Ladies and gentlemen, good day and welcome to Five-Star Business Finance Limited Q4 and FY 2025 Earnings Conference call, hosted by Motilal Oswal Financial Services Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijit Tibrewal from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.
Yeah, thank you, Manav. Good morning, everyone. I am Abhijit Tibrewal from Motilal Oswal, and it is our pleasure to welcome you all to this earnings call. Thank you very much for joining us for the Five-Star Business Finance call to discuss their Q4 FY 2025 earnings. To discuss the company's earnings, I am pleased to welcome Mr. Lakshmipathy Deenadayalan, Chairman and Managing Director, Mr. Rangarajan Krishnan, Joint Managing Director and CEO, Mr. Srikanth Gopalakrishnan, Joint Managing Director and CFO. On behalf of Motilal Oswal, we thank the senior management of Five-Star for giving us this opportunity to host you today. I now invite Mr. Pathy for his opening remarks. With that, over to you, sir.
Yeah, thank you, Abhijit. Good morning, everyone, and welcome everyone to Q4 and for the full year earnings call. I am happy to say we have done a commendable performance for the full year and in the last quarter. As I said in my last earnings call, financial year 2025 was a challenging year, both from business and regulatory environments. We at Five-Star had forecast it well and done all the needed precautions. Our proactive decisions on growth and lowering the yields have helped us to navigate the tough times. Our focus was on quality growth rather than just growth. With these opening remarks, let me take you through the operational performance of Five-Star. We have opened 19 branches in Q4, and our total count stands at 748 branches as of 31st March. For the full year, we have grown from INR 9,641 Crores to INR 11,877 Crores AUM at 23.20%.
If the disruption in Karnataka from January to March was not there, we would have done our guidance of 25% growth, which I said in last earnings call. Disbursement grew 9% year-on-year and 55% quarter-on-quarter, which indicates the business environment is better now. We are back with quality growth. On collections front, our unique collections metric was at 96.2% in Q4 versus 96.7% in Q3, and collection efficiency was at 97.7% in Q4 versus 98% in Q3. There was a small dip due to disruption in collections in Karnataka from January to March. On NPA side, the gross stage three assets have inched up from 1.62% to 1.97% in Q4. Again, Karnataka has played a part in growing this NPA from 1.62 to 1.79. Having said that, I am very confident that this will get stabilized in this next quarter.
I can say that we have one of the good asset quality for the profile of customers whom we lend an average ticket size of between INR 3 lakh-INR 5 lakh. We stand as one of the best asset quality lenders in the entire country. On the cost of borrowing, our incremental cost of funds have dropped to 9.29% from 9.56%, nearly 27 b ps drop. This shows the confidence that the lender has on Five-Star, and the rates are starting to come down. The cost of borrowing on the book is at 9.63%, same as last quarter. On profitability, I'm again happy to announce we have touched four-digit profit after tax for the first time in the history of Five-Star. For the full year, we have done INR 1,073 crore PAT against INR 836 crore PAT for the financial year 2024, registering a growth of 28%.
To commemorate this achievement, the board also recommended a dividend of INR 2 per share, which works out to 200% on face value and translating to a dividend payout of 5.5%, which is roughly around INR 60 crore on the total profitability of INR 1,070 crore. I would also like to assure that this would not have any major impact on our capital adequacy and our need for capital in the future. With this, let me close my initial remarks and hand it over to Srikanth for getting into more details. Thank you.
Very good morning to all of you. As Mr. Pathy said, I think given the headwinds that we have been witnessing, our results are quite commendable. We have been seeing headwinds both in the form of over-leverage and also the disruption in Karnataka, especially in the last quarter. Given this context, and obviously, the results will need to be looked at from this context, the results are definitely healthy and commendable. To get into some details, as of March 25, we had an active loan base of more than INR 4.5 lakh. This represents a growth of 19% on a year-on-year basis in the borrower count. We ended March 25 with a branch count of 748 branches.
We have added about 228 branches over the last 12 months, but this is largely due to the split branch strategy that we had undertaken, where bigger branches were split into smaller ones or newer branches from a risk management perspective. Disbursements saw a growth of 9% year-on-year and 55% on a QoQ basis. We consciously slowed down disbursements in Q4 to get to our AUM guidance of 25%. This quarter, we are back on track on disbursements. The one quarter has not really had any impact on our disbursements. Our ability to pull back the disbursements has been demonstrated in the last quarter. AUM grew by about 23% on a year-on-year basis. If not for the Karnataka disruption, we would have definitely achieved our guidance. Again, like Mr.
Pathy said, I think we are an institution that focuses on quality growth and not growing for the sake of growth. We ended March 2025 with an AUM of slightly short of INR 12,000 crore. We ended with INR 11,877 crore. From a yields perspective, our yields gradually keep coming down. As you would recall, we had dropped our lending rates by about 200 basis points for all incremental loans from November, which will have an impact on the yield. For the quarter, the yield dropped to 23.7%. The spread remained healthy at about 14.1%. There was no movement in the cost of funds because most of the funds that we took, we had taken in the last week of March. Despite the incremental borrowing coming at a lower cost, this has not reflected on the book yet.
The good part is it will start reflecting on the book, resulting in better spreads. The NIM also dropped because of yield drop coupled with some increase in leverage. So the NIM dropped to 16.84% as compared to 17.19%. The cost to income, despite the headwinds that we are seeing, despite the credit costs that you see, our cost to income, inclusive of credit cost, still stands at less than 37%. It is at 36.63%, which is well within our guidance of 35%-37%. It had inched up a little bit because typically in Q4, we also take some provisions for incentives for certain conferences that we will conduct for our employees. Given this, typically the Q4 expenses will tend to be slightly elevated. This has resulted in an ROA of 8.04% for the current quarter. ROE continues to remain healthy at 18.36%.
From a borrowing perspective, we have about 47 lenders who have lent to us. What we had committed to you about four quarters back, that the company has been looking at diversifying its borrowing base, I think is clearly showing very strong traction. We had dropped our borrowing from banks. The proportion of borrowing from banks has come down from almost close to 80% to 63% as of March 2025. We had about 63% of borrowings from banks. In the last quarter, we had received incremental debt of about INR 700 crore. We availed about INR 1,100 crore primarily on account of some older sanctions that we had. This came in at an all-inclusive cost of 9.29%, which is 27 basis points lower than the incremental cost of incremental debt that we had in Q3. We continue to carry a good amount of liquidity on our balance sheet.
We had a liquidity buffer of close to INR 2,300 crores and unavailed sanction lines of INR 100 crores as of March 2025. The collection efficiency did drop a little bit, but if you look at it from a contextual perspective, the drop is not very material. There was a 30 basis points drop in overall collection efficiency and about 0.5% drop in our unique customer collection efficiency. There has been a slight increase in NPA from 1.62% to 1.79% on a quarter-on-quarter basis. Again, a slight inch up in the stage two assets as well. What is also important to note is that we are carrying a healthy PCR on our overall book as well as on our stage three assets. Our stage three PCR remains at 51%, and our overall PCR remains at 1.63%.
Given the situation, we'll continue to create appropriate levels of provisions on our books that can sort of insulate the company from any shocks in the future. All of this resulted in a PAT of INR 279 crore, representing an 18% year-on-year increase. For the full year, like Mr. Pathy said, we have crossed a PAT of INR 1,000 crore, which is a really memorable achievement and an extraordinary achievement in the life of any company. We had a net worth of over INR 6,300 crore as of March. I think we are very healthy from a capital perspective. There has been a little bit of asset quality impact, but if you look at it from a contextual perspective, I think we have delivered quite healthy results.
What gives us confidence is the easing of interest rates, which will definitely mean lower cost of funds, the tax stops that have been given for the middle-income people, which means there will be more money in the hands of people for consumption as well as investment, which means our borrowers' businesses will go up. I think this definitely should start; we should start seeing the demand picking up, which will result in a healthy growth, good asset quality, and a strong profitability for the company in the quarters to come. With this, we will end our remarks. Happy to take any questions.
Thank you very much sir. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your touchstone phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets only while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. We have our first question from the line of Mahrukh Adajania from Nuvama Wealth. Please go ahead.
Yeah, hi, good morning. I had a couple of questions. Firstly, you did mention the impact of Karnataka on collection efficiency. Is that the only reason why your X bucket and even your total collection efficiency is lower QoQ ? Is that the only reason, and how do we look at it going ahead, especially after the Tamil Nadu Ordinance? That is my first question, and then I have a few more questions.
Yeah, good morning, Mahrukh. Yes, you're right. The impact of Karnataka Ordinance was completely unexpected. No one was prepared for that. Till mid of January, things were as normal. By the end of January, the draft ordinance came into picture, and the ordinance was introduced in the February month that had an impact till the 10th or 15th of March. We have bounced back very well in the month of March itself, and this month we are bouncing back better. That is one major reason. The other general reason is the over-leverage crisis, which we have been talking about for the last two quarters, is still prevailing. It's not that completely they have gone, but I'm very happy to say that small-ticket lenders, both from fintech and microfinance, they have stopped substantial lending to this segment. The threat of more over-leverage is gone now.
That's why if you see our disbursement and business, we're back as usual. I will say 2/3 contributed from Karnataka and 1/3 contributed in general.
Okay, so will that 1/3 ease anytime soon, or it'll take time only?
As I mentioned in last earnings call, let me recollect what I have said is I think the guardrails what microfinance and other small lenders have put in place has to come into act. I think I have heard something last week saying that that has deferred to June or July or whatever it is. I think that is the first indication that the over-leverage is completely stopped and more leverage comes down gradually. I'm expecting at least from the June month or the July quarter, the small-ticket lenders, unsecured small-ticket lenders, they follow the guardrails what the self-regulated organizations have been put in place. I think that's the first indication I'll be looking very keenly. Second, I think since I have been saying that even though we lend between INR 3 lakh-INR 5 lakh ticket size, we are fully secured.
The behavioral aspect of customers remains completely different when they handle secured lenders. I think we will be navigating this crisis with the healthy collections that have been shown quarterly and monthly. This will be prevailing for at least the next two quarters, is my guess.
Okay, got it. Just in terms of your guidance, now AUM growth will settle in the 25% range, or do you see it picking up to 30% maybe in two years because the stride still remains low, right? How do you view your?
This year also, I think we are giving a guidance of 25% what we gave last year after October till things get settled. We have to see how the new Tamil Nadu Ordinance, which has passed, but we are well prepared in Tamil Nadu. It's the home state for Five-Star. We can handle any kind of situations here. Let me tell till today morning, the situations are completely under control. There's nothing that whatever we have seen in Karnataka, nothing has happened till now. This is a state of bigger banks and bigger NBFCs. I think state government will be very clear. As I read the initial draft bill, the regulated entities like banks and NBFCs are completely excluded from this ordinance. That's what the bill said. We have to deep dive into the bill and see what are the implications.
There will be some kind of disruptions, but not like what we've seen in Karnataka. That's the confident statement that I can give.
Okay, sir. I have the last question. How do you look at cost of funds from here on, as in that when we build out for the future for FY 2026, do we build and how much lower?
Mahrukh, I think what is currently coming out is, see, especially the first triple rate cut that happened, there has not been much of pass-on by the banks through lower MCLRs. After the second rate cut, we have seen banks already starting to drop their SAR rates, and deposit rates are also going down, which is a logical point for the MCLR drops to follow. The other point is also that over the last few days, the expectation of the market in terms of interest rate drop during this year has gone up quite a bit. Originally, we were all thinking 50-75 basis points, but today I think people are talking a lot higher. Our belief is that on an incremental basis, we should at least see 25-30 basis points of benefit coming through to us.
We also have about 65% of our book, which is variable grade, out of which roughly it is 50/50. MCLR link will be about 50%, and EBR link will be about 50%. Even these should start getting, we should start getting benefits on reduction because of MCLR drops. My sense is I think we should see a good reduction in cost of funds both on the incremental debt as well as on the book in the next year to come. What is that proportion at this point of time? We will just wait for banks to come down with their thoughts on the MCLR, but I think it should be a fairly sizable number is our hope and guess.
Okay, perfect. Thank you so much.
Thank you. We have our next question from the line of Raghav Garg from Ambit Capital. Please go ahead.
Hi, good morning, and thanks for the opportunity. Firstly, I just wanted to understand your thought process on the ECL provisioning. Stage one and two ECL provisions have come down despite stress arising. I just wanted to understand that, wouldn't it be prudent to provide more or create some overlays in such a scenario?
Raghav, we are creating a good amount of overlays. The only point is if you really look at our PD and LGD rates, these are fairly low. In fact, our LGD on one of our biggest segments will be sub 20%. When you have a sub 20% LGD, that means you are effectively going to be creating only 20% provision on your stage three assets, right? If you look at our stage three, we are carrying 51% of provision. Obviously, we want to be conservative, and there is also some bit of input from the Reserve Bank of India on this, where they are sort of expecting the NBFCs to keep their provisions on stage three at around 50%. A lot of our overlays actually go towards the stage three assets, which means you can't keep creating too much overlays on your stage two as well.
This quarter, we have also created a good amount of overlays on the stage two assets, where, let us say, a zero DPD customer at the beginning of the quarter did not pay any installment during that particular quarter. We have created overlay on such customers. There is a small portion of such customers because of the over-leverage and Karnataka disruption we have seen during this quarter. There we have created overlays. Given the low PD and low LGD, there is a little bit of a constraint in terms of creating too much overlays on stage one and two. See, stage three is relatively easier because if there is a deep delinquent account, we can just overrule the LGD and create a 100% LGD on that. That becomes a little difficult to justify when it is a stage two account.
In a stage two account, the proportion is also high. You start creating an overlay. It adds to too much of provision. See, our belief is a provision of 1.5%-1.7% is a very strong provision for a secured loan portfolio like ours. Now, how you distribute this 1.5%-1.7% is what the company takes a call in concerns with the board and the statutory auditors. There will be some ups and downs that you'll probably see in stage one or stage two. I think this is a consistent messaging that we've been giving for the last few quarters. In fact, last quarter also, I said that we will be more focused on the overall provision coverage rather than nitpicking too much on what should be the stage one, stage two, and stage three. Stage three is a little bit regulatorily driven.
We'll probably maintain around 50% on stage three. The balance will be given to stage one and two.
Understood. That's fairly clear. The other question is, why has the ticket size gone up this quarter? Is that entirely an impact of load disbursement in Karnataka, and is that it, or there's something else to it? Because I think in the last couple of quarters, you mentioned that you'll try to contain your ticket size, right? In that context, I just wanted to understand this a bit better.
Raghav, the ticket size going up is a very conscious strategy. We have been guiding over the last few quarters that in general, if you look at it, Five-Star ticket size will be trending more towards INR 4 lakh-INR 5 lakh rather than being around 3 lakh . Pre-COVID, we were about 3.5 lakh , and we were guiding you that the ticket size will grow at least at an inflationary rate year-on-year. More and more, I think the sweet spot for Five-Star seems to be between INR 5 lakh -INR 10 lakh rather than consciously focusing on very, very small tickets instead of sub 3 lakh . Sub INR 3 lakh, also even this over-leverage crisis exposed very clearly that people at sub INR 3 lakh are the people and the vulnerable segments which got most affected because of the over-leverage.
There is a conscious strategy, at least in terms of incremental disbursements, can we move more and more towards a little bit higher ticket sizes and thereby get the overall average ticket sizes up? This is something that you will see trending in Five-Star even in the future. I do not think we are changing our customer segments because even earlier we were present in this segment, but just that the importance and the focus that we are giving to this ticket size segment is a little bit higher than what we used to do earlier. I think the average ticket sizes will tend to move up and go closer towards INR 4.5 lakh-INR 5 lakh as we see in the next few quarters.
Understood. No, the only reason I'm asking is because there was a very specifically you had stated that you would try to control the ticket sizes until the situation is over. Should we understand that things are improving at a faster pace than what you had expected initially, and hence the call on increasing the ticket size?
Raghav, what Ranga said is the profile of customers remains the same, but we have started to pick the higher category of profile of customers in the last few months. If you see the addition of number of customers or loans to Five-Star stands at around 4% in the last quarter, whereas the growth is at 6.25% in the last quarter. Generally, if you see earlier quarters, both the numbers will go hand in hand. In this quarter, you see the addition of new customers to Five-Star stands around 4%-4.5%, whereas the growth is around 6.25%. That shows the ticket size is slowly inching up to the better profile customers in the segment.
It is not that what we said in the last two quarters, increasing the ticket size of the same profile of customers to whom we have been dealing with, that we have still contained it, but we are picking the best, better customers in the profile of the category where we lend. We will be within the range bound of INR 3 lakh-INR 5 lakh. That is the sweetest spot of Five-Star, where you see lesser competition, and really it is a challenging underwriting and collections that has to be taken part. There is no change in that.
Raghav, just one point to add in this is as we reduce the interest rates, it is also helping us be that much more appealing towards this slightly higher ticket size segments and go focus towards them.
A combination of all this is helping the ticket size improve a little bit as compared to the previous quarters.
Understood. Okay, thanks. Do I have, can I ask one more question, please?
Yes, Raghav.
Yeah. Any thoughts on pricing? This is a question that we keep getting very frequently. Any thoughts on reducing it further? Will you keep it here? I think not so much from a pricing point of view, maybe from a spreads point of view. What are your thoughts? I think right now you are lending at 22%, right? Any thoughts of reducing it further?
Raghav, in my initial comments, I said proactively we have taken a call two quarters ago reducing the rate of interest. I think that stands good for Five-Star. I think we have brought down on a sizable and good from a lending perspective. I do not see we will be doing it, but as Srikanth said, we will be expecting the bank borrowing to come down in this quarter. As I said, comparing to last quarter itself, close to 25 bps have come down, incremental borrowing. Those incremental benefits what we get from banks, I think we and board will take a joint call saying that how much it can be passed on to the new customers.
Thank you. That's all.
Thank you. We have our next question from the line of Adityap al Singh from MSA Capital Partners. Please go ahead.
Hi. Hello.
Yeah, we can hear you. Please go ahead.
Thank you so much. Great performance. Congratulations to the team. Quick couple of questions. When we look at the deterioration of the collection efficiency, you highlighted in your commentary that some part of it was because of the Karnataka ordinance and some part of it was because of cash flow problems or over-leveraging problems in some part of our customer base. If I were to say, is it largely the 70 basis points drop in our collection efficiency QoQ largely because of the Karnataka issue, or is there some fundamental underlying problem with the cash flows of our customers?
Yeah, Aditya, I recall what I said to the earlier questions is the drop in collection efficiency from 98% to 97.7%. It is a drop of 0.3%, just 0.3% quarter-on-quarter. that is predominantly due to Karnataka's two and a half months effect. It started in January, and now the normalcy is coming back strongly, but in March month, we bounced back very well. That is the two-third impact, and the balance impact is that in general, the stress in the system still prevails. It is not increasing, but still it prevails. Gradually, you'll see some kind of collection dips here and there in some pockets from certain customers. Both put together only that 0.3% drop you see in collection efficiency comparing to last quarter. That general trend, I think, will still remain in the next two quarters, not the Karnataka one.
That is almost we are able to settle it very well. The general trend in the system, especially in the middle and lower middle class profile of customers, will be there for the next two quarters is my guess.
Understood. Just hopping on the asset quality point again, if I look at all the asset quality indicators, be it stage two, be it PAR 30 +, be it a GNPA with one year lag and two year lag, there has been a last four consecutive quarters, we've seen it deteriorating. How much would you say that this is because of the problem in the microfinance and unsecured loan part, or I would say that the control that has happened, that is that the guardians that have come in because of which the growth has slowed down in these pockets?
Aditya, our guidance, if you recollect our guidance for past many years, and when we become listed, we said our gross NPA will be sub 2% because please understand, we are not lending to the best of best profiles of this country. We are lending to middle and lower middle class people where their underwriting is challenging and was challenging. As I said, even our asset quality has inched up to 1.79%, still I feel and I see, which is one of the best asset quality to the segment of customers whom we lend. Our guidance will be our stage three assets will be sub 2%. That is where our guidance always stands. Having said that, the overall credit cost, our guidance will be sub 1%. This is where the range that we like to operate.
As someone indicated, our lending rate is at 22%, and our return on assets are at 7%-8%. Keeping that in mind, asset quality at 1.77% is a commendable position in the market.
Understood. Just last two questions. When I look at the branches, in Q1, that is FY 2025 Q1, we had added 27 branches. What was the split branches in that number? For FY 2026, how many split branches are yet to be completed?
Aditya, just on an overall basis, if you look at, we are close to about 750 branches. Now, out of the 750 branches, we'll have roughly about 150 branches which are split branches. Now, majority of the branches which got opened last year, last year we opened 228 branches, out of which 150 branches are split. We had explained this in the past, and I'm just reconfirming that.
Just one data point.
Yeah, I'm just relating the strategy again. The first part of what we wanted to do as part of the split strategy is any branch which has more than 1,500 customers, we wanted to focus on them and then split it. That part of the split is largely over. Now, we have a few more branches between 1,000 customers and 1,500 customers. It's a split that will continue to happen this year as well. Definitely, it may not be as high as what happened last year. In general, we are good to open about close to 75-100 branches every year, including the split branch. I think we will stick to that same guidance as far as this year is also concerned.
Understood. This, in the balance sheet, there is a capital working together 60 to grow? Another last question would be that a new state has been added. If you can just help me understand these last two points.
See, the capital asset is a building that we had purchased for construction of head office premises. That will come up over the next few years because this is a place that we have purchased. You need to demolish the existing building and construct. That is the capital work in progress that you're seeing there. I did not understand. We have added the Gujarat state. What is your question?
You wanted to understand which state? We have opened Gujarat. We have the first branch there in Ahmedabad.
Understood. Thank you so much. That's all from my side.
Yeah, thank you.
Thank you. We have our next question from the line of Renish from ICICI . Please go ahead.
Yeah, hi sir. Good morning. I'm the congressman Gujarat member. Just two things. One on the sort of clarification side, I will take that first. In terms of its size and all, of course, you did mention that INR 3 lakh-INR 5 lakh will remain a sweet spot for us given the kind of yield and maybe the great cost. On the suggested basis, obviously, this will be a profit driver. When we are saying that incrementally, we'll move towards better quality and high ticket size in the same customer segment to INR 5 lakh-INR 10 lakh. How much do you think in terms of AUM mix changing over the next two to three years, given there is a bit of a change in strategy?
Obviously, INR 5 lakh-INR 10 lakh ticket size segment is more crowded than sub INR 5 lakh ticket size, especially in TN where even large NBFCs are also operating in the same segment at 60%-70% yield. How much do you think in terms of AUM mix changing and also will this have any corresponding impact on the yields which are at 22% currently?
Renish, let me go a little deeper into it. As we stand today, the ticket size of more than INR 10 lakh constitutes close to 5% of our overall book. 5% of our overall book. The majority of our book stands at below INR 5 lakh. Some good amount of book stands at below INR 3 lakh. What we are trying to do is, in the below INR 3 lakh segment, we are trying to be a little careful in these times and start focusing on the ticket size around INR 3 lakh-INR 5 lakh more. That is the first scenario. That is why you see the ticket size has gone up a little, INR 50,000, quarter-on-quarter. Having said that, what Ranga mentioned was we will also be focusing on above INR 10 lakh cases, but not in a big way.
Maybe the overall above INR 10 lakh, which stands at 5% now, can go up to 7%-8% in the next one year or two years.
Renish, just want to add, I think more than the focus that we give on greater than INR 10 lakh, the focus will be a little more on INR 5 lakh-INR 10 lakh. What you're seeing is about 13% of INR 5 lakh-INR 10 lakh today. That can even, so what is sub INR 3 lakh today, which is roughly at about 32%. If you are able to move about 5%-10% of our book from less than INR 3 lakh proportion to INR 5 lakh-INR 10 lakh, the way we probably look at it is less than INR 3 lakh will be more around, let's say, 20% level. More than INR 3 lakh or INR 3 lakh-INR 10 lakh will be the large portion of our book. Today, you have one third of our book in less than INR 3 lakh.
I think we want to cut that to maybe around 20% or 25% in the near future.
Got it. Got it. Got it.
On the pricing side also, as we said, the yields drop what we did four-five months back. That will also help us to get into a better ticket size segment. More focus will be on INR 3 lakh-INR 5 lakh segment. That will be the predominant book of Five-Star.
Got it. Got it. Basically, we are not changing the strategy. Maybe given the current time wherein below 3 lakh is appearing more vulnerable, we are sort of changing that mix by 10% between INR 3 lakh-INR 5 lakh and INR 5 lakh-INR 10 lakh. I mean, that's the paradigm, right?
Yes. Yes. Yes. Yes.
Okay. Okay. Got it. Also, secondly, on this Tamil Nadu issue, I am just sort of drawing lines from the Karnataka and how it impacted our book, right? Given only 6% exposure in Karnataka, we saw at least a quarter facing a problem. Obviously, the T N issue will be far lesser in terms of impact versus Karnataka, but at the same time, we are almost 30% in TN . How are you confident that Q1, Q2 will be at par with your assumption in terms of credit cost and asset quality? Because when you are saying that we will be able to maintain credit cost at 1%, it essentially means that we are actually not factoring any of the issue from TN . How should one read this?
See, as I said in earlier question, Karnataka was completely taken by surprise. That circumstance is not prevailing in Tamil Nadu as we speak now. None of our employees from Tamil Nadu branches have reached out to head office talking about this bill. That means it is very clearly contained, and people have understood that banks and NBFCs are excluded from this. Having said that, there will be some kind of pressure, a little bit of disturbance at the ground level. We can't say nothing can happen. For that, we have to wait and see. Maybe 15-20 days from now can emerge as a clearer picture in Tamil Nadu rather than today. My hope and confidence is Tamil Nadu is the home of many big lenders, both banks and non-banks, right?
Right. Right.
We are well equipped here, and the connectivity, branch setup, people, all are well equipped to handle any circumstance. Being a hometown, that gives me a confidence that we can handle it far, far better than Karnataka.
Okay. Got it. Just maybe follow up on that. Maybe asset quality, collection, etc., might not impact and sort of went out as per expectation. Just the thought that, I mean, as a cautious stance, are we thinking to recalibrate this assessment in TN at least for Q1?
As I speak now, we have not taken any decision on lowering the disbursement. The disbursement will be as usual in Q1 for Tamil Nadu. As I said, 15-20 days will give us a more clearer picture. If there is a need for that, definitely we'll be proactive on that.
Got it. Got it. Okay. Okay. Sir, this is very, very helpful, sir. Thank you so much for giving the answers. Thank you.
Thank you. Thank you.
Thank you. We have our next question from the line of Viral Shah from IIFL Capital. Please go ahead.
Yeah, hi. Thank you, sir, for the opportunity. First of all, congrats on, I would say, good set of results given the current environment that we are in. Sir, I had a few questions. Just first, one follow-up to your comment with regards to yields, basically you taking into account whenever the banks pass on their benefit. Correct me if I'm wrong, but you had actually mentioned that you had proactively passed on this 200 bps of rate cut ahead of the, say, anticipated reduction. With this reduction in cost of funds coming through, do we further anticipate, I would say, incremental yield lending rate cut over the next, I would say, 6-12 months?
Viral, I think what we meant as proactive was driven by us. If you really look at our cost of funds, let's say, two, three years back and where we were when we dropped our yields, it had actually come down from about 11 .5% to 9 .5% . There was a benefit that was required to be passed on to the borrowers. The only point was, given the uncertain times, interest rates were moving up, or rather they were not cooling off, you were seeing risk weights having an impact on possible capital and interest rates. Given the uncertain times, we had actually been pushing. When we were seeing that the regulator might step in or is getting a little uncomfortable with the kind of rate that entire NBFC industry was operating at, we proactively dropped the rates.
That is what we meant by proactive. We will definitely keep watching the space as and when we get a benefit that we believe is longstanding. See, in this segment, you cannot keep dropping the rates and then pushing up the rates on a quarterly basis or on a half-yearly basis. Once you drop the rates, it has to be there for a long period of time. When we believe that the benefit in cost of funds is longstanding and permanent for us, definitely on a proactive basis, we will want to pass it on to the customers. When we mean by proactive, it is not like at the insistence of somebody. We want to do it on our own. That is the intent.
At this point of time, again, just giving you a little more clarity, we believe that the rates that we are operating at, and not just the interest rate, Viral, it's including the processing fees and others, what you call as the portfolio rate or the average annual percentage rate, APR. I think from what we understand is we are at a range which is comfortable to the regulator also. There is no additional action that is required from the company's end at this point of time. We will keep evaluating the spreads. If we see that the cost of funds is dropping materially and in a longstanding manner, definitely we'll take the call to pass on that benefit. Our thought at this point of time is that maybe this may not be required for the next three to four quarters.
Got it. This is very clear. Just one more follow-up on that. Now that the regulator has again reverted the risk weight on bank lending to NBFCs, do you anticipate and want to say again go towards bank borrowings given the advantage that it has being a floating rate book plus the relative ease of getting it?
The point is valid. In fact, we had a fairly detailed discussion internally on this yesterday at our board meeting as well. Given that the regulator may not be too fussed about diversification, obviously, internally, from a risk management perspective, we want to keep a diversified borrowing book. It is not like we are just going to go back to 80% of bank borrowing again. Yes, given that the regulator may not be too pushy and the fact that it is a declining interest rate scenario, which means bank borrowings will come in a lot cheaper, the risk weight has not really had an impact on us. Even when the risk weights increased, we were able to push back any increases that the banks wanted. I do not think that had any major impact. With the interest rate cycle turning, definitely bank borrowings will be a lot cheaper.
If you look at Q4, where we had borrowed, we had borrowed, we had taken a lot of bank sanctions out of that, which is why you're seeing a 27 bps drop in the cost of incremental debt. Given that perspective, I think we will want to be a little more biased in favor of banks. Whether 63% proportion of banks will continue to keep dropping, it may not. Maybe we would like to operate at a 65%-70% bank proportion, which will also give us a good benefit on the cost of funds.
Got it, Srikanth. Two more questions, I would say, for Mr. Pathy or Ranga. If you can see, if we just take a step back from all of this crisis, maybe it will take another two quarters or four quarters, whatever it is. Does this structurally increase, I would say, the TAM and the ability for us to grow given the, I would say, relative pullback in the credit availability for those bottom of the pyramid customers? Are you seeing some of that happening already, given that we are now probably now 12 months into the cycle? Just from a medium-term perspective, any color you can give on that?
We are very optimistic on total addressable market. There is no change on that perspective. If you see the lower middle-class people where the leverage has gone up, I think fairly for the last six months, the extra leverage is not building up. To that extent, the credit which was flowing very freely to them, it was completely pulled back, especially by the small ticket unsecured lenders, fintechs, and microfinance. We are able to see that from our new applications which we are receiving on a quarterly basis. That is a very encouraging signal. That is what I said. In Q4, the business environment is looking better, and this better will become better and better if you move quarter-on-quarter. Having said that, the guardrails that were being brought in by the MFI have to be implemented.
If that gets implemented, two things will be positive for Five-Star. One is the credit demand will be high because usually what they were getting from microfinance, the supply is now coming down. That brings in a good quality of customers to pick and choose from even below INR 3 lakh segment. That is one positive. Second thing is the over-leverage is contained. The cash flows remain healthy in the rural market. Our collections will be stabilized.
Got it. On your comment, sir, with regards to the MFI guardrails getting implemented, has the three-lender cap not been implemented? Because our sense was that it has already gone into effect from 1st of April.
No, I think as per my information, what I have been received a few days back, it's been pushed to June or July. I am not into that point because you have to check with the microfinance organizations.
Fair enough, sir. Sir, last, if you can just give some updates on our medium-term strategy to say getting into another product, say, affordable housing, what is the thought process over there, or is it too early right now to discuss that?
I will not say it's too early because we have been discussing this product all the while because it's 100% or more than that complementary to the existing product that what we have, mortgage loans to business and non-business customers. Definitely, you will see some kind of strides that we do organically in Five-Star. Maybe we'll at least start up that initiative in the later part of Q3 or Q4 of this financial year to begin organically getting into that product with our existing branch network. As you see, we have close to 7,000 employees in business and collections and 750 branches network spreading across more deeper in south. I think that gives us an easy runway to get into this product which we have been talking and thinking for a long time.
Got it. Sir, when you do that, at least in the initial stages, I know you will be utilizing the same branch network and all, but it will require some bit of additional resources and processes to be there. Should we anticipate, say, some increase in your OpEx once you start that for, say, a year or so?
Veeral, that is too early to answer that. You asked my thought process. I told you the thought process, how we will be planning at least the later part of this financial year. We have to look into it. A lot of these things will be addressed at that point of time.
Got it, sir. Fair enough. Thank you and all the very best.
Thank you.
Thank you. We have our next question from the line of Madan Gopal Ramu from Sundaram Alternates. Please go ahead. Mr. Madan, are you there? Mr. Madan, are you there? We'll move on to the next participant from the line of Divyansh Gupta from Latent Advisors. Please go ahead.
Hi. One data point question. What would be our non-collection employee count of that 6,689? The associated question is that if I look at per loan per business employee, at least in the last quarter, it was one loan per month. Does it mean that for any scale-up, we will keep on increasing our headcount, or is there a headroom in increasing this productivity?
Let Srikanth and Ranga give the answer for the first one which you asked. On the second part, in general, when we move up to INR 12,000 crore of AUM, the general metric was per employee, the AUM will be around INR 1 crore-INR 1.25 crore. That was our historical average. We will be getting into that INR 1.25 crore AUM per employee. That is our endeavor. That is also one of the reasons where the ticket size moving up will help us to get into that INR 1.25 crore per employee zone. That is our comfort.
Divyansh, the total number of business officers alone at the end of last quarter was 4,889. We also ended up disbursing last quarter 37,855 loans. If you look at it on an average, every officer is doing about 2.6 loans per month.
Sorry, you said 4,889, right?
Yeah. 4,889 officers disbursing 37,855 loans, translating to 2.6 loans per officer per month. This is what happened in Q4. Yeah.
Got it. Got it. Understood. The second one was that in the last one call, someone had asked, and we had mentioned that our average CIBIL score is around 550, right? If I divide this into a spectrum of saying NTC and more than 650 and whatever remains else, what would be the distribution? Is this a specific, let's say, underwriting policy? Is it a part of the strategy itself to target a lower CIBIL customer because then other banks are not lending to him? He only has an option of going to a money lender, and therefore Five-Star wins with its products and offerings?
Yeah, I think the completely new-to-credit, we have been telling on this number, broadly remains flat, and what we have been telling is about 25%. You will probably see about 10% of the people, 10%-15% of people who are at 650 and above, or maybe 700 and above. There will be at least 55%-60% of our borrowers who are probably operating anywhere between 400-550 or 400-600. See, the people who are, let's say, 700 and above, they are being catered to by the larger NBFCs, banks. They're getting higher quantum of funds. They're getting cheaper funds. That is not the target market for us. Our target market is either a person who is coming to the formal ecosystem for the first time for this size of loan.
He could have borrowed a product loan like a microfinance or a gold loan. For this size of a loan and a secured loan, we are probably the first lender to almost 90% of our customers. We will continue to focus on this segment, the 80% being NTC and people with sub, let's say, 550-600 kind of a credit score. These are people where the target market is high, where we are able to command a slightly better pricing, leading to better profitability. There are also not much alternatives available for them. They will continue to be our target market.
Will this also be for our home loan or home loan? Because at least in the lab, you know there is a house that you can go and take, whereas in a housing, he's actually putting in equity and building a house. Therefore, the collateral is not necessarily, I won't say perfect from a documentation perspective, but it's not ready, right? Will this change from a home loan perspective if there is any thought on it?
Divyansh, two points. Firstly, I think definitely the home loans profile should definitely look better than this because the yields are not going to be the same. We cannot operate the same level of risk. The risk-reward has to work out in your favor. Obviously, we are going to target a slightly different set of customers from a home loan perspective. Like Mr. Pathy put it, we have enough time to think and put the product strategy for it. It's not happening at this point of time. We still have a couple of quarters away. Broadly, the thought process is very clear that we cannot target the same set of customers here. I also want to add a second perspective to what Srikanth just said.
Just because we are going and targeting as somebody with an average score of 550 does not automatically mean that the customer is a high-risk customer. Over the years, we have understood as to how to glean these customers and see how two customers having 550 score is not the same. Somebody could be having 550 because he has defaulted on a secured private lending loan. Somebody could be having 550 score because he has secured on a gold loan or, let's say, a government-guaranteed loan. We do not view these two customers very, very similarly. I think over the years, we have sort of understood as to which is an acceptable risk for Five-Star and which is not an acceptable risk for Five-Star.
That gives us the edge to go to this customer segment even with a score of 550 and ensure that we are not as risky as what it is perceived in the general turn of the market. I think if you keep this perspective, it's slightly different targeting segment, that strategy that we adopt at Five-Star.
Understood. Understood. Two more questions. One is a very basic data question. In the call, we have mentioned more than INR 10 lakh AUM is around 5%, whereas in the presentation, it is around one and zero. In mota mota, it is 1%.
You're right. I think 5% was a little more colloquially mentioned, but it's about 1%-2%.
It's 1%. Got it. Got it. The last one is that if I looked at our lagged NPA numbers, the level of, let's say, 2-year lagged NPA is around 3.7%, which is, let's say, from the presentation perspective that we have been disclosing, was, let's say, last seen in September of 2020, which was, let's say, a natural disaster, not planned and not under our control, right? It is reaching those levels. While I understand there might be a Karnataka-led noise, Karnataka, let's say, two years ago was also 7% or 6% of our portfolio. It cannot be only Karnataka. One is how should we read into this? What are the actions we are taking to bring it back to, let's say, a more comfortable number?
Firstly, when you said Karnataka was 6%-7% even two years back, we are not talking about Karnataka's proportion. It is 6%-7%. It has been for the last, let's say, two or three years. Today, the level of NPA in Karnataka is higher than what it was two or three years back. That is what is contributing. If you look at our absolute NPA itself, it has gone up this quarter, right? The last couple of quarters, we have been seeing a little bit of impact on our portfolio. When you compare this with the two-year lag, it will obviously look a little worse. Our guidance view on a two-year lag is it will be anywhere around the 1.36% and all that you are seeing in Q4 FY 2022. I think those are not sustainable.
We are seeing the normal NPA numbers for this business model is sub 2%, which means if you are looking at a two-year lag, and I'm assuming 25% growth on a year-on-year basis, it should at least be 3%-3.25%. Even in the current quarter, we are not way off on a two-year lag NPA number. We would like this number to be more around 2.5%-2.75%. Obviously, there have been some disruptions, but we are taking the necessary action to bring this down. With the portfolio moderating, I do not think you will ever see a 1.3%-1.4% kind of a two-year lag numbers and all that. You will probably see that in a normal NPA. A two-year lag will probably work more around a 2.5%-3% number.
Thank you, sir. We have our next question from the line of Chandrasekhar Sridhar from Fidelity International. Please go ahead.
Hi. Good morning. Can you just remind us on the change which in the years which you had done, there were some thoughts around not having a blanket reduction, but changes in yields basis of the quality of the customer, sort of trying to tell essentially to the regulator that there's a lot more science behind the pricing. Is that in force as of now? How does that play through in the context of given that some more increase in ticket sizes? Does that mean that the customers who are now coming closer to the INR 7 lakh-INR 8 lakh will come at lower than the 200 bps reduction as a result?
Chandra, when we revised our interest rate model at the time of reducing the rates, we had clearly gone to a risk-based pricing. Short answer to your question is it has not worked. The range of interest rates is anywhere between 21.5%-22.95%. The blended yield comes to about 22.25%-22.5%, which is where we said it is a drop of 200 basis points on an average basis. There is a customer who today could get a 21.5%. There is a customer who can get close to 23%. It is a completely risk-based pricing depending on the score of the credit score of the borrower, depending on the end use of the loan that we give to, whether we can classify him as a priority sector loan or not. Clearly, it is a risk-based pricing which is involved.
See, our belief is the current drop in interest is reasonable enough for us to even look at a slightly better profile of customers. It does not mean that if we have to go to a better profile of customers or given the fact that we are going to a better profile of customers, there will be more yield drops that will have to come. The current drop itself is sufficient to attract better quality of customers within the overall customer target that we have. That is why we said at this point of time, we are not advertising any further drop in interest rates. I think this is the question.
If we talk about further drop, it's a question of the mix changing. With the mix changing, and then given that you're working with a rather than a blanket, you're working with a range, you'll have more customers coming in at the lower end of the range is the question.
I think we have seen that.
We have been directly sort of helping the mix.
No, no, I understand. We have seen that. Today, when we said it is a 200 basis points drop, our average lending, which used to be at about 24.5% or so prior to November, today it is coming more around 22.25%-22.5%. There are people, there are about, I would say, 25% of the customers who are coming sub 22.5%. Maybe some proportion which is between 22.5% and 23%, which is why you are looking at a blended yield of closer to 22.5%. We are not seeing the mix significantly changing, at least in the near future.
The second one is this one, AUM per employee. By when do you think you can get to this INR 1.25 crore?
Chandra, we are hoping that by this financial year end or mid of next financial year, you will see that AUM per employee inching up. See, this all depends upon the growth, right? Growth depends upon the environment which we are. We are hoping this environment will be better as we move towards the quarter-on-quarter. That will inch up the growth. That will inch up the AUM per employee to where we want to be.
I mean, it essentially means that the employee count over the next year should not be more than 4%-5% increase. You're saying in a year and a half, 5% to maybe 7%.
Should be. Should be. Because that's why I gave an indication. The quarterly AUM growth was 6.25%. The new addition customers were 4.5%. To that extent, we don't need so much of employees for the meaningful quarters. You're right.
Got it. Got it. This is the last question. Did I hear it right that the cost of fund reduction you expect for the whole year is 25 basis points?
At least. 25-30 basis points is what on the incremental cost. This is from the current level, Chandra. We are at about INR 930, INR 935. From here, we are expecting 25-30 basis points on the incremental cost. Obviously, there will be some further benefit coming in from the book cost as well because MCLRs will drop, EBRs will drop. The overall benefit can be slightly higher than even 30 basis points.
Got it. Okay. Thank you.
Thank you. We have our next question from the line of Pranav Gupta from Aionios Alpha Management. Please go ahead.
Yeah. Hi. Good morning and thanks for the opportunity. Just a couple of questions. We want to talk about TN and some of private comments from a lot of other lenders from various segments. I mean, the biggest issues that most lenders are sort of faced are various attrition.
Sorry to interrupt, Mr. Pranav. Your voice is quite muffled.
Just give me a second.
Is it better now? Am I audible?
Yeah, yeah. Better. Please go ahead, Pranav.
Yeah. Hi. Hi. Good morning and thanks for the opportunity. The question was mainly relating to Tamil Nadu, where a large part of the issue faced by lenders over the last couple of years has been high attrition rates. If we sort of now think about it along with the ordinance, how should one think of. Maybe one ahead of you mentioned that you're very confident that the impact that we saw in Karnataka is not something that we should see in Tamil Nadu. Just to sort of tie it up with the attrition issue, how should one think about that? That's the first question.
Hello. The audio is not clear. Is it clear right now? Can you all hear us?
Yes, sir. We can hear you.
Okay.
We were unable to hear your half question.
I understood this question. Let me address it to the extent I have understood the question. I think the ordinance has just got cleared, right? Yesterday, it got cleared. In 15-20 days, we will know how the impact is going to be at the ground level. The ordinance clearly states that regulated entities are out of this. That is the confidence that I said that disruption may be, but it will be far lesser than Karnataka. That is from a collections perspective. From a disbursement perspective, I see nothing getting stopped in Tamil Nadu because this is the hometown of Five-Star. We have been here for the last 40 years, and we know the customers better in this segment beyond anyone. From an attrition perspective, it is too early to talk about attrition.
I don't think attrition is directly connected with the bill or ordinance, what it gets cleared in the state, right? There will be some kind of difficulties in collections, and we agree the difficulties, and we let the people do what best they can do. I don't think that has a direct impact on the ordinance because I can clearly say in Karnataka, the attrition was not anything got alarmed because of the ordinance. There were disruptions. There was some kind of harassment because we didn't anticipate that kind of ordinance to get into a state. Here in Tamil Nadu, we are well prepared. I don't think that will be any cause of concern from an attrition perspective.
No. Just on the attrition bit, just to clarify, obviously, I was not implying that the attrition sort of links to the ordinance. What I was trying to understand is that most lenders have seen attrition, which is why collections in Tamil Nadu for lenders have sort of been impacted. Now that the ordinance is also in place, which increases the impact further, how should one think about that? That was the question. I'll probably take that offline later. The same question is.
No, no. Pranav, I can answer that. I got it. From Five-Star perspective, Tamil Nadu is one of the best collecting states. I do not know about other lenders for Five-Star. That comes on the top of our list from a collections perspective. That is our confidence and strength, what we have in the home state of Five-Star. That will keep continuing. This bill will have very less disruption and very short disruption. That is what I hope for.
Right. Just as a follow-up to that, I mean, how should one tie that up with the relatively slower growth there in Tamil Nadu, given that it's the best collecting state? How should one think of that just as a follow-up?
See, that I've been talking in the earnings call for quite a long time. We said this financial year, Tamil Nadu and Karnataka will inch up their growth. That's what exactly happened in Tamil Nadu. If you see Tamil Nadu on a quarterly basis, it's performing really very well. You will see Tamil Nadu as a state, today being at a little sub 30%, will cross 30% very comfortably.
Sure. Understood. Second is just a clarification on the cost of funds bit. I know you sort of highlighted that on multiple occasions. Just to clarify, given that you and we have already taken the price cut on a blended basis of 200 basis points, obviously, that is more on a risk-based level. This sustainable dip in cost of funds that we think would sort of play out over this year of 30-35 basis points. Srikanth sir mentioned that we could see some pass-through to incremental customers. Is that sort of tied up purely with the risk-based pricing, or is it sort of a downward revision of the overall range of pricing that we mentioned earlier?
Pranav, firstly, I want to clarify. I think this 30-35 basis points that we are looking at for the current year, that is not going to have any impact on the yields because, see, again, in our customer segment, 25 basis points of reduction in rate and all makes absolutely no difference for the customers. When you do a yield drop, it has to be closer to 7,500 basis points or so. That is what makes a meaningful difference for you to attract better customers. This 30-35 basis points, I think, is not going to result in any yield reduction. If, let us say, there is a possibility of a rating upgrade that we get and the situation becomes a lot better, we are able to borrow at much cheaper cost.
We are able to borrow at 75 basis points lower than where we are borrowing today. That is when we will start looking at the yield reductions, which is why we said, given that all of these things look a little unlikely at this point of time or may happen only towards the second half or end of the year, there is unlikely to be any interest rate reductions for this financial year.
Perfect. That's very clear. Just one last question regarding the dividend that we paid out. Obviously, this is more, as Pathy sir mentioned, on a milestone basis. Any policy that we are stating around this, or can we look at this just as one-off milestone-driven event?
No, Pranav. I think now we are getting into a dividend-paying mode. It is not a milestone-based event. I think we will become a dividend-paying company. The payout will obviously be gradual. We are not going to take it to any significant numbers shortly. I think we want to be gradual and measured and pay the appropriate level of dividend to our shareholders. We have kept a max range, which is quite high. At this point of time, I do not even want to talk about that. Our payouts will probably range anywhere between 5%-8% for the foreseeable future. I think you will see the company paying out dividends every year hereafter.
Great. Great. Thank you so much. All the best for the next quarter.
Thank you. We have our next question from the line of Manik Bansal from Master Capital Services. Please go ahead.
Hi, sir. Thank you so much for this opportunity. My question is, what is the reason for the 35 basis points increase in OpEx?
35 basis points increase in OpEx. Okay.
Yeah. Sequentially.
No, that is primarily because of the denominator also being lower, right? Where we wanted to be at 25% growth, we are at 23%. Consequently, you are also seeing the total assets being lower than where we wanted to be. If you are looking at another 2%, that means it will at least be another INR 200 crore-INR 300 crore of balance sheet size going up, which will obviously have dropped in. The question is, the OpEx is a little front-ended, which will get absorbed by.
Sorry, OpEx. 30 basis points increase in OpEx.
Because OpEx to assets only are going to, right?
Okay. Right.
When the assets are lower, the OpEx to assets will be higher.
Okay. Next question is, as you mentioned, that there is one branch opened in Gujarat, right? How do you look to expand in that state? What kind of opportunities do you see there? Because if we look at the branch network, other than Andhra Pradesh and Tamil Nadu, it has not grown that much in the past many quarters. Is that the same thing that is going to happen in Gujarat also?
Manik, I do not know on the basis on which you are making this comment that branches have not increased only except in these two states. We have given the branch count, and it has increased across. Today, there are multiple states where we are inching only towards 100 branches, including our latest state, which is Madhya Pradesh, which is having 94 branches as of March. We have expressed our strategy multiple times in the past. Any new state that we enter, the first 18 months to 24 months will be a very measured growth. We will not put up more than four branches. Only when we get confidence in the state, we expand further. Gujarat is no different. For the first 18 to 24 months, you will not see us opening more than four or five branches.
Once we get confidence in the state, it's a very, very large state. Many established lenders have been doing business for decades in that state. It is important for us to understand and crack that state very well. We will take our time. After 18-24 months of good operations there, I'm sure that it's going to be a very big state for us.
Thank you. Thank you.
Thank you. We have our next question from the line of Shrinjana Mittal from RatnaTraya. Please go ahead.
Yeah. Hi. Thank you for the opportunity. I have two questions. I understand that the Karnataka impact on the collection has already been discussed. I just wanted to see if it is possible, can you share the collection efficiency number X of Karnataka for the last three, four quarters?
Shrinjana, we'll probably take it offline. We don't have the data ready for the three, four quarters. So we'll have to take it offline.
Sure. Just one more bookkeeping question. In this quarter, what would be the number of split branches that we have opened?
Sorry, in this quarter? Can you repeat the question?
The number of split branches that we have opened in the last three, four quarters, if you can share that as well.
Last one year, roughly about 148 split branches out of the 228 overall branches.
Understood. Okay. Thank you. Thanks.
Thank you. We have our next question from the line of Sarthak Nautiyal from ERAYA Capital. Please go ahead.
Hello.
Yeah. Yeah, we can hear you. Please go ahead.
Congratulations on a good set of numbers. I have a few questions. Considering 25% of AUM growth and drop in yield roughly by 200 basis points versus last year, what kind of earning growth are we expecting in FY 2026? What is our target for ROA and ROE in the near term?
See, for FY 2026, you are right. The earnings growth will be slightly muted. If you are looking at a portfolio growth of about 25%, given that we have dropped our yields from November, and you will see a fuller impact, I think we should look at an earnings growth anywhere between 12%-15% for FY 2026. The ROAs, I think if the leverage is not going to go up significantly, ROAs will continue to be around 7.5%-8%. We are not going to see any significant reduction in ROA, which also means that ROE will also not go up in a quick manner. Both of them will move in a gradual manner. Earnings growth will be at about 12%-15%.
Okay, sir. Okay. Also, I want to understand what is the end usage of our loans and what kind of collaterals we have against the loans.
End use of loans is broadly three purposes. Business purpose constituting about 60%. 25% will be for construction of a house or purchase of a property. The balance 15% will be for personal consumption, which has a large cash outlay. It could be medical emergency, education, or consumption-related purposes. The kind of collateral that we have for all these loans, we do not differentiate the loans based on end use. Both the underwriting and the product features are very, very similar for all the three end uses. The collateral is the self-occupied residential property. 95% of the loans is backed by a self-occupied residential property. The balance 5% could largely be commercial properties that the customers own. Maybe about a percentage out of the 5% will be also on vacant lands. It is a hard collateral.
Okay. Also, as our NPAs are increasing, are we planning to auction the collaterals that are addressed to address this issue?
No, I think we are well within the range in terms of NPAs. What the numbers that you have seen is because of a temporary disruption in a particular state, we have never auctioned any of this. We are confident of our usual negotiated settlement with the customers. There is a legal team in-house that we have, which pursues the 90+ customers. We are very, very confident that it will happen in the normal course. We have never auctioned any collateral so far in the history of Five-Star, and we will continue to do the same at this point of time also.
Okay. Okay. Just the last question. How are the incentives of disbursement team structured? In any manner, are they responsible for collection also, or are they purely assessed on disbursement targets only?
We have two types of officers at the base level. Officers who do business and collections. This team generally handles the lower vintage customers. Typically, about less than 24-month customers is handled by this team. We also have specialized collection teams, which handle higher vintage customers at the branch level. Obviously, the people who handle only collections are incentivized and measured only on the collection efficiency that they do. In terms of business, what people are responsible for is, one is what is the quality of sourcing and the disbursements. Second is, of the loans that they have disbursed, how much of it is turning into early arrears or early mortality accounts within the first 12 months and 24 months. The third part is also within the 12 to 24 months that they are handling, how is the collection efficiency of those customers measured?
It is a combination of all these three is where they are measured and rewarded on.
Okay. Okay, sir. Thank you. Thank you for taking my questions.
Thank you. We have our next question from the line of [Diraj Khan] from Ascendant Capital Partners. Please go ahead.
Hello. Hello. Am I audible?
Yes.
Yes.
Please go ahead with the questions.
Yes. Thank you for the opportunity. Sir, a few data-keeping questions, then I'll quickly come to my questions. Firstly, what is the breakup of the AUM, salaried, and self-employed customers?
Self-employed will be roughly about.
25%.
Self-employed.
25%.
Yes. Self-employed and salaried.
See, if you remove shopkeepers, shopkeepers will be about 60%. Self-employed will be about 25%. 15% of our customers will be salaried, typically cash salaried or contractual laborers and all that.
Understood. Understood. Could you just give me the number of files that we disburse during the full year and the sanction, the number of files, if that is available, or amount, whatever?
The full year disbursements we have given is close to INR 5,000 crore, INR 4,970 crore.
The count.
The count. I meant to say the count of files, if that is available.
Just go ahead with the next question as we get the data by then.
Okay. Thank you.
The first question that I have is with respect to the growth. Now, I know that the state of that we have some problem with one particular state. X of that, how do you see the growth panning out with respect to a breakdown of how much of the growth will be productivity-led, inflation in the average ticket size, and the change in the mix? What I want to understand is the breakdown of the growth with respect to these aspects. Also, with Maharashtra now becoming in the range of inflection point where we have 25 branches, that state should start scaling up. With respect to new geographies and existing geographies, how will the growth break down in these two parameters?
Firstly, the overall growth guidance the company is giving is at about 25%. Now, obviously, the mix of how this 25% is going to be achieved is going to be through a faster growth in some of the inflection point states. Like rightly you mentioned, Central India, we have just crossed the milestone of INR 1,000 crore portfolio in Central India at this point of time. That will definitely continue to grow at a faster pace than some of the older states that we have. As of now, the mix is roughly about 8% of our portfolio is Central India, and that will continue to inch towards the 10%-12% in the years to come.
We had guided that over the steady state of about three to five years, we will have at least 15%-16% coming in from Central India and the rest of it coming in from the southern states. Within the state-specific strategies, we will continue to happen like this. Productivity-led improvements to an extent will definitely happen. I think we are not bad on productivity. Like I mentioned to a previous question, we are almost already at about 2.6 loans per officer per month in terms of disbursement. We will expect this to inch up to closer to three loans per officer per month. That is a great productivity for us to maintain. We will also gain some things out of the increase in the ticket sizes.
Even if the ticket size increase is close to, let's say, 5%-6% per annum, a combination of productivity increase and this ticket size increase, we are very confident of delivering a 25% kind of a growth that we have guided for.
Understood. Just to break it down, 10% would be productivity, 10% would be growth with respect to volumes and expected. Could that be possible to do it, or?
Roughly, you can say 5% productivity increase, 5% ticket size. The balance 15% is acquiring incremental customers, both through our existing branch network and the new branch network.
Understood. Understood. Thank you. With respect to the reasons, now, as you said that Central India will be a good part of the coming few years as we move ahead. In the current scenario, with respect to some of the other peers and other companies that are there in the market segment, there are some murmurs with respect to Central India, specifically the states of Madhya Pradesh, Chhattisgarh, even parts of Maharashtra, seeing some bit of stress that is being built up. Are you seeing any of that, or is the customer segment exclusive of that, what the other players are seeing? That is one.
No specific trends that we are observing. These are early days. Having spent more than five years in states like Madhya Pradesh, we understand the state fairly well. We have built up good teams, both at the leadership level in the respective state and at the ground level. We will be watchful of how any of the states are going to emerge and confident of handling it. [Diraj], also just answering your prior question on the number of loans which got disbursed, it is 138,660 loans during FY 2025.
Okay. That is the disbursement count. Understood.
Yeah.
Also the sanction number, if that is available, the number of sanction count?
The sanction does not matter, and we don't reveal it specifically. Usually, the sanction to disbursement for us is about 95%.
95% is sanction to disbursement?
Yeah.
The login to sanction, if that could be possible in amount basis or count, however?
Maybe about 75%-80%.
Yeah. 75%-80% is the login to sanction.
Yes.
Great. Just a final bit on the branch expansion. What will be the absolute new number of branches, not the split, the absolute new number of branches that we are targeting for the full year? Will that be again predominantly focused on the core geographies or more on the new geographies?
I think specifically this year, Pratheej, given that we have opened quite a lot of branches in FY 2025, the focus of the company will clearly be on getting productivity and making sure that these branches are performing up to their optimal level. That will be point one. Maybe the branch count will definitely be slightly lesser. We usually guide for about minimum of 75 new branches in a particular year. Maybe the number in terms of new branches will be slightly lower this year. A combination of new plus split will be equal to 75-100. That is the guidance that we are giving you for this financial year. As usual, the focus will be more in the established states that we do. We will, of course, open new branches in the new locations.
Last year, if you look at it in FY 2025, we opened close to 50 branches in Central India. Maybe it will continue to be a slightly lesser or equal number in Central India. The rest of the branches will come in from our core geographies of the three states in South India, which is Tamil Nadu, Andhra, and Telangana.
Great. Thank you. Final one, on the credit cost, what will be the guidance for FY 2026?
Our guidance stays at 75-100 basis points.
Understood. Thank you very much. That was very helpful. Congrats on a good setup.
Thank you. We have our next question from the line of Madan Gopal Ramu from Sundaram Alternates. Please go ahead.
Hello, sir. Sir, this is Aravind. Sorry for the mishap in the last name. Thank you for the opportunity. Congratulations on the good set of numbers in the light of the tough situation in the segment we operate in. Sir, we are building capacity in terms of branch addition, in terms of employee addition, and we are focusing more and more on INR 3 lakh-INR 5 lakh rather than less than INR 3 lakh and around INR 5 lakh-INR 10 lakh. In the wake of all this, we still have a very conservative guidance of the growth guidance of 25%. I'm just wondering, do you think if the environment, credit environment improves, we can easily increase the growth guidance, let's say, two-three quarters down the line if the demand improves? Sorry, if the credit situation improves.
Yeah. You're perfectly right. As I said, total addressable market is very big. And Five-Star is in this segment for the last 20 years. That gives a clear edge for Five-Star to move ahead. That's why we are doing it. As I said in the initial point, that quality is almost the most important for any lenders. If you see, I think the political issues are also now starting to come up. You saw Karnataka last quarter. You are seeing Tamil Nadu now. We don't know, right, which will be the next following state. Keeping these all in mind, and INR 12,000 crores of AUM, 25% growth is not a normal one. I think it's a commendable growth. Keeping your asset quality and credit cost one of the lowest in the industry for the yields what you generate. I think that's more important.
Growth comes a little later. The quality and profitability has to be in front end. The growth can be taken up.
Thank you, sir. We have our last question from the line of Nikhil Agarwal from VT Capital. Please go ahead.
Hi. Good morning. Am I audible?
Yeah, yeah. Please go ahead.
Right. Hi. Thank you for taking my question, sir. While it has been touched upon, my question is more so strategic aspect related, which is your shift from the less than INR 3 lakh ticket size to INR 5 lakh-INR 10 lakh ticket size. I just wanted to know that the drop that you have seen in production efficiency, like you said, that not entirely is attributable to Karnataka, and some of it is to the lower ticket size people who are leveraged. I just wanted to know how much of that is from this segment, which is why we have taken the decision of shifting.
I think, Nikhil, first of all, we are not taking the decision of quitting any segment. We will continue to operate in that segment also.
Right. 10% shift, like you mentioned.
Yeah. What we are saying is, given that we have also dropped our yields, it is allowing us the flexibility to focus on the creamier customers within this segment, which is where we are going to, let us say, INR 3 lakh-INR 5 lakh or INR 5 lakh-INR 10 lakh. See, one of the points is the less than INR 3 lakh, typically, despite the fact that we do secured loans, we do much longer term of loan, there is a tendency for people to bucket us with microfinance institutions, which is probably maybe one reason that could have caused some impact. At this point, if you ask us to break the impact between these various points, I do not think we will be able to do that. Like Mr. Pathy said, the broad thing that we have seen is about 2/3 coming from Karnataka.
The point is one-third into sub INR 3 lakh, INR 3 lakh-INR 5 lakh. I think that would be that's beyond the company at this point of time. Our belief is the stress in the less than INR 3 lakh segment is probably slightly higher as compared to, let's say, INR 3 lakh-INR 5 lakh or INR 5 lakh-INR 10 lakh, where the customers are a little more savvy. Their incomes are a lot more stable. From a collections perspective, they tend to be a lot better customers, which is why we are moving, let's say, a 10% population from sub INR 3 lakh to INR 3 lakh-INR 10 lakh.
Great. I got my answer, sir. One last question. The credit cost guidance of 75 to 100 basis points, is it a midterm long-term guidance, or is it for effort indicators only?
The range is, I would say, it's a midterm guidance at least. We are not going to change the range unless situations get very different. For FY 2026, I can probably say that we'll be more closer to the lower end of the range rather than the higher end of the range. Our guidance stands at 75-100 basis points for the medium term.
Perfect. Thank you, sir. Thank you. That was just a question.
Yeah. Thank you.
Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you. Good to hear a lot of questions coming out from state-specific and growth-specific. I'm confident that we will navigate all the tough times and will come out with better results in the first quarter of this financial year. Thank you.
Thank you. On behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.