Ladies and gentlemen, good day and welcome to the Five-Star Business Finance Q1 FY 2026 earnings conference call hosted by JM Financial and Institutional Securities Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ajit Kumar from JM Financial and Institutional Securities Limited. Thank you and over to you, sir.i
Thank you, Shruti. Good morning, everyone. I am Ajit Kumar from JM Financial. Welcome to Five-Star Business Finance 's earnings conference call. To discuss the company's earnings, we have with us Mr. Lakshmipathy Deenadayalan, Chairman and Managing Director; Mr. Rangarajan Krishnan, Joint Managing Director and CEO; and Mr. Srikanth Gopalakrishnan, Joint Managing Director and CFO. On behalf of JM Financial, we thank the senior management of Five-Star Business Finance Limited for giving us this opportunity to host you today. I now invite Mr. Lakshmipathy for his opening remarks. With that, over to you, sir.
Yeah, thank you, Ajit. I welcome everyone for this earnings call. Thank you everyone for taking up this call in the morning. With me, Ranga, the CEO, and Srikanth, the Chief CFO, which we jointly take up this earnings call. Let me not run through the numbers because I know the numbers are with you for some time. Instead of getting into the numbers, I want to take you through on the Five-Star thoughts and aspects and remedies what we have been doing on this pain point. Let me start. In this financial ecosystem, the pain does not start with one and end with the same. It affects the entire ecosystem. The pain differs from lender to lender. One who has better underwriting and good collection infrastructure will have the least pain. Yes, from Five-Star Q1 performance, the numbers show the pain.
If compared with others in the segment, then we will realize the stress is far less for us. I, as I said, I want to spend some time with you all on the following points. What is the cause for this pain? Where is the pain coming from? What are the remedies taken? Where are the early signs of improvement coming from? What is our outlook for the financial year 2026? Let me begin with a very important question. What is the cause for this pain? Yes, you all know it is over-leveraged, i.e., indebted. Low financial literacy in small-ticket borrowers, which has led to this over-leverage. Last 24 to 18 months, we saw high spurs in credit moving towards the segments in the form of microcredit, personal loans, and credit cards.
To add to this, the states like Karnataka, the ordinance which was enacted early this year, has added more pains to this. Where is the pain coming from? We see the pain in small loan borrowers, to be more specific, below INR 3 lakh ticket size, and customers from risky locations and colonies. They were the target customers of microcredits, personal loan lenders. We see the more pain coming from these ticket sizes and these segments and these localities. Most important, what are the remedies taken by Five-Star? We have slowed down our exposure to below INR 3 lakh and started to focus on INR 5 lakh to INR 10 lakh segments. Our key spot will remain in the INR 3 lakh to INR 5 lakh segment. Even in the INR 3 lakh to INR 5 lakh segments, highly indebted customers and customers from riskier locations and colonies are avoided.
With respect to over-leverage, we check the leverage of customers prior to the sanction of our loans, and we adopt conservative practices on debt burden ratio and LTV. However, the problem has cropped up with customers over-leveraging themselves post taking our loans, which is what has caused some level of stress. To address this, we are making some changes on customer profile and underwriting side. We are focusing on better quality customers, more financially literate customers who will not over-leverage themselves even during the times of high liquidity. This also means we are focusing on higher ticket customers who have better financial understanding, and historically, we also see this portfolio performing much better for us. We are also avoiding certain customer profiles, certain geographical areas where we find collection problems and consequent asset quality stress.
With respect to income evaluation, we are also avoiding or giving much lower weightage to customers with a high proportion of agri and other seasonal incomes. Further, wherever we find multiple members of the family involved in the same self-employment, we are restricting their incomes to a much lower level so that we protect our downside. Where are the early signs of improvement coming from? The lessons learned by the lenders who have caused this pain, the uncomfortable runaway space at which the consumer credit was given for the last few quarters has stopped. The new guardrails have been put in place by the MFIN. This will ensure no new over-leverage pain is caught in the system. Since many or almost all microfinance and personal loan lenders have written down bad loans, this is technically the over-leverage has come down to small borrowers.
Hence, secured lenders like us will start seeing a pickup in collections going forward. To be more data-specific, our July month collections till now, comparing with April month, have shown good improvement both in Q1 C1 and collection efficiency. Finally, coming to our outlook for the financial year 2026, this quarter, and in July, August, September, this quarter will see the pain continue but will get stabilized by quarter end. The second half of the year, from December and March quarter onwards, we will see improvements in growth, collections, and leading to better asset quality. Again, we are not revising our growth and profit guidance of 25% growth and 12%- 15% profit for the financial year 2026, which we gave last quarter. If any out of control happens due to external factors, we will come back on this.
The clear spot guidance for the full year will be in the range of 1.20% -1.25%. To conclude, yes, we admit we have slipped from our own standards, but let me assure you all, Five-Star Secured Lending products with better underwriting and good collection infrastructure will be the last two hedges and first two bounce backs. We will bounce back quickly. Now, on the second most important development, which I wanted to share to you all, is yes, you have seen the exchange notification. Ranga , our CEO, is stepping down. He's resigning from our company. He's been with me for the last 10 years. He's been in the company for the last 10 years and has remarkable track record, which means taking this company from nowhere to a unicorn and from a unicorn to a listed entity has spoken a lot about his credibility and capability.
For the last few months, he has been carrying his desire to be an entrepreneur, to take up the entrepreneurial activity. Being an entrepreneur myself, I felt we were not right to stop him. Finally, in the month of June, we both agreed and we took this to yesterday's board meeting and both have approved this. He will be relieved from the company's activity from 14th August onwards. Having said that, I'm an operational guy. I've been operating this company and built this business model for the last 22 years. We have a strong second-line management team across all functions. We see no disturbance on Ranga's exit. I'll be taking up the entire operational work. As you said, we both were sharing it, 60%-65%. I was always doing it. He was doing 30%-35%. We exchanged sales in a year or a quarter.
Where the overlook has to come from me, we have a very strong second-level management, as I said earlier, across business collections, credit operations, in all departments. That will be ready for the growth of the company as usual. With this, let me hand it over to Srikanth , CFO, to take you through our numbers.
Good morning to all of you. As Mr. Pathy said in his opening remarks, this has been a little bit of a muted quarter by our standards. We would have certainly liked to perform a lot better. For reasons which are a bit beyond our control, the performance has been a bit muted. We are very confident that we will be able to quickly turn around from where we are to come back to our earlier levels. I'll just take a few minutes to give some updates on some of the numbers for this quarter and for the year to date, which pretty much is the same. Despite the constraints that we have seen, the crisis that has been caused by the over-leverage, we continue to invest in physical infrastructure. We have not stopped our branch opening, nor have we stopped splitting the branches which have become bigger.
During this quarter, typically to a Q1 trend, we have opened about 19 branches, which has ended with 767 branches as of June 30th, 2025. Our customer base is at about close to 4.8 lakhs. Consciously, we slowed down on our disbursal because during periods of stress, it is not prudent to be aggressive on lending. The focus was a lot more on collections. Even from the management oversight perspective, we put a lot more on collections. The disbursal had a little bit of an impact. It was almost flat compared to the same quarter last year. Consequently, AUM growth was also a little bit muted at about 5% quarter on quarter and 20% year on year. This is all on account of the current crisis that we are seeing.
Once we turn around and get our numbers back on track, we will get back to our growth target as well, which is why we are not revising our growth guidance from our stated 25% level. We have ended with a portfolio of slightly short of INR 12.5 crores . On the financial metrics, consequent to the yield drop that we did on our incremental loans from November of last year, and we are guided that every year you will probably see a compression in yields by about 60 to 75 basis points because we did drop our incremental yields by about 200 bps. You have seen a 20 basis point drop in the current quarter. Our yields stood at around 23.5%.
The positive aspect that we have seen is in one quarter, we have been able to reduce our cost of funds by about 10 basis points, thanks to the repo rate cut by RBI and our ability to negotiate better with lenders. Our incremental debt has come in at 3.59%, 70 basis points lower compared to the last quarter, which is a very significant drop to be achieved in one quarter. The cost to income has inched up a little, has inched up quite a bit, primarily because of the credit cost. If you strip the credit cost away from it, I think they're largely flat, probably a percentage point up because of the increments that we'll give, the effect of which will be caught up over the next three quarters. The credit cost has been on the higher side. It has gone up from about 0.7%- 1.3%.
We are revising our guidance a little bit to be at around 1.2% for the full year. This has resulted in an ROA of 7.24% and an ROE of about 16.57%. We should be able to pick up these numbers as we go forward, especially on the ROE with growth coming in and leverage going up. As I said, on the liquidity side, on the funding side, we have made very good progress during this quarter. We have, while the quantum rates have been a little lesser given typical seasonality of the first quarter, the cost is extremely attractive. Also, during the quarter, we have had our outlook on our rating increase from stable to positive, both by India Ratings and their ratings. Hopefully, that shows the trajectory of the ratings to come in the next few quarters.
Overall, for the quarter, we have clocked the profit after tax of INR 266 crore, which is a 6% growth on a year-to-year basis. Compared to the last quarter, it was down by 5%, primarily on credit cost. We also maintain a good level of provision coverage. If you look at the overall provision coverage on the portfolio, it has gone up from 1.63%- 1.94%. On stage three, we continue to maintain more than 50% of provisions. This also has a good amount of overlays that we have built on customers where we possibly saw some kind of an over-leverage stress. People who moved stages in the same quarter, moved multiple buckets in the same quarter. The number that you are seeing has a good amount of overlay.
As we go forward and our asset quality gets better, hopefully, we will start seeing some reins of these provisions or the necessity to build incremental provisions will be a lot lesser. Our net worth stood at a little over INR 6,500 crore. The task before us is cut out. We have taken necessary remedial measures, and we are completely focusing on what could be done to ensure that Five-Star gets back to its own standards. That is something that will keep us busy for the next one to two quarters. Hopefully, we will keep meeting you as we go forward with better numbers. We will take a pause and happy to take the questions from any of you. Thank you.
Thank you very much. We will now begin the question -and -answer session. Anyone who wishes to ask a question may press star and one on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Mahrukh from Nuvama. Please go ahead.
Yeah, hi. Good morning. I have a few questions. For CLAC, Cable collection efficiency for the quarte r is at 96.3%. What needs to change in the macro to take it higher, right? This is kind of a lagged impact from leverage. Unless things change in the macro, and these are secured loans, people do want to, you know, not have their property sold off or not having to sell their property, and yet they are defaulting. What needs to change in the macro? Is there good enough visibility that that's built, right? I think other banks and other lenders have also pointed out to incremental stress in our field segment. That's my first question. One lender said on their call that they are seeing incremental stress on south-based mortgages because they had acquired, so AU said that, and you know they had copiously acquired SimCare.
Is it the same overlapping segment? Usually, banks don't operate in your segment, but they did an acquisition. Asking, is this like stress in the south-based mortgage segment, or how do we view it?
Yeah. Thank you. I'll go one by one. First, from the collections question, what do you ask? See, from a macro perspective, I believe two things which I feel these are the green shoots from a macro perspective. One is the microfinance lenders and personal loan lenders, they have taken up the credit growth more sensibly. To add it, the guardrails which have been put in place are effectively working out with what I'm hearing from the market. I believe no fresh over-leverage has been created to any customers or any families going forward. That's the first green shoot I see. What will happen to the already customer who sits on high over-leverage? That is where the key difference comes between a secured lender and an unsecured lender.
As I said in my opening remarks, you see quite a bit of write-downs happening from microfinance and personal loan lenders for the last three quarters. If you see Five-Star Business Finance Limited, we have not written down any number this quarter. When a loan is getting written down, especially unsecured loans getting written down, and the collection people stop approaching the customers, the secured lenders keep approaching the borrowers always. Earlier, if there were two, three lenders focusing on collections from a customer, today it would be only the secured lenders who would be focusing on the collections from the same customers. A good thing to remember is that our economy is doing well, and we see the cash flow has not dropped at any of the middle and lower middle-class people, especially those related to the real estate segment, carpenters, plumbers, and all. The cash flows are there.
Now the customers will start paying the EMIs to the secured lender, where I said Five-Star Business Finance Limited will be one among them to see the collections getting uptick. To add to that, now we have added more collections people at the ground level. To be more specific, in the last quarter alone, close to 200 collection officers have been put in place wherever we see things, both at the branch level and even at the state level. This will argue well for our outlook, saying that the improvement will come from next quarters onward. On the south-based, let me not mention any of the names that were referred.
From Five-Star's perspective, yes, we got a hit in Karnataka, but that was purely based on ordinance, which was put in place from January, and it got spotted out in the March, April, May due to the local politicians, police, and financially illiterate customers. Even in Karnataka, I can give you the good numbers. Comparing with April to July, you see a 3%- 4% uptick in collections metrics in this month. That gives us the confidence. Slowly, these ordinances are getting recalled. The registered lenders and secured lenders like Five-Star will be in a very good position in the coming months. Other than that, we see some kind of strain or stress in Andhra Pradesh, to be a little specific, but leaving that, Telangana and Tamil Nadu in a very, very strong weekend.
Got it. Just in terms of credit cost, during the second quarter, they're still elevated, but they will stay similar, or there's a possibility of higher credit cost?
The possibility of higher credit cost at this point is nonexistent. We don't expect the credit cost numbers to go up in the second quarter. It will either come down marginally or probably stay where it is, and then start decreasing from the second half of the year. We don't envisage any increase in credit cost for the second quarter.
Okay. Thank you, So much.
Thank you.
Thank you. Next question is from the line of Renish from ICICI. Please go ahead.
Yeah. Hi, sir. Thank you for the opportunity. A couple of things. One of these strategies, right, you highlighted about, you know, we'll be moving towards the INR 5 lakh to INR 10 lakh ticket size, and obviously, we'll continue to focus on INR 3 lakh to INR 5 lakh. Just wanted to understand what kind of a mean yield impact do you see on people incrementally, you know, high resistance in high tickets? I don't know whether this will be for a, let's say, short term or actually we'll be moving towards the high ticket size. That ticket size currently, you know, is highly competitive with a lot of operable agent buyers and will get products, especially in-house. Where do you see a mean yield settling with this growth strategy on the ticket size?
Yeah. See, first of all, the INR 5 lakh to INR 10 lakh segment is not new for Five-Star Business Finance Limited. If you break up Five-Star Business Finance Limited's portfolio, close to 15% of our existing customers are INR 5 lakh to INR 10 lakh. In fact, it's a little more if you take about INR 10 lakh also. This is not the new segment that we are entering into. We are already participating in a good way. What we are trying to say is the less than INR 3 lakh segment will be slowly run down. To that end, to the extent the INR 5 lakh to INR 1 lakh segment will be focused. Suppose the INR 1 lakh to INR 3 lakh segment is close to 30% as you see. We are intending to bring it down to 25% in this March. That 5% incremental growth will come from INR 5 lakh to INR 10 lakh.
Let me be very clear, our main focus will be between INR 3 lakh to INR 5 lakh. That's our sweet spot. We are not seeing any competition in pricing in INR 5 lakh to INR 10 lakh because, as you mentioned, the people are most interested in about INR 10 lakh segment, even average of INR 10 lakh segment. I don't think there is much competition here. We are an existing player in this segment. We will see that slowly we are inching up close to 20%- 25% of our portfolio in this INR 5 lakh t o INR 10 lakh segment.
Okay. I'm going to ask a couple of, yeah.
Go ahead.
I'm going to ask a couple of questions.
One is when we are talking about INR 5 lakh to INR 10 lakh, we'll be more closer to INR 5 lakh than to INR 10 lakh. It is not like a segment where we are going to tread on the feet of the others. It is still a segment that is not, we're not focused by many of the players. Our confidence also comes from the fact that we have dropped the rates by 200 bps. To that extent, there is more competitiveness in Five-Star Business Finance Limited today to reach out to this segment and meet their demand. We really don't see the need for any significant drop in yield to the segment, which will have an impact on the learning. I think with our current yield, we should be able to improve this INR 5 lakh to INR 10 lakh. You will not see any kind of a learning impact.
Got it. Got it. If you can share a yield difference between these two ticket sizes, it would be helpful.
Today it is not on the basis of ticket size. It is on the basis of whether the customer has a higher credit score, whether the customer is taking a loan for business purpose, which will make him qualify as a priority sector asset for a bank lending. For that purpose, we give a 1% or a 2% subsidy. Our good news is people who are taking a higher ticket loan will be a lot more prone towards that. They will have even more registrations. They will be more easier to onboard for a UTM access registration. Inherently, they will get a little better rate compared to a, let's say, a sub-INR 3 lakh customer.
Yeah. That's what the whole point is, right? As we move to risk-based pricing, naturally, the inherent risk of this customer profile will be better than, let's say, from INR 1 lakh to INR 3 lakh or INR 1 lakh to INR 5 lakh ticket size. We are able to actually capture this at this stage, and hence there will be an impact of yield. I understand, as you rightly said, as of now, it is not on the ticket size. We might offset this with the cost of borrowing benefit. I mean, is that the fair assumption?
Yes, Renish. The second is, for now, like Mr. Pathy said, we are probably planning to push this by maybe another 5%. Even if the yield differential is 1% between a priority sector and a non-priority sector customer, you're not going to see that affecting the portfolio significantly, maybe 5-10 basis points or any. This is comfortably able to adjust it through the cost of interest.
Got it. Thank you, sir. Just a last thing on this, you know, starting consider CPD. If you can just take us through the flow forward, you know, from a 30- 90+ in a normal scenario, and how do you think this flow rate is behaving in the current cycle in the next three to six months?
Generally, the flow rate from 30 to 60, 30- 90 +, 30+ to 90+ is largely erected. You will probably see about, you know, this is why I'm not taking the last quarter because last quarter has been a bit of an aberration. Generally, you will probably see about 90, 95%, that's 90%+ stabilizing in the 31 to 60-day buckets. Whatever flows in out of the 390-day bucket, we see a D1Q1 of somewhere between 90%- 95%. You're probably looking at maybe 5%- 10% of loans that will probably spin from a 30+ to 90+ historically. That flow rate has seen a little bit of an impact in the last quarter or maybe in the last couple of quarters.
We are confident that we'll be able to erect the flow as we go forward and bring our flow rate back to historical levels.
Got it.
Renish, to add a point here, yes, we were talking about the flow. If you see Five-Star's recovery from 90 plus, it has gone up very well. You all know that we have set up a legal recovery team. Today, it is more than 100 people, 100 advocates on rolls. If I can share the numbers, in the last financial year, on an average, INR 12 crore to INR 14 crore were recovered from NPAs. I'm talking about 90+ accounts, 90+ DPG accounts, and the written down accounts. This year, from June, September, December, March, you will see that moving close to INR 18 crore to INR 20 crore of recovery every quarter. You will see close to INR 70 crore to INR 80 crore of NPAs getting recovered. That will also add, even though there is some flow from 5% or 8% flow from 30+ buckets to 90 +.
Got it. Just a last thing on this from a very big insight. We have been talking about setting up or expanding our collections team in the spend. Where do we spend on that front?
Pretty good, Ranga here. I just wanted to state that the collection team spending is clearly happening. Today, what we are doing is we are looking at specific pockets where there is higher collection stress, which is, you know, the pocket of both Karnataka and in Andhra Pradesh. In both these, Mr. Patty has just spelled out that we have added almost 200 collection officers. This is more on pin codes and branches where we are seeing more collection stress. I think the support is being given. Today, overall, we have seen 50,000 collection officers. That's a large enough vertical for us to relook at in terms of where you wanted to put the collection strength. I think it's largely stable today. If at all we see any emerging stress pockets, specific pockets or branches, we will continue to keep adding those. Otherwise, largely, the structure is in place.
Got it. These 2,000 officers are only for collection. I mean, there is no sales target for them.
Nothing. These are exclusive collection people today. We also had a split between they handle one kind of accounts. The collection team today handles all the PPG accounts. They only handle the area of accounts. There is more focus, specialized focus given by the collection team when the business team handles all the collection, I mean, current accounts only. For the group that we have, this 2,000 is more than adequate, and they have an appropriate supervisory structure above them to be monitored. I think this entire structure was both from a division of accounts and in terms of adequacy of officers, which got fine-tuned over the last three or four months. Today, we are more or less adequate. I think we should take care of we are not seeing any new stress emerging anywhere. Wherever we saw stress, the collection team is already put in place.
Hopefully, this will suffice and see it through over the next couple of months.
Got it. This is very helpful, sir. Thank you and best of luck.
Thank you.
Thank you. Our next question is from the line of Mr. Nischint Chawathe from Kotak. Please go ahead.
Hi. Thanks for taking that question. Karnataka is just around 6% of the business. If you could spell out, in terms of how much of the incremental stress during the quarter came in from Karnataka, was it anything meaningful?
The NPA in Karnataka did go up. There was an increase in the NPA number. The point is, given that Karnataka is only about 5% -6% of our portfolio, it's not a very significant number. The incremental addition to the NPA could have been more like INR 15 crore to INR 20 crore from Karnataka because the portfolio is much lower there. We also saw some bit of an impact on the Andhra Pradesh portfolio, especially on the smaller ticket sizes, where we did see some bit of an impact on the NPA number. Given that that's a much larger portfolio, it's a combination of two. I would say in absolute quantum, Andhra Pradesh caused a little more stress given its sizable proportion rather than Karnataka.
We had done a scrub a couple of quarters back where we did highlight that the overlap with microfinance customers was not very large. The exposure to stressed customers, again, over their over-leveraged microfinance customers, was in single digits. I was just curious, what has really changed? Have people taken loans since then, or have the same kind of borrowers defaulted? Do you see the borrower set who's kind of under stress in a completely different design around?
You see, one thing that came, and we did last in December, and we have actually done a scrub now. What we are seeing is the overlap has actually gone up, not just with microfinance, but even at an overall level. What used to be about close to 15% for us in December has actually crossed 20% levels. I think we are somewhere between 20%- 25% of over-leveraged customers on the book. Microfinance, you know, consequently, microfinance has also gone up. What used to be about 30% of microfinance, in some states, it has gone up much higher. In some states, it has gone up. I think what we've also seen is, especially in states like Andhra Pradesh and Telangana, where for almost one and a half decades, microfinance were marked there, we did see the entry of microfinance back maybe in the last year or so.
There has been a little more, possibly higher quantum lending by microfinance in those states, which has caused some stress in those pockets as well. From our behavior of the over-leveraged customers, we are not seeing too much of a stress in the higher ticket segments, like INR 3+ lakh segments. We are not seeing the over-leveraged customers either defaulting with other institutions also and definitely not defaulting much with us. Where we are seeing the stress is in the lower ticket customers and more so in the over-leveraged segment within over-leveraged customers within that segment.
Sure. If you could share some thoughts in terms of how do you, you know, how kind of things move forward after Ranga 's exit? Obviously, he's played a very meaningful role. I think as a team, you have done very well. How do you kind of plan to plug that? How do you kind of arrest any further exit of employees?
I can assure you there is no further exit of management team or employees will happen because of Ranga's exit. As I said, he has been with me for the last 10 years and purely to take up the entrepreneurial activity, as I said in the opening remarks, he was discussing with me for the last some time. I thought this time I should really encourage that. I encouraged it, and at the appropriate time, he spoke to the board. We are bringing it in the June quarter. Having said that, Ranga reported to me. I'm always the operational guy in the last 22 years of my work in Five-Star. It is one more added few stakes to me.
At Business and Collections, I can name there are three strong management people: Vishnu Ram, who's a COO, Satya, who's a CEO, and Murli, who's the Head of Business, is already there in the system. Along with them, I'll be the fourth person to take care of Business and Collections alone. With this strength, you can see that there's nothing yet affected. Business will be as usual for Five-Star. Like I said, other departments like Credit, IT, you can see from our management team, there are already chiefs and deputies there. We don't see any issues because of this exit.
Got it. Just on the incremental cost of funds, going back to Srikanth, do you think with 8.6%, I mean, it's a very sudden drop. Do you think it is kind of a function of the mix? Is it sustainable, or where do you see this going?
The thought was simply that when it's there at 8.60%, we don't do so because we have borrowed less than a quarter, and we have only taken from banks. Having said that, we would want to continue the diversification and not lose the benefits that we derived in the last year. When we go there, I think the cost would be a little higher. Our guess is I think it is definitely not going to go beyond the levels. 8.60% may be more like an 8.75% level for the full year. I think we should be able to manage at 8.75% for the full year. At this point, I don't really see why we should drop 8.75 % on the incremental bottom.
Got it. And best wishes to Ranga for his future endeavors.
Thank you, Renish.
Thank you. Our next question is from the line of Parag Jariwala from White Oak. Please go ahead.
Yes, thank you. One question is, if you can just elaborate that the volcano that happened in June, how has the collections and any big movement that has taken place, if you can, just to know that whether you know the pain was more in the beginning of the month of May or it was more in the month of June, that is one question. Secondly, you know, one question is that how are you approaching the GPV estimates currently? I mean, are you starting now a proper recovery in the sense that you're doing notices and purchasing the property, or are you still willing to use one or two installment times and then ask the community to move on it? Those are my two questions.
Yeah. Yeah, Parag, let me go one by one. I think first from the performance of last quarter, April, May, and June, more or less all the three months were reacting a little lower comparing to our standards of collections. There's no much difference between April was good or June was good. All three months were not good as per our standards. From July onwards, since I started my numbers, I mean, my performance retreat, July looks really impressive. If this impressiveness continues in August and September, you will see much stronger stabilization in Q2. That will also feed us to better collections in Q3 and Q4, as I stated earlier. On the second point, DPV's focus, when Ranga answered the question, we were very clear that now the accounts, both current customers who have no DPV and the customers who have DPV, is being segregated.
The customers who have no DPVs is being handled by the business team. They are much softer customers, much easier to handle. Mostly, they will get the EMIs tier by themselves. That leads to only DPV customers. The entire DPV customers, or what we call carrier customers, are handled by the entire collection team. The 2,000 officers and the more officers who joined in this quarter, along with the supervisory layer, now they are starting to focus only on the DPV customers from April onwards. We have seen a good improvement in this quarter beginning onwards. That's where we have changed our approach. The team that was handling both the current and arrears was now being split. The current is now handled by the business team who are posting the files.
The entire arrears is being handled by the collection specialist who will focus and follow up with the customers more so that your EMIs are recovered on time.
Okay. Thanks.
Thank you.
Thank you. Our next question is from the line of Vikas Mistry from Moonshot Ventures. Please go ahead.
Yeah, thanks for the opportunity. Just asking on the same point of collection efficiency, can you quantitatively define what has been the collection efficiency in ours?
Can you come back?
Yeah, just on collection efficiency. As you say, this curve data in December, again, the overlap is higher. We continue to see collection efficiency dipping. What gives you so much confidence that we will not be having higher credit costs? Can you give me quantitative figures on other collection efficiency numbers?
There are three more days to go, and we will have some good amount of collection efficiency coming in the last three days. At this point, as Mr. Patty said, compared to the first month of last quarter, we are better off. I don't think we'll be able to give any specific numbers at this point.
Like we can connect after month end.
After the month ends, we can see if we can give some information to the entire public. Let's see. I don't know how we generally, we don't have a practice of publishing information in specific, on a month-end basis or on the performance of the month. Let's see if we can do something. What we are seeing is the trend is definitely improving. Compared to the first month of last quarter, it's looking better.
Thanks for the closer issue you could be able to give. Second is that on over-leverage. How can quantitatively define how much tightening of new loan generation we have done? Let's suppose earlier we were giving loans to the customers. We are having maybe two loans. What is the condition right now to address this over-leverage crisis not happening in the future?
Prior to the sanction of a loan, we always had a very stringent underwriting mechanism. As we discussed, you know, we take on the obligations of the customer, and after knocking the obligations from the income, we only go for a 50% bank burden ratio. Our underwriting was quite stringent. The problem is, once you have given the loan, there is no way that you can protect the customers or stop the customers from not over-leveraging themselves. Given the profile of our customers who are not very financially literate or savvy, when liquidity is available, they will go and over-leverage themselves. That was a problem that we saw. This is where in his opening remarks, Mr. Lakshmipathy Deenadayalan addressed this. Today, we are moving away from this profile of customers.
We are getting to a little more higher quality profile of customers whose financial understanding is a lot better, and who will not over-leverage themselves for surveillance reasons, even when liquidity is available. The question is not about how many lenders have given loans before we sanctioned the loan. That was always under our watch. The problem was how many lenders gave money to the particular customer after we have sanctioned the loan. Moving to a different profile of customers, we believe that will get addressed. Obviously, the battles that the microfinance are put in should also interfere with the over-leverage problem so it does not crop up again.
Totally understand.
One point to add here, because if you can look at the number of offices that we have or the number of branches that we have, both have significantly gone up. Despite that, if you look at the disbursements, it's more or less flat. That only shows you that even though the sourcing volume is high, we have tend to source easily in terms of whom to give and whom not to give at this point of time, which means the resistance in credit level has gone up. It's a tightening right at the sourcing level in terms of at least potential customers who we think might get over-leveraged in the future. Those are trying to get arrested right at the sourcing stage.
Yeah, definitely. Okay, fine. That's all from my side.
Thank you. Our next question is from the line of Subhanu Bangal from Tree Head Capital. Please go ahead.
Hello.
Yes, sir. Is it audible? Please go ahead.
Yeah, my question on cost to income ratio. This quarter, cost to income is almost significantly gone up. For your guidance, go ahead and follow up.
As you said, the cost to income has gone up primarily because of credit cost going up. If you break up the 41%, I think it's probably 33% cost to income and about 8% of credit cost to income. That 33% will be largely raised bonds. We should probably see somewhere around 30%- 32% of cost coming in because this quarter also has the increment impact, right? Mostly income will be coming in, but the cost is starting from day one. The credit cost should also normalize because we have taken a good amount of provision. I believe the cost to income should stay somewhere around 35%- 37% at least for this year.
From H2?
From H2.
Okay.
Yeah. My second question on H2. If the cost of everything is adequate for the June quarter? in July?
For July? Yeah, yeah. Like I said, July is still not over. April has three more days to go, and there are quite a good amount of collections that generally happen in the last three days. At this point, even if it is looking better compared to April, which is the first month of last quarter, we will probably be able to give you the final data only after the month end is over.
Thank you.
Thank you. Our next question is from the line of Karthik Srinivas from Unifi Mutual Fund. Please go ahead.
Hello. Hi. Thanks for the opportunity. I just had two questions. One is on the activity rate at the loan officer level. What would be the ballpark activation rate at the loan officer level? The overall current loan officer, has it gone up or down after we have seen some amount of stress building up? That's question number one. On question number three, just taking a few on the remarks that you have had on underwriting practices. I just had the, you see, how often do we submit the loan details to civil authorities, to the CIBIL or TransUnion, so that the problem of over-leverage is arrested at the household level? How often do we submit the data to them?
Karthik, on your first question, we have not seen any significant spurt in attrition over the last, let's say, three or four quarters.
It is slightly on the higher side, as we have said, especially if you look at the officer level, the business and collection. This number on a quarterly basis is anywhere around 17%- 18%, which means you're talking about 65%- 70% of attrition happening at the officers on an annualized basis. That number is basically the main thing. You'll probably see half a percent more displayed that way. Most of this comes from people who have stayed with us less than one year. If the officers continue for more than one year, the attrition is significantly lower there. It may even drop to as low as about 20%- 25%. Nothing very peculiar to what has happened in this quarter is reflecting in attrition. On your second question, today we submit the data to the bureau on a quarterly basis.
This is something that we are mandated to do, and we always are very high on compliance. We submit the data to the bureaus on a quarterly basis.
Got it. Since MFI companies that we often see in multiple cases, how do we ensure that during the time or during the course of the loan? I understand that once the loan is done, we can't do much about it. Do we have additional guideline testing how we manage the interface to household level and ongoing level, maybe in our CalAccount as well.
There is a regulatory necessity for even MFIs to submit data on a quarterly basis. This has come in, if I remember right, maybe in the last about six months or so. Today, every institution has to submit data to the bureau on a quarterly basis. It is not the earlier practice where people submit on a monthly basis. At best, you are probably taking a risk for 15 days and not beyond that.
Thank you.
Thank you. Our next question is from the line of Raghav from Ambit Capital. Please go ahead.
Good morning. I have a case of three. One is just a clarification question that the shared cost balance of 1.3% is on total assets, right, not on drawstrong. On drawstrong, it will be more like 1.6%, 1.7%.
Our ratios are on total assets, average total assets.
Understood. Secondly, how are you feeling about recovery of the assets? In this quarter, you haven't written off any loans like you mentioned. In fact, the trends the last couple of quarters, there have been some write-offs. Also, in one of the previous calls, I think you had mentioned that there was some pressure on customer cash flow. If I remember correctly, today you seem to count a lot more positives on that as pressure. Is there a question that it's optimal to inform that getting better and will get better and what will help them to pay?
Raghav, let me answer this question. I think the customer's cash flows are not better, but it is staying on where it is. My answer was always there was no dint in the cash flows. If the cash flows are getting better, no, I'm not told that cash flows are getting better. There's no dint in the cash flow. The bigger problem is not on the cash flows. The bigger problem is the over-leveraging in the EMI capability of that family or that person. It's caused the confusion in the minds of the customers whom to pay, whom not to pay. That is why we saw all secured, all unsecured MFI getting disturbed three, four quarters before, and the pain still continues. I just saw four or five days back MFI's results, one gold standard MFI results, which still shows 8.8% of credit costs, even in the month of June.
That clearly shows the pain points in MFI still continue. Now the customers didn't realize and have to realize that he has to pay promptly to the secured lender. Now the time has come for him to differentiate between the unsecured and secured lenders, which he was clubbing for the last few months. Since the collection efforts for the unsecured, the guide will come down substantially because we all know that if one EMI is gone, the loan has gone for unsecured. Our collections efforts will continue even if in a DPD bucket. That is the confidence which is showing up in July and showing up in my commentary that coming month, our collections will be better than last quarter.
That I understand. This is what the customer cash flows are where they were before. There is also a higher percentage of the over-leveraged customers that overlap with MFI. We've seen the sharp impact in the infinite stress in the coming quarters. As that workplace is stressful, stay at this level, it will probably come down in the customer. Is that how you are?
Yes, Raghav, that is our belief. That's what I said, what is happening in July month and what is happening from the data is what I see. There is a substantial write-offs from these lenders. That means the customer's technical over-leverage is slowly coming down. Hence, his liability to repay will only lie with the secured lenders. Five-Star being a secured lender will be able to get that EMI in a normal method, what we used to get before the low leverage crisis up to this.
That's very clear. Our last question is, you know, you said the next quarter changes to the last quarter, and maybe that is important to you what has happened in the first quarter of the second quarter. That number is at 7%, sir. In the first quarter, what is what the difference involved? My only question is, how should one think about NPAs and a static pool of loans in a different situation?
Raghav, I think this is probably not the representative quarter that we should be considering because obviously, this leasing has been on the higher price. We are very clearly guiding you that we should be able to control this leasing as we go forward. I think on this, let me better understand your data. We can connect top lines. I'll better understand your data and give you some sense on what kind of leases we should probably be reviewing.
That's very clear.
Thank you.
Thank you. Our next question is from the line of Girish Shetty from Girik Capitals. Please go ahead.
Hi, sir. Just a few questions from our side. You mentioned that you had a discussion with a senior position. The second question is, just to understand your model, if I look at your loan book, like when it was at INR 3,000 crore, INR 4,000 crore kind of a level, you had a similar number of employees, like 3,000, 4,000. Now at 11,000, we have 11,000 employees, obviously because we do a lot of focus on collection. I just wanted to understand when you are reaching like 35,000, 30,000, 50,000 on this level, will you be needing the same number of employees? I just wanted to understand on the scaling we've got in the business.
Yeah.
Go for the details.
Yeah. Yeah, I'll go one by one. I'll pick on the first part on Ranga. Clearly, now the focus for me and the management team will be getting back to business collection and quality for our Five-Star standards as quick as possible. That is our first intent, and that is where our entire focus is going to be. As I said in earlier questions, the depths of management teams in each department, especially business and collection department, as I said, along with me, there are three management people who are heading at Chief and Head levels will be functioning with me to ensure that growth collections are back on track. That is the first and the top priority that I've taken now. Yes, the succession has been discussed in yesterday's board, and we will take it to the board at the appropriate level, appropriate time.
I can surely tell you that next nine months, the focus in my mind will be only on the operational side, not on the succession side. Maybe at the end of March, I can give you more clarity on the need and appropriate time that what Five-Star needs for a CEO role. Till that point, I'll be the complete in charge of operations. That is what the board intends to do, and that is what I'm intending to do. On the second question, yes, you're right. For some years, the growth momentum was kicking into Five-Star. The average employee to AUM was around INR 1 crore. Our historical numbers goes up to INR 1.25 crore per employee. That is what we have been saying always. At the steady level, maybe INR 30,000 crore, INR 50,000 crore, you will not see the same INR 1 crore per employee.
Maybe we'll be seeing INR 1.25 crore per employee. That also obviously is when we are moving up the ticket price.
Okay. Okay, sir.
Thank you. Thank you, sir.
Thank you.
Thank you. Our next question is from the line of Pranav Gupta from Aionios Alpha Investment Managers. Please go ahead.
Hello.
Hello, sir. You're audible. Please go ahead.
Hi. Good morning, and thanks for the opportunity.
Sir, I'm sorry to interrupt. Your voice is a bit low. Can you repeat?
Just give me a second.
Yes, sir. Sure.
Is this better now?
Yes.
Yeah.
Hi, and good morning, and thanks for the opportunity. The first question is on the DPD movement and the trends that we've seen this quarter. Based on the collections that we've seen in July, how do you think about the W1C1 collection efficiency and flow power from Zero DPD? Has that stabilized? Do we probably see another couple of quarters of further downward movement before it stabilizes? How should one think of that? Currently talking on the Zero DPD market.
Yes. For now, I think for the quarter, you will see much stabilization coming into the picture. You will not see much of improvements in BPDs. As we step into the second half, December and March quarter, the growth kicks in. Growth also brings in a good amount of current customers to the current bucket, denominator effect. You see the collection efficiency and D1Q1 are going up in December and March quarter. You will see the improvements coming from December and March. This quarter, as I said in my earlier opening remarks, you will see a much stronger stabilization at the quarter end.
Right. Jerome, just to follow up on this, you mentioned one could see much higher recoveries coming in from the NPA bucket. Is it safe to also assume that given that you've put in a lot more people in connections on the BPD bucket, you'll see pullbacks coming in from this quarter? Maybe that is something that we sort of start expecting from next quarter onwards?
Currently, they're not committing anything on pullbacks. Currently, what we are committing is a stabilization of the customers in their respective buckets. I think that is the first and foremost effort that we will put in. Of course, there will be a few customers who will be coming back to the better buckets. What I mentioned earlier on this, good amount of recovery coming in, I was mentioning about legal recovery. That is, you recover your money from the deep delinquent customers, 90+ customers and written-down customers. That will see close to INR 70 crore to INR 80 crore getting recovered in this financial year, is what I mentioned.
No, absolutely. That's very clear. The second question is on the OpEx base. Obviously, this quarter, we saw the cost ratios impact a little bit, purely because of business being slightly on the slower side. Over a two, three-year perspective, how should one think about, you know, cost-to-market value and cost-to-market assets for implementing?
I know you're talking about OpEx or credit costs?
OpEx, OpEx. We saw that it's up a little bit purely because of slower disbursements. On a more medium-term basis, how should one think about cost-to-market assets?
We are not changing our guidance on any of them. The only guidance we are changing is on credit costs to average assets, which we should talk about closer to 100 basis points, 95 to 100. That number, we are pushing it to 1.2%. Other than that, the guidance that we gave on the OpEx, which will probably be about 5%, at 5% level, continues to hold good. No changes to our guidance on that.
Sure, sir. Thank you so much for the invitation, and good luck for the future quarters.
Thank you.
Thank you. Our next question is from the line of Shrinjana Mittal from MS Capitals. Please go ahead.
Hi, thank you for this opportunity. Just one question. In the early, we tracked some asset quality metrics called early mortality account. Is it possible for you to share, like, what was that number for this quarter versus same quarter last year and last quarter?
No, I was asking about risk mortality.
Yeah, risk mortality, yeah.
See, that number will be very small there. The number has gone up. In percentage terms, that number will be extremely low, but in terms of the number of accounts, yes, there has been an increase. What used to be maybe 75 to 100 accounts has actually gone closer to 150, 160 accounts for this quarter. This is basically whatever has turned NPA during this quarter and disbursed in the last 12 months. That number has inched up a little bit. I think in percentage terms, if you look at it, it will be very, very low.
Got it. This change is coming from the same set of customers, which we earlier spoke about?
Yes.
Yeah, okay. Got it. Thanks.
Thank you. Our next question is from the line of Rakesh Kumar from Valentis Advisors. Please go ahead.
Yeah, hi. Thanks, first. Just on this over-leveraging part, like, you know, as a preemptive measure, how soon do we get the, you know, understanding that the borrower whom we have lent is now over-leveraged? Because as you said that, you know, you get the civil filing is happening in a 15-day time. How soon do we get that information that the borrower is over-leveraged now?
Rakesh, we can get it whenever we want because the credit bureaus today have a scrub that they can give us anytime we want. Generally, doing this has its cost implications also. We do it at least once in a quarter, but there are times when we probably do it once in half a year. In a time when we are facing some level of stress, I think we can get to know of this within the next quarter.
I don't know. You, as a practitioner, will know better if we should increase the frequency of the same or not, subject to the cost involvement issue. Secondly, after having known that, how soon we can wind up our positions or maybe increase the security level of the assets from the borrower?
Rakesh, that's not possible because, you know, you have given out a loan based on a specific collateral. If the borrower happens to over-leverage, especially post the loan that you have given, there are only two things that we can do. One, I think we can try to get to know the information as soon as possible. Two, we can have a close monitoring of that account and increase our collection efforts. We cannot recall the loan or increase the security cover that we have because the borrower is not giving you an additional collateral to make you more comfortable. That's not a practical option. The practical option is more how do you avoid the customer's future and how do you increase the monitoring level for this customer who has gone a little bit over-leveraged?
Okay. Sure. Got it. Thanks.
Thank you. Our next question is from the line of Devyansh Gupta from Latent PMS. Please go ahead.
Hi. Am I audible?
Yes, sir. You're audible.
Yes. The first question was that, see, the NFI stress that was going on was something as a known factor. We know that typically people will default on the unsecured first, and then finally, they will stop paying the secured loans, right? The question is that was this, this quarter's number was much worse than what we had anticipated because we would have seen all these cycles in the past, right? We just wanted to get a sense of, was it a bigger surprise than what we would have estimated? How should we understand that, how much pain is more than because people are saying at least on a recognition basis, it is at least Q2 should also be affected by at least for NFI's years.
You're right, this came in with surprise. Otherwise, I would have guided in the March quarter itself that this is coming up. If you see, December to March, other credit costs that our NPAs were only going up 10, 15 bps, which is normal, right? Only in this quarter, you see the NPAs shooting up. This was a little bit of a surprise to us. When we did a study in April, May, and June, and found out the cause of the pain, that's what I started my commentary saying. What is the cause of this pain? Where is this pain coming from? Based on that, what are the remedies that Five-Star Business Finance Limited has taken from June, July month onward? It was a surprise for us, a bit of a surprise. I'm confident, because finally, the emptying car sales are put in place.
Personal loans and fintechs are wiped out. This gives the confidence that no more over-leverage will be created for a time being here, at least, to the customers of Five-Star Business Finance Limited. We are also moving away from the low-segment, financially illiterate people. This will all put a clear sensing that going forward, our asset quality will be much better. Yes, it was a surprise, a bit of a surprise in the June quarter.
Got it. The second question associated with, let's say, the asset quality only, is that excluding Karnataka and Andhra Pradesh, is the asset quality or the provision sent on the asset quality excluding Karnataka and Andhra Pradesh? The associated question is that Karnataka, I understand there was a roll-out, and it's through which caused confusion. Any reason why Andhra Pradesh specifically has escalated with respect to asset quality?
Yeah. I think that we can't get that data if you have right now. To that, I will explain about Karnataka and Andhra. Karnataka, as you rightly say, it's the ordinance impact, which started in January, and which is slowly coming down as we see this month. We are quite a 2%, 3% better than where we are in April month collections. Slowly, I think Karnataka is bouncing back in collection first. Business, we are not looking to grow in Karnataka, at least for the next two, three months. We'll see how the collections trend is stabilizing there. Based on that, our business call will be taken in that shape. In Andhra, there is no ordinance that took place, but the Binod-Tilak segment was much larger there.
We were gone to some riskier localities, colonies, and minority communities where people got confused and got impacted due to unsecured lenders, non-paying to unsecured lenders because they're showing a similar trend to a secured lender. Hopefully, this month, people will realize and come back on paying their EMOs a bit regularly. That is our hope. That is where there was a shift in Andhra in last quarter.
Does that then mean that on an ongoing basis or future, we are going to avoid these, let's say, high-riskier places? I mean, one is questionable.
Yes, I said in the opening sequence, we'll be avoiding INR 1 lakh to INR 3 lakh segments where the risk is higher at the current period of time. I will not say always, but at the current period of time, the INR 1 lakh to INR 3 lakh segment is avoidable by Five-Star. We are moving that, whatever dip you see in that segment will be added in the INR 5 lakh to INR 10 lakh segment.
Got it. On the civil checks, we do civil checks for the people that we are getting in, but whom we are getting in the loan agreement with. We also do a civil check of all the family members. Is that fair enough?
yes, of course. As Five-Star Business Finance Limited's business model always, we see, we say that we lend to a family rather than to an individual. If you see Five-Star Business Finance Limited's, each agreement, you will at least see three to four co-applicants along with the applicant. The entire earning family members will be taken into agreement. For the entire people, the CIBIL, IMARC credit bureau checks will be done.
Understood. Just the last question, while I'm assuming the data is getting accumulated and processed, is it fair to assume that given, let's say, the situation of NPAs and, let's say, the interest rate transition, housing launch is delayed, or are we still looking to launch something in housing within this year?
Nothing is getting delayed here. The planning is quite active. Let me give you some inputs in the next earnings call.
Sure.
On the data, if you ask, Tamil Nadu and Telangana, like I think I mentioned earlier itself, they are doing much better than the company average. Tamil Nadu's NPA is sub-1.5%. Telangana's NPA is at about, a little over 2%. Both of these are below the numbers for the company. The rest of the country is slightly worse, but not unduly worried there because the proportion is small. There have been some legacy issues because its NPA is looking a little higher. The two big states of Tamil Nadu and Telangana are performing very well.
Got it. Got it. Understood. Thank you.
Thank you. Our next question is from the line of Darshan Deora from Indvest Group. Please go ahead.
Thank you for the opportunity. My first question was on the LGD or the loss given default. Given that loans go to 100% secured and that's mostly with SORP, what do you think the company's actual experience in terms of the loss given default?
In the seven portfolios, we typically see a loss given default of anywhere around 15% to 20%. This is also not on account of the principle that the company uses because the loss given default computations also assume the time value, which means the accrued interest will also need to be taken into account. Primarily, we lose money only on the interest component. If you look at, I think this is the data that we used to give still about four quarters back, on loans which had NPAs at the time of settlement, not every NPA, that number will even be a lot better. At the time of settlement also, if a loan is an NPA, on an average, we recover somewhere around 18% to 20% of IRR on those loans.
The company has not really lost principle on any of its assets, but some bit of IRR compromise is what we end up doing.
If I were to look at, like, say, the operating history of the company or the history of the company since it began, the actual principal write-off would be negligible.
Negligible. Generally, we write for, you know, a credit loss of anywhere around 25 to 50 basis points, but that is all it is.
Got it. Just to understand this distinction that you have made in terms of the officer, where now the officers who are looking after origination are only looking at DPD as regular collections. You have a separate team of 2,000 people who are handling the DPD cases. Has the existing team been segregated into these two separate teams, or have these 2,000 people been hired or received as a mix, actually by hiring people from the market?
That's the obvious situation. We already had a team of close to 2,500, 2,600 over the last few quarters. We will only acclimate the rest of it as part of the ongoing efforts in terms of giving specific support on whether we see the first pocket. What is new is not that it's more than, you know, it's not about the team, but it's about the account segregation between the teams which have happened over the last one quarter. Earlier, what used to happen is we used to divide the segregation of accounts between the two teams more than in intakes. The business team used to handle accounts of less than 24 months, and the collection team used to handle accounts of greater than 24 months, irrespective of the bucket.
What we have picked up now is the business team will handle current accounts, current buckets, and the collection team will handle DPD buckets. That's a split which has happened over the last about a quarter or so, more to give emphasis on the fact that DPD customers require special efforts and special attention to ensure that they are not going forward close and sort of arresting and getting them back on track.
At the time of doing ICO, the officer was in charge of origination and collection. There has been that sort of tweaking of the business model over the last four quarters.
Yeah, correct.
Got it. Got it. Thanks. Thanks. Good luck, Ranga, with your future initiatives there. Thank you. Thank you. Good luck to me.
Thank you. Our next question is from the line of Aditya Das as an individual investor. Please go ahead.
Hello?
Yes, sir.
Am I audible?
Please go ahead. Please go ahead.
Yes. I had a, it's a longer-term business question. I understand, you know, one or two quarters, I have increasing service costs because of all the issues from last year's regime. Over the longer term, three, five years from now, I just wanted to understand how do we see the business, what is actually the ROAs or MIN and ROEs that we expect out of this business? What is the sustainable service cost that we can expect on a longer-term basis?
Yes. I think, you know, whatever guidances that we have given to you in the past, and Mr. Patti alluded to this also, is sort of medium term. For now, I think given the situation that we are in, it's a little difficult for us to give you a very long-term guidance.
Probably for the next three years, we are intending to grow at a CAGR of 25% on the loan book. We will definitely see profit growing at 15%- 18%. This year may be a little muted because last year we dropped our rates, which is why, you know, we were guiding for a 15%- 20% for this year. That number will pick up over time. ROAs will certainly drop because we will be continuing to increase the leverage. If you look at the next three-year kind of a picture, we should probably be operating anywhere around a 7x kind of an ROA.
Assume if we are able to get to a 2x, 2.5x kind of leverage, or rather, I would say, debt equity, maybe a 2x debt equity, which means close to a 3x kind of leverage, we should be looking at anywhere around 18% -20% of ROE for the next three-year horizon. The only change that we have made is our guidance on the credit cost. If we used to talk about 80 to 100 basis points, we are pushing that number to about 1.2%, because there could be some macro-level issues that keep cropping up now and then.
For us to operate at a tight credit cost of 80 to 100 basis points, especially when we are becoming a lot bigger, we'll probably be, let's say, at an INR 20,000 crore to INR 25,000 crore portfolio by then. That would mean, you know, it would be quite a bit of a stretch. We are pushing our credit cost guidance to about 1.2%. Other than that, none of the other guidances change. Whatever we have been giving in the past continues to hold good.
Okay, just one additional question here. If, ideally, we are measuring the portfolio under INR 3 lakh to almost like INR 5 lakh to 10 lakh per unit, is the large credit cost being, like the credit cost, you know, guidance should ideally remain the same or come down because those segments should ideally have better, you know, quality customers, even on longer-term basis?
We are not planning to move, you know, the whole stock share, right? Maybe you'll probably see 5% being moved year on year. This can have a benefit on the credit cost, but will it be significant or material? I think we will probably take a look as we go forward and then maybe immediately look at the guidance at a little later point of time. Today, we would like to be a little more conservative on our guidance given what we have seen over the last few quarters. This is where we are guiding you for 1.2%. If at all, you may probably see some positive surprises going forward. At this point, we would like to continue with our guidance of 1.2%.
Got it. If I could, excuse me, one more question. When you see a different picture, what do you see the opportunity side in this segment that you're raising some now? If you kind of move 5% -10% of your portfolio to INR 5 lakh to INR 10 lakh, what is the opportunity on a longer-term basis that you see in this INR 5 lakh to INR 10 lakh and INR 6 lakh to INR 10 lakh segment? How can our loan portfolio really be considering or?
You would have seen in our BRFC and two other BRFCs that came post that, where the opportunity for this segment is quite high. This is coming from the ASB report that CRISIL has been doing. We also had some ISC follow-on studies on their original 2018 report. Opportunity size is very high. Some people talk about INR 22 trillion. You talk about, I think it's a, it's a few, you know, few lakh crore. I don't think the constraint is going to come in terms of the opportunity size. As we said, we intend to grow at least at a tether of 25%. Which means, you know, you can work out the numbers. We ended with close to INR 12,000 crore last year. That means we'll probably be at about a little over INR 15,000 crore for this year. From there, we just have to break in.
Our intent is, let's record the opportunity is large. We don't want to grow in a very aggressive manner. We want to have a growth combined with the right quality of assets that we onboard. If we believe at around 25% levels, we should be able to achieve. That's what we will be targeting. The markets can never go into be a constraint for this 25% growth. Maybe we can grow higher, but we would like to have the quality growth.
Thank you so much, sir.
Thank you. Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for closing comments. Over to you, sir.
Thank you all for patiently listening and questioning us on the clarity about last quarter's performance. Hope you have given the clarity. As I said in the opening remarks, this is one of the quarters that you see your company standard coming down a little bit on growth, collections, and quality. This quarter will be a stabilization quarter. In quarters to come, you'll see that get back the growth, collections, and resulting in good quality. With that, connecting you and the next earning call, further future numbers.
Thank you. On behalf of JM Financial Institutional Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect.