2023. With the growth momentum coming back, the collections and asset quality remaining extremely robust, not just in this quarter, but over the last 5-6 quarters, I think we believe that we remain extremely well-poised to take advantage of the huge opportunity available in this segment. That's a synopsis of the quarter and the year for you. We will now take any questions that any of you may have. Thank you.
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 touchtone 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 questions assemble. You may press star and one to ask the question. The first question is from Pranav Mehta from Value Research Investments. Please go ahead.
Yeah, good morning and congratulations, sir, for excellent set of numbers. First question is on the liability side. You did just touch upon it briefly in your opening remarks. We'd like to know more from you know, about the steps that we have planned for the next year to basically granularize and further diversify our sources of borrowing, given that, you know, our liability requirements will be significant to fund our growth aspirations and with the average cost of funds, we should expect to continue trending downwards. That is the first question. Secondly, since the P&L, the fee income line. For this quarter as well as for the full year, there has actually been a significant drop in this line item.
If you can just explain what has led to this. These are my two questions. Thank you.
you know, Pranav, taking the liability side, first. What is important to note is that whatever borrowings that we have, the INR 4,200 crores have come in from a small set of lenders. It has actually come in from about 50 lenders to us. This includes, you know, the largest of the public sector banks, the largest of the private sector banks, who have only a small exposure with the company. Even the likes of, let us say, SBI Card from India has about INR 500 crores of exposure in the company, which is not even 10% of the overall asset base. There is a significant headroom available for us to increase with increase our borrowings from all these people.
From a structure perspective, you know, we are, we have the expertise to, you know, borrow through term loans, we have the expertise to issue non-convertible debentures. We have done securitization transactions. In fact, in the last quarter, we did almost about INR 600 crores of securitization. We did the largest transaction of about INR 350 crores with DBS Bank. Today banks are also actively looking at, you know, taking securitization exposures. We are very confident that even if we are able to push this exposure limits to 2x with each of these lenders, we will be ending up with almost INR 8,100 crores of liability book, which is sufficient for the growth that we are looking at for next year.
We are not really looking at any challenges on the liability front. See, from a rate perspective, our belief is we have probably seen the dip of the curve. It is probably gonna stabilize at this point. Maybe not for the next couple of quarters we will see easing coming through. Maybe towards the later part of the year we could see some easing. We are not seeing any incremental, you know, increases to come from here. We should be borrowing at around the 960-975 levels that we were borrowing even in Q4.
With a book cost at around 10.1, any borrowing less than 10.1 mathematically will only give us a benefit in terms of the cost of funding on the book going down or at least staying at 10.1%. Both from a quantum perspective and from a cost perspective, we are not actually seeing any impact to come in in the current financial year. Moving over to your question on the fee and other income. This is partly from the perspective of an accounting treatment difference, Pranav. Earlier we used to collect INR 2,000 at the time of login to ensure that the customer is actually serious about onboarding the loan.
In the past, what we used to do is this used to be completely recognized in the top line. As per Ind AS, and the amounts were small. As per Ind AS, with the amounts increasing, this is supposed to be, you know, treated on an amortized cost basis. You will have to knock off whatever current expenses for origination that the company incurs, and only the balance can go into the top line, that too on an accrual basis. If you look at it, whatever legal, the initial legal and inspection fees that we collected, about 80%, 82% of that gets knocked off against the expenses. Only 18% goes to the top line. That is why you are seeing a drop in fee income from about INR 32 crores to INR 22 crores for the current year.
Results have been significantly more robust as compared to the prior year.
Pranav, to the, to add one point to what Srikanth said on the first question, on liability side, our rating has moved from A to double A in the second, third quarter of last financial year. That is not fully capitalized. We will expect further big names to come in, and the quantums, that will also push down the pricing to the extent what we can deal with the lenders. That is not fully capitalized. We feel next financial year. Just to give a number, Q3, we raised more than INR 1,000 crores. In Q4, we raised more than INR 1,300 crores of liability. I don't think the liability is going to be any challenge.
The customers to whom we lend, they are quite rate sensitive, so I don't think even borrowing from lenders will not have any impact on our growth.
Okay. Thank you, and all the best.
Thank you. Next question is from the line of Manish Ostwal from Nirmal Bang. Please go ahead.
Yes, sir. Thank you for the opportunity. My question on our loan pricing mechanism. We generate on a portfolio yield of 44%, and we have a credit losses 0.72% for the last year and this year also even lower than that. My question is from a risk adjusted perspective, since we are pricing almost 2% a month on a loan product, what would be the sustainable trade cost for the business model what we operate at Five-Star? Secondly, what is your comfortable leverage on the balance sheet? Currently, it's 2x of the net worth. What is the comfortable leverage we can assume for the business? Thank you.
Manish, I think the guidance that we have been giving on the credit cost, while, you know, it has been swinging a little bit over the last few years, given the first wave of COVID, second wave of COVID, companies building up provisions, you know, in anticipation of, you know, certain stress in their portfolio. Our guidance to you on the credit cost will be, you know, 75-100 basis points is what you should probably, you know, plan. While 72 basis points was for the financial year 2022. Like I said, in FY 2020, 2021 and 2022, we had upfront loaded some of our provisions. You know, anticipating stress because of COVID, because of, you know, the change regulatory norms and all that. That is now-
The 38 basis points is for the quarter and 29 basis points for the year is also because of us upfronting certain provisions in the previous years. This number will go up as we, you know, get into the future. From a modeling perspective, we'll guide you for a 75-100 basis points of credit cost, which is something that we can comfortably absorb in our P&L. In terms of the second question, from a leverage perspective, we are at 2x of leverage today. Historically, over the last 10, 12 years, Five-Star has been comfortable operating around the 4-4.5x of leverage, which means a 3-3.5x of net equity.
I think that is the level that we will be comfortable and we are targeting to achieve in the next few years. Given the strength of our network and the internal accruals that we keep doing on a year-on-year basis, it is going to take a little time for us to reach this level, but I think we will be comfortable operating at around the 4-4.5x of leverage, translating roughly to 3-3.5x of net equity.
Sir, in terms of looking our profitability and the ROE metrics. I believe there is, still there's a room for our cost of borrowing to reduce further, given the, you know, profitability and the capital adequacy positioning. What is your comment on that, sir?
Sir, sorry to interrupt you. Manish, may I request you to mute your line from your side, please.
Hello, am I audible?
Yes, you're audible. Could you just please stay quiet while the management is responding? I'll request you to mute while the management is answering the question.
Sure. Hello.
Yeah, I got the question. We got the question. Yeah. See, currently our book is running at 10.12%. You know, like I said, we are borrowing at around 9.5%-9.75%. There is still some, you know, minor benefit that is available. Maybe this 10.1 will probably drop to about 10 or maybe another 10-15 basis points. Today, if you look at our spreads, we are at about 14%.
What we have also been guiding is that, wanting to be a responsible institution, I think as we go forward, we will, once we have seen the peak and the rates start stabilizing or start easing off, we will also want to pass on some of these benefits to our borrowers. Our steady state, where we are guiding you for the spreads will be about 12%-13%. There will be some benefit coming from cost of funds dropping in the future and also, you know, some impact coming on account of us dropping the yields. We will be comfortable operating around the 12%-13% kind of spread. If you look at FY 2022, we were at about 13.5%.
should be around 13% is where the company has operated in the last many years, and that's something that we'll also be comfortable operating at. There is some benefit that may come in from liabilities, like Mr. Lakshmipathy said, given our rating upgrades, and the fact that we are looked at as a very safe institution by the banks and financial institutions, that I don't see significant benefit coming in the next financial year. 10.1 may go down by maybe another 20-25 basis points.
Sure. Last, very quickly, what is the guidance for the branch expansion for next year? Thanks. Thanks a lot for answering all the questions.
Manish, the quick guidance, what we always keep saying is, we'll be adding close to 50-60 branches year-on-year.
That's a very important lever for us for registering a 30%+ growth year-on-year. That's our guidance for the short term.
Thank you very much. The next question is from the line of Parag Jariwala from HDFC. Please go ahead.
Yeah. Same question. You know, if I look at, let's say, over two, three years, where do you see, you know, because many of the branches which you opened in last 1.5 year would have not, you know, fully matured in terms of business they do. Next two, three years, where do you see our, you know, disbursement as well as the AUM, you know, kind of, go up from here? If you can, you know, probably, just outline the, you know, three years metrics from here on?
Yeah. Let me start with the disbursement, what you've been talking. See, as I said, the growth factor will come from three strong positions of Five-Star. Before let me also clarify that Five-Star's presence is strongly in Tier 3 to Tier 7 towns, where the shopkeepers, self-employed, cash salaries, first port of credit is borrowing from the local people. That is where Five-Star goes and disturbs the market, and we capture the market in these tiers. I think the first level of growth will come from branch expansion. As I said in earlier question, we'll be opening close to 60 to 50 branches year-over-year.
Just to give you a data, last year we said we opened 73 branches, and out of that 96 branches or more have break even on in what? Six to nine months. That shows the strong opportunity potential what we have in the local market to disturb the local markets credit. As we move forward from next two to three years, I said, branch opening, addition of people, feet on street and slight increase in average ticket size. We have moved our average ticket size from INR 3 lakh to close to INR 3.3 lakhs, taking inflation into account. Putting all these three things together in next two to three years, we can very comfortably grow at 30%+ without any disturbance.
As I said, our collections also have moved up very well in last two quarters, especially after the new RBI guidelines came in, which was a little bit of threat for the retail lending segment that we did very well. The strategy worked very well. We dropped down that even from 1.42% to 6% to 1.32% now. We feel very comfortable both in opportunity, our execution and collection. We can very strongly give a guidance of 30%+ year-on-year growth in next two to three years.
Okay. Thank you.
Thank you. This question is from the line of Chandrasekhar Sridhar from Fidelity International. Please go ahead.
Hi. Good morning. I have a few questions for Srikanth. Srikanth, I noticed the share of fixed rate borrowing that has come down. Maybe you could just help me understand what is the share of, how do you think of medium long-term, just the share of fixed rate borrowing, into both and, what's the average rate of your fixed rate borrowing at this point? If you can keep in that, you know, for us also, maybe, it's worthwhile just sharing the composition of the transactions, banks, certain number, but just banks and securitization, that will be really useful.
Sure. Chandrasekhar, yeah, the fixed rate borrowings are coming down because, you know, we are, we are more and more borrowing term loans from banks. The good part is we are not linking our, you know, the rates to the repo, which typically tends to move faster and move much deeper. Our borrowings are linked to the MCLRs of the banks, either at six months or one year intervals. We are definitely not going to see very, very frequent interest rate movements that may be happening. Our guidance is typically most of the securitization transactions tend to be fixed. NCDs are fixed, but we have not been too active in the NCD market.
I think I would probably guide you to something around 25%-35%, 25%-30% of fixed rate borrowings in a steady state scenario. About 70%-75% coming through the variable rate model. In terms of the cost of funds on the fixed rate borrowings, Chandra, I think these are largely around 9.25%-9.50%. At this point of time or at the time of origination, we actually don't see too much of a difference between a fixed rate borrowing versus a variable rate borrowing. Like I said, fixed rate borrowings are typically the PTC transactions where initially the rate tends to be lower. You also have the other costs in terms of the negative carry on the credit enhancements.
You have the rating and other expenses, which tends to push up the cost to about 950 or so. You will typically see fixed rate borrowings and variable rate borrowings broadly at around the, you know, 940, 950 levels. Give or take 10 basis points this way, that way, depending on, you know, which lender comes in what quantums and all that. Typically, we tend to pay some premium for very strong lenders or for significantly higher quantums. From a structure perspective, Chandra, I think this is part of our presentation as well. If you look at March 23, 66% of our borrowings have come in in the form of bank term loans. 6% are from other, you know, other term loans.
Typically, the larger NBFCs like Bajaj and Cholamandalam of the world. We have 12% NCD issuances that we have done, and 23%, you know, where we have borrowed through the PTC, the securitization route, and about 2% in the form of ECB. Our guidance typically is also being that other than bank term loans, be it NCDs or securitization, we'll typically want to keep this at around, you know, 30% levels, 25%-30% levels in a steady state scenario. The bank term loans, we are even happy to take it up to 55%-60%, because that is one form of borrowing where we feel it is fairly sticky. You know, there are no knee-jerk reactions depending on how the economy moves or if there is any event risk that comes through.
I think we'll continue to target, you know, the NCD market. One of the places where we probably don't have today is a lot of AMCs taking, you know, subscribing to our NCDs. I think that is one thing that we will target in the, in the coming year. Securitization, people are, you know, there are many takers for the company's assets, given the strong quality. We will continue to explore securitization and obviously, you know, with the preference, the first preference being term loans from banks.
Sure. Thanks, on that. Can you just share maybe the duration of the assets in the book at this point in time?
The duration of the assets, Chandra, like we say, adjusted for prepayments. While on origination it's around 6.5 years, but adjusted for prepayments, typically we see this number at around 4.5 years. On the liabilities, you know, there's no question of prepayments. Okay. The good part is we are also getting liabilities for seven years. We have recently gotten a seven-year sanction from one of the largest public sector banks. The average duration is roughly about 4 years.
Four years. Okay. All right. can you, from a
Good morning, Chandra. I'll invite Ranga to answer on both the questions.
Hi, Chandra. On the first question, your observation is right. We had explained this in the past conference call also. We believe that, you know, when a branch crosses a particular threshold in terms of assets, it's better from a risk management perspective to split the branch, wherein we can open two or three neighborhood branches and then split, you know, the new branches goes along with a certain set of accounts which are more closer to the vicinity of the branch. Whenever a branch, let's say, crosses 1,500, 2,000 accounts, what we tend to do is we'll open one or two branches nearby. On day one, these branches will start with 300, 400 accounts. Optically it appears as if, you know, the five-year-old or the larger branches are not moving it, but that's not the case.
You, you know, to really go through the true growth of these branches, we'll have to combine any child branches which are originated from these parent branches and then put it together to get a real picture. This is something that we routinely do because it helps us manage risks far better. No concentration risk for us. More importantly, it also helps us promote employees. You know, when a branch performs very well and they have been consistently doing good, we will identify high-performing officers on the same branch and then promote them as branch managers in the vicinity branches, and then they will take off from there. You know, it's not true that the branches are sort of plateauing beyond five years. It continues to grow at a healthy pace.
On second, the collection vertical, you know, we had updated earlier that the collection vertical formation is complete in Tamil Nadu, and we had started off that in Telangana. Telangana is also almost complete. We wanted to wait and watch to see how these two states are behaving from a stability perspective post the collections vertical, from a cost perspective, from collection efficiencies perspective, and any disruptions that we are seeing in the business. We're happy to report that, you know, across various internal benchmarks and metrics, you know, it has yielded extremely good results for us. Two large states are taken care. I think the only other large state which is remaining is Andhra Pradesh, and where we will be doing it gradually over the next few quarters.
Great. Thanks. Very useful. We can just squeeze in a very last one here. Why has the stage 3 PCR gone up?
Can you repeat, Chandra?
Why has the stage three PCR gone up?
Chandra, that's purely a, you know, a function of the ECL model that we are actually seeing. We're also trying to create a little more on the restructured book. While the LGD on stage three is still fairly muted, we are targeting, you know, any deep delinquent accounts, like loans which are more than 450 days are provided for at, you know, close to 100%. Stage three restructured assets are provided for at 100%. We are consciously creating a lot more overlays on the stage three assets, especially on, you know, deep delinquent accounts and restructured assets, which is why, you know, you see. The more, the NPAs are a little sticky for us, right?
While you don't see incremental NPAs coming through, it takes time for the resolution of these NPAs. When it keeps going into the 450+ DDD kind of a number, you tend to create more PCR. This is purely a function of the LGDs restructuring and the DDD of the assets, the stage three assets.
Chandra, let me also add, it's very prudent to increase your provision in stage three assets. That is one point.
That has also resulted in the reasons what Srikanth said, that has also resulted in the gross stage three versus net stage three. If you see gross is 1.36 versus net of 0.69. It takes care of 49% of what is discounted for. I, we think it's very prudent method to follow this, especially when the restructured books are getting matured and moratorium accounts are getting matured. We want to have a very conservative approach, and we'll see how next few quarters behave.
Yeah. Basically this is more like a longer term steady state. It's basically more of a function of these restructured accounts and mercy accounts more than anything else. It's a function of the account mix changing more than anything else. In longer term, you should be running at lower PCRs going forward.
Yes, Chandra. Don't take this as a guidance. I think our steady state guidance will be more like about 30%-40% PCR on stage 3. That's against what we are seeing today, which is a little inflated because of the reasons that we explained.
Okay. Thank you so much.
Thank you.
Thank you. The next question is from the line of Arjun Bagga from Baroda BNP Paribas. Please go ahead.
Yeah. Hi, sir. Good morning, and congratulations on a good set of numbers. Just one question. Just wanted to understand that, I think the cash for us has gone up from some INR 900 crores in the last quarter to some INR 3,600 crores. If you could just help me, understand what is this due to, and going forward, what should be a steady state number that we can expect?
Arjun, I think this is a conscious call that we took during this quarter for, you know, for three reasons. You know, one is, you know, we are expecting a strong quarter in Q1 as well, where, you know, you will see good amount of disbursements. There could be some, you know, mute, muting as compared to the Q4, but you will still see a much stronger quarter as compared to any other, typical Q1s that you have seen in the past. For which we need to build adequate liquidity. All of us know that, you know, typically the first quarter tends to be a little muted from a bank borrowing perspective.
Very clearly, expecting a strong quarter, is where we have built this adequate liquidity for us. See, our liquidity policy is fairly straightforward, Arjun. We will endeavor to maintain, you know, three months operational expenses, three months debt repayments, and month month of projected disbursements, which today roughly works to about INR 900 crores-INR 1,000 crores. That will probably be the number that we want to be at. The other reason why we also built a little more liquidity in Q4 of this year is also because of certain chunkier repayments that's coming up in the month of April and May. We had done few NCD and covered fund transactions in the past.
Those are coming up for maturity, so those will amount to roughly about INR 350 crores-INR 400 crores. So there is a bit of, you know, excess liquidity that we have maintained to ensure repayment of these borrowings. It's a combination of repayments coming up, the stronger quarter that we are expecting in the current, the first quarter. And lastly, you know, banks being more active in Q4 and being muted in Q1. You will always see Q4 being a little skewed, but I think we will endeavor to, you know, maintain about INR 1,000 crores-INR 1,200 crores of liquidity on a steady state basis, at least for this year.
Sure, sir. This is helpful. Thank you.
Thank you. Next question is from the line of Amit Mantri from 2Point2 Capital. Please go ahead.
Yeah. Hi. I have just one question on the statewide growth. Andhra Pradesh has seen a very strong growth this year, almost 15%. Can you talk a bit about what's happening in Andhra Pradesh, that's, you know, driving this strong growth in loan book?
Amit, this was a conscious call that we had taken last year. We saw Andhra Pradesh, you know, showing us extremely good results. We have built great teams there. Last year as a conscious strategy, we opened the highest number of branches in Andhra Pradesh. We opened close to 21 branches in the state. You know, happy to report that all those branches have performed extremely well and are well set. That is the spurt that you see in disbursements coming from Andhra Pradesh because of this.
Just to add little bit of more more state color. For Five-Star, we have a predominant south base, where we are in presence in Tamil Nadu, Andhra, Telangana, and Karnataka. Tamil Nadu is our home state, will always perform well, and Andhra and Telangana are the states where the performance is very good. One state I wanted to keep a note here is Karnataka, which was little muted during COVID. Pre-COVID it was doing well, whereas in COVID period it was little muted. Happy to say that Karnataka has also come aligned with the all other three states south. Going forward, we say 50-60 branches what we intend to put in, minimum, will Karnataka also have in the line.
You have... This year you'll have a good spread of branches across Tamil Nadu, Andhra, Telangana, and Karnataka. Definitely, having said, we have high stakes in non-south also. Today our non-south MP, MH, and Chhattisgarh all put together, we have close to 50-55 branches across non-south. That will also keep growing. We'll also be putting our seeds in very important states like Rajasthan and Gujarat, where we will be starting learning about their ground level behavioral aspect, customers, repayments, legal nuances. We will put our seed branches in Rajasthan and Gujarat in this year, and we'll wait and see how that behaves. That's a broad state input. Last year we have invested a little more in Andhra.
We feel there is more opportunity, that has yielded a good growth in Andhra. You see Andhra still stood in last year. This year we see across all states the growth will be there.
Thank you very much.
Thank you.
Next question is on the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.
Hi, sir. Good morning. Couple of questions from my side. The first one is, what is the total rejection ratio?
I'm sorry, you're not audible. Can I request you to speak through the handset?
Hi. Am I audible now?
Yes, much better. Thank you.
Hi. The first question is on the research question. What are the rejection ratios that we have in the top three states such as Tamil Nadu, Karnataka and Andhra. Second is, we have certain number of mature branches. What is the current number of mature branches and what is their profit contribution? The third question is, what is the total number of cases that have got resolved in SARFAESI till now inception and post-COVID?
Your first question was last year's, I'll explain the third question. What is the number of SARFAESI cases that we have initiated since inception? SARFAESI is applicable only for loans of INR 20 lakhs and above. Our average ticket size is INR 3 lakhs-INR 5 lakhs. We are not covered by SARFAESI for a good chunk of our loans, except for hardly about 2%, 3% of our loans, which will potentially be, you know, above INR 20 lakhs, this one. That said, we had started initiating SARFAESI proceeding against these loans, whatever handful of loans that we have above INR 20 lakhs. The last quarter, we've had some good results.
We didn't need to go up to the auction part. I think at least four accounts, three to four accounts got settled right after we initiated the SARFAESI notices to the customers themselves. You know, it's not a big part of our strategy given that, you know, extremely hardly less than 1%-2% of our loans fall in the SARFAESI category. To add on this third question or this question, Mishra, you can repeat the first question again. On this SARFAESI or repossession or sale, I think we have been telling constantly to the market and all of the conference call that has in last 20 years we have been in this business, we have not done a physical repossession yet.
That doesn't mean that our accounts are not meant for repossession. We do a technical repossession, which we explained in detail in last or before that. When account becomes a NPA, or 90+ , the legal proceeding starts. We have all right to take the property to the auction. We know how the property can be taken to the auction group. We move the customers and property to arbitration. Arbitration agree quickly, and we file a EP petition in the local jurisdiction court. That gives us the right to the take the possession and sell the property in the market. By doing this method, we strongly feel the value of the property is going to go down at least 50%-60% of the market value.
Neither the customer nor the company is going to benefit out of this. What is our strategy that we have been adopting for last many, many years? It has resulted in a very good recovery from NPA, both in principal and IRR. We keep negotiating with the customer once the legal notice is sent to them, and we discuss with them about the inability of the repayment and taking the property to the market by the customer itself. That protects the market value of the property. Hence, when the customer takes the property to the market, it will not happen immediately. It will take 18 to 24 months, and we keep negotiating with the customer.
When he takes the property to the market, he gets the full value of the market because market, they don't know the property is brought to the market as a distressed sale. It has been brought to the market as a normal sale. He gets the full value of the property. At that point of time, our debt will be 35%, his equity will be 65%, and very comfortably he'll be paying back our debt, which goes to the contracted IRR, and he will take away the 65% of the capital, and he'll move on to the second life award where he intend to do. By this method, it's a win-win to both the customer as well as the company. We get our principal and contracted IRR.
Customer gets a good chunk of sale, what he gets from the market value, and he restarts his second life. I think that is where we have also been in BRHP close to 4,000 accounts which got settled by this technical repossession sale, where we are able to get back close to our contracted IRR. Close to 22% we are able to recover from this deep value customers. That is the strategy which is working well because these customers are not intentional defaulters. There's only a delay which has happened just for various factors. I think this is where the Five-Star focus will be. Having said this, we have also put in our legal recovery vertical here for last few quarters.
Chief Legal Officer has joined. With that vertical being very strong now, more and more properties you'll see going to the EP level, we have to wait and see how many properties that we'll be selling or we'll be making the customer to sell.
Right. The first two questions on rejection ratio and mature branches, profit contribution.
Rejection ratio and mature branches profit.
Yeah. Shubhranshu, the general rejection ratio that we see, you know, we are measuring rejection ratio at two levels.
One is what is the rejection ratio that happens before the login. Second is what happens after the login. Prior to the login, you know, we go to great lengths to actually teach our people to ensure that the right files are logged in, so that nobody is wasting time on a wrong file. Even prior to the login, we ask the people to go and visit the place of business, place of residence, and make a calculated call whether this file is likely to get approved. This way, most of the filtration gets done pre-login stage itself. You will see that at the pre-login stage, our rejection ratios are anywhere between 30%-40%.
Once the file is logged in, you know, the maybe the, you know, quantum of loan that the customer is requesting could get reduced, but we will at least see 80% of the files getting approved at this stage from a login to sanction perspective. The rejection ratios are about 20% at this stage post the login. This is similar across, you know, all the states. There is no big differences between, you know, different, states here. Maybe some new branches it could be a little higher, but wherever we see the rejection ratios are higher than this 20%+ , we will get into the details, maybe give him more training, ask him to go to another branch and then, you know, shadow the existing team for a few weeks.
All that gets done, but on an average it's about 20%. The number of branches, which are mature and their profit contribution. When you say mature, you know, the way we measure is that any branch on an average breaks even between six to nine months from inception. If a branch reaches a, you know, assets under management of about INR 2.5 crores, they break even at a branch level. At anywhere between six to nine months, we have consistently seen that the branches reach this point of time, and beyond that they become contributing branches. This is one point that Mr. Pathy also explaining, that out of all the branches that we opened last year, 96% of the branches have crossed, you know, INR 2.5.
INR 2 crores-INR 2.5 crores of portfolio within the same six-month mark that we had. To be precise, except for one branch which took maybe nine to 10 months to reach this level, every other branch had crossed this level, which means every branch, you know, these are very, very asset light branches, and they start contributing from day one. We reach maturity level at a break-even perspective fairly fast at a branch level. From that perspective, every branch is a contributing branch. You know, beyond that, it really depends on whether it is a normal branch, super branch, it's a parent branch, child branch. There are multiple variables within that. It's not a straight answer for your question, but we don't have loss-making branches or pure collection branches as such, sir. Understood, sir.
If I can just sneak in one last question, sir. How do we avoid fraud or any inaccuracy in the valuation of the property? How many people do you employ in credit and for the for this purpose? Or any external valuation we do of this property? The, you know, the entire checking, underwriting, and the values for the property is done in-house. We don't employ any third-party agencies because we believe that people who are in your full-time role are more controllable and, you know, pollutions will be far lesser. The checking happens in two different departments. One is the business team which logs in the file. Even at the business team, the officer who logs in the file is the first person who checks the file.
That file has to get finally recommended by the chief of the branch, which is the branch manager, who will also go personally visit this file, do a valuation exercise, you know, do a character assessment, do a casual assessment, and finally recommend that file from his perspective. None of the people in the business side have any approval power. From the business team, there are a minimum of two people who check every file that gets logged in. Like I said, they don't have an approval power. The file moves to the credit team. At credit team, we again have two people. One person is called the field credit. Every branch has a field credit. They don't report to the business at all. They will do an independent assessment of this file.
They don't get access to what assessment has been done by the business team. They will do an independent assessment of this file across all the three parameters. They will submit their report to the senior, you know, person in the credit, which is called the chain credit or the approval credit. They will finally check on the parameters and then give an approval. This approval credit is more centralized or, you know, based out of regional offices of Five-Star, but you know, it is split state-wise, you know, at various regional offices of Five-Star. Between these four pairs of eyes, you know, it's very difficult for a wrong document or a fraudulent document to get inside, especially when, you know, credit team has no incentive on the quantum of business gets done or the amount of approvals which gets done.
Credit team's incentives are purely based on productivity metrics. They get equal incentives for a rejected file or for an approved file. We have not seen any, you know, great fraud documents which are coming here. Two additional checks which also gets done post the sanction by the credit team is one by the operations team, where the physical file finally comes to the head office in Chennai. Every file is checked here clearly before the disbursement happens. Second, because it's a mortgage backed, you know, loan that we are giving, the mortgage has to be registered with the government agencies. For whatever reason, if the document is a fraud, the government is unlikely to accept the mortgage done on a fraudulent document. That acts as an indirect checkpoint for us also.
Only after all these layers are created, you know, and passed through, final loan sanction happens. Just to add, one, two point on what Ranga said in detail about how frauds are less. First is very simple. Fraud doesn't happen to a small ticket line, small ticket size loan. Our average ticket size is 3-3.5 lakhs. Generally, frauds don't happen at a smaller ticket size loans. Having said that, the valuation part what you mentioned-we have two teams that run the business and credit. Both check the valuation. They check last three transaction happened in the locality. What is the last three transaction happened both, purchase and sold. They take the lowest of the debt that we call as a market value.
From there 20% knockdown is being put in place that we call as a distress value. Market value is INR 100 means the distress value will be taken as INR 80. From there, the LTV, loan to value is only 60%. That is INR 40 that we lend on that property. Actually there is two teams. One is business and credit. We take the lowest of the both. I think in last 20 years we would have seen a handful of frauds which is happening in a year, one or two. For close to addition of 1 lakh loans to Vistaar, we have one or two in a year. I think this is also a prevalent activity, has been controlled in the small files.
Understood, sir. Best of luck.
Thank you. The next question is from the line of Raghavendra from Edelweiss Capital Pvt. Ltd.
Hi, thanks . I just wanted to understand a bit more, you know, on your branches strategy and state wise. When I look at your number of branches per district historically, that's been about two per district. Even FY 2022 we were at that level. When I look at state specific data, it seems that, you know, your branch presence in each district in Andhra Pradesh is more dense. It seems that your presence in Andhra Pradesh districts is more dense, having about four branches per district. Could you explain, you know, how do you define a state specific strategy as far as, you know, the branch density is concerned? I have another follow-up question. Thank you.
Raghav, you know, thanks for the question. We had clarified this in the past. We don't have any rule internally that, you know, every district has to be penetrated and each district has to have only one branch or two branches. The potential of a state or the potential of a region is seen by the number of thriving towns, you know, municipalities which are there, where today we go up to Tier 6 and Tier 7 towns. Any town which is defined as having population of greater than 20,000-25,000 with good retail activity where other NBFCs are present, that's a possibility for us. Secondly, like I said, you know, if a branch is very successful, we can easily open three to four branches right in the vicinity.
The district penetration or density is something that, you know, does not get into our mind space while actually deciding how many branches to put. It's more about population, it's more about repayment data, it's more about other presence of other NBFCs and banks in a particular locality. That is what is more important for us to decide on a particular branch location. Andhra Pradesh from that perspective, we still believe there are a lot of other known potential where we can potentially get into. There is no perspective of reaching anywhere close to, you know, saturation at this point of time. We will continue to adopt the same methodology as far as the branch expansion is concerned.
Sir, could you help us with the number of districts, for at least southern states, if you have that data available readily with you? The number of districts that you are present in.
Raghav, we just explained that that doesn't get into our decision making stream at all. It's more about towns, populations and tiers of towns. Having said that, Raghav, I think we'll be present in almost all districts in Andhra, almost all districts in Tamil Nadu, almost all districts in Telangana. Just to give a perspective. As Ranga very clearly said, population is a metric for us. If a town has a population of more than 25,000, that's our presence will be there to disturb the local credit prevailing there. That's our model, which is yielding us very well, where the other competitors penetration is not so. They stay in Tier 1 and Tier 2, whereas our model is Tier 3 to Tier 6 towns where we penetrate.
Capturing the towns is more important for us rather than staying from a district perspective. Having said that, we are present in all districts in three major states in South.
Sure. That's also clear. Thank you.
Thank you.
Thank you. The next question is from the line of Kiran Engineer from CLSA. Please go ahead.
Yeah. Hi, welcome. Just a couple of questions. Firstly, there was this RBI discussion paper on penal charges. To the extent that comes into effect, what would be the impact for you all on, you know, on yield or on fee income?
Kiran, we are not expecting any changes. In fact, if you look at the guidelines that have been issued, which is in the draft stage obviously, we are actually completely compliant to all of that. We don't charge penal interest on the principal outstanding. We charge penal interest only on the overdue installments for the number of days that it remains overdue. This is duly disclosed in the Fair Practices Code, so we don't really see any impact. I think the only impact that probably could come through, I think this also had some discussions made in various forums, is the fact that changing the nomenclature from penal interest to penal charges, could make this fee, you know, subject to GST.
That is going to add another 18% on this amount in the hands of the borrowers. Obviously any company who's charging this is now going to charge the GST also and take it from the borrower, which is actually more detrimental to the borrower rather than, you know, being in his or her interest.
I believe, you know, this is under some discussion. If that comes through, you know, we'll also have to charge GST on them and pay it up. Other than that, we are completely compliant and don't see any kind of an impact coming across. In short, in short, there is no impact. Zero impact for Paisabazaar if it comes. The good practice what RBI says in the circular, Paisabazaar has been practicing for the last 20 years. That's, that's the exact the outcome what we expect. There is no impact at all.
As Srikanth said, there may be some impact in the hands of the customer, if the, if RBI is not changing the normal principle from penal charges to penal interest again. There will be 18% impact to the penal charges in the hands of the customer. That we feel as a lender to the large resource, we are increasing little bit of burden to the customers. That's what our representative associations has made their request to RBI. We'll wait and see.
Got it. Got it. Secondly also, you know, our employee expenses have tapered off a bit despite adding more employees. Any one-off here?
Kiran, you are comparing, current quarter to previous quarter?
Yes.
Quarter-on-quarter?
Yeah.
Like last time we did mention, Kiran, you know, we had given a one-time, you know, in the December quarter, we had given a one-time payment to the employees with the successful completion of IPO. Which is 1 month salary. It's basically four months salary against three months salary that you're looking at, which is where, you know, it has tapered off a little bit.
Okay. Okay. That makes sense. I forgot that. Just lastly, in terms of your three lac customers, you know, just seeing how many of them are repeat. Do you also track, you know, if a customer finishes a loan with you, does he continue another loan with you? Does he move to another lender in the system, say, be a small finance bank or a bank?
Biran, I think this is a, this is a question that you had asked us a few quarters back as well. See, what we typically see is at a point of time, and I'm talking as of March, we have about 20,000-25,000 customers who are actually having multiple loans with us. These are people who will have most likely, you know, two loans. That is the potential customers who are top, what we call as top-up customers. People who have a loan, they have a fresh requirement, they come, and then we give a fresh loan to them and both the loans run simultaneously.
What we have also seen is in the past is that there are another 20 odd thousand customers who have actually closed their loans in the past and come and have taken a fresh loans with the, you know, fresh loans with the company. They are what you call as repeat customers. They might have, you know, matured their earlier loan could have matured, or they could have pre-closed their earlier loan and come and taken a fresh loan from Paisabazaar. What we are talking is about 30-40 thousand customers who could be, you know, various forms of toppers or repeats. Anecdotally, what we believe, Biran, and this is something where we don't have empirical data to, you know, to prove.
What we have seen as in our experience is that if we onboard 100 customers, and you know, these are largely customers from the unorganized institutions, we see that about 10% of the customers graduate to the formal institutions. Like you said, you know, the larger NBFC, small finance banks or banks. They are able to pay perfectly well, you know, for the 84 months and records are there in the credit bureau and, you know, their requirement for loan is much higher, which is met by a larger NBFC or a small finance bank. We also see about 10% of our customers going back to the unorganized lending because they are not able to stand the rigor of, you know, the collection follow-up that we do and all that.
80% of the customers typically tend to stay with us. Either they will close, they will get their loan matured, come back for another loan, which is I think over the next few years we will see that happening a lot more because it's a five to seven year loan and our growth has come in largely in the last about five to seven years. Plus, we also see, like I said, you know, people who will pre-close their loan ahead of a year and then come and take loans from us. 80% typically, you know, continues to stay with Paisabazaar in various forms. But like I said, you know, this is more from the company's experience and we don't have empirical evidence to sort of show this data.
Okay. That's all from my end. Thank you and all the best.
Thank you.
Next question is from the line of Abhishek from Financial Investor. Please go ahead.
Hi.
Abhishek, sorry, you sound very bad. Can you please check your audio?
From the experience...
Hello, Abhishek, can you hear?
Hello. Yeah, I can hear you.
See your voice is breaking. Could you come in a better reception area, please?
Yes. Just a second. Can you hear me now?
Yes.
Hello. Can you hear me?
Yes.
Yeah. Congratulations on a wonderful quarter. I just wanted to know if these fintechs are now also lending to the same segment people what you were saying earlier. How do you see the competition from these fintechs who are in, they also are having a data about customers or like these marginal people, number one. Number two question is on your presentation page 40, there's a past three year rates with a two year lag, that percentage is around 2.11%. Basically, obviously that is after RBI reclassification. I want to say that if that is a 2.11% of this refers to the loans that you had two years ago, it's a much higher percentage. Do you see?
Is it due to any accounting norm or do you see that percent is remaining at a one year lag?
40 from your presentation. Just these two questions for FinTechs and it's for space PSFs.
I'll ask Srikanth to take the second question, and we'll come back on the first one.
Yeah.
See, I think the lag NPA, the way, you know, what we have presented is that a company which is growing significantly fast, the NPAs could tend to get camouflaged because of the growth. Which is why, you know, every NBFC looks at a lag NPA. What we mean by lag NPA is the NPA as of 31st March 2023. A two-year lag means you are comparing it against the portfolio as of 31st March 2021. Effectively, whatever loans that we have onboarded in the last two years, you don't really give any benefit at all. Those loans could have turned NPA and may be there in the numerator, but you don't give the benefit of the denominator. Which is why.
Correct.
you know, the 1.04%, 9,190 pluses, as of 31st March looks at 2.11% from a lag perspective. If you really look at it, this is a very, very healthy number. two-year lag means, you know, we have probably dispersed INR 1,750 crore in FY 2022 and about INR 3,300 crore in FY 2023. Entire INR 5,000 crore of dispersals is not even forming part of the denominator, which was, you know, about INR 4,400 crore as of 2021. Whereas the numerator is INR 93 crore, which is NPAs as of 31st March. It is not a high number at all. It is actually a very, very low number. you know.
Any idea about the industry number? Any idea about the industry number for this lag?
I think we can't say any industry number. I think you can go and calculate. As Srikanth said, it is a pure mathematic calculation. Denominator takes two years back AUM. The numerator takes the current 90+. Abhishek, there are companies whose current NPAs, what typically is called as going through their NPAs. You know, NPA as of 31st March, as a percentage of 31st March portfolio, most of the companies are more than 2%. What we are saying is our lag NPA is 2% lagged by two years. That is the comparison.
I think that will be one of the fix in the industry for the customers whom we cater to. That's second question. On the first question, let me also add, I'll invite Ranga for further adding. If you give a context on that, see, if you compare Five-Star with FinTechs, I think two things that we very large with them. One is the place of presence. Their place of presence in Tier 1 and Tier 2. Our place of presence is from Tier 3 to Tier 7, which we said. We are not touching at all. That is one big difference. Second difference is their product is completely different. Their product is lending to the working capital need of a business customer.
Ding to the business needs of a business customer. Both are different. Once the business is set up, the working capital requirement comes in. We go at the first instance to help the customer to set up the business. The product itself is different. To add more to the product, their product, their ticket size need will be around INR 50,000 to INR 1 lakh, whereas our ticket size is close to INR 3 lakh to INR 3.5 lakh. Their tenure will be very short, six months to eight months because it is a working capital. Our tenure will be close to seven years. They operate in fully unsecured segment, being a working capital lending. Our segment is fully secured
I think FinTechs are no threat for Five-Star, both in presence, where we operate and they operate, and the product in what they give to a business customer versus what we give to the business customer. Broadly, they are in a different market and we are in a different market. Finally, to end, even if you compare with FinTechs, I think the collections what a traditional NBFC like Five-Star does and profitability what we bring on table and asset quality what we mentioned earlier, I don't think, they are nowhere even nearer to traditional NBFCs. Great. I'll just request you people to make Five-Star a little more presentable to the investor community, because if you are doing such a great work at the end of the day, no one knows.
To be very frank, I have come across Five Star, I've stayed here for, like, in just more than a year. You just need to bring your presence to the investor community, whatever can be, you feel like. Like, you should take note area. Really, that's appreciable.
Thank you, Abhishek. Point is noted. We are already doing it. We'll further do it in a more thoughtful way.
Thank you.
Thank you. Next question is from the line of Nischint Chawathe from Kotak Institutional Equities. Please go ahead.
Thanks. My question has been answered.
Thank you. Next question is from the line of Vignesh Iyer from Sekur Investments. Please go ahead.
Congratulations on good set of numbers. Just two questions from my side. The first question is, just the rapid expansion, I mean, big expansion that you have done in Andhra Pradesh, is it a function of the fact that the state government is continuously expanding and bringing in bigger projects and a certain kind of smaller retailers are also getting active and they are going for, you know, some kind of loan for doing their businesses or maybe even for any other, you know, related purposes. My second question is, we have got lot of headrooms when it comes to taking it from the market, as you said, up to four.
What would be the steady state ROE and ROE that we target maybe two years down the line? These are the two questions.
Yeah, Vignesh, we'll answer one by one. First, on the Andhra strength, let me clarify to everyone again. The decision what we took to invest more in Andhra purely based on our performance in Andhra. Nothing to do with any state government's intervention into the shopkeepers or anything. I think all the four states from economy perspective are growing really very well. Karnataka, if you recollect a few days back, there was a article in a paper where the economy activity in Karnataka is extremely high. As I said, we have not opened a single branch in Karnataka. It is not a state government or state in total, how it performs in economy activity that I start branch investment will be planned. It's not like that.
It's our own experience in that state, what kind of piece that we have set up, what type of customers we have lent, and how is the repaying capacity or repayment happening in that state. That dictates the number of investments both in the branches as well as people we budget year on year. I think, last year it was thumbs up to Andhra. We have invested a lot. I have answered that question. This year, the branch expansion and the people expansion will be evenly across all four states of South. That's point number one. I think, I hope that I have answered the first question. On the second question, we have guided a growth of 20%+ very comfortably in next two to three years. The game plan is growth.
We will increase our leverage, as Srikanth was already gave a indication on the earlier question. With that leverage kicking in in next two to three years, our return on asset in steady state, if the steady state may kick in three years or five years down the line, a steady state on ROA will be close to 60%-60.5%. Due to the leverage increase in next three to five years, our ROE will be in 30%+. That's what we anticipate.
Thank you, sir. That's all from my side. All the best.
Thank you.
Thank you. The next question is from the line of Nilesh Jainani from JM Financial . Please go ahead.
Hi. Good morning, gentlemen, thanks for the opportunity. My first question is from a longer term outlook. It's from a 3-5-year perspective, we talk about 30% growth. Wanted to understand, this would be largely led by branch led, or the fleet addition on ground or average ticket size, because we typically have in the range of 3-5 lakh category. Are we planning to expand this range also going forward? Any color on that from a three-year perspective.
Hi, Nilesh. We had sort of covered it in our earnings presentation that we have uploaded. There are three levers to growth for us primarily. The first lever is, of course, the increase in branch presence. We had already guided for at least adding 50-60 branches every year. Last year we did 73. We are fairly confident of at least putting up 50-60 branches year-on-year. These predominantly will come in South. We expect at least 80% of the new branch additions to come in from South, with 20% contribution from non-South regions. This is the first lever. Second lever, of course, is, you know, we have constantly strived to increase the number of officers per branch.
Because when a branch is successful and an area is familiar to us, instead of putting up a branch, we always believe that it is better to add more number of people to the existing branches. We are already successful, we are familiar with the area, we have existing customers. Business can be done easily in that existing branch. We have constantly increased the number of officers. Today, the average is about a little over 8. This will continue to go on. You will, over the period of time, see this 8 increase into 9 and 9 increase into 10. We will not do it in an urgent manner because we don't want to breach our productivity metrics here. We will ensure that over a period of time, the number of officers in every branch also increases.
It helps us from both risk perspective and increasing the potential business that we can do from an existing branch. This is the second lever of growth. The third lever, of course, is the ticket size. Ticket size today we are averaging about INR 3.2 lakhs in Q4. you know, pre-COVID, we were already at about INR 3.3 lakhs, INR 3.5 lakhs. During COVID, during times of uncertainty, we consciously tightened the credit metrics, and we went down all the way to about INR 2.5 lakhs of average ticket size. As the economy is opening up, we have slowly now come back to INR 3.2. The first break for us will be where we are coming back to pre-COVID levels of INR 3.3-INR 3.5, which will happen, you know, in the next few quarters.
Beyond that, I think ticket size increases will be largely inflationary in nature. We don't intend to move away from this customer bucket because we are very familiar with this customer bucket. We understand them deeply, and we have lot of experience in working with them. In the same, you know, customer bucket, but with a little bit addition of ticket size due to inflationary trends, you'll also see some growth trajectory coming in from there. A combination of these three is what is making us confident of delivering a 30%+ kind of a growth over the short to medium term.
Okay. Just to follow up on this. One, let's say hypothetically, if we don't want to add branches going forward, from the same branches, what sorts of growth we can expect considering the current AUM per branch? Second follow-up was, in the investor presentation, you had mentioned that retail customers were in the range of 30,000-40,000 amongst the 3 lac customers. Retail seems to be slightly lower. What are these two questions from my side?
On the first question, I think, if we stop adding branches, hypothetically, I think we'll still be able to deliver maybe about a 20% growth rate, which is the combination of growth lever 1 and growth lever 2 and growth lever 3. Nothing stops us from adding more number of people in the existing branches themselves. Of course, productivity also will see an improvement over a period of time, and the ticket size increases will come. About 20% growth rate is something that we can see with no addition to the branches at this point of time in the short and medium term.
Secondly, on the repeat, loans, you know, I think the point that we want to keep in mind is that our average tenure, like Srikanth had, you know, explained earlier, behaviorally it's about four and a half years. Repeats will come after four and a half years. If you were to just retrace our own, you know, growth, how big we were four and a half, five years back in 2018, our book size was hardly about INR 1,000 crore. You know, I think you should keep this in mind while you are looking at a repeat from Five-Star Business Finance. That is why I think we were explaining it more from a, you know, company's experience perspective on how we see customers staying with us and moving over a longer period of time.
Got it. One last question on the cost side. Any levers to bring down the cost? Because cost to average assets are in the range of 8% for us. Any levers there?
We do have some benefits. Like, if you look at our cost to income, I think, we are probably one of the best in the industry in terms of cost to income, given, you know, certain manual intensive nature of the activities that we do. Having said that, yes, we are investing in technology. We are, you know, doing a lot more projects on the technology side, and we have also significantly invested in the senior management. You know, both of these are not going to linearly grow with the portfolio. We will see some benefit coming on the cost front, but, you know, in terms of OpEx to assets, I think it'll probably drop by another 50 to 70 basis points. You know, not possible to expect any significant drops to come in the future years.
Got it. Those were my questions, and thank you so much and all the best.
Thank you.
Thank you. Next question is from the line of Saptarshee Ganguly from Centrum Broking. Please go ahead.
Yeah. Good morning and thank you for the opportunity, sir. My question is on the, like, operating leverage of the business and on the growth sustainability, in the sense that if I see your last eight years, that your AUM has grown more than 50x, but your business officers have grown more higher than that. In the sense that officers also grown at a higher pace than the AUM. My question is, today we are at 4,000 number of business officers. Next period of growth, let's say next eight, 10 years, if we grow 10x at an AUM of current size, will it not be a very difficult to have at least around 10x or more than 10x number of business officers hiring and training them? Do you see human people intensive businesses like this scale up ours?
Like requiring talent can be a challenge for our growth sustainability. Second question is regarding if acquisition of like business officers grows at similar pace of AUM, then is there a case of operating leverage?
I will take up the first question. See, I think, from a risk of training perspective, I think I have also addressed in a few calls earlier, that we don't see any underwriting getting diluted, both in business and credit vertical, right? That's foremost concern that outcome of this question, that we grow 30%+ in next three to five years. A very simple answer to that is, see, we want to open 50-60 branches year on year. We need 50-60 BMs with a very good knowledge on our business model, underwriting and collections. Today we have close to 4,000 officers, as you said rightly.
Picking 40, 50 people from them who is really bright in productivity, who is very good in collections, who maintains a good asset quality. We have the data of 4,000 officers on day in, day out on their productivity, collections and NPA. Picking the top 50 from the officer and giving him the branch manager's position is not going to be a challenge for Five-Star. If a guy is able to do a good productivity, that means he understood who is our customer. If a guy is doing a good collection, that means his assessment on character, cash flow and collateral, which is a triple C assessment what we do, has been done well. That is why the outcome is the collections is good.
Picking 50 or 60 officers from 4,000 group of 4,000 people and giving them a career growth of branch manager doesn't feel any threat, even, not even today, even going forward. That's, that's it from the business side. From officers side, we don't see much of the knowledge to be gained because they are the connecting between the customers and the branch manager. Branch manager... Because the branch manager is the starting point of the knowledge center, where the underwriting, collections control, attrition, everything is being managed by the branch in charge. This is where our focus is going to be there.
Having said that, officers, we train them to the way that they can be connected with the local people and distribute our product, like customers, how they understand our product better. What is the pricing difference between the local money lender and Five-Star? How is the EMI? Diminishing balance goes well. These are the standard things that we expect our officers to talk with the customers to bring the file to the login. It comes to the hands of BM. Because the BM is the first knowledge center at the branch. We don't see even at 10x growth our underwriting will get diluted. Even from the credit aspect, there's a separate team which looks into the same triple C approach, both assessing the character, cash flow and collateral.
Today we have close to 180 approval credits. Not the paid credits at the bank. I'm talking of those approval credits to approve the file. Tomorrow, suppose we want to add 20-25 more to the approval credit. We don't get outside. We know the 350 or 370 people field credit what we have in the system. We know the best person in that, in the assessment order, because we have the data about each and every field credit. We take that 20-25 people from field credit and give them a career improvement to the approval levels.
I don't think as long as our pools, both in business and credit is bigger, picking 50 people to chat, who is the best among that pool and giving them a career growth and taking care of the business and credit vertical, there will not be any dilution in risk underwriting even at the 30% growth that what we intend. That's on the question number one. On the question number two, I'll invite Srikanth to answer on that.
Satish, like we said on the operating leverage, see today at the field level, we have one of the best productivities that you could ever see in this kind of segment. You know, our officers log in, you know, four to five files out of which about four files get sanctioned and dispersed. Which is one of the best productivities because they are also going to be handling collections for a period of time. Where we think, you know, operating leverage will come in, like I said, is in terms of the, you know, senior management bandwidth, which is not built for an INR 7,000 crore company. This is built for a much larger, size of, Five-Star. The second will be in terms of technology where, you know, we are making significant investments.
You know, we could look at probably, you know, down the line looking at straight-through processing for certain percent of files. Where today every file is touched by, you know, multiple people, at least four to five, people across the business credit, and approval verticals. We could, we will be definitely exploring the fact that if, you know, we are extremely comfortable with a particular file, does it need to go through this entire, chain of, you know, business credit and all this. This will help us bring in operating leverage. This will also help us cut down the turnaround times. Some of these, you know, things are work in progress, and we will probably, you know, get to see the results in the next, few quarters.
like I guided, you know, don't expect, you know, significant operating leverage to bring down our cost to assets. Even in a steady state, I think we are expecting our cost to assets to be around 6% levels, and that is something we are comfortable with. Our P&L has the ability to absorb that and still give a return on assets guidance that Mr. Soti gave some time back.
Great. Thank you so much for the detailed answer. Just one last question is, as your cost of fund reduces from 10%+ to your current marginal cost of borrowing. I don't want to know your cost of assets. Will you reduce your yield or will you want to increase your profitability? If you want to reduce your yield and therefore increase that target in the civil market or you want to increase your ROE in short, medium term?
Yeah. Thank you for this question. I think this was also addressed in earlier calls. See, in 2 years down the line, our borrowing cost was at around 12% on books. We have brought it down to 10%, roughly around 10%. We have got a benefit of 200 basis. We have not passed on this benefit to our customers because we wanted to see where the tip of the curve really stands. As Srikanth said, we are thinking in next 1 or 2 quarters this will get saturated and we will get a clear indication from the market that there will not be any more increase from regulator or bankers.
Once we get that, definitely we'll be bringing down our yields, from 22% close to 23 or even say 22.5%, not to go and capture the bigger market. This is just to be a very responsible lender. The market is huge. People operating in this market along with Five Star are few and few. Even comparing with them, their quality and profitability is no match with Five Star. I don't think there's any pressure from the market to reduce to bring pricing. We will be doing it in next few quarters to come to be a reasonable lender. That's the point number 1.
As a guidance, what Srikanth already said, we will be guiding the market on NIMs close to 14%-15% and spreads around 13%-14%. That's the guidance in the long run. There will be a reduction in yield because we have not transferred our benefit of what we got from our lenders to our borrowers. Of course, the profitability is on a very high side, so we don't have any intent to increase the profitability further. I think that's a clear strategy going forward.
Understood, sir. Thank you for patiently answering and all having you.
Sure. Thank you.
Thank you very much. I now hand the conference over to management for closing comments.
Thank you all for attending this earnings call of the company. Like we said, it has been a extremely strong quarter for us, and we do have the necessary infrastructure built with us with the clouds of COVID and all the uncertainties it's receding. We are very confident and hopeful that we will be able to, we are in a position of strength to take advantage of the market opportunities available. Till we connect with you in the next earnings call. Once again, thank you from the management team for taking the time out to look at our results and ask us the questions. Like one individual investor said, our intent is to make you understand our business model.
We'll be happy to address any follow-on questions that you have. The presentation contains the email ID of the investor relations team. Feel free to reach out to us, and we'll be happy to engage with you. Thank you once again.
Thank you.
Thank you very much. On behalf of Nuvama Institutional Equities, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.