Percent, which is being led by increase in number of branches. As I said last time, we are adding good number of branches. Comparing to last December, to now, we have added close to 89 branches. Comparing to last quarter, we have added 17 branches. As of now, the total branches stands at 369 branches for Five Star Taking you to the very important point, which is the asset quality of Five Star. Let me start with 90+ and come to the NPA. 90+ has been flat comparing to last quarter with at 1.16%.
The terminology NPA has been changed, which is in line with RBI circular dated 12th November 2021, which got implemented from 1st October 2022, stands at 1.45%. The difference between 1.16 of 90+ and NPA of 1.45 is 0.29%, which is INR 18.10 crores of loans has been categorized as NPA, even though it is less than 90 DPD, as per the new circular, which got kicked in from 1st October 2022. Moving to the liability, I'm happy to register. We have raised more than INR 1,000 crores in a single quarter, which is the first of its kind in Five Star. We are building our strength, not only from assets, we are also building our strength in liabilities. Few more datas.
Our incremental cost of borrowing has moved from 8.5% last year to 8.7% this year with an increase of 20 bits, even though repo rate has moved from 4%- 6.25% with an increase of 225 bits. That shows the comfort in which lenders have on Five Star, being a good capitalized capital company and quality and profitability standing by. And cost of borrowing on the book has come down from 10.5% in last year to 10.35% now. As I said in last quarter also, there is no need of increase of lending rates to our borrowers. That doesn't will occur in quarters to come.
On the profitability, we have moved from INR 118 crores of PAT to INR 151 crores of PAT, registering a 28% growth in year-on-year and from INR 144 crores to INR 151 crores Q-on-Q with registering a growth of 5%. On rating, I'm happy to announce our rating has moved from A+ to AA-. India Ratings has assigned a AA- rating to Five-Star. With this, let me hand over the session to Srikanth, our CFO, to take you through more. Thank you.
Very good morning to all of you. I'll just quickly touch upon, you know, a few aspects, and then, you know, hand over the for any Q&A. See, from a numbers perspective, as in the previous quarters, I think our growth has been both branch-led as well as customer-led, which is a very minimal increase in ticket sizes. We have had a total active loan base moving from INR 2.5 lakhs in September to about INR 2.7 lakhs today. And on a year-on-year basis, this represented a growth of 24% from about INR 2.15 lakhs. Branch counts continues to be robust. We have added 89 branches during the last one year and about 17 branches during the quarter.
The branch count stands at 369 branches as of December. The growth in AUM has been at about 31% year-on-year and 9% quarter-on-quarter. We ended December quarter with INR 6,242 crore of loan book. For the nine months ended December 31st, 2022, our average yield on the portfolio was at about 24.11% and average cost of funds at around 10.35%. This has resulted in a spread of 13.76% as against a spread of 13.49% during the 9 months of financial year 2022.
NIM again, is at a very healthy number of about 18.5, 18.55% for the quarter, primarily due to lower leverage, but a large part of it is also being on the back of lower funding costs. year-to-date, the NIM has improved to 17.91%. Our cost to income stands at a very healthy number of about 35.56% for the first nine months as compared to 35.62% for the nine months Sep- ended December 2021. This has resulted in a return on assets of 8.64% year-to-date and a return on equity of 14.66%. That's it from the numbers perspective.
From a borrowings perspective, I think we have a very healthy borrowing profile with about 50 lenders lending to us. The bank lending proportion has been going up. That tends to be the, you know, very sticky proportion of the overall borrowings for us. Banks contribute about 56% of our debt, and we have diversified our borrowings, you know, across non-convertible debentures, market-linked debentures. We have done securitization transactions and also issued ECBs. As Mr. Pati said, during the quarter, I think we raised over INR 1,050 crores of incremental debt at an all-in cost of about 9.1%. What you see on the presentation, an all-in of 8.7% for the 9 months is only the coupon.
Last quarter, if you look at it was 8.7% of all-in cost. That did go up by 40 basis points. What is important to note that while the cost of funds has gone up by about 40 basis points as compared to the previous quarter, we are still borrowing a very good quantum of debt at optimal cost. As compared to the Q4 of last year, our borrowing cost has actually gone up by about 42 basis points despite the fact that RBI has raised their repo rate by about 225 basis points. Clearly, Five Star is seen as an attractive lending institution by the borrowings by the borrowers. As Mr.
Pati said, India Ratings has given us as a, you know, rating of AA- during this quarter. Which is very clearly something that stands a testimony to the strength of the company. We are hoping that the other rating agencies will also follow, you know, during this period. On the balance sheet, liquidity remains robust at over INR 1,000 crores, without taking any of the, you know, pipeline sanctions. We are expecting that this will tide us in a very good manner over the next 2 quarters. What all this has actually done is bring down our overall borrowing cost on the book as well from about 10.56% last year, to about 10.35% for the nine months ended December.
For the quarter, it's at 10.26%. There is very counterintuitively, Five-Star has seen a reduction in borrowing cost, despite the adverse interest environment over there. On the collections, again, we have spoken about the business momentum. The collections have also been very robust, not just during this quarter but over the last about 6 quarters or so. We have been clocking a collection efficiency of over 98% in the last 6 quarters, with 4 quarters showing over 100% collection efficiency. Even the 30-plus number, which you were seeing at about 13.5, 13.7% last quarter, has actually dropped down to closer to 12.1% as we speak as of December 2022. One important development, I think Mr.
Pati touched upon this, is the upgradation norms that got implemented from first October. Just to, you know, refresh everyone's memory, RBI came out with this circular on November 12, 2021, and then followed up with another circular on February 15, 2022, where these upgradation norms were, you know, deferred to first October. Basically what this means is any loan that crosses 90 DPD at any day during the quarter can only be brought back to standard asset only if they clear all the overdues. you know, given our profile of earn and pay customers, there are always going to be some customers who may not be able to pay on the due date, but they will clear before the month end.
Our stage three assets or NPA that we have aligned to the revised norms stands at 1.45%. Out of this 1.45%, 1.16% represents assets that are over 90 days past due as on December 31, 2022. 0.29% predominantly is sitting in the bucket of 61-90 and 31-60. Since these customers crossed 90 DPD at some point of time during the quarter, they have not regularized their account to 0 DPD, which is why they will also have to be classified as NPA. If you were to recall, you know, we had guided even last quarter that this number, the dichotomy between stage three assets and NPA, would be around 75-100 basis points.
For this quarter, it's only at about 29 basis points. We continue to hold a very robust pro-provision both on the overall book as well as on the Stage 3 assets. On the Stage 3 assets, our provision has been almost flat compared to previous quarter. Currently, we hold about 44.78% provision on the Stage 3 assets and 1.66 provision, % provision on the overall AUM. You know, with the effects of COVID having almost receded completely, we are seeing very good traction across the various portfolio buckets, the overall provision coverage on the AUM will gradually, you know, start normalizing in the coming quarters, that's something that you will keep seeing it.
On the restructured book, you know, what was, we restructured 1.83% of our assets during the second wave of COVID. Currently the restructured book as a proportion of overall AUM stands at 1%, at INR 62 crores. Even on this book, we maintain a very healthy provision coverage of about 48.61%. It's also good to note that there is a, you know, good performance that we are seeing on the restructured book. About 91% of the restructured book continues to be in the standard category. If you would recall, it's been 5 quarters since the restructuring ended. Even after 5 quarters, we have about 91% of the book who's staying in the less than 90-day bucket. Profit for the quarter, as Mr.
Pati had outlined is about INR 150 crores, representing a 28% year-on-year growth. For the nine months, we had clocked a profit after tax of INR 435 crores, representing an increase of 29% year-on-year. We had a net worth of INR 4,165 crores as of December 2022. The company has continued to show a very robust growth, profitability and quality, and we are very confident and remain well poised to continue the momentum in Q4 as well. Typically, Q4 tends to be the best quarter for us as for any other NBFC. We are very confident of, you know, showing good results for that quarter as well.
With this note, you know, we will take a pause here, and we'll open out for any questions that any of you may have. Thank you very much.
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 the 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 question queue assembles. Participants who wishes to ask a question may press star and one now. Anyone who wishes to ask a question may press star and one. The first question is from the line of Pranav from Pranav Reddy. Please go ahead.
Hi, sir. Thanks a lot and congrats on a great set of numbers. Sir, have you shared anywhere SMA-1, SMA-2 data in the presentation?
Pranav, we have given you the numbers of 30+ and 90+ . 30+ consists of both SMA-2 and SMA Three. 30+ stands at 12.1%.
Right.
If you remove 1.45% out of that, you know, which will be about 10.55% or 10.6%. That's one data that we have. We also have on the slide, the subsequent slide, the bucket-wise portfolio break up.
Uh-
SMA-1, which is 1-30, stands at about little over 7%. 31-60, which is SMA-2, stands at 5.42%. 61-90 stands at 5.23%, and NPA stands at 1.45%. This is on slide 26.
Right. This data, if you track it for, say, before COVID and during COVID, how is this data improved? Any trend that you can give for any one of these data points, for example, say, one, 30-60 DPD? Any trend that you can draw and highlight?
Pranav, let me take it up. Srikanth will come out with the numbers. See, Pranav, I think pre-COVID our numbers have to be compared with pre-COVID with now.
Right.
You know, these customers are earn and pay customers. You can't expect them to be in the current stage till the tenure gets closed.
Right.
We have to track them. When is that first arrear hits the customers, and the subsequent months, how the customers pays the arrears is the trend that what we'll be. We have to see it. If you just compare this with other lenders who are lending to prime customers, this may be little higher, but we know that because that is why I said, this is less crowded market. When you want to lend to these customers, you have to be very clear about their earn pattern and their paying pattern for a long, long time. We have a pattern for last 20 years. If you see our pre-COVID, our best current bucket was around 82%.
Now it stays at 80.87, which is 81%. It has moved substantially from last December from 67%. Very confidently next quarter we will break our best ever current at Five Star. That's what the trend has been showing at Five Star. Srikanth has numbers. I think I'll leave it to Srikanth.
Yeah. Pranav, I think we are broadly, you know, in line with our best numbers that we have seen, you know, pre-COVID. Like, Mr. Pati said, current is about, we were at 82%, we are at 81% currently. In fact, on the 1-30-day bucket, we are actually better off, you know, as compared to 8%, 1-30, we are at about 7% today. 31-60, you know, broadly in line, we were at about, you know, close to 4.5% then. We are at about 5.4% now. 61-90, we were at about 4%, you know, because this, there'll be something that, the NPA also will be showing a little higher number.
We were at 4% and we are currently at about 5%. There is a 1% difference, you know, in the 31-60 and 61-90-day bucket as compared to the best numbers that we clocked pre-COVID. Things are definitely, you know, coming down as you will see even in the presentation between December 2021, September 2022, and December 2022. Not just in terms of per-percentages. Across the various buckets, you will see the absolute quantum also, you know, dropping. We are very confident that this number will show, you know, better improvement in the March and the subsequent quarters to come.
Right. Last question from my side. I'll come back in the queue. The 369 branches that we have, what is per year typically we will increase?
Pranav, the normal opening, rate of opening of branches is about 50-60 branches per year. That is, that has been our, you know, pre-COVID track record in terms of number of new branches that we get to open per year. This year has been a little higher. In the last one year, as Mr. Pati had put it, we had opened about 89 branches. The rate is higher because the last two years, because of COVID, were muted in terms of branch openings. There is some pent-up demand that is getting absorbed this year. I think we will get back to normalcy of about 50-60 branches per year going forward.
Right. Thank you, sir.
Thank you. The next question is from the line of Rahul Bangadia from BanyanTree Investment Managers. Please go ahead.
Thank you for taking my question, sir. There are two questions. 1, if you could give us an indication or guidance on your credit cost going ahead, because this quarter is a really low number. What should we expect going ahead on a medium term basis?
Yeah. See, if you look at, you know, during the quarter of December 2021, we had a credit cost of about, you know, little over, you know, close to 100 basis points, about 94 basis points. Because, you know, that was also the time, you know, post first wave, second wave, we were consciously building, you know, more of provisions. That has started normalizing. Our belief while this quarter looks at about 27 basis points or so, our belief is that, you know, this number will be anywhere around the 1% levels once we have the steady state scenario.
You know, what it used to be pre-COVID, around 1% or so is where we think the credit cost should start stabilizing in a steady state scenario.
Okay.
Rahul, just to add a point from a guidance perspective, I think, see, we are extremely performing very well. Let me take the inputs from the earlier question, where COVID hit most of the sectors in our country, but we were able to manage one of the best asset quality, even though the DPD performance was little down. That DPD performance is now picking up. That's what last question we clarified. We'll be beating all the numbers of previous best DPDs at Five Star in next quarter. Having said that, as a guidance of credit cost, I think we'll be happy to give you at 1%-1.5% at a longer go.
Having the performance is really good, but I want to be more cautious, so to give a guidance of 1%-1.5% in the long run.
Okay. Sir, second question was, what is the general repayment period that happens here, two and a half to three years, and has that number changed over the last four, five years?
It's not two and a half to three years, Rahul. It's more like four and a half years. Our origination tenure is up to seven years. In fact, almost 85% of our loans get sanctioned for a seven-year tenure. Adjusted for prepayments, what we see is that this number is around four to four and a half years. It has sort of largely stayed, you know, around that level, in the last few years. We are not seeing it significantly increasing or significantly constricting.
The reason that I asked this question was, if you look at the in your own presentation from, you have given data from FY15 to FY22. If you look at the loan disbursements and then the growth in the AUM, broadly it's the three, two and a half to three year number that comes out, that's why I asked the question.
No, no. A lot of loans, you know, whatever gets booked in the initial part of the year, you'll see the repayments. Rest of it you may not see. Typically, you know, it's what we see is about 2.5% of, you know, run off every month. 2%-2.5%. 2% at 24% for the year works to about a little over 4.5 years.
Great, sir. Thank you. I'll come back for more. Thank you.
Thank you. The next question is from the line of Jitu Panjabi from EM Capital Advisors. Please go ahead.
Yeah, hi. Hi, hi, Pati and Ranga. Just one bigger question is what are the trends you're seeing on the ground which would translate into growth? Are you seeing an opportunity to expand much faster and grow the book faster? Are you in the mode where you need to be a little more cautious? I also saw in media there was a comment which talked about a 20-25% growth. Does that look doable in the next 4-6 quarters as well?
Ravi, let me start. I'll ask Ranga to even add. As we will always be very cautious. We will not be dynamic when we handle these customers. As I said, single shop owners, self-employed and cash salary customers, which is very hard to grade. We'll be always cautious. That's our philosophy. At the ground level, we see tremendous opportunity. As I've been saying to everyone and everyone knows that this is a segment of customers who have not been, their credit was not being met by formal lenders years and decades for now. Five Star took a call in 2002 and went behind them and successfully have done in last 20 years.
We are very optimistic from this opportunity perspective. These are the things that will drive our growth. First we were at INR 3.5 lakhs average ticket size, which has come down to INR 2.5 lakhs during COVID consciously, and now we are slowly picking back. We are at INR 3 lakhs average ticket size as of December. That will move towards INR 3.5 lakhs. That's the first point that we wanted to reach because we were lending at INR 3.5 lakhs average ticket size pre-COVID. Second growth, as Ranga said, we'll be opening close to 50-60 branches, which used to be 40-50 branches pre-COVID. We'll be doing it at 50-60 branches year-over-year. That will give us the next leg of growth.
We are happy to say we keep adding number of officers at the existing branches, which is performing phenomenally well. With these three levers of growth, and the tremendous opportunity at ground, our mind always puts us in a conscious mode, definitely we can deliver the growth, what you referred to a interview which I gave a few days back.
Okay, thanks. Okay. I hear you talking both about the structural opportunity that you're seeing long term, which is being played out, and second, also the three levers that you're seeing, being used to expand the book. Are you seeing just the underlying economic environment, enough to step up a gear, or are you still gonna stay in the same gear you were earlier?
Sorry for belaboring the point, but I just thought I wanted a little bit of color on the underlying environment.
Due to the underlying environment has clearly sort of picked up from the COVID lows. You know, we used to take about on an average six months to break even when we open a new branch. We are getting back to that now. Like Mr. Patil put it, you know, large part of our growth even historically has been driven by how much we want to grow rather than mindlessly sort of opening a set of branches that we are not able to digest well and keep up the culture both in terms of repayment and in terms of the culture of credits that we have built painstakingly over the last about 20 years. While technically what you say is right, which is the opportunity is quite large, and we may be in a position to open even 100 branches per year.
I think, you know, we are still in a mode where we wanna make sure that what has been built over the years cannot get compromised for any reason. Which means we will continue to build slowly and steadily about 50 to 60 branches per year. The other nuance that sort of works well in this segment is that every state is very different. Every state has a culture. Every, you know, just like every customer has a culture, every state has a culture. It's not easy to randomly go into new states and, you know, start opening up branches.
If you look at throughout this year, bulk of the branches that we opened in the last 12 months, 89 branches we opened, bulk of the branches are in states where we already have a very, very significant and a strong presence. We are consolidating our positions in the core states of south, while at the same time sort of opening seed branches, experimental branches in the central Indian states. This cautiousness is something that we will always carry forward as a culture of Five Star. I think, you know, the growth numbers that you have mentioned and that we have added in the past are imminently sort of meetable even with this cautiousness as a approach from our side.
Okay. Fantastic. Fantastic. Thank you so much and good wishes on the journey.
Thank you. The next question is from the line of Sagar from Anand Rathi. Please go ahead.
Hello. Hi, good morning, sir. I just wanted a little bit color on the client base you have in comparison to the South-based banks like Karur Vysya Bank or South Indian Bank, et cetera, and also if they are rated or overview on their rating. Thank you.
The client base, how they are different as compared to, let's say, the banks of Karur Vysya Bank, South Indian Bank.
Yeah. Sagar, our clients are largely, I would segment them into three categories. The first segment are people, you know, who are single shop owners. This forms the bulk of whom we serve. These are people either by themselves or through their family members, they provide some kind of a service. It could be, you know, anything that a common man needs for every day. It could be a Kirana shop, provisions, flower vendors, fruit vendors, eateries, pharmacies, repair shops, salons. The classic service segment is what we target. This forms about 60% of our customer base. 25% of our customers are self-employed individuals. These are category B and category C self-employed individuals. Doctor, not your doctors and engineers, but more in the category of plumbers, painters, masons, you know, that's the category that we significantly serve.
The last 15% are employed. These are, they are largely cash salary, who are employed in the informal segment. People who work in shops, factories as casual laborers, people who are wage earners. That forms about 15% of the people. Across these categories, you know, in general, the common trends are while they have income, but they don't have documentary proof to prove their income significantly. It's more of kaccha bills and, you know, what papers that they maintain for running their business. The idea and the challenge here is, you know, how do you assess cash flows in the absence of documentary proofs of income? That is where we specialize in.
If you were to take a look at a bank, I think, the segment is at least 2, 3 notches above this. While they also could be doing businesses, small businesses, but it could be something far higher than a single shop owner that you will see on an average when you walk down the street on a market lane. These people, a bank targets may be doing the single shop, but it could be a supermarket. They could be, you know, people who are, you know, doing a much higher skilled job. While everything is MSME, while everything is small ticket loans, but I think the color and segment of what different people target is very different in the market.
To add what Ranga said on a few notches, it's clearly you can differentiate between the average ticket size, what Five Star specialize versus the banks which you mentioned, which are doing predominant business in lending to MSME in South India. Our average ticket size is INR 3 lakhs, right? I think, I don't know any bank lends to a individual client for an INR 3 lakh loan for a seven year tenure. Their ticket size may be in the north or north of INR 10 lakhs or INR 15 lakhs. Lending to a shopkeeper can be a common terminology, but within the shopkeeper, the average ticket size where Five Star specialized is between INR 3 lakhs-INR 5 lakhs.
Okay. Thank you, sir.
Thank you. The next question is from the line of Jinesh Shah, an individual investor. Please go ahead.
Yeah, good morning, sir. Good morning, sir.
You are sounding little low. Can you speak little louder?
Yeah. Yeah. A few things, just wanted to understand about the business attributes. One is, so few of the observations which I have had is that-
We have a 100% collection doing in-house. That's one part. Second, is the leverage on the balance sheet has been low. The third important aspect is the use of technology. How these three things are differentiating company from the rest of the players in the market, and if you can just understand where, I mean, the, how this differentiation is more secure to us as compared to the other player? Going ahead, like, what kind of trend do you see within, like, resulting out of this three unique things which you have? If you can just throw some light on them. That's it.
Thank you, Jinesh. I'll just take up all the three aspects one by one. The first is 100% in-house collections. This has been the core of what we have always put up within Five Star. Not only 100% in-house collections, we also have this norm that the person who originates the business is responsible for collections. This is a key differentiation between us versus many other players in the market. We fundamentally believe that if a person understands the pain of collections, he's going to be a lot more responsible when he's sourcing a business.
Even while we have set up a collection vertical within Five Star over the last about one and a half years or so, but it's a conscious decision for the collection vertical only to handle customers which are above 24 months buckets. 24 months of tenure, not bucket. 24 months of tenure. Which means for the first 24 months since origination, whatever bucket the customer is going to be, whether it is a current bucket or a earlier bucket or even an NPA bucket, the account does not get transferred into a collections vertical. The person who has originated has to handle that loan. This is something that, you know, is core to what we have built, and we don't have any intention of changing this even over the medium to long term.
We will continue to have 100% full-time employees who are handling collections. The other early call that we have taken at Five Star is that there are three core verticals. The first is sourcing, the second is underwriting, and the third is collections. These three define who a lender is. Across the three verticals, we will not have anything which is outsourced. We will not have DSA agents who are sourcing loans. We will not have, you know, some third-party agencies who are helping us underwrite the loans or get it to a particular format, or we will not have anybody else who is collecting our loans. Across all these three verticals, which is fundamental to a lender, we will continue to, you know, manage 100% with full-time employees of Five Star.
On the second part, which is on leverage, you know, you must understand that we are a standalone NBFC. We are not backed by large layer. You know, we are not backed by parental houses. It was started by an individual. We have painstakingly, you know, come to this point over about 38 years so far. As you will see that this sector is not smooth. You know, this sector will have its ups and downs. Unless you are really well capitalized, you cannot press the pedal of acceleration and growth over the medium to long term period. One of the early calls that we had taken is that we will...
when we started inviting private capital, which is the, you know, marquee names which has backed up right from 2014 to 2020, we will ensure that good quality capital is coming in from, you know, these investors who will stay with us for the long term. Unless you have the capital comfort, you are not going to be in a position to improve your rating. You're not going to be in a position to get high quality professionals to join your firm. You can't get bankers to take comfort on a standalone NBFC, you know, and sort of extend their lending lines. It's also going to be very difficult, you know, when suddenly banks are going to start being very cautious because of sectoral impact. You can't just be on and off into the market.
I think capital comfort was absolutely required during our high growth phase, and that's the reason we built significant buffers of capital over the 2014- 2020 period. As we see, you will obviously recall that when we came out with an IPO, it was complete OFS. We didn't want to raise a single rupee of capital from public because we believe we have reached a point where we are significantly and adequately capital sufficient at this point of time, and we have the comfort of very high accruals. For the first nine months of, you know, this financial year, we already are about INR 434 crores of PAT, and we have not paid any dividends. The entire thing is going to be sort of reaped back into the business.
This is going to continue, you know, for the foreseeable future, where we are going to have strong accruals. It's a profitable model, and we have significant capital comfort. Any investor with us at this point of time is going to enjoy the upside in terms of, profitable growth without dilution, and that has been. We will increase leverage, but it will be organically increased over a period of time. Just to increase leverage, we are not going to accelerate the pace beyond the rate of comfort that we are good with. The last part is on tech. Obviously every business has to have a tech angle at this point of time, and we continue to significantly invest into tech.
You must sort of understand the customer segment that we are targeting is not the usual customer segment, you know, that comes in the mainstream media or news when you sort of compare other fintechs or NBFCs who are targeting the segment. Bulk of our branches are between tier 3 and tier 6. Well over 90% of our branches are between tier 3 and tier 6. Obviously, I had explained the customer profile of people that we target. These people are not even category 1 adopters of technology, so their ability to understand, adopt technology is very different from the average sort of mind share that you get when you speak of tech in a business. We are cautious about what works for this segment, how that has to be implemented within the, you know, Five Star.
without sort of diluting our focus or making people uncomfortable with, you know,
With sort of trusting technology where it is not needed. We will tread a fine line here, but that said, I think we are making, sort of fairly significant investments, especially over the last two, three years into technology, and that will continue to, provide a guidance over the next, few years to come.
Just follow up on these two. One is, you mentioned about the leverage, maybe turning a little better. Is there a threshold which you have defined for that? Second, when we're talking about the cost to income, I mean, we have more like... The reason why I'm asking about the use of technology more from a cost perspective, how much it can push down the cost and what would be the... Like, when you lever it. I can see your, you have built the building blocks. You have added the branches, you have added the people, you are investing in technology, but the cost to income ratio remaining at a much sustainable level, more close to like a maybe 30-35.
But where do we see going ahead when you see the scale, like as you said, like, uh, when, when the business starts scaling up, uh, over next, uh, two, three years, where do we see the cost to income ratio also moving towards? Or is there going to be a more reinvestment which is going to happen, uh, over next, uh, two, three years for this business, which will, uh, be in linear to the growth in the business? That's what I wa-wa-wanted to understand. Thanks.
See, from a leverage perspective, you know, historically, I think we have been comfortable around the 3-4x of leverage, which means, you know, 3x of debt equity, which is something, you know, people, you know, even the debt providers, the credit rating agencies are all comfortable with. You know, you don't have too much of pressure to start, you know, building up the capital. Our belief is that over the next about three years or so, our leverage should be at about 2-3x, which will push up the ROE. You should also look at today the net interest margins are inflated to some extent because of lower leverage.
While the spreads are at a very healthy level, and we will continue to remain at the 12%-13% kind of spreads, you will definitely see some kind of a drop in the net interest margins because of leverage going up. What is currently, you know, at about 17.5%-18% will probably drop to about 14%-15% in a steady state scenario. There will be a compression in the return on assets on account of this. Given the leverage kicking in, and, you know, the return on assets at a steady state, you know, being around 6% or so, with about 3x-4x of leverage, we should be looking at 20%-22% of return on equity in a steady state scenario.
You will definitely see these numbers panning out over the next 3+ years. From a cost to income perspective, you know, we are probably, you know, given the segment that we are operating in, where, you know, it is a little bit, you know, more intensive on the manual side. While we will definitely leverage technology, we have built a very strong senior management team, so you don't need to invest a lot more on the management side. You will also need to keep putting feet on street. There are always going to be efforts both on underwriting and collections that we'll have to expend. We don't see too much of ability on the cost to income to drop.
Where we have the abilities as the assets keep increasing, what currently you are seeing on OpEx to AUM about 6.25% for the year, should definitely, you know, in a steady state scenario, come to about 5.5% or so. 5.5%-6% is what we think is a steady state scenario OpEx to AUM. Cost to income would broadly range around 34%-35% even in a steady state scenario. With the incomes going up, you know, that pushes up your ROA and with leverage and debt equity going up, that pushes up your ROE.
Deenadayalan, being an important question, let me also reiterate. See, I think, our cost to income ratio is one of the best in this industry, to the price that what we lend to the market, right? Even at this quarter, we are at 38%. If you knock down one time expense that we shared with our employees, due to our successful IPO, it'll be around 35%-36%. That will be one of the best cost to income ratio to the segment or to the IRR as what we lend. That's point number one. The game plan will be shifting our ROA towards ROE. Today, if you see ROA is around north of 8%, because of low leverage. As Srikanth said, the leverage is going to kick in.
That's the focus that what we have planned for. As a data point, we have raised more than INR 1,050 crores in a single quarter. That shows the ability of leveraging ourself. Even at the leverage of 1 to 2, currently our return on equity is at around 14.67%, close to 15%. That will move towards 20%-22% as the leverage kicks in. Don't expect a big drop in cost to income ratio. As I said, we are one of the best in the market if you compare with the IRR as what we lend for.
Yes, we are fully loaded on management, fully loaded on technology, and there'll be some slight drop in OpEx as a % of AUM, what Srikanth said, but the focus will be moving towards a healthy return on equity to the shareholders.
Thank you. The next question is from the line of Chandra from Fidelity. Please go ahead.
Hi. Very good morning, Mr. Pati, Srikanth and Ranga. I had a few questions. One, can you just share the Stage 2 assets, which is maybe two or three-year vintage, at this point in time? Reason being just trying to understand, you know, some of your customer segments obviously can't roll back two payments at one point in time and would have been originated during somewhere around the lockdown period. Just trying to understand just by vintage, the Stage 2.
Chandra, just give us a few minutes. I think you can proceed with your questions. We will get you to the data shortly.
Sure. Second is just what is the number of collection officers, which we have, right now? How should we fundamentally think of the pure collection officers over a period of time on a per branch level? My understanding was that you have maybe about 1,200 with about INR 20,000 a month, which is about INR 30 crores odd annualized. Just how should we think of just pure collection officers on a per branch level on a steady-state basis? That's one. Second is, you know, just your the target spreads. How do you think of it over a period of time? You did say it was 12%-13%. Your incremental cost of borrowing is still lower than the average cost of borrowing, one.
You know, the customers are not as sensitive to yields you said in the past. Given that, you know, the average cost of borrowing, the incremental is still lower than the average, how should we just think over the medium and over the longer term? The other question is that, see, we have about 270,000 odd live cases, 360 branches, maybe about 730 odd per branch. How do we think from a risk management perspective, just concentration in certain regions? Like, do we, do we... For example, if you work by a pin code, for example, we don't do more than 20 cases or 30 cases in a pin code. How do we think of risk management?
The very last question is, what is your attrition at the branch officer level, and how many of them have you shared stock with? Thank you.
Chandra, I'll just take a few questions while Srikanth is gathering the data. Firstly, we have about a little over 1,000 officers, collections officers, as we have at this point of time. There are 2 points that I would like to clarify here. We have, within collection officers at this point of time, we have types of collection officers. One is what we call as a collection vertical itself, which means they don't do anything, you know, apart from collections. They're just doing collections. It's a separate vertical where they have a manager, they have a supervisor, they even have a state head who is only looking at collection. At this point of time, there are 2 states which have a collection vertical, which is Tamil Nadu and Telangana.
For the rest of the states at this point of time, we have a collection support, which means, you know, they are collection officers only, but they don't have a vertical, which means they don't have a separate supervisor who is dedicated to collections. They are officers who will support the branch in collections. They will do only collections, but they are, you know, officers who are supporting the branch in collections. Across these two, let me not confuse you with more nuances between the two. At this point of time, across these two, we have about 1,000 officers. The way to think about it is that each officer on an average can handle about 125 accounts. That's the metric that we have.
Whatever is the number of accounts that we have over the 24-month vintage, that divided by 125 is the metric that we will adopt in terms of number of collections officers that we will have. It's linear. But you know, when we first move a set of accounts to collections, you will see the spurt. But if you look at, you know, over the steady state, every quarter, whatever is the new set of accounts which is moving towards the collection vertical, we will have those many number of officers at the collection level. Second, on the risk management framework. We are very clear that we have two types of branches. We have a normal branch, and we have a super branch.
At this point of time, we have a normal branch of little over 210 branches and super branches of about 160 branches. A super branch is a branch which has a vintage of more than t years. They are very good in collections. They are, you know, good in business. They have created a, you know, presence for themselves in the locations in which they operate. We graduate the branch to become a super branch. Once it becomes a super branch, you know, that's the first touchpoint in terms of how do we start managing risk. We address risk at multiple levels once a branch starts becoming super branch, which means we don't want to be dependent on a single branch manager because that's where the first risk starts.
What we do is that the super branch is in essence, it'll have two branch managers, and it'll also have one senior branch manager who is handling the two branch managers. It'll have about 10 officers. It'll have two branch managers and one senior branch manager. At the officer level, there are redundancies which are built. If somebody resigns, you know, it's not going to suffer either from a collections perspective because there are 10 officers. At a branch manager level, there are redundancies. At an SBM level, even if one of the branch managers were to go, you know, between the three of them, which is one SBM and two assistant branch managers, we'll easily be able to support whatever happens at the branch level. This is from a people perspective, how do we manage the risk.
Second, if let's say the branch becomes a super branch and the number of accounts which are handled by the branch increases, we will keep adding officers to that branch. We will not put enormous pressure on the existing set of officers only to handle all the accounts from a collections perspective and also generate incremental business. The thumb rule that we have is that if a officer is doing business and collections, on an average, he can handle about 100 accounts. The moment it crosses a per officer level of 100 accounts, we will start adding more and more officers as per the need in the branch. We have branches which have more than 12, 13 officers at this point of time. We also have branches where we have lesser number of officers given the accounts.
The third way we manage risk is that if a branch becomes too big because they have done extremely good business, let's say they have 2,000 accounts, you know, we don't want to just keep building on the same branch for any reason. What we will do is that we'll open nearby branches because we believe that there is a lot of good potential in that area. We'll open a branch which is like 20 km, 25 km away. Not just open a branch, but we will transfer a set of accounts from this existing branch to the new branch. As the branch gets opened, on day 1, they will have about, let's say 500, 600 accounts which are getting transferred to them, which reduces the risk at, you know, the single branch location level.
There are multiple, you know, touch points that we do from a risk management perspective right at the branch level. Of course, there are layers much above the branch. You know, the number of supervisors that we will handle. Three years back, we used to have about 20 supervisors. At this point of time, we have 87 supervisors. On an average, each supervisor doesn't handle more than five branches. They are there, you know, for the first need of a branch, whether be it collection, be it business, be it recruitment. We will continue to, you know, promote people internally. Most of the supervisors are people who are groomed internally, and they take on responsibilities because they are very good. Most of the supervisors will have a vintage of more than five years with Five Star.
We will continue to add supervisors, you know, as necessary in each of these metrics. Across business collections, supervisory layers and credit, you know, the risk management is sort of embedded into the way the business scales up and overall taken up to the next level. At a attrition level, I just add that point. If you take attrition at a officer level in a branch, it's about, 29%, 28%-29%, overall, largely in line with the industry. If you had to split it, most of this 28%-29% will be for people who are with Five Star for less than a year. Somebody who is about, you know, more than a year, generally tends to stay with Five Star for a longer period.
The reason could be that when people join from other NBFCs, you know, they have to fit right with the culture, the, you know, the thought of doing business and collections together. For various reasons, the attrition at that level may be a little higher, but it's in line with the industry. If you had to go one level higher, which is the people who really matter in the branch and who are controlling the branch, which is what is the attrition at the BM and above level, will be roughly at about 9%-10%.
Chandra, getting back to the two questions that you asked, you know, one is the vintage wise Stage 2 and the target spreads that we are looking at. Vintage wise Stage 2, you know, about 98% of the accounts which are in Stage 2 are two years and more. We have only 2% of Stage 2 customers, which are 30+, 30-90, who are in Stage 2, who have been in the company for a less than two year vintage. You know, typically Stage 2 comes in only after 24 months or so. 98% are over 24 months. In terms of the target spreads, yes, today our spreads are higher, and we are sort of guiding you for a 12%-13% kind of a spread.
This is something we updated even in the last call. See, if it was a normalized scenario, I think some of the benefits that we have, obtained on the reduced cost of funds would have passed on to the customers. At the end of the day, we also want to be a responsible lender despite the fact that this segment may not be extremely price sensitive, but any benefit that we get, at least a good portion of that we would want to pass on to our borrowers. In a normal scenario, we would have passed on some of these benefits, but today we don't know exactly where this entire interest rate cycle is going to sort of peak out or end. We are, you know, being on a little bit of a wait and watch kind of a scenario.
Once we realize that the interest rate scenario has peaked, I think we will definitely pass on some of the benefits to the incremental loans, which will gradually bring down the spreads to about 12%-13%. While it's about 13.7% today, we should expect to see about 75- 100 basis points dropping once. That will be gradual because ours is a fixed rate portfolio. We can't reprice the existing book. But on the incremental loans, the boarding rate will be lower. To that extent, it will start slowly, gradually pulling the spread down to 12- 13 levels.
Sure. Your Stage 2, for example, right now is actually where it was in, say, 2019, approximately there. Is it, I mean, obviously during this period, you have added customers who have fallen back on their payments, you know, one or two payments and not been able to, you know, repay both those payments at the same time, which is why some of them may be residing in Stage 2. Is it fair to assume that once they get flushed out eventually from the system and complete their dues, that your actual Stage 2 may be lower than where it was, say, in 2019 levels? Is that possible?
See, Chandra, I think the guidance that we would probably try and give you is our Stage 2 should be, you know, more like about, while it is about, you know, it's roughly maybe about 10.5%-10.6% as we speak. Even in a steady state, I think this number will be more like 8%-9%. If we are expecting people to significantly roll back or significantly not fall into buckets or fall into buckets and then come back to Stage 1 and all that, it's not going to be the case. Our belief is that, you know, our 1+ number will be, you know, more like 15%-16% in a steady state scenario. Currently, it's almost at about 19%.
maybe we will see another 2, 3 percentage points, bettering here. If you trickle down from there, we should see a Stage 2, you know, which is a 30+, including the 90+ numbers of about 10%. If you assume a 1.5%-2% kind of, NPA number, 1.5% more like 90+, we should be seeing a Stage 2 number of anywhere around 8%-8.5%. You know, while there will be some improvement that we'll keep coming through, but, I think even in a steady state, this number is expected to be at around 8% or so.
Sure. Sorry, I didn't get the answer. Just how many of your branch managers have stock in the company?
Yeah. We have given stock options to all the senior branch managers and above. It's not at a branch manager level. Every senior branch manager, supervisor, and anybody above that, totally about 350 employees of Five-Star have stock options.
Great. Thank you very much. All the best.
Thank you. The next question is from the line of Arjun Bagga from Baroda BNP Paribas. Please go ahead.
Yeah. Hi, ma'am. Thank you. Thank you, sir, for this opportunity. Good morning. Sir, just wanted to get one, just some color on the restructured book. Like, I understand it is at 1% currently. So, if I were to just understand how has this moved over the last 2-3 quarters, what have been the kind of slippages there and what has been the repayment?
Arjun, I think, number one, in the history of Five Star, I think we have done only one restructuring, which is during COVID too, where we restructured about INR 83 crores of assets. Even this restructuring, we gave them a moratorium for six months between April 2021 and September 2021. What you are seeing today, which is 1%, which is INR 62 crores.
Mm-hmm.
There is a rundown of INR 21 crores that has already happened. INR 62 crores is the book which is, you know, which is live as on date. Like I said, 91% of these customers are in standard category.
Mm-hmm.
About, you know, 9% are customers who are in the, you know, who are in the 90+ category. The difference in a collection efficiency between this as well as a normal account, yes, there is a difference. In fact, if you look at the 61-day DPD of this, of this portfolio, it will be on the higher side, not even comparable to, you know, what we are seeing, you know, what we are seeing on the normal book. What is also heartening to note that it is not that a large portion of this is actually slipping to 90+. We are only seeing about 8-10%, which is slipping to 90+ and staying at 8%-10% on a quarter-on-quarter basis.
If you recall, even last quarter when we gave you the numbers, while it was 1.16% of the overall book, the restructured portfolio, even then we had 91% standard. We are seeing about 9%-10% who's in the 90+ category. Like how we sort of guided you even in the past, we expect that about 20% or so of this book, 20%-25% of this book is going to sort of be at 90+ or eventually there'll be, you know, some level of credit cost that we'll have to absorb on this, you know, on this book. Towards this, what we have also been consciously doing is building a very robust provision coverage.
As I highlighted, we are at about close to 50% provision coverage on the restructured book. Even if there is an eventual, you know, credit cost of about 20%-25% that we'll have to absorb on this book, we are more than adequately covered and there will be, you know, we don't expect any incremental impact onto the PNL.
Sure, sir. This is really helpful. Another question on the asset quality. I understand during this quarter we took the regulatory change of classifying less than 90 DPD assets also as the GNPA, which I understand most of the peers, like or close competitors like Aavas or Aptus had done last year itself when the circular came out for the first time. Any specific reasons that this was not done in the last quarter, Q2, when we first reported the results? Second is, did I understand it correctly that the number which stood at around 29 basis points during this quarter, maybe, that maybe has between 75 to 100 basis points, if my understanding is correct?
Yeah. Arjun, you know, two things. First, why did we not implement earlier? The answer is, see, RBI came out with a circular on November 12, 2021. You know, the deferral of upgradation norm was given on February 15th, 2022, post the declaration of results of most of, you know, all the equity participants. We had taken a very conscious call. You know, at that point of time, we were not required to disclose the December results being only a debt listed entity.
We had also said, you know, given the way that the circular was floated out, where, you know, there was no time given for institutions to sort of prepare and given our borrower profile, people who have been paying with a few days delay here and there, but were regularizing the account before the month end, you know, we needed that time to sort of educate our internal system, educate our staff. Thankfully, you know, RBI gave that, you know, on February 15th. We had the time to sort of educate them, and that is where you're seeing the results of 1.45, which is only 29 basis points difference. Now, why did we not come in September quarter?
There was no need for us to come in September quarter because the upgradation norms are kicking in only from first October. Any customer who slips into 90+ from first October but does not come back to 0 DPD is what is needed to be reported as NPA, which is why we are doing it in this quarter. One is there was no need for us to report in the September quarter. The circular is effective first October and we have disclosed from this quarter. Your second point is correct, your assumption. What you are seeing as 29 basis points currently, that's the impact of 1 quarter. There will be some build up that you will keep seeing in every quarters.
We believe that that number, you know, over a steady state should not be more than about 75-100 basis points of difference between actual 90+ and what is being reported as NPA.
Thank you, sir. Thank you. That, that's helpful. Just one last question from my side.
Sure.
I understand that the incremental cost of funds for us during the quarter has, I think, gone up by some 60, 70 basis points. Still the portfolio cost of funds continues to go down. I think that is down some 15, 20 basis points on a quarter-on-quarter basis. Just to understand this, sir, is there some changes or renegotiations from our side on the existing lines as well? Or is it just that the repayments are coming at, sorry, the newer borrowing that we're doing that is coming at a lower compared to portfolio level borrowings cost?
It is the second part, Arjun. The replacement cost is coming lower than the, you know, original cost of the debt which is getting replaced. Which is why, you know, mathematically you're seeing the numbers going down. It's technically, you know, our book was running at 10.5%.
Yeah.
Now, firstly, I would like to correct you. During this quarter, this number went up by about 50 basis points as compared to the previous quarter.
Okay.
We are borrowing at an all-in cost. When I mean all-in, I'm including all ancillary costs like processing fees and other borrowing costs. That is at about 9.12%. Given that the book was running at 10.5%, and the replacement happening at 9.1%, mathematically, the 10.5% is coming down to 10.35% for the 9 months and 10.26% for the quarter.
Sure, sir. Sure. Thank you, sir. That answers my questions. Thank you. Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants, please limit your questions to two per participant. The next question is from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.
Hi, good morning. Thank you for this opportunity. A couple of questions. The first one is given the fact that we lend out to the guys who are in the unorganized segment or are slightly below prime, are there any development financial institutions subscribing to our bonds? If yes, what would be the quantum, whether domestic or any foreign development institutions who subscribe to our bond or have given us any line of credit? That's the first one. Second is any kind of negative covenants we have on the bonds. That's the second. If we can split the AUM into ticket size as per proportion. What proportion of the AUM would be less than INR 1 lakh? INR 1-3 lakhs would be what proportion?
INR 3-5 lakhs and INR 5 lakhs+. Thank you so much.
Yeah. Shubhranshu, I think the first question on the DFI lending, yes, we have taken, you know, borrowed moneys from DFIs, both domestic as well as international. Domestic institutions like SIDBI have lent to us in the past, while currently we don't have a line, but we are in talks with SIDBI to sort of get a fresh line. On the international side, we have had moneys that we have raised from institutions like Responsibility in the past. The ECB that we are currently carrying on book is given by the Swedish development, you know, sovereign fund, Swedfund. Developmentally, institutions are, you know, lending moneys to us.
Unfortunately, you know, given hedging costs and given the withholding tax, there is some level of, you know, increase in terms of borrowing moneys from foreign institutions, foreign developmental institutions. Which is why, you know, you don't see a big proportion of money that we have borrowed from them. We will continue to evaluate, to see what best we can do in terms of borrowing from, you know, borrowing from the DFIs. In terms of the... What's the second question?
On, ticket size.
On the ticket size, yeah.
No, the second question was on negative covenants on bonds. If we are in any kind of bond market making exercise, do the market makers ask for any kind of negative covenant, whether verbal or written, either?
Nothing specific, Shubhranshu, you know, in terms of the negative covenants. These are typical covenants where we are expected to maintain certain financial ratios, you know, expected to inform them about, you know, changes in board, changes in management and all that. You don't really see any major negative covenants that we have agreed to as part of any of the lending agreements, not just on the DFI side, but, you know, across the various, you know, various borrowings that we have done. Shubhranshu, on the ticket size, you know, up to INR 3 lakhs or up to INR 5 lakhs is the core bucket. 88% of our loans are up to INR 5 lakhs.
If I had to further split it, up to INR 3 lakhs will be about 48% and INR 3-5 lakhs will be about 40%. within the INR 5-10 lakhs,
Up to INR 3 lakhs, what was the number, sir?
46% of our book is up to INR 3 lakhs. 43% is between INR 3 and INR 5 lakhs, so that's 89%.
Right.
About 10% of the book is between INR 5 lakhs and INR 10 lakhs. We just have 1% of the book, which is more than INR 10 lakhs.
Thank you. This was very helpful. Best of luck.
Thank you. The next question is from the line of Chintan Shah from ICICI Securities. Please go ahead.
Hello. Yeah, congratulations on strong set of numbers. Just 1 question on the coverage ratio. You know, on the Stage 3 coverage, Stage 1 loan, our coverage has come down to roughly 27 bits, which was like 32 bits quarter or 2 quarters ago and 37 within the past quarter. Similarly, coverage on Stage 2 has also come down a little. Also, as management has guided for credit costs in the range of 100 to 150 bits for the next year. What could be the any ballpark numbers or any targets on the coverage ratio on Stage 1 and Stage 2?
Chintan, I think historically, while last quarter we did have a little bit of overlays, even on Stage 1 assets, more on, you know, potential IRAC, those customers who could have become IRAC DPDs. Historically, we have seen Stage 1 being at about 30 basis points or so, you know, 25- 30 basis points, even pre-COVID. I think the guidance that we give you is Stage 1 will continue to be at about 25 to 30 basis points. On the Stage 2, again, it was a little, higher, especially in December quarter or the quarters earlier than that. Primarily because, you know, a lot of the 60- 90 DPD loans, which had the potential of becoming NPA under the revised RBI regime were given higher provision.
You know, December 2021, you are seeing an 8.3% of Stage 2 coverage. That's been gradually coming down. September, it was at about 7.5%. We are at 7.25 as we speak. Again, this is broadly at a steady state right now. We should operate anywhere around, you know, 6.5%-7% of Stage 2 provision coverage. Stage 3 is at 45% currently. We will again, over here, there is a little bit of overlays that we have built in, we would probably think this number will be anywhere around 35% to, you know, 40%-42% in a steady state scenario.
Chintan, just to reiterate what we said on the credit cost guidance. We have said overall credit cost guidance of 1% to 1.5%. On behalf of that, we have a overall provision as a ECL as 1.66%. I think well, we are well over than our guidance. As the guidance comes down, I think overall provisions as a part of ECL may also come down.
Okay. Okay. sir, you mean that 1%-1.5% is provisions or total ECL provisions as a percentage of assets, that would be around 1.5%. Is that understanding correct?
Sorry, Chintan. Please, can you repeat it?
I think for Q3 we have 1.66%, which is ECL provisions as a percentage of total assets is 1.66. So that number would be around 1.5. Is that correct?
No, no. No, no. No, Chintan. See this 1.66, like I said, it will start normalizing. Just to give you a sense, pre-COVID, this number used to be about 80-90 basis points.
Okay. Yeah, yeah. That I understand. Yeah. Sorry.
What we are saying is 1% to 1.5% is the credit cost hit that will come on to the P&L, you know, both in the form of write-offs and as incremental provisions that we'll build. What comes, you know, onto the, you know, onto the ECL as a percentage of AUM will, I think, you know, gradually start dropping. At this point of time, you know, we are not able to, we don't wanna give a long-term guidance. We just want to see how things pan out. It will start normalizing from 1.66, which is a little bit on the higher side, especially with COVID effects receding and our buckets showing a much better performance as compared to what we saw in the last couple of years.
Sure. This is very helpful. Just one last point on the lending rate hikes. I suppose we would have not taken any lending rate hikes since the RBI reported hike from May. Do we also see any need for it in the coming quarters, even if there is a, for example, 25 or 50 basis point hike from current levels?
No, at this point of time, like we said, you know, our spread, you know, very ironically, has only been going up.
Yeah, yeah.
There is clearly no intent on the side of the company to increase the lending rates to the borrowers. Once we see the peak of the interest rate cycle and our spreads continuing to remain robust as they are today, we will probably look at passing on some of the benefits that we have derived on the borrowing cost to the borrowers. You'll actually see a incremental lending rate coming down, you know, by whatever proportion that's available in the form of benefit that we can pass to the borrowers. Nothing on the anvil for lending rate increase.
Sure. Just one follow-up on this. In terms of our competitors, their lending rates would be relatively similar to our lending rate or on the higher end or on the lower end?
For this product, Chintan, it'll be similar.
Okay. In case if we pass on the lending rates to the borrowers, we will be at a relatively lower rate than our peers in case they don't pass on.
Yes.
Sure. Sure. This is very helpful. Thank you. That's it from my side. Thank you and all the very best.
Thank you.
Thank you. The next question is from the line of Piran Engineer from CLSA. Please go ahead.
Yeah. Hi. Congrats on the quarter. I just have a follow-up question to one of the earlier participant's question. What is the difference between collection vertical and collection support?
Collection vertical is when, you know, right from the officer level till the state head level, you know, we have a separate person who's responsible only for collections. You have an officer collections, manager collections, senior manager collections, supervisor collections, state head collections. This is what we define as a collection vertical. In a collection support, the support ends at the branch level. You have an officer collections, you have a branch manager who does both business and collections. From there above, you know, it's a joint responsibility. You have a supervisor who does both business and collections. You have a state head who is doing both business and collections. Historically, Five Star always had that approach.
Now when we decided to move towards the collection vertical, we don't want to disrupt this arrangement across all the states because it takes time to set up the collection vertical. You have to do it carefully. We are doing it in phases. We have done it for the first two states, big states. We will be doing it in phases over the next 3- 4 quarters across the other states.
If there's a collection branch manager in the collection support function, he reports to the senior branch manager. Is that right? not to like an area collection manager.
Correct. You're right. Yeah.
Got it. Okay. That was it. Thank you.
Thank you. The next question is from the line of Saptarshi Chatterjee from Centrum PE.
Yeah. Good morning, sir. Thank you for the opportunity. My question is on the collection interventions that we do, preferably more on the 30-day DPD-
That helps us to bring down the GNP to close to around 1% level.
Saptarshi, usually the first 30 days, it rests with the branch. The branch teams along with the branch manager, they'll assess if at all there is a delay from the customer as to why there is a delay. They will want to assess if the reason is genuine, because, you know, most of our customers are earn and pay customers. It could be for a genuine reason that the customer has not paid in a particular month, maybe on the due date. You know, if he sort of regularizes before the end of month, it is okay. The branch manager and the officers responsible for that role, they will take a call on what necessary steps needs to be taken.
I think the moment it crosses 30 days, the supervisors, I mentioned earlier in the call that we have about 87 supervisors at this point of time. The supervisors also get into an active role into this. Anything which is above 30, especially within the 31-60 days, the supervisors will ensure that they are more senior people, so they will want to take a call on whether the branch manager is assessing the situation rightly. Is it a problematic customer? Is it a willful defaulter? Or is this a genuine case where you can give a little more time and the customer will come back to regularization? That part happens within the 31-60 days, where the supervisor, if necessary, he will even go and personally visit these customers, or maybe we'll follow up with, on phone with these customers.
He will go for calls along with the branch managers. All this intervention happens within the 31- 60 day, you know, number. Given that a senior person is involved, we will see significant fall right at this bucket. Anything that crosses the, you know, 60 day bucket and moves into the bucket 3, which is 61- 90, not just the supervisor, even the head office is involved, the legal teams are involved. We will be sending centralized notices to the customer, you know, asking him to explain the reason. Maybe a loan recall notice will be sent. We will send some, you know, advisory or cautionary notices to the customer in terms of what happens at the time of a default.
This alongside the head office supervisors, we also have senior people at the head office, which includes the chief business officer, the chief operating officer, deputy, you know, chief business officer. I think all these people, we will also be involved in terms of following up directly with the supervisors and the branch manager, alongside taking the call on where necessary legal action is required. You know, all that put together gives us a good result in terms of arresting any further flows beyond the 90 days, that's we are able to get very good numbers at the. Even if somebody who has slipped into the bucket 3, doesn't automatically go into our NPA. We will be able to arrest significant proportion, 95%, 96% of the proportion in the same bucket and not allow for a forward flow.
Understood, sir. Very helpful. On the, like, number of employees, you have around 6,000, close to 7,000 employees. Can you please give some breakup of, like, you have already told about 1,000 collection officers, but what kind number of business officers, number of branch managers, number of underwriting people, legal people, IT people? If you can give some breakup of this employee base?
Roughly within the business and collections, if you add all of them together, we have about 4,850 officers, 4,850 people, and this forms about 70% of our overall employee base. We have almost 600 people in credit. This is about 8.5%. We have about 700 people in operations. That's about 10% of our overall workforce. We also have people who act as cashiers in branches. That's about close to 500. That's about another 7%. We have legal teams internally. This includes both people who give opinions and who cross-check opinions, and also people who are involved in recovery efforts. We have 80 people, full-time lawyers within Five Star. That's about another 1%, roughly.
The rest is head office and management. Totally put together, we have 6,933 employees as of December.
Great, sir. Thank you. Last question is in terms of your branch structure, can you give some breakup of your branch office? Let's say for a branch of more than five years of vintage, like what kind of office in terms of range and salary is that going to?
Sir, today, you know, when we set up a branch, we have, we put five officers, one branch manager, one cashier, one field credit person and one operations officer. That's a total of nine people. Typically what we see as a salary for, you know, salary both fixed and variable for a field officer is about INR 20,000-INR 25,000. That's like INR 1 lakh to INR 1 lakh and, you know, INR 1.25 lakhs. You have branch manager who will be getting anywhere around INR 40,000-INR 50,000. That's INR 1.75 lakhs. Each of the other people, you know, on a broad basis, the credit, operations support and cashier, the average salary will be about INR 20,000.
you know, you're talking about INR 1.75 lakhs for the business and collections and another about INR 75,000 for the other staff. That's INR two and a half lakhs on the personal cost. Plus, these are all very no-frill branches there. you know, you'll probably have about another INR 10,000 of electricity cost and various other OpEx expenses. It should not cross more than INR 3 lakhs for a normal branch when we start. Depending on the increase in the number of officers, you know, the assistant branch, the multiple branch managers and the senior branch manager for the, for the super branches, the INR 3 lakhs may go anywhere all the way up to, you know, INR 6-7 lakhs.
Understood. Sir, can I squeeze in just one last question?
Yeah.
Yeah. Sir, in terms of number of loan accounts, I think you have close to around 2.7 lakh loan accounts. Do you have any number in mind in terms of target addressable market? Like what kind of numbers you can reach in your existing states, after which you have to break into other states?
Yes. See, roughly today, just about 7% of our portfolio comes from non-South. 93% of the portfolio is within South. I had explained the philosophy that we have consistently followed. You know, it's difficult or we wanna be cautious when it comes to expansion in newer geographies and states. While we will put branches, but it's going to be at a very measured pace as compared to penetration within the existing states that we have. The bulk of expansion that we envisage in the next 2-3 years, at least 80%-85% of the expansion will happen within the southern states.
That said, we will, anyway be putting up branches in central India, and we also have, you know, intentions to enter into one or two neighborhood states, from where we are already present in central India. These will be more measured. In terms of AUM impact, it'll take another 24- 36 months for these states to really matter and come to a reasonable level. The first, 2- 3 years we'll be cautiously expanding the newer geographies. Bulk will come in from the existing regions.
Satish, just to add, I think while we don't have a state-wise breakup of the target addressable market, one of the studies that we had put in our prospectus, which was done by CRISIL, was the target addressable market across the country. This is exactly the profile of borrowers that we are catering to. You know, where people have a property, they are in the service-oriented businesses, they don't have lending from formal institutions. It's INR 22 trillion. That's like INR 22 lakh crores. You know, institutions like us all put together would not even have scratched the surface bit. I think in terms of the market opportunity it is very high.
A lot of this market opportunity is also sort of concentrated in states like South India, like Tamil Nadu, Andhra, Telangana, Rajasthan, you know, Madhya Pradesh, Maharashtra and all that. It's a very huge market out there in terms of opportunity.
Understood, sir. Very, very helpful. Thank you so much.
Thank you. The next question is from the line of Chandra from Fidelity. Please go ahead.
Hi. Sorry, just a follow-up. Obviously, the last couple of years as you're adding this collection vertical, I've seen the employee expense number going up pretty significantly. I would think that some of this will be basically just filling up this entire function and here on it's a function of case growth. Is it just reasonable to assume that once you get to. I was looking at, like, your case numbers, like, a couple of years back, and it seems that you need to. I think once you hit 1,200 or 1,300 is where you sort of, beyond which you sort of grow with the increase in the number of cases. Just trying to understand just directionally how should we start thinking of employee OpEx after you get to your target.
Yeah, Chandra, I think that was one of your follow-up earlier question, what is the guidance going forward? See, for last first 20 years, from 2002 to 2022, we didn't have any collection vertical nor the collection support. As Ranga said, the officer who sources the file has to be the in-charge person for collection too. That worked very well. During COVID 1 and COVID 2, if you recall the presentations, our DPDs were little lower because of the customers got impacted on their cash flows. Not in a big way from 90+, but if you see our current and 30+, it has bit spiked up. To give a immediate effect to it, we thought we will incorporate two things.
One is the collection support and a collection vertical. Having said that, we don't want to give at the day one of file getting disbursed. We wanted after 24 months of tenure boarding getting completed. As Ranga said, putting a vertical in a state is not an easy joke. It's not a cakewalk. You have to be very, very careful selecting the people, giving those accounts to their hands and see how it works. That is where Tamil Nadu got implemented and Telangana subsequently got implemented. Whereas the rest of the states we started with a collection support. Collection support is much easier to put in a branch.
Suppose, if a branch has 1,000 accounts, we can give one branch manager and two officers to start with, and as the number of accounts goes up, the number of officers can be increased. This is the thought process. Having seen this in last 4, 5 quarters, if you see, recollect, our numbers are bettering quarter-on-quarter. In fact, next quarter our numbers will be further better than what we see. Now we are thinking that yes, on a guidance basis, per branch if it matures beyond 24 months, we will give a collection support or a vertical will be three to four people in that branch.
It will not be as big number as you see now because it's the time of correcting your DPDs, putting things back in order. We have invested a lot in that. This team, I'm very confident we can handle more and more accounts that flows into 24 months tenure. Going forward, I think number of people handling collection will be moderated going forward.
Understood. Very clear. Thank you very much.
Thank you. The next question is from the line of Pranav from Rare Enterprises. Please go ahead.
We can go to the next question.
As there is no response, we'll move to the next question, which is from the line of Harshil Shah from Envision Capital. Please go ahead.
Yes, sir. Thank you for taking my question. Our loans are fully collateralized. Could you give some color on the kind of the collateral that we collect and LTV on the same?
Harshil, bulk of the collateral that we take is a self-occupied residential property, and we don't take kutcha houses. These are all pucca houses, backed by a clear document.
We'll take two legal opinions on this document, one external, one internal, and we'll also go and register our mortgage with the state government, registration authority. You can very clearly see Five Star's ownership of mortgage across each of those properties that we do. 95% is SORP. The balance 5% may be about commercial properties, you know, which are shops owned by the borrowers, which gets mortgaged to us. The origination LTVs will be about largely between 40%-50% is the origination LTV. The portfolio LTV as of Q3 will be about 37%.
Okay. Who would be our primary customers? I'm sorry, our primary competitors? Would it be fintechs or the unorganized money lenders? If you could just, please ask for some details on that, some information.
The primary competitors are money lenders across each of the markets that we serve. Like I covered earlier, we are largely between tier three and tier six now. Primary, you know, focus across this segment is disrupting the money lending segment. That is where most of these people have been financed so far. When they see an organized lender, especially, you know, a company with track record of more than 35 years, registered with RBI and then having a good brand name coming there, we see a lot of people naturally preferring us over an unorganized money lender for better practices, you know, for easier loan process, and for the safety of the documents that they sort of give it to us as a part of the mortgage.
This apart, of course, there are several other people who are also targeting this segment. Few other NBFCs, few other small finance banks. I would say that, you know, as compared with most other players, we are very significantly focused only on this segment, which is a small business loan segment, and we have no other product and no other diversions beyond this.
Okay. Thank you very much.
Thank you. The next question is from the line of Khushboo Rai from Moneycontrol. Please go ahead.
Yes, sir. Good morning, sir, and congratulations on the good sets of number. Just one question. Sir, what do you think regarding the sustainability of the margins? You know, the margins has been in the range of around 15%-18% over the last couple of years. What are the reasons and how sustainable is this level?
Khushboo, I think we already gave you a sort of guidance. Our margins are a little higher, you know, because of lower leverage that we have. The more portfolio gets funded by debt, there will be compression in the margins. What we look at, you know, more closely is the spread, because that reflects the ability of the company to raise debt at the optimal cost. The margins is actually a function of leverage thereafter. Our belief is that in a steady state scenario, we should be operating at a spread of 12%-13% and a margin of, you know, 14%-15% as we go forward. There will be a constriction of about 2% 2.5% in the margins over the next few years.
Given that the leverage will increase, you will also see this translating into higher return on equity to the shareholders.
Okay. Thank you, sir.
Thank you.
With this, we complete this circle. Maruk, anything?
I would now like to hand the conference over to the management for any closing comments.
Thank you all. Thank you for listening us very patiently about our new business model, niche business model that we have created and the follow-up on results. Thank you. As I said, March quarter will be also better than this quarter. Hoping in very optimism way. See you soon on the Q4 conference call. Thank you.
Thank you. On behalf of Five-Star Business Finance Limited, that concludes this conference. Thanks for joining us and you may now disconnect your lines.